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 March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-5153
USX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 25-0996816
(State of Incorporation) (I.R.S. Employer Identification No.)
600 Grant Street, Pittsburgh, PA 15219-4776
(Address of principal executive offices)
Tel. No. (412) 433-1121
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 April 30, 1999
USX-Marathon Group - 308,650,075 shares
USX-U.S.Steel Group - 88,362,078 shares
<PAGE> 2
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED March 31, 1999
---------------------------
INDEX Page
----- ----
PART I - FINANCIAL INFORMATION
A. Consolidated Corporation
Item 1. Financial Statements:
Consolidated Statement of Operations 4
Consolidated Balance Sheet 6
Consolidated Statement of Cash Flows 8
Selected Notes to Consolidated
Financial Statements 9
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends and Ratio of
Earnings to Fixed Charges 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 24
Financial Statistics 26
B. Marathon Group
Item 1. Financial Statements:
Marathon Group Statement of Operations 27
Marathon Group Balance Sheet 28
Marathon Group Statement of Cash Flows 29
Selected Notes to Financial Statements 30
Item 2. Marathon Group Management's Discussion and
Analysis of Financial Condition and
Results of Operations 37
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 49
Supplemental Statistics 51
<PAGE> 3
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED March 31, 1999
---------------------------
INDEX Page
----- ----
PART I - FINANCIAL INFORMATION (Continued)
C. U. S. Steel Group
Item 1. Financial Statements:
U. S. Steel Group Statement of Operations 53
U. S. Steel Group Balance Sheet 54
U. S. Steel Group Statement of Cash Flows 55
Selected Notes to Financial Statements 56
Item 2. U. S. Steel Group Management's Discussion
and Analysis of Financial Condition
and Results of Operations 62
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 71
Supplemental Statistics 73
PART II - OTHER INFORMATION
Item 5. Other Information 74
Item 6. Exhibits and Reports on Form 8-K 75
<PAGE> 4
Part I - Financial Information
A. Consolidated Corporation
<TABLE>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
------------------------------------------------
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Sales $6,078 $6,887
Dividend and affiliate income (loss) (7) 25
Gain (loss) on disposal of assets (22) 14
Gain on ownership change in Marathon Ashland
Petroleum LLC - 248
Other income 5 13
------ ------
Total revenues 6,054 7,187
------ ------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 4,554 5,171
Selling, general and administrative expenses 52 85
Depreciation, depletion and amortization 308 347
Taxes other than income taxes 1,025 963
Exploration expenses 63 82
Inventory market valuation credits (349) (25)
------ ------
Total costs and expenses 5,653 6,623
------ ------
INCOME FROM OPERATIONS 401 564
Net interest and other financial costs 83 82
Minority interest in income of Marathon Ashland
Petroleum LLC 145 54
------ ------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 173 428
Provision for estimated income taxes 63 158
------ ------
INCOME BEFORE EXTRAORDINARY LOSS 110 270
Extraordinary loss on extinguishment of debt,
net of income tax 5 -
------ ------
NET INCOME 105 270
Dividends on preferred stock 2 2
------ ------
NET INCOME APPLICABLE TO COMMON STOCKS $103 $268
====== ======
<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>
First Quarter Ended
March 31
(Dollars in millions, except per share amounts) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
APPLICABLE TO MARATHON STOCK:
Net income $119 $183
- Per share - basic and diluted .38 .63
Dividends paid per share .21 .21
Weighted average shares, in thousands
- Basic 309,029 288,846
- Diluted 309,196 289,490
APPLICABLE TO STEEL STOCK:
Income (loss) before extraordinary loss $(11) $85
- Per share - basic (.13) .98
- diluted (.13) .95
Extraordinary loss, net of income tax 5 -
- Per share - basic and diluted .05 -
Net income (loss) $(16) $85
- Per share - basic (.18) .98
- diluted (.18) .95
Dividends paid per share .25 .25
Weighted average shares, in thousands
- Basic 88,368 86,600
- Diluted 88,368 94,125
<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
March 31 December 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $77 $146
Receivables, less allowance for doubtful
accounts of $8 and $12 1,530 1,663
Inventories 2,426 2,008
Deferred income tax benefits 217 217
Net assets held for sale 136 -
Other current assets 236 172
------ ------
Total current assets 4,622 4,206
Investments and long-term receivables,
less reserves of $3 and $10 1,151 1,249
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$16,415 and $16,238 12,722 12,929
Prepaid pensions 2,432 2,413
Other noncurrent assets 314 336
------ ------
Total assets $21,241 $21,133
====== ======
<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
March 31 December 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES
Current liabilities:
Notes payable $67 $145
Accounts payable 2,416 2,478
Distribution payable to minority shareholder of
Marathon Ashland Petroleum LLC - 103
Payroll and benefits payable 441 480
Accrued taxes 270 245
Accrued interest 57 97
Long-term debt due within one year 80 71
------ ------
Total current liabilities 3,331 3,619
Long-term debt, less unamortized discount 4,150 3,920
Long-term deferred income taxes 1,614 1,579
Employee benefits 2,841 2,868
Deferred credits and other liabilities 717 720
Preferred stock of subsidiary 250 250
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely junior
subordinated convertible debentures of USX 182 182
Minority interest in Marathon Ashland Petroleum LLC 1,735 1,590
STOCKHOLDERS' EQUITY
Preferred stock -
6.50% Cumulative Convertible issued - 2,767,787 shares
($138 liquidation preference) 3 3
Common stocks:
Marathon Stock issued - 308,650,075 shares and
308,458,835 shares 309 308
Steel Stock issued - 88,362,042 shares and
88,336,439 shares 88 88
Securities exchangeable solely into Marathon Stock
issued - 316,738 shares and 507,324 shares - 1
Additional paid-in capital 4,588 4,587
Deferred compensation - (1)
Retained earnings 1,483 1,467
Accumulated other comprehensive income (loss) (50) (48)
------ ------
Total stockholders' equity 6,421 6,405
------ ------
Total liabilities and stockholders' equity $21,241 $21,133
====== ======
<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>
First Quarter Ended
March 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $105 $270
Adjustments to reconcile to net cash provided
from operating activities:
Extraordinary loss 5 -
Minority interest in income of Marathon Ashland
Petroleum LLC - net of distributions 42 30
Depreciation, depletion and amortization 308 347
Exploratory dry well costs 31 56
Inventory market valuation credits (349) (25)
Pensions and other postretirement benefits (38) (52)
Deferred income taxes 35 92
Gain on ownership change in Marathon Ashland
Petroleum LLC - (248)
(Gain) loss on disposal of assets 22 (14)
Changes in:
Current receivables - sold 30 -
- operating turnover (143) 224
Inventories (106) (67)
Current accounts payable and accrued expenses 190 53
All other - net (78) (23)
------ ------
Net cash provided from operating activities 54 643
------ ------
INVESTING ACTIVITIES:
Capital expenditures (275) (276)
Disposal of assets 23 6
Restricted cash-withdrawals 29 196
- deposits (19) (3)
Affiliates - investments - (73)
- loans and advances (20) (22)
All other - net 1 20
------ ------
Net cash used in investing activities (261) (152)
------ ------
FINANCING ACTIVITIES:
Commercial paper and revolving
credit arrangements - net (46) (120)
Other debt - borrowings 297 462
- repayments (29) (31)
Common stock - issued 6 5
- repurchased - (195)
Cash restricted for redemption of debt - (66)
Dividends paid (89) (85)
------ ------
Net cash provided from (used in) financing activities 139 (30)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1) -
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (69) 461
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 146 54
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $77 $515
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(129) $(115)
Income taxes paid (3) (47)
<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. Certain reclassifications of prior year data have been made
to conform to 1999 classifications. Additional information is contained
in the USX Annual Report on Form 10-K for the year ended
December 31, 1998.
2. During 1997, Marathon Oil Company (Marathon) and Ashland Inc.
(Ashland) agreed to combine the major elements of their refining, marketing
and transportation (RM&T) operations. On January 1, 1998, Marathon
transferred certain RM&T net assets to Marathon Ashland Petroleum LLC
(MAP), a new consolidated subsidiary. Also on January 1, 1998, Marathon
acquired certain RM&T net assets from Ashland in exchange for a 38%
interest in MAP. The acquisition was accounted for under the purchase
method of accounting. The purchase price was determined to be
$1.9 billion, based upon an external valuation. The change in Marathon's
ownership interest in MAP resulted in a gain of $248 million, which is
included in first quarter 1998 revenues.
Effective August 11, 1998, Marathon acquired Tarragon Oil and Gas
Limited (Tarragon), a Canadian oil and gas exploration and production
company. Results for the first quarter of 1999 include the operations of
Marathon Canada Limited, formerly known as Tarragon.
3. In 1997, USX sold its stock in Delhi Gas Pipeline Corporation and
other subsidiaries of USX that comprised all of the Delhi Group. The net
proceeds of the sale of $195 million were used to redeem all shares of USX-
Delhi Group Common Stock (Delhi Stock) and were distributed to the holders
thereof on January 26, 1998. After the redemption, 50,000,000 shares of
Delhi Stock remain authorized but unissued.
4. Inventories are carried at lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
<TABLE>
<CAPTION>
(In millions)
------------------------
March 31 December 31
1999 1998
-------- -----------
<S> <C> <C>
Raw materials $864 $916
Semi-finished products 319 282
Finished products 1,289 1,205
Supplies and sundry items 156 156
------ ------
Total (at cost) 2,628 2,559
Less inventory market valuation reserve 202 551
------ ------
Net inventory carrying value $2,426 $2,008
====== ======
</TABLE>
<PAGE> 10
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. (Continued)
The inventory market valuation reserve reflects the extent that the
recorded LIFO cost basis of crude oil and refined products inventories
exceeds net realizable value. The reserve is decreased to reflect
increases in market prices and inventory turnover and increased to reflect
decreases in market prices. Changes in the inventory market valuation
reserve result in noncash charges or credits to costs and expenses. For
additional information, see discussion of results of operations in the
Marathon Group's Management's Discussion and Analysis of Financial
Condition and Results of Operations.
5. Total comprehensive income for the first quarter of 1999 was $103
million and $271 million for the first quarter of 1998.
6. On March 19, 1999, MAP announced that it had signed a definitive
agreement to sell Scurlock Permian LLC (Scurlock), its crude oil gathering
business, to Plains Marketing, L.P. At March 31, 1999, the net assets held
for sale totaled $136 million and have been reclassified as current assets
in the consolidated balance sheet. During the first quarter of 1999, MAP
recorded an estimated pretax loss of $16 million related to the sale.
Scurlock has been reported as part of the Marathon Group's refining,
marketing and transportation operating segment.
7. The method of calculating net income (loss) per share for the Marathon
Stock and Steel Stock reflects the USX Board of Directors' intent that the
separately reported earnings and surplus of the Marathon Group and the
U. S. Steel Group, as determined consistent with the USX Certificate of
Incorporation, are available for payment of dividends on the respective
classes of stock, although legally available funds and liquidation
preferences of these classes of stock do not necessarily correspond with
these amounts. The financial statements of the Marathon Group and the U.
S. Steel Group, taken together, include all accounts which comprise the
corresponding consolidated financial statements of USX.
Basic net income (loss) per share is calculated by adjusting net
income for dividend requirements of preferred stock and is based on the
weighted average number of common shares outstanding.
Diluted net income (loss) per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of
stock options, provided in each case, the effect is not antidilutive.
<PAGE> 11
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
7. (Continued)
<TABLE>
<CAPTION>
COMPUTATION OF INCOME PER SHARE
First Quarter Ended
March 31
1999 1998
Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Marathon Group
Net income (millions) $119 $119 $183 $183
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 309,029 309,029 288,846 288,846
Effect of dilutive securities - stock options - 167 - 644
------ ------ ------ ------
Average common shares and dilutive effect 309,029 309,196 288,846 289,490
====== ====== ====== ======
Net income per share $.38 $.38 $.63 $.63
====== ====== ====== ======
U. S. Steel Group
Net income (loss) (millions):
Income (loss) before extraordinary loss $(9) $(9) $87 $87
Dividends on preferred stock 2 2 2 -
Extraordinary loss 5 5 - -
------ ------ ------ ------
Net income (loss) applicable to Steel Stock (16) (16) 85 87
Effect of dilutive convertible securities - - - 2
------ ------ ------ ------
Net income (loss) assuming conversions $(16) $(16) $85 $89
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 88,368 88,368 86,600 86,600
Effect of dilutive securities:
Trust preferred securities - - - 4,256
Preferred stock - - - 3,211
Stock options - - - 58
------ ------ ------ ------
Average common shares and dilutive effect 88,368 88,368 86,600 94,125
====== ====== ====== ======
Per share:
Income (loss) before extraordinary loss $(.13) $(.13) $.98 $.95
Extraordinary loss .05 .05 - -
------ ------ ------ ------
Net income (loss) $(.18) $(.18) $.98 $.95
====== ====== ====== ======
</TABLE>
<PAGE> 12
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
8. On March 31, 1999, USX irrevocably deposited with a trustee the entire
5.5 million common shares it owned in RTI International Metals, Inc. (RTI).
The deposit of the shares resulted in the satisfaction of USX's obligation
under its 6-3/4% Exchangeable Notes (indexed debt) due February 1, 2000.
Under the terms of the indenture, the trustee will exchange the RTI shares
for the notes at maturity. The notes are exchangeable for shares of RTI
common stock on a variable basis up to one share per note depending on the
market price of RTI common stock at maturity. Ownership of any shares not
required for satisfaction of the indexed debt will revert to USX.
As a result of the above transaction, USX recorded in the first
quarter of 1999 an extraordinary loss of $5 million, net of a $3 million
income tax benefit, representing prepaid interest expense and the write-off
of unamortized debt issue costs, and a pretax charge of $22 million,
representing the difference between the carrying value of the investment in
RTI and the carrying value of the indexed debt, which is included in gain
(loss) on disposal of assets. This transaction represents a noncash
investing and financing activity of $56 million, which was the carrying
value of the indexed debt at March 31, 1999.
Additionally, a $13 million credit to adjust the indexed debt to
settlement value at March 31, 1999, is included in net interest and other
financial costs. The indexed debt adjustment in the first quarter of 1998
resulted in a charge of $4 million.
In December 1996, USX had issued the $117 million of notes indexed to
the common share price of RTI. At maturity, USX would have been required
to exchange the notes for shares of RTI common stock, or redeem the notes
for the equivalent amount of cash. Since USX's investment in RTI was
attributed to the U. S. Steel Group, the indexed debt was also attributed
to the U. S. Steel Group. USX had a 26% investment in RTI and accounted
for its investment using the equity method of accounting.
9. The items below are included in both revenues and costs and expenses,
resulting in no effect on income.
<TABLE>
<CAPTION>
(In millions)
-------------------
First Quarter Ended
March 31
1999 1998
---- ----
<S> <C> <C>
Consumer excise taxes on petroleum products and
merchandise $913 $863
Matching crude oil and refined product buy/sell
transactions settled in cash 872 988
</TABLE>
10. Income from operations includes net periodic pension credits of $45
million and $50 million in the first quarter of 1999 and 1998,
respectively. These pension credits are primarily noncash and for the most
part are included in selling, general and administrative expenses.
11. The provision for estimated income taxes for the periods reported is
based on tax rates and amounts which recognize management's best estimate
of current and deferred tax assets and liabilities.
<PAGE> 13
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
12. The Marathon Group's operations consists of three reportable operating
segments: 1) Exploration and Production (E&P) - explores for and produces
crude oil and natural gas on a worldwide basis; 2) Refining, Marketing and
Transportation (RM&T) - refines, markets and transports crude oil and
petroleum products, primarily in the Midwest and southeastern United States
through MAP; and 3) Other Energy Related Businesses (OERB). OERB is an
aggregation of two segments which fall below the quantitative reporting
thresholds: 1) Natural Gas and Crude Oil Marketing and Transportation -
markets and transports its own and third-party natural gas and crude oil in
the United States; and 2) Power Generation - develops, constructs and
operates independent electric power projects worldwide. The U. S. Steel
Group consists of one operating segment, U. S. Steel (USS). USS is engaged
in the production and sale of steel mill products, coke and taconite
pellets. USS also engages in the following related business activities:
the management of mineral resources, domestic coal mining, engineering and
consulting services, and real estate development and management. The
results of segment operations are as follows:
<TABLE>
<CAPTION>
Total
Marathon
(In millions) E&P RM&T OERB Segments USS Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST QUARTER 1999
Revenues:
Customer $572 $4,179 $82 $4,833$1,245 $6,078
Intersegment (a) 34 5 9 48 - 48
Intergroup (a) 3 - 4 7 1 8
Equity in earnings (loss) of
unconsolidated affiliates 1 3 8 12 (23) (11)
Other 6 6 3 15 10 25
----- ----- ----- ----- ----- -----
Total revenues $616 $4,193 $106 $4,915$1,233 $6,148
===== ===== ===== ===== ===== =====
Segment income (loss) $36 $45 $15 $96 $(59) $37
===== ===== ===== ===== ===== =====
FIRST QUARTER 1998
Revenues:
Customer $518 $4,579 $96 $5,193$1,669 $6,862
Intersegment (a) 43 1 2 46 - 46
Intergroup (a) 4 - 3 7 - 7
Equity in earnings (loss) of
unconsolidated affiliates (1) 3 5 7 15 22
Other 1 13 2 16 12 28
----- ----- ----- ----- ----- -----
Total revenues $565 $4,596 $108 $5,269$1,696 $6,965
===== ===== ===== ===== ===== =====
Segment income $124 $128 $14 $266 $106 $372
===== ===== ===== ===== ===== =====
<FN>
(a)Intersegment and intergroup sales and transfers were conducted on an arms-
length basis.
</TABLE>
<PAGE> 14
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
12. (Continued)
The following schedule reconciles segment revenues and income (loss) to
amounts reported in the Marathon and U. S. Steel Groups' financial
statements:
<TABLE>
<CAPTION>
Marathon Group U.S. Steel Group
First Quarter First Quarter
Ended Ended
March 31 March 31
(In millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Revenues of reportable segments $4,915 $5,269 $1,233 $1,696
Items not allocated to segments:
Gain on ownership change in MAP - 248 - -
Other (16) 24 (22) -
Elimination of intersegment revenues (48) (46) - -
Administrative revenues - 3 - -
------ ------ ----- -----
Total Group revenues $4,851 $5,498 $1,211 $1,696
====== ====== ====== ======
Income:
Income (loss) for reportable segments $96 $266 $(59) $106
Items not allocated to segments:
Gain on ownership change in MAP - 248 - -
Administrative expenses (26) (38) (5) (9)
Pension credits - - 108 93
Costs related to former business activities - - (24) (28)
Inventory market valuation adjustments 349 25 - -
Other (a) (16) (99) (22) -
------ ------ ------ ------
Total Group income (loss) from operations $403 $402 $(2) $162
====== ====== ====== ======
<FN>
(a)Represents for the Marathon Group in 1999, estimated loss on sale of
Scurlock and in 1998, international exploration and production property
impairments, MAP transition charges and gas contract settlement. For the U.
S. Steel Group in 1999, represents loss on investment in RTI stock used to
satisfy indexed debt obligations.
</TABLE>
<PAGE> 15
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
13. At March 31, 1999, USX had $550 million in borrowings against its
$2,350 million long-term revolving credit agreement.
At March 31, 1999, Marathon Ashland Petroleum LLC (MAP) had no
borrowings against its $500 million revolving credit agreements with banks
or its $190 million revolving credit agreement with Ashland.
USX has a short-term credit agreement totaling $125 million at March
31, 1999. Interest is based on the bank's prime rate or London Interbank
Offered Rate (LIBOR), and carries a facility fee of .15%. Certain other
banks provide short-term lines of credit totaling $150 million which
require a .125% fee or maintenance of compensating balances of 3%. At
March 31, 1999, there were no borrowings against these facilities. USX had
other outstanding short-term borrowings of $67 million.
In the event of a change in control of USX, debt obligations totaling
$3,739 million at March 31, 1999, may be declared immediately due and
payable.
14. In the first quarter of 1999, USX issued $300 million in aggregate
principal amount of 6.65% Notes due 2006.
On March 31, 1999, USX extinguished $117 million of indexed debt,
representing 6-3/4% Exchangeable Notes due February 1, 2000. See Note 8
for further discussion.
15. USX has an agreement (the program) to sell an undivided interest in
certain accounts receivable of the U. S. Steel Group. Payments are
collected from the sold accounts receivable; the collections are reinvested
in new accounts receivable for the buyers; and a yield, based on defined
short-term market rates, is transferred to the buyers. At March 31, 1999,
the amount sold under the program that had not been collected was $350
million, which will be forwarded to the buyers at the end of the agreement,
or in the event of earlier contract termination. If USX does not have a
sufficient quantity of eligible accounts receivable to reinvest in for the
buyers, the size of the program will be reduced accordingly. The buyers
have rights to a pool of receivables that must be maintained at a level of
at least 115% of the program's size. In the event of a change in control
of USX, as defined in the agreement, USX may be required to forward
payments collected on sold accounts receivable to the buyers.
16. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments involving a variety
of matters, including laws and regulations relating to the environment.
Certain of these matters are discussed below. The ultimate resolution of
these contingencies could, individually or in the aggregate, be material to
the consolidated financial statements. However, management believes that
USX will remain a viable and competitive enterprise even though it is
possible that these contingencies could be resolved unfavorably. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
<PAGE> 16
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
16. (Continued)
USX is subject to federal, state, local and foreign laws and
regulations relating to the environment. These laws generally provide for
control of pollutants released into the environment and require responsible
parties to undertake remediation of hazardous waste disposal sites.
Penalties may be imposed for noncompliance. At March 31, 1999, and
December 31, 1998, accrued liabilities for remediation totaled $152 million
and $145 million, respectively. It is not presently possible to estimate
the ultimate amount of all remediation costs that might be incurred or the
penalties that may be imposed. Receivables for recoverable costs from
certain states, under programs to assist companies in cleanup efforts
related to underground storage tanks at retail marketing outlets, were $42
million at March 31, 1999, and $41 million at December 31, 1998.
For a number of years, USX has made substantial capital expenditures
to bring existing facilities into compliance with various laws relating to
the environment. In the first quarter of 1999 and for the years 1998 and
1997, such capital expenditures totaled $21 million, $173 million and $134
million, respectively. USX anticipates making additional such expenditures
in the future; however, the exact amounts and timing of such expenditures
are uncertain because of the continuing evolution of specific regulatory
requirements.
At March 31, 1999, and December 31, 1998, accrued liabilities for
platform abandonment and dismantlement totaled $147 million and $141
million, respectively.
Guarantees by USX of the liabilities of affiliated entities totaled
$217 million at March 31, 1999. In the event that any defaults of
guaranteed liabilities occur, USX has access to its interest in the assets
of most of the affiliates to reduce losses resulting from these guarantees.
As of March 31, 1999, the largest guarantee for a single affiliate was $131
million.
At March 31, 1999, 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 March 31, 1999, totaled $843 million compared
with $812 million at December 31, 1998.
On August 1, 1999, U. S. Steel, along with several major steel
competitors, faces the expiration of the labor agreement with the United
Steelworkers of America. U. S. Steel's ability to negotiate an acceptable
labor contract is essential to its ongoing operations. Any labor
interruptions could have an adverse effect on operations, financial results
and cash flow.
<PAGE> 17
<TABLE>
<CAPTION>
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS - (Unaudited)
----------------------------------------------------------
First Quarter Ended
March 31 Year Ended December 31
- --------------------- -------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<C> <C> <C> <C> <C> <C> <C>
3.52 5.08 3.36 3.92 3.62 1.49 2.01
==== ==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS - (Unaudited)
-------------------------------------------------
First Quarter Ended
March 31 Year Ended December 31
- --------------------- -------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<C> <C> <C> <C> <C> <C> <C>
3.63 5.26 3.47 4.11 3.90 1.62 2.18
==== ==== ==== ==== ==== ==== ====
</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 which is principally
engaged in the energy business through its Marathon Group and in the steel
business through its U. S. Steel Group. The following discussion should be read
in conjunction with the first quarter 1999 USX Consolidated Financial Statements
and selected notes. For income per common share amounts applicable to USX's two
classes of common stock, USX-Marathon Group Common Stock ("Marathon Stock") and
USX-U. S. Steel Group Common Stock ("Steel Stock"), see Consolidated Statement
of Operations - Income per Common Share. For Group results, see Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
Marathon Group and the U. S. Steel Group. For operating statistics, see
Supplemental Statistics following Management's Discussion and Analysis of
Financial Condition and Results of Operations for the respective Groups.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting USX. These
statements typically contain words such as "anticipates", "believes",
"estimates", "expects" or similar words indicating that future outcomes are
uncertain. In accordance with "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, these statements are accompanied by cautionary
language identifying important factors, though not necessarily all such factors,
that could cause future outcomes to differ materially from those set forth in
the forward-looking statements. For additional risk factors affecting the
businesses of USX, see Supplementary Data - Disclosures About Forward-Looking
Statements in the USX 1998 Form 10-K.
Results of Operations
- ---------------------
Revenues for the first quarter of 1999 and 1998 are set forth in the
following table:
<TABLE>
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<C> <C> <C>
Revenues
Marathon Group $4,851 $5,498
U. S. Steel Group 1,211 1,696
Eliminations (8) (7)
------ ------
Total USX Corporation revenues 6,054 7,187
Less:
Excise taxes (a)(b) 913 863
Matching buy/sell transactions (a)(c) 872 988
------ ------
Revenues excluding above items $4,269 $5,336
====== ======
- ------
<FN>
(a) Included in both revenues and costs and expenses for the Marathon Group and
USX Consolidated.
(b) Consumer excise taxes on petroleum products and merchandise.
(c) Matching crude oil and refined products buy/sell transactions settled in
cash.
</TABLE>
Revenues (excluding matching buy/sell transactions and excise taxes)
decreased by $1,067 million in the first quarter of 1999 as compared with the
first quarter of 1998. The decline reflected decreases of 16% for the Marathon
Group and 29% for the U. S. Steel Group. For discussion of revenues by group see
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Marathon Group and the U. S. Steel Group.
<PAGE> 19
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income from operations for the first quarter of 1999 and 1998 are set forth
in the following table:
<TABLE>
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Reportable segments
Marathon Group
Exploration & production 36 124
Refining, marketing & transportation 45 128
Other energy related businesses 15 14
---- ----
Income for reportable segments - Marathon Group 96 266
U. S. Steel Group
U. S. Steel operations (59) 106
---- ----
Income for reportable segments - USX Corporation 37 372
Items not allocated to reportable segments:
Marathon Group 307 136
U. S. Steel Group 57 56
---- ----
Total income from operations - USX Corporation 401 564
</TABLE>
Income for reportable segments decreased by $335 million in the first
quarter of 1999 as compared with the first quarter of 1998, reflecting decreases
of $170 million for the Marathon Group reportable segments and $165 million for
U. S. Steel operations. For discussion of income from operations by segment see
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Marathon Group and the U. S. Steel Group.
<PAGE> 20
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Net interest and other financial costs for the first quarter of 1999 and
1998 are set forth in the following table:
<TABLE>
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Net interest and other financial costs 83 82
Less:
Favorable (unfavorable) adjustment to carrying value
of indexed debt (a) 13 (4)
------ ------
Net interest and other financial costs
adjusted to exclude above item $96 $78
====== ======
- ------
<FN>
(a) In December 1996, USX issued $117 million of 6-3/4% Exchangeable Notes Due
February 1, 2000 ("indexed debt"), indexed to the price of RTI common stock. On
March 31, 1999, USX irrevocably deposited with a trustee the entire 5.5 million
common shares it owned in RTI. The deposit of shares resulted in the
satisfaction of USX's obligation under the indexed debt. Under the terms of the
indenture, the trustee will exchange the RTI shares for the notes at maturity.
The notes are exchangeable for shares of RTI common stock on a variable basis up
to one share per note depending on the market price of RTI common stock at
maturity. If the market price of RTI common stock at maturity exceeds $21.375
per share the entire 5.5 million shares will not be required to satisfy USX's
obligation under the indexed debt. Ownership of any shares not required for
satisfaction of the indexed debt will revert to USX. A maximum of 838,000
shares, or 4% of the shares of RTI common stock outstanding on March 31, 1999,
would revert to USX if the market price of RTI common stock at maturity equals
or exceeds $25.23 per share. There will be no indexed debt adjustment or
interest expense related to indexed debt in future quarters. For further
discussion, see Note 8 to the USX Consolidated Financial Statements.
</TABLE>
Excluding the adjustment to the carrying value of indexed debt, net
interest and other financial costs increased by $18 million in the first quarter
of 1999 as compared with the first quarter of 1998, due primarily to higher
average debt levels and lower interest income.
Provision for estimated income taxes of $63 million and $158 million for
the first quarter of 1999 and 1998 were based on tax rates and amounts that
recognize management's best estimate of current and deferred tax assets and
liabilities.
Extraordinary loss on extinguishment of debt of $5 million, net of a $3
million income tax benefit, in the first quarter of 1999 represents prepaid
interest expense and the write-off of unamortized debt issue costs resulting
from the satisfaction of USX's obligation of its indexed debt. For further
discussion, see Note 8 to the USX Consolidated Financial Statements.
Net income was $105 million in the first quarter of 1999, a decrease of
$165 million from the first quarter of 1998, reflecting decreases of $101
million and $64 million for the U. S. Steel Group and the Marathon Group,
respectively.
Dividends to Stockholders
- -------------------------
On April 27, 1999, the USX Board of Directors (the "Board") declared
dividends of 21 cents per share on Marathon Stock and 25 cents per share on
Steel Stock, payable June 10, 1999, to stockholders of record at the close of
business on May 19, 1999. The Board also declared a dividend of $0.8125 per
share on USX's 6.50% Cumulative Convertible Preferred Stock, payable June 30,
1999, to stockholders of record at the close of business on June 1, 1999.
<PAGE> 21
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
On April 27, 1999, Marathon Oil Canada Limited, an indirect subsidiary of
Marathon Oil Company, declared a dividend of CDN $0.3105 per share on its non-
voting Exchangeable Shares, payable June 10, 1999, to stockholders of record at
the close of business on May 19, 1999.
Cash Flows
- ----------
Cash and cash equivalents totaled $77 million at March 31, 1999, compared
with $146 million at December 31, 1998. The decrease is the result of a $78
million decrease for the Marathon Group, partially offset by a $9 million
increase for the U. S. Steel Group.
Net cash provided from operating activities totaled $54 million in the
first quarter of 1999, compared with $643 million in the first quarter of 1998.
The $589 million decrease mainly reflected unfavorable working capital changes,
decreased profitability and a distribution by MAP to Ashland of $103 million in
first quarter 1999 as compared to $24 million in first quarter 1998.
Capital expenditures for property, plant and equipment in the first quarter
of 1999 were $275 million, compared with $276 million in the first quarter of
1998. For further details, see USX Corporation - Financial Statistics, following
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Investments in affiliates of $73 million in the first quarter of 1998
primarily reflects funding for entry into VSZ U. S. Steel, s. r.o., a joint
venture in Slovakia with VSZ a.s. for the U. S. Steel Group.
Contract commitments to acquire property, plant and equipment and long-term
investments at March 31, 1999, totaled $843 million compared with $812 million
at December 31, 1998.
The withdrawal of restricted cash of $196 million in 1998 was primarily the
result of redeeming all of the outstanding shares of USX - Delhi Group Common
Stock with the $195 million net proceeds from the sale of the Delhi Companies
that had been classified as restricted cash in 1997.
USX's total long-term debt, preferred stock of subsidiary, USX obligated
preferred securities of a subsidiary trust and notes payable, was $4,729 million
at March 31, 1999, up $161 million from December 31, 1998, primarily due to the
issuance of $300 million of 6.65% Notes due 2006, partially offset by the
settlement of indexed debt. For further discussion of the settlement of indexed
debt, see Note 8 to the USX Consolidated Financial Statements.
Liquidity
- ---------
At March 31, 1999, USX had $550 million of borrowings against its $2,350
million long-term revolving credit agreement and $67 million of borrowings
against other short-term lines. There were no borrowings against the MAP
revolving credit agreements at March 31, 1999.
USX management believes that its short-term and long-term liquidity is
adequate to satisfy its obligations as of March 31, 1999, and to complete
currently authorized capital spending programs. Future requirements for USX's
business needs, including the funding of capital expenditures, debt maturities
for the balance of 1999 and years 2000 and 2001, and any amounts that may
ultimately be paid in connection with contingencies (which are discussed in Note
16 to the USX Consolidated Financial Statements), are expected to be financed by
a combination of internally generated funds, proceeds from the sale of stock,
borrowings and other external financing sources.
<PAGE> 22
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
USX management's opinion concerning liquidity and USX's ability to avail
itself in the future of the financing options mentioned in the above forward-
looking statements are based on currently available information. To the extent
that this information proves to be inaccurate, future availability of financing
may be adversely affected. Factors that could affect the availability of
financing include the performance of each Group (as measured by various factors
including cash provided from operating activities), the state of worldwide debt
and equity markets, investor perceptions and expectations of past and future
performance, the overall U.S. financial climate, and, in particular, with
respect to borrowings, by levels of USX's outstanding debt and credit ratings by
rating agencies.
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
USX has incurred and will continue to incur substantial capital, operating
and maintenance, and remediation expenditures as a result of environmental laws
and regulations. To the extent these expenditures, as with all costs, are not
ultimately reflected in the prices of USX's products and services, operating
results will be adversely affected. USX believes that domestic competitors of
the U. S. Steel Group and substantially all the competitors of the Marathon
Group are subject to similar environmental laws and regulations. However, the
specific impact on each competitor may vary depending on a number of factors,
including the age and location of its operating facilities, marketing areas,
production processes and the specific products and services it provides.
USX has been notified that it is a potentially responsible party ("PRP") at
43 waste sites under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") as of March 31, 1999. In addition, there are 21 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 132 additional sites,
excluding retail gasoline stations, where remediation is being sought under
other environmental statutes, both federal and state, or where private parties
are seeking remediation through discussions or litigation. Of these sites, 17
were associated with properties conveyed to MAP by Ashland for which Ashland has
retained liability for all costs associated with remediation. At many of these
sites, USX is one of a number of parties involved and the total cost of
remediation, as well as USX's share thereof, is frequently dependent upon the
outcome of investigations and remedial studies. USX accrues for environmental
remediation activities when the responsibility to remediate is probable and the
amount of associated costs is reasonably determinable. As environmental
remediation matters proceed toward ultimate resolution or as additional
remediation obligations arise, charges in excess of those previously accrued may
be required.
In October 1998, the National Enforcement Investigations Center and Region
V of the United States Environmental Protection Agency conducted a multi-media
inspection of MAP's Detroit refinery. Subsequently, in November 1998, Region V
conducted a multi-media inspection of MAP's Robinson refinery. These
inspections covered compliance with the Clean Air Act (New Source Performance
Standards, Prevention of Significant Deterioration, and the National Emission
Standards for Hazardous Air Pollutants for Benzene), the Clean Water Act (Permit
exceedances for the Waste Water Treatment Plant), reporting obligations under
the Emergency Planning and Community Right to Know Act and the handling of
process waste. Although MAP has
<PAGE> 23
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
been advised as to certain compliance issues, including one contested Notice of
Violation regarding MAP's Detroit refinery, it is not known when complete
findings on the results of the inspections will be issued. In an action
separate from the multi-media inspection, the Department of Justice filed a
civil complaint in February 1999, alleging violation of the Clean Air Act with
respect to benzene releases at the Robinson refinery.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments involving a variety of matters,
including laws and regulations relating to the environment (see Note 16 to the
USX Consolidated Financial Statements for a discussion of certain of these
matters). The ultimate resolution of these contingencies could, individually or
in the aggregate, be material to the USX Consolidated Financial Statements.
However, management believes that USX will remain a viable and competitive
enterprise even though it is possible that these contingencies could be resolved
unfavorably. See discussion of Liquidity herein.
Outlook
- -------
See Outlook in Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Marathon Group and the U. S. Steel Group.
Year 2000 Readiness Disclosure
- ------------------------------
See Year 2000 Readiness Disclosure in Management's Discussion and Analysis
of Financial Condition and Results of Operations for the Marathon Group and the
U. S. Steel Group.
Accounting Standard
- -------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This new standard requires recognition of all
derivatives as either assets or liabilities at fair value. This new standard may
result in additional volatility in both current period earnings and other
comprehensive income as a result of recording recognized and unrecognized gains
and losses resulting from changes in the fair value of derivative instruments.
At adoption this new standard requires a comprehensive review of all outstanding
derivative instruments to determine whether or not their use meets the hedge
accounting criteria. It is possible that there will be derivative instruments
employed in our businesses that do not meet all of the designated hedge criteria
and they will be reflected in income on a mark-to-market basis. Based upon the
strategies currently used by USX and the level of activity related to forward
exchange contracts and commodity-based derivative instruments in recent periods,
USX does not anticipate the effect of adoption to have a material impact on
either financial position or results of operations. USX plans to adopt the
standard effective January 1, 2000, as required.
<PAGE> 24
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Commodity Price Risk and Related Risks
- --------------------------------------
Sensitivity analysis of the incremental effects on pretax income of
hypothetical 10% and 25% changes in commodity prices for open derivative
commodity instruments as of March 31, 1999 are provided in the following table:
(a)
<TABLE>
<CAPTION>
Incremental Decrease
in Pretax Income
Assuming a Hypothetical
Price Change of(a)
(Dollars in millions) 10% 25%
- --------------------------------------------------------------------------------
- ----
<S> <C> <C>
Derivative Commodity Instruments
Marathon Group (b) (c)
Crude oil (price decrease) (d) $4.8 $28.3
Natural gas (price decrease) (d) 9.2 23.7
Refined products (price decrease) (d) 4.1 10.8
U. S. Steel Group
Natural gas (price decrease) (d) $2.4 $6.0
Zinc (price decrease) (d) 2.0 4.6
Tin (price decrease) (d) .3 .6
Nickel (price decrease) (d) .1 .2
<FN>
(a) Gains and losses on derivative commodity instruments are generally
offset by price changes in the underlying commodity. Effects of these
offsets are not reflected in the sensitivity analyses. Amounts reflect
the estimated incremental effect on pretax income of hypothetical 10% and
25% changes in closing commodity prices for each open contract position
at March 31, 1999. Marathon Group and U. S. Steel Group management
evaluate their portfolios of derivative commodity instruments on an
ongoing basis and add or revise strategies to reflect anticipated market
conditions and changes in risk profiles. Changes to the portfolios
subsequent to March 31, 1999, would cause future pretax income effects to
differ from those presented in the table.
(b) The number of net open contracts varied throughout first quarter
1999, from a low of 453 contracts at March 11, to a high of 19,223
contracts at March 31, and averaged 8,321 for the quarter. The
derivative commodity instruments used and hedging positions taken also
varied throughout first quarter 1999, and will continue to vary in the
future. Because of these variations in the composition of the portfolio
over time, the number of open contracts, by itself, cannot be used to
predict future income effects.
(c) The calculation of sensitivity amounts for basis swaps assumes that
the physical and paper indices are perfectly correlated. Gains and
losses on options are based on changes in intrinsic value only.
(d) The direction of the price change used in calculating the
sensitivity amount for each commodity reflects that which would result in
the largest incremental decrease in pretax income when applied to the
derivative commodity instruments used to hedge that commodity.
</TABLE>
<PAGE> 25
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Interest Rate Risk
- ------------------
As of March 31, 1999, the discussion of USX's interest rate risk has not
changed materially from that presented in Quantitative and Qualitative
Disclosures About Market Risk included in USX's 1998 Form 10-K.
Foreign Currency Exchange Rate Risk
- -----------------------------------
As of March 31, 1999, the discussion of USX's foreign currency exchange
rate risk has not changed materially from that presented in Quantitative and
Qualitative Disclosures About Market Risk included in USX's 1998 Form 10-K.
Equity Price Risk
- -----------------
USX was subject to equity price risk resulting from its issuance in
December 1996 of $117 million of 6 3/4% Exchangeable Notes due February 1, 2000
("indexed debt"). However, on March 31, 1999, USX irrevocably deposited with a
trustee the entire 5.5 million shares it owned in RTI. The deposit of shares
resulted in the satisfaction of USX's obligation under the indexed debt. Under
the terms of the indenture, the trustee will exchange the RTI shares for the
notes at maturity. USX is no longer exposed to any negative risks associated
with changes in the value of RTI common stock. For further discussion, see Note
8 to the USX Consolidated Financial Statements.
Safe Harbor
- -----------
USX's quantitative and qualitative disclosures about market risk include
forward-looking statements with respect to management's opinion about risks
associated with USX's use of derivative instruments. These statements are based
on certain assumptions with respect to market prices and industry supply and
demand for crude oil, natural gas, refined products, steel products and certain
raw materials. To the extent that these assumptions prove to be inaccurate,
future outcomes with respect to USX's hedging programs may differ materially
from those discussed in the forward-looking statements.
<PAGE> 26
<TABLE>
USX CORPORATION
FINANCIAL STATISTICS (Unaudited)
--------------------------------
<CAPTION>
First Quarter
Ended
March 31
----------------
(Dollars in Millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUES
Marathon Group $4,851 $5,498
U. S. Steel Group 1,211 1,696
Eliminations (8) (7)
------- -------
Total $6,054 $7,187
INCOME (LOSS) FROM OPERATIONS
Marathon Group $403 $402
U. S. Steel Group (2) 162
----- -----
Total $401 $564
CAPITAL EXPENDITURES
Marathon Group $196 $219
U. S. Steel Group 79 57
----- -----
Total $275 $276
INVESTMENTS IN AFFILIATES
Marathon Group $ - $7
U. S. Steel Group - 66
----- -----
Total $ - $73
</TABLE>
<PAGE> 27
Part I - Financial Information (Continued):
B. Marathon Group
<TABLE>
MARATHON GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions, except per share amounts) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Sales $4,840 $5,224
Dividend and affiliate income 16 10
Gain (loss) on disposal of assets (10) 3
Gain on ownership change in Marathon Ashland
Petroleum LLC - 248
Other income 5 13
------ ------
Total revenues 4,851 5,498
------ ------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 3,405 3,723
Selling, general and administrative expenses 122 131
Depreciation, depletion and amortization 237 270
Taxes other than income taxes 970 915
Exploration expenses 63 82
Inventory market valuation credits (349) (25)
------ ------
Total costs and expenses 4,448 5,096
------ ------
INCOME FROM OPERATIONS 403 402
Net interest and other financial costs 75 54
Minority interest in income of Marathon Ashland
Petroleum LLC 145 54
------ ------
INCOME BEFORE INCOME TAXES 183 294
Provision for estimated income taxes 64 111
------ ------
NET INCOME $119 $183
====== ======
MARATHON STOCK DATA:
Net income per share - basic and diluted $.38 $.63
Dividends paid per share .21 .21
Weighted average shares, in thousands
- Basic 309,029 288,846
- Diluted 309,196 289,490
<FN>
Selected notes to financial statements appear on pages 30-36.
</TABLE>
<PAGE> 28
<TABLE>
MARATHON GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
---------------------------------
<CAPTION>
March 31 December 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $59 $137
Receivables, less allowance for doubtful
accounts of $3 and $3 1,140 1,277
Inventories 1,714 1,310
Deferred income tax benefits 80 80
Net assets held for sale 136 -
Other current assets 236 172
------ ------
Total current assets 3,365 2,976
Investments and long-term receivables 611 603
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$10,415 and $10,299 10,216 10,429
Prepaid pensions 200 241
Other noncurrent assets 278 295
------ ------
Total assets $14,670 $14,544
====== ======
LIABILITIES
Current liabilities:
Notes payable $60 $132
Accounts payable 1,853 1,980
Payroll and benefits payable 128 150
Distribution payable to minority shareholder of
Marathon Ashland Petroleum LLC - 103
Accrued taxes 137 99
Accrued interest 50 87
Long-term debt due within one year 69 59
------ ------
Total current liabilities 2,297 2,610
Long-term debt, less unamortized discount 3,706 3,456
Long-term deferred income taxes 1,466 1,450
Employee benefits 522 553
Deferred credits and other liabilities 392 389
Preferred stock of subsidiary 184 184
Minority interest in Marathon Ashland Petroleum LLC 1,735 1,590
COMMON STOCKHOLDERS' EQUITY 4,368 4,312
------ ------
Total liabilities and common stockholders' equity $14,670 $14,544
====== ======
<FN>
Selected notes to financial statements appear on pages 30-36.
</TABLE>
<PAGE> 29
<TABLE>
<CAPTION>
MARATHON GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
First Quarter Ended
March 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $119 $183
Adjustments to reconcile to net cash provided from (used in)
operating activities:
Minority interest in income of Marathon Ashland
Petroleum LLC - net of distributions 42 30
Depreciation, depletion and amortization 237 270
Exploratory dry well costs 31 56
Inventory market valuation credits (349) (25)
Pensions and other postretirement benefits 13 -
Deferred income taxes 13 49
Gain on ownership change in Marathon Ashland
Petroleum LLC - (248)
(Gain) loss on disposal of assets 10 (3)
Changes in:
Current receivables (107) 167
Inventories (92) (54)
Current accounts payable and accrued expenses 158 86
All other - net (101) (2)
------ ------
Net cash provided from (used in)
operating activities (26) 509
------ ------
INVESTING ACTIVITIES:
Capital expenditures (196) (219)
Disposal of assets 21 4
Restricted cash - withdrawals 29 1
- deposits (15) (3)
Affiliates - investments - (7)
- loans and advances (20) (22)
All other - net 1 17
------ ------
Net cash used in investing activities (180) (229)
------ ------
FINANCING ACTIVITIES:
Increase in Marathon Group's portion of USX
consolidated debt 188 304
Specifically attributed debt - borrowings 138 -
- repayments (138) -
Marathon Stock issued 6 3
Cash restricted for redemption of debt - (59)
Dividends paid (65) (61)
------ ------
Net cash provided from financing activities 129 187
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1) -
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (78) 467
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 137 36
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $59 $503
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(104) $(92)
Income taxes paid, including settlements with the
U. S. Steel Group (1) (63)
<FN>
Selected notes to financial statements appear on pages 30-36.
</TABLE>
<PAGE> 30
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited
but, in the opinion of management, reflects all adjustments necessary for a
fair presentation of the results for the periods covered. All such
adjustments are of a normal recurring nature unless disclosed otherwise.
These financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Certain reclassifications of prior year data have been made
to conform to 1999 classifications. Additional information is contained
in the USX Annual Report on Form 10-K for the year ended
December 31, 1998.
2. The financial statements of the Marathon Group include the financial
position, results of operations and cash flows for the businesses of
Marathon Oil Company (Marathon) and certain other subsidiaries of USX, and
a portion of the corporate assets and liabilities and related transactions
which are not separately identified with ongoing operating units of USX.
These financial statements are prepared using the amounts included in the
USX consolidated financial statements. Corporate amounts reflected in
these financial statements are determined based upon methods which
management believes to be reasonable. The accounting policies applicable
to the preparation of the financial statements of the Marathon Group may be
modified or rescinded in the sole discretion of the Board of Directors of
USX (Board), although the Board has no present intention to do so. The
Board may also adopt additional policies depending on the circumstances.
Although the financial statements of the Marathon Group and the U. S.
Steel Group separately report the assets, liabilities (including contingent
liabilities) and stockholders' equity of USX attributed to each such Group,
such attribution of assets, liabilities (including contingent liabilities)
and stockholders' equity between the Marathon Group and the U. S. Steel
Group for the purpose of preparing their respective financial statements
does not affect legal title to such assets and responsibility for such
liabilities. Holders of USX-Marathon Group Common Stock (Marathon Stock)
and USX-U. S. Steel Group Common Stock (Steel Stock) are holders of common
stock of USX and continue to be subject to all the risks associated with an
investment in USX and all of its businesses and liabilities. Financial
impacts arising from one Group that affect the overall cost of USX's
capital could affect the results of operations and financial condition of
the other Group. In addition, net losses of either Group, as well as
dividends or distributions on any class of USX Common Stock or series of
Preferred Stock and repurchases of any class of USX Common Stock or series
of Preferred Stock at prices in excess of par or stated value, will reduce
the funds of USX legally available for payment of dividends on both classes
of Common Stock. Accordingly, the USX consolidated financial information
should be read in connection with the Marathon Group financial information.
<PAGE> 31
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
2. (Continued)
The financial statement provision for estimated income taxes and
related tax payments or refunds have been reflected in the Marathon Group
and the U. S. Steel Group financial statements in accordance with USX's tax
allocation policy for such groups. In general, such policy provides that
the consolidated tax provision and related tax payments or refunds are
allocated between the Marathon Group and the U. S. Steel Group for group
financial statement purposes, based principally upon the financial income,
taxable income, credits, preferences and other amounts directly related to
the respective groups.
The provision for estimated income taxes for the Marathon Group is
based on tax rates and amounts which recognize management's best estimate
of current and deferred tax assets and liabilities. Differences between
the combined interim tax provisions of the Marathon and U. S. Steel Groups
and USX consolidated are allocated to each group based on the relationship
of the individual group provisions to the combined interim provisions.
3. The method of calculating net income (loss) per common share for the
Marathon Stock and Steel Stock reflects the Board's intent that the
separately reported earnings and surplus of the Marathon Group and the
U. S. Steel Group, as determined consistent with the USX Certificate of
Incorporation, are available for payment of dividends on the respective
classes of stock, although legally available funds and liquidation
preferences of these classes of stock do not necessarily correspond with
these amounts.
Basic net income per share is based on the weighted average number of
common shares outstanding.
Diluted net income per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of
stock options, provided in each case, the effect is not antidilutive.
See Note 7 of the Notes to USX Consolidated Financial Statements for
the computation of income per share.
4. During 1997, Marathon and Ashland Inc. (Ashland) agreed to combine the
major elements of their refining, marketing and transportation (RM&T)
operations. On January 1, 1998, Marathon transferred certain RM&T net
assets to Marathon Ashland Petroleum LLC (MAP), a new consolidated
subsidiary. Also on January 1, 1998, Marathon acquired certain RM&T net
assets from Ashland in exchange for a 38% interest in MAP. The acquisition
was accounted for under the purchase method of accounting. The purchase
price was determined to be $1.9 billion, based upon an external valuation.
The change in Marathon's ownership interest in MAP resulted in a gain of
$248 million, which is included in first quarter 1998 revenues.
Effective August 11, 1998, Marathon acquired Tarragon Oil and Gas
Limited (Tarragon), a Canadian oil and gas exploration and production
company. Results for the first quarter of 1999 include the operations of
Marathon Canada Limited, formerly known as Tarragon.
<PAGE> 32
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. The items below are included in both revenues and costs and expenses,
resulting in no effect on income.
<TABLE>
<CAPTION>
(In millions)
-------------------
First Quarter Ended
March 31
1999 1998
---- ----
<S> <C> <C>
Consumer excise taxes on petroleum products and
merchandise $913 $863
Matching crude oil and refined product buy/sell
transactions settled in cash 872 988
</TABLE>
6. The Marathon Group's total comprehensive income for the first quarter
of 1999 was $121 million and $184 million for the first quarter of 1998.
7. On March 19, 1999, MAP announced that it had signed a definitive
agreement to sell Scurlock Permian LLC (Scurlock), its crude oil gathering
business, to Plains Marketing, L.P. At March 31, 1999, the net assets held
for sale totaled $136 million and have been reclassified as current assets
in the balance sheet. During the first quarter of 1999, MAP recorded an
estimated pretax loss of $16 million related to the sale. Scurlock has
been reported as part of the refining, marketing and transportation
operating segment.
8. The Marathon Group's operations consists of three reportable operating
segments: 1) Exploration and Production (E&P) - explores for and produces
crude oil and natural gas on a worldwide basis; 2) Refining, Marketing and
Transportation (RM&T) - refines, markets and transports crude oil and
petroleum products, primarily in the Midwest and southeastern United States
through MAP; and 3) Other Energy Related Businesses (OERB). OERB is an
aggregation of two segments which fall below the quantitative reporting
thresholds: 1) Natural Gas and Crude Oil Marketing and Transportation -
markets and transports its own and third-party natural gas and crude oil in
the United States; and 2) Power Generation - develops, constructs and
operates independent electric power projects worldwide. The results of
segment operations are as follows:
<PAGE> 33
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. (Continued)
<TABLE>
<CAPTION>
Total
(In millions) E&P RM&T OERB Segments
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIRST QUARTER 1999
Revenues:
Customer $572 $4,179 $82 $4,833
Intersegment (a) 34 5 9 48
Intergroup (a) 3 - 4 7
Equity in earnings of
unconsolidated affiliates 1 3 8 12
Other 6 6 3 15
------ ------ ------ ------
Total revenues $616 $4,193 $106 $4,915
====== ====== ====== ======
Segment income $36 $45 $15 $96
====== ====== ====== ======
FIRST QUARTER 1998
Revenues:
Customer $518 $4,579 $96 $5,193
Intersegment (a) 43 1 2 46
Intergroup (a) 4 - 3 7
Equity in earnings (loss) of
unconsolidated affiliates (1) 3 5 7
Other 1 13 2 16
------ ------ ------ ------
Total revenues $565 $4,596 $108 $5,269
====== ====== ====== ======
Segment income $124 $128 $14 $266
====== ====== ====== ======
<FN>
(a)Intersegment and intergroup sales and transfers were conducted on an arms-
length basis.
</TABLE>
<PAGE> 34
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. (Continued)
The following schedule reconciles segment revenues and income to amounts
reported in the Marathon Group financial statements:
<TABLE>
<CAPTION>
First Quarter Ended
March 31
(In millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Revenues of reportable segments $4,915 $5,269
Items not allocated to segments:
Gain on ownership change in MAP - 248
Other (16) 24
Elimination of intersegment revenues (48) (46)
Administrative revenues - 3
------ ------
Total Group revenues $4,851 $5,498
====== ======
Income:
Income for reportable segments $96 $266
Items not allocated to segments:
Gain on ownership change in MAP - 248
Administrative expenses (26) (38)
Inventory market valuation adjustments 349 25
Other (a) (16) (99)
------ ------
Total Group income from operations $403 $402
====== ======
<FN>
(a)Represents in 1999, estimated loss on sale of Scurlock and in 1998,
international exploration and production property impairments, MAP
transition charges and gas contract settlement.
</TABLE>
<PAGE> 35
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
9. 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)
------------------------
March 31 December 31
1999 1998
----------- -----------
<S> <C> <C>
Crude oil and natural gas liquids $707 $731
Refined products and merchandise 1,102 1,023
Supplies and sundry items 107 107
------ ------
Total (at cost) 1,916 1,861
Less inventory market valuation reserve 202 551
------ ------
Net inventory carrying value $1,714 $1,310
====== ======
</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.
10. At March 31, 1999, accounts payable includes an estimated income tax
payable to the U. S. Steel Group of $13 million, determined in accordance
with the tax allocation policy discussed in Note 2.
11. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments relating to the
Marathon Group involving a variety of matters, including laws and
regulations relating to the environment. Certain of these matters are
discussed below. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the Marathon Group
financial statements. However, management believes that USX will remain a
viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the Marathon Group. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The Marathon Group is subject to federal, state, local and foreign
laws and regulations relating to the environment. These laws generally
provide for control of pollutants released into the environment and require
responsible parties to undertake remediation of hazardous waste disposal
sites. Penalties may be imposed for noncompliance. At March 31, 1999, and
December 31, 1998, accrued liabilities for remediation totaled $48 million.
It is not presently possible to estimate the ultimate amount of all
remediation costs that might be incurred or the penalties that may be
imposed. Receivables for recoverable costs from certain states, under
programs to assist companies in cleanup efforts related to underground
storage tanks at retail marketing outlets, were $42 million at March 31,
1999, and $41 million at December 31, 1998.
<PAGE> 36
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
11. (Continued)
For a number of years, the Marathon Group has made substantial capital
expenditures to bring existing facilities into compliance with various laws
relating to the environment. In the first quarter of 1999 and for the
years 1998 and 1997, such capital expenditures totaled $15 million, $124
million and $81 million, respectively. The Marathon Group anticipates
making additional such expenditures in the future; however, the exact
amounts and timing of such expenditures are uncertain because of the
continuing evolution of specific regulatory requirements.
At March 31, 1999, and December 31, 1998, accrued liabilities for
platform abandonment and dismantlement totaled $147 million and $141
million, respectively.
Guarantees by USX and its consolidated subsidiaries of the liabilities
of an affiliated entity of the Marathon Group totaled $131 million at March
31, 1999 and December 31, 1998.
At March 31, 1999, the Marathon Group's pro rata share of obligations
of LOOP LLC and various pipeline affiliates secured by throughput and
deficiency agreements totaled $165 million. Under the agreements, the
Marathon Group is required to advance funds if the affiliates are unable to
service debt. Any such advances are prepayments of future transportation
charges.
The Marathon Group's contract commitments to acquire property, plant
and equipment and long-term investments at March 31, 1999, totaled $675
million compared with $624 million at December 31, 1998.
<PAGE> 37
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The Marathon Group includes Marathon Oil Company ("Marathon") and certain
other subsidiaries of USX Corporation ("USX"), which are engaged in worldwide
exploration and production of crude oil and natural gas; domestic refining,
marketing and transportation of petroleum products primarily through Marathon
Ashland Petroleum ("MAP"), owned 62% by Marathon; and other energy related
businesses. Net income and related per share amounts are net of Ashland Inc.'s
38% minority interest in MAP's income. The Management's Discussion and Analysis
should be read in conjunction with the Marathon Group's Financial Statements and
Notes to Financial Statements. The discussion of Results of Operations should
be read in conjunction with the Supplemental Statistics provided on pages 51 and
52.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting the
businesses of the Marathon Group. These statements typically contain words such
as "anticipates", "believes", "estimates", "expects", "targets" or similar words
indicating that future outcomes are uncertain. In accordance with "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, these
statements are accompanied by cautionary language identifying important factors,
though not necessarily all such factors, that could cause future outcomes to
differ materially from those set forth in forward-looking statements. For
additional risk factors affecting the businesses of the Marathon Group, see
Supplementary Data - Disclosures About Forward-Looking Statements in USX's 1998
Form 10-K.
<PAGE> 38
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
Revenues for the first quarter of 1999 and 1998 are summarized in the
following table:
<TABLE>
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Sales by product:
Refined products $1,748 $2,126
Merchandise 459 403
Liquid hydrocarbons 498 420
Natural gas 291 345
Transportation and other products 59 79
Gain on ownership change in MAP (a) - 248
Other (b) 11 26
------ ------
Subtotal 3,066 3,647
Excise taxes (c)(e) 913 863
Matching buy/sell transactions (d)(e) 872 988
------ ------
Total revenues $4,851 $5,498
====== ======
- --------
<FN>
(a) See Note 4 to the Marathon Group Financial Statements for a discussion of
the gain on ownership change in MAP.
(b) Includes dividend and affiliate income, gains and losses on disposal of
assets and other income.
(c) Consumer excise taxes on petroleum products and merchandise.
(d) Matching crude oil and refined product buy/sell transactions settled in
cash.
(e) Included in both revenues and operating costs, resulting in no effect on
income.
</TABLE>
Revenues (excluding matching buy/sell transactions and excise taxes)
decreased by $581 million in the first quarter of 1999 from the comparable
prior-year period. The decrease primarily reflected lower average refined
product prices and worldwide liquid hydrocarbon and natural gas prices,
partially offset by higher merchandise sales and increased worldwide crude
oil and natural gas volumes.
<PAGE> 39
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income from operations for the first quarter of 1999 and 1998 are
summarized in the following table:
<TABLE>
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Exploration & production ("E&P")
Domestic $38 $74
International (2) 50
---- ----
Income for E&P reportable segment 36 124
Refining marketing & transportation 45 128
Other energy related businesses (a) 15 14
---- ----
Income for reportable segments $96 $266
Items not allocated to reportable segments:
Administrative expenses (b) $(26) $(38)
IMV reserve adjustment (c) 349 25
Estimated loss on sale of Scurlock Permian LLC (d) (16) -
Gain on ownership change & transition
charges - MAP (e) - 225
E&P int'l impairment & domestic contract
settlement (f) - (76)
----- -----
Total income from operations $403 $402
<FN>
- --------
(a)Includes marketing and transportation of domestic natural gas and crude oil,
and power generation.
(b)Includes the portion of the Marathon Group's administrative costs not
charged to the operating segments and the portion of USX corporate general
and administrative costs allocated to the Marathon Group.
(c)The inventory market valuation ("IMV") reserve reflects the extent to which
the recorded LIFO cost basis of crude oil and refined products inventories
exceeds net realizable value.
(d)For additional information regarding the estimated loss on sale of Scurlock
Permian LLC, see Note 7 to the Marathon Group Financial Statements.
(e)The gain on ownership change and one-time transition charges related to the
formation of MAP. For additional discussion of the gain on ownership change
in MAP, see Note 4 to the Marathon Group Financial Statements.
(f)This represents a write-off of certain non-revenue producing international
investments and the gain from the resolution of contract disputes with a
purchaser of Marathon's natural gas production from certain domestic
properties.
</TABLE>
Income for reportable segments in the first quarter of 1999 decreased by
$170 million from last year's first quarter, due primarily to lower worldwide
liquid hydrocarbon and natural gas prices and lower refined product margins.
<PAGE> 40
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Worldwide E&P ("upstream") segment income in the first quarter of 1999
decreased by $88 million from last year's first quarter, primarily due to the
factors discussed below.
Domestic E&P income in the first quarter of 1999 decreased by $36 million
from last year's first quarter. This decrease was mainly due to lower liquid
hydrocarbon and natural gas prices, partially offset by higher liquid
hydrocarbon volumes primarily from the Gulf of Mexico and lower exploration
expense. For additional information regarding production and prices, refer to
the Supplemental Statistics on pages 51 and 52.
International E&P income in the first quarter of 1999 decreased by $52
million from last year's first quarter. This decrease was mainly due to higher
exploration expense and lower liquid hydrocarbon and natural gas prices. For
additional information regarding production and prices, refer to the
Supplemental Statistics on pages 51 and 52.
Refining, marketing and transportation ("downstream") segment income in the
first quarter of 1999 decreased by $83 million from last year's first quarter.
The decline in downstream segment income was primarily due to lower refined
product margins and an additional accrual for variable pay plan awards for the
1998 performance year, partially offset by a recognized marked-to market
derivative gain and increased merchandise sales volumes at Speedway SuperAmerica
LLC.
Other energy related businesses segment income in the first quarter of 1999
increased by $1 million from last year's first quarter.
Items not allocated to reportable segments
Administrative expenses in the first quarter of 1999 decreased by $12
million from last year's first quarter. The decrease was primarily due to lower
accruals for employee benefit plans.
IMV reserve adjustment - When U. S. Steel Corporation acquired Marathon Oil
Company in March 1982, crude oil and refined product prices were at historically
high levels. In applying the purchase method of accounting, the Marathon
Group's crude oil and refined product inventories were revalued by reference to
current prices at the time of acquisition, and this became the new LIFO cost
basis of the inventories. Generally accepted accounting principles require that
inventories be carried at lower of cost or market. Accordingly, the Marathon
Group has established an IMV reserve to reduce the cost basis of its inventories
to net realizable value. Quarterly adjustments to the IMV reserve result in
noncash charges or credits to income from operations.
When Marathon acquired the crude oil and refined product inventories
associated with Ashland's RM&T operations on January 1, 1998, the Marathon Group
established a new LIFO cost basis for those inventories. The acquisition cost
of these inventories lowered the overall average cost of the Marathon Group's
combined RM&T inventories. As a result, the price threshold at which an IMV
reserve will be recorded has also been lowered. This acquisition resulted in a
one-time reduction in the IMV reserve, yielding a net favorable IMV reserve
adjustment in the first quarter of 1998.
<PAGE> 41
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
These adjustments affect the comparability of financial results from period
to period as well as comparisons with other energy companies, many of which do
not have such adjustments. Therefore, the Marathon Group reports separately the
effects of the IMV reserve adjustments on financial results. In management's
opinion, the effects of such adjustments should be considered separately when
evaluating operating performance.
Net interest and other financial costs in the first three months of 1999
increased by $21 million from the comparable 1998 period, mainly due to
increased costs resulting from higher average debt levels and lower interest
income.
The provision for estimated income taxes in the first quarter of 1999
decreased by $47 million from last year's first quarter due to a decline in
income before taxes.
Net income for the first quarter decreased by $64 million in 1999 from
1998, primarily reflecting the factors discussed above.
Cash Flows
- ----------
Net cash provided from (used in) operating activities was ($26) million in
the first quarter of 1999, compared with $509 million in the first quarter of
1998. The $535 million decrease mainly reflected unfavorable working capital
changes, decreased profitability and a distribution by MAP to Ashland of $103
million in first quarter 1999 as compared to $24 million in first quarter 1998.
The favorable working capital change reported in the first quarter of 1998 was
due to a temporary change in excise tax payment patterns, which reversed later
in the year.
Capital expenditures in the first quarter of 1999 totaled $196 million,
compared with $219 million in the first quarter of 1998. For additional
information regarding capital expenditures, refer to the Supplemental Statistics
on page 50.
Cash from disposal of assets was $21 million in the first quarter of 1999,
compared with $4 million in the first quarter of 1998. Proceeds in 1999 were
mainly from the sale of domestic production properties.
The net change in restricted cash was a net withdrawal of $14 million in
the first quarter of 1999, compared to a net deposit of $2 million in the first
quarter of 1998. The 1999 amount represents cash withdrawn for the purchase and
cash deposited from the sale of domestic production properties.
Loans and advances to affiliates were $20 million in the first quarter of
1999, compared with $22 million in the first quarter of 1998. Cash outflows in
both periods mainly reflected funding provided to equity affiliates for capital
projects, primarily the Sakhalin II project in Russia.
Contract commitments for property, plant and equipment acquisitions and
long-term investments at March 31, 1999, totaled $675 million compared with $624
million at year-end 1998.
<PAGE> 42
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Financial obligations, which consist of the Marathon Group's portion of USX
debt and preferred stock of a subsidiary attributed to both groups, as well as
debt specifically attributed to the Marathon Group, increased by $188 million in
the first quarter of 1999. Financial obligations increased primarily because
capital expenditures and dividend payments exceeded cash from operating
activities. These obligations were partially funded by a reduction in cash of
$78 million. For further details, see USX Consolidated Management's Discussion
and Analysis of Financial Condition and Results of Operations.
Derivative Instruments
- ----------------------
See Quantitative and Qualitative Disclosure About Market Risk for
discussion of derivative instruments and associated market risk for the Marathon
Group.
Liquidity
- ---------
For discussion of USX's liquidity and capital resources, see Management's
Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and
Liquidity.
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
The Marathon Group has incurred and will continue to incur substantial
capital, operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. To the extent these expenditures, as with
all costs, are not ultimately reflected in the prices of the Marathon Group's
products and services, operating results will be adversely affected. The
Marathon Group believes that substantially all of its competitors are subject to
similar environmental laws and regulations. However, the specific impact on
each competitor may vary depending on a number of factors, including the age and
location of its operating facilities, marketing areas, production processes and
whether or not it is engaged in the petrochemical business, power business or
the marine transportation of crude oil and refined products.
USX has been notified that it is a potentially responsible party ("PRP") at
18 waste sites related to the Marathon Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of March
31, 1999. In addition, there are 8 sites related to the Marathon Group where
USX has received information requests or other indications that USX may be a PRP
under CERCLA but where sufficient information is not presently available to
confirm the existence of liability.
There are also 98 additional sites, excluding retail marketing outlets,
related to the Marathon Group where remediation is being sought under other
environmental statutes, both federal and state, or where private parties are
seeking remediation through discussions or litigation. Of these sites, 17 were
associated with properties conveyed to MAP by Ashland for which Ashland has
retained liability for all costs associated with remediation.
At many of these sites, USX is one of a number of parties involved and the
total cost of remediation, as well as USX's share thereof, is frequently
dependent upon the outcome of investigations and remedial studies. The Marathon
Group accrues for environmental remediation activities when the responsibility
to remediate is probable and the amount of associated costs is reasonably
determinable. As environmental remediation matters proceed toward ultimate
resolution or as
<PAGE> 43
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
additional remediation obligations arise, charges in excess of those previously
accrued may be required.
In October 1998, the National Enforcement Investigations Center and Region
V of the United States Environmental Protection Agency conducted a multi-media
inspection of MAP's Detroit refinery. Subsequently, in November 1998, Region V
conducted a multi-media inspection of MAP's Robinson refinery. These
inspections covered compliance with the Clean Air Act (New Source Performance
Standards, Prevention of Significant Deterioration, and the National Emission
Standards for
Hazardous Air Pollutants for Benzene), the Clean Water Act (Permit exceedances
for the Waste Water Treatment Plant), reporting obligations under the Emergency
Planning and Community Right to Know Act and the handling of process waste.
Although MAP has been advised as to certain compliance issues, including one
contested Notice of Violation regarding MAP's Detroit refinery, it is not known
when complete findings on the results of the inspections will be issued. In an
action separate from the multi-media inspection, the Department of Justice filed
a civil complaint in February 1999, alleging violation of the Clean Air Act with
respect to benzene releases at the Robinson refinery.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the Marathon Group
involving a variety of matters, including laws and regulations relating to the
environment. See Note 11 to the Marathon Group Financial Statements for a
discussion of certain of these matters. The ultimate resolution of these
contingencies could, individually or in the aggregate, be material to the
Marathon Group Financial Statements. However, management believes that USX will
remain a viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the Marathon Group. See
discussion of Liquidity in USX Consolidated Management's Discussion and Analysis
of Financial Condition and Results of Operations.
Outlook
- -------
The outlook regarding the Marathon Group's upstream revenues and income is
largely dependent upon future prices and volumes of liquid hydrocarbons and
natural gas. Prices have historically been volatile and have frequently been
affected by unpredictable changes in supply and demand resulting from
fluctuations in worldwide economic activity and political developments in the
world's major oil and gas producing and consuming areas. Any decline in prices
could have a material adverse effect on the Marathon Group's results of
operations. A prolonged decline in such prices could also adversely affect the
quantity of crude oil and natural gas reserves that can be economically produced
and the amount of capital available for exploration and development.
Marathon's 1999 worldwide liquid hydrocarbon production is currently
estimated to average in the range of 225,000 to 230,000 barrels per day ("bpd").
This estimate assumes production from the Stellaria field in the Gulf of Mexico
will commence in the third quarter 1999, rather than the second quarter 1999 as
originally anticipated. Worldwide natural gas volumes for 1999 are expected to
average in the range of 1.33 to 1.35 billion cubic feet per day. Liquid
hydrocarbon and natural gas production estimates for 2000 and 2001 are still in
line with previous estimates.
<PAGE> 44
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The above discussion includes forward-looking statements with respect to
worldwide liquid hydrocarbon production and natural gas volumes for 1999, 2000
and
2001, commencement of projects and dates of initial production. These
statements are based on a number of assumptions, including (among others)
prices, amount of capital available for exploration and development, worldwide
supply and demand for
petroleum products, regulatory constraints, reserve estimates, production
decline rates of mature fields, timing of commencing production from new wells,
timing and results of future development drilling, reserve replacement rates and
other geological, operating and economic considerations. In addition,
development of new production properties in countries outside the United States
may require protracted negotiations with host governments and is frequently
subject to political considerations, such as tax regulations, which could
adversely affect the timing and economics of projects. To the extent these
assumptions prove inaccurate and/or negotiations and other considerations are
not satisfactorily resolved, actual results could be materially different than
present expectations.
Downstream income of the Marathon Group is largely dependent upon refining
crack spreads (the difference between light product prices and crude costs).
Refined product margins have been historically volatile and vary with the level
of economic activity in the various marketing areas, the regulatory climate and
the available supply of crude oil and refined products. Refined product demand
in the United States is expected to be positively impacted as demand for
transportation fuels keeps pace with economic activity. In addition, asphalt
demand should reflect increased activity in infrastructure repairs. The
foregoing discussion includes forward-looking statements with respect to demand
for petroleum products. Some factors that could potentially cause actual
results to differ materially from present expectations include (among others)
pricing, supply and demand for petroleum products, regulatory constraints and
unforeseen hazards such as weather conditions.
In March 1999, MAP signed a definitive agreement to sell Scurlock Permian
LLC to Plains Marketing, L.P. for approximately $136 million. Scurlock Permian
LLC, a wholly owned subsidiary of MAP, is engaged in crude oil transportation,
trading and marketing in an area reaching from the Rocky Mountains to the Gulf
Coast. The transaction is expected to close in the second quarter with an
effective date of April 1, 1999. MAP recorded an estimated pretax loss on the
sale of Scurlock Permian LLC of $16 million in first quarter 1999. The statement
as to the expected close of the transaction is a forward-looking statement.
Some factors that could potentially affect the timing of the closing include
(among others) receipt of government approvals, consents of third parties and
satisfaction of customary closing conditions.
<PAGE> 45
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Year 2000 Readiness Disclosure
- ------------------------------
The Marathon Group is executing Year 2000 action plans which include:
* prioritizing and focusing on those computerized and automated systems and
processes ("systems") critical to the Marathon Group's operations in terms of
material operational, safety, environmental and financial risk to the company.
* allocating and committing appropriate resources to fix the problem.
* developing detailed contingency plans for those systems critical to the
operations in terms of material operational, safety, environmental and
financial risk to the company.
* communicating with, and aggressively pursuing, critical third parties to
help ensure the Year 2000 readiness of their products and services through use
of mailings, telephone contacts, and the inclusion of Year 2000 readiness
language in purchase orders and contracts.
* performing rigorous Year 2000 tests of critical systems.
* participating in, and exchanging Year 2000 information with industry trade
associations, such as the American Petroleum Institute ("API").
* engaging qualified outside engineering and information technology
consulting firms to assist in the Year 2000 inventory, assessment and
readiness.
State of Readiness
Information Technology (IT) systems are 89% ready as of March 31, 1999.
This is a decrease from 92% as of January 31, 1999 as reported in USX's 1998
Form 10-K. As a result of internal audits and continuing business unit review,
additional IT systems (third party software packages) were identified in
February and March 1999. These additional IT systems have been inventoried and
assessed, however, Year 2000 readiness has not been achieved for all of them.
As a result, the overall readiness percent for IT systems decreased. Efforts
continue to identify systems and processes that may be affected by the Year
2000, however, management believes the higher-risk systems have been identified.
IT systems not Year 2000 ready at March 31, 1999 are expected to be completed by
September 30, 1999.
Inventorying of Non-Information Technology (Non-IT) systems was 98%
complete as of March 31, 1999. Assessment of these inventoried systems was 86%
completed. Of the inventory assessed, few require remediation. All Non-IT
systems are scheduled to be Year 2000 ready by the end of the third quarter of
1999 except for a few system remediations which will be implemented during
fourth quarter 1999 in conjunction with scheduled plant maintenance shutdowns.
The following chart provides the percent of completion for the (i)
inventory of systems and processes that may be affected by the Year 2000 ("Y2K
Inventory"), (ii) analysis performed to determine the Year 2000 date impact of
inventoried systems and processes ("Y2K Impact Assessment") and (iii) overall
Year 2000 readiness of the Marathon Group's Year 2000 inventory ("Y2K Readiness
of Overall Inventory"). The percent of completion for Y2K Readiness of overall
Inventory includes all inventory systems not date impacted, those systems
already Year 2000 ready and those corrected and made Year 2000 ready through the
renovation/replacement, testing and implementation activities.
<PAGE> 46
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
<TABLE>
<CAPTION>
Percent Completed
Y2K
Y2K Readiness
As of March 31, 1999 Impact of
Y2K Assess- Overall
Inventory ment Inventory
------ ------ ------
<S> <C> <C> <C>
Information Technology 100% 100% 89%
Non-Information Technology 98% 86% 75%
</TABLE>
Third Parties
Third parties include suppliers, customers and vendors. Third party
vendors are covered under the IT readiness efforts. Contacts have been made
with all critical third parties to determine if they will be able to provide
their services to the Marathon Group after the Year 2000. Each business unit is
reviewing the compliancy status of critical third parties and contacting those
that have not responded or have responded with an unacceptable status. Third
parties risk to the business are being addressed as a part of the business
unit's contingency planning and the appropriate plans are being developed to
overcome any potential risk.
The Costs to Address Year 2000 Issues
The estimated costs associated with Year 2000 readiness, are $42 million,
of which $21 million are incremental costs. This reflects an increase of $6
million from the previously reported estimate, of which $2 million are
incremental costs. The increase in estimated costs results primarily from
increased use of external consultants, increased internal staffing, and the cost
of replacing non-compliant non-IT systems. Total costs incurred as of March 31,
1999, were $21 million, including $9 million of incremental costs. Year 2000
costs may increase in the future as a result of problems that may be encountered
during testing and requirements of the contingency plans that are being
developed.
The Risks of the Company's Year 2000 Issues
The most reasonably likely worst case Year 2000 scenario would be the
inability of critical third party suppliers, such as utility providers,
telecommunication companies, and other critical suppliers, such as drilling
equipment suppliers, platform suppliers, crude oil suppliers and pipeline
carriers, to continue providing their products and services. This could pose
the greatest material operational, safety, environmental and/or financial risk
to the company.
In addition, the lack of accurate and timely Year 2000 date impact
information from suppliers of automation and process control systems and
processes is a concern. Without quality information from suppliers,
specifically on embedded chip technology, some Year 2000 problems could go
undetected until after January 1, 2000.
<PAGE> 47
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In a report issued February 24, 1999 by the United States Senate Special
Committee on the Year 2000 Technology Problem, the committee expressed concern
that many of the countries from which the United States imports oil are
significantly behind the United States in their Year 2000 remediation efforts
and oil production and transportation could be at some risk. In 1998, 64% or
577,000 bpd of the crude oil processed by MAP's refineries was from foreign
sources and acquired primarily from various foreign national oil companies,
producing companies and traders. Of this total, approximately 330,000 bpd was
acquired from the Middle East. According to a report by the American Petroleum
Institute and a February 1999 report by the United States Department of Energy,
the four largest exporters of petroleum to the United States expect all critical
systems to be Year 2000 compliant by the end of 1999. If any country is unable
to export, other countries may be able to compensate. According to the API
report, in any event, importing of oil would not stop instantaneously as there
is always some crude oil en route to the United States. In addition, the United
States government has a Strategic Petroleum Reserve as a buffer to protect
against temporary interruption in foreign oil supplies. The Marathon Group
could be adversely affected by a disruption in supply if alternate sources of
supply were not available.
Contingency Planning
The Marathon Group has participated in an API work group to develop a Year
2000 contingency plan format. This format, which addresses all Year 2000 areas
of concern, has been adopted as the industry standard. Marathon business units
are working on the "Plan Formulation" step of the API contingency plan format.
Overall, contingency planning is 39% completed, which is ahead of the 30%
milestone that was projected for March 31, 1999. These plans are to be
completed and tested, when practical, by the end of the third quarter of 1999.
A multiple occurrence emergency response drill for Year 2000 is planned for the
third quarter of 1999.
The foregoing Year 2000 discussion includes forward-looking statements of
the Marathon Group's efforts, management's expectations and costs relating to
Year 2000 readiness. These statements are based on certain assumptions
including, but not limited to, the availability of programming and testing
resources, vendors' ability to install or modify proprietary hardware and
software, unanticipated problems identified in the ongoing Year 2000 readiness
review, the effectiveness and execution of contingency plans and the level of
incremental costs associated with Year 2000 readiness efforts. If these
assumptions prove to be incorrect, actual results could differ materially from
present expectations.
<PAGE> 48
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Accounting Standard
- --------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This new standard requires recognition of all
derivatives as either assets or liabilities at fair value. This new standard
may result in additional volatility in both current period earnings and other
comprehensive income as a result of recording recognized and unrecognized gains
and losses resulting from changes in the fair value of derivative instruments.
At adoption this new standard requires a comprehensive review of all outstanding
derivative instruments to determine whether or not their use meets the hedge
accounting criteria. It is possible that there will be derivative instruments
employed in our businesses that do not meet all of the designated hedge criteria
and they will be reflected in income on a mark-to-market basis. Based upon the
strategies currently used by USX and the level of activity related to forward
exchange contracts and commodity-based derivative instruments in recent periods,
USX does not anticipate the effect of adoption to have a material impact on
either financial position or results of operations of the Marathon Group. USX
plans to adopt the standard effective
January 1, 2000, as required.
<PAGE> 49
MARATHON GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Commodity Price Risk and Related Risks
- --------------------------------------
Sensitivity analysis of the incremental effects on pretax income of
hypothetical 10% and 25% changes in commodity prices for open derivative
commodity instruments as of March 31, 1999 are provided in the following table:
(a)
<TABLE>
<CAPTION>
Incremental Decrease
in Pretax Income
Assuming a Hypothetical
Price Change of(a)
(Dollars in millions) 10% 25%
- --------------------------------------------------------------------------------
<S> <C> <C>
Derivative Commodity Instruments
Marathon Group (b) (c)
Crude oil (price decrease) (d) $4.8 $28.3
Natural gas (price decrease) (d) 9.2 23.7
Refined products (price decrease) (d) 4.1 10.8
<FN>
(a) Gains and losses on derivative commodity instruments are generally
offset by price changes in the underlying commodity. Effects of these
offsets are not reflected in the sensitivity analyses. Amounts reflect
the estimated incremental effect on pretax income of hypothetical 10% and
25% changes in closing commodity prices for each open contract position
at March 31, 1999. Marathon Group management evaluates its portfolio of
derivative commodity instruments on an ongoing basis and adds or revises
strategies to reflect anticipated market conditions and changes in risk
profiles. Changes to the portfolio subsequent to March 31, 1999, would
cause future pretax income effects to differ from those presented in the
table.
(b) The number of net open contracts varied throughout first quarter
1999, from a low of 453 contracts at March 11, to a high of 19,223
contracts at March 31, and averaged 8,321 for the quarter. The
derivative commodity instruments used and hedging positions taken also
varied throughout first quarter 1999, and will continue to vary in the
future. Because of these variations in the composition of the portfolio
over time, the number of open contracts, by itself, cannot be used to
predict future income effects.
(c) The calculation of sensitivity amounts for basis swaps assumes that
the physical and paper indices are perfectly correlated. Gains and
losses on options are based on changes in intrinsic value only.
(d) The direction of the price change used in calculating the
sensitivity amount for each commodity reflects that which would result in
the largest incremental decrease in pretax income when applied to the
derivative commodity instruments used to hedge that commodity.
</TABLE>
<PAGE> 50
MARATHON GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Interest Rate Risk
- ------------------
As of March 31, 1999, the discussion of the Marathon Group's interest rate
risk has not changed materially from that presented in Quantitative and
Qualitative Disclosures About Market Risk included in USX's 1998 Form 10-K.
Foreign Currency Exchange Rate Risk
- -----------------------------------
As of March 31, 1999, the discussion of the Marathon Group's foreign
currency exchange rate risk has not changed materially from that presented in
Quantitative and Qualitative Disclosures About Market Risk included in USX's
1998 Form 10-K.
Equity Price Risk
- -----------------
As of March 31, 1999, the Marathon Group had no material exposure to equity
price risk.
Safe Harbor
- -----------
The Marathon Group's quantitative and qualitative disclosures about market
risk include forward-looking statements with respect to management's opinion
about risks associated with the Marathon Group's use of derivative instruments.
These statements are based on certain assumptions with respect to market prices
and industry supply and demand for crude oil, natural gas and refined products.
To the extent that these assumptions prove to be inaccurate, future outcomes
with respect to the Marathon Group's hedging programs may differ materially from
those discussed in the forward-looking statements.
<PAGE> 51
<TABLE>
<CAPTION>
MARATHON GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
-----------------------------------
($ in Millions)
First Quarter
Ended March 31
--------------
1999(a) 1998
---- ----
<S> <C> <C>
INCOME (LOSS) FROM OPERATIONS
Exploration & Production ("E&P")
Domestic $38 $74
International (2) 50
----- -----
Income For E&P Reportable Segment 36 124
Refining, Marketing & Transportation 45 128
Other Energy Related Businesses (b) 15 14
----- -----
Income For Reportable Segments $96 $266
Items Not Allocated To Reportable Segments:
Administrative Expenses $(26) $(38)
Inventory Market Val. Res. Adjustment 349 25
Estimated loss on Sale of Scurlock Permian (16) -
Gain on Ownership Change
& Transition Charges-MAP - 225
E&P Int'l. Impairment & Domestic Contract Settlement - (76)
---- -----
Marathon Group Income From Operations $403 $402
CAPITAL EXPENDITURES
Exploration & Production $149 $167
Refining, Marketing & Transportation 46 50
Other (c) 1 2
----- -----
Total $196 $219
EXPLORATION EXPENSE
Domestic $22 $38
International (d) 41 44
----- -----
Total $63 $82
INVESTMENTS IN AFFILIATES - $7
LOANS AND ADVANCES TO AFFILIATES $20 $22
OPERATING STATISTICS
Net Liquid Hydrocarbon Production (e):
United States 143.1 125.8
Europe 34.0 40.4
Other International 31.0 5.7
----- -----
Worldwide 208.1 171.9
Net Natural Gas Production (f):
United States 769.3 748.2
Europe (g) 399.5 453.6
Other International 189.5 13.1
----- -------
Total Consolidated 1,358.3 1,214.9
Equity Affiliate 35.6 42.5
----- -------
Worldwide 1,393.9 1,257.4
</TABLE>
<PAGE> 52
<TABLE>
<CAPTION>
MARATHON GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Continued) (Unaudited)
-----------------------------------
First Quarter
Ended March 31
--------------
1999(a) 1998
---- ----
<S> <C> <C>
Average Equity Sales Prices (h):
Liquid Hydrocarbons (per Bbl)
Domestic $9.16 $12.10
International 10.73 13.75
Natural Gas (per Mcf)
Domestic $1.48 $1.90
International 1.86 2.16
Crude Oil Refined (e) 848.2 905.3
Refined Products Sold (e) 1,121.0 1,142.5
Matching buy/sell volumes included in refined
products sold (e) 38.1 47.6
- ------------
<FN>
(a) Where applicable, results for first quarter 1999 include Marathon
Canada Limited, formerly Tarragon Oil and Gas Limited, which was acquired
by Marathon on
August 12, 1998.
(b) Includes domestic natural gas and crude oil marketing and
transportation, and power generation.
(c) Includes other energy related businesses and corporate capital
expenditures.
(d) Includes $30 million for impairment in the first quarter of 1998.
(e) Thousands of barrels per day
(f) Millions of cubic feet per day
(g) Includes gas acquired for injection and subsequent resale of 20 and
26 mmcfd in the first quarters of 1999 and 1998, respectively.
(h) Prices exclude gains and losses from hedging activities.
</TABLE>
<PAGE> 53
Part I - Financial Information (Continued):
C. U. S. Steel Group
<TABLE>
<CAPTION>
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
------------------------------------
First Quarter Ended
March 31
(Dollars in millions, except per share amounts) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Sales $1,246 $1,670
Income (loss) from affiliates (23) 15
Gain (loss) on disposal of assets (12) 11
------ ------
Total revenues 1,211 1,696
------ ------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 1,157 1,455
Selling, general and administrative expenses (credits) (70) (46)
Depreciation, depletion and amortization 71 77
Taxes other than income taxes 55 48
------ ------
Total costs and expenses 1,213 1,534
------ ------
INCOME (LOSS) FROM OPERATIONS (2) 162
Net interest and other financial costs 8 28
------ ------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS (10) 134
Provision (credit) for estimated income taxes (1) 47
------ ------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS (9) 87
Extraordinary loss on extinguishment of debt,
net of income tax 5 -
------ ------
NET INCOME (LOSS) (14) 87
Dividends on preferred stock 2 2
------ ------
NET INCOME (LOSS) APPLICABLE TO STEEL STOCK $(16) $85
====== ======
STEEL STOCK DATA:
Income (loss) before extraordinary loss $(11) $85
- Per share - basic (.13) .98
- diluted (.13) .95
Extraordinary loss, net of income tax 5 -
- Per share - basic and diluted .05 -
Net income (loss) $(16) $85
- Per share - basic (.18) .98
- diluted (.18) .95
Dividends paid per share .25 .25
Weighted average shares, in thousands
- Basic 88,368 86,600
- Diluted 88,368 94,125
<FN>
Selected notes to financial statements appear on pages 56-61.
</TABLE>
<PAGE> 54
<TABLE>
<CAPTION>
U. S. STEEL GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
------------------------------------
March 31 December 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $18 $9
Receivables, less allowance for doubtful
accounts of $5 and $9 406 392
Inventories 712 698
Deferred income tax benefits 177 176
------ ------
Total current assets 1,313 1,275
Investments and long-term receivables,
less reserves of $3 and $10 637 743
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$6,000 and $5,939 2,506 2,500
Prepaid pensions 2,232 2,172
Other noncurrent assets 56 59
------ ------
Total assets $6,744 $6,749
====== ======
LIABILITIES
Current liabilities:
Notes payable $7 $13
Accounts payable 577 501
Payroll and benefits payable 313 330
Accrued taxes 137 150
Accrued interest 7 10
Long-term debt due within one year 11 12
------ ------
Total current liabilities 1,052 1,016
Long-term debt, less unamortized discount 444 464
Long-term deferred income taxes 148 129
Employee benefits 2,319 2,315
Deferred credits and other liabilities 480 484
Preferred stock of subsidiary 66 66
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely junior
subordinated convertible debentures of USX 182 182
STOCKHOLDERS' EQUITY
Preferred stock 3 3
Common stockholders' equity 2,050 2,090
------ ------
Total stockholders' equity 2,053 2,093
------ ------
Total liabilities and stockholders' equity $6,744 $6,749
====== ======
<FN>
Selected notes to financial statements appear on pages 56-61.
</TABLE>
<PAGE> 55
<TABLE>
<CAPTION>
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------
First Quarter Ended
March 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income (loss) $(14) $87
Adjustments to reconcile to net cash provided
from operating activities:
Extraordinary loss 5 -
Depreciation, depletion and amortization 71 77
Pensions and other postretirement benefits (51) (52)
Deferred income taxes 22 43
(Gain) loss on disposal of assets 12 (11)
Changes in:
Current receivables - sold 30 -
- operating turnover (33) 70
Inventories (14) (13)
Current accounts payable and accrued expenses 30 (44)
All other - net 22 (23)
------ ------
Net cash provided from operating activities 80 134
------ ------
INVESTING ACTIVITIES:
Capital expenditures (79) (57)
Disposal of assets 2 2
Restricted cash - deposits (4) -
Affiliates - investments - (66)
All other - net - 3
------ ------
Net cash used in investing activities (81) (118)
------ ------
FINANCING ACTIVITIES:
Increase in U. S. Steel Group's portion of USX
consolidated debt 42 7
Specifically attributed debt repayments (8) -
Steel Stock issued - 2
Cash restricted for redemption of debt - (7)
Dividends paid (24) (24)
------ ------
Net cash provided from (used in)
financing activities 10 (22)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9 (6)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9 18
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $18 $12
====== ======
Cash provided from (used in) operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(25) $(23)
Income taxes (paid) refunded, including settlements
with the Marathon Group (2) 16
<FN>
Selected notes to financial statements appear on pages 56-61.
</TABLE>
<PAGE> 56
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited
but, in the opinion of management, reflects all adjustments necessary for a
fair presentation of the results for the periods covered. All such
adjustments are of a normal recurring nature unless disclosed otherwise.
These financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Certain reclassifications of prior year data have been made
to conform to 1999 classifications. Additional information is contained
in the USX Annual Report on Form 10-K for the year ended
December 31, 1998.
2. The financial statements of the U. S. Steel Group include the
financial position, results of operations and cash flows for all businesses
of USX other than the businesses, assets and liabilities included in the
Marathon Group and a portion of the corporate assets and liabilities and
related transactions which are not separately identified with ongoing
operating units of USX. These financial statements are prepared using the
amounts included in the USX consolidated financial statements. Corporate
amounts reflected in these financial statements are determined based upon
methods which management believes to be reasonable. The accounting
policies applicable to the preparation of the financial statements of the
U. S. Steel Group may be modified or rescinded in the sole discretion of
the Board of Directors of USX (Board), although the Board has no present
intention to do so. The Board may also adopt additional policies depending
on the circumstances.
Although the financial statements of the U. S. Steel Group and the
Marathon Group separately report the assets, liabilities (including
contingent liabilities) and stockholders' equity of USX attributed to each
such Group, such attribution of assets, liabilities (including contingent
liabilities) and stockholders' equity between the U. S. Steel Group and the
Marathon Group for purposes of preparing their respective financial
statements does not affect legal title to such assets and responsibility
for such liabilities. Holders of USX-U. S. Steel Group Common Stock (Steel
Stock) and USX-Marathon Group Common Stock (Marathon Stock) are holders of
common stock of USX and continue to be subject to all the risks associated
with an investment in USX and all of its businesses and liabilities.
Financial impacts arising from one Group that affect the overall cost of
USX's capital could affect the results of operations and financial
condition of the other Group. In addition, net losses of either Group, as
well as dividends or distributions on any class of USX Common Stock or
series of Preferred Stock and repurchases of any class of USX Common Stock
or series of Preferred Stock at prices in excess of par or stated value,
will reduce the funds of USX legally available for payment of dividends on
both classes of Common Stock. Accordingly, the USX consolidated financial
information should be read in connection with the U. S. Steel Group
financial information.
The financial statement provision for estimated income taxes and
related tax payments or refunds have been reflected in the U. S. Steel
Group and the Marathon Group financial statements in accordance with USX's
tax allocation policy for such groups. In general, such policy provides
that the consolidated tax provision and related tax payments or refunds are
allocated
<PAGE> 57
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
2. (Continued)
between the U. S. Steel Group and the Marathon Group for group
financial statement purposes, based principally upon the financial income,
taxable income, credits, preferences and other amounts directly related to
the respective groups.
The provision for estimated income taxes for the U. S. Steel Group is
based on tax rates and amounts which recognize management's best estimate
of current and deferred tax assets and liabilities. Differences between
the combined interim tax provisions of the U. S. Steel and Marathon Groups
and USX consolidated are allocated to each group based on the relationship
of the individual group provisions to the combined interim provisions.
3.The U. S. Steel Group's total comprehensive income (loss) for the first
quarter of 1999 was $(18) million and $87 million for the first quarter of
1998.
4. The method of calculating net income (loss) per common share for the
Steel Stock and Marathon Stock reflects the Board's intent that the
separately reported earnings and surplus of the U. S. Steel Group and the
Marathon Group, as determined consistent with the USX Certificate of
Incorporation, are available for payment of dividends on the respective
classes of stock, although legally available funds and liquidation
preferences of these classes of stock do not necessarily correspond with
these amounts.
Basic net income (loss) per share is calculated by adjusting net
income for dividend requirements of preferred stock and is based on the
weighted average number of common shares outstanding.
Diluted net income (loss) per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of
stock options, provided in each case, the effect is not antidilutive.
See Note 7, of the Notes to USX Consolidated Financial Statements for
the computation of income per share.
5. On March 31, 1999, USX irrevocably deposited with a trustee the entire
5.5 million common shares it owned in RTI International Metals, Inc. (RTI).
The deposit of the shares resulted in the satisfaction of USX's obligation
under its 6-3/4% Exchangeable Notes (indexed debt) due February 1, 2000.
Under the terms of the indenture, the trustee will exchange the RTI shares
for the notes at maturity. The notes are exchangeable for shares of RTI
common stock on a variable basis up to one share per note depending on the
market price of RTI common stock at maturity. Ownership of any shares not
required for satisfaction of the indexed debt will revert to USX.
As a result of the above transaction, USX recorded in the first
quarter of 1999 an extraordinary loss of $5 million, net of a $3 million
income tax benefit, representing prepaid interest expense and the write-off
of unamortized debt issue costs, and a pretax charge of $22 million,
representing
<PAGE> 58
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (Continued)
the difference between the carrying value of the investment in RTI and
the carrying value of the indexed debt, which is included in gain (loss) on
disposal of assets. This transaction represents a noncash investing and
financing activity of $56 million, which was the carrying value of the
indexed debt at March 31, 1999.
Additionally, a $13 million credit to adjust the indexed debt to
settlement value at March 31, 1999, is included in net interest and other
financial costs. The indexed debt adjustment in the first quarter of 1998
resulted in a charge of $4 million.
In December 1996, USX had issued the $117 million of notes indexed to
the common share price of RTI. At maturity, USX would have been required
to exchange the notes for shares of RTI common stock, or redeem the notes
for the equivalent amount of cash. Since USX's investment in RTI was
attributed to the U. S. Steel Group, the indexed debt was also attributed
to the U. S. Steel Group. USX had a 26% investment in RTI and accounted
for its investment using the equity method of accounting.
6. The U. S. Steel Group consists of one operating segment, U. S. Steel.
U. S. Steel is engaged in the production and sale of steel mill products,
coke and taconite pellets. U. S. Steel also engages in the following
related business activities: the management of mineral resources, domestic
coal mining, engineering and consulting services, and real estate
development and management. The results of segment operations are as
follows:
<TABLE>
<CAPTION>
First Quarter Ended
March 31
(In millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Customer $1,245 $1,669
Intergroup (a) 1 -
Equity in earnings (loss) of unconsolidated affiliates (23) 15
Other 10 12
------ ------
Total revenues $1,233 $1,696
====== ======
Segment income (loss) $(59) $106
====== ======
<FN>
(a) Intergroup sales and transfers were conducted on an arm's-length basis.
</TABLE>
<PAGE> 59
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
6. (Continued)
The following schedule reconciles segment revenue and income (loss) to
amounts reported in the U. S. Steel Group's financial statements:
<TABLE>
<CAPTION>
First Quarter Ended
March 31
(In millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenues of reportable segment $1,233 $1,696
Loss on investment in RTI stock used to satisfy
indexed debt obligations (22) -
------ ------
Total Group revenues $1,211 $1,696
====== ======
Income (loss) for reportable segment $(59) $106
Items not allocated to segment:
Administrative expenses (5) (9)
Pension credits 108 93
Costs related to former business activities (24) (28)
Loss on investment in RTI stock used to satisfy
indexed debt obligations (22) -
------ ------
Total Group income (loss) from operations $(2) $162
====== ======
</TABLE>
7. Income (loss) from operations includes net periodic pension credits of
$53 million and $51 million in the first quarter of 1999 and 1998,
respectively. These pension credits are primarily noncash and for the most
part are included in selling, general and administrative expenses.
8. Inventories are carried at the lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
<TABLE>
<CAPTION>
(In millions)
-------------------------
March 31 December 31
1999 1998
----------- -----------
<S> <C> <C>
Raw materials $157 $185
Semi-finished products 319 282
Finished products 187 182
Supplies and sundry items 49 49
---- ----
Total $712 $698
==== ====
</TABLE>
<PAGE> 60
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
9. The U. S. Steel Group participates in an agreement (the program) to
sell an undivided interest in certain accounts receivable. Payments are
collected from the sold accounts receivable; the collections are reinvested
in new accounts receivable for the buyers; and a yield, based on defined
short-term market rates, is transferred to the buyers. At March 31, 1999,
the amount sold under the program that had not been collected was $350
million, which will be forwarded to the buyers at the end of the agreement,
or in the event of earlier contract termination. If the U. S. Steel Group
does not have a sufficient quantity of eligible accounts receivable to
reinvest in for the buyers, the size of the program will be reduced
accordingly. The buyers have rights to a pool of receivables that must be
maintained at a level of at least 115% of the program size. In the event
of a change in control of USX, as defined in the agreement, the U. S. Steel
Group may be required to forward payments collected on sold accounts
receivable to the buyers.
10. At March 31, 1999, accounts receivable includes an estimated income
tax receivable from the Marathon Group of $13 million, determined in
accordance with the tax allocation policy discussed in Note 2.
11. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments relating to the U.
S. Steel Group involving a variety of matters including laws and
regulations relating to the environment. Certain of these matters are
discussed below. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the U. S. Steel Group
financial statements. However, management believes that USX will remain a
viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the U. S. Steel Group. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The U. S. Steel Group is subject to federal, state and local laws and
regulations relating to the environment. These laws generally provide for
control of pollutants released into the environment and require responsible
parties to undertake remediation of hazardous waste disposal sites.
Penalties may be imposed for noncompliance. At March 31, 1999, and
December 31, 1998, accrued liabilities for remediation totaled $104 million
and $97 million, respectively. It is not presently possible to estimate
the ultimate amount of all remediation costs that might be incurred or the
penalties that may be imposed.
For a number of years, the U. S. Steel Group has made substantial
capital expenditures to bring existing facilities into compliance with
various laws relating to the environment. In the first quarter of 1999 and
for the years 1998 and 1997, such capital expenditures totaled $6 million,
$49 million and $43 million, respectively. The U. S. Steel Group
anticipates making additional such expenditures in the future; however, the
exact amounts and timing of such expenditures are uncertain because of the
continuing evolution of specific regulatory requirements.
Guarantees by USX of the liabilities of affiliated entities of the U.
S. Steel Group totaled $86 million at March 31, 1999. In the event that
any defaults of guaranteed liabilities occur, USX has access to its
interest in the assets of the affiliates to reduce U. S. Steel Group losses
resulting from these guarantees. As of March 31, 1999, the largest
guarantee for a single affiliate was $58 million.
<PAGE> 61
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
11. (Continued)
The U. S. Steel Group's contract commitments to acquire property,
plant and equipment at March 31, 1999, totaled $168 million compared with
$188 million at December 31, 1998.
On August 1, 1999, U. S. Steel, along with several major steel
competitors, faces the expiration of the labor agreement with the United
Steelworkers of America. U. S. Steel's ability to negotiate an acceptable
labor contract is essential to its ongoing operations. Any labor
interruptions could have an adverse effect on operations, financial results
and cash flow.
<PAGE> 62
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----------------------------------------------
The U. S. Steel Group includes U. S. Steel, which is engaged in the
production, transportation and sale of steel mill products, coke, and taconite
pellets; the management of mineral resources; domestic coal mining; real estate
development; and engineering and consulting services. Certain business
activities are conducted through joint ventures and partially owned companies,
such as USS/Kobe Steel Company ("USS/Kobe"), USS-POSCO Industries ("USS-POSCO"),
PRO-TEC Coating Company ("PRO-TEC"), Transtar, Inc. ("Transtar"), Clairton 1314B
Partnership, and VSZ U. S. Steel, s. r.o. Management's Discussion and Analysis
should be read in conjunction with the U. S. Steel Group's Financial Statements
and Notes to Financial Statements. The discussion of Results of Operations
should be read in conjunction with the Supplemental Statistics provided on page
73.
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 Information in USX
1998 Form 10-K.
Results of Operations
- ---------------------
Revenues for the first quarter of 1999 and 1998 are set forth in the
following table:
<TABLE>
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Sales $1,246 $1,670
Income (loss) from affiliates (23) 15
Gain (loss) on disposal of assets (12) 11
------------
Total revenues 1,211 1,696
====== ======
</TABLE>
Total revenues decreased by $485 million in the first quarter of 1999
compared with the first quarter of 1998. The decrease primarily reflected
lower average steel product prices (average steel product prices decreased
$40/ton), lower shipment volumes (total steel shipments decreased
approximately 552,000 tons), and lower income from affiliates.
<PAGE> 63
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Income (loss) from operations for the U. S. Steel Group for the first
quarter of 1999 and 1998 are set forth in the following table:
<TABLE>
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Segment income (loss) for U. S. Steel Operations (a) $(59) $106
Items not allocated to segment:
Pension credits 108 93
Administrative expenses (5) (9)
Costs related to former business activities (b) (24) (28)
Loss on investment in RTI stock used to satisfy indexed
debt obligations (c) (22) -
------ ------
Total income (loss) from operations $(2) $162
====== ======
- ------
<FN>
(a) Includes income from the production and sale of steel mill products,
coke and taconite pellets; the management of mineral resources; domestic
coal mining; real estate development; and engineering and consulting
services.
(b) Includes the portion of postretirement benefit costs and certain
other expenses principally attributable to former business units of the
U. S. Steel Group.
(c) For further details, see Note 5 to the U. S. Steel Group Financial
Statements.
</TABLE>
Segment income for U. S. Steel operations
Segment income for U. S. Steel operations, which decreased $165 million in
the first quarter of 1999, compared with the first quarter of 1998, included a
$10 million charge for environmental accruals. In addition to the effect of
this item, the decrease in segment income in the first quarter of 1999 for U. S.
Steel operations was primarily due to lower average steel prices, lower
shipments, lower income from affiliates, and increased pension costs charged to
U. S. Steel operations.
Steel product prices and shipment volumes continue to be negatively affected by
the ongoing effects of steel imports, including the recent increase in imports
of cut-to-length plate, and the continued weakness in tubular markets.
Items not allocated to segment
Pension credits associated with pension plan assets and liabilities
allocated to pre-1987 retirees and former businesses are not included in segment
income for U. S. Steel operations. These pension credits, which are primarily
noncash, totaled $108 million in first quarter of 1999, compared to $93 million
in first quarter of 1998.
Pension credits, combined with pension costs included in segment income for
U. S. Steel operations, resulted in net pension credits of $52 million in the
first quarter of 1999 and $49 million in the first quarter of 1998. Future net
pension credits can be volatile dependent upon the future marketplace
performance of plan assets, changes in actuarial assumptions regarding such
factors as a selection of a discount rate and rate of return on assets, changes
in the amortization levels of transition amounts or prior period service costs,
plan amendments affecting benefit payout levels and profile changes in the
beneficiary populations being valued. Changes in any of these factors could
cause net pension credits to change. To the extent net pension credits decline
in the future, income from operations would be adversely affected. For
additional information on pensions, see Note 7 to the U. S. Steel Group
Financial Statements.
<PAGE> 64
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Net interest and other financial costs for the first quarter of 1999 and
1998 are set forth in the following table:
<TABLE>
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Net interest and other financial costs $8 $28
Less:
Favorable (unfavorable) adjustment to
carrying value of indexed debt(a) 13 (4)
------ ------
Net interest and other financial costs
adjusted to exclude above item $21 $24
====== ======
<FN>
- -------
(a)In December 1996, USX issued $117 million of 6 3/4% Exchangeable Notes
Due February 1, 2000 ("indexed debt") indexed to the price of RTI
common stock. On March 31, 1999, USX irrevocably deposited with a
trustee the entire 5.5 million common shares it owned in RTI. The
deposit of shares resulted in the satisfaction of USX's obligation
under its indexed debt. Under the terms of the indenture, the trustee
will exchange the RTI shares for the notes at maturity. The notes are
exchangeable for shares of RTI common stock on a variable basis up to
one share per note depending on the market price of RTI common stock at
maturity. If the market price of RTI common stock at maturity exceeds
$21.375 per share the entire 5.5 million shares will not be required to
satisfy USX's obligation under the indexed debt. Ownership of any
shares not required for satisfaction of the indexed debt will revert to
USX. A maximum of 838,000 shares, or 4% of the shares of RTI common
stock outstanding on March 31, 1999, would revert to USX if the market
price of RTI common stock at maturity equals or exceeds $25.23 per
share. There will be no indexed debt adjustment or interest expense
related to indexed debt in future quarters. For further discussion,
see Note 5 to the U. S. Steel Group Financial Statements.
</TABLE>
Adjusted net interest and other financial costs decreased by $3 million in
the first quarter of 1999 as compared with the same period in 1998, due
primarily to lower average interest rates.
The provision for estimated income taxes in the first quarter of 1999
decreased compared to the same period in 1998 due to a decline in income from
operations.
The extraordinary loss on extinguishment of debt of $5 million (net of $3
million income tax benefit) in the first quarter of 1999 represents prepaid
interest expense and the write-off of unamortized debt issue costs resulting
from the satisfaction of USX's obligation of its indexed debt. For further
discussion, see Note 5 to the U. S. Steel Group Financial Statements.
Net loss in the first quarter of 1999 was $14 million, compared with net
income of $87 million in the first quarter of 1998. Net income decreased $101
million in the first quarter of 1999 compared to the same period in 1998,
primarily reflecting the factors discussed above.
Operating Statistics
- --------------------
First quarter 1999 steel shipments of 2.4 million tons and raw steel
production of 2.7 million tons decreased 19% and 13%, respectively, from the
same period in 1998. Raw steel capability utilization in the first quarter of
1999 averaged 87.1%, compared to 99.6% in the same period in 1998. Production
and raw steel capability utilization in the first quarter of 1999 continued to
be negatively impacted by the ongoing effects of steel imports.
<PAGE> 65
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Cash Flows
- ----------
Net cash provided from operating activities decreased $54 million in the
first quarter of 1999, compared with the first quarter of 1998. The decrease
was due mainly to decreased profitability.
Capital expenditures in the first quarter of 1999 were $79 million,
compared with $57 million in the same period in 1998. Contract commitments for
capital expenditures at March 31, 1999, totaled $168 million, compared with $188
million at year-end 1998.
Net cash used in investments in equity affiliates in the first quarter of
1998 of $66 million primarily reflects funding for entry into a joint venture in
Slovakia with VSZ a.s. ("VSZ"). In February 1998, this 50-50 joint venture,
doing business as VSZ U. S. Steel, s. r.o., took over ownership and operation of
an existing tin mill facility at VSZ's Ocel plant in Kosice, with annual
production capability of 140,000 metric tons.
Financial obligations (excluding the noncash satisfaction of the indexed
debt) increased by $34 million in the first quarter of 1999. Financial
obligations consist of the U. S. Steel Group's portion of USX debt and preferred
stock of a subsidiary attributed to both groups, as well as debt and financing
agreements specifically attributed to the U. S. Steel Group.
Derivative Instruments
See Quantitative and Qualitative Disclosures About Market Risk for
discussion of derivative instruments and associated market risk for U. S. Steel
Group.
Liquidity
For discussion of USX's liquidity and capital resources, see Management's
Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and
Liquidity.
Environmental Matters, Litigation and Contingencies
- ---------------------------------------------------
The U. S. Steel Group has incurred and will continue to incur substantial
capital, operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. In recent years, these expenditures have
been mainly for process changes in order to meet Clean Air Act obligations,
although ongoing compliance costs have also been significant. To the extent
these expenditures, as with all costs, are not ultimately reflected in the
prices of the U. S. Steel Group's products and services, operating results will
be adversely affected. The U. S. Steel Group believes that all of its domestic
competitors are subject to similar environmental laws and regulations. However,
the specific impact on each competitor may vary depending on a number of
factors, including the age and location of its operating facilities, marketing
areas, production processes and the specific products and services it provides.
To the extent that competitors are not required to undertake equivalent costs in
their operations, the competitive position of the U. S. Steel Group could be
adversely affected.
USX has been notified that it is a potential responsible party (``PRP'') at
25 waste sites related to the U. S. Steel Group under the Comprehensive
Environmental Response, Compensation and Liability Act (``CERCLA'') as of March
31, 1999. In addition, there are 13 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 34 additional sites related to the U. S. Steel Group
where remediation is being sought
<PAGE> 66
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
under other environmental statutes, both federal and state, or where private
parties are seeking remediation through discussions or litigation. At many of
these sites, USX is one of a number of parties involved and the total cost of
remediation, as well as USX's share thereof, is frequently dependent upon the
outcome of investigations and remedial studies. The U. S. Steel Group accrues
for environmental remediation activities when the responsibility to remediate is
probable and the amount of associated costs is reasonably determinable. As
environmental remediation matters proceed toward ultimate resolution or as
additional remediation obligations arise, charges in excess of those previously
accrued may be required.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the U. S. Steel Group
involving a variety of matters, including laws and regulations relating to the
environment, certain of which are discussed in Note 11 to the U. S. Steel Group
Financial Statements. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the U. S. Steel Group Financial
Statements. However, management believes that USX will remain a viable and
competitive enterprise even though it is possible that these contingencies could
be resolved unfavorably to the U. S. Steel Group.
Outlook
- -------
Shipment volumes and average steel product prices in the second 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 ongoing effects of steel imports,
including the recent increase in imports of cut-to-length plate, and continued
weak tubular markets. In recent years, demand for steel in the United States has
been at high levels. Any weakness in the U.S. economy for capital goods or
consumer durables could further adversely impact U. S. Steel Group's product
prices and shipment levels.
During the second quarter of 1999, the Fairfield Works seamless pipe mill
will be down for approximately five weeks for a major upgrade which will improve
the productivity and quality from that facility.
On August 1, 1999, U. S. Steel, along with several major steel competitors,
faces the expiration of the labor agreement with the United Steelworkers of
America ("USWA"). U. S. Steel's ability to negotiate an acceptable labor
contract is essential to ongoing operations. Any labor interruptions could have
an adverse effect on operations, financial results and cash flow.
Steel imports to the United States accounted for an estimated 26%, 30% and
24% of the domestic steel market in the first two months of 1999, and for the
years 1998 and 1997, respectively. Steel imports of cut-to-length plate
increased 40% in the first two months of 1999, compared to the same period in
1998.
On September 30, 1998, U. S. Steel joined with 11 other producers and the
USWA to file trade cases against Japan, Russia, and Brazil. Those filings
contend that millions of tons of unfairly traded hot-rolled carbon sheet
products have caused serious injury to the domestic steel industry through
rapidly falling prices and lost business. The U. S. International Trade
Commission ("ITC"), in its preliminary determination in November 1998, found the
domestic steel industry was being threatened with material injury as a result of
imports of hot-rolled carbon sheet products from these three countries and, on
February 12, 1999, the U.S. Department of Commerce ("Commerce") announced
preliminary duty determinations on imports from Japan and Brazil. Thereafter,
on February 22, 1999, the Clinton Administration,
<PAGE> 67
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
contemporaneous with announcing preliminary duty determinations on hot-rolled
product imports from Russia, announced that it had initialed two agreements with
the Russian government concerning steel imports. One agreement suspends the
investigation concerning hot-rolled product imports and the second is a
comprehensive agreement concerning all steel product imports from Russia except
for plate products and hot-rolled products. On April 29, 1999, Commerce
announced its final decision that Japan was dumping hot-rolled steel in the
domestic market. Japan could be liable to pay duties ranging from 17.86 percent
to 67.14 percent on the products. The Commerce decision means importers of
steel from Japan will be required to post bonds to cover the duties on the
imports, pending the outcome of a separate ruling by the ITC. The preliminary
injury determination and the preliminary duty determinations are subject to
further investigation by the ITC on imports from Japan, Russia and Brazil, and
Commerce on imports from Russia and Brazil.
On February 16, 1999, U.S. Steel joined with four other producers and the
USWA to file trade cases against eight countries (Japan, South Korea, India,
Indonesia, Macedonia, the Czech Republic, France, and Italy) concerning imports
of cut-to-length plate products. Anti-dumping cases were filed against all the
countries and countervailing duty cases were filed against six of the countries.
On April 2, 1999, the ITC issued its preliminary determination that the domestic
industry was being injured or threatened with injury as the result of imports
from six of the countries. (The ITC determined that the volume of imports from
Macedonia and the Czech Republic were negligible and had declined in importance
in the United States market relative to the other countries.) Commerce is
expected to announce preliminary duty determinations in early July. The
preliminary injury determination and the to-be-announced preliminary duty
determinations are subject to further investigation by the ITC and Commerce.
USX intends to file additional anti-dumping and countervailing duty
petitions if unfairly traded imports adversely impact, or threaten to adversely
impact, the results of the U. S. Steel Group.
The forgoing discussion includes statements concerning anticipated steel
demand, steel pricing, and shipment levels are forward-looking and are based
upon assumptions as to future product prices and mix, and levels of steel
production capability, production and shipments. These forward-looking
statements can be affected by imports, domestic and international economies,
domestic production capacity, and customer demand. In the event these
assumptions prove to be inaccurate, actual results may differ significantly from
those presently anticipated.
On April 12, 1999, U. S. Steel Group and Kobe Steel, Ltd. announced that
they had entered into a letter of intent with Blackstone Capital Partners II
(Blackstone) to combine USS/KOBE steelmaking and bar producing assets in Lorain,
Ohio with those of companies controlled by Blackstone (Republic Technologies
International Inc., Republic Engineered Steels, Inc., and Bar Technologies
Inc.). The transaction, which is subject to numerous conditions, is not
expected to close until summer. The seamless pipe business of USS/KOBE is
excluded from this transaction and will continue to operate as a joint venture
partnership between USX and Kobe Steel. USX and Kobe would jointly own
approximately 30% of the combined operations. Pending
<PAGE> 68
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
negotiation of a definitive agreement, USX may need to consider an impairment of
the carrying value of its investment in USS/Kobe Steel later in 1999. The need
to recognize any impairment loss will depend upon the resolution of the
contingencies to the proposed transaction, decisions to temporarily idle any
operations or to reduce the workforce, and the completion of accounting
valuations of the net assets of the combined businesses.
Year 2000 Readiness Disclosure
- ------------------------------
A multi-functional Year 2000 task force continues to execute a preparedness
plan which addresses readiness requirements for business computer systems,
technical infrastructure, end-user computing, third parties, manufacturing,
environmental operations, systems products produced and sold, and dedicated R&D
test facilities. The U. S. Steel Group is executing a Year 2000 readiness plan
which includes:
prioritizing and focusing on those computerized and automated systems and
processes critical to the operations in terms of material safety, operational,
environmental, quality and financial risk to the company.
allocating and committing appropriate resources to fix the problem.
communicating with, and aggressively pursuing, critical third parties to
help ensure the Year 2000 readiness of their products and services through use
of mailings, telephone contacts, on-site assessments and the inclusion of Year
2000 readiness language in purchase orders and contracts.
performing rigorous Year 2000 tests of critical systems.
participating in, and exchanging Year 2000 information with industry trade
associations, such as the American Iron & Steel Institute, Association of Iron &
Steel Engineers and the Steel Industry Systems Association.
engaging qualified outside engineering and information technology
consulting firms to assist in the Year 2000 impact assessment and readiness
effort.
State of Readiness
The U. S. Steel Group's progress on achieving Year 2000 readiness is
currently on pace with stated objectives. Certain systems/processes are to be
replaced and/or upgraded with third-party Year 2000 ready products and services.
All systems and processes are targeted to be Year 2000 ready, including
integration testing, by the end of the third quarter, 1999. This schedule may be
impacted by the availability of information and services from third-party
suppliers/vendors on the Year 2000 readiness of their products and services.
Generally, efforts in 1999 will be primarily devoted to both Year 2000 systems
and integration testing, tracking of the readiness of third parties, developing
contingency plans and verifying the state of Year 2000 readiness.
The following chart provides the percent of completion for the inventory of
systems and processes that may be affected by the year 2000 ("Y2K Inventory"),
the analysis performed to determine the Year 2000 date impact on inventoried
systems and processes ("Y2K Impact Assessment") and the year 2000 readiness of
the U. S. Steel Group`s year 2000 inventory ("Y2K Readiness of Overall
Inventory"). The percent of completion for Y2K Readiness of Overall Inventory
includes all inventory items not date impacted, those items already Year 2000
ready and those corrected and made Year 2000 ready through the
renovation/replacement, testing and implementation activities.
<PAGE> 69
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
<TABLE>
<CAPTION>
Percent Completed
Y2K
Y2K Readiness
Impact of
Y2K Assess- Overall
As of March 31, 1999 Inventory ment Inventory
------ ------ ------
<S> <C> <C> <C>
Information Technology 100% 99% 96%
Non-Information Technology 100% 98% 96%
</TABLE>
Third Parties
The U. S. Steel Group continues to review its third party relationships
(including, but not limited to outside processors, process control systems and
hardware suppliers, telecommunication providers, and transportation carriers) to
determine those critical to its operations. The majority of contacts have been
made with critical third parties to determine if they will be able to provide
their product and service to the U. S. Steel Group after the Year 2000. An
aggressive follow-up process with those third parties not responding or
returning an unacceptable response is underway. Communications with U. S. Steel
Group's third parties is an on-going process which includes mailings, telephone
contacts and on-site visits. If it is determined that there is a significant
risk with a third party, an effort will be made to work with those third parties
to resolve the issue, or a new provider of the same products or services will be
investigated and secured. As of March 31, 1999, the U. S. Steel Group has sent
out approximately 900 inquiries and over 85% have responded. Approximately 490
of these third parties are considered critical vendors/suppliers, including
outside steel processors. The response rate for the critical third parties is
at 97%. Follow-up phone assessments have been made on 30% (145) of the critical
third parties. For over 82% of those assessed to date, there is a medium to high
level of assurance that the third parties will be Year 2000 ready. In addition,
on-site Year 2000 assessments have also been made on several critical third
parties to verify the effectiveness and accuracy of their responses. Other on-
site assessments are planned, as conditions warrant. Additional follow-up phone
and/or on-site assessments as deemed necessary are scheduled for completion by
the end of third quarter, 1999.
The Costs to Address Year 2000 Issues
The current estimated cost associated with Year 2000 readiness, is
approximately $29 million, which includes $16 million in incremental cost. Total
costs incurred as of March 31, 1999, were $16 million, including $7 million of
incremental costs. As Y2K Impact Assessment nears completion and the renovation
planning, readiness implementation and testing evolve, the estimated costs may
change.
Year 2000 Risks to the Company
The most reasonably likely worst case Year 2000 scenario would be the
inability of third party suppliers, such as utility providers, telecommunication
companies, outside processors, and other critical suppliers, to continue
providing their products and services. This could pose the greatest material
safety, operational, environmental, quality and/or financial risk to the
company.
In addition, the lack of accurate and timely Year 2000 date impact
information from suppliers of automation and process control systems and
processes is a concern to the U. S. Steel Group. Without timely and quality
information from suppliers, specifically on embedded chip technology, schedules
for attaining readiness can be impacted and some Year 2000 problems could go
undetected during the transition to the year 2000.
<PAGE> 70
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Contingency Planning
General guidelines have been issued to all business units for creating
contingency plans to address those critical facets of operations that can cause
a material safety, operational, environmental, or financial risk to the company.
Representatives of the U. S. Steel Group are working with the Association of
Iron & Steel Engineers and the American Iron & Steel Institute to develop
contingency planning guidelines to address issues specific to the steel
industry. These guidelines are intended to help entities develop specific
contingency plans that will cover their associated Year 2000 risks and areas of
concern. The U. S. Steel Group currently expects to have contingency plans
completed and tested, when practical, by the middle of 1999.
This discussion includes forward-looking statements of the U. S. Steel
Group's efforts and management's expectations relating to Year 2000 readiness.
The Steel Group's ability to achieve Year 2000 readiness and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, the
availability and cost of programming and testing resources, vendors' ability to
install or modify proprietary hardware and software and unanticipated problems
identified in the ongoing Year 2000 readiness review. Also, the U. S. Steel
Group's ability to mitigate Year 2000 risks could be adversely impacted by the
ability to complete, and the effectiveness of, contingency plans.
Accounting Standard
- --------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This new standard requires recognition of all
derivatives as either assets or liabilities at fair value. This new standard
may result in additional volatility in both current period earnings and other
comprehensive income as a result of recording recognized and unrecognized gains
and losses resulting from changes in the fair value of derivative instruments.
At adoption this new standard requires a comprehensive review of all outstanding
derivative instruments to determine whether or not their use meets the hedge
accounting criteria. It is possible that there will be derivative instruments
employed in our businesses that do not meet all of the designated hedge criteria
and they will be reflected in income on a mark-to-market basis. Based upon the
strategies currently used by USX and the level of activity related to forward
exchange contracts and commodity-based derivative instruments in recent periods,
USX does not anticipate the effect of adoption to have a material impact on
either financial position or results of operations for the U. S. Steel Group.
USX plans to adopt the standard effective January 1, 2000, as required.
<PAGE> 71
U. S. STEEL GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Commodity Price Risk and Related Risks
- --------------------------------------
Sensitivity analysis of the incremental effects on pretax income of
hypothetical 10% and 25% decreases in commodity prices for open derivative
commodity instruments as of March 31, 1999 are provided in the following table:
(a)
<TABLE>
<CAPTION>
Incremental Decrease
in Pretax Income
Assuming a Hypothetical
Price Change of(a)
(Dollars in millions) 10% 25%
- --------------------------------------------------------------------------------
<S> <C> <C>
Derivative Commodity Instruments
U. S. Steel Group
Natural gas $2.4 $6.0
Zinc 2.0 4.6
Tin .3 .6
Nickel .1 .2
<FN>
(a) Gains and losses on derivative commodity instruments are generally
offset by price changes in the underlying commodity. Effects of these
offsets are not reflected in the sensitivity analyses. Amounts reflect
the estimated incremental effect on pretax income of hypothetical 10% and
25% changes in closing commodity prices for each open contract position
at March 31, 1999. U. S. Steel Group management evaluates its portfolio
of derivative commodity instruments on an ongoing basis and adds or
revises strategies to reflect anticipated market conditions and changes
in risk profiles. Changes to the portfolio subsequent to March 31, 1999,
would cause future pretax income effects to differ from those presented
in the table.
</TABLE>
<PAGE> 72
U. S. STEEL GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Interest Rate Risk
- ------------------
As of March 31, 1999, the discussion of the U. S. Steel Group's interest
rate risk has not changed materially from that presented in Quantitative and
Qualitative Disclosures About Market Risk included in USX's 1998 Form 10-K.
Foreign Currency Exchange Rate Risk
- -----------------------------------
As of March 31, 1999, the U. S. Steel Group had no material exposure to
foreign currency exchange rate risk.
Equity Price Risk
- -----------------
USX was subject to equity price risk resulting from its issuance in
December 1996 of $117 million of 6 3/4% Exchangeable Notes due February 1, 2000
("indexed debt"). However, on March 31, 1999, USX irrevocably deposited with a
trustee the entire 5.5 million shares it owned in RTI. The deposit of shares
resulted in the satisfaction of USX's obligation under the indexed debt. Under
the terms of the indenture, the trustee will exchange the RTI shares for the
notes at maturity. USX is no longer exposed to any negative risks associated
with changes in the value of RTI common stock. For further discussion, see Note
5 to the U.S. Steel Group Financial Statements.
Safe Harbor
- -----------
The U. S. Steel Group's quantitative and qualitative disclosures about
market risk include forward-looking statements with respect to management's
opinion about risks associated with the U. S. Steel Group's use of derivative
instruments. These statements are based on certain assumptions with respect to
market prices and industry supply and demand for steel products and certain raw
materials. To the extent that these assumptions prove to be inaccurate, future
outcomes with respect to the U. S. Steel Group's hedging programs may differ
materially from those discussed in the forward-looking statements.
<PAGE> 73
<TABLE>
<CAPTION>
U. S. STEEL GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
------------------------------------
($ in Millions)
First Quarter
Ended March 31
--------------
1999 1998
---- ----
<S> <C> <C>
REVENUES $1,211 $1,696
INCOME (LOSS) FROM OPERATIONS
U. S. Steel Operations (a) (b) $(59) $106
Items not allocated to segment:
Pension Credits 108 93
Administrative Expenses (5) (9)
Costs related to former business activities (c) (24) (28)
Loss on investment in RTI stock used to satisfy indexed
debt obligations (22) -
----- -----
Total U. S. Steel Group $(2) $162
PENSION COSTS INCLUDED IN U. S. STEEL OPERATIONS $56 $44
CAPITAL EXPENDITURES $79 $57
OPERATING STATISTICS
Average steel price per ton $436 $476
Steel Shipments (d) 2,381 2,933
Raw Steel-Production (d) 2,743 3,143
Raw Steel-Capability Utilization (e) 87.1% 99.6%
Total iron ore shipments 1,363 1,783
- -----------
<FN>
(a) Results in first quarter 1999 included a $10 million charge for
environmental accruals.
(b) Includes the production and sale of steel products, coke and taconite
pellets; domestic coal mining; the management of mineral resources;
engineering and consulting services; and equity income from joint
ventures and partially owned companies, such as USS/Kobe Steel Company,
USS-POSCO Industries, PRO-TEC Coating Company, Transtar Inc., and RTI
International Metals, Inc. (formerly RMI Titanium Company). Also
includes results of real estate development and management, and leasing
and financing activities.
(c) Includes other postretirement benefit costs and certain other
expenses principally attributable to former business units of the U. S.
Steel Group.
(d) Thousands of net tons
(e) Based on annual raw steel production capability of 12.8 million tons.
</TABLE>
<PAGE> 74
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)
-------------------
First Quarter Ended
March 31
1999 1998
---- ----
<S> <C> <C>
INCOME DATA:
Revenues $4,842 $5,489
Income from operations 408 408
Net income 111 173
</TABLE>
<TABLE>
<CAPTION>
(In millions)
----------------------
March 31 December 31
1999 1998
-------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Assets:
Current assets $4,771 $4,742
Noncurrent assets 11,153 11,420
------ ------
Total assets $15,924 $16,162
====== ======
Liabilities and Stockholder's Equity:
Current liabilities $2,318 $2,543
Noncurrent liabilities 9,162 9,428
Preferred stock of subsidiary 11 17
Minority interest in consolidated subsidiary 1,735 1,590
Stockholder's equity 2,698 2,584
------ ------
Total liabilities and stockholder's equity $15,924 $16,162
====== ======
</TABLE>
<PAGE> 75
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.
3.3 Amendments to USX By-Laws
adopted by the Board of
Directors on February 23, 1999 Incorporated by reference to
Exhibit 3(c) to the USX
Report on Form 10-K for
the year ended
December 31, 1998
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 January 22, 1999, reporting under Item 5. Other Events,
the announcement of fourth quarter and 1998 earnings and filing the
related press releases.
Form 8-K/A dated January 22, 1999, reporting under Item 5. Other Events,
the announcement of fourth quarter and 1998 earnings and filing the
related press releases in substantially the form as released, which
superseded USX Corporation's earlier filing of such announcements.
Form 8-K dated January 26, 1999, reporting under Item 5. Other Events,
the announcement of the USX-Marathon Group 1999 capital, investment and
exploration budget and filing the related press release. Also, under
Item 5. Other Events, USX Corporation filed revised calculations of the
computation of ratio of earnings to combined fixed charges and preferred
stock dividends and the computation of the ratio of earnings to fixed
charges for each of the year-to-date periods ended March 31, June 30, and
September 30, 1998.
Form 8-K dated January 27, 1999, reporting under Item 5. Other Events,
and Underwriting Agreement in connection with the issuance of 6.65% Notes
Due 2006 pursuant to a shelf registration on Form S-3, File No. 333-
56867.
<PAGE> 76
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned chief accounting officer thereunto duly authorized.
USX CORPORATION
By /s/ Kenneth L. Matheny
Kenneth L. Matheny
Vice President &
Comptroller
May 12, 1999
<TABLE>
<CAPTION>
Exhibit 12.1
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS - (Unaudited)
----------------------------------------------------------
(Dollars in Millions)
First Quarter
Ended Year Ended December 31
March 31 --------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Portion of rentals
representing interest $26 $26 $105 $82 $78 $76 $83
Capitalized interest 9 9 46 31 11 13 58
Other interest and fixed
charges 85 75 328 312 382 452 456
Pretax earnings which would
be required to cover
preferred stock dividend
requirements of parent 4 4 15 20 36 46 49
---- ---- ---- ---- ---- ---- ----
Combined fixed charges
and preferred stock
dividends (A) $124 $114 $494 $445 $507 $587 $646
==== ==== ==== ==== ==== ==== ====
Earnings-pretax income
with applicable
adjustments (B) $436 $579 $1662 $1745 $1837 $877 $1300
==== ==== ==== ==== ==== ==== ====
Ratio of (B) to (A) 3.52 5.08 3.36 3.92 3.62 1.49 2.01
==== ==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Exhibit 12.2
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS - (Unaudited)
-------------------------------------------------
(Dollars in Millions)
First Quarter
Ended Year Ended December 31
March 31 --------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Portion of rentals
representing interest $26 $26 $105 $82 $78 $76 $83
Capitalized interest 9 9 46 31 11 13 58
Other interest and fixed
charges 85 75 328 312 382 452 456
---- ---- ---- ---- ---- ----- ----
Total fixed charges (A) $120 $110 $479 $425 $471 $541 $597
==== ==== ==== ==== ==== ==== ====
Earnings-pretax income
with applicable
adjustments (B) $436 $579 $1662 $1745 $1837 $877 $1300
==== ==== ==== ==== ==== ==== ====
Ratio of (B) to (A) 3.63 5.26 3.47 4.11 3.90 1.62 2.18
==== ==== ==== ==== ==== ==== ====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 77
<SECURITIES> 0
<RECEIVABLES> 1538
<ALLOWANCES> 8
<INVENTORY> 2426
<CURRENT-ASSETS> 4622
<PP&E> 29137
<DEPRECIATION> 16415
<TOTAL-ASSETS> 21241
<CURRENT-LIABILITIES> 3331
<BONDS> 4150
182
3
<COMMON> 397<F1>
<OTHER-SE> 6021
<TOTAL-LIABILITY-AND-EQUITY> 21241
<SALES> 6078
<TOTAL-REVENUES> 6054
<CGS> 5653
<TOTAL-COSTS> 5653
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83
<INCOME-PRETAX> 173
<INCOME-TAX> 63
<INCOME-CONTINUING> 110
<DISCONTINUED> 0
<EXTRAORDINARY> 5
<CHANGES> 0
<NET-INCOME> 105
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F3>
<FN>
<F1>Consists of Marathon Stock issued, $309; Steel Stock issued, $88.
<F2>Basic earnings (loss) per share applicable to Marathon Stock, $.38; Steel Stock,
($.18).
<F3>Diluted earnings (loss) per share applicable to Marathon Stock, $.38; Steel Stock,
($.18).
</FN>
</TABLE>
