<PAGE>
FORM 10-K 1998
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
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
Securities registered pursuant to Section 12 (b) of the Act:*
Title of Each Class
<TABLE>
<S> <C>
USX -- Marathon Group 6-3/4% Exchangeable Notes Due 2000
Common Stock, par value $1.00 8-3/4% Cumulative Monthly Income Preferred Shares,
USX -- U. S. Steel Group Series A (Liquidation Preference $25 per share)**
Common Stock, par value $1.00 6.75% Convertible Quarterly Income Preferred
6.50% Cumulative Convertible Preferred Securities (Initial Liquidation Amount $50 per
(Liquidation Preference $50.00 per share) Security)***
7% Guaranteed Notes Due 2002 of Marathon Oil Company****
</TABLE>
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 and (2) has been subject to such filing
requirements for at least the past 90 days. Yes X No
-------- ----------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Aggregate market value of Common Stock held by non-affiliates as of January 31,
1999: $9.2 billion. The amount shown is based on the closing prices of the
registrant's Common Stocks on the New York Stock Exchange composite tape on that
date. Shares of Common Stock held by executive officers and directors of the
registrant are not included in the computation. However, the registrant has
made no determination that such individuals are "affiliates" within the meaning
of Rule 405 under the Securities Act of 1933.
There were 308,467,709 shares of USX-Marathon Group Common Stock and 88,336,439
shares of USX-U. S. Steel Group Common Stock outstanding as of January 31, 1999.
Documents Incorporated By Reference:
Proxy Statement dated March 8, 1999 is incorporated in Part III.
Proxy Statement dated March 9, 1998 is incorporated in Part IV.
- --------------------
* These securities are listed on the New York Stock Exchange. In addition,
the Common Stocks are traded on The Chicago Stock Exchange and the
Pacific Exchange.
** Issued by USX Capital LLC.
*** Issued by USX Capital Trust I
**** Obligations of Marathon Oil Company, USX Capital LLC and USX Capital Trust
I, all wholly owned subsidiaries of the registrant, have been guaranteed
by the registrant.
<PAGE>
<TABLE>
<CAPTION>
INDEX
PART I
<S> <C> <C>
NOTE ON PRESENTATION........................................... 2
Item 1. BUSINESS
USX CORPORATION........................................... 3
MARATHON GROUP............................................ 5
U. S. STEEL GROUP......................................... 27
Item 2. PROPERTIES..................................................... 37
Item 3. LEGAL PROCEEDINGS
MARATHON GROUP............................................ 37
U. S. STEEL GROUP......................................... 40
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 44
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 45
Item 6. SELECTED FINANCIAL DATA
USX CONSOLIDATED.......................................... 47
MARATHON GROUP............................................ 49
U. S. STEEL GROUP......................................... 50
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
USX CONSOLIDATED.......................................... U-39
MARATHON GROUP............................................ M-25
U. S. STEEL GROUP......................................... S-25
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
USX CONSOLIDATED.......................................... U-61
MARATHON GROUP............................................ M-37
U. S. STEEL GROUP......................................... S-38
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
USX CONSOLIDATED.......................................... U-1
MARATHON GROUP............................................ M-1
U. S. STEEL GROUP......................................... S-1
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................... 51
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 52
Item 11. MANAGEMENT REMUNERATION........................................ 53
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................. 53
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 53
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.................................................. 54
SIGNATURES...................................................................... 57
GLOSSARY OF CERTAIN DEFINED TERMS............................................... 58
SUPPLEMENTARY DATA
SUMMARIZED FINANCIAL INFORMATION OF MARATHON OIL COMPANY...................... 59
DISCLOSURES ABOUT FORWARD-LOOKING STATEMENTS.................................. 60
</TABLE>
1
<PAGE>
NOTE ON PRESENTATION
USX Corporation ("USX" or the "Corporation") 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. USX has two classes of common
stock, USX-Marathon Group Common Stock ("Marathon Stock") and USX-U. S. Steel
Group Common Stock ("Steel Stock"). Each class of Common Stock is intended to
provide stockholders of that class with a separate security reflecting the
performance of the related group.
Effective October 31, 1997, USX sold Delhi Gas Pipeline Corporation and
other subsidiaries of USX that comprised all of the USX-Delhi Group ("Delhi
Companies"). On January 26, 1998, USX used the $195 million net proceeds from
the sale to redeem all of the 9.45 million outstanding shares of USX-Delhi Group
Common Stock.
USX continues to include consolidated financial information in its periodic
reports required by the Securities Exchange Act of 1934, in its annual
shareholder reports and in other financial communications. The consolidated
financial statements are supplemented with separate financial statements of the
Marathon Group and the U. S. Steel Group, together with the related Management's
Discussion and Analyses, descriptions of business and other financial and
business information to the extent such information is required to be presented
in the report being filed. The financial information of the Marathon Group and
U. S. Steel Group and certain financial information relating to the Delhi
Companies, taken together, includes all accounts which comprise the
corresponding consolidated financial information of USX.
For consolidated financial reporting purposes, USX consists of the Marathon
Group and the U. S. Steel Group. The 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 Marathon Stock and Steel Stock
are holders of common stock of USX and continue to be subject to all of the
risks associated with an investment in USX and all of its businesses and
liabilities. Financial impacts arising from either of the Groups that affect the
overall cost of USX's capital could affect the results of operations and
financial condition of both groups. In addition, net losses of any Group, as
well as dividends and distributions on any class of USX common stock or series
of preferred stock and repurchases of any class of USX common stock or series of
preferred stock at prices in excess of par or stated value, will reduce the
funds of USX legally available for payment of dividends on both classes of USX
common stock. Accordingly, the USX consolidated financial information should be
read in connection with the Marathon Group and the U. S. Steel Group financial
information.
For information regarding accounting matters and policies affecting the
Marathon Group and the U. S. Steel Group financial statements, see "Financial
Statements and Supplementary Data - Notes to Financial Statements - 1. Basis of
Presentation and - 4. Corporate Activities" for each respective group. For
information regarding dividend limitations and dividend policies affecting
holders of Marathon Stock and Steel Stock, see "Market for Registrant's Common
Equity and Related Stockholder Matters."
For a Glossary of Certain Defined Terms used in this document, see page 58.
Forward-Looking Statements
Certain sections of USX's Form 10-K, particularly Item 1. Business, Item 3.
Legal Proceedings, Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations and Item 7A. Quantitative and Qualitative
Disclosures About Market Risk, 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 forward-looking statements. For
additional factors affecting the businesses of USX, see Supplementary Data -
Disclosures About Forward-Looking Statements.
2
<PAGE>
PART I
Item 1. BUSINESS
USX CORPORATION
USX Corporation was incorporated in 1901 and is a Delaware corporation.
Executive offices are located at 600 Grant Street, Pittsburgh, PA 15219-4776.
The terms "USX" and "Corporation" when used herein refer to USX Corporation or
USX Corporation and its subsidiaries, as required by the context.
Groups
For consolidated reporting purposes, USX consists of the Marathon Group and
the U. S. Steel Group. Effective October 31, 1997, USX sold Delhi Gas Pipeline
Corporation and other subsidiaries of USX that comprised all of the Delhi Group.
See "Financial Statements and Supplementary Data - Notes to USX Consolidated
Financial Statements - 5. Discontinued Operations" on page U-11. The businesses
of the Marathon Group and the U. S. Steel Group, are as follows:
. The Marathon Group includes Marathon Oil Company ("Marathon") and certain
other subsidiaries of 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 LLC ("MAP"), owned 62 percent by Marathon; and other energy
related businesses. Marathon Group revenues as a percentage of total USX
consolidated revenues were 78% in 1998, 69% in 1997 and 71% in 1996.
. The U. S. Steel Group includes U. S. Steel, which is engaged in 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. Certain business
activities are conducted through joint ventures and partially-owned
companies, such as USS/Kobe Steel Company, USS-POSCO Industries, PRO-TEC
Coating Company, Transtar, Inc., Clairton 1314B Partnership, VSZ U. S.
Steel, s. r.o. and RTI International Metals, Inc. U. S. Steel Group
revenues as a percentage of total USX consolidated revenues were 22% in
1998, 31% in 1997 and 29% in 1996.
3
<PAGE>
A three-year summary of financial highlights for the groups is provided below.
<TABLE>
<CAPTION>
Income Assets
from Net at Capital
Revenues(a)(b) Operations(b)(c) Income Year-End Expenditures
-------------- ---------------- ------ --------- ------------
<S> <C> <C> <C> <C> <C>
(Millions)
Marathon Group
1998 $22,075 $ 938 $310 $14,544 $1,270
1997 15,754 932 456 10,565 1,038
1996 16,394 1,296 664 10,151 751
U. S. Steel Group
1998 6,283 579 364 6,693 310
1997 6,941 773 452 6,694 261
1996 6,670 483 273 6,580 337
Adjustments for
Discontinued
Operations and
Eliminations (d)
1998 (23) - - (104) -
1997 (107) - 80 25 74
1996 (87) - 6 249 80
Total USX Corporation
1998 $28,335 $1,517 $674 $21,133 $1,580
1997 22,588 1,705 988 17,284 1,373
1996 22,977 1,779 943 16,980 1,168
</TABLE>
- -----------
(a) Consists of sales, dividend and affiliate income, gain on ownership change
in MAP, net gains on disposal of assets, gain on affiliate stock offering
and other income.
(b) Excludes amounts for the companies comprising the Delhi Group of USX (sold
in 1997; see footnote (d) below), which have been reclassified as
discontinued operations.
(c) Includes the following favorable (unfavorable) amounts: adjustments to the
inventory market valuation reserve for the Marathon Group of $(267)
million, $(284) million and $209 million in 1998, 1997 and 1996,
respectively; and gain on ownership change in MAP of $245 million in 1998.
(d) Effective October 31, 1997, USX sold Delhi Gas Pipeline Corporation and
other subsidiaries of USX that comprised all of the Delhi Group.
For additional financial information about the Groups, see "Financial
Statements and Supplementary Data - Notes to USX Consolidated Financial
Statements - 10. Group and Segment Information" on page U-13.
The total number of active USX Headquarters employees not assigned to a
specific group at year-end 1998 was 248.
A narrative description of the primary businesses of the Marathon Group and
the U. S. Steel Group is provided below.
4
<PAGE>
MARATHON GROUP
The Marathon Group is comprised of Marathon Oil Company and certain other
subsidiaries of 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 LLC ("MAP"),
owned 62% by Marathon Oil Company; and other energy related businesses.
Marathon Group revenues as a percentage of total USX consolidated revenues were
78% in 1998, 69% in 1997 and 71% in 1996.
The following table summarizes Marathon Group revenues for each of the last
three years:
<TABLE>
<CAPTION>
Revenues (a)
(Millions) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Sales by product:
Refined products....................... $ 9,091 $ 7,012 $ 7,132
Merchandise............................ 1,873 1,045 1,000
Liquid hydrocarbons.................... 1,818 941 1,111
Natural gas............................ 1,144 1,331 1,194
Transportation and other products...... 271 167 180
Gain on ownership change in MAP (b)..... 245 - -
Other (c)............................... 104 86 97
------- ------- -------
Subtotal................................ 14,546 10,582 10,714
Matching buy/sell transactions (d) (f).. 3,948 2,436 2,912
Excise taxes (e) (f).................... 3,581 2,736 2,768
------- ------- -------
Total revenues........................ $22,075 $15,754 $16,394
======= ======= =======
</TABLE>
- -----------
(a) Amounts in 1998 include 100% of Marathon Ashland Petroleum LLC ("MAP") and
are not comparable to prior periods.
(b) See Note 5 to the Marathon Group Financial Statements for a discussion of
the gain on ownership change in MAP.
(c) Includes dividend and affiliate income, net gains on disposal of assets and
other income.
(d) Matching crude oil and refined products buy/sell transactions settled in
cash.
(e) Consumer excise taxes on petroleum products and merchandise.
(f) Included in both revenues and costs and expenses, resulting in no effect on
income.
For additional financial information about USX's operating segments, see
"Financial Statements and Supplementary Data - Notes to USX Consolidated
Financial Statements - 10, Group and Segment Information" on page U-13.
RECENT DEVELOPMENT
MAP announced on March 1, 1999, that it signed a memorandum of
understanding to sell Scurlock Permian LLC, its crude oil gathering business, to
Plains All American Pipeline, L.P. Scurlock Permian LLC is actively engaged in
purchasing, selling and trading crude oil, principally at Midland, Texas;
Cushing, Oklahoma; and St. James, Louisiana, three of the major distribution
points for U.S. crude oil, and at major trading and distribution hubs in western
Canada.
Exploration and Production
Oil and Natural Gas Exploration and Development
Marathon is currently conducting exploration and development activities in
13 countries. Principal exploration activities are in the United States, the
United Kingdom, Canada, Denmark, Egypt, Gabon, Ireland, the
5
<PAGE>
Netherlands and Tunisia. Principal development activities are in the United
States, the United Kingdom, Canada, Egypt, Gabon and Russia. Marathon is also
pursuing opportunities in Angola and other West Africa countries, South America,
the Middle East and around the Black Sea.
During 1998, exploration activities resulted in discoveries in the United
States, the United Kingdom, Canada, Egypt, Gabon and the Netherlands.
The following table sets forth, by geographic area, the number of net
productive and dry development and exploratory wells completed in each of the
last three years (references to "net" wells or production indicate Marathon's
ownership interest or share as the context requires):
<TABLE>
<CAPTION>
Net Productive and Dry Wells Completed (a)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
United States
Development (b)- Oil 28 44 43
- Gas 58 76 73
- Dry 2 3 9
---- ---- ----
Total 88 123 125
Exploratory - Oil 7 4 1
- Gas 5 13 18
- Dry 8 10 13
---- ---- ----
Total 20 27 32
---- ---- ----
Total United States 108 150 157
International (c)
Development (b)- Oil 7 5 3
- Gas 7 1 1
- Dry 2 - -
---- ---- ----
Total 16 6 4
Exploratory - Oil 5 4 3
- Gas 4 - -
- Dry 15 5 6
---- ---- ----
Total 24 9 9
---- ---- ----
Total International 40 15 13
---- ---- ----
Total Worldwide 148 165 170
==== ==== ====
</TABLE>
- -----------
(a) Includes the number of wells completed during the year regardless of the
year in which drilling was initiated. A dry well is a well found to be
incapable of producing hydrocarbons in sufficient quantities to justify
completion. A productive well is a well that is not a dry well.
(b) Indicates wells drilled in the proved area of an oil or gas reservoir.
(c) Includes Marathon's equity interest in CLAM.
United States
In the United States during 1998, Marathon drilled 45 gross (32 net)
wildcat and delineation ("exploratory") wells of which 26 gross (19 net) wells
encountered hydrocarbons. Of these 26 wells, 5 gross (3 net) wells were
temporarily suspended, and will be reported in the Net Productive and Dry Wells
Completed table when
6
<PAGE>
completed. Principal domestic exploratory and development activities were in
the U.S. Gulf of Mexico and the states of Texas, Oklahoma and New Mexico.
Exploration expenditures during the three-year period ended December 31,
1998, totaled $521 million in the United States, of which $217 million was
incurred in 1998. Development expenditures during the three-year period ended
December 31, 1998, totaled $1,176 million in the United States, of which $431
million was incurred in 1998.
The following is a summary of recent, significant exploration and
development activity in the United States including discussion, as deemed
appropriate, of completed wells, drilling wells and wells under evaluation.
Gulf of Mexico - Marathon continues to consider the deepwater Gulf of
Mexico ("Gulf") as a core area for domestic growth in oil and gas production and
has committed significant resources to exploit its opportunities.
Four of the five wells of the Troika subsea development project in the
Green Canyon Block 244 field, located in the central Gulf were completed and
tied back to a co-venturer's platform at year-end 1998. The fifth well is
scheduled for completion and tie-back in late first quarter 1999. The Troika
project, consisting of four blocks (Green Canyon Blocks 200, 201, 244 and 245),
has recoverable reserves estimated at over 200 million gross barrels of oil
equivalent ("BOE"). Marathon holds a 33.3% working interest in this
development.
Ewing Bank Block 963 ("Arnold") and 917 ("Oyster") developments were tied
back subsea to the Marathon-operated Ewing Bank 873 platform during the second
quarter of 1998. Recoverable reserves are estimated at 25 million gross BOE for
Arnold and 10 million gross BOE for Oyster. Marathon owns a working interest of
62.5% in Arnold and 66.7% in Oyster.
Progress continues on development of the Green Canyon Block 112/113
("Stellaria/Angus") project in the central Gulf. After drilling the initial
discovery well on Green Canyon Block 112 in mid-1997, Marathon confirmed the
discovery with a successful delineation well on Green Canyon Block 113 later
that year. A three-well development completed subsea and tied back to a co-
venturer's platform is underway, with initial production targeted for mid-1999.
Marathon has a 33.3% working interest in the Stellaria/Angus project.
The Viosca Knoll Block 786 ("Petronius") development in the deepwater Gulf,
was originally scheduled to begin production in the second quarter of 1999, but
the project was delayed when the last platform topsides module being lifted
during installation fell into the sea. The lost module will have to be
replaced. Third party insurance is expected to cover costs associated with the
module replacement and its installation on the platform. First production is
now expected in the fourth quarter of 2000. The Petronius project is estimated
to have recoverable reserves of 95 million gross BOE. Marathon holds a 50%
working interest in this project.
During 1998, Marathon participated in the Central and Western Gulf of
Mexico lease sales. This effort added 26 blocks and 13 prospects to Marathon's
growing deepwater leasehold inventory.
To support an expanding inventory of deepwater prospects, Marathon, in
1998, acquired one-third interest in a five-year contract for the Noble Amos
Runner, a drilling rig capable of drilling in water depths up to 6,000 feet.
Marathon also signed a five-year contract, convertible to a three-year
commitment, for the new build Sedco Cajun Express, capable of drilling in water
up to 8,500 feet. These rigs become available in mid-1999 and mid-2000,
respectively, and sustain an on-going deepwater exploration program.
Texas - In east Texas, Marathon is actively involved in a development
drilling program for gas reserves in the Austin Chalk area. Marathon has
approximately 73,000 net acres under lease in this play. A 12-well development
program, in which Marathon will have an average 87% working interest, is planned
for 1999.
Oklahoma - In 1998, Marathon had a discovery in the Granite Wash formation
in western Oklahoma. Delineation wells and development are planned for 1999.
Marathon has a 100% working interest in this discovery well.
7
<PAGE>
With respect to the 1997 Arbuckle discovery in the Carter Knox field, a
confirmation well was completed in 1998. A sour gas facility was built to treat
the Arbuckle gas and is currently processing about 20 million cubic feet per day
("mmcfd") from the discovery and confirmation wells. The plant is capable of
treating 40 mmcfd and was designed for expansion as needed. Marathon has a 100%
working interest in both wells and the gas treating facility. A third well was
drilled to the Arbuckle formation but was not successful. However, this well
was completed in alternate formations in early 1999. Marathon has a 75.3%
working interest in this well.
New Mexico - In 1998, Marathon drilled 31 successful wells in the Travis
Canyon and Indian Basin fields of southeast New Mexico. Marathon has 3,000 net
acres under lease in the Travis Canyon field and in 1999, plans to drill 3
development wells and 3 delineation wells in Travis Canyon and 13 development
wells in Indian Basin. Marathon's working interest averages 75% and 85% in
Travis Canyon and Indian Basin, respectively.
International
Outside the United States during 1998, Marathon drilled 17 gross (9 net)
exploratory wells in 6 countries. Of these 17 wells, 11 gross (5 net) wells
encountered hydrocarbons, of which 6 gross (3 net) wells were temporarily
suspended and will be reported in the Net Productive and Dry Wells Completed
table when completed.
Marathon's expenditures for international oil and natural gas exploration
activities, including Marathon's 50% equity interest in CLAM Petroleum B.V.
("CLAM") and Marathon's 37.5% equity interest in Sakhalin Energy Investment
Company Ltd. ("Sakhalin Energy"), during the three-year period ended December
31, 1998, totaled $285 million, of which $125 million was incurred in 1998.
Marathon's international development expenditures, including CLAM and Sakhalin
Energy, during the three-year period ended December 31, 1998, totaled $541
million, of which $256 million was incurred in 1998.
The following is a summary of recent, significant exploration and
development activity outside the United States, including discussion, as deemed
appropriate, of completed wells, drilling wells and wells under evaluation.
United Kingdom - Marathon is continuing its development of the Brae area in
the U.K. North Sea where it is the operator and owns a 41.6% revenue interest in
the South, Central and North Brae fields, a 38.5% revenue interest in the East
Brae field and a 28.1% revenue interest in the West Brae/Sedgwick joint
development project. Marathon has interests in 39 blocks in the U.K. North Sea
and other offshore areas.
With respect to the West Brae/Sedgwick joint development, the initial phase
of development was completed in 1998 and is comprised of four production wells
and a single water injection well. Another production well is planned for 1999
which will produce additional reserves proved in 1998 through delineation
drilling in the northern portion of the field. Gross reserves for the joint
project are estimated at approximately 55 million BOE. The successful
development drilling program, combined with the delineation program, has
extended the potential from this development.
In June 1997, Marathon announced the Dalmore oil discovery in the U.K.
North Sea on Block 16/6b. The well was drilled to a depth of 7,150 feet and
encountered 107 feet of net oil pay. Marathon is the operator and holds a 62.5%
working interest in the well. This discovery is located 12 miles west of the
Brae A platform. A delineation well was drilled in October 1997, approximately
one-half mile southwest of the discovery, but was unsuccessful. During 1998,
additional acreage was obtained in this trend when two blocks were awarded to
the west and northwest of Dalmore. In 1999, a second well is expected to be
drilled to further delineate the discovery.
Canada - On August 11, 1998, Marathon acquired Tarragon Oil and Gas Limited
("Tarragon"), a Canadian oil and gas exploration and production company, which
was subsequently renamed Marathon Canada Limited ("MCL"). This acquisition
added approximately 290 million net BOE, or in excess of a 20% increase, to
Marathon's year-end proved reserves. In addition, approximately two million net
acres of acquired undeveloped leasehold provides Marathon significant growth
opportunities in one of North America's most attractive gas basins. MCL's 1999
capital spending plans on exploration and development activities reflect an
aggressive full-year program with significant drilling to exploit these new
assets.
8
<PAGE>
Egypt - In June 1998, Marathon announced a gas discovery on the onshore El
Manzala concession. The Abu Monkar No. 1 well flowed at a maximum rate of 21.6
mmcfd. The well has been suspended pending further appraisal work. In October
and November 1998, a seismic program was completed to define additional
locations for possible future drilling. In 1999, technical and economic
evaluations are expected to be completed. Marathon is the operator and holds a
60% working interest in this concession.
Gabon - In January 1998, oil production commenced from the Tchatamba Marin
field in the Kowe Permit, located 18 miles offshore Gabon. Field reserves are
estimated to be approximately 30 million gross BOE. Marathon is the operator of
this field. Its working interest was proportionately reduced from 75% to 56.25%
in early 1998 after the Gabonese government exercised its right to obtain a 25%
interest in the field.
The Tchatamba West discovery was drilled in early 1998, 4.5 miles northwest
of the Tchatamba Marin production facilities. This field has possible reserves
of seven million gross BOE, and is being evaluated as a one-well development
tied back to the Tchatamba Marin facility. The 1997 Tchatamba South discovery,
which tested at 8,165 barrels of oil per day, is being developed with a minimum
concept platform and will be tied back to the Tchatamba Marin facility. The
Tchatamba South field was delineated during 1998, with the Tchatamba South Nos.
3 and 4 wells. The No. 3 well was successful and will be utilized along with
the No. 1 well in the field development. The No. 4 well was unsuccessful and
was abandoned. The Tchatamba South field has estimated reserves of
approximately 30 million gross BOE and is expected to be producing in the third
quarter of 1999.
In June 1998, Marathon and its partner announced an oil discovery on the
East Orovinyare prospect, four miles offshore Gabon. The East Orovinyare No. 1
wildcat well was drilled in the Kowe Permit in 65 feet of water and encountered
an oil column in excess of 400 feet. The first appraisal well, East Orovinyare
No. 2, was drilled and tested a combined daily flow rate of 2,460 barrels of 35-
degree API gravity of oil. In 1999, Marathon plans to evaluate the reservoir to
formulate a field-wide development plan.
Marathon is the operator of the Tchatamba West, Tchatamba South and East
Orovinyare fields with a 75% working interest in these fields. Under the terms
of the Kowe Permit, the Gabonese government has the right to obtain a maximum
25% working interest in any development, which would proportionately reduce
Marathon's interest.
The Akoumba Marin Permit lies in 2,000 to 6,000 feet of water. Marathon
holds a 100% working interest in this concession. The initial exploratory well
was drilled in early 1999 and did not encounter hydrocarbons. Further
evaluation of remaining prospects is underway to determine if additional
drilling opportunities are warranted. Under the terms of the Akoumba Marin
Permit, the Gabonese government has the right to obtain a maximum 10% working
interest in any development, which would reduce Marathon's interest.
In 1998, Marathon expanded its opportunities in Gabon by acquiring an
interest in the Inguessi Permit, which is adjacent to the Kowe Permit. Marathon
acquired over 300 square kilometers of three-dimensional ("3-D") seismic data as
part of an expenditure commitment to earn a 50% working interest in this
concession. Under the terms of the Inguessi Permit, the Gabonese government has
the right to obtain a maximum 10% working interest in any development, which
would proportionately reduce Marathon's interest.
Ireland - During 1997, Marathon drilled an exploratory well in the
Porcupine Basin off the west coast of Ireland. Although hydrocarbons were
encountered, the well was plugged and abandoned. In 1998, Marathon's working
interest in the Porcupine Basin increased from 33.3% to 50% due to a co-
venturer's relinquishment of its interest. Marathon continues to evaluate
future prospects, however, no drilling activities are presently planned for
1999. Marathon is the operator of this license.
Marathon continues to evaluate development options for the Southwest
Kinsale reservoir. This reservoir is located on the west side of the Kinsale
Head field in the Celtic Sea and is estimated to contain approximately 36
billion cubic feet ("bcf") of recoverable gas. A subsea development is planned,
with first production expected in fourth quarter 1999. Marathon holds a 100%
working interest in this area.
9
<PAGE>
Tunisia - Marathon's 60% working interest in the 470,000-acre South Jenein
Permit in southern Tunisia was formally ratified by the government in 1996. In
1998, Marathon acquired 523 kilometers of two-dimensional seismic data and
drilled an exploratory well (Jenein-1). This well encountered hydrocarbons and
was suspended pending further evaluation. Jenein-1 was the first of a two-well
exploration commitment for the permit.
Netherlands - In 1998, Marathon, through its 50% equity interest in CLAM,
drilled three gross exploratory wells and six gross development wells in the
Netherlands North Sea. A new CLAM discovery was made in 1998, the first outside
the joint development area. This discovery is expected to be evaluated with a
delineation well planned in 1999. A total of five development wells and two
exploratory wells are presently planned for 1999. Also, in 1998, CLAM was
awarded two blocks in the Danish sector of the North Sea. A 3-D seismic program
is presently planned for 1999.
Independent from its interest in CLAM, in January 1999, Marathon was
awarded the A-15 block in the Netherlands North Sea. Marathon holds a 40%
working interest in this block, which is operated by a co-venturer.
Denmark - In June 1998, Marathon acquired one block in Denmark, a new
operating country for Marathon. The geologic and field development knowledge
obtained from the Brae/Sedgwick area of the United Kingdom led to the
identification of the areas awarded to Marathon and its partners. Further
evaluations, including a 3-D seismic program are scheduled in 1999.
Russia - Marathon holds a 37.5% interest in Sakhalin Energy, an
incorporated joint venture company responsible for the overall management of the
Sakhalin II project. This project includes development of the Piltun-
Astokhskoye ("P-A") oil field and the Lunskoye gas-condensate field, which are
located 8-12 miles offshore Sakhalin Island in the Russian Far East Region. The
Russian State Reserves Committee has approved estimated combined reserves for
the P-A and Lunskoye fields of one billion gross barrels of liquid hydrocarbons
and 14 trillion cubic feet of natural gas.
In 1997, a Development Plan for the P-A license area, Phase I: Astokh
Feature was approved. Offshore drilling and production facilities for the
Astokh Feature were set in place on September 1, 1998. Drilling of development
wells commenced in December of 1998. First production from the Astokh Feature
is scheduled for mid-1999, with sales forecast to average 45,000 gross barrels
per day ("bpd") of oil annually as early as 2000. This rate is based on six
months of offshore loading operations during the ice-free weather window at an
estimated daily rate of 90,000 gross barrels. Marathon's equity share of
reserves from primary production in the Astokh Feature is 80 million barrels of
oil.
The approved Development Plan also provides for further appraisal work for
the remainder of the P-A field. An appraisal well was drilled during the summer
weather window in 1998 and the results are being evaluated. Conceptual design
work for further development of the P-A field, including pressure maintenance
for the Astokh Feature, continues. With respect to the Lunskoye field,
appraisal work and efforts to secure long term gas sales markets continue.
Commencement of gas production from the Lunskoye field, which will be contingent
upon the conclusion of a gas sales contract, is anticipated to occur in 2005 or
later.
Late in 1997, the Sakhalin Energy consortium arranged a limited recourse
project financing facility of $348 million. Sakhalin Energy borrowed the full
amount of this facility in 1998 to fund Phase I expenditures and to repay
amounts previously advanced to Sakhalin Energy by its shareholders.
In the area of significant Russian legislation, the Russian Parliament
passed a Production Sharing Agreement ("PSA") Amendments Law and a PSA Enabling
Law, which brings other Russian legislation into conformance with the PSA Law.
These laws were signed by President Yeltsin and enacted in 1999.
At December 31, 1998, Marathon's investment in the Sakhalin II project was
$275 million.
The above discussions include forward-looking statements concerning various
projects, drilling plans, expected production and sales levels, reserves and
dates of initial production, which are based on a number of
10
<PAGE>
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, reserve replacement rates, drilling rig availability 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 and tax regulations, which could adversely affect the
economics of projects. To the extent these assumptions prove inaccurate and/or
negotiations and other considerations are not satisfactorily resolved, actual
results could be materially different than present expectations.
Reserves
At December 31, 1998, the Marathon Group's net proved liquid hydrocarbon
and natural gas reserves, including equity affiliate interests, totaled
approximately 1.6 billion barrels on a BOE basis, of which 57% were located in
the United States. (Natural gas reserves are converted to barrels of oil
equivalent using a conversion factor of six thousand cubic feet ("mcf") of
natural gas to one barrel of oil.) On a BOE basis, Marathon replaced 242% of
its 1998 worldwide oil and gas production. Including dispositions, Marathon
replaced 235% of worldwide oil and gas production. Additions during 1998 were
primarily attributable to acquired reserves in Canada.
11
<PAGE>
The table below sets forth estimated quantities of net proved oil and gas
reserves at the end of each of the last three years.
Estimated Quantities of Net Proved Oil and Gas Reserves at December 31
<TABLE>
<CAPTION>
Developed Developed & Undeveloped
---------------------- -----------------------
1998 1997 1996 1998 1997 1996
------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
(Millions of Barrels)
Liquid Hydrocarbons
United States............. 489 486 443 568 609 589
Europe.................... 119 161 163 122 161 177
Other International (c)... 67 12 11 194 26 26
----- ----- ----- ----- ----- -----
Total Consolidated..... 675 659 617 884 796 792
Equity affiliates (a)..... - - - 80 82 -
----- ----- ----- ----- ----- -----
WORLDWIDE................... 675 659 617 964 878 792
===== ===== ===== ===== ===== =====
Developed reserves as % of
total net reserves........ 70.0% 75.1% 77.9%
(Billions of Cubic Feet)
Natural Gas
United States............. 1,678 1,702 1,720 2,151 2,220 2,239
Europe.................... 909 1,024 1,133 966 1,048 1,178
Other International (c)... 534 19 16 830 23 21
----- ----- ----- ----- ----- -----
Total Consolidated..... 3,121 2,745 2,869 3,947 3,291 3,438
Equity affiliate (b)...... 76 78 100 110 111 132
----- ----- ----- ----- ----- -----
WORLDWIDE................... 3,197 2,823 2,969 4,057 3,402 3,570
===== ===== ===== ===== ===== =====
Developed reserves as % of
total net reserves........ 78.8% 83.0% 83.2%
(Millions of Barrels)
Total BOEs
United States............. 769 770 729 927 979 962
Europe.................... 270 332 352 282 336 373
Other International (c)... 156 15 14 332 30 30
----- ----- ----- ----- ----- -----
Total Consolidated..... 1,195 1,117 1,095 1,541 1,345 1,365
Equity affiliates (a)..... 13 13 17 98 100 22
----- ----- ----- ----- ----- -----
WORLDWIDE................... 1,208 1,130 1,112 1,638 1,445 1,387
===== ===== ===== ===== ===== =====
Developed reserves as % of
total net reserves........ 73.7% 78.2% 80.2%
</TABLE>
- -----------
(a) Represents Marathon's equity interests in CLAM and Sakhalin Energy.
(b) Represents Marathon's equity interests in CLAM.
(c) Includes Canada for 1998.
The above estimates, which are forward-looking statements, are based upon a
number of assumptions, including (among others) prices, presently known physical
data concerning size and character of the reservoirs, economic recoverability,
production experience and other operating considerations. To the extent these
assumptions prove inaccurate, actual recoveries could be materially different
than current estimates.
For additional details of estimated quantities of net proved oil and gas
reserves at the end of each of the last three years, see "Consolidated Financial
Statements and Supplementary Data - Supplementary Information on Oil and Gas
Producing Activities - Estimated Quantities of Proved Oil and Gas Reserves" on
page U-32. Reports have been filed with the U.S. Department of Energy ("DOE")
for the years 1997 and 1996 disclosing the year-end
12
<PAGE>
estimated oil and gas reserves. A similar report will be filed for 1998. The
year-end estimates reported to the DOE are the same as the estimates reported in
the USX Consolidated Supplementary Data.
Oil and Gas Acreage
The following table sets forth, by geographic area, the developed and
undeveloped oil and gas acreage held as of December 31, 1998:
<TABLE>
<CAPTION>
Gross and Net Acreage
Developed &
Developed Undeveloped Undeveloped
------------ ------------- -------------
Gross Net Gross Net Gross Net
----- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
(Thousands of Acres)
United States............ 2,279 950 3,199 1,838 5,478 2,788
Europe................... 340 283 2,145 1,048 2,485 1,331
Other International (b).. 1,408 842 8,708 4,745 10,116 5,587
----- ----- ------ ----- ------ -----
Total Consolidated...... 4,027 2,075 14,052 7,631 18,079 9,706
Equity affiliates (a).... 350 36 705 178 1,055 214
----- ----- ------ ----- ------ -----
WORLDWIDE............... 4,377 2,111 14,757 7,809 19,134 9,920
===== ===== ====== ===== ====== =====
</TABLE>
- -----------
(a) Represents Marathon's equity interests in CLAM and Sakhalin Energy.
(b) Includes Canada.
Oil and Natural Gas Production
The following tables set forth daily average net production of liquid
hydrocarbons and natural gas for each of the last three years:
<TABLE>
<CAPTION>
Net Liquid Hydrocarbons Production (a)
(Thousands of Barrels per Day) 1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
United States (b)....................... 135 115 122
Europe (c).............................. 42 41 51
Other International (c) (g)............. 19 8 8
----- ----- -----
WORLDWIDE............................... 196 164 181
===== ===== =====
Net Natural Gas Production (d)
(Millions of Cubic Feet per Day)
United States (b)....................... 744 722 676
Europe (e).............................. 360 412 486
Other International (g)................. 81 11 13
----- ----- -----
Total Consolidated.................... 1,185 1,145 1,175
Equity affiliate (f).................... 33 42 45
----- ----- -----
WORLDWIDE............................... 1,218 1,187 1,220
===== ===== =====
</TABLE>
- -----------
(a) Includes crude oil, condensate and natural gas liquids.
(b) Amounts reflect production from leasehold and plant ownership, after
royalties and interests of others.
(c) Except for Canada and Gabon, amounts reflect equity tanker liftings, truck
deliveries and direct deliveries of liquid hydrocarbons before royalties,
if any. The amounts correspond with the basis for fiscal settlements with
governments. Crude oil purchases, if any, from host governments are not
included.
(d) Amounts reflect sales of equity production, only. It excludes volumes
purchased from third parties for resale of 23 mmcfd in 1998 and 32 mmcfd in
1997 and 1996.
(e) Amounts reflect production before royalties.
(f) Represents Marathon's equity interest in CLAM.
(g) Includes Canada for 1998.
13
<PAGE>
At year-end 1998, Marathon was producing crude oil and/or natural gas in
eight countries, including the United States. Marathon's worldwide liquid
hydrocarbon production increased 32,000 bpd, or approximately 20%, from 1997,
mainly reflecting new production in the Gulf of Mexico, acquired production in
Canada and new operations in Gabon. Marathon's 1999 worldwide liquid
hydrocarbon production is expected to increase 17% from 1998, to average
approximately 230,000 bpd. Most of the increase is anticipated in the second
half of the year. This primarily reflects projected new production from the
Phase I development of the P-A field in Russia, start-up of the Tchatamba South
field in the third quarter of 1999 and a full year of production by Marathon
Canada Limited, partially offset by natural production declines of mature
fields. In 2000, worldwide liquid hydrocarbon production is expected to remain
consistent with 1999 levels and is expected to increase by approximately 10 to
15% over 2000 productions levels in 2001.
Marathon's 1998 worldwide sales of equity natural gas production, including
Marathon's share of CLAM's production, increased about 3% from 1997, reflecting
acquired production in Canada and increased production from properties in East
Texas, partially offset by natural declines in international fields (primarily
in Ireland and Norway). In addition to sales of 474 net mmcfd of international
equity natural gas production, Marathon sold 23 net mmcfd of natural gas
acquired for injection and resale during 1998. In 1999, Marathon's worldwide
natural gas volumes are expected to increase 11% over 1998 levels, to average
approximately 1.38 bcfd. This primarily reflects increases in North American
gas production, offset by natural declines in mature international fields,
primarily in Ireland and Norway. In 2000, worldwide natural gas volumes are
expected to remain consistent with 1999 levels and are expected to increase by
approximately 4% over 2000 levels in 2001.
The above projections of 1999, 2000 and 2001 liquid hydrocarbon production
and natural gas volumes are forward-looking statements. They are based on known
discoveries and do not include any additions from potential or future
acquisitions or future wildcat drilling. They are also based on certain
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, reserve replacement
rates and other geological, operating and economical considerations. If these
assumptions prove to be incorrect, actual results could be materially different
than present expectations.
United States
Approximately 69% of Marathon's 1998 worldwide liquid hydrocarbon
production and equity liftings and 61% of worldwide natural gas production
(including CLAM volumes) were from domestic operations. The principal domestic
producing areas are located in Texas, the U.S. Gulf of Mexico, Wyoming, New
Mexico and Oklahoma. Marathon's ongoing domestic growth strategy is to apply
its technical expertise in fields with undeveloped potential, to dispose of
interests in non-core properties with limited upside potential and high
production costs, and to acquire significant working interests in properties
with high development potential.
Marathon continues to apply enhanced recovery and reservoir management
programs and cost containment efforts to maximize liquid hydrocarbon recovery
and profitability in mature fields such as the Yates field in Texas and the
Oregon Basin field in Wyoming. Enhanced recovery efforts for the Yates field
include an ongoing evaluation of thermal recovery techniques.
Texas - Onshore production for 1998 averaged 33,900 net bpd of liquid
hydrocarbons and 186 net mmcfd of natural gas, representing 25% of Marathon's
total U.S. liquid hydrocarbon and natural gas production, respectively. Liquids
production volumes decreased by 3,600 net bpd from 1997 levels, while gas
volumes increased by 25 net mmcfd from 1997 levels. The liquid volume decrease
was mainly due to natural production declines and the gas volume increase was a
result of successful development programs in east Texas.
Within Texas, Marathon owns a 49.8% working interest in, and is the
operator of, the Yates Field Unit, one of the largest fields in the United
States on the basis of reserves. Marathon's 23,200 net bpd of 1998 liquid
hydrocarbon production from the Yates field and gas plant accounted for 17% of
Marathon's total U.S. liquids
14
<PAGE>
production. Activation of a thermal pilot project began in December 1998 with
the completion of a steam generation facility.
Gulf of Mexico - During 1998, Marathon's Gulf production averaged 54,700
net bpd of liquid hydrocarbons and 84 net mmcfd of natural gas, representing 41%
and 11% of Marathon's total U.S. liquid hydrocarbon and natural gas production,
respectively. Liquid hydrocarbon production increased by 26,200 net bpd and
natural gas production increased by 7 net mmcfd from the prior year, mainly due
to new production from Troika, Arnold and Oyster, offset by declines from mature
fields. At year-end 1998, Marathon held working interests in 14 fields and 31
platforms, 20 of which Marathon operates.
Ewing Bank 873 is an important part of Marathon's deepwater infrastructure,
where Marathon is the operator and holds a 66.7% working interest. Production
averaged 32,100 net bpd and 24 net mmcfd in 1998, compared with 19,000 net bpd
and 12 net mmcfd in 1997, primarily due to new production from Arnold and
Oyster.
Wyoming - Liquid hydrocarbon production for 1998 averaged 23,700 net bpd,
representing 18% of Marathon's total U.S. liquid hydrocarbon production, down
from 24,700 net bpd in 1997. The decrease in 1998 from 1997 was primarily due
to capital restraints and natural production declines. Gas production averaged
61 net mmcfd in 1998, compared to 54 net mmcfd in 1997, with the increase due
mainly to developments in southwest Wyoming.
New Mexico - Production in New Mexico, primarily from the Indian Basin and
Travis Canyon fields, averaged 12,500 net bpd and 109 net mmcfd in 1998,
compared with 12,400 net bpd and 109 net mmcfd in 1997.
Oklahoma - Gas production for 1998 averaged 107 net mmcfd, representing 14%
of Marathon's total U.S. gas production, compared with 109 net mmcfd in 1997.
Alaska - Marathon's production from Alaska averaged 144 net mmcfd of
natural gas in 1998, compared with 149 net mmcfd in 1997. Marathon's primary
focus in Alaska is the expansion of its natural gas business through
exploration, exploitation, development and marketing.
International
Interests in liquid hydrocarbon and/or natural gas production are held in
the U.K. North Sea, Irish Celtic Sea, the Norwegian North Sea, Canada, Egypt and
Gabon. In addition, Marathon has an interest through an equity affiliate (CLAM)
in the Netherlands North Sea.
U.K. North Sea - The following table sets forth Marathon's average net
liquid hydrocarbon liftings in the Brae area, for each of the last three years:
<TABLE>
<CAPTION>
Brae-Area Average Net Liquid Hydrocarbon Liftings
(Net Barrels per Day)
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
East Brae.............. 14,500 22,000 29,800
North Brae............. 9,300 8,900 10,000
South Brae............. 3,800 3,600 4,700
Central Brae........... 4,700 3,300 4,200
West Brae.............. 8,600 1,400 -
------ ------ ------
TOTAL.................. 40,900 39,200 48,700
====== ====== ======
</TABLE>
East Brae is a gas condensate field, which uses gas cycling. The decrease
in East Brae production in 1998 primarily reflects the expected depletion of the
reservoir. Gas for pressure maintenance at East Brae is provided by injecting
gas streams from the Brae B platform.
15
<PAGE>
North Brae is a gas condensate field, produced via the Brae B platform
using the gas cycling technique. Although partial cycling continues, the
majority of North Brae gas is being transferred to the East Brae reservoir for
pressure maintenance and sales. North Brae liftings shown in the table above
include production from the Beinn field, which underlies the North Brae field.
The Brae A facilities act as the host platform for the underlying South Brae
field, adjacent Central Brae field and West Brae/Sedgwick fields.
The strategic location of the Brae A, Brae B and East Brae platforms and
pipeline infrastructure has generated significant third-party business since
1986. Arrangements were finalized in 1998 for the processing and transportation
of reservoir fluids from the outside-operated Larch field. This agreement
brings to 15, the number of third-party fields contracted to the Brae system.
In addition to generating processing and pipeline tariff revenue, third-party
business also has a favorable impact on Brae area operations by optimizing
infrastructure usage and extending the economic life of the facilities.
Participation in the Scottish Area Gas Evacuation ("SAGE") system provides
pipeline transportation and onshore processing for Brae-area gas. The Brae
group owns 50% of SAGE, which has a total wet gas capacity of approximately 1.0
bcfd. The other 50% is owned by the Beryl group, which operates the system. A
30-inch pipeline connects the Brae, Beryl and Scott fields to the SAGE gas
processing terminal at St. Fergus in northeast Scotland. The St. Fergus
facilities were expanded in 1998, and a new pipeline connecting the Britannia
field to the St. Fergus terminal began transporting gas for processing through
SAGE in August 1998.
Marathon's total United Kingdom gas sales from all sources averaged 188 net
mmcfd in 1998, compared with 162 net mmcfd in 1997. Sales of Brae-area gas
through the SAGE pipeline system averaged 185 net mmcfd for the year 1998 and
159 net mmcfd for the year 1997. Of these totals, 162 mmcfd and 127 mmcfd was
Brae-area equity gas in 1998 and 1997, respectively, and 23 and 32 mmcfd was gas
acquired for injection and subsequent resale in 1998 and 1997, respectively.
Ireland - Marathon holds a 100% working interest in the Kinsale Head and
Ballycotton fields in the Irish Celtic Sea. Natural gas sales from these
maturing fields were 168 net mmcfd in 1998, compared with 228 net mmcfd in 1997.
This production decline is expected to be partially offset by compressor
modifications being implemented in 1999 and 2000, which is expected to improve
recovery from Kinsale Head, and by the planned development of the Southwest
Kinsale reservoir.
Norway - In the Norwegian North Sea, Marathon holds a 23.8% working
interest in the Heimdal field, which had 1998 sales of 27 net mmcfd of natural
gas and 900 net bpd of condensate, compared with 1997 sales of 54 net mmcfd of
natural gas and 1,700 net bpd of condensate. In mid-1994, Marathon issued a
notice of termination on the gas sales agreements for this field based upon low
gas prices and high pipeline tariffs associated with the operations. The
effective date of the termination was June 11, 1996. In June 1996, an agreement
was reached with one of the buyers, which provided for an improved economic
position for 30% of the gas sales. The remaining 70% share of sales, sold under
a separate agreement, remains unresolved, although gas sales have continued
under protest. Heimdal production is scheduled to cease in late 1999 with
future revenue from third party business commencing in 2002. During 1998, an
agreement was reached with the Heimdal Group and the operator to redevelop the
field as a processing and transportation center.
Canada - MCL net production averaged 16,000 bpd and 166 mmcfd from August
12, 1998 through year-end 1998.
Egypt - Marathon holds interests in four concessions in Egypt under
production sharing agreements. Liquid hydrocarbon and natural gas production
totaled 8,500 net bpd and 16 net mmcfd in 1998, compared with 8,300 net bpd and
11 net mmcfd in 1997.
Gabon - In 1998, the first year of production, the Tchatamba Marin field
produced 4,700 net bpd of liquid hydrocarbons.
16
<PAGE>
Netherlands - Marathon's 50% equity interest in CLAM, the eighth largest
producer and reserves holder in the Netherlands North Sea, provides a 5%
entitlement in the production of 19 gas fields, which provided sales of 33 net
mmcfd of natural gas in 1998, compared with 42 net mmcfd in 1997. The decrease
in natural gas sales was mainly attributable to natural production declines and
an equity redetermination.
The following tables set forth productive wells and service wells for each
of the last three years and drilling wells as of December 31, 1998:
<TABLE>
<CAPTION>
Gross and Net Wells
1998 Productive Wells (a)
- ---- -----------------------------
Oil Gas Service Wells (b) Drilling Wells (c)
-------------- ------------- ----------------- -----------------
Gross Net Gross Net Gross Net Gross Net
------ ------ ------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States............ 9,396 3,616 3,214 1,414 4,062 1,127 16 12
------ ------ ----- ----- ----- ----- ----- -----
Europe................... 33 13 64 32 22 9 2 1
Other International (f).. 1,248 795 1,459 1,068 162 111 1 0
------ ------ ----- ----- ----- ----- ----- -----
Total Consolidated... 10,677 4,424 4,737 2,514 4,246 1,247 19 13
Equity affiliates (d).... - - 83 4 - - 2 1
------ ------ ----- ----- ----- ----- ----- -----
WORLDWIDE................ 10,677 4,424 4,820 2,518 4,246 1,247 21 14
====== ====== ===== ===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
1997 Productive Wells (a)
- ---- ---------------------------
Oil Gas Service Wells (b)
------------- ------------ -----------------
Gross Net Gross Net Gross Net
------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
United States............ 9,661 3,755 3,282 1,451 4,100 1,138
Europe................... 30 12 58 30 21 8
Other International...... 19 13 7 2 - -
------ ----- ----- ----- ----- -----
Total Consolidated...... 9,710 3,780 3,347 1,483 4,121 1,146
Equity affiliate (e)..... - - 78 5 - -
------ ----- ----- ----- ----- -----
WORLDWIDE................ 9,710 3,780 3,425 1,488 4,121 1,146
====== ===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
1996 Productive Wells (a)
- ---- --------------------------
Oil Gas Service Wells (b)
------------- ----------- ---------------
Gross Net Gross Net Gross Net
------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
United States............ 10,939 3,860 3,248 1,401 4,891 1,181
Europe................... 28 12 55 30 19 8
Other International...... 11 7 10 2 - -
------ ----- ----- ----- ----- -----
Total Consolidated...... 10,978 3,879 3,313 1,433 4,910 1,189
Equity affiliate (e)..... - - 76 5 - -
------ ----- ----- ----- ----- -----
WORLDWIDE................ 10,978 3,879 3,389 1,438 4,910 1,189
====== ===== ===== ===== ===== =====
</TABLE>
- -----------
(a) Includes active wells and wells temporarily shut-in. Of the gross
productive wells, gross wells with multiple completions operated by
Marathon totaled 518, 335 and 329 in 1998, 1997 and 1996, respectively.
Information on wells with multiple completions operated by other companies
is not available to Marathon.
(b) Consists of injection, water supply and disposal wells.
(c) Consists of exploratory and development wells.
(d) Represents CLAM and Sakhalin Energy.
(e) Represents CLAM.
(f) Includes Canada.
17
<PAGE>
The following tables set forth average production costs and sales prices
per unit of production for each of the last three years:
<TABLE>
<CAPTION>
Average Production Costs (a) 1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
(Dollars per BOE)
United States............................. $ 3.12 $ 3.93 $3.97
International - Europe.................... 4.29 4.27 4.38
- Other International (d)... 4.73 3.40 3.29
Total Consolidated........................ $ 3.55 $ 4.01 $4.09
- Equity affiliate (b)...... 3.99 5.86 5.22
WORLDWIDE................................. $ 3.56 $ 4.05 $4.11
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996 1998 1997 1996
------ ------ ------ ------ ------ ------
Average Sales Prices (c) Crude Oil and Condensate Natural Gas Liquids
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars per Barrel)
United States.............................. $10.60 $17.32 $19.12 $ 8.64 $13.28 $13.59
International - Europe..................... 12.87 19.37 20.77 11.49 17.85 17.33
- Other International (d).... 11.31 16.62 19.74 8.38 18.12 17.65
WORLDWIDE.................................. $11.17 $17.79 $19.63 $ 9.12 $14.52 $14.71
</TABLE>
<TABLE>
<CAPTION>
Natural Gas
----------------------
<S> <C> <C> <C>
(Dollars per Thousand Cubic Feet)
United States.............................. $ 1.79 $ 2.20 $ 2.09
International - Europe..................... 2.07 2.00 1.96
- Other International (d).... 1.34 2.10 2.34
Total Consolidated......................... $ 1.85 $ 2.13 $ 2.04
- Equity affiliate (b)....... 2.37 2.73 2.74
WORLDWIDE.................................. $ 1.86 $ 2.15 $ 2.06
</TABLE>
- -----------
(a) Production costs are as defined by the Securities and Exchange Commission
and include property taxes, severance taxes and other costs, but exclude
depreciation, depletion and amortization of capitalized acquisition,
exploration and development costs and certain administrative costs. Natural
gas volumes were converted to barrels of oil equivalent using a conversion
factor of six mcf of natural gas to one barrel of oil.
(b) Represents CLAM.
(c) Prices exclude gains/losses from hedging activities.
(d) Includes Canada for 1998.
Refining, Marketing and Transportation
Effective January 1, 1998, Marathon and Ashland Inc. ("Ashland") formed a
new domestic refining, marketing and transportation ("RM&T") company, Marathon
Ashland Petroleum LLC ("MAP"). On January 1, 1998, Marathon transferred certain
RM&T net assets to MAP. Also, on January 1, 1998, Marathon acquired certain
RM&T net assets from Ashland in exchange for a 38% interest in MAP. For further
discussion of MAP, see Note 3 to the USX Consolidated Financial Statements on
page U-10.
Since MAP is a consolidated subsidiary of Marathon, operating statistics
and financial data applicable to the Marathon Group's RM&T activities include
100% of MAP's operations, commencing January 1, 1998.
The following discussion of RM&T operations includes historical data for
the three-year period ended December 31, 1998. Operating measures such as
refined product yields and refined product sales in 1998 include 100% of MAP and
are not comparable to prior period amounts.
18
<PAGE>
Refining
MAP owns and operates seven refineries with an aggregate refining capacity
of 935,000 barrels of crude oil per calendar day. The table below sets forth
the location and daily throughput capacity of each of MAP's refineries as of
December 31, 1998:
<TABLE>
<CAPTION>
In-Use Refining Capacity
(Barrels per Day)
<S> <C>
Garyville, LA.................. 232,000
Catlettsburg, KY............... 222,000
Robinson, IL................... 192,000
Detroit, MI.................... 74,000
Canton, OH..................... 73,000
Texas City, TX................. 72,000
St. Paul Park, MN.............. 70,000
-------
TOTAL.......................... 935,000
=======
</TABLE>
MAP's refineries include crude oil atmospheric and vacuum distillation,
fluid catalytic cracking, catalytic reforming, desulfurization and sulfur
recovery units. The refineries have the capability to process a wide variety of
crude oils and to produce typical refinery products, including reformulated
gasoline. MAP's refineries are integrated via pipelines and barges to maximize
operating efficiency. The transportation links that connect the refineries
allow the movement of intermediate products to optimize operations and the
production of higher margin products. For example, naphtha is moved from Texas
City and Catlettsburg to Robinson where excess reforming capacity is available.
Gas oil is moved from Robinson to Detroit and Cattlettsburg where excess fluid
catalytic cracking unit capacity is available. Light cycle oil is moved from
Texas City to Robinson where excess desulfurization capacity is available.
Marathon's 50,000 bpd Indianapolis refinery, which was not contributed to
MAP, has remained idled since October 1993. The status of the refinery is
periodically reviewed, considering economic as well as regulatory matters. In
1998, several refining components were dismantled and sold. As of February 28,
1999, the refinery remained idled.
During 1998, MAP's refineries processed 894,000 bpd of crude oil and
127,000 bpd of other charge and blend stocks. The following table sets forth
MAP's refinery production by product group for 1998 and Marathon's refinery
production by product group for 1997 and 1996:
<TABLE>
<CAPTION>
Refined Product Yields
(Thousands of Barrels per Day) 1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
Gasoline........................ 545 353 345
Distillates..................... 270 154 155
Propane......................... 21 13 13
Feedstocks & Special Products... 64 36 35
Heavy Fuel Oil.................. 49 35 30
Asphalt......................... 68 39 36
----- ---- ----
TOTAL........................... 1,017 630 614
===== ==== ====
</TABLE>
Maintenance activities requiring temporary shutdown of certain refinery
operating units ("turnarounds") are periodically performed at each of the
operating refineries. MAP completed major turnarounds at the Garyville and
Canton refineries in 1998. In addition, a maintenance and safety improvement
program was implemented and substantially completed at the Catlettsburg, Canton
and St. Paul Park refineries in 1998.
MAP and a third party are constructing facilities to produce 800 million
pounds per year of polymer grade propylene and polypropylene at the Garyville
refinery. MAP is building, and will own and operate facilities to
19
<PAGE>
produce polymer grade propylene. The third party is constructing, and will own
and operate the polypropylene facilities and market its output. Production of
the polymer grade propylene is scheduled to begin in the second quarter of 1999.
Marketing
In 1998, MAP's refined product sales volumes (excluding matching buy/sell
transactions) totaled 17.8 billion gallons (1,159,000 bpd). Excluding sales
related to matching buy/sell transactions, the wholesale distribution of
petroleum products to private brand marketers and to large commercial and
industrial consumers, primarily located in the Midwest, the upper Great Plains
and the Southeast, accounted for about 64% of MAP's refined product sales
volumes in 1998. Approximately 46% of MAP's gasoline volumes and 77% of its
distillate volumes were sold on a wholesale basis to independent unbranded
customers in 1998.
The following table sets forth the volume of MAP's consolidated refined
product sales by product group for 1998 and Marathon's consolidated refined
product sales by product group for 1997 and 1996:
<TABLE>
<CAPTION>
Refined Product Sales
(Thousands of Barrels per Day) 1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
Gasoline..................................... 671 452 468
Distillates.................................. 318 198 192
Propane...................................... 21 12 12
Feedstocks & Special Products................ 67 40 37
Heavy Fuel Oil............................... 49 34 31
Asphalt...................................... 72 39 35
----- ---- ----
TOTAL........................................ 1,198 775 775
===== ==== ====
Matching Buy/Sell Volumes included in above.. 39 51 71
</TABLE>
As of December 31, 1998, MAP supplied petroleum products to 3,117 Marathon
and Ashland branded retail outlets located primarily in Ohio, Michigan, Indiana,
Kentucky and Illinois. Branded retail outlets are also located in the states of
West Virginia, Wisconsin, Virginia, Tennessee, Minnesota, Pennsylvania and North
Carolina.
MAP currently has both the Marathon and Ashland brands for jobbers. In
1998, MAP decided to endorse a single brand concept for maximum market
effectiveness. The brand chosen was Marathon because of its significant
longtime presence in the market and its substantially larger number of retail
outlets and credit card holders. If an Ashland jobber chooses to become a
Marathon branded jobber, MAP assists in re-imaging the applicable locations to
Marathon brand specifications.
In 1998, retail sales of gasoline and diesel fuel were also made through
limited service and self-service stations and truck stops operated in 20 states
by a wholly owned MAP subsidiary, Speedway SuperAmerica, LLC ("SSA"). As of
December 31, 1998, this subsidiary had 2,257 retail outlets which sold petroleum
products and convenience-store merchandise, primarily under the brand names
"Speedway," "SuperAmerica", "Starvin' Marvin" and "Rich". SSA's revenues from
the sale of convenience-store merchandise totaled $1,827 million in 1998,
compared with $1,037 million for Emro Marketing Company in 1997. Profits
generated from these sales tend to moderate the margin volatility experienced in
the retail sale of gasoline and diesel fuel. The selection of merchandise
varies among outlets -- 1,978 of SSA's 2,257 outlets at December 31, 1998, had
convenience stores which sold a variety of food and merchandise, and the
remaining outlets sold selected convenience-store items such as cigarettes,
candy and beverages.
In July 1998, MAP announced plans to locate the SSA corporate headquarters
in Enon, Ohio, where Emro Marketing Company was formerly located. The move to
Enon was completed in December 1998.
20
<PAGE>
Supply and Transportation
The crude oil processed in MAP's refineries is obtained from negotiated
lease, contract and spot purchases or exchanges. In 1998, MAP's negotiated
lease, contract and spot purchases of U.S. crude oil for refinery input averaged
317,000 bpd including 24,000 bpd acquired from Marathon. 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 which approximately 330,000 bpd was acquired
from the Middle East.
In addition, MAP, through its subsidiary, Scurlock Permian LLC, is actively
engaged in purchasing, selling and trading crude oil, principally at Midland,
Texas; Cushing, Oklahoma; and St. James, Louisiana, three of the major
distribution points for U.S. crude oil, and at major trading and distribution
hubs in western Canada. MAP announced on March 1, 1999, that it signed a
memorandum of understanding to sell Scurlock Permian LLC to Plains All American
Pipeline, L.P. The transaction, subject to customary closing conditions,
including execution of definitive agreements, consent of third parties, and
receipt of governmental approvals, is expected to be completed in the second
quarter of 1999.
MAP operates a system of pipelines and terminals to provide crude oil to
its refineries and refined products to its marketing areas. Eighty-eight light
product and asphalt terminals are strategically located throughout the Midwest,
upper Great Plains and Southeast. These facilities are supplied by a
combination of pipelines, barges, rail cars and trucks.
At December 31, 1998, MAP owned, leased or had an ownership interest in
approximately 2,653 miles of crude oil gathering lines; 4,553 miles of crude oil
trunk lines; and 2,861 miles of products trunk lines. In addition, MAP owned a
46.7% interest in LOOP LLC ("LOOP"), which is the owner and operator of the only
U.S. deepwater oil port, located 18 miles off the coast of Louisiana; a 49.9%
interest in LOCAP Inc. ("LOCAP"), which is the owner and operator of a crude oil
pipeline connecting LOOP and the Capline system; and a 37.2% interest in the
Capline system, a large diameter crude oil pipeline extending from St. James,
Louisiana to Patoka, Illinois.
MAP also has a 33.3% ownership interest in Minnesota Pipe Line Company,
which operates a crude oil pipeline in Minnesota. Minnesota Pipe Line Company
provides MAP with access to 270,000 bpd nominal capacity of crude oil common
carrier transportation from Clearbrook, Minnesota to Cottage Grove, Minnesota,
which is in the vicinity of MAP's St. Paul Park, Minnesota, refinery.
MAP plans to build a pipeline from its Catlettsburg refinery to Columbus,
Ohio. The wholly owned pipeline is expected to initially move about 50,000 bpd
of refined products into central Ohio. Construction is expected to commence in
the summer of 1999 after final regulatory approvals. The pipeline is expected
to be operational in the first half of 2000.
MAP's marine transportation operations include towboats and barges that
transport refined products on the Ohio, Mississippi and Illinois rivers, their
tributaries, and the Intercoastal Waterway. MAP leases on a long-term basis two
single-hulled 80,000-ton-deadweight tankers, which are primarily used for third-
party delivery of foreign crude oil to the United States. The initial term of
these charters expires in 2001 and 2002, subject to certain renewal options.
These tankers are not essential for MAP to satisfy its own crude oil
requirements. In 1999, MAP "bare boat sub-chartered" these tankers to a third
party operator, who will operate the vessels.
MAP leases rail cars in various sizes and capacities for movement of
petroleum products. MAP also owns a large number of tractors, tank trailers,
and general service trucks.
The above discussion related to Scurlock Permian LLC contains forward-
looking statements regarding the schedule for closing the sale transaction. The
closing of this transaction and the timing thereof involve uncertainties
including, but not limited to, the execution of definitive agreements, receipt
of government approvals, consent of third parties, and satisfaction of customary
closing conditions. A delay in completing any of these could
21
<PAGE>
result in a delay in closing the sale transaction. In addition, failure to
complete any of these events could result in the sale transaction not closing as
currently contemplated.
Other Energy Related Businesses
Natural Gas and Crude Oil Marketing and Transportation
Marathon owns and operates, as a common carrier, approximately 174 miles of
crude oil gathering lines and 187 miles of crude oil trunk lines that were not
contributed to MAP. In addition, Marathon owns interests in various pipeline
systems that were not contributed to MAP, including a 29% interest of Odyssey
Pipeline L.L.C., which owns and operates a 300,000 bpd crude oil pipeline
serving Main Pass Blocks 69, 72 and 289 and Viosca Knoll Blocks 780 and 786; a
28% interest of Poseidon Oil Pipeline Company, L.L.C., which owns and operates a
400,000 bpd crude oil pipeline system connected to the Marathon-operated Ewing
Bank 873 platform in the Gulf of Mexico; a 24.33% interest of Nautilus Pipeline
Company, L.L.C., which owns and operates a 600 mmcfd natural gas pipeline
system, also located in the Gulf of Mexico; a 17.4% interest of Explorer
Pipeline Company, which operates a light products pipeline system extending from
the Gulf Coast to the Midwest; and a 2.5% interest of Colonial Pipeline Company,
which operates a light products pipeline system extending from the Gulf Coast to
the East Coast.
Marathon has a 30% ownership in a Kenai, Alaska, natural gas liquefication
plant and two 87,500 cubic meter tankers used to transport liquefied natural gas
("LNG") to customers in Japan. Feedstock for the plant is supplied from a
portion of Marathon's equity natural gas production in the Cook Inlet. LNG is
sold under a long-term contract with two of Japan's largest utility companies
which calls for the sale of more than 900 gross bcf over the term of the
contract. Marathon has a 30% participation in this contract which is effective
through March 31, 2004, and provides an option for a five-year extension.
During 1998, LNG deliveries totaled 66.0 gross bcf (20.0 net bcf), up from 62.2
gross bcf (18.6 net bcf) in 1997.
In addition to the sale of domestic equity production of natural gas,
Marathon purchases gas from third-party producers and marketers for resale.
This activity helps to maximize the value of Marathon's equity gas production,
while meeting customers' needs for secure and source-flexible supplies.
The Marathon Group includes five USX subsidiaries that are engaged solely
in the natural gas business. Carnegie Interstate Pipeline Company ("CIPCO") is
an interstate pipeline company engaged in the transportation of natural gas via
interstate commerce. Carnegie Production Company produces and sells natural
gas, while Carnegie Natural Gas Sales, Inc. is an unregulated marketer of
natural gas. Carnegie Natural Gas Company ("Carnegie") functions as a local
distribution company serving residential, commercial and industrial customers in
West Virginia and western Pennsylvania. Finally, Carnegie Natural Gas Storage
LLC was established to invest in gas storage projects. As of December 31, 1998,
Carnegie owned and operated approximately 1,800 miles of natural gas gathering
lines. Owned proved developed reserves dedicated to gathering operations were
44.7 bcf in 1998 as compared to 39.8 bcf and 42.8 bcf in 1997 and 1996,
respectively.
Carnegie is regulated as a public utility by state commissions within its
service areas, while CIPCO is regulated by the Federal Energy Regulatory
Commission as an interstate pipeline. Total natural gas throughput was 23 bcf
in 1998 compared to 32 bcf and 34 bcf in 1997 and 1996, respectively.
Power Generation
Marathon, through its wholly owned subsidiary, Marathon Power Company, Ltd.
("Marathon Power"), pursues development, construction, ownership and operation
of independent electric power projects in the global electrical power market. In
1997, Marathon Power acquired a 50% interest in an Ecuadorian power generation
company, which owns and operates two generating plants in Ecuador capable of
delivering 130 megawatts of power. Marathon Power is actively pursuing a variety
of projects in Latin America, Europe, Africa and the Asia/Pacific Region.
22
<PAGE>
Competition and Market Conditions
The oil and gas industry is characterized by a large number of companies,
none of which is dominant within the industry, but a number of which have
greater resources than Marathon. Marathon must compete with these companies for
the rights to explore for oil and gas. Acquiring the more attractive
exploration opportunities frequently requires competitive bids involving
substantial front-end bonus payments or commitments to work programs. Based on
industry sources, Marathon believes it currently ranks 11th among U.S. based
petroleum corporations on the basis of 1997 worldwide liquid hydrocarbon and
natural gas production.
Marathon through MAP must also compete with a large number of other
companies to acquire crude oil for refinery processing and in the distribution
and marketing of a full array of petroleum products. MAP believes it ranks
fourth among U.S. petroleum companies on the basis of crude oil refining
capacity as of January 1, 1999. MAP competes in three distinct markets --
wholesale, branded and retail distribution -- for the sale of refined products,
and believes it competes with more than 50 companies in the wholesale
distribution of petroleum products to private brand marketers and large
commercial and industrial consumers; nine refiner/marketers in the supply of
branded petroleum products to dealers and jobbers; and over 1,800 petroleum
product retailers in the retail sale of petroleum products. Marathon also
competes in the convenience store industry through MAP's retail outlets.
The Marathon Group's operating results are affected by price changes in
crude oil, natural gas and petroleum products as well as changes in competitive
conditions in the markets it serves. Generally, operating results from
production operations benefit from higher crude oil and natural gas prices while
refining and marketing margins may be adversely affected by crude oil price
increases. Market conditions in the oil industry are cyclical and subject to
global economic and political events.
Employees
The Marathon Group had 32,862 active employees as of December 31, 1998,
which included 28,449 MAP employees. Of the MAP total, 21,586 were employees of
Speedway SuperAmerica, LLC, primarily representing employees at retail marketing
outlets.
Certain hourly employees at the Catlettsburg and Canton refineries are
represented by the Paper, Allied Industrial, Chemical and Energy Workers
International Union under labor agreements which expire on January 31, 2002,
while certain hourly employees at the Texas City refinery are represented by the
same union under a labor agreement which expires on March 31, 2002. Certain
hourly employees at the St. Paul Park and Detroit refineries are represented by
the International Brotherhood of Teamsters under labor agreements which expire
on May 31, 1999 and January 31, 2000, respectively.
Property, Plant and Equipment Additions
For property, plant and equipment additions, see "Management's Discussion
and Analysis of Financial Condition, Cash Flows and Liquidity - Capital
Expenditures" for the Marathon Group on page M-29.
Environmental Matters
The Marathon Group maintains a comprehensive environmental policy overseen
by the Public Policy Committee of the USX Board of Directors. The Health,
Environment and Safety organization has the responsibility to ensure that the
Marathon Group's operating organizations maintain environmental compliance
systems that are in accordance with applicable laws and regulations. The
Health, Environment and Safety Management Committee, which is comprised of
officers of the group, is charged with reviewing its overall performance with
various environmental compliance programs. Also, the Marathon Group has formed
an Emergency Management Team, composed of senior management, which will oversee
the response to any major emergency environmental incident throughout the group.
23
<PAGE>
The businesses of the Marathon Group are subject to numerous federal, state
and local laws and regulations relating to the protection of the environment.
These environmental laws and regulations include the Clean Air Act ("CAA") with
respect to air emissions, the Clean Water Act ("CWA") with respect to water
discharges, the Resource Conservation and Recovery Act ("RCRA") with respect to
solid and hazardous waste treatment, storage and disposal, the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") with respect
to releases and remediation of hazardous substances, and the Oil Pollution Act
of 1990 ("OPA-90") with respect to oil pollution and response. In addition,
many states where the Marathon Group operates have similar laws dealing with the
same matters. These laws and their associated regulations are constantly
evolving and becoming increasingly stringent. The ultimate impact of complying
with existing laws and regulations is not always clearly known or determinable
due in part to the fact that certain implementing regulations for laws such as
RCRA and the CAA have not yet been finalized or in certain instances are
undergoing revision. These environmental laws and regulations, particularly the
1990 Amendments to the CAA and new water quality standards, could result in
increased capital, operating and compliance costs.
For a discussion of environmental capital expenditures and costs of
compliance for air, water, solid waste and remediation, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Management's Discussion and Analysis of Environmental Matters, Litigation and
Contingencies" on page M-31 and "Legal Proceedings" for the Marathon Group on
page 37.
The Marathon Group has incurred and will continue to incur substantial
capital, operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. To the extent these expenditures, as with
all costs, are not ultimately reflected in the prices of the Marathon Group's
products and services, operating results will be adversely affected. The
Marathon Group believes that substantially all of its competitors are subject to
similar environmental laws and regulations. However, the specific impact on
each competitor may vary depending on a number of factors, including the age and
location of its operating facilities, marketing areas, production processes and
whether or not it is engaged in the petrochemical business or the marine
transportation of crude oil or refined products.
Air
The CAA imposes stringent limits on air emissions, establishes a federally
mandated operating permit program and allows for civil and criminal enforcement
sanctions. The principal impact of the CAA on the Marathon Group is on its RM&T
operations. The CAA also establishes attainment deadlines and control
requirements based on the severity of air pollution in a geographical area. It
is estimated that, from 1999 to 2002, the Marathon Group, which includes all
seven MAP refineries, may spend approximately $90 million in order to comply
with the proposed Maximum Achievable Control Technology ("MACT") Phase II
standards under the CAA. These standards require new control equipment on Fluid
Catalytic Cracking Units and other units. In addition, the standards for RFG
become even more stringent in the year 2000, when Phase II Complex Model RFG
will be required. It is expected that new Tier II Fuels regulations will be
issued during 1999, requiring reduced sulfur levels in both gasoline and diesel
fuels, which would not take effect until sometime after 2002. It is anticipated
that if final regulations are adopted, consistent with earlier drafts of the
regulations, the compliance cost for these regulations could amount to a total
of several hundred million dollars spread over a period of several years.
In July 1997, the Environmental Protection Agency (" U.S. EPA") promulgated
the revisions to the National Ambient Air Quality Standards ("NAAQS") for ozone
and particulate matter. Additionally, in 1998, the U.S. EPA published a
nitrogen oxide ("NOx") State Implementation Plan ("SIP") call, which would
require some 22 states, including many states where the Marathon Group has
operations, to revise their SIPs to reduce NOx emissions. The effective date
for any additional NOx control mechanisms to be installed will not be until May
2003. The impact of the revised NAAQS and NOx standards could be significant to
Marathon, but the potential financial effects cannot be reasonably estimated
until the states develop and implement their revised SIPs covering their NAAQS
and NOx (particularly if it covers fuels) standards.
24
<PAGE>
Water
The Marathon Group maintains numerous discharge permits as required under
the National Pollutant Discharge Elimination System program of the CWA, and has
implemented systems to oversee its compliance efforts. In addition, the
Marathon Group is regulated under OPA-90 which amended the CWA. Among other
requirements, OPA-90 requires the owner or operator of a tank vessel or a
facility to maintain an emergency plan to respond to discharges of oil or
hazardous substances. Also, in case of such spills, OPA-90 requires responsible
companies to pay removal costs and damages caused by them, provides for
substantial civil penalties, and imposes criminal sanctions for violations of
this law.
Additionally, OPA-90 requires that new tank vessels entering or operating
in domestic waters be double-hulled, and that existing tank vessels that are not
double-hulled be retrofitted or removed from domestic service, according to a
phase-out schedule. MAP leases on a long-term basis two single-hulled, 80,000-
ton-deadweight tankers, which are primarily used for third-party delivery of
foreign crude oil to the United States. The initial term of these charters
expires in 2001 and 2002, subject to certain renewal options. In 1999, MAP
"bare boat sub-chartered" these tankers to a third party operator, who will
operate the vessels. The Coast Guard National Pollution Funds Center has
granted permission to Marathon and Ashland to self-insure the financial
responsibility amount for liability purposes for MAP's tankers, as provided in
OPA-90. In addition, most of the barges, which are used in MAP's river
transportation operations, meet the double-hulled requirements of OPA-90.
Single-hulled barges owned and operated by MAP are in the process of being
phased out. Displaced single-hulled barges will be divested or recycled into
docks or floats within MAP's system.
The Marathon Group operates facilities at which spills of oil and hazardous
substances could occur. Several coastal states in which Marathon operates have
passed state laws similar to OPA-90, but with expanded liability provisions,
including provisions for cargo owners as well as ship owners. Marathon has
implemented emergency oil response plans for all of its components and
facilities covered by OPA-90.
Solid Waste
The Marathon Group continues to seek methods to minimize the generation of
hazardous wastes in its operations. RCRA establishes standards for the
management of solid and hazardous wastes. Besides affecting current waste
disposal practices, RCRA also addresses the environmental effects of certain
past waste disposal operations, the recycling of wastes and the regulation of
underground storage tanks ("USTs") containing regulated substances. Since the
U.S. EPA has not yet promulgated implementing regulations for all provisions of
RCRA and has not yet made clear the practical application of all the
implementing regulations it has promulgated, the ultimate cost of compliance
cannot be accurately estimated. In addition, new laws are being enacted and
regulations are being adopted by various regulatory agencies on a continuing
basis, and the costs of compliance with these new rules can only be broadly
appraised until their implementation becomes more accurately defined.
Remediation
The Marathon Group operates certain retail outlets where, during the normal
course of operations, releases of petroleum products from USTs have occurred.
Federal and state laws require that contamination caused by such releases at
these sites be assessed and remediated to meet applicable standards. The
enforcement of the UST regulations under RCRA has been delegated to the states
which administer their own UST programs. The Marathon Group's obligation to
remediate such contamination varies, depending upon the extent of the releases
and the stringency of the laws and regulations of the states in which it
operates. A portion of these remediation costs may be recoverable from state
UST reimbursement funds once the applicable deductibles have been satisfied.
Accruals for remediation expenses and associated reimbursements are established
for sites where contamination has been determined to exist and the amount of
associated costs is reasonably determinable.
As a general rule, Marathon and Ashland retained responsibility for certain
costs of remediation arising out of the prior ownership and operation of those
businesses transferred to MAP. Such continuing responsibility,
25
<PAGE>
in certain situations, may be subject to threshold or sunset agreements which
gradually diminish this responsibility over time.
USX is also involved in a number of remedial actions under RCRA, CERCLA and
similar state statutes related to the Marathon Group. It is possible that
additional matters relating to the Marathon Group may come to USX's attention
which may require remediation.
26
<PAGE>
U.S. STEEL GROUP
The U. S. Steel Group includes U. S. Steel, the largest steel producer in
the United States, which is engaged in 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. 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, VSZ U. S. Steel, s. r.o. and RTI
International Metals, Inc. ("RTI"). U. S. Steel Group revenues as a percentage
of total USX consolidated revenues were approximately 22% in 1998, 31% in 1997
and 29% in 1996.
The following table sets forth the total revenues of the U. S. Steel Group
for each of the last three years.
<TABLE>
<CAPTION>
Revenues
(Millions) 1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Sales by product:
Sheet and Semi-finished Steel Products... $3,501 $3,820 $3,677
Tubular, Plate, and Tin Mill Products.... 1,513 1,754 1,635
Raw Materials (Coal, Coke and Iron Ore).. 591 671 757
Other (a)................................ 578 570 466
Income from affiliates..................... 46 69 66
Gain on disposal of assets................. 54 57 16
Gain on affiliate stock offering (b)....... - - 53
------ ------ ------
TOTAL U. S. STEEL GROUP REVENUES........... $6,283 $6,941 $6,670
====== ====== ======
</TABLE>
- -----------
(a) Includes revenue from the sale of steel production by-products, engineering
and consulting services, real estate development and resource management.
(b) For further details, see Note 5 to the U. S. Steel Group Financial
Statements.
For additional financial information about USX's industry segments, see
"Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements - 10. Group and Segment Information" on page U -13.
The total number of active U. S. Steel Group employees at year-end 1998 was
19,169. Most hourly and certain salaried employees are represented by the United
Steelworkers of America ("USWA").
U. S. Steel's contract with the USWA, covering approximately 15,000
employees, expires on August 1, 1999. 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.
U. S. Steel Mining Company, LLC ("U. S. Steel Mining") entered into a five
year contract with the United Mine Workers of America ("UMWA"), effective
January 1, 1998, covering approximately 1,000 employees. This agreement follows
that of other major mining companies.
Steel Industry Background and Competition
The domestic steel industry is cyclical and highly competitive and is
affected by excess world capacity which has restricted price increases during
periods of economic growth and led to price decreases during economic
contraction. In addition, the domestic steel industry, including U. S. Steel,
faces competition from producers of materials such as aluminum, cement,
composites, glass, plastics and wood in many markets.
U. S. Steel is the largest steel producer in the United States and competes
with many domestic and foreign steel producers. Domestic competitors include
integrated producers which, like U. S. Steel, use iron ore and coke as
27
<PAGE>
primary raw materials for steel production, and mini-mills which primarily use
steel scrap and, increasingly, iron bearing feedstocks as raw materials. Mini-
mills generally produce a narrower range of steel products than integrated
producers, but typically enjoy certain competitive advantages such as lower
capital expenditures for construction of facilities and non-unionized work
forces with lower employment costs and more flexible work rules. An increasing
number of mini-mills utilize thin slab casting technology to produce flat-rolled
products, and additional domestic flat-rolled mini-mill capacity was added in
1998. Through the use of thin slab casting, mini-mill competitors are
increasingly able to compete directly with integrated producers of flat-rolled
products. Depending on market conditions, the additional production generated by
flat-rolled mini-mills could have an adverse effect on U. S. Steel's selling
prices and shipment levels.
Steel imports to the United States accounted for an estimated 30%, 24% and
23% of the domestic steel market for the years 1998, 1997 and 1996,
respectively. In November 1998, steel imports accounted for an estimated 37% of
the domestic steel market. Steel imports of hot rolled and cold rolled steel
increased 42% in 1998, compared to 1997. Steel imports of plates increased 75%
in 1998, compared to 1997. Foreign competitors typically have lower labor costs,
and are often owned, controlled or subsidized by their governments, allowing
their production and pricing decisions to be influenced by political and
economic policy considerations as well as prevailing market conditions.
Continued high levels of imported steel will have an adverse affect on future
market prices and demand levels for domestic steel.
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 November 1998, determination, 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. This
preliminary determination of injury is subject to further investigation by the
ITC and U.S. Department of Commerce ("Commerce"). On February 12, 1999, Commerce
announced preliminary anti-dumping duty margins on hot rolled imports from Japan
(ranging from approximately 25% to 67%) and Brazil (ranging from approximately
50% to 71%) and preliminary countervailing duty margins on imports from Brazil
(ranging from more than 6% to more than 9%). On February 22, 1999, Commerce
announced preliminary anti-dumping duty margins on hot rolled imports from
Russia (ranging from approximately 71% to 217%). However, Commerce announced at
the same time that it had initialed an agreement with Russia to suspend the
anti-dumping investigation on hot rolled imports from Russia. This agreement, if
approved, allows the annual import of 750,000 metric tons of hot rolled steel
product from Russia at a minimum price ranging from $255 to $280 FOB per metric
ton. U. S. Steel is opposed to this agreement and is reviewing all available
remedies to challenge this agreement. U. S. Steel will pursue the hot rolled
import case against Russia to obtain the issuance of final determinations by
Commerce and the ITC. The preliminary injury determination and the preliminary
anti-dumping and countervailing duty margin determinations are subject to
further investigation by the ITC and Commerce. It is presently expected that
Commerce will issue its final anti-dumping and countervailing duty margin
determinations on April 28, 1999, and the ITC will issue its final injury
determination on June 2, 1999.
In addition to announcing the preliminary anti-dumping duty margins on hot
rolled imports from Russia and the proposed suspension agreement on those
imports, Commerce also announced on February 22, 1999 that it had initialed an
agreement with Russia to restrict imports of major steel products, other than
hot rolled and cut-to-length plate, from Russia. U. S. Steel is opposed to this
agreement.
Plate products accounted for 10%, 8% and 9% of U. S. Steel Group shipments
in 1998, 1997 and 1996, respectively. On November 5, 1996, two other domestic
steel plate producers filed antidumping cases with Commerce and the ITC
asserting that People's Republic of China, the Russian Federation, Ukraine, and
South Africa engaged in unfair trade practices with respect to the export of
carbon cut-to-length plate to the United States. U. S. Steel Group has supported
these cases. Commerce issued final affirmative determination of dumping for each
country in October 1997, finding substantial dumping margins on cut-to-length
steel plate imports from these countries. In December 1997, the ITC voted
unanimously that the United States industry producing cut-to-length carbon steel
plate was injured due to imports of dumped cut-to-length plate from the four
countries. The
28
<PAGE>
United States has negotiated suspension agreements that limit imports of cut-to-
length carbon steel plate from the four countries to a total of approximately
440,000 tons per year for the next five years, a reduction of about two-thirds
from 1996 import levels, and provide for an average 10-15% increase in import
prices to remove the injurious impact of the imports. Any violation or
abrogation of the suspension agreements will result in imposition of the dumping
duties found by Commerce.
On February 16, 1999, U. S. Steel, along with Bethlehem Steel Corporation,
IPSCO, Inc., Gulf States Steel Inc., Tuscaloosa Steel Company, and the USWA,
filed trade cases against South Korea, France, Italy, Macedonia, India, the
Czech Republic, Japan, and Indonesia, contending that dumped and subsidized cut-
to-length plate are being imported into the United States from these countries.
The U. S. Steel Group's businesses are subject to numerous federal, state
and local laws and regulations relating to the storage, handling, emission and
discharge of environmentally sensitive materials. U. S. Steel believes that its
major domestic integrated steel competitors are confronted by substantially
similar conditions and thus does not believe that its relative position with
regard to such other competitors is materially affected by the impact of
environmental laws and regulations. However, the costs and operating
restrictions necessary for compliance with environmental laws and regulations
may have an adverse effect on U. S. Steel's competitive position with regard to
domestic mini-mills and some foreign steel producers and producers of materials
which compete with steel, which may not be required to undertake equivalent
costs in their operations. For further information, see Environmental
Proceedings on page 40, Legal Proceedings on page 40, and Management's
Discussion and Analysis of Environmental Matters, Litigation and Contingencies
on page S-30.
Business Strategy
U. S. Steel produces raw steel at Gary Works in Indiana, Mon Valley Works
in Pennsylvania and Fairfield Works in Alabama.
U. S. Steel has responded to competition resulting from excess steel
industry capability by eliminating less efficient facilities, modernizing those
that remain and entering into joint ventures, all with the objective of focusing
production on higher value-added products, where superior quality and special
characteristics are of critical importance. These products include bake
hardenable steels and coated sheets for the automobile and appliance industries,
laminated sheets for the manufacture of motors and electrical equipment,
improved tin mill products for the container industry and oil country tubular
goods. Modernization projects over the past two years support U. S. Steel's
objectives of providing value-added products. These projects included the
dualine coating lines at Fairfield Works and Mon Valley Works for the
construction market; the cold mill upgrades at Gary Works and Mon Valley Works;
the second hot-dip galvanized sheet line at PRO-TEC and the Fairless Works
galvanizing line upgrade for the automotive market. In 1998, U. S. Steel began
the conversion of the Fairfield Works bloom caster and pipemill to use round
semifinished steel for tubular production. This project is planned to come on
line in 1999 and will enhance U. S. Steel's ability to serve the tubular goods
markets. Additional modernization projects in 1999 include the new 64" pickle
line and upgrades to the cold mill at Mon Valley Works, the upgrade of the hot
strip mill coilers and replacement of coke battery thruwalls at Gary Works, the
basic oxygen furnace emissions project at Fairfield Works, and the new customer
service center in Detroit to support our automotive business. These projects
support U. S. Steel's objective of providing quality value-added products and
services to customers.
In addition to the modernization of its production facilities, USX has
entered into a number of joint ventures with domestic and foreign partners to
take advantage of market or manufacturing opportunities in the sheet, tin mill,
tubular, bar and plate consuming industries. In November 1998, operations
commenced on the newly constructed hot-dip galvanized sheet line at PRO-TEC.
This second line expanded PRO-TEC's capacity by nearly 400,000 tons a year to
1.0 million tons annually. The increase in capacity will enable U. S. Steel to
offer additional value-added products to the automotive industry. Also in 1998,
Olympic Laser Processing L.L.C. (a 50-50 joint venture between U. S. Steel Group
and Olympic Steel, Inc.) completed construction of the world's first fully
automated laser blank welding facility. Laser welded blanks are used in the
automotive industry for an increasing number of body fabrication applications.
Commercial operations will begin in 1999 once the facility
29
<PAGE>
becomes certified for specific parts with the automotive manufacturers.
U. S. Steel continues to pursue lower manufacturing cost objectives through
continuing cost improvement programs. These initiatives include, but are not
limited to, reduced production cycle time, improved yields, increased customer
orientation and improved process control.
U. S. Steel Segment Operations
U. S. Steel operates plants which produce steel products in a variety of
forms and grades. Raw steel production was 11.2 million tons in 1998, compared
with 12.3 million tons in 1997 and 11.4 million tons in 1996. Raw steel produced
was nearly 100% continuous cast in 1998, 1997 and 1996. Raw steel production
averaged 88% of capability in 1998, compared with 97% of capability in 1997 and
89% of capability in 1996. U.S. Steel's stated annual raw steel production
capability was 12.8 millions tons for 1998 (7.7 million at Gary Works, 2.8
million at Mon Valley Works and 2.3 million at Fairfield Works).
Steel shipments were 10.7 million tons in 1998, 11.6 million tons in 1997
and 11.4 million tons in 1996. U. S. Steel Group shipments comprised
approximately 10.3% of domestic steel shipments in 1998. Exports accounted for
approximately 4% of U. S. Steel Group shipments in 1998, 1997 and 1996.
30
<PAGE>
The following tables set forth significant U. S. Steel shipment data by
major markets and products for each of the last three years. Such data do not
include shipments by joint ventures and other affiliates of USX accounted for by
the equity method.
<TABLE>
<CAPTION>
Steel Shipments By Market and Product
Sheets Tubular,
& Semi-finished Plate & Tin
Major Market - 1998 Steel Mill Products Total
- -------------------- --------------- ------------- ------
<S> <C> <C> <C>
(Thousands of Net Tons)
Steel Service Centers................... 1,867 696 2,563
Further Conversion:
Trade Customers........................ 706 434 1,140
Joint Ventures......................... 1,473 - 1,473
Transportation (Including Automotive)... 1,438 347 1,785
Containers.............................. 222 572 794
Construction and Construction Products.. 809 178 987
Oil, Gas and Petrochemicals............. - 509 509
Export.................................. 226 156 382
All Other............................... 867 186 1,053
----- ----- ------
TOTAL.................................. 7,608 3,078 10,686
===== ===== ======
Major Market - 1997
- --------------------
(Thousands of Net Tons)
Steel Service Centers................... 2,020 726 2,746
Further Conversion:
Trade Customers........................ 859 519 1,378
Joint Ventures......................... 1,568 - 1,568
Transportation (Including Automotive)... 1,503 255 1,758
Containers.............................. 216 640 856
Construction and Construction Products.. 889 105 994
Oil, Gas and Petrochemicals............. - 810 810
Export.................................. 236 217 453
All Other............................... 879 201 1,080
----- ----- ------
TOTAL.................................. 8,170 3,473 11,643
===== ===== ======
Major Market - 1996
- -------------------
(Thousands of Net Tons)
Steel Service Centers................... 2,155 676 2,831
Further Conversion:
Trade Customers........................ 848 379 1,227
Joint Ventures......................... 1,542 - 1,542
Transportation (Including Automotive)... 1,391 330 1,721
Containers.............................. 238 636 874
Construction and Construction Products.. 733 132 865
Oil, Gas and Petrochemicals............. - 746 746
Export.................................. 303 190 493
All Other............................... 886 187 1,073
----- ----- ------
TOTAL.................................. 8,096 3,276 11,372
===== ===== ======
</TABLE>
31
<PAGE>
The following table lists products and services by facility or business unit:
Gary............................. Sheets; Tin Mill; Plates; Coke
Fairfield........................ Sheets; Tubular
Mon Valley....................... Sheets
Fairless......................... Sheets; Tin Mill
USS-POSCO(a)..................... Sheets; Tin Mill
USS/Kobe(a)...................... Bar; Tubular
PRO-TEC(a)....................... Galvanized Sheet
VSZ U. S. Steel s. r.o.(a)....... Tin Mill
Clairton......................... Coke
Clairton 1314B Partnership(a).... Coke
Transtar(a)...................... Transportation
RTI(a)........................... Titanium Metal
Minntac.......................... Taconite Pellets
U.S. Steel Mining................ Coal
Resource Management.............. Administration of Mineral, Coal and Timber
Properties
USX Realty Development........... Real estate sales, leasing and management
USX Engineers and Consultants.... Engineering and Consulting Services
- -----------
(a) Equity affiliate
USX and its wholly owned entity, U. S. Steel Mining, have domestic coal
properties with demonstrated bituminous coal reserves of approximately 790
million net tons at year-end 1998 compared with approximately 799 million net
tons at year-end 1997. The decrease in 1998 was due to production, leasing
activity and engineering revisions. The reserves are of metallurgical and steam
quality in approximately equal proportions. They are located in Alabama,
Illinois, Indiana, Pennsylvania, Tennessee and West Virginia. Approximately 96%
of the reserves are owned, and the rest are leased. The leased properties are
covered by a lease which expires in 2005. U. S. Steel Mining's coal production
was 7.3 million tons in 1998, compared with 7.5 million tons in 1997 and 7.3
million tons in 1996. Coal shipments were 7.7 million tons in 1998, compared
with 7.8 million tons in 1997 and 7.1 million tons in 1996.
USX controls domestic iron ore properties having demonstrated iron ore
reserves in grades subject to beneficiation processes in commercial use by U. S.
Steel of approximately 739 million tons at year-end 1998, substantially all of
which are iron ore concentrate equivalents available from low-grade iron-bearing
materials. All demonstrated reserves are located in Minnesota. Approximately 32%
of these reserves are owned and the remaining 68% are leased. Most of the leased
reserves are covered by a lease expiring in 2058 and the remaining leases have
expiration dates ranging from 2021 to 2026. U. S. Steel's iron ore operations at
Mt. Iron, Minnesota ("Minntac") produced 15.8 million net tons of taconite
pellets in 1998, 16.3 million net tons in 1997 and 15.1 million net tons in
1996. Taconite pellet shipments were 15.4 million tons in 1998, compared with
16.5 million tons in 1997 and 15.0 million tons in 1996.
USX's Resource Management administers the remaining mineral lands and
timber lands of U. S. Steel and is responsible for the lease or sale of these
lands and their associated resources, which encompass approximately 300,000
acres of surface rights and 1,500,000 acres of mineral rights in 13 states.
USX Engineers and Consultants, Inc. sells technical services worldwide to
the steel, mining, chemical and related industries. Together with its subsidiary
companies, it provides engineering and consulting services for facility
expansions and modernizations, operating improvement projects, integrated
computer systems, coal and lubrication testing and environmental projects.
USX Realty Development develops real estate for sale or lease and manages
retail and office space, business and industrial parks and residential and
recreational properties.
32
<PAGE>
For significant operating data for U. S. Steel Operations for each of the
last five years, see "USX Consolidation Financial Statements and Supplementary
Data - Five-Year Operating Summary - U. S. Steel Group" on page U-37.
USX participates directly and through subsidiaries in a number of joint
ventures included in the U. S. Steel segment operations. All of the joint
ventures are accounted for under the equity method. Certain of the joint
ventures and other investments are described below, all of which are at least
50% owned except Transtar, RTI, Acero Prime and the Clairton 1314B Partnership.
For financial information regarding joint ventures and other investments, see
"Financial Statements and Supplementary Data - Notes to Financial Statements -
16. Investments and Long-term Receivables" for the U. S. Steel Group on page S-
15.
USX and Pohang Iron & Steel Co., Ltd. ("POSCO") of South Korea participate
in a joint venture, USS-POSCO, which owns and operates the former U. S. Steel
Pittsburg, California Plant. The joint venture markets high quality sheet and
tin products, principally in the western United States market area. USS-POSCO
produces cold-rolled sheets, galvanized sheets, tin plate and tin-free steel.
USS-POSCO's annual rated shipment capacity is 1.4 million tons with hot bands
principally provided by U. S. Steel and POSCO. Total shipments by USS-POSCO were
approximately 1.5 million tons in 1998.
USX and Kobe Steel, Ltd. ("Kobe") of Japan participate in a joint venture,
USS/Kobe, which owns and operates the former U. S. Steel Lorain, Ohio Works. The
joint venture produces raw steel for the manufacture of bar and tubular
products. Bar products are sold by USS/Kobe while U. S. Steel has sales and
marketing responsibilities for tubular products. Total shipments by USS/Kobe in
1998 were approximately 1.4 million tons. USS/Kobe's contract with the USWA,
covering approximately 2,300 employees, expires on August 1, 1999. USS/Kobe's
annual raw steel capability is 2.6 million tons with iron ore and coke provided
primarily by U. S. Steel. Raw steel production was approximately 1.7 million
tons in 1998.
USX and Kobe also participate in another joint venture, PRO-TEC, which owns
and operates two hot-dip galvanizing lines in Leipsic, Ohio. The first
galvanizing line commenced operations in early 1993. In November 1998,
operations commenced on a second hot-dip galvanized sheet line which expanded
PRO-TEC's capacity nearly 400,000 tons a year to 1.0 million tons annually. PRO-
TEC produced approximately 633,000 prime tons of galvanized steel in 1998 on the
original facility.
USX and Worthington Industries Inc. participate in a joint venture known as
Worthington Specialty Processing which operates a steel processing facility in
Jackson, Michigan. The plant is operated by Worthington Industries, Inc. and is
dedicated to serving U. S. Steel customers. The facility contains state-of-the-
art technology capable of processing master steel coils into both slit coils and
sheared first operation blanks including rectangles, trapezoids, parallelograms
and chevrons. It is designed to meet specifications for the automotive,
appliance, furniture and metal door industries. The joint venture processes
material sourced by U. S. Steel, with a processing capacity of 600,000 tons
annually. In 1998, Worthington Specialty Processing processed approximately
411,000 tons.
USX and Rouge Steel Company participate in Double Eagle Steel Coating
Company ("DESCO"), a joint venture which operates an electrogalvanizing facility
located in Dearborn, Michigan. This facility enables U. S. Steel to further
supply the automotive demand for steel with corrosion resistant properties. The
facility can coat both sides of sheet steel with zinc or alloy coatings and has
the capability to coat one side with zinc and the other side with alloy.
Capacity is 870,000 tons of electrogalvanized steel annually, with availability
of the facility shared equally by the partners. In 1998, DESCO produced
approximately 861,000 tons of electrogalvanized steel.
USX and Olympic Steel, Inc. formed a 50-50 joint venture in 1997 to process
laser welded sheet steel blanks at a facility in Van Buren, Michigan. The joint
venture conducts business as Olympic Laser Processing L.L.C. Startup began in
1998. Effective capacity is approximately 2.4 million parts annually. Laser
welded blanks are used in the automotive industry for an increasing number of
body fabrication applications. U. S. Steel will be the venture's primary
customer and will be responsible for marketing the laser welded blanks.
33
<PAGE>
USX owns a 46% interest in Transtar, which in 1988 purchased the former
domestic transportation businesses of USX including railroads, a dock company,
USS Great Lakes Fleet, Inc. and Warrior & Gulf Navigation Company. Blackstone
Transportation Partners, L.P. and Blackstone Capital Partners L.P., both
affiliated with The Blackstone Group, together own 53% of Transtar, and the
senior management of Transtar owns the remaining 1%.
USX and VSZ a.s., formed a 50-50 joint venture in Kosice, Slovakia, for the
production and marketing of tin mill products to serve an emerging Central
European market. In February 1998, the joint venture, doing business as VSZ U.
S. Steel, s. r.o., took over ownership and commenced operation of an existing
tin mill facility (VSZ's Ocel plant in Kosice) with an annual production
capacity of 140,000 metric tons.
In 1997, USX entered into the Clairton 1314B Partnership, a strategic
partnership with two limited partners to acquire an interest in three coke
batteries at Clairton Works. The partnership has an annual coke production
capability of 1.5 million tons. In 1998, production of coke totaled 1.5 million
tons. U. S. Steel, the general partner, owns a 9.78% interest in the Clairton
1314B Partnership.
In 1997, USX, through its subsidiary, United States Steel Export Company de
Mexico, along with Feralloy Mexico, S.R.L. de C.V., and Intacero de Mexico, S.A.
de C.V., formed a joint venture for a slitting and warehousing facility in San
Luis Potosi, Mexico. The joint venture will conduct business as Acero Prime and
will service primarily the appliance industry. Construction was completed in
1998 with operations commencing in early 1999.
USX owns a 26% interest in RTI (formerly RMI Titanium Company), a leading
producer of titanium metal products. RTI is accounted for under the equity
method (for additional information, see Note 5 to the U. S. Steel Group
Financial Statements). RTI is a publicly traded company listed on the New York
Stock Exchange. In December 1996, USX issued $117 million of 6 3/4% Exchangeable
Notes Due February 1, 2000 ("Indexed Debt") indexed to the price of RTI common
stock. At maturity, USX must exchange these notes for shares of RTI common
stock, or redeem the notes for the equivalent amount of cash. For additional
information on Indexed Debt, see Note 17, footnote (d), to the USX Consolidated
Financial Statements on page U-20.
Property, Plant and Equipment Additions
For property, plant and equipment additions, including capital leases, see
"Management's Discussion and Analysis of Financial Condition, Cash Flows and
Liquidity - Capital Expenditures" for the U. S. Steel Group on page S-28.
Environmental Matters
The U. S. Steel Group maintains a comprehensive environmental policy
overseen by the Public Policy Committee of the USX Board of Directors. The
Environmental Affairs organization has the responsibility to ensure that the U.
S. Steel Group's operating organizations maintain environmental compliance
systems that are in accordance with applicable laws and regulations. The
Executive Environmental Committee, which is comprised of officers of the U. S.
Steel Group, is charged with reviewing its overall performance with various
environmental compliance programs. Also, the U. S. Steel Group, largely through
the American Iron and Steel Institute, continues its involvement in the
negotiation of various air, water, and waste regulations with federal, state and
local governments to assure the implementation of cost effective pollution
reduction strategies.
The businesses of the U. S. Steel Group are subject to numerous federal,
state and local laws and regulations relating to the protection of the
environment. These environmental laws and regulations include the Clean Air Act
("CAA") with respect to air emissions; the Clean Water Act ("CWA") with respect
to water discharges; the Resource Conservation and Recovery Act ("RCRA") with
respect to solid and hazardous waste treatment, storage and disposal; and the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
with respect to releases and remediation of hazardous substances. In addition,
all states where the
34
<PAGE>
U. S. Steel Group operates have similar laws dealing with the same matters.
These laws are constantly evolving and becoming increasingly stringent. The
ultimate impact of complying with existing laws and regulations is not always
clearly known or determinable due in part to the fact that certain implementing
regulations for laws such as RCRA and the CAA have not yet been promulgated or
in certain instances are undergoing revision. These environmental laws and
regulations, particularly the CAA, could result in substantially increased
capital, operating and compliance costs.
For a discussion of environmental capital expenditures and the cost of
compliance for air, water, solid waste and remediation, see "Management's
Discussion and Analysis of Environmental Matters, Litigation and Contingencies"
on page S-30 and "Legal Proceedings" for the U. S. Steel Group on page 40.
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 CAA 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. U. S. Steel believes that its major domestic integrated
steel competitors are confronted by substantially similar conditions and thus
does not believe that its relative position with regard to such other
competitors is materially affected by the impact of environmental laws and
regulations. However, the costs and operating restrictions necessary for
compliance with environmental laws and regulations may have an adverse effect on
U. S. Steel's competitive position with regard to domestic mini-mills and some
foreign steel producers and producers of materials which compete with steel,
which may not be required to undertake equivalent costs in their operations. In
addition, the specific impact on each competitor may vary depending on a number
of factors, including the age and location of its operating facilities and its
production methods. For further information, see "Legal Proceedings" on page 40,
and "Management's Discussion and Analysis of Environmental Matters, Litigation
and Contingencies" on page S-30.
Air
The CAA imposed more stringent limits on air emissions, established a
federally mandated operating permit program and allowed for enhanced civil and
criminal enforcement sanctions. The principal impact of the CAA on the U. S.
Steel Group is on the coke-making and primary steel-making operations of U. S.
Steel, as described in this section. The coal mining operations and sales of U.
S. Steel Mining may also be affected.
The CAA requires the regulation of hazardous air pollutants and development
and promulgation of Maximum Achievable Control Technology ("MACT") Standards.
The amendment to the Chrome Electroplating MACT to include the chrome processes
at Gary and Fairless and the Pickling MACT are expected in 1999. The EPA is
required to promulgate MACT standards for integrated iron and steel plants and
taconite iron ore processing by November 15, 2000. The impact of these new
standards could be significant to U. S. Steel, but the cost cannot be reasonably
estimated until the rules are finalized.
The CAA specifically addressed the regulation and control of coke oven
batteries. The National Emission Standard for Hazardous Air Pollutants for coke
oven batteries was finalized in October 1993, setting forth the MACT standard
and, as an alternative, a Lowest Achievable Emission Rate ("LAER") standard.
Effective January 1998, U. S. Steel elected to comply with the LAER standards.
U. S. Steel believes it will be able to meet the current LAER standards. The
LAER standards will be further revised in 2010 and additional health risk-based
standards are expected to be adopted in 2020. EPA is in the process of
developing the Phase II Coke MACT for pushing, quenching and battery stacks
which is scheduled to be finalized in 2000. This MACT will impact U. S. Steel,
but the cost cannot be reasonably estimated at this time.
The CAA also mandates the nationwide reduction of emissions of acid rain
precursors (sulfur dioxide and nitrogen oxides) from fossil fuel-fired
electrical utility plants. Specified emission reductions are to be achieved by
2000. Phase I began on January 1, 1995, and applies to 110 utility plants
specifically listed in the law. Phase II, which begins on January 1, 2000, will
apply to other utility plants which may be regulated under the law.
35
<PAGE>
U. S. Steel, like all other electricity consumers, will be impacted by increased
electrical energy costs that are expected as electric utilities seek rate
increases to comply with the acid rain requirements.
In September 1997, the EPA adopted revisions to the National Ambient Air
Quality Standards for ozone and particulate matter which are significantly more
stringent than prior standards. EPA has issued a Nitrogen Oxide ("NOx") State
Implementation Plan ("SIP") Call to require certain states to develop plans to
reduce NOx emissions focusing on large utility and industrial boilers. The
impact of these revised standards could be significant to U. S. Steel, but the
cost cannot be reasonably estimated until the final revised standards and the
NOx SIP Call are issued and, more importantly, the states implement their State
Implementation Plans covering their standards.
In 1998, all of the coal production of U. S. Steel Mining was metallurgical
coal, which is primarily used in coke production. While USX believes that the
new environmental requirements for coke ovens will not have an immediate effect
on U. S. Steel Mining, the requirements may encourage development of steelmaking
processes that reduce the usage of coke. The new ozone and particulate matter
standards could be significant to U. S. Steel Mining, but the cost is not
capable of being reasonably estimated until rules are proposed or finalized.
Water
The U. S. Steel Group maintains the necessary discharge permits as required
under the National Pollutant Discharge Elimination System program of the CWA,
and it is in compliance with such permits. In 1998, USX entered into a consent
decree with the Environmental Protection Agency ("EPA") which resolved alleged
violations of the Clean Water Act National Pollution Discharge Elimination
System ("NPDES") permit at Gary Works and provides for a sediment remediation
project for a section of the Grand Calumet River that runs through Gary Works.
Contemporaneously, USX entered into a consent decree with the public trustees
which resolves potential liability for natural resource damages on the same
section of the Grand Calumet River. USX has agreed to pay civil penalties of
$2.9 million for the alleged water act violations and $0.5 million in natural
resource damages assessment costs, which will be paid in 1999. In addition, USX
will pay the EPA $1 million at the end of the remediation project for future
monitoring costs. During the negotiations leading up to the settlement with
EPA, capital improvements were made to upgrade plant systems to comply with the
NPDES requirements. The sediment remediation project is an approved final
interim measure under the corrective action program for Gary Works and is
expected to cost approximately $30 million over the next six years. Estimated
remediation and monitoring costs for this project have been accrued.
Solid Waste
The U. S. Steel Group continues to seek methods to minimize the generation
of hazardous wastes in its operations. RCRA establishes standards for the
management of solid and hazardous wastes. Besides affecting current waste
disposal practices, RCRA also addresses the environmental effects of certain
past waste disposal operations, the recycling of wastes and the regulation of
storage tanks. Corrective action under RCRA related to past waste disposal
activities is discussed below under "Remediation."
Remediation
A significant portion of the U. S. Steel Group's currently identified
environmental remediation projects relate to the remediation of former and
present operating locations. These projects include the remediation of the Grand
Calumet River (discussed above), and the closure and remediation of permitted
hazardous and non-hazardous waste landfills.
The U. S. Steel Group is also involved in a number of remedial actions
under CERCLA, RCRA and other federal and state statutes, and it is possible that
additional matters may come to its attention which may require remediation. For
a discussion of remedial actions related to the U. S. Steel Group, see "Legal
Proceedings - U. S. Steel Group Environmental Proceedings."
36
<PAGE>
Item 2. PROPERTIES
The location and general character of the principal oil and gas properties,
plants, mines, pipeline systems and other important physical properties of USX
are described in the Item 1. Business section of this document. Except for oil
and gas producing properties, which generally are leased, or as otherwise
stated, such properties are held in fee. The plants and facilities have been
constructed or acquired over a period of years and vary in age and operating
efficiency. At the date of acquisition of important properties, titles were
examined and opinions of counsel obtained, but no title examination has been
made specifically for the purpose of this document. The properties classified as
owned in fee generally have been held for many years without any material
unfavorably adjudicated claim.
Several steel production facilities and interests in two liquefied natural
gas tankers are leased. See "Financial Statements and Supplementary Data - Notes
to Consolidated Financial Statements - 12. Leases" on page U-17.
The basis for estimating oil and gas reserves is set forth in "Consolidated
Financial Statements and Supplementary Data - Supplementary Information on Oil
and Gas Producing Activities - Estimated Quantities of Proved Oil and Gas
Reserves" on pages U-32 and U-33.
USX believes that its surface and mineral rights covering reserves are
adequate to assure the basic legal right to extract the minerals, but may not
yet have obtained all governmental permits necessary to do so.
Unless otherwise indicated, all reserves shown are as of December 31, 1998.
Item 3. LEGAL PROCEEDINGS
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments related to the Marathon Group and
the U. S. Steel Group involving a variety of matters, including laws and
regulations relating to the environment. Certain of these matters are included
below in this discussion. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the consolidated financial
statements and/or to the financial statements of the applicable group. However,
management believes that USX will remain a viable and competitive enterprise
even though it is possible that these contingencies could be resolved
unfavorably.
Marathon Group
Environmental Proceedings
The following is a summary of proceedings attributable to the Marathon
Group that were pending or contemplated as of December 31, 1998, under federal
and state environmental laws. Except as described herein, it is not possible to
predict accurately the ultimate outcome of these matters; however, management's
belief set forth in the first paragraph under Item 3. "Legal Proceedings" above
takes such matters into account.
Claims under the Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA") and related state acts have been raised with respect to
the cleanup of various waste disposal and other sites. CERCLA is intended to
expedite the cleanup of hazardous substances without regard to fault.
Potentially responsible parties ("PRPs") for each site include present and
former owners and operators of, transporters to and generators of the substances
at the site. Liability is strict and can be joint and several. Because of
various factors including the ambiguity of the regulations, the difficulty of
identifying the responsible parties for any particular site, the complexity of
determining the relative liability among them, the uncertainty as to the most
desirable remediation techniques and the amount of damages and cleanup costs and
the time period during which such costs may be incurred, USX is unable to
reasonably estimate its ultimate cost of compliance with CERCLA.
37
<PAGE>
Projections, provided in the following paragraphs, of spending for and/or
timing of completion of specific projects are forward-looking statements. These
forward-looking statements are based on certain assumptions including, but not
limited to, the factors provided in the preceding paragraph. To the extent that
these assumptions prove to be inaccurate, future spending for, or timing of
completion of environmental projects may differ materially from those stated in
forward-looking statements.
At December 31, 1998, USX had been identified as a PRP at a total of 17
CERCLA waste sites related to the Marathon Group. Based on currently available
information, which is in many cases preliminary and incomplete, USX believes
that its liability for cleanup and remediation costs in connection with each of
these sites will be under $1 million per site, and most will be under $100,000.
In addition, there are 8 waste 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 92 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, 16 were
associated with properties conveyed to MAP by Ashland which has retained
liability for all costs associated with remediation. Based on currently
available information, which is in many cases preliminary and incomplete, the
Marathon Group believes that its liability for cleanup and remediation costs in
connection with 14 of these sites will be under $100,000 per site, another 32
sites have potential costs between $100,000 and $1 million per site, 9 sites may
involve remediation costs between $1 million and $5 million per site. In
addition, cleanup and remediation at one site, described in the following
paragraph is expected to cost more than $5 million. There are 20 sites with
insufficient information to estimate any remediation costs.
There is one site that involves a remediation program in cooperation with
the Michigan Department of Environmental Quality at a closed and dismantled
refinery site located near Muskegon, Mich. During the next 10 to 20 years, the
Marathon Group anticipates spending between $8 million and $12 million at this
site. Expenditures for 1999 are expected to be approximately $570,000.
Additionally, negotiations are taking place with Michigan Department of
Environmental Quality to eventually perform a risk-based closure on this site.
As discussed in Management's Discussion and Analysis of Environmental
Matters, Litigation and Contingencies, on page U-47, in October 1998, the
National Enforcement Investigations Center and Region V of the United States
Environmental Protection Agency ("U.S. EPA") conducted a multi-media inspection
of MAP's Detroit refinery. Subsequently, in November 1998, Region V and Illinois
Environmental Protection Agency conducted a multi-media inspection of MAP's
Robinson refinery. These inspections covered compliance with the Clean Air Act
(the Act, as amended by the 1990 Amendments, the "CAA") including 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
discussed below, it is not known when complete findings on the results of the
inspections will be issued.
In connection with the multi-media inspection at MAP's Detroit refinery, in
December 1998, U.S. EPA, Region V issued a Notice of Violation against the
refinery alleging that, as a result of "stack tests" conducted in 1992, 1995,
1997 and 1998, at the fluid catalytic cracking unit and the fluid catalytic
cracking unit carbon monoxide boiler, the refinery exceeded the emission limits
for particulate matter and sulfur dioxide thereby violating the CAA.
In January 1997, a Notice of Violation ("NOV") was served by the Illinois
Environmental Protection Agency on the Marathon Group, including Marathon Oil
Company (Robinson Refinery and Brand Marketing, now operating organizations
within MAP), Marathon Pipe Line Company (now Marathon Ashland Pipe Line LLC) and
38
<PAGE>
Emro Marketing Company (now Speedway SuperAmerica LLC), consolidating various
alleged violations of federal and state environmental laws and regulations
relating to air, water and soil contamination. Based on the ongoing negotiations
with Illinois Environmental Protection Agency, a penalty in excess of $100,000
may be assessed against each of these companies. Negotiations continue with the
State Attorney General's office and the Illinois Environmental Protection Agency
to resolve these alleged violations. In two of the matters, the State Attorney
General's office has instituted civil actions against Speedway SuperAmerica LLC
with regards to a UST site in Chicago, Illinois and violations of the CAA
dealing with the installation, testing and reporting of Stage II Vapor Recovery
Systems in certain station sites in Illinois.
In October 1996, U.S. EPA Region 5 issued a Finding of Violation against
the Robinson refinery alleging that it does not qualify for an exemption under
the National Emission Standards for Benzene Waste Operations pursuant to the
CAA, because the refinery's Total Annual Benzene releases exceed the limitation
of 10 megagrams per year, and as a result, the refinery is in violation of the
emission control, record keeping, and reports requirements. The Marathon Group
contends that it does qualify for the exemption. However, in February 1999, the
U.S. Department of Justice ("DOJ") in Chicago, Illinois, filed a civil complaint
in the U.S. District Court for the Southern District of Illinois alleging six
counts of violations of the CAA with respect to the benzene releases.
In connection with the formation of MAP all three of the refineries owned
by Ashland Inc. ("Ashland") were conveyed effective January 1, 1998, to MAP or
its subsidiaries. Ashland reported in its 1997 Form 10-K, that during 1997, the
U.S. EPA completed comprehensive inspections of these three refineries, prior to
formation of MAP. These inspections evaluated Ashland's compliance with federal
environmental laws and regulations at those facilities. Ashland reported in its
1998 Form 10-K, that during 1998, the U.S. EPA and Ashland reached an agreement
with respect to the alleged violations discovered during those inspections.
Ashland reported that it agreed to pay $5.864 million in civil penalties.
Ashland also reported that it would under take specific remedial projects and
improvements at the refinery sites, as well as, a number of supplemental
environmental projects involving improvements to the facilities' operations.
Ashland reported that the total cost of these projects is expected to be $26
million. Under the terms of its agreements with MAP, Ashland has retained
responsibility for matters arising out of these inspections, including
commencement of work as soon as practical on certain enumerated projects.
Posted Price Litigation
The Marathon Group, alone or with other energy companies, has been named in
a number of lawsuits in State and Federal courts alleging various causes of
action related to crude oil royalty payments based on posted prices, including
underpayment of royalty interests, underpayment of severance taxes, antitrust
violations, and violation of the Texas common purchaser statute. Plaintiffs in
these actions include governmental entities and private entities or individuals,
and some seek class action status. All of these cases are in various stages of
preliminary activities. No class certification has been determined as to
Marathon in any case to date.
During November 1997, Marathon and over twenty other defendants entered
into a proposed class settlement agreement covering antitrust and contract
claims from January 1, 1986, through September 30, 1997, excluding federal and
Indian royalty claims, common purchaser claims and severance tax claims. A new
settlement agreement was filed with the U.S. District Court in Texas on June 26,
1998, which replaces the November 1997 Settlement Agreement. The new settlement
agreement omits from the settlement class all State entities which receive
royalty payments and only covers private claimants. At a hearing on December 1,
1998, the Court preliminarily approved the new settlement agreement for the
group of defendants of which Marathon is a part. The new settlement agreement
settles all private claims, subject to opt-outs and a fairness hearing scheduled
on April 5, 1999, for a period from January 1, 1986 to September 30, 1998. If
the Court approves the settlement, Marathon's payment is not expected to be
material.
Marathon has been named by private plaintiffs as a defendant, along with
other energy companies, in a lawsuit under the False Claims Act in the U.S.
District Court of Texas (Eastern District). On February 19, 1998, the U.S. DOJ
announced that it had intervened against four of the other energy-company
defendants named in such
39
<PAGE>
action. (U.S. ex rel., J. Benjamin Johnson et al. v. Exxon Company USA et al.).
Marathon's Motion seeking dismissal from this case has been denied.
The Marathon Group intends to vigorously defend such remaining cases.
U. S. Steel Group
Legal Proceedings
B&LE Litigation
In 1994, judgments against the Bessemer & Lake Erie Railroad ("B&LE") in
the amount of approximately $498 million, plus interest, in the Lower Lake Erie
Iron Ore Antitrust Litigation were upheld and have been paid. A trial in a
related lawsuit (Pacific Great Lakes Corporation v. B&LE) filed under the Ohio
Valentine Act in the Cuyahoga County (Ohio) Court of Common Pleas in September
1995, was concluded in February 1996, with a jury verdict finding no injury to
the plaintiff. The plaintiff appealed the verdict to the Cuyahoga County Court
of Appeals which, in 1998, affirmed the judgment of the lower court. A request
by the plaintiff to the Supreme Court of Ohio to accept an appeal in the case is
pending.
The B&LE was a wholly owned subsidiary of USX throughout the period the
conduct occurred. It is now a subsidiary of Transtar, in which USX has a 46%
equity interest. USX is obligated to reimburse Transtar for judgments against
the B&LE in these matters.
Inland Steel Patent Litigation
In July 1991, Inland Steel Company ("Inland") filed an action against USX
and another domestic steel producer in the U. S. District Court for the Northern
District of Illinois, Eastern Division, alleging defendants had infringed two of
Inland's steel-related patents. Inland seeks monetary damages of up to
approximately $50 million and an injunction against future infringement. USX in
its answer and counterclaim alleges the patents are invalid and not infringed
and seeks a declaratory judgment to such effect. In May 1993, a jury found USX
to have infringed the patents. The District Court has yet to rule on the
validity of the patents. In July 1993, the U. S. Patent Office rejected the
claims of the two Inland patents upon a reexamination at the request of USX and
the other steel producer. A further request was submitted by USX to the Patent
Office in October 1993, presenting additional questions as to patentability
which was granted and consolidated for consideration with the original request.
In 1994, the Patent Office issued a decision rejecting all claims of the Inland
patents. Inland has appealed this decision to the Patent Office Board of
Appeals. An oral hearing was held in March 1997. No decision has been reached.
Asbestos Litigation
USX has been and is a defendant in a large number of cases in which
plaintiffs allege injury resulting from exposure to asbestos. Many of these
cases involve multiple plaintiffs and most have multiple defendants. These
claims fall into three major groups: (1) claims made under the Jones Act and
general maritime law by employees of the Great Lakes or Intercoastal Fleets,
former operations of USX; (2) claims made by persons who did work at U. S. Steel
Group facilities; and (3) claims made by industrial workers allegedly exposed to
an electrical cable product formerly manufactured by USX. To date all actions
resolved have been either dismissed or settled for immaterial amounts. It is not
possible to predict with certainty the outcome of these matters; however, based
upon present knowledge, USX believes that the remaining actions will be
similarly resolved. This statement of belief is a forward-looking statement.
Predictions as to the outcome of pending litigation are subject to substantial
uncertainties with respect to (among other things) factual and judicial
determinations, and actual results could differ materially from those expressed
in the forward-looking statements.
40
<PAGE>
Environmental Proceedings
The following is a summary of the proceedings attributable to the U. S.
Steel Group that were pending or contemplated as of December 31, 1998, under
federal and state environmental laws. Except as described herein, it is not
possible to accurately predict the ultimate outcome of these matters; however,
management's belief set forth in the first paragraph under "Item 3. Legal
Proceedings" above takes such matters into account.
Claims under CERCLA and related state acts have been raised with respect to
the cleanup of various waste disposal and other sites. CERCLA is intended to
expedite the cleanup of hazardous substances without regard to fault. PRPs for
each site include present and former owners and operators of, transporters to
and generators of the substances at the site. Liability is strict and can be
joint and several. Because of various factors including the ambiguity of the
regulations, the difficulty of identifying the responsible parties for any
particular site, the complexity of determining the relative liability among
them, the uncertainty as to the most desirable remediation techniques and the
amount of damages and cleanup costs and the time period during which such costs
may be incurred, USX is unable to reasonably estimate its ultimate cost of
compliance with CERCLA.
Projections, provided in the following paragraphs, of spending for and/or
timing of completion of specific projects are forward-looking statements. These
forward-looking statements are based on certain assumptions including, but not
limited to, the factors provided in the preceding paragraph. To the extent that
these assumptions prove to be inaccurate, future spending for, or timing of
completion of environmental projects may differ materially from those stated in
forward-looking statements.
At December 31, 1998, USX had been identified as a PRP at a total of 29
CERCLA sites related to the U. S. Steel Group. Based on currently available
information, which is in many cases preliminary and incomplete, USX believes
that its liability for cleanup and remediation costs in connection with twelve
of these sites will be between $100,000 and $1 million per site and ten will be
under $100,000.
At the remaining seven sites, USX has no reason to believe that its share
in the remaining cleanup costs at any single site will exceed $5 million,
although it is not possible to accurately predict the amount of USX's share in
any final allocation of such costs. Following is a summary of the status of
these sites:
1. At USX's former Duluth, Minn. Works, USX spent a total of approximately
$11 million through 1998. The Duluth Works was listed by the Minnesota
Pollution Control Agency under the Minnesota Environmental Response and
Liability Act on its Permanent List of Priorities. The U.S. EPA has
consolidated and included the Duluth Works site with the St. Louis River
and Interlake sites on the U.S. EPA's National Priorities List. The
Duluth Works cleanup has proceeded since 1989. USX is conducting an
engineering study of the estuary sediments and the construction of a
breakwater in the estuary. Depending upon the method and extent of
remediation at this site, future costs are presently unknown and
indeterminable.
2. The Buckeye Reclamation Landfill, near St. Clairsville, Ohio, has been
used at various times as a disposal site for coal mine refuse and
municipal and industrial waste. USX is one of 15 PRPs that have
indicated a willingness to enter into an agreed order with the U.S. EPA
to perform a remediation of the site. Implementation of the remedial
design plan, resulting in a long-term cleanup of the site, is estimated
to cost approximately $28.5 million.
One of the PRPs filed suit against the U.S. EPA, the Ohio Environmental
Protection Agency, and 13 PRPs including USX. The U.S. EPA, in turn,
filed suit against the PRPs to recover $1.5 million in oversight costs.
In May 1996, USX entered into a final settlement agreement to resolve
this litigation and the overall allocation. USX agreed to pay 4.8% of
the estimated costs which would result in USX paying an additional
amount of approximately $1.1 million over a two- to three-year period.
To date USX has spent $350,000 at the site. Remediation will commence in
1999.
41
<PAGE>
3. The D'Imperio/Ewan sites in New Jersey are waste disposal sites where a
former USX subsidiary allegedly disposed of used paint and solvent
wastes. USX has entered into a settlement agreement with the major PRPs
at the sites which fixes USX's share of liability at approximately $1.2
million, $578,000 of which USX has already paid. The balance, which is
expected to be paid over the next several years, has been accrued.
4. The Berks Associates/Douglassville Site ("Berks Site") is situated on a
50-acre parcel located on the Schuylkill River in Berks County, Pa. Used
oil and solvent reprocessing operations were conducted on the Berks Site
between 1941 and 1986. The U.S. EPA undertook the dismantling of the
Berks Site's former processing area and instituted a cost recovery suit
in July 1991 against 30 former Berks Site customers, as PRPs to recover
$8 million it expended in the process area dismantling. The 30 PRPs
targeted by the U.S. EPA joined over 400 additional PRPs in the U.S.
EPA's cost recovery litigation. On June 30, 1993, the U.S. EPA issued a
unilateral administrative order to the original 30 PRPs ordering
remediation which the U.S. EPA estimates will cost over $70 million. In
June 1996, the PRPs proposed an alternative remedy estimated to cost
approximately $20 million. USX expects its share of these costs to be
approximately 7%. In September 1997, USX signed a consent decree to
conduct a feasibility study at the site relating to the alternative
remedy. This remedy has been submitted to the U.S. EPA and the DOJ for
their approval.
In February 1996, USX and other Berks Site PRPs were sued by the
Pennsylvania Department of Environmental Resources ("PaDER") for $6
million in past costs.
5. In 1987 the California Department of Health Services ("DHS") issued a
remedial action order for the GBF/Pittsburg landfill near Pittsburg,
Calif. Records indicate that from 1972 through 1974, Pittsburg Works
arranged for the disposal of approximately 2.6 million gallons of waste
oil, sludge, caustic mud and acid which were eventually taken to this
landfill for disposal. The DHS recently requested that an interim
remediation of one of the plumes of site contamination be carried out as
soon as possible. The Generators' Cooperative Group has agreed to fund
the interim remediation which is expected to cost approximately
$400,000, of which U. S. Steel paid $43,175. Total remediation costs are
estimated to be between $18 million and $32 million. In June, 1997, the
DHS issued a Remedial Action Plan. Work on the Remedial Action Plan has
been deferred while a Group application for an alternative remedy is
being reviewed. The GBF Respondents Group has initiated an action
against parties implicated at the site who have failed to become
involved in cleanup related activities. In 1998, USX entered into an
agreement that establishes USX's liability among the site transporter
and the other participating waste generators at 10.2%. Liability of the
site owner has yet to be established.
6. In 1988, USX and three other PRPs agreed to the issuance of an
administrative order by the U.S. EPA to undertake emergency removal work
at the Municipal & Industrial Disposal Co. site in Elizabeth, Pa. The
cost of such removal, which has been completed, was approximately $4.2
million, of which USX paid $3.4 million. The U.S. EPA has indicated that
further remediation of this site may be required in the future, but it
has not conducted any assessment or investigation to support what
remediation would be required. In October 1991, the PaDER placed the
site on the Pennsylvania State Superfund list and began a Remedial
Investigation and Feasibility Study ("RI/FS") which was issued in 1997.
It is not possible to estimate accurately the cost of any remediation or
USX's share in any final allocation formula; however, based on presently
available information, USX may have been responsible for as much as 70%
of the waste material deposited at the site. On October 10, 1995, the
U.S. DOJ filed a complaint in the U.S. District Court for Western
Pennsylvania against USX and other Municipal & Industrial Disposal Co.
defendants to recover alleged costs incurred at the site. In June 1996,
USX agreed to pay $245,000 to settle the government's claims for costs
against USX, American Recovery, and Carnegie Natural Gas. In 1996, USX
filed a cost recovery action against parties who did not contribute to
the cost of the removal activity at the site. USX has reached a
settlement in principle with all of the parties except the site owner.
In 1998, PaDER gave conditional approval of a conceptual plan to
remediate the entire site.
42
<PAGE>
7. USX participated with 35 other PRPs in performing removal work at the
Ekotek/Petrochem site in Salt Lake City, Utah under the terms of a 1991
administrative order negotiated with the U.S. EPA. The removal work was
completed in 1992 at a cost of over $9 million. In July 1992, the PRP
Remediation Committee negotiated an administrative order on consent to
perform a RI/FS of the site. The RI/FS was completed in 1995. A
remediation plan estimated to cost $16.6 million was proposed by the
U.S. EPA in 1995. In 1997, the U.S. EPA issued a revised Record of
Decision with a remedial action estimated to cost $12.2 million. USX has
contributed $875,000 through 1998 towards completing the removal work
and performing the RI/FS. USX's proportionate share of costs presently
being used by the PRP Remediation Committee is approximately 5% of the
participating PRPs. The PRP Remediation Committee commenced cost
recovery litigation against approximately 1,100 non-participating PRPs.
Almost all of these defendants have settled their liability or joined
the PRP Remediation Committee. In February 1997, the U.S. EPA issued an
administrative order to USX and other PRPs to undertake the proposed
remedial action and to reimburse approximately $5 million to de minimus
PRPs who had earlier settled with the U.S. EPA on the basis of a
substantially greater remedial cost estimate. On December 15, 1997, USX,
along with forty other parties, signed a consent decree to clean up the
site. Site cleanup will commence in 1999.
In addition, there are 17 sites related to the U. S. Steel Group where USX
has received information requests or other indications that USX may be a PRP
under CERCLA but where sufficient information is not presently available to
confirm the existence of liability.
There are also 34 additional sites related to the U. S. Steel Group where
remediation is being sought under other environmental statutes, both federal and
state, or where private parties are seeking remediation through discussions or
litigation. Based on currently available information, which is in many cases
preliminary and incomplete, the U. S. Steel Group believes that its liability
for cleanup and remediation costs in connection with six of these sites will be
under $100,000 per site, another five sites have potential costs between
$100,000 and $1 million per site, and eleven sites may involve remediation costs
between $1 million and $5 million. Another of the 34 sites, the Grand Calumet
River remediation at Gary Works, is expected to have remediation costs in excess
of $5 million. Potential costs associated with remediation at the remaining 11
sites are not presently determinable.
The following is a discussion of remediation activities at the U. S. Steel
Group's major facilities:
Gary Works
In 1990 a consent decree was signed by USX which, among other things,
required USX to study and implement a program to remediate the sediment in a
portion of the Grand Calumet River. USX has developed a sediment remediation
plan for the section of the Grand Calumet River that runs through Gary Works. As
proposed, this project would require five to six years to complete after
approval and would be followed by an environmental recovery validation. The
estimated program cost, which has been accrued, is approximately $30 million.
USX has entered into a consent decree with the U.S. EPA which provides for the
expanded sediment remediation program and resolves alleged violations of the
prior consent decree and National Pollutant Discharge Elimination System permit
since 1990. USX has to pay civil penalties of $2.9 million for alleged
violations of the Clean Water Act at Gary Works. In addition, USX has entered
into a consent decree with the public trustees to settle natural resource damage
claims for the portion of the Grand Calumet River that runs through Gary Works.
This settlement obligates USX to purchase and restore several parcels of
property and pay $1.5 million in past and future assessment and monitoring
costs.
In October 1996, USX was notified by the Indiana Department of
Environmental Management ("IDEM") acting as lead trustee, that IDEM and the U.S.
Department of the Interior had concluded a preliminary investigation of
potential injuries to natural resources related to releases of hazardous
substances from various municipal and industrial sources along the east branch
of the Grand Calumet River and Indiana Harbor Canal. The Public Trustees
completed a preassessment screen pursuant to federal regulations and have
determined to perform a NRD Assessment. USX was identified as a PRP along with
15 other companies owning property along the river and harbor canal. USX and
eight other PRPs have formed a joint defense group. The Trustees notified the
public of
43
<PAGE>
their plan for assessment and later adopted the plan. The PRP group and the
trustees are working to coordinate trustee and PRP assessment activities.
On October 23, 1998, a final Administrative Order on Consent was issued by
U.S. EPA addressing Corrective Action for Solid Waste Management Units
throughout Gary Works. This order requires USX to perform a RCRA Facility
Investigation ("RFI") and a Corrective Measure Study ("CMS") at Gary Works. The
Current Conditions Report, USX's first deliverable, was submitted to U.S. EPA on
January 31, 1999.
IDEM issued NOVs to USS Gary Works in 1994 alleging various violations of
air pollution requirements. In early 1996, USX paid a $6 million penalty and
agreed to install additional pollution control equipment and programs costing
approximately $100 million to be installed and implemented over a period of
several years. In January 1998, USS Gary Works entered into negotiations of a
second Agreed Order with IDEM. The current draft requires increased monitoring
at the No. 8 Blast Furnace and the replacement of the large bell and one hot
blast stove at the No. 8 Blast Furnace by December 31, 1999. The proposed
penalty is $1,037,000 which resolves outstanding NOV's from 1994 to present and
includes Stipulated Penalties from the Agreed Order signed in 1996. The second
Agreed Order is presently expected to be finalized by the end of the first
quarter 1999.
Clairton
In 1987, USX and the PaDER entered into a consent Order to resolve an
incident in January 1985 involving the alleged unauthorized discharge of benzene
and other organic pollutants from Clairton Works in Clairton, Pa. That consent
Order required USX to pay a penalty of $50,000 and a monthly payment of $2,500
for five years. In 1990, USX and the PaDER reached agreement to amend the
consent Order. Under the amended Order, USX agreed to remediate the Peters Creek
Lagoon (a former coke plant waste disposal site); to pay a penalty of $300,000;
and to pay a monthly penalty of up to $1,500 each month until the former
disposal site is closed. Remediation costs have amounted to $2.2 million with
another $3.9 million presently projected to complete the project.
Fairless Works
In January 1992, USX commenced negotiations with the U.S. EPA regarding the
terms of an Administrative Order on consent, pursuant to the RCRA, under which
USX would perform a RFI and a CMS at Fairless Works. A Phase I RFI report was
submitted during the third quarter of 1997. A Phase II/III RFI will be submitted
following U.S. EPA approval. The RFI/CMS will determine whether there is a need
for, and the scope of, any remedial activities at Fairless Works.
Fairfield Works
In December 1995, USX reached an agreement in principle with the U.S. EPA
and the DOJ with respect to alleged RCRA violations at Fairfield Works. A
consent decree was signed by USX and the United States and filed with the court
on December 11, 1997, under which USX will pay a civil penalty of $1 million,
implement two SEPs costing a total of $1.75 million and implement a RCRA
corrective action at the facility. One SEP was completed during 1998 at a cost
of $250,000.
Mon Valley Works/Edgar Thomson Plant
In September 1997, USX received a draft consent decree addressing issues
raised in a NOV issued by the U.S. EPA in January 1997. The NOV alleged air
quality violations at U. S. Steel's Edgar Thomson Plant, which is part of Mon
Valley Works. The draft consent decree addressed these issues, including various
operational requirements, which U.S. EPA believes are necessary to bring the
plant into compliance. USX has begun implementing some of the compliance
requirements identified by U.S. EPA. USX is meeting with U.S. EPA and other
involved agencies to negotiate a consent decree and an appropriate penalty. USX
and the U.S. EPA have tentatively agreed to a civil penalty of $1 million and
the U.S. EPA is currently evaluating certain SEPs proposed by the company as a
means of further reducing the final negotiated civil penalty.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
44
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The principal market on which Marathon Stock and Steel Stock are traded is
the New York Stock Exchange. Information concerning the high and low sales
prices for the common stocks as reported in the consolidated transaction
reporting system and the frequency and amount of dividends paid during the last
two years is set forth in "Consolidated Financial Statements and Supplementary
Data - Selected Quarterly Financial Data (Unaudited)" on page U-29.
As of January 31, 1999, there were 76,871 registered holders of Marathon
Stock and 59,874 registered holders of Steel Stock.
The Board of Directors intends to declare and pay dividends on Marathon Stock
and Steel Stock based on the financial condition and results of operations of
the Marathon Group and the U. S. Steel Group respectively, although it has no
obligation under Delaware law to do so. In determining its dividend policy with
respect to Marathon Stock and Steel Stock, the Board will rely on the separate
financial statements of the Marathon Group and the U. S. Steel Group,
respectively. The method of calculating earnings per share for Marathon Stock
and Steel Stock reflects the Board's intent that separately reported earnings
and the surplus of the Marathon Group and the U. S. Steel Group, as determined
consistent with the USX Restated Certificate of Incorporation, are available for
payment of dividends to the respective classes of stock, although legally
available funds and liquidation preferences of these classes of stock do not
necessarily correspond with these amounts. Dividends on all classes of preferred
stock and USX common stock are limited to legally available funds of USX, which
are determined on the basis of the entire Corporation. Distributions on Marathon
Stock and Steel Stock would be precluded by a failure to pay dividends on any
series of preferred stock of USX. In addition, net losses of any 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 preferred
stock at prices in excess of par or stated value, will reduce the funds of USX
legally available for payment of dividends on the two classes of USX common
stock as well as any preferred stock.
Dividends on Steel Stock are further limited to the Available Steel Dividend
Amount. Net losses of the Marathon Group and distributions on Marathon Stock,
and on any preferred stock attributed to the Marathon Group will not reduce the
funds available for declaration and payment of dividends on Steel Stock unless
the legally available funds of USX are less than the Available Steel Dividend
Amount.
See "Financial Statements and Supplementary Data - Notes to Consolidated
Financial Statements - 22. Dividends" on page U-23.
The Board has adopted certain policies with respect to the Marathon Group and
the U. S. Steel Group, including, without limitation, the intention to: (i)
limit capital expenditures of the U. S. Steel Group over the long term to an
amount equal to the internally generated cash flow of the U. S. Steel Group,
including funds generated by sales of assets of the U. S. Steel Group, (ii) sell
assets and provide services between the Marathon Group and the U. S. Steel Group
only on an arm's-length basis and (iii) treat funds generated by sales of
Marathon Stock or Steel Stock and securities convertible into such stock as
assets of the Marathon Group or the U. S. Steel Group, as the case may be, and
apply such funds to acquire assets or reduce liabilities of the Marathon Group
or the U. S. Steel Group, respectively. These policies may be modified or
rescinded by action of the Board, or the Board may adopt additional policies,
without the approval of holders of the two classes of USX common stock, although
the Board has no present intention to do so.
45
<PAGE>
Fiduciary Duties of the Board; Resolution of Conflicts
Under Delaware law, the Board must act with due care and in the best interest
of all the stockholders, including the holders of the shares of each class of
USX common stock. The interests of the holders of any class of USX common stock
may, under some circumstances, diverge or appear to diverge. Examples include
the optional exchange of Steel Stock for Marathon Stock at the 10% premium, the
determination of the record date of any such exchange or for the redemption of
any Steel Stock; the establishing of the date for public announcement of the
liquidation of USX and the commitment of capital among the Marathon Group and
the U. S. Steel Group.
Because the Board owes an equal duty to all common stockholders regardless of
class, the Board is the appropriate body to deal with these matters. In order to
assist the Board in this regard, USX has formulated policies to serve as
guidelines for the resolution of matters involving a conflict or a potential
conflict, including policies dealing with the payment of dividends, limiting
capital investment in the U. S. Steel Group over the long term to its internally
generated cash flow and allocation of corporate expenses and other matters. The
Board has been advised concerning the applicable law relating to the discharge
of its fiduciary duties to the common stockholders in the context of the
separate classes of USX common stock and has delegated to the Audit Committee of
the Board the responsibility to review matters which relate to this subject and
report to the Board. While the classes of USX common stock may give rise to an
increased potential for conflicts of interest, established rules of Delaware law
would apply to the resolution of any such conflicts. In general, under Delaware
law, a good faith determination by a disinterested and adequately informed Board
with respect to any such matter would be a defense to any claim of liability
made on behalf of the holders of any class of USX common stock. USX is aware of
no precedent concerning the manner in which such rules of Delaware law would be
applied in the context of its capital structure.
46
<PAGE>
Item 6. SELECTED FINANCIAL DATA
USX - Consolidated
<TABLE>
<CAPTION>
Dollars in millions (except per share data)
----------------------------------------------
1998 1997 1996 1995 1994
------ ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues(a) (b).................... $28,335 $22,588 $22,977 $20,413 $19,055
Income from operations(b).......... 1,517 1,705 1,779 726 1,174
Includes:
Inventory market valuation
charges (credits)................ 267 284 (209) (70) (160)
Impairment of long-lived assets.. - - - 675 -
Income from continuing operations.. 674 908 946 217 532
Income (loss) from
discontinued operations.......... - 80 6 4 (31)
Extraordinary loss................. - - (9) (7) -
Net income......................... $ 674 $ 988 $ 943 $ 214 $ 501
Noncash credit from exchange of
preferred stock (c).............. - 10 - - -
Dividends on preferred stock....... (9) (13) (22) (28) (31)
------- ------- ------- ------- -------
Net income applicable to
common stocks.................... $ 665 $ 985 $ 921 $ 186 $ 470
</TABLE>
- -----------
(a) Consists of sales, dividend and affiliate income, gain on ownership change
in MAP, net gains on disposal of assets, gain on affiliate stock offering
and other income.
(b) Excludes amounts for the Delhi Companies (sold in 1997), which have been
reclassified as discontinued operations. See Note 5 to the USX
Consolidated Financial Statements, on page U-11.
(c) See Note 25 to the USX Consolidated Financial Statements, on page U-25.
<TABLE>
<CAPTION>
Common Share Data
<S> <C> <C> <C> <C> <C>
Marathon Stock:
Income (loss) before extraordinary loss
applicable to Marathon Stock........... $ 310 $ 456 $ 671 $ (87) $ 315
Per share-basic (in dollars)............. 1.06 1.59 2.33 (.31) 1.10
-Diluted (in dollars).................. 1.05 1.58 2.31 (.31) 1.10
Net income (loss) applicable to
Marathon Stock......................... 310 456 664 (92) 315
Per share-basic (in dollars)............. 1.06 1.59 2.31 (.33) 1.10
-Diluted (in dollars).................. 1.05 1.58 2.29 (.33) 1.10
Dividends paid (in dollars).............. .84 .76 .70 .68 .68
Common Stockholders' Equity
per share (in dollars)................. 13.95 12.53 11.62 9.99 11.01
</TABLE>
47
<PAGE>
SELECTED FINANCIAL DATA (contd.)
USX - Consolidated (contd.)
<TABLE>
<CAPTION>
Dollars in millions (except per share data)
--------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Steel Stock:
Income before extraordinary loss
applicable to Steel Stock............ $ 355 $ 449 $ 253 $ 279 $ 176
Per share-basic (in dollars)........... 4.05 5.24 3.00 3.53 2.35
-Diluted (in dollars)................ 3.92 4.88 2.97 3.43 2.33
Net income applicable to
Steel Stock.......................... 355 449 251 277 176
Per share-basic (in dollars)........... 4.05 5.24 2.98 3.51 2.35
-Diluted (in dollars)................ 3.92 4.88 2.95 3.41 2.33
Dividends paid (in dollars)............ 1.00 1.00 1.00 1.00 1.00
Common Stockholders' Equity
per share (in dollars)............... 23.66 20.56 18.37 16.10 12.01
Balance Sheet Data-December 31:
Capital expenditures-for year.......... $ 1,580 $ 1,373 $ 1,168 $ 1,016 $ 1,033
Total assets........................... 21,133 17,284 16,980 16,743 17,517
Capitalization:
Notes payable........................ $ 145 $ 121 $ 81 $ 40 $ 1
Total long-term debt................. 3,991 3,403 4,212 4,937 5,599
Preferred stock of subsidiary(a)..... 250 250 250 250 250
Trust preferred securities(a)........ 182 182 - - -
Minority interest in MAP............. 1,590 - - - -
Redeemable Delhi Stock(b)............ - 195 - - -
Preferred stock...................... 3 3 7 7 112
Common stockholders' equity.......... 6,402 5,397 5,015 4,321 4,190
------- ------- ------- ------- -------
Total capitalization.............. $12,563 $ 9,551 $ 9,565 $ 9,555 $10,152
======= ======= ======= ======= =======
Ratio of earnings to fixed charges(c).. 3.47 4.11 3.90 1.62 2.18
Ratio of earnings to combined fixed
charges and preferred stock
dividends(c)......................... 3.36 3.92 3.62 1.49 2.01
</TABLE>
- -----------
(a) See Note 25 to the USX Consolidated Financial Statements, on page U-25.
(b) On January 26, 1998, USX redeemed all of the outstanding shares of Delhi
Stock. For additional information regarding Delhi Stock, see Income Per
Common Share on page U-3, and Note 5 to the USX Consolidated Financial
Statements, on page U-11.
(c) Amounts represent combined fixed charges and earnings from continuing
operations.
48
<PAGE>
SELECTED FINANCIAL DATA (contd.)
USX - Marathon Group
<TABLE>
<CAPTION>
Dollars in millions (except per share data)
-------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues(a)................................. $22,075 $15,754 $16,394 $13,913 $12,949
Income from operations...................... 938 932 1,296 147 776
Includes:
Inventory market valuation
charges (credits)......................... 267 284 (209) (70) (160)
Impairment of long-lived assets............ - - - 659 -
Income (loss) before extraordinary
loss....................................... 310 456 671 (83) 321
Net income (loss)........................... $ 310 $ 456 $ 664 $ (88) $ 321
Dividends on preferred stock................ - - - (4) (6)
------- ------- ------- ------- -------
Net income (loss) applicable to
Marathon Stock............................. $ 310 $ 456 $ 664 $ (92) $ 315
Per Common Share Data
Income (loss) before extraordinary
loss
- basic.................................... $ 1.06 $ 1.59 $ 2.33 $ (.31) $ 1.10
- diluted.................................. 1.05 1.58 2.31 (.31) 1.10
Net income (loss)-basic..................... 1.06 1.59 2.31 (.33) 1.10
- diluted.................................. 1.05 1.58 2.29 (.33) 1.10
Dividends paid.............................. .84 .76 .70 .68 .68
Common stockholders' equity................. 13.95 12.53 11.62 9.99 11.01
Balance Sheet Data-December 31:
Capital expenditures-for year............... $ 1,270 $ 1,038 $ 751 $ 642 $ 753
Total assets................................ 14,544 10,565 10,151 10,109 10,951
Capitalization:
Notes payable.............................. $ 132 $ 108 $ 59 $ 31 $ 1
Total long-term debt....................... 3,515 2,893 2,906 3,720 4,038
Preferred stock of subsidiary.............. 184 184 182 182 182
Minority interest in MAP................... 1,590 - - - -
Preferred stock............................ - - - - 78
Common stockholders' equity................ 4,312 3,618 3,340 2,872 3,163
------- ------- ------- ------- -------
Total capitalization..................... $ 9,733 $ 6,803 $ 6,487 $ 6,805 $ 7,462
======= ======= ======= ======= =======
</TABLE>
- -------------
(a) Consists of sales, dividend and affiliate income, gain on ownership change
in MAP, net gains on disposal of assets and other income.
49
<PAGE>
SELECTED FINANCIAL DATA (contd.)
USX - U. S. Steel Group
<TABLE>
<CAPTION>
Dollars in millions (except per share data)
-------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues(a)................................. $6,283 $6,941 $6,670 $6,557 $6,141
Income from operations...................... 579 773 483 582 388
Includes:
Impairment of long-lived assets............ - - - 16 -
Income before extraordinary
loss....................................... 364 452 275 303 201
Net income.................................. $ 364 $ 452 $ 273 $ 301 $ 201
Noncash credit from exchange
of preferred stock(b)....................... - 10 - - -
Dividends on preferred stock................ (9) (13) (22) (24) (25)
------ ------ ------ ------ ------
Net income applicable to
Steel Stock................................ $ 355 $ 449 $ 251 $ 277 $ 176
Per Common Share Data
Income before extraordinary
loss
-basic..................................... $ 4.05 $ 5.24 $ 3.00 $ 3.53 $ 2.35
-diluted................................... 3.92 4.88 2.97 3.43 2.33
Net income -basic........................... 4.05 5.24 2.98 3.51 2.35
-diluted................................... 3.92 4.88 2.95 3.41 2.33
Dividends paid.............................. 1.00 1.00 1.00 1.00 1.00
Common stockholders' equity................. 23.66 20.56 18.37 16.10 12.01
Balance Sheet Data-December 31:
Capital expenditures-for year............... $ 310 $ 261 $ 337 $ 324 $ 248
Total assets................................ 6,693 6,694 6,580 6,521 6,480
Capitalization:
Notes payable.............................. $ 13 $ 13 $ 18 $ 8 $ -
Total long-term debt....................... 476 510 1,087 1,016 1,453
Preferred stock of subsidiary.............. 66 66 64 64 64
Trust Preferred Securities................. 182 182 - - -
Preferred stock............................ 3 3 7 7 32
Common stockholders' equity................ 2,090 1,779 1,559 1,337 913
------ ------ ------ ------ ------
Total capitalization...................... $2,830 $2,553 $2,735 $2,432 $2,462
====== ====== ====== ====== ======
</TABLE>
- -----------
(a) Consists of sales, dividend and affiliate income, net gains on disposal of
assets, gain on affiliate stock offering and other income.
(b) See Note 25 to the USX Consolidated Financial Statements, on page U-25.
50
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Indexes to Financial Statements, Supplementary Data, Management's
Discussion and Analysis, and Quantitative and Qualitative Disclosures About
Market Risk of USX Consolidated, the Marathon Group and the U. S. Steel Group
are presented immediately preceding pages U-1, M-1 and S-1, respectively.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Indexes to Financial Statements, Supplementary Data, Management's
Discussion and Analysis, and Quantitative and Qualitative Disclosures About
Market Risk for USX Consolidated, the Marathon Group and the U. S. Steel Group
are presented immediately preceding pages U-1, M-1 and S-1, respectively.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable
51
<PAGE>
USX
Index to Consolidated Financial Statements, Supplementary
Data, Management's Discussion and Analysis, and Quantitative
and Qualitative Disclosures About Market Risk
Page
----
Management's Report.......................................... U-1
Audited Consolidated Financial Statements:
Report of Independent Accountants............................ U-1
Consolidated Statement of Operations......................... U-2
Consolidated Balance Sheet................................... U-4
Consolidated Statement of Cash Flows......................... U-5
Consolidated Statement of Stockholders' Equity............... U-6
Notes to Consolidated Financial Statements................... U-8
Selected Quarterly Financial Data............................. U-29
Principal Unconsolidated Affiliates........................... U-30
Supplementary Information..................................... U-30
Five-Year Operating Summary -- Marathon Group................. U-35
Five-Year Operating Summary -- U. S. Steel Group.............. U-37
Five-Year Financial Summary................................... U-38
Management's Discussion and Analysis.......................... U-39
Quantitative and Qualitative Disclosures About Market Risk.... U-61
<PAGE>
Management's Report
The accompanying consolidated financial statements of USX
Corporation and Subsidiary Companies (USX) are the responsibility
of and have been prepared by USX in conformity with generally
accepted accounting principles. They necessarily include some
amounts that are based on best judgments and estimates. The
consolidated financial information displayed in other sections of
this report is consistent with these consolidated financial
statements.
USX seeks to assure the objectivity and integrity of its
financial records by careful selection of its managers, by
organizational arrangements that provide an appropriate division of
responsibility and by communications programs aimed at assuring
that its policies and methods are understood throughout the
organization.
USX has a comprehensive formalized system of internal
accounting controls designed to provide reasonable assurance that
assets are safeguarded and that financial records are reliable.
Appropriate management monitors the system for compliance, and the
internal auditors independently measure its effectiveness and
recommend possible improvements thereto. In addition, as part of
their audit of the consolidated financial statements, USX's
independent accountants, who are elected by the stockholders,
review and test the internal accounting controls selectively to
establish a basis of reliance thereon in determining the nature,
extent and timing of audit tests to be applied.
The Board of Directors pursues its oversight role in the
area of financial reporting and internal accounting control through
its Audit Committee. This Committee, composed solely of
nonmanagement directors, regularly meets (jointly and separately)
with the independent accountants, management and internal auditors
to monitor the proper discharge by each of its responsibilities
relative to internal accounting controls and the consolidated
financial statements.
<TABLE>
<CAPTION>
<S> <C> <C>
Thomas J. Usher Robert M. Hernandez Kenneth L. Matheny
Chairman, Board of Directors Vice Chairman Vice President
& Chief Executive Officer & Chief Financial Officer & Comptroller
</TABLE>
Report of Independent Accountants
To the Stockholders of USX Corporation:
In our opinion, the accompanying consolidated financial
statements appearing on pages U-2 through U-28 present fairly, in
all material respects, the financial position of USX Corporation
and its subsidiaries at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial
statements are the responsibility of USX's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
600 Grant Street, Pittsburgh, Pennsylvania 15219-2794
February 9, 1999
U-1
<PAGE>
Consolidated Statement of Operations
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Revenues:
Sales (Note 6) $27,887 $22,375 $22,743
Dividend and affiliate income 96 105 99
Gain on disposal of assets 82 94 71
Gain on ownership change in
Marathon Ashland Petroleum LLC (Note 3) 245 -- --
Gain on affiliate stock offering (Note 9) -- -- 53
Other income 25 14 11
------- ------- -------
Total revenues 28,335 22,588 22,977
------- ------- -------
Costs and expenses:
Cost of sales (excludes items shown below) 20,712 16,047 16,930
Selling, general and administrative expenses 304 218 144
Depreciation, depletion and amortization 1,224 967 985
Taxes other than income taxes 3,998 3,178 3,202
Exploration expenses 313 189 146
Inventory market valuation charges (credits) (Note 19) 267 284 (209)
------- ------- -------
Total costs and expenses 26,818 20,883 21,198
------- ------- -------
Income from operations 1,517 1,705 1,779
Net interest and other financial costs (Note 7) 279 347 421
Minority interest in income of
Marathon Ashland Petroleum LLC (Note 3) 249 -- --
------- ------- -------
Income from continuing operations before income taxes 989 1,358 1,358
Provision for estimated income taxes (Note 13) 315 450 412
------- ------- -------
Income from continuing operations 674 908 946
------- ------- -------
Discontinued operations (Note 5):
Income (loss) from operations (net of income tax) -- (1) 6
Gain on disposal (net of income tax) -- 81 --
------- ------- -------
Income from discontinued operations -- 80 6
------- ------- -------
Extraordinary loss (Note 8) -- -- 9
------- ------- -------
Net income 674 988 943
Noncash credit from exchange of preferred stock (Note 25) -- 10 --
Dividends on preferred stock (9) (13) (22)
------- ------- -------
Net income applicable to common stocks $ 665 $ 985 $ 921
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
U-2
<PAGE>
<TABLE>
<CAPTION>
Income Per Common Share
(Dollars in millions, except per share data) 1998 1997 1996
<S> <C> <C> <C>
CONTINUING OPERATIONS
Applicable to Marathon Stock:
Income before extraordinary loss $ 310 $ 456 $ 671
Extraordinary loss -- -- 7
----- ----- -----
Net income $ 310 $ 456 $ 664
Per Share Data
Basic:
Income before extraordinary loss $1.06 $1.59 $2.33
Extraordinary loss -- -- .02
----- ----- -----
Net income $1.06 $1.59 $2.31
Diluted:
Income before extraordinary loss $1.05 $1.58 $2.31
Extraordinary loss -- -- .02
----- ----- -----
Net income $1.05 $1.58 $2.29
Applicable to Steel Stock:
Income before extraordinary loss $ 355 $ 449 $ 253
Extraordinary loss -- -- 2
----- ----- -----
Net income $ 355 $ 449 $ 251
Per Share Data
Basic:
Income before extraordinary loss $4.05 $5.24 $3.00
Extraordinary loss -- -- .02
----- ----- -----
Net income $4.05 $5.24 $2.98
Diluted:
Income before extraordinary loss $3.92 $4.88 $2.97
Extraordinary loss -- -- .02
----- ----- -----
Net income $3.92 $4.88 $2.95
DISCONTINUED OPERATIONS
Applicable to Delhi Stock:
Income before extraordinary loss $79.7 $ 6.4
Extraordinary loss -- .5
----- -----
Net income $79.7 $ 5.9
Per Share Data
Basic:
Income before extraordinary loss $8.43 $ .67
Extraordinary loss -- .06
----- -----
Net income $8.43 $ .61
Diluted:
Income before extraordinary loss $8.41 $ .67
Extraordinary loss -- .06
----- -----
Net income $8.41 $ .61
</TABLE>
See Note 24, for a description and computation of income per common
share.
The accompanying notes are an integral part of these consolidated
financial statements.
U-3
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet
(Dollars in millions) December 31 1998 1997
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents (Note 4) $ 146 $ 54
Receivables, less allowance for doubtful accounts of
$12 and $15 (Note 14) 1,663 1,417
Inventories (Note 19) 2,008 1,685
Deferred income tax benefits (Note 13) 217 229
Other current assets 172 87
------- -------
Total current assets 4,206 3,472
Investments and long-term receivables, less reserves of
$10 and $15 (Note 15) 1,249 1,028
Property, plant and equipment -- net (Note 18) 12,929 10,062
Prepaid pensions (Note 11) 2,413 2,247
Other noncurrent assets 336 280
Cash restricted for redemption of Delhi Stock (Note 5) -- 195
------- -------
Total assets $21,133 $17,284
Liabilities
Current liabilities:
Notes payable $ 145 $ 121
Accounts payable 2,478 2,011
Distribution payable to minority shareholder of
Marathon Ashland Petroleum LLC (Note 4) 103 --
Payroll and benefits payable 480 521
Accrued taxes 245 304
Accrued interest 97 95
Long-term debt due within one year (Note 17) 71 471
------- -------
Total current liabilities 3,619 3,523
Long-term debt (Note 17) 3,920 2,932
Long-term deferred income taxes (Note 13) 1,579 1,353
Employee benefits (Note 11) 2,868 2,713
Deferred credits and other liabilities 720 736
Preferred stock of subsidiary (Note 25) 250 250
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely junior subordinated
convertible debentures of USX (Note 25) 182 182
Minority interest in Marathon Ashland Petroleum LLC (Note 3) 1,590 --
Redeemable Delhi Stock (Note 5) -- 195
Stockholders' Equity (Details on pages U-6 and U-7)
Preferred stock (Note 26) --
6.50% Cumulative Convertible issued -- 2,767,787 shares and
2,962,037 shares ($138 and $148 liquidation preference, respectively) 3 3
Common stocks:
Marathon Stock issued -- 308,458,835 shares and 288,786,343 shares
(par value $1 per share, authorized 550,000,000 shares) 308 289
Steel Stock issued -- 88,336,439 shares and 86,577,799 shares
(par value $1 per share, authorized 200,000,000 shares) 88 86
Securities exchangeable solely into Marathon Stock --
issued -- 507,324 shares (Note 3) 1 --
Additional paid-in capital 4,587 3,924
Deferred compensation (1) (3)
Retained earnings 1,467 1,138
Accumulated other comprehensive income (loss) (48) (37)
------- -------
Total stockholders' equity 6,405 5,400
------- -------
Total liabilities and stockholders' equity $21,133 $17,284
------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
U-4
<PAGE>
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents
Operating activities:
Net income $ 674 $ 988 $ 943
Adjustments to reconcile to net cash provided
from operating activities:
Minority interest in income of
Marathon Ashland Petroleum LLC -- net of distributions 38 -- --
Depreciation, depletion and amortization 1,224 987 1,012
Exploratory dry well costs 186 78 54
Inventory market valuation charges (credits) 267 284 (209)
Pensions and other postretirement benefits (181) (342) (151)
Deferred income taxes 184 228 257
Gain on disposal of the Delhi Companies -- (287) --
Gain on ownership change in
Marathon Ashland Petroleum LLC (245) -- --
Gain on disposal of assets (82) (94) (71)
Gain on affiliate stock offering -- -- (53)
Changes in: Current receivables -- sold (30) (390) --
-- operating turnover 451 16 (170)
Inventories (6) (39) 27
Current accounts payable and accrued expenses (497) 91 83
All other -- net (180) (62) (73)
------- ------- -------
Net cash provided from operating activities 1,803 1,458 1,649
------- ------- -------
Investing activities:
Capital expenditures (1,580) (1,373) (1,168)
Acquisition of Tarragon Oil and Gas Limited (686) -- --
Proceeds from sale of the Delhi Companies -- 752 --
Disposal of assets 86 481 443
Restricted cash -- withdrawals 241 108 --
-- deposits (67) (205) (98)
Affiliates -- investments (115) (219) (32)
-- loans and advances (104) (46) (6)
-- repayments of loans and advances 63 7 19
All other -- net 12 6 43
------- ------- -------
Net cash used in investing activities (2,150) (489) (799)
------- ------- -------
Financing activities:
Commercial paper and revolving credit arrangements -- net 724 41 (153)
Other debt -- borrowings 1,036 11 191
-- repayments (1,445) (786) (711)
Common stock -- issued 668 82 53
-- repurchased (195) -- --
Preferred stock repurchased (8) -- --
Dividends paid (342) (316) (307)
------- ------- -------
Net cash provided from (used in) financing activities 438 (968) (927)
------- ------- -------
Effect of exchange rate changes on cash 1 (2) 1
------- ------- -------
Net increase (decrease) in cash and cash equivalents 92 (1) (76)
Cash and cash equivalents at beginning of year 54 55 131
------- ------- -------
Cash and cash equivalents at end of year $ 146 $ 54 $ 55
</TABLE>
See Note 20, for supplemental cash flow information.
The accompanying notes are an integral part of these consolidated
financial statements.
U-5
<PAGE>
Consolidated Statement of Stockholders' Equity
After the redemption of the USX -- Delhi Group Common Stock (Delhi
Stock) on January 26, 1998 (Note 5), USX has two classes of common
stock: USX -- Marathon Group Common Stock (Marathon Stock) and USX
U. S. -- Steel Group Common Stock (Steel Stock), which are intended
to reflect the performance of the Marathon and U. S. Steel Groups,
respectively. (See Note 10, for a description of the two Groups.)
During 1998, USX issued 878,074 Exchangeable Shares (exchangeable
solely into Marathon Stock) related to the purchase of a Canadian
company. (See Note 3.)
On all matters where the holders of Marathon Stock and
Steel Stock vote together as a single class, Marathon Stock has one
vote per share and Steel Stock has a fluctuating vote per share
based on the relative market value of a share of Steel Stock to the
market value of a share of Marathon Stock. In the event of a
disposition of all or substantially all the properties and assets
of the U. S. Steel Group, USX must either distribute the net
proceeds to the holders of the Steel Stock as a special dividend or
in redemption of the stock, or exchange the Steel Stock for the
Marathon Stock. In the event of liquidation of USX, the holders of
the Marathon Stock and Steel Stock will share in the funds
remaining for common stockholders based on the relative market
capitalization of the respective Marathon Stock and Steel Stock to
the aggregate market capitalization of both classes of common
stock.
<TABLE>
<CAPTION>
Dollars in millions Shares in thousands
----------------------------------- ------------------------------------
1998 1997 1996 1998 1997 1996
---------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Preferred stock (Note 26) --
6.50% Cumulative Convertible:
Outstanding at beginning of year $ 3 $ 7 $ 7 2,962 6,900 6,900
Repurchased -- -- -- (194) -- --
Exchanged for trust preferred securities -- (4) -- -- (3,938) --
----- ----- ----- ------- ------- ----------
Outstanding at end of year $ 3 $ 3 $ 7 2,768 2,962 6,900
----- ----- ----- ------- ------- ----------
Common stocks:
Marathon Stock:
Outstanding at beginning of year $ 289 $ 288 $ 287 288,786 287,525 287,398
Issued in public offering 17 -- -- 17,000 -- --
Issued for:
Employee stock plans 2 1 1 2,236 1,209 127
Dividend Reinvestment Plan -- -- -- 66 52 --
Exchangeable Shares -- -- -- 371 -- --
----- ----- ----- ------- ------- ----------
Outstanding at end of year $ 308 $ 289 $ 288 308,459 288,786 287,525
----- ----- ----- ------- ------- ----------
Steel Stock:
Outstanding at beginning of year $ 86 $ 85 $ 83 86,578 84,885 83,042
Issued for:
Employee stock plans 2 1 2 1,733 1,416 1,649
Dividend Reinvestment Plan -- -- -- 25 277 194
----- ----- ----- ------- ------- ----------
Outstanding at end of year $ 88 $ 86 $ 85 88,336 86,578 84,885
----- ----- ----- ------- ------- ----------
Delhi Stock:
Outstanding at beginning of year $ -- $ 9 $ 9 -- 9,448 9,447
Issued (canceled) for employee stock plans -- -- -- -- (3) 1
Reclassified to redeemable Delhi Stock -- (9) -- -- (9,445) --
----- ----- ----- ------- ------- ----------
Outstanding at end of year $ -- $ -- $ 9 -- -- 9,448
----- ----- ----- ------- ------- ----------
Securities exchangeable solely into
Marathon Stock:
Issued to acquire Tarragon stock $ 1 $ -- $ -- 878 -- --
Exchanged for Marathon Stock -- -- -- (371) -- --
----- ----- ----- ------- ------- ----------
Outstanding at end of year $ 1 $ -- $ -- 507 -- --
----- ----- ----- ------- ------- ----------
</TABLE>
(Table continued on next page)
U-6
<PAGE>
<TABLE>
<CAPTION>
Stockholders' Equity Comprehensive Income
(Dollars in millions) 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C>
Additional paid-in capital:
Balance at beginning of year $3,924 $4,150 $4,094
Marathon Stock issued 598 38 3
Steel Stock issued 57 52 53
Exchangeable Shares:
Issued 28 -- --
Exchanged for Marathon Stock (12) -- --
6.50% preferred stock:
Repurchased (8) -- --
Exchanged for trust preferred
securities -- (188) --
Reclassified to redeemable Delhi
Stock -- (128) --
------ ------ ------
Balance at end of year $4,587 $3,924 $4,150
------ ------ ------
Deferred compensation (Note 21) $ (1) $ (3) $ (4)
------ ------ ------
Retained earnings:
Balance at beginning of year $1,138 $ 517 $ (116)
Net income 674 988 943 $ 674 $ 988 $ 943
Dividends on preferred stock (9) (13) (22)
Dividends on Marathon Stock
(per share: $.84 in 1998,
$.76 in 1997 and $.70 in 1996) (248) (219) (201)
Dividends on Steel Stock (per
share $1.00) (88) (86) (85)
Dividends on Delhi Stock
(per share: $.15 in 1997
and $.20 in 1996) -- (1) (2)
Reclassified to redeemable Delhi
Stock -- (58) --
Noncash credit from exchange of
preferred stock -- 10 --
------ ------ ------
Balance at end of year $1,467 $1,138 $ 517
------ ------ ------
Accumulated other comprehensive
income (loss):
Minimum pension liability
adjustments:
Balance at beginning of year $ (32) $ (22) $ (23)
Changes during year, net of
taxes/(a)/ (5) (10) 1 (5) (10) 1
------ ------ ------ ------ ------ ------
Balance at end of year (37) (32) (22)
------ ------ ------
Foreign currency translation
adjustments:
Balance at beginning of year $ (8) $ (8) $ (8)
Changes during year, net of
taxes/(a)/ (3) -- -- (3) -- --
------ ------ ------ ------ ------ ------
Balance at end of year (11) (8) (8)
------ ------ ------
Unrealized holding gains on
investments:
Balance at beginning of year $ 3 $ -- $ --
Changes during year, net of
taxes/(a)/ 2 3 -- 2 3 --
------ ------ ------ ------ ------ ------
Reclassification adjustment for
gains included in net income (5) -- -- (5) -- --
------ ------ ------ ------ ------ ------
Balance at end of year -- 3 --
------ ------ ------
Total balances at end of year $ (48) $ (37) $ (30)
------ ------ ------
Total comprehensive income/(b)/ $ 663 $ 981 $ 944
Total stockholders' equity $6,405 $5,400 $5,022
------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
(a) Related income tax provision (credit): 1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Minimum pension liability
adjustments $ 3 $ 5 $ --
Foreign currency translation
adjustments 4 -- --
Unrealized holding gains on
investments 2 (1) --
(b) Total comprehensive income by Group:
Marathon Group $ 306 $ 457 $ 665
U. S. Steel Group 357 444 273
Delhi Group -- 80 6
------ ------ ------
Total $ 663 $ 981 $ 944
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
U-7
<PAGE>
Notes to Consolidated Financial Statements
1. Summary of Principal Accounting Policies
Principles applied in consolidation -- The consolidated
financial statements include the accounts of USX Corporation and
the majority-owned subsidiaries which it controls (USX).
Investments in unincorporated oil and gas joint ventures,
undivided interest pipelines and jointly owned gas processing
plants are consolidated on a pro rata basis.
Investments in other entities over which USX has
significant influence are accounted for using the equity method of
accounting and are carried at USX's share of net assets plus loans
and advances.
Investments in other companies whose stock is publicly
traded are carried at market value. The difference between the cost
of these investments and market value is recorded in other
comprehensive income (net of tax). Investments in companies whose
stock has no readily determinable fair value are carried at cost.
Use of estimates -- Generally accepted accounting principles
require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at year-end and the reported
amounts of revenues and expenses during the year. Significant items
subject to such estimates and assumptions include the carrying
value of long-lived assets; valuation allowances for receivables,
inventories and deferred income tax assets; environmental
liabilities; liabilities for potential tax deficiencies and
potential litigation claims and settlements; and assets and
obligations related to employee benefits. Additionally, certain
estimated liabilities are recorded when management commits to a
plan to close an operating facility or to exit a business activity.
Actual results could differ from the estimates and assumptions
used.
Revenue recognition -- Revenues principally include sales,
dividend and affiliate income, gains or losses on the disposal of
assets and gains or losses from changes in ownership interests.
Sales are recognized when products are shipped or
services are provided to customers. Consumer excise taxes on
petroleum products and merchandise and matching crude oil and
refined products buy/sell transactions settled in cash are included
in both revenues and costs and expenses, with no effect on income.
Dividend and affiliate income includes USX's
proportionate share of income from equity method investments and
dividend income from other investments. Dividend income is
recognized when dividend payments are received.
When long-lived assets depreciated on an individual basis
are sold or otherwise disposed of, any gains or losses are
reflected in income. Such gains or losses on the disposal of long-
lived assets are recognized when title passes to the buyer and, if
applicable, all significant regulatory approvals are received.
Proceeds from disposal of long-lived assets depreciated on a group
basis are credited to accumulated depreciation, depletion and
amortization with no immediate effect on income.
Gains or losses from a change in ownership of a
consolidated subsidiary or an unconsolidated affiliate are
recognized in revenues in the period of change.
Cash and cash equivalents -- Cash and cash equivalents include
cash on hand and on deposit and investments in highly liquid debt
instruments with maturities generally of three months or less.
Inventories -- Inventories are carried at lower of cost or
market. Cost of inventories is determined primarily under the last-
in, first-out (LIFO) method.
Derivative instruments -- USX engages in commodity and currency
risk management activities within the normal course of its
businesses as an end-user of derivative instruments (Note 27).
Management is authorized to manage exposure to price fluctuations
related to the purchase, production or sale of crude oil, natural
gas, refined products, nonferrous metals and electricity through
the use of a variety of derivative financial and nonfinancial
instruments. Derivative financial instruments require settlement in
cash and include such instruments as over-the-counter (OTC)
commodity swap agreements and OTC commodity options. Derivative
nonfinancial instruments require or permit settlement by delivery
of commodities and include exchange-traded commodity futures
contracts and options. At times, derivative positions are closed,
prior to maturity, simultaneous with the underlying physical
transaction and the effects are recognized in income accordingly.
USX's practice does not permit derivative positions to remain open
if the underlying physical market risk has been removed. Derivative
instruments relating to fixed price sales of equity production are
marked-to-market in the current period and the related income
effects are included
U-8
<PAGE>
within income from operations. All other changes in the market
value of derivative instruments are deferred, including both closed
and open positions, and are subsequently recognized in income, as
sales or cost of sales, in the same period as the underlying
transaction. Premiums on all commodity-based option contracts are
initially recorded based on the amount paid or received; the
options' market value is subsequently recorded as a receivable or
payable, as appropriate. The margin receivable accounts required
for open commodity contracts reflect changes in the market prices
of the underlying commodity and are settled on a daily basis.
Forward exchange contracts are used to manage currency
risks related to commitments for capital expenditures and existing
assets or liabilities denominated in a foreign currency. Gains or
losses related to firm commitments are deferred and included with
the underlying transaction; all other gains or losses are
recognized in income in the current period as sales, cost of sales,
interest income or expense, or other income, as appropriate.
Forward exchange contract values are included in receivables or
payables, as appropriate.
Recorded deferred gains or losses are reflected within
other current and noncurrent assets or accounts payable and
deferred credits and other liabilities. Cash flows from the use of
derivative instruments are reported in the same category as the
hedged item in the statement of cash flows.
Exploration and development -- USX follows the successful efforts
method of accounting for oil and gas exploration and development.
Gas balancing -- USX follows the sales method of accounting for gas
production imbalances.
Long-lived assets -- Except for oil and gas producing properties,
depreciation is generally computed on the straight-line method
based upon estimated lives of assets. USX's method of computing
depreciation for steel producing assets modifies straight-line
depreciation based on the level of production. The modification
factors range from a minimum of 85% at a production level below 81%
of capability, to a maximum of 105% for a 100% production level. No
modification is made at the 95% production level, considered the
normal long-range level.
Depreciation and depletion of oil and gas producing
properties are computed using predetermined rates based upon
estimated proved oil and gas reserves applied on a units-of-
production method. Depletion of mineral properties, other than
oil and gas, is based on rates which are expected to amortize cost
over the estimated tonnage of minerals to be removed.
USX evaluates impairment of its oil and gas producing
assets primarily on a field-by-field basis. Other assets are
evaluated on an individual asset basis or by logical groupings of
assets. Assets deemed to be impaired are written down to their fair
value, including any related goodwill, using discounted future cash
flows and, if available, comparable market values.
Environmental liabilities -- USX provides for remediation costs
and penalties when the responsibility to remediate is probable and
the amount of associated costs is reasonably determinable.
Generally, the timing of remediation accruals coincides with
completion of a feasibility study or the commitment to a formal
plan of action. Remediation liabilities are accrued based on
estimates of known environmental exposure and are discounted in
certain instances. If recoveries of remediation costs from third
parties are probable, a receivable is recorded. Estimated
abandonment and dismantlement costs of offshore production
platforms are accrued based on production of estimated proved oil
and gas reserves.
Postemployment benefits -- USX recognizes an obligation to
provide postemployment benefits, primarily for disability-related
claims covering indemnity and medical payments. The obligation for
these claims and the related periodic costs are measured using
actuarial techniques and assumptions, including an appropriate
discount rate, analogous to the required methodology for measuring
pension and other postretirement benefit obligations. Actuarial
gains and losses are deferred and amortized over future periods.
Insurance -- USX is insured for catastrophic casualty and
certain property and business interruption exposures, as well as
those risks required to be insured by law or contract. Costs
resulting from noninsured losses are charged against income upon
occurrence.
Reclassifications -- Certain reclassifications of prior years'
data have been made to conform to 1998 classifications.
2. New Accounting Standards
The following accounting standards were adopted by USX:
Reporting comprehensive income -- Effective January 1,
1998, USX adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income". This Standard
establishes requirements for reporting and display of
comprehensive income and its components in the financial
statements. Comprehensive income is defined as the change in
equity of a business enterprise during a period from
transactions and other events from nonowner sources. It includes
U-9
<PAGE>
all changes in equity during a period except those resulting
from investments by and distributions to owners. See required
disclosures on page U-7.
Disclosures of operating segments -- USX adopted in 1998,
Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" (SFAS No. 131), which establishes new standards for
reporting information about operating segments and related
disclosures about products and services, geographic areas and
major customers. The most significant new requirement of this
Standard is that reportable operating segments be based on an
enterprise's internally reported business segments. USX has
complied with SFAS No. 131 by disclosing Group operating
segments and other required data at Note 10.
Disclosures of postretirement benefits -- USX adopted in 1998,
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits"
(SFAS No. 132), which revises and standardizes the reporting
requirements for postretirement benefits. However, the Standard
does not change the measurement and recognition of those
benefits. USX has complied with SFAS No. 132 by disclosing
pension and other postretirement benefits at Note 11.
Environmental remediation liabilities -- Effective January 1,
1997, USX adopted American Institute of Certified Public
Accountants Statement of Position No. 96-1, "Environmental
Remediation Liabilities" (SOP 96-1), which provides additional
interpretation of existing accounting standards related to
recognition, measurement and disclosure of environmental
remediation liabilities. As a result of adopting SOP 96-1, USX
identified additional environmental remediation liabilities of
$46 million, of which $28 million was discounted to a present
value of $13 million and $18 million was not discounted.
Assumptions used in the calculation of the present value amount
included an inflation factor of 2% and an interest rate of 7%
over a range of 22 to 30 years. Estimated receivables for
recoverable costs related to adoption of SOP 96-1 were $4
million. The net unfavorable effect of adoption on income from
operations at January 1, 1997, was $27 million.
Stock-based compensation -- Effective January 1, 1996, USX
adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123), which
establishes a fair value based method of accounting for employee
stock-based compensation plans. The Standard permits companies
to continue to apply the accounting provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25), provided certain disclosures are made.
USX has complied with SFAS No. 123 by following the accounting
provisions of APB No. 25 and including the required disclosures
at Note 21.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
(SFAS No. 133). This new Standard requires recognition of all
derivatives as either assets or liabilities at fair value. SFAS No.
133 may result in additional volatility in both current period
earnings and other comprehensive income as a result of recording
recognized and unrecognized gains and losses resulting from changes
in the fair value of derivative instruments. SFAS No. 133 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 employed 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 SFAS No. 133 effective January 1, 2000, as required.
3. Business Combinations
In August 1998, Marathon Oil Company (Marathon) acquired
Tarragon Oil and Gas Limited (Tarragon), a Canadian oil and gas
exploration and production company. Securityholders of Tarragon
received, at their election, Cdn$14.25 for each Tarragon share, or
the economic equivalent in Exchangeable Shares of an indirect
Canadian subsidiary of Marathon, which are exchangeable solely on a
one-for-one basis into Marathon Stock. The purchase price included
cash payments of $686 million, issuance of 878,074 Exchangeable
Shares valued at $29 million and the assumption of $345 million in
debt.
The Exchangeable Shares are exchangeable at the option of
the holder at any time and automatically redeemable on August 11,
2003 (and, in certain circumstances, as early as August 11, 2001).
The holders of Exchangeable Shares are entitled to receive declared
dividends equivalent to dividends declared from time to time by USX
on Marathon Stock.
USX accounted for the acquisition using the purchase
method of accounting. The 1998 results of operations include the
operations of Marathon Canada Limited, formerly known as Tarragon,
commencing August 12, 1998.
U-10
<PAGE>
During 1997, Marathon and Ashland Inc. (Ashland) agreed
to combine the major elements of their refining, marketing and
transportation (RM&T) operations. On January 1, 1998, Marathon
transferred certain RM&T net assets to Marathon Ashland Petroleum
LLC (MAP), a new consolidated subsidiary. Also on January 1, 1998,
Marathon acquired certain RM&T net assets from Ashland in exchange
for a 38% interest in MAP. The acquisition was accounted for under
the purchase method of accounting. The purchase price was
determined to be $1.9 billion, based upon an external valuation.
The change in Marathon's ownership interest in MAP resulted in a
gain of $245 million, which is included in 1998 revenues.
In connection with the formation of MAP, Marathon and
Ashland entered into a Limited Liability Company Agreement dated
January 1, 1998 (the LLC Agreement). The LLC Agreement provides for
an initial term of MAP expiring on December 31, 2022 (25 years from
its formation). The term will automatically be extended for ten-
year periods, unless a termination notice is given by either party.
Also in connection with the formation of MAP, the parties
entered into a Put/Call, Registration Rights and Standstill
Agreement (the Put/Call Agreement). The Put/Call Agreement provides
that at any time after December 31, 2004, Ashland will have the
right to sell to Marathon all of Ashland's ownership interest in
MAP, for an amount in cash and/or Marathon or USX debt or equity
securities equal to the product of 85% (90% if equity securities
are used) of the fair market value of MAP at that time, multiplied
by Ashland's percentage interest in MAP. Payment could be made at
closing, or at Marathon's option, in three equal annual
installments, the first of which would be payable at closing. At
any time after December 31, 2004, Marathon will have the right to
purchase all of Ashland's ownership interests in MAP, for an amount
in cash equal to the product of 115% of the fair market value of
MAP at that time, multiplied by Ashland's percentage interest in
MAP.
The following unaudited pro forma data for USX includes
the results of operations of Tarragon for 1998 and 1997, and the
Ashland RM&T net assets for 1997, giving effect to the acquisitions
as if they had been consummated at the beginning of the years
presented. The pro forma data is based on historical information
and does not necessarily reflect the actual results that would have
occurred nor is it necessarily indicative of future results of
operations.
<TABLE>
<CAPTION>
(In millions, except per share amounts) 1998 1997
<S> <C> <C>
Revenues $ 28,429 $30,167
Net income 643/(a)/ 989/(a)/
Net income per common share of Marathon Stock --
Basic and diluted .95 1.58
</TABLE>
/(a)/Excluding the pro forma inventory market valuation
adjustment, pro forma net income would have been $747 million
in 1998 and $1,151 million in 1997. Reported net income,
excluding the reported inventory market valuation adjustment,
would have been $778 million in 1998 and $1,167 million in
1997.
4. Transactions Between MAP and Ashland
At December 31, 1998, MAP included in their cash and cash
equivalents, a $103 million demand note invested with Ashland,
which is payable March 15, 1999.
During 1998, MAP's petroleum products' sales to Ashland
were $185 million and MAP's purchases of products and services from
Ashland were $45 million. These transactions were conducted on an
arm's-length basis.
At December 31, 1998, MAP had current receivables from
Ashland of $22 million and current payables, including
distributions payable, to Ashland of $106 million.
5. Discontinued Operations
Effective October 31, 1997, USX sold its stock in Delhi Gas
Pipeline Corporation and other subsidiaries of USX that comprised
all of the Delhi Group (Delhi Companies). The transaction involved
a gross purchase price of $762 million. Under the USX Restated
Certificate of Incorporation (USX Certificate), USX was required to
elect one of three options to return the value of the net proceeds
received in the transaction to the holders of shares in Delhi Stock
(Delhi shareholders). Of the three options, USX elected to use the
net proceeds of $195 million, or $20.60 per share, to redeem all
shares of Delhi Stock. The net proceeds were distributed to the
Delhi shareholders on January 26, 1998. After the redemption,
50,000,000 shares of Delhi Stock remain authorized but unissued.
The sale of the Delhi Companies resulted in a gain on
disposal of $81 million, net of $206 million income taxes.
As of December 31, 1997, the balance sheet of the Delhi
Group consisted of cash restricted for the redemption of Delhi
Stock of $195 million and redeemable Delhi Stock in an equal and
offsetting amount.
U-11
<PAGE>
The financial results of the Delhi Group have been
reclassified as discontinued operations for the 1997 and 1996
periods presented in the Consolidated Statement of Operations and
are summarized as follows:
<TABLE>
<CAPTION>
Year Ended
December 31
----------------------
(In millions) 1997/(a)/ 1996
<S> <C> <C>
Revenues $1,205 $1,062
Costs and expenses 1,190 1,031
------ ------
Income from operations 15 31
Net interest and other financial costs 23 21
------ ------
Income (loss) before income taxes (8) 10
Provision (credit) for estimated income taxes (7) 4
------ ------
Net income (loss) $ (1) $ 6
</TABLE>
/(a)/Represents ten months of operations.
6. Revenues
The items below are included in revenues and costs and expenses,
with no effect on income.
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
<S> <C> <C> <C>
Matching crude oil and refined product
buy/sell transactions settled in cash $3,948 $2,436 $2,912
Consumer excise taxes on petroleum products
and merchandise 3,581 2,736 2,768
</TABLE>
7. Other Items
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
<S> <C> <C> <C>
Net interest and other financial costs from continuing operations
Interest and other financial income:
Interest income $ 35 $ 11 $ 8
Other 4 (6) (1)
------ ------ ------
Total 39 5 7
------ ------ ------
Interest and other financial costs:
Interest incurred 325 289 345
Less interest capitalized 46 31 11
------ ------ ------
Net interest 279 258 334
Interest on tax issues 21 20 14
Financial costs on trust preferred securities 13 10 --
Financial costs on preferred stock of subsidiary 22 21 21
Amortization of discounts 6 6 9
Expenses on sales of accounts receivable 21 40 40
Adjustment to settlement value of indexed debt (44) (10) 6
Other -- 7 4
------ ------ ------
Total 318 352 428
------ ------ ------
Net interest and other financial costs $ 279 $ 347 $ 421
</TABLE>
Foreign currency transactions
For 1998, 1997 and 1996, the aggregate foreign currency
transaction gains (losses) included in determining income
from continuing operations were $13 million, $4 million
and $(24) million, respectively.
8. Extraordinary Loss
On December 30, 1996, USX irrevocably called for redemption on
January 30, 1997, $120 million of 8-1/2% Sinking Fund
Debentures, resulting in a 1996 extraordinary loss of $9
million, net of a $5 million income tax benefit.
9. Gain on Affiliate Stock Offering
In 1996, an aggregate of 6.9 million shares of RTI International
Metals, Inc. (RTI) (formerly RMI Titanium Company) common stock
was sold in a public offering at a price of $18.50 per share and
total net proceeds of $121 million. Included in the offering
were 2.3 million shares sold by USX for net proceeds of $40
million. USX recognized a total pretax gain of $53 million, of
which $34 million was attributable to the shares sold by USX and
$19 million was attributable to the increase in value of USX's
investment as a result of the shares sold by RTI. The income tax
effect related to the total gain was $19 million. As a result of
this transaction, USX's ownership in RTI decreased from
approximately 50% to 27%. USX continues to account for its
investment in RTI under the equity method of accounting.
U-12
<PAGE>
10. Group and Segment Information
After the redemption of the Delhi Stock on January 26, 1998, USX has two classes
of common stock: Marathon Stock and Steel Stock, which are intended to reflect
the performance of the Marathon Group and the U. S. Steel Group, respectively.
A description of each group and its products and services is as follows:
Marathon Group -- The Marathon Group includes Marathon Oil Company and
certain other subsidiaries of USX. Marathon Group revenues as a percentage of
total consolidated USX revenues were 78% in 1998, 69% in 1997 and 71% in
1996. For information on sales by product line, see table of revenues on page
U-49 of Management's Discussion and Analysis.
U. S. Steel Group -- The U. S. Steel Group consists of U. S. Steel, the
largest domestic integrated steel producer. U. S. Steel Group revenues as a
percentage of total consolidated USX revenues were 22% in 1998, 31% in 1997
and 29% in 1996. For information on sales by product line, see table of
revenues on page U-56 of Management's Discussion and Analysis.
Group Operations:
<TABLE>
<CAPTION>
Income
From Net Capital
(In millions) Year Revenues Operations Income Expenditures Assets
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Marathon Group 1998 $22,075 $ 938 $310 $1,270 $14,544
1997 15,754 932 456 1,038 10,565
1996 16,394 1,296 664 751 10,151
- -----------------------------------------------------------------------------------------------------------------------------------
U. S. Steel Group 1998 6,283 579 364 310 6,693
1997 6,941 773 452 261 6,694
1996 6,670 483 273 337 6,580
- -----------------------------------------------------------------------------------------------------------------------------------
Adjustments for 1998 (23) -- -- -- (104)
Discontinued 1997 (107) -- 80 74 25
Operations and 1996 (87) -- 6 80 249
Eliminations
- -----------------------------------------------------------------------------------------------------------------------------------
Total USX 1998 $28,335 $1,517 $674 $1,580 $21,133
Corporation 1997 22,588 1,705 988 1,373 17,284
1996 22,977 1,779 943 1,168 16,980
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Operating Segments:
USX's reportable operating segments are business units within the Marathon and
U. S. Steel Groups, each providing their own unique products and services. Each
operating segment is independently managed and requires different technology and
marketing strategies. Segment income represents income from operations allocable
to operating segments. The following items included in income from operations
are not allocated to operating segments:
. Gain on ownership change in MAP
. Gain on affiliate stock offering
. Pension credits associated with pension plan assets and liabilities
allocated to pre-1987 retirees and former businesses
. Certain costs related to former U. S. Steel Group business activities
. Certain general and administrative costs related to all Marathon Group
operating segments in excess of amounts billed to MAP under service
contracts and amounts charged out to operating segments under Marathon's
shared services procedures
. USX corporate general and administrative costs. These costs primarily
consist of employment costs including pension effects, professional
services, facilities and other related costs associated with corporate
activities.
. Inventory market valuation adjustments
. Certain other items not allocated to operating segments for business
performance reporting purposes
U-13
<PAGE>
The Marathon Group's operations consists of three reportable operating segments:
1) Exploration and Production -- explores for and produces crude oil and natural
gas on a worldwide basis; 2) Refining, Marketing and Transportation -- refines,
markets and transports crude oil and petroleum products, primarily in the
Midwest and southeastern United States through MAP; and 3) Other Energy Related
Businesses. Other Energy Related Businesses is an aggregation of two segments
which fall below the quantitative reporting thresholds: 1) Natural Gas and Crude
Oil Marketing and Transportation -- markets and transports its own and third-
party natural gas and crude oil in the United States; and 2) Power Generation --
develops, constructs and operates independent electric power projects worldwide.
The U. S. Steel Group consists of a single operating segment, U. S. Steel. U. S.
Steel is engaged in the production and sale of steel mill products, coke and
taconite pellets; the management of mineral resources; domestic coal mining;
engineering and consulting services; and real estate development and management.
<TABLE>
<CAPTION>
Refining, Other
Exploration Marketing Energy Total
and and Related Marathon
(In millions) Production Transportation Businesses Segments U. S. Steel Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998
Revenues:
Customer $2,085 $19,290 $306 $21,681 $6,180 $27,861
Intersegment/(a)/ 144 10 17 171 -- 171
Intergroup/(a)/ 13 -- 7 20 2 22
Equity in earnings of
unconsolidated affiliates 2 12 14 28 46 74
Other 26 40 11 77 55 132
------ ------- ---- ------- ------ -------
Total revenues $2,270 $19,352 $355 $21,977 $6,283 $28,260
------ ------- ---- ------- ------ -------
Segment income $ 278 $ 896 $ 33 $ 1,207 $ 330 $ 1,537
Significant noncash items included in
segment income:
Depreciation, depletion and amortization/(b)/ 581 272 6 859 283 1,142
Pension expenses/(c)/ 3 16 2 21 187 208
Capital expenditures/(d)/ 839 410 8 1,257 305 1,562
Affiliates -- investments/(e)/ -- 22 17 39 71 110
- ------------------------------------------------------------------------------------------------------------------------------------
1997
Revenues:
Customer $1,575 $13,606 $381 $15,562 $6,812 $22,374
Intersegment/(a)/ 619 -- -- 619 -- 619
Intergroup/(a)/ 99 -- 6 105 2 107
Equity in earnings of
unconsolidated affiliates 14 4 7 25 69 94
Other 7 20 30 57 58 115
------ ------- ---- ------- ------ -------
Total revenues $2,314 $13,630 $424 $16,368 $6,941 $23,309
------ ------- ---- ------- ------ -------
Segment income $ 773 $ 563 $ 48 $ 1,384 $ 618 $ 2,002
Significant noncash items included in
segment income:
Depreciation, depletion and amortization/(b)/ 469 173 7 649 303 952
Pension expenses/(c)/ 3 8 1 12 169 181
Capital expenditures/(d)/ 810 205 6 1,021 256 1,277
Affiliates -- investments/(e)/ 114 -- 73 187 26 213
- ------------------------------------------------------------------------------------------------------------------------------------
1996
Revenues:
Customer $1,765 $14,130 $299 $16,194 $6,535 $22,729
Intersegment/(a)/ 776 -- -- 776 -- 776
Intergroup/(a)/ 83 -- 4 87 -- 87
Equity in earnings of
unconsolidated affiliates 6 8 11 25 66 91
Other 10 13 13 36 16 52
------ ------- ---- ------- ------ -------
Total revenues $2,640 $14,151 $327 $17,118 $6,617 $23,735
------ ------- ---- ------- ------ -------
Segment income $ 900 $ 249 $ 57 $ 1,206 $ 248 $ 1,454
Significant noncash items included in
segment income:
Depreciation, depletion and amortization/(b)/ 499 173 6 678 292 970
Pension expenses/(c)/ 2 8 1 11 172 183
Capital expenditures/(d)/ 504 234 3 741 336 1,077
Affiliates -- investments/(e)/ 20 -- 11 31 -- 31
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/Intersegment and intergroup sales and transfers were conducted on an
arm's-length basis.
/(b)/Differences between segment totals and consolidated totals represent
amounts included in administrative expenses and, in 1998, international
exploration and production property impairments.
/(c)/Differences between segment totals and consolidated totals represent
unallocated pension credits and amounts included in administrative
expenses.
/(d)/Differences between segment totals and consolidated totals represent
amounts related to corporate administrative activities and, in 1997 and
1996, discontinued operations.
/(e)/Differences between segment totals and consolidated totals represent
amounts related to corporate administrative activities.
U-14
<PAGE>
The following schedule reconciles segment revenues and income to amounts
reported in the Marathon and U. S. Steel Groups' financial statements:
<TABLE>
<CAPTION>
Marathon Group U. S. Steel Group
(In millions) 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Revenues of reportable segments $21,977 $16,368 $17,118 $6,283 $6,941 $6,617
Items not allocated to segments:
Gain on ownership change in MAP 245 -- -- -- -- --
Gain on affiliate stock offering -- -- -- -- -- 53
Other 24 -- 35 -- -- --
Elimination of intersegment revenues (171) (619) (776) -- -- --
Administrative revenues -- 5 17 -- -- --
------ ------- ------- ------ ------ ------
Total Group revenues $22,075 $15,754 $16,394 $6,283 $6,941 $6,670
------- ------- ------- ------ ------ ------
Income:
Income for reportable segments $ 1,207 $ 1,384 $ 1,206 $ 330 $ 618 $ 248
Items not allocated to segments:
Gain on ownership change in MAP 245 -- -- -- -- --
Gain on affiliate stock offering -- -- -- -- -- 53
Administrative expenses (106) (168) (133) (24) (33) (28)
Pension credits -- -- -- 373 313 330
Costs related to former business activities -- -- -- (100) (125) (120)
Inventory market valuation adjustments (267) (284) 209 -- -- --
Other/(a)/ (141) -- 14 -- -- --
------- ------- ------- ------ ------ ------
Total Group income from operations $ 938 $ 932 $ 1,296 $ 579 $ 773 $ 483
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/Represents international exploration and production property impairments,
suspended exploration well write-offs, gas contract settlement and MAP
transition charges in 1998. Represents net gains on certain asset sales,
charges for withdrawal from a nonprofit oil spill response group and
certain state tax adjustments in 1996.
Geographic Area:
The information below summarizes the operations in different geographic areas.
Transfers between geographic areas are at prices which approximate market.
<TABLE>
<CAPTION>
Revenues
----------
Within Between
Geographic Geographic
(In millions) Year Areas Areas Total Assets/(a)/
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Marathon Group:
United States 1998 $21,296 $ -- $21,296 $ 7,675
1997 15,034 -- 15,034 5,588
1996 15,509 -- 15,509 5,192
United Kingdom 1998 532 -- 532 1,788
1997 698 -- 698 1,932
1996 859 -- 859 2,002
Other Foreign Countries 1998 247 420 667 1,497
1997 22 39 61 444
1996 26 43 69 270
Eliminations 1998 -- (420) (420) --
1997 -- (39) (39) --
1996 -- (43) (43) --
Total Marathon Group 1998 $22,075 $ -- $22,075 $10,960
1997 15,754 -- 15,754 7,964
1996 16,394 -- 16,394 7,464
- ------------------------------------------------------------------------------------------------------------------------------------
U. S. Steel Group:
United States 1998 $ 6,266 $ -- $ 6,266 $ 3,043
1997 6,926 -- 6,926 3,023
1996 6,642 -- 6,642 3,024
Foreign Countries 1998 17 -- 17 69
1997 15 -- 15 1
1996 28 -- 28 2
Total U. S. Steel Group 1998 $ 6,283 $ -- $ 6,283 $ 3,112
1997 6,941 -- 6,941 3,024
1996 6,670 -- 6,670 3,026
- ------------------------------------------------------------------------------------------------------------------------------------
Adjustments for Discontinued 1998 $ (23) $ -- $ (23) $ --
Operations and Eliminations 1997 (107) -- (107) --
1996 (87) -- (87) 557
- ------------------------------------------------------------------------------------------------------------------------------------
Total USX Corporation 1998 $28,335 $ -- $28,335 $14,072
1997 22,588 -- 22,588 10,988
1996 22,977 -- 22,977 11,047
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/Includes property, plant and equipment and investments in affiliates.
U-15
<PAGE>
11. Pensions and Other Postretirement Benefits
USX has noncontributory defined benefit pension plans covering
substantially all employees. Benefits under these plans are
primarily based upon years of service and final average pensionable
earnings, or a minimum benefit based upon years of service,
whichever is greater. In addition, pension benefits based upon a
percent of total career pensionable earnings cover certain
participating salaried employees.
USX also has defined benefit retiree health and life
insurance plans (other benefits) covering most employees upon their
retirement. Health benefits are provided, for the most part,
through comprehensive hospital, surgical and major medical benefit
provisions subject to various cost sharing features. Life insurance
benefits are provided to certain nonunion and union represented
retiree beneficiaries primarily based on employees' annual base
salary at retirement. For most union retirees, benefits are
provided for the most part based on fixed amounts negotiated in
labor contracts with the appropriate unions. Except for certain
life insurance benefits paid from reserves held by insurance
carriers and benefits required to be funded by union contracts,
most other benefits have not been prefunded.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------ ------------------
(In millions) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Change in benefit obligations
Benefit obligations at January 1 $ 8,085 $ 7,885 $ 2,451 $ 2,417
Service cost 119 96 27 21
Interest cost 544 562 172 175
Plan amendments 14 37 (30) --
Actuarial (gains) losses 637 462 164 (11)
Acquisition 145 -- 98 --
Settlement, curtailment and termination benefits 10 4 7 --
Benefits paid (925) (961) (160) (151)
--------- ------- ------- -------
Benefit obligations at December 31 $ 8,629 $ 8,085 $ 2,729 $ 2,451
Change in plan assets
Fair value of plan assets at January 1 $ 10,925 $ 9,849 $ 258 $ 111
Actual return on plan assets 1,507 1,972 31 19
Acquisition 55 -- -- --
Employer contributions (6) 44 -- 150
Benefits paid (907) (940) (24) (22)
--------- ------- ------- -------
Fair value of plan assets at December 31 $ 11,574 $10,925 $ 265 $ 258
Funded status of plans at December 31 $ 2,945/(a)/ $ 2,840/(a)/ $(2,464) $(2,193)
Unrecognized net gain from transition (175) (249) -- --
Unrecognized prior service costs (credits) 566 628 (38) (7)
Unrecognized net actuarial gains (993) (993) (81) (254)
Additional minimum liability/(b)/ (75) (79) -- --
--------- ------- ------- -------
Prepaid (accrued) benefit cost $ 2,268 $ 2,147 $(2,583) $(2,454)
--------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
/(a)/Includes several small plans that have accumulated
benefit obligations in excess of plan assets:
Projected benefit obligation (PBO) $ (120) $ (151)
Plan assets -- 24
--------- -------
PBO in excess of plan assets $ (120) $ (127)
/(b)/Additional minimum liability recorded
was offset by the following:
Intangible asset $ 18 $ 30
--------- -------
Accumulated other comprehensive income (losses):
Beginning of year $ (32) $ (22)
Change during year (net of tax) (5) (10)
--------- -------
Balance at end of year $ (37) $ (32)
</TABLE>
U-16
<PAGE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
(In millions) 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit cost (credit)
Service cost $ 119 $ 96 $ 104 $ 27 $ 21 $ 26
Interest cost 544 562 568 172 175 183
Return on plan assets -- actual (1,507) (1,972) (1,275) (31) (19) (12)
-- deferred gain 631 1,144 422 10 8 1
Amortization of unrecognized (gains) losses 7 3 7 (12) (12) 2
Multiemployer and other USX plans 6 6 6 13/(a)/ 15/(a)/ 15/(a)
Settlement and termination costs 10/(b)/ 4 6 -- -- --
----- ------- ------- ----- ----- -----
Net periodic benefit cost (credit) $(190) $ (157) $ (162) $ 179 $ 188 $ 215
</TABLE>
/(a)/Represents payments to a multiemployer health care benefit
plan created by the Coal Industry Retiree Health Benefit Act
of 1992 based on assigned beneficiaries receiving benefits.
The present value of this unrecognized obligation is broadly
estimated to be $103 million, including the effects of future
medical inflation, and this amount could increase if
additional beneficiaries are assigned.
/(b)/Represents costs of the U. S. Steel Group 1998 voluntary early
retirement program.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Actuarial assumptions at December 31:
Discount rate 6.5% 7.0% 6.5% 7.0%
Expected annual return on plan assets 9.0% 9.5% 9.0% 9.5%
Increase in compensation rate 4.0% 4.0% 4.0% 4.0%
</TABLE>
For measurement purposes, an 8% annual rate of increase
in the per capita cost of covered health care benefits was assumed
for 1999. The rate was assumed to decrease gradually to 5% for 2005
and remain at that level thereafter.
A one-percentage-point change in assumed health care cost
trend rates would have the following effects:
<TABLE>
<CAPTION>
1-Percentage- 1-Percentage-
(In millions) Point Increase Point Decrease
<S> <C> <C>
Effect on total of service and interest cost components $ 23 $ (17)
Effect on other postretirement benefit obligations 288 (237)
</TABLE>
12. Leases
Future minimum commitments for capital leases (including sale-
leasebacks accounted for as financings) and for operating leases
having remaining noncancelable lease terms in excess of one year
are as follows:
<TABLE>
<CAPTION>
Capital Operating
(In millions) Leases Leases
<S> <C> <C>
1999 $ 10 $ 229
2000 11 293
2001 11 200
2002 11 116
2003 11 82
Later years 117 208
Sublease rentals -- (16)
----- ------
Total minimum lease payments 171 $1,112
======
Less imputed interest costs (76)
-----
Present value of net minimum lease payments
included in long-term debt $ 95
</TABLE>
Operating lease rental expense from continuing operations:
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
<S> <C> <C> <C>
Minimum rental $ 293 $ 237 $ 227
Contingent rental 29 25 15
Sublease rentals (8) (8) (8)
----- ----- ------
Net rental expense $ 314 $ 254 $ 234
</TABLE>
USX leases a wide variety of facilities and equipment
under operating leases, including land and building space, office
equipment, production facilities and transportation equipment. Most
long-term leases include renewal options and, in certain leases,
purchase options. In the event of a change in control of USX, as
defined in the agreements, or certain other circumstances,
operating lease obligations totaling $115 million may be declared
immediately due and payable.
U-17
<PAGE>
13. Income Taxes
Provisions (credits) for estimated income taxes on income from
continuing operations were:
<TABLE>
<CAPTION>
1998 1997 1996
(In millions) Current Deferred Total Current Deferred Total Current Deferred Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal $102 $ 168 $270 $208 $ 163 $ 371 $142 $ 151 $ 293
State and local 33 18 51 7 32 39 12 21 33
Foreign (4) (2) (6) 12 28 40 4 82 86
---- ----- ---- ---------- -------- -------- -------- ---------- ----------
Total $131 $ 184 $315 $227 $ 223 $ 450 $158 $ 254 $ 412
</TABLE>
A reconciliation of federal statutory tax rate (35%) to total
provisions from continuing operations follows:
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
<S> <C> <C> <C>
Statutory rate applied to income from continuing operations
before income taxes $ 346 $ 475 $ 476
Effects of foreign operations, including foreign tax credits (37) (11) (16)
State and local income taxes after federal income tax effects 33 25 22
Credits other than foreign tax credits (12) (24) (48)
Excess percentage depletion (11) (10) (7)
Effects of partially owned companies (4) (9) (16)
Nondeductible business and amortization expenses 4 5 5
Dispositions of subsidiary investments -- -- (8)
Adjustment of prior years' income taxes (5) 2 3
Adjustment of valuation allowances -- (5) --
Other 1 2 1
------- ------ ------
Total provisions on income from continuing operations $ 315 $ 450 $ 412
</TABLE>
Deferred tax assets and liabilities resulted from the
following:
<TABLE>
<CAPTION>
(In millions) December 31 1998 1997
<S> <C> <C>
Deferred tax assets:
Minimum tax credit carryforwards $ 200 $ 222
State tax loss carryforwards (expiring in 1999 through 2018) 118 127
Foreign tax loss carryforwards (portion of which expire in 1999 through 2013) 414 483
Employee benefits 1,170 1,079
Expected federal benefit
for:
Crediting certain foreign deferred income taxes 528 249
Deducting state and other foreign deferred income taxes 48 47
Receivables, payables and debt 80 63
Contingency and other accruals 188 198
Other 50 10
Valuation allowances:
Federal (30) --
State (73) (91)
Foreign (260) (272)
------- -------
Total deferred tax assets/(a)/ 2,433 2,115
------- -------
Deferred tax liabilities:
Property, plant and equipment 2,409 2,062
Prepaid pensions 917 790
Inventory 186 212
Investments in subsidiaries and affiliates 57 74
Other 190 94
------- -------
Total deferred tax liabilities 3,759 3,232
------- -------
Net deferred tax liabilities $1,326 $1,117
</TABLE>
/(a)/USX expects to generate sufficient future taxable income to
realize the benefit of its deferred tax assets. In addition,
the ability to realize the benefit of foreign tax credits is
based upon certain assumptions concerning future operating
conditions (particularly as related to prevailing oil prices),
income generated from foreign sources and USX's tax profile in
the years that such credits may be claimed.
The consolidated tax returns of USX for the years 1990
through 1994 are under various stages of audit and administrative
review by the IRS. USX believes it has made adequate provision for
income taxes and interest which may become payable for years not
yet settled.
Pretax income (loss) from continuing operations included
$(75) million, $250 million and $339 million attributable to
foreign sources in 1998, 1997 and 1996, respectively.
Undistributed earnings of certain consolidated foreign
subsidiaries at December 31, 1998, amounted to $132 million. No
provision for deferred U.S. income taxes has been made for these
subsidiaries because USX intends to permanently reinvest such
earnings in those foreign operations. If such earnings were not
permanently reinvested, a deferred tax liability of $46 million
would have been required.
U-18
<PAGE>
14. Sales of Receivables
USX has an agreement (the program) at December 31, 1998, 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 December 31, 1998,
the amount sold under the program that had not been collected was
$320 million, which will be forwarded to the buyers at the end of
the agreement in 1999, 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 amounts sold under the
current and previous programs averaged $347 million, $705 million
and $740 million for years 1998, 1997 and 1996, respectively. (For
most of 1997 and for the year 1996, the Marathon and Delhi Groups
had a separate accounts receivable program that was terminated in
late 1997.) 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. USX does not generally require collateral for accounts
receivable, but significantly reduces credit risk through credit
extension and collection policies, which include analyzing the
financial condition of potential customers, establishing credit
limits, monitoring payments and aggressively pursuing delinquent
accounts. In the event of a change in control of USX, USX may be
required to forward to the buyers, payments collected on the sold
accounts receivable.
15. Investments and Long-Term Receivables
<TABLE>
<CAPTION>
(In millions) December 31 1998 1997
<S> <C> <C>
Equity method investments $1,062 $ 838
Other investments 81 88
Receivables due after one year 56 71
Deposits of restricted cash 21 --
Other 29 31
------ ------
Total $1,249 $1,028
</TABLE>
Summarized financial information of affiliates accounted for
by the equity method of accounting follows:
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
<S> <C> <C> <C>
Income data -- year:
Revenues $3,510 $3,705 $3,274
Operating income 324 342 318
Net income 176 191 193
Balance sheet data -- December 31:
Current assets $1,290 $1,094
Noncurrent assets 4,382 3,476
Current liabilities 874 863
Noncurrent liabilities 2,137 1,521
</TABLE>
Dividends and partnership distributions received from
equity affiliates were $42 million in 1998, $34 million in 1997 and
$49 million in 1996.
USX purchases from equity affiliates totaled $395
million, $461 million and $509 million in 1998, 1997 and 1996,
respectively. USX sales to equity affiliates totaled $725 million,
$812 million and $830 million in 1998, 1997 and 1996, respectively.
16. Short-Term Credit Agreement
USX has a short-term credit agreement totaling $125 million at
December 31, 1998. Interest is based on the bank's prime rate or
London Interbank Offered Rate (LIBOR), and carries a facility fee
of .15%. Certain other banks provide short-term lines of credit
totaling $150 million which require a .125% fee or maintenance of
compensating balances of 3%. At December 31, 1998, there were $40
million in borrowings against these facilities. USX had other
outstanding short-term borrowings of $105 million.
U-19
<PAGE>
17. Long-Term Debt
<TABLE>
<CAPTION>
Interest December 31
(In millions) Rates -- % Maturity 1998 1997
<S> <C> <C> <C> <C>
USX Corporation:
Revolving credit facility/(a)/ 2001 $ 700 $ --
Notes payable 6-17/20 -- 9-4/5 1999 -- 2023 2,267 2,239
Foreign currency obligations/(b)/ 5-3/4 -- -- 68
Obligations relating to Industrial Development and
Environmental Improvement Bonds and Notes/(c)/ 3-3/20 -- 6-7/8 2007 -- 2033 494 470
Indexed debt/(d)/ 6-3/4 2000 69 113
All other obligations, including sale-leaseback
financing and capital leases 1999 -- 2012 94 98
Consolidated subsidiaries:
Revolving credit facilities/(e)/
Guaranteed Notes 7 2002 135 135
Guaranteed Loan/(f)/ 9-1/20 1999 -- 2006 245 265
Notes payable 8-1/2 1999 -- 2001 2 3
All other obligations, including capital leases 1999 -- 2008 11 38
------ ------
Total /(g)(h)/ 4,017 3,429
Less unamortized discount 26 26
Less amount due within one year 71 471
------ ------
Long-term debt due after one year $3,920 $2,932
</TABLE>
/(a)/An amended agreement which terminates in August 2001, provides
for borrowing under a $2,350 million revolving credit
facility. Interest is based on defined short-term market
rates. During the term of this agreement, USX is obligated to
pay a variable facility fee on total commitments, which was
.15 % at December 31, 1998.
/(b)/These obligations were redeemed during 1998.
/(c)/At December 31, 1998, USX had outstanding obligations relating
to Environmental Improvement Bonds in the amount of $159
million, which were supported by letter of credit arrangements
that could become short-term obligations under certain
circumstances.
/(d)/The indexed debt represents 6-3/4% exchangeable notes due
February 1, 2000, in the principal amount of $117 million or
$21.375 per note, which was the market price per share of RTI
common stock on November 26, 1996. At maturity, the principal
amount of each note will be mandatorily exchanged by USX into
shares of RTI common stock (or, at USX's option, the cash
equivalent and/or such other consideration as permitted or
required by the terms of the notes) at a defined exchange
rate, which is based on the average market price of RTI common
stock valued in January 2000. The carrying value of the notes
is adjusted quarterly to settlement value and any resulting
adjustment is charged or credited to income and included in
net interest and other financial costs.
/(e)/In 1998, MAP entered into a revolving credit facility for
$100 million that terminates in July 1999 and a $400 million
revolving credit facility that terminates in July 2003.
Interest is based on defined short-term market rates for both
facilities. During the terms of the agreements, MAP is
obligated to pay a variable facility fee on total commitments.
At December 31, 1998, the facility fee was .10% for the $100
million facility and .125% for the $400 million facility. At
December 31, 1998, the unused and available credit was $500
million. In the event that MAP defaults on indebtedness (as
defined in the agreement) in excess of $100 million, USX has
guaranteed the payment of any outstanding obligations.
/(f)/The guaranteed loan was used to fund a portion of the costs in
connection with the development of the East Brae Field and the
SAGE pipeline in the North Sea. A portion of proceeds from a
long-term gas sales contract is dedicated to loan service
under certain circumstances. Prepayment of the loan may be
required under certain situations, including events impairing
the security interest.
/(g)/Required payments of long-term debt for the years 2000-2003
are $127 million, $981 million, $209 million and $186 million,
respectively.
/(h)/In the event of a change in control of USX, as defined in the
related agreements, debt obligations totaling $3,610 million
may be declared immediately due and payable. The principal
obligations subject to such a provision are Notes payable
$2,267 million; and Guaranteed Loan $245 million. In such
event, USX may also be required to either repurchase the
leased Fairfield slab caster for $108 million or provide a
letter of credit to secure the remaining obligation.
<TABLE>
<CAPTION>
18. Property, Plant and Equipment
(In millions) December 31 1998 1997
<S> <C> <C>
Marathon Group $20,728 $17,233
U. S. Steel Group 8,439 8,295
------- ---------
Total 29,167 25,528
Less accumulated depreciation, depletion and amortization 16,238 15,466
------- ---------
Net $12,929 $10,062
</TABLE>
Property, plant and equipment includes gross assets
acquired under capital leases (including sale-leasebacks accounted
for as financings) of $108 million at December 31, 1998, and $134
million at December 31, 1997; related amounts in accumulated
depreciation, depletion and amortization were $77 million and $94
million, respectively.
U-20
<PAGE>
19. Inventories
<TABLE>
<CAPTION>
(In millions) December 31 1998 1997
<S> <C> <C>
Raw materials $ 916 $ 582
Semi-finished products 282 331
Finished products 1,205 922
Supplies and sundry items 156 134
------ ------
Total (at cost) 2,559 1,969
Less inventory market valuation reserve 551 284
------ ------
Net inventory carrying value $2,008 $1,685
</TABLE>
At December 31, 1998 and 1997, the LIFO method accounted
for 90% and 92%, respectively, of total inventory value. Current
acquisition costs were estimated to exceed the above inventory
values at December 31 by approximately $310 million and $300
million in 1998 and 1997, respectively.
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.
20. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
<S> <C> <C> <C>
Cash used in operating activities included:
Interest and other financial costs paid
(net of amount capitalized) $ (336) $ (382) $ (488)
Income taxes paid (183) (400) (127)
Commercial paper and revolving credit arrangements net:
Commercial paper -- issued $ 1,650 $ -- $ 1,422
-- repayments (950) -- (1,555)
Credit agreements -- borrowings 15,836 10,454 10,356
repayments (15,867) (10,449) (10,340)
Other credit arrangements -- net 55 36 (36)
-------- -------- --------
Total $ 724 $ 41 $ (153)
Noncash investing and financing activities:
Common stock issued for dividend reinvestment
and employee stock plans $ 5 $ 10 $ 6
Acquisition of Tarragon
-- Exchangeable Shares issued 29 -- --
-- liabilities assumed 433 -- --
Acquisition of Ashland RM&T net assets
-- 38% interest in MAP 1,900 -- --
-- liabilities assumed 1,038 -- --
Acquisition of assets -- debt issued -- -- 2
Disposal of assets -- notes and common stock received 2 -- 12
-- liabilities assumed by buyers -- 240 25
Trust preferred securities exchanged for preferred stock -- 182 --
Marathon Stock issued for Exchangeable Shares 11 -- --
</TABLE>
21. Stock-Based Compensation Plans
The 1990 Stock Plan, as amended and restated, authorizes the
Compensation Committee of the Board of Directors to grant
restricted stock, stock options and stock appreciation rights to
key management employees. Such employees are generally granted
awards of the class of common stock intended to reflect the
performance of the group(s) to which their work relates. Up to .5
percent of the outstanding Marathon Stock and .8 percent of the
outstanding Steel Stock, as determined on December 31 of the
preceding year, are available for grants during each calendar year
the 1990 Plan is in effect. In addition, awarded shares that do not
result in shares being issued are available for subsequent grant,
and any ungranted shares from prior years' annual allocations are
available for subsequent grant during the years the 1990 Plan is in
effect. As of December 31, 1998, 8,141,990 Marathon Stock shares
and 2,524,613 Steel Stock shares were available for grants in 1999.
The Stock-Based Compensation Plans' activity below includes the
Delhi Stock prior to its January 1998 redemption (Note 5).
Restricted stock represents stock granted for such
consideration, if any, as determined by the Compensation Committee,
subject to provisions for forfeiture and restricting transfer.
Those restrictions may be removed as conditions such as
performance, continuous service and other criteria are met.
Restricted stock is issued at the market price per share at the
date of grant and vests over service periods that range from one to
five years.
U-21
<PAGE>
Deferred compensation is charged to stockholders' equity
when the restricted stock is granted and subsequently adjusted for
changes in the market value of the underlying stock. The deferred
compensation is expensed over the balance of the vesting period and
adjusted if conditions of the restricted stock grant are not met.
The following table presents information on restricted
stock grants:
<TABLE>
<CAPTION>
Marathon Stock Steel Stock
1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Number of shares granted 25,378 20,430 11,495 17,742 11,942 5,605
Weighted-average grant-date
fair value per share $ 34.00 $ 29.38 $ 22.38 $ 37.28 $ 32.00 $31.94
</TABLE>
Stock options represent the right to purchase shares of
Marathon Stock, Steel Stock or Delhi Stock at the market value of
the stock at date of grant. Certain options contain the right to
receive cash and/or common stock equal to the excess of the fair
market value of shares of common stock, as determined in accordance
with the plan, over the option price of shares. Stock options vest
after a one-year service period and expire 10 years from the date
they are granted.
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
Marathon Stock Steel Stock Delhi Stock
Shares Price/(a)/ Shares Price/(a)/ Shares Price/(a)/
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 5,056,550 $23.63 1,056,650 $35.68 259,900 $ 16.24
Granted 633,825 22.38 411,705 31.94 77,550 13.63
Exercised (321,985) 17.50 (100,260) 31.98 (1,500) 12.69
Canceled (137,820) 26.82 (22,500) 33.43 (9,000) 17.49
---------- ------ --------- ------ ------- ----------
Balance December 31, 1996 5,230,570 23.78 1,345,595 34.85 326,950 15.60
Granted 756,260 29.38 457,590 32.00 94,250 13.31
Exercised (2,215,665) 23.86 (158,265) 31.85 (6,300) 12.21
Canceled (76,300) 26.91 (11,820) 34.36 (6,650) 15.73
---------- ------ --------- ------ ------- ----------
Balance December 31, 1997 3,694,865 24.81 1,633,100 34.35 408,250 15.13
Granted 987,535 34.00 611,515 37.28
Exercised (594,260) 27.61 (230,805) 32.00
Canceled (13,200) 27.22 (21,240) 35.89
Redeemed -- -- (408,250) 20.60/(b)/
---------- ------ --------- -------
Balance December 31, 1998 4,074,940 26.62 1,992,570 35.50 --
</TABLE>
/(a)/Weighted-average exercise price
/(b)/Redemption price
The following table represents stock options at December
31, 1998, excluding the Delhi Stock, which was redeemed on January
26, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
Weighted-
Number Average Weighted- Number Weighted-
Range of of Shares Remaining Average of Shares Average
Exercise Under Contractual Exercise Under Exercise
Prices Option Life Price Option Price
<S> <C> <C> <C> <C> <C> <C>
Marathon Stock $17.00 -- 23.44 1,728,295 5.7 years $20.63 1,728,295 $20.63
25.38 -- 26.88 174,050 2.4 25.46 174,050 25.46
29.08 -- 34.00 2,172,595 7.3 31.48 1,189,060 29.39
--------- ---------
Total 4,074,940 3,091,405
--------- ---------
Steel Stock $22.46 -- 25.44 32,815 2.5 years $24.83 32,815 $24.83
31.69 -- 34.44 1,076,165 7.2 32.57 1,076,165 32.57
37.28 -- 44.19 883,590 7.8 39.46 279,375 44.19
--------- ---------
Total 1,992,570 1,388,355
</TABLE>
During 1996, USX adopted SFAS No. 123, Accounting for
Stock-Based Compensation, as discussed in Note 2, and elected to
continue to follow the accounting provisions of APB No. 25. Actual
stock-based compensation expense (credit) was $(3) million in 1998,
$30 million in 1997 and $8 million in 1996. Incremental
compensation expense, as determined under SFAS No. 123, was not
material ($.02 or less per share for all years presented).
Therefore, pro forma net income and earnings per share data have
been omitted.
Effective January 1, 1997, USX created a deferred
compensation plan for non-employee directors of its Board of
Directors. The plan permits participants to defer some or all of
their annual retainers in the form of common stock units or cash.
Common stock units are book entry units equal in value to a share
of Marathon Stock or Steel Stock. Deferred stock benefits are
distributed in shares of common stock within five business days
after a participant leaves the Board of Directors. During 1998 and
1997, no shares of common stock were distributed.
U-22
<PAGE>
22. Dividends
In accordance with the USX Certificate, dividends on the
Marathon Stock and Steel Stock are limited to the legally available
funds of USX. Net losses of any Group, as well as dividends and
distributions on any class of USX Common Stock or series of
preferred stock and repurchases of any class of USX Common Stock or
series of preferred stock at prices in excess of par or stated
value, will reduce the funds of USX legally available for payment
of dividends on all classes of Common Stock. Subject to this
limitation, the Board of Directors intends to declare and pay
dividends on the Marathon Stock and Steel Stock based on the
financial condition and results of operations of the related group,
although it has no obligation under Delaware law to do so. In
making its dividend decisions with respect to each of the Marathon
Stock and Steel Stock, the Board of Directors considers, among
other things, the long-term earnings and cash flow capabilities of
the related group as well as the dividend policies of similar
publicly traded companies.
Dividends on the Steel Stock are further limited to the
Available Steel Dividend Amount. At December 31, 1998, the
Available Steel Dividend Amount was at least $3,336 million. The
Available Steel Dividend Amount will be increased or decreased, as
appropriate, to reflect U. S. Steel Group net income, dividends,
repurchases or issuances with respect to the Steel Stock and
preferred stock attributed to the U. S. Steel Group and certain
other items.
23. Stockholder Rights Plan
USX's Board of Directors has adopted a Stockholder Rights Plan
and declared a dividend distribution of one right for each
outstanding share of Marathon Stock and Steel Stock referred to
together as "Voting Stock." Each right becomes exercisable, at a
price of $120, when any person or group has acquired, obtained the
right to acquire or made a tender or exchange offer for 15% or more
of the total voting power of the Voting Stock, except pursuant to a
qualifying all-cash tender offer for all outstanding shares of
Voting Stock, which is accepted with respect to shares of Voting
Stock representing a majority of the voting power other than Voting
Stock beneficially owned by the offeror. Each right entitles the
holder, other than the acquiring person or group, to purchase one
one-hundredth of a share of Series A Junior Preferred Stock or,
upon the acquisition by any person of 15% or more of the total
voting power of the Voting Stock, Marathon Stock or Steel Stock (as
the case may be) or other property having a market value of twice
the exercise price. After the rights become exercisable, if USX is
acquired in a merger or other business combination where it is not
the survivor, or if 50% or more of USX's assets, earnings power or
cash flow are sold or transferred, each right entitles the holder
to purchase common stock of the acquiring entity having a market
value of twice the exercise price. The rights and exercise price
are subject to adjustment, and the rights expire on October 9,
1999, or may be redeemed by USX for one cent per right at any time
prior to the point they become exercisable. Under certain
circumstances, the Board of Directors has the option to exchange
one share of the respective class of Voting Stock for each
exercisable right.
24. Income Per Common Share
The method of calculating net income per share for the Marathon
Stock, the Steel Stock and, prior to November 1, 1997, the Delhi
Stock reflects the USX Board of Directors' intent that the
separately reported earnings and surplus of the Marathon Group, the
U. S. Steel Group and the Delhi Group, as determined consistent
with the USX Certificate, are available for payment of dividends on
the respective classes of stock, although legally available funds
and liquidation preferences of these classes of stock do not
necessarily correspond with these amounts. The financial statements
of the Marathon Group, the U. S. Steel Group and the Delhi Group,
taken together, include all accounts which comprise the
corresponding consolidated financial statements of USX.
Basic net income per share is calculated by adjusting net
income for dividend requirements of preferred stock and, in 1997,
the noncash credit on exchange of preferred stock and is based on
the weighted average number of common shares outstanding.
Diluted net income per share assumes conversion of
convertible securities for the applicable periods outstanding and
assumes exercise of stock options, provided in each case, the
effect is not antidilutive.
U-23
<PAGE>
<TABLE>
<CAPTION>
COMPUTATION OF INCOME PER SHARE
1998 1997 1996
Basic Diluted Basic Diluted Basic Diluted
<S> <C> <C> <C> <C> <C> <C>
CONTINUING OPERATIONS
Marathon Group
Net income (millions):
Income before extraordinary loss $ 310 $ 310 $ 456 $ 456 $ 671 $ 671
Extraordinary loss -- -- -- -- 7 7
-------- -------- -------- -------- -------- -------
Net income 310 310 456 456 664 664
Effect of dilutive securities --
Convertible debentures -- -- -- 3 -- 14
-------- -------- -------- -------- -------- -------
Net income assuming conversions $ 310 $ 310 $ 456 $ 459 $ 664 $ 678
======== ======== ======== ======== ======== ========
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 292,876 292,876 288,038 288,038 287,460 287,460
Effect of dilutive securities:
Convertible debentures -- -- -- 1,936 -- 8,975
Stock options -- 559 -- 546 -- 133
-------- -------- -------- -------- -------- -------
Average common shares and dilutive effect 292,876 293,435 288,038 290,520 287,460 296,568
======== ======== ======== ======== ======== ========
Per share:
Income before extraordinary loss $ 1.06 $ 1.05 $ 1.59 $ 1.58 $ 2.33 $ 2.31
Extraordinary loss -- -- -- -- .02 .02
-------- -------- -------- -------- -------- -------
Net income $ 1.06 $ 1.05 $ 1.59 $ 1.58 $ 2.31 $ 2.29
U. S. Steel Group
Net income (millions):
Income before extraordinary loss $ 364 $ 364 $ 452 $ 452 $ 275 $ 275
Noncash credit from exchange of preferred stock -- -- 10 -- -- --
Dividends on preferred stock (9) -- (13) -- (22) (22)
Extraordinary loss -- -- -- -- (2) (2)
-------- -------- -------- -------- -------- -------
Net income applicable to Steel Stock 355 364 449 452 251 251
Effect of dilutive securities:
Trust preferred securities -- 8 -- 6 -- --
Convertible debentures -- -- -- 2 -- 3
-------- -------- -------- -------- -------- -------
Net income assuming conversions $ 355 $ 372 $ 449 $ 460 $ 251 $ 254
======== ======== ======== ======== ======== ========
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 87,508 87,508 85,672 85,672 84,025 84,025
Effect of dilutive securities:
Trust preferred securities -- 4,256 -- 2,660 -- --
Preferred stock -- 3,143 -- 4,811 -- --
Convertible debentures -- -- -- 1,025 -- 1,925
Stock options -- 36 -- 35 -- 12
-------- -------- -------- -------- -------- -------
Average common shares and dilutive effect 87,508 94,943 85,672 94,203 84,025 85,962
======== ======== ======== ======== ======== ========
Per share:
Income before extraordinary loss $ 4.05 $ 3.92 $ 5.24 $ 4.88 $ 3.00 $ 2.97
Extraordinary loss -- -- -- -- .02 .02
-------- -------- -------- -------- -------- -------
Net income $ 4.05 $ 3.92 $ 5.24 $ 4.88 $ 2.98 $ 2.95
DISCONTINUED OPERATIONS
Delhi Group
Net income (millions):
Income before extraordinary loss $ 79.7 $ 79.7 $ 6.4 $ 6.4
Extraordinary loss -- -- .5 .5
-------- -------- -------- -------
Net income $ 79.7 $ 79.7 $ 5.9 $ 5.9
======== ======== ======== ========
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 9,449 9,449 9,448 9,448
Stock options -- 21 -- 3
-------- -------- -------- -------
Average common shares and dilutive effect 9,449 9,470 9,448 9,451
======== ======== ======== ========
Per share:
Income before extraordinary loss $ 8.43 $ 8.41 $ .67 $ .67
Extraordinary loss -- -- .06 .06
-------- -------- -------- -------
Net income $ 8.43 $ 8.41 $ .61 $ .61
</TABLE>
U-24
<PAGE>
25. Preferred Stock of Subsidiary and Trust Preferred Securities
USX Capital LLC, a wholly owned subsidiary of USX, sold
10,000,000 shares (carrying value of $250 million) of 8-3/4%
Cumulative Monthly Income Preferred Shares (MIPS) (liquidation
preference of $25 per share) in 1994. Proceeds of the issue were
loaned to USX. USX has the right under the loan agreement to extend
interest payment periods for up to 18 months, and as a consequence,
monthly dividend payments on the MIPS can be deferred by USX
Capital LLC during any such interest payment period. In the event
that USX exercises this right, USX may not declare dividends on any
share of its preferred or common stocks. The MIPS are redeemable at
the option of USX Capital LLC and subject to the prior consent of
USX, in whole or in part from time to time, for $25 per share on or
after March 31, 1999, and will be redeemed from the proceeds of any
repayment of the loan by USX. In addition, upon final maturity of
the loan, USX Capital LLC is required to redeem the MIPS. The
financial costs are included in net interest and other financial
costs.
In 1997, USX exchanged approximately 3.9 million 6.75%
Convertible Quarterly Income Preferred Securities (Trust Preferred
Securities) of USX Capital Trust I, a Delaware statutory business
trust (Trust), for an equivalent number of shares of its 6.50%
Cumulative Convertible Preferred Stock (6.50% Preferred Stock)
(Exchange). The Exchange resulted in the recording of Trust
Preferred Securities at a fair value of $182 million and a noncash
credit to Retained Earnings of $10 million.
USX owns all of the common securities of the Trust, which
was formed for the purpose of the Exchange. (The Trust Common
Securities and the Trust Preferred Securities are together referred
to as the Trust Securities.) The Trust Securities represent
undivided beneficial ownership interests in the assets of the
Trust, which consist solely of USX 6.75% Convertible Junior
Subordinated Debentures maturing March 31, 2037 (Debentures),
having an aggregate principal amount equal to the aggregate initial
liquidation amount ($50.00 per security and $203 million in total)
of the Trust Securities issued by the Trust. Interest and principal
payments on the Debentures will be used to make quarterly
distributions and to pay redemption and liquidation amounts on the
Trust Preferred Securities. The quarterly distributions, which
accumulate at the rate of 6.75% per annum on the Trust Preferred
Securities and the accretion from fair value to the initial
liquidation amount, are charged to income and included in net
interest and other financial costs.
Under the terms of the Debentures, USX has the right to
defer payment of interest for up to 20 consecutive quarters and, as
a consequence, monthly distributions on the Trust Preferred
Securities will be deferred during such period. If USX exercises
this right, then, subject to limited exceptions, it may not pay any
dividend or make any distribution with respect to any shares of its
capital stock.
The Trust Preferred Securities are convertible at any
time prior to the close of business on March 31, 2037 (unless such
right is terminated earlier under certain circumstances) at the
option of the holder, into shares of Steel Stock at a conversion
price of $46.25 per share of Steel Stock (equivalent to a
conversion ratio of 1.081 shares of Steel Stock for each Trust
Preferred Security), subject to adjustment in certain
circumstances.
The Trust Preferred Securities may be redeemed at any
time at the option of USX, at a premium of 103.25% of the initial
liquidation amount through March 31, 1999, and thereafter,
declining annually to the initial liquidation amount on April 1,
2003, and thereafter. They are mandatorily redeemable at March 31,
2037, or earlier under certain circumstances.
Payments related to quarterly distributions and to the
payment of redemption and liquidation amounts on the Trust
Preferred Securities by the Trust are guaranteed by USX on a
subordinated basis. In addition, USX unconditionally guarantees the
Trust's Debentures. The obligations of USX under the Debentures,
and the related indenture, trust agreement and guarantee constitute
a full and unconditional guarantee by USX of the Trust's
obligations under the Trust Preferred Securities.
26. Preferred Stock
USX is authorized to issue 40,000,000 shares of preferred stock,
without par value --
6.50% Cumulative Convertible Preferred Stock (6.50% Preferred
Stock) -- As of December 31, 1998, 2,767,787 shares (stated value
of $1.00 per share; liquidation preference of $50.00 per share)
were outstanding. The 6.50% Preferred Stock is convertible at any
time, at the option of the holder, into shares of Steel Stock at a
conversion price of $46.125 per share of Steel Stock, subject to
adjustment in certain circumstances. This stock is redeemable at
USX's sole option, at a price of $51.625 per share beginning April
1, 1998, and thereafter at prices declining annually on each April
1 to an amount equal to $50.00 per share on and after April 1,
2003.
U-25
<PAGE>
27. Derivative Instruments
USX uses commodity-based derivative instruments to manage exposure
to price fluctuations related to the anticipated purchase or
production and sale of crude oil, natural gas, refined products,
nonferrous metals and electricity. The derivative instruments used,
as a part of an overall risk management program, include exchange-
traded futures contracts and options, and instruments which require
settlement in cash such as OTC commodity swaps and OTC options.
While risk management activities generally reduce market risk
exposure due to unfavorable commodity price changes for raw
material purchases and products sold, such activities can also
encompass strategies which assume certain price risk in isolated
transactions.
USX uses forward exchange contracts to minimize its
exposure to foreign currency price fluctuations.
USX remains at risk for possible changes in the market
value of the derivative instrument; however, such risk should be
mitigated by price changes in the underlying hedged item. USX is
also exposed to credit risk in the event of nonperformance by
counterparties. The credit worthiness of counterparties is subject
to continuing review, including the use of master netting
agreements to the extent practical, and full performance is
anticipated.
The following table sets forth quantitative information
by class of derivative instrument:
<TABLE>
<CAPTION>
Fair Carrying Recorded
Value Amount Deferred Aggregate
Assets Assets Gain or Contract
(In millions) (Liabilities)/(a)/ (Liabilities) (Loss) Values/(b)/
<S> <C> <C> <C> <C>
December 31, 1998:
Exchange-traded commodity futures $ -- $ -- $ (2) $ 104
Exchange-traded commodity options 3/(c)/ 2 3 776
OTC commodity swaps/(d)/ (9)/(e)/ (9) (7) 297
OTC commodity options 3 3 3 147
----- ------ ----- ------
Total commodities $ (3) $ (4) $ (3) $1,324
===== ====== ===== ======
Forward exchange contracts/(f)/:
receivable $ 36 $ 36 $ -- $ 36
December 31, 1997:
Exchange-traded commodity futures $ -- $ -- $ -- $ 30
Exchange-traded commodity options 1/(c)/ 1 2 129
OTC commodity swaps (3)/(e)/ (3) (4) 50
OTC commodity options -- -- -- 6
----- ------ ----- ------
Total commodities $ (2) $ (2) $ (2) $ 215
===== ====== ===== ======
Forward exchange contracts/(g)/:
--receivable $ 11 $ 10 $ -- $ 59
payable (1) (1) (1) 5
----- ------ ----- ------
Total currencies $10 $ 9 $ (1) $ 64
</TABLE>
/(a)/The fair value amounts for OTC positions are based on various
indices or dealer quotes. The fair value amounts for currency
contracts are based on dealer quotes of forward prices
covering the remaining duration of the forward exchange
contract. The exchange-traded futures contracts and certain
option contracts do not have a corresponding fair value since
changes in the market prices are settled on a daily basis.
/(b)/Contract or notional amounts do not quantify risk exposure,
but are used in the calculation of cash settlements under the
contracts. The contract or notional amounts do not reflect the
extent to which positions may offset one another.
/(c)/Includes fair values as of December 31, 1998 and 1997, for
assets of $23 million and $3 million and for liabilities of
$(20) million and $(2) million, respectively.
/(d)/The OTC swap arrangements vary in duration with certain
contracts extending into 2008.
/(e)/Includes fair values as of December 31, 1998 and 1997, for
assets of $29 million and $1 million and for liabilities of
$(38) million and $(4) million, respectively.
/(f)/The forward exchange contracts relating to USX's foreign
operations have various maturities ending in December 1999.
/(g)/The forward exchange contracts relating to foreign
denominated debt matured in 1998.
U-26
<PAGE>
28. Fair Value of Financial Instruments
Fair value of the financial instruments disclosed herein is not
necessarily representative of the amount that could be realized or
settled, nor does the fair value amount consider the tax
consequences of realization or settlement. The following table
summarizes financial instruments, excluding derivative financial
instruments disclosed in Note 27, by individual balance sheet
account:
<TABLE>
<CAPTION>
1998 1997
Fair Carrying Fair Carrying
(In millions) December 31 Value Amount Value Amount
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 146 $ 146 $ 54 $ 54
Receivables 1,663 1,663 1,417 1,417
Investments and long-term receivables 180 124 177 120
------ ------ ------ --------
Total financial assets $1,989 $1,933 $1,648 $1,591
Financial liabilities:
Notes payable $ 145 $ 145 $ 121 $ 121
Accounts payable 2,478 2,478 2,011 2,011
Distribution payable to minority shareholder of MAP 103 103 -- --
Accrued interest 97 97 95 95
Long-term debt (including amounts due within one year) 4,203 3,896 3,646 3,281
Preferred stock of subsidiary and trust
preferred securities 414 432 435 432
------ ------ ------ --------
Total financial liabilities $7,440 $7,151 $6,308 $5,940
</TABLE>
Fair value of financial instruments classified as current
assets or liabilities approximates carrying value due to the short-
term maturity of the instruments. Fair value of investments and
long-term receivables was based on discounted cash flows or other
specific instrument analysis. Fair value of preferred stock of
subsidiary and trust preferred securities was based on market
prices. Fair value of long-term debt instruments was based on
market prices where available or current borrowing rates available
for financings with similar terms and maturities.
USX's unrecognized financial instruments consist of
receivables sold and financial guarantees. It is not practicable to
estimate the fair value of these forms of financial instrument
obligations because there are no quoted market prices for
transactions which are similar in nature. For details relating to
sales of receivables see Note 14, and for details relating to
financial guarantees see Note 29.
29. Contingencies and Commitments
USX is the subject of, or 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.
Environmental matters --
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 December 31, 1998 and 1997, accrued liabilities for remediation
totaled $145 million and $158 million, respectively. It is not
presently possible to estimate the ultimate amount of all
remediation costs that might be incurred or the penalties that may
be imposed. Receivables for recoverable costs from certain states,
under programs to assist companies in cleanup efforts related to
underground storage tanks at retail marketing outlets, were $41
million at December 31, 1998, and $42 million at December 31, 1997.
For a number of years, USX has made substantial capital
expenditures to bring existing facilities into compliance with
various laws relating to the environment. In 1998 and 1997, such
capital expenditures totaled $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 December 31, 1998 and 1997, accrued liabilities for
platform abandonment and dismantlement totaled $141 million and
$128 million, respectively.
U-27
<PAGE>
Guarantees --
Guarantees of the liabilities of affiliated entities by
USX and its consolidated subsidiaries totaled $212 million at
December 31, 1998, and $73 million at December 31, 1997. 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 potential losses resulting from these guarantees. As of
December 31, 1998, the largest guarantee for a single affiliate was
$131 million.
At December 31, 1998 and 1997, USX's pro rata share of
obligations of LOOP LLC and various pipeline affiliates secured by
throughput and deficiency agreements totaled $164 million and $165
million, respectively. 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.
Commitments --
At December 31, 1998 and 1997, contract commitments to
acquire property, plant and equipment and long-term investments
totaled $812 million and $533 million, respectively.
USX entered into a 15-year take-or-pay arrangement in
1993, which requires USX to accept pulverized coal each month or
pay a minimum monthly charge of approximately $1.3 million. Charges
for deliveries of pulverized coal totaled $23 million in 1998 and
$24 million in 1997. If USX elects to terminate the contract early,
a maximum termination payment of $108 million, which declines over
the duration of the agreement, may be required.
USX is a party to a 15-year transportation services
agreement with a natural gas transmission company. The contract
requires USX to pay a minimum annual demand charge of approximately
$5 million starting in the year 2000 and concluding in the year
2014. The payments are required even if the transportation facility
is not utilized.
Other --
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.
U-28
<PAGE>
Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1998 1997
(In millions, except per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONTINUING OPERATIONS
Revenues $6,700 $ 7,156 $ 7,292 $ 7,187 $ 5,734 $ 5,657 $ 5,502 $ 5,695
Income (loss) from operations (37) 320 670 564 346 557 436 366
Includes:
Inventory market valuation
charges (credits) 245 50 (3) (25) 147 (41) 64 114
Gain on ownership change
in MAP -- (1) (2) 248 -- -- -- --
Net income (loss):
Income (loss) from
continuing operations $ (10) $ 116 $ 298 $ 270 $ 190 $ 308 $ 215 $ 195
Income (loss) from
discontinued operations -- -- -- -- 81 (1) (1) 1
------ ------- ------- ------ ------- ------ ------ ------
Net income (loss) $ (10) $ 116 $ 298 $ 270 $ 271 $ 307 $ 214 $ 196
Marathon Stock data:
Net income (loss) $ (86) $ 51 $ 162 $ 183 $ 38 $ 192 $ 118 $ 108
-- Per share: basic (.29) .18 .56 .63 .14 .67 .41 .37
diluted (.29) .17 .56 .63 .13 .66 .41 .37
Dividends paid per share .21 .21 .21 .21 .19 .19 .19 .19
Price range of Marathon Stock/(a)/:
-- Low 26-11/16 25 32-3/16 31 29 28-15/16 25-5/8 23-3/4
-- High 38-1/8 37-1/8 38-7/8 40-1/2 38-7/8 38-3/16 31-1/8 28-1/2
Steel Stock data:
Net income applicable
to Steel Stock $ 74 $ 63 $ 133 $ 85 $ 149 $ 114 $ 105 $ 81
-- Per share: basic .83 .72 1.53 .98 1.74 1.32 1.23 .96
diluted .81 .71 1.46 .95 1.64 1.25 1.06 .93
Dividends paid per share .25 .25 .25 .25 .25 .25 .25 .25
Price range of Steel Stock/(a)/:
-- Low 21-5/8 20-7/16 31 28-7/16 26-7/8 34-3/16 25-3/8 26-3/8
-- High 27-3/4 33-1/2 43-1/16 42-1/8 36-15/16 40-3/4 35-5/8 33-3/8
DISCONTINUED OPERATIONS
Delhi Stock data:
Net income (loss) $ 81/(b)/ $ (1) $ (1) $ 1
-- Per share: basic 8.51/(b)/ (.06) (.16) .15
diluted 8.46/(b)/ (.06) (.16) .15
Dividends paid per share -- .05 .05 .05
Price range of Delhi
Stock/(a)/:
-- Low 14-7/8 12-1/8 12-1/4 13
-- High 20-5/8 15-1/2 14-3/8 17
</TABLE>
/(a)/Composite tape.
/(b)/Represents one month of operations and gain on disposal of the Delhi
Companies.
U-29
<PAGE>
Principal Unconsolidated Affiliates (Unaudited)
<TABLE>
<CAPTION>
December 31, 1998
Company Country Ownership Activity
<S> <C> <C> <C>
Clairton 1314B Partnership, L.P. United States 10% Coke & Coke By-Products
CLAM Petroleum B.V. Netherlands 50% Oil & Gas Production
Double Eagle Steel Coating Company United States 50% Steel Processing
Kenai LNG Corporation United States 30% Natural Gas Liquification
LOCAP, Inc. United States 50%/(a)/ Pipeline & Storage Facilities
LOOP LLC United States 47%/(a)/ Offshore Oil Port
Minnesota Pipe Line Company United States 33%/(a)/ Pipeline Facility
Nautilus Pipeline Company, LLC United States 24% Natural Gas Transmission
Odyssey Pipeline LLC United States 29% Pipeline Facility
Poseidon Oil Pipeline Company LLC United States 28% Crude Oil Transportation
PRO-TEC Coating Company United States 50% Steel Processing
RTI International Metals, Inc./(b)/ United States 26% Titanium & Specialty Metals
Sakhalin Energy Investment Company Ltd. Russia 38% Oil & Gas Development
Transtar, Inc. United States 46% Transportation
USS/Kobe Steel Company United States 50% Steel Products
USS-POSCO Industries United States 50% Steel Processing
VSZ U. S. Steel, s. r.o. Slovakia 50% Tin Mill Products
Worthington Specialty Processing United States 50% Steel Processing
</TABLE>
/(a)/Represents the ownership of MAP.
/(b)/Formerly RMI Titanium Company.
Supplementary Information on Mineral Reserves (Unaudited)
Mineral Reserves (other than oil and gas)
<TABLE>
<CAPTION>
Reserves at December 31/(a)/ Production
(Million tons) 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Iron/(b)/ 738.6 754.8 716.3 15.8 16.8 15.1
Coal/(c)/ 789.7 798.8 859.5 7.3 7.5 7.1
</TABLE>
/(a)/Commercially recoverable reserves include demonstrated (measured and
indicated) quantities which are expressed in recoverable net product tons.
/(b)/In 1998, iron ore reserves decreased due to production and engineering
revisions. In 1997, iron ore reserves increased 55.3 million tons due to
lease exchanges.
/(c)/In 1998, coal reserves decreased due to production, lease activity and
engineering revisions. In 1997, coal reserves decreased 53.2 million tons
due to a lease termination.
Supplementary Information on Oil and Gas Producing Activities (Unaudited)
Capitalized Costs and Accumulated Depreciation, Depletion and Amortization/(a)/
<TABLE>
<CAPTION>
United Other Equity
(In millions) December 31 States Europe Intl. Consolidated Affiliates Total
<S> <C> <C> <C> <C> <C> <C>
1998
Capitalized costs:
Proved properties $8,366 $4,432 $1,273 $14,071 $621 $14,692
Unproved properties 400 43 105 548 7 555
------ ------ ------ ------- ---- -------
Total 8,766 4,475 1,378 14,619 628 15,247
------ ------ ------ ------- ---- -------
Accumulated depreciation,
depletion and amortization:
Proved properties 5,020 2,685 135 7,840 156 7,996
Unproved properties 91 -- 5 96 -- 96
------ ------ ------ ------- ---- -------
Total 5,111 2,685 140 7,936 156 8,092
------ ------ ------ ------- ---- -------
Net capitalized costs $3,655 $1,790 $1,238 $ 6,683 $472 $ 7,155
1997
Capitalized costs:
Proved properties $8,117 $4,384 $ 163 $12,664 $405 $13,069
Unproved properties 335 68 75 478 4 482
------ ------ ------ ------- ---- -------
Total 8,452 4,452 238 13,142 409 13,551
------ ------ ------ ------- ---- -------
Accumulated depreciation,
depletion and amortization:
Proved properties 4,915 2,517 76 7,508 127 7,635
Unproved properties 86 -- 4 90 -- 90
------ ------ ------ ------- ---- -------
Total 5,001 2,517 80 7,598 127 7,725
------ ------ ------ ------- ---- -------
Net capitalized costs $3,451 $1,935 $ 158 $ 5,544 $282 $ 5,826
</TABLE>
/(a)/Excludes assets specifically related to Other production-related earnings.
U-30
<PAGE>
Supplementary Information on Oil and Gas Producing Activities
(Unaudited) CONTINUED
Results of Operations for Oil and Gas Producing Activities,
Excluding Corporate Overhead and Interest Costs/(a)/
<TABLE>
<CAPTION>
United Other Equity
(In millions) States Europe Intl. Consolidated Affiliates Total
<S> <C> <C> <C> <C> <C> <C>
1998: Revenues:
Sales/(b)/ $ 518 $ 454 $ 71 $ 1,043 $ 28 $ 1,071
Transfers 536 -- 51 587 -- 587
------ ----- ----- ------- ------ -------
Total revenues 1,054 454 122 1,630 28 1,658
Expenses:
Production costs (295) (153) (57) (505) (8) (513)
Exploration expenses/(c)/ (179) (45) (86) (310) (5) (315)
Depreciation, depletion
and amortization/(d)/ (339) (150) (68) (557) (8) (565)
Other expenses (37) (3) (11) (51) -- (51)
------ ----- ----- ------- ------ -------
Total expenses (850) (351) (222) (1,423) (21) (1,444)
Other production-related
earnings/(e)/ 1 15 3 19 1 20
------ ----- ----- ------- ------ -------
Results before income taxes 205 118 (97) 226 8 234
Income taxes (credits) 61 22 (28) 55 3 58
------ ----- ----- ------- ------ -------
Results of operations $ 144 $ 96 $ (69) $ 171 $ 5 $ 176
1997: Revenues:
Sales/(b)/ $ 581 $ 572 $ 21 $ 1,174 $ 42 $ 1,216
Transfers 724 -- 38 762 -- 762
------ ----- ----- ------- ------ -------
Total revenues 1,305 572 59 1,936 42 1,978
Expenses:
Production costs (337) (162) (12) (511) (15) (526)
Exploration expenses (127) (34) (25) (186) (1) (187)
Depreciation, depletion
and amortization (300) (130) (16) (446) (8) (454)
Other expenses (32) (3) (13) (48) -- (48)
------ ----- ----- ------- ------ -------
Total expenses (796) (329) (66) (1,191) (24) (1,215)
Other production-related
earnings/(e)/ -- 28 1 29 1 30
------ ----- ----- ------- ------ -------
Results before income taxes 509 271 (6) 774 19 793
Income taxes (credits) 170 79 4 253 4 257
------ ----- ----- ------- ------ -------
Results of operations $ 339 $ 192 $ (10) $ 521 $ 15 $ 536
1996: Revenues:
Sales/(b)/ $ 451 $ 736 $ 24 $ 1,211 $ 45 $ 1,256
Transfers 858 -- 43 901 -- 901
------ ----- ----- ------- ------ -------
Total revenues 1,309 736 67 2,112 45 2,157
Expenses:
Production costs/(f)/ (340) (202) (12) (554) (14) (568)
Exploration expenses (97) (24) (24) (145) (3) (148)
Depreciation, depletion
and amortization (302) (160) (14) (476) (12) (488)
Other expenses (31) (5) (15) (51) -- (51)
------ ----- ----- ------- ------ -------
Total expenses (770) (391) (65) (1,226) (29) (1,255)
Other production-related
earnings/(e)/ 1 28 -- 29 1 30
------ ----- ----- ------- ------ -------
Results before income taxes 540 373 2 915 17 932
Income taxes (credits) 192 115 (1) 306 7 313
------ ----- ----- ------- ------ -------
Results of operations $ 348 $ 258 $ 3 $ 609 $ 10 $ 619
</TABLE>
/(a)/Includes the results of using derivative instruments to
manage commodity and foreign currency risks.
/(b)/Includes net gains on asset dispositions and natural
gas contract settlements, as of December 31, 1998, 1997
and 1996, of $43 million, $7 million and $25 million,
respectively.
/(c)/Includes international property impairments and suspended
exploration well write-offs of $73 million.
/(d)/Includes international property impairments of $10 million.
/(e)/Includes revenues, net of associated costs, from third-party
activities that are an integral part of USX's production
operations. Third-party activities may include the processing
and/or transportation of third-party production, and the
purchase and subsequent resale of gas utilized in reservoir
management.
/(f)/Includes domestic production tax charges of $11 million
related to prior periods.
U-31
<PAGE>
Supplementary Information on Oil and Gas Producing Activities
(Unaudited) CONTINUED
Costs Incurred for Property Acquisition, Exploration and
Development -- Including Capital Expenditures
<TABLE>
<CAPTION>
United Other Equity
(In millions) States Europe Intl. Consolidated Affiliates Total
<S> <C> <C> <C> <C> <C> <C>
1998: Property acquisition:
Proved $ 3 $ 3 $ 1,051 $ 1,057 $ -- $ 1,057
Unproved 82 -- 57 139 -- 139
Exploration 217 39 75 331 11 342
Development 431 40 46 517 170 687
1997: Property acquisition:
Proved $ 16 $ -- $ -- $ 16 $ -- $ 16
Unproved 50 -- -- 50 -- 50
Exploration 170 53 43 266 3 269
Development 477 67 27 571 142 713
1996: Property acquisition:
Proved $ 36 $ -- $ -- $ 36 $ -- $ 36
Unproved 44 -- 2 46 19 65
Exploration 134 26 34 194 1 195
Development 268 31 15 314 3 317
</TABLE>
Estimated Quantities of Proved Oil and Gas Reserves
The following estimates of net reserves have been determined
by deducting royalties of various kinds from USX's gross reserves.
The reserve estimates are believed to be reasonable and consistent
with presently known physical data concerning size and character of
the reservoirs and are subject to change as additional knowledge
concerning the reservoirs becomes available. The estimates include
only such reserves as can reasonably be classified as proved; they
do not include reserves which may be found by extension of proved
areas or reserves recoverable by secondary or tertiary recovery
methods unless these methods are in operation and are showing
successful results. Undeveloped reserves consist of reserves to be
recovered from future wells on undrilled acreage or from existing
wells where relatively major expenditures will be required to
realize production. Liquid hydrocarbon production amounts for
international operations principally reflect tanker liftings of
equity production. USX did not have any quantities of oil and gas
reserves subject to long-term supply agreements with foreign
governments or authorities in which USX acts as producer.
<TABLE>
<CAPTION>
United Other Equity
(Millions of barrels) States Europe Intl. Consolidated Affiliates Total
<S> <C> <C> <C> <C> <C> <C>
Liquid Hydrocarbons
Proved developed and
undeveloped reserves:
Beginning of year -- 1996 558 183 23 764 -- 764
Purchase of reserves in place 26 -- -- 26 -- 26
Revisions of previous estimates 3 (1) 3 5 -- 5
Improved recovery 19 -- -- 19 -- 19
Extensions, discoveries and
other additions 54 13 15 82 -- 82
Production (45) (18) (3) (66) -- (66)
Sales of reserves in place (26) -- (12) (38) -- (38)
--- --- --- --- --- -----
End of year -- 1996 589 177 26 792 -- 792
Purchase of reserves in place 2 -- -- 2 -- 2
Revisions of previous estimates 9 (1) 3 11 -- 11
Improved recovery 22 -- -- 22 -- 22
Extensions, discoveries and
other additions 31 -- -- 31 82 113
Production (42) (15) (3) (60) -- (60)
Sales of reserves in place (2) -- -- (2) -- (2)
--- --- --- --- --- -----
End of year -- 1997 609 161 26 796 82 878
Purchase of reserves in place 1 -- 156/(a)/ 157 -- 157
Revisions of previous estimates (1) (28) 1 (28) (2) (30)
Improved recovery 3 -- -- 3 -- 3
Extensions, discoveries and
other additions 10 4 18 32 -- 32
Production (49) (15) (7) (71) -- (71)
Sales of reserves in place (5) -- -- (5) -- (5)
--- --- --- --- --- -----
End of year -- 1998 568 122 194 884 80 964
Proved developed reserves:
Beginning of year -- 1996 470 182 21 673 -- 673
End of year -- 1996 443 163 11 617 -- 617
End of year -- 1997 486 161 12 659 -- 659
End of year -- 1998 489 119 67 675 -- 675
</TABLE>
/(a)/ Represents reserves related to the acquisition of Tarragon
Oil and Gas Limited in August 1998.
U-32
<PAGE>
<TABLE>
<CAPTION>
Supplementary Information on Oil and Gas Producing Activities (Unaudited) CONTINUED
Estimated Quantities of Proved Oil and Gas Reserves
(continued)
United Other Equity
(Billions of cubic feet) States Europe Intl. Consolidated Affiliates Total
<S> <C> <C> <C> <C> <C> <C>
Natural Gas
Proved developed and
undeveloped reserves:
Beginning of year -- 1996 2,210 1,344 35 3,589 131 3,720
Purchase of reserves in place 10 -- -- 10 -- 10
Revisions of previous estimates (27) 26 (14) (15) 9 (6)
Improved recovery 10 -- -- 10 -- 10
Extensions, discoveries and
other additions 308 2 5 315 8 323
Production (247) (166) (5) (418) (16) (434)
Sales of reserves in place (25) (28) -- (53) -- (53)
----- ----- --- ----- --- -----
End of year -- 1996 2,239 1,178 21 3,438 132 3,570
Purchase of reserves in place 31 -- -- 31 -- 31
Revisions of previous estimates (39) 9 6 (24) (6) (30)
Improved recovery -- -- -- -- -- --
Extensions, discoveries and
other additions 262 -- -- 262 -- 262
Production (264) (139) (4) (407) (15) (422)
Sales of reserves in place (9) -- -- (9) -- (9)
----- ----- --- ----- --- -----
End of year -- 1997 2,220 1,048 23 3,291 111 3,402
Purchase of reserves in place 10 -- 782/(a)/ -- 792 792
Revisions of previous estimates (16) 10 (1) (7) 5 (2)
Improved recovery -- -- -- -- -- --
Extensions, discoveries and
other additions 238 32 55 325 5 330
Production (272) (124) (29) (425) (11) (436)
Sales of reserves in place (29) -- -- (29) -- (29)
----- ----- --- ----- --- -----
End of year -- 1998 2,151 966 830 3,947 110 4,057
Proved developed reserves:
Beginning of year -- 1996 1,517 1,300 35 2,852 105 2,957
End of year -- 1996 1,720 1,133 16 2,869 100 2,969
End of year -- 1997 1,702 1,024 19 2,745 78 2,823
End of year -- 1998 1,678 909 534 3,121 76 3,197
</TABLE>
/(a)/ Represents reserves related to the acquisition of Tarragon
Oil and Gas Limited in August 1998.
Standardized Measure of Discounted Future Net Cash Flows and
Changes Therein Relating to Proved Oil and Gas Reserves
Estimated discounted future net cash flows and changes
therein were determined in accordance with Statement of Financial
Accounting Standards No. 69. Certain information concerning the
assumptions used in computing the valuation of proved reserves and
their inherent limitations are discussed below. USX believes such
information is essential for a proper understanding and assessment
of the data presented.
Future cash inflows are computed by applying year-end
prices of oil and gas relating to USX's proved reserves to the
year-end quantities of those reserves. Future price changes are
considered only to the extent provided by contractual arrangements
in existence at year-end.
The assumptions used to compute the proved reserve valuation
do not necessarily reflect USX's expectations of actual revenues to
be derived from those reserves nor their present worth. Assigning
monetary values to the estimated quantities of reserves, described
on the preceding page, does not reduce the subjective and ever-
changing nature of such reserve estimates.
Additional subjectivity occurs when determining present
values because the rate of producing the reserves must be
estimated. In addition to uncertainties inherent in predicting the
future, variations from the expected production rate also could
result directly or indirectly from factors outside of USX's
control, such as unintentional delays in development, environmental
concerns, changes in prices or regulatory controls.
The reserve valuation assumes that all reserves will be
disposed of by production. However, if reserves are sold in place
or subjected to participation by foreign governments, additional
economic considerations also could affect the amount of cash
eventually realized.
Future development and production costs, including abandonment
and dismantlement costs, are computed by estimating the
expenditures to be incurred in developing and producing the proved
oil and gas reserves at the end of the year, based on year-end
costs and assuming continuation of existing economic conditions.
Future income tax expenses are computed by applying the
appropriate year-end statutory tax rates, with consideration of
future tax rates already legislated, to the future pretax net cash
flows relating to USX's proved oil and gas reserves. Permanent
differences in oil and gas related tax credits and allowances are
recognized.
Discount was derived by using a discount rate of 10 percent a
year to reflect the timing of the future net cash flows relating to
proved oil and gas reserves.
U-33
<PAGE>
<TABLE>
<CAPTION>
Supplementary Information on Oil and Gas Producing Activities
(Unaudited) CONTINUED
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves (continued)
United Other Equity
(In millions) States Europe Intl. Consolidated Affiliates Total
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998:
Future cash inflows $ 8,615 $ 3,850 $2,686 $15,151 $ 1,036 $ 16,187
Future production costs (3,781) (2,240) (950) (6,971) (586) (7,557)
Future development costs (585) (130) (323) (1,038) (124) (1,162)
Future income tax expenses (850) (630) (542) (2,022) (45) (2,067)
------- ------- ------ ------- ------- --------
Future net cash flows 3,399 850 871 5,120 281 5,401
10% annual discount for
estimated timing of cash flows (1,498) (256) (392) (2,146) (136) (2,282)
------- ------- ------ ------- ------- --------
Standardized measure of
discounted future net cash
flows relating to proved oil
and gas reserves $ 1,901 $ 594 $ 479 $ 2,974 $ 145 $ 3,119
December 31, 1997:
Future cash inflows $13,902 $ 6,189 $ 484 $20,575 $ 1,714 $ 22,289
Future production costs (4,739) (2,310) (172) (7,221) (643) (7,864)
Future development costs (702) (162) (18) (882) (200) (1,082)
Future income tax expenses (2,413) (1,371) (62) (3,846) (232) (4,078)
------- ------- ------ ------- ------- --------
Future net cash flows 6,048 2,346 232 8,626 639 9,265
10% annual discount for
estimated timing of cash flows (2,696) (1,011) (52) (3,759) (367) (4,126)
------- ------- ------ ------- ------- --------
Standardized measure of
discounted future net cash
flows relating to proved oil
and gas reserves $ 3,352 $ 1,335 $ 180 $ 4,867 $ 272 $ 5,139
December 31, 1996:
Future cash inflows $19,640 $ 8,177 $ 631 $28,448 $ 390 $ 28,838
Future production costs (5,442) (2,454) (177) (8,073) (153) (8,226)
Future development costs (762) (179) (45) (986) (35) (1,021)
Future income tax expenses (4,151) (2,256) (115) (6,522) (78) (6,600)
------- ------- ------ ------- ------- --------
Future net cash flows 9,285 3,288 294 12,867 124 12,991
10% annual discount for
estimated timing of cash flows (4,232) (1,033) (69) (5,334) (40) (5,374)
------- ------- ------ ------- ------- --------
Standardized measure of
discounted future net cash
flows relating to proved oil
and gas reserves $ 5,053 $ 2,255 $ 225 $ 7,533 $ 84 $ 7,617
</TABLE>
<TABLE>
<CAPTION>
Summary of Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves
Consolidated Equity Affiliates Total
--------------------------- -------------------------- -----------------------------
(In millions) 1998 1997 1996 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales and transfers of
oil and gas produced,
net of production costs $(1,125) $(1,424) $(1,558) $ (20) $ (28) $ (31) $(1,145) $(1,452) $(1,589)
Net changes in prices and
production costs related
to future production (3,662) (3,677) 3,651 (372) (36) 37 (4,034) (3,713) 3,688
Extensions, discoveries and
improved recovery, less
related costs 284 458 1,572 4 263 9 288 721 1,581
Development costs incurred
during the period 517 571 314 170 142 3 687 713 317
Changes in estimated future
development costs (306) (302) (316) (105) (128) (10) (411) (430) (326)
Revisions of previous
quantity estimates (110) 43 15 (2) (5) 9 (112) 38 24
Net changes in purchases
and sales of minerals
in place 636 14 (58) -- -- -- 636 14 (58)
Accretion of discount 639 1,065 658 39 13 11 678 1,078 669
Net change in income taxes 869 1,350 (1,342) 57 (29) (11) 926 1,321 (1,353)
Other 365 (764) (365) 102 (4) (8) 467 (768) (373)
Net change for the year (1,893) (2,666) 2,571 (127) 188 9 (2,020) (2,478) 2,580
Beginning of year 4,867 7,533 4,962 272 84 75 5,139 7,617 5,037
End of year $ 2,974 $ 4,867 $ 7,533 $ 145 $ 272 $ 84 $ 3,119 $ 5,139 $ 7,617
</TABLE>
U-34
<PAGE>
Five-Year Operating Summary -- Marathon Group
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Liquid Hydrocarbon Production (thousands of barrels per day)
United States (by region)
Alaska -- -- 8 9 9
Gulf Coast 55 29 30 33 12
Southern 6 8 9 11 12
Central 4 5 4 8 9
Mid-Continent Yates 23 25 25 24 23
Mid-Continent Other 21 21 20 19 18
Rocky Mountain 26 27 26 28 27
------ ------ ------ ------ ------
Total United States 135 115 122 132 110
------ ------ ------ ------ ------
International
Abu Dhabi -- -- -- -- 1
Canada 6 -- -- -- --
Egypt 8 8 8 5 7
Indonesia -- -- -- 10 3
Gabon 5 -- -- -- --
Norway 1 2 3 2 2
Tunisia -- -- -- 2 3
United Kingdom 41 39 48 54 46
------ ------ ------ ------ -------
Total International 61 49 59 73 62
------ ------ ------ ------ -------
Total 196 164 181 205 172
Natural gas liquids included in above 17 17 17 17 15
Net Natural Gas Production (millions of cubic feet per day)
United States (by region)
Alaska 144 151 145 133 123
Gulf Coast 84 78 88 94 79
Southern 208 189 161 142 134
Central 117 119 109 105 110
Mid-Continent 125 125 122 112 89
Rocky Mountain 66 60 51 48 39
------ ------ ------ ------ -------
Total United States 744 722 676 634 574
------ ------ ------ ------ -------
International
Canada 65 -- -- -- --
Egypt 16 11 13 15 17
Ireland 168 228 259 269 263
Norway 27 54 87 81 81
United Kingdom -- equity 165 130 140 98 39
-- other/(a)/ 23 32 32 35 --
------ ------ ------ ------ -------
Total International 464 455 531 498 400
------ ------ ------ ------ -------
Consolidated 1,208 1,177 1,207 1,132 974
Equity affiliate/(b)/ 33 42 45 44 40
------ ------ ------ ------ -------
Total 1,241 1,219 1,252 1,176 1,014
Average Sales Prices
Liquid Hydrocarbons (dollars per barrel)/(c)/
United States $10.42 $16.88 $18.58 $14.59 $13.53
International 12.24 18.77 20.34 16.66 15.61
Natural Gas (dollars per thousand cubic feet)/(c)/
United States $1.79 $2.20 $2.09 $1.63 $1.94
International 1.94 2.00 1.97 1.80 1.58
Net Proved Reserves at year-end (developed and undeveloped)
Liquid Hydrocarbons (millions of barrels)
United States 568 609 589 558 553
International 316 187 203 206 242
------ ------ ------ ------ -------
Consolidated 884 796 792 764 795
Equity affiliate/(d)/ 80 82 -- -- --
------ ------ ------ ------ -------
Total 964 878 792 764 795
Developed reserves as % of total net reserves 70% 75% 78% 88% 90%
Natural Gas (billions of cubic feet)
United States 2,151 2,220 2,239 2,210 2,127
International 1,796 1,071 1,199 1,379 1,527
------ ------ ------ ------ -------
Consolidated 3,947 3,291 3,438 3,589 3,654
Equity affiliate/(b)/ 110 111 132 131 153
------ ------ ------ ------ -------
Total 4,057 3,402 3,570 3,720 3,807
Developed reserves as % of total net reserves 79% 83% 83% 80% 79%
</TABLE>
/(a)/ Represents gas acquired for injection and subsequent
resale.
/(b)/ Represents Marathon's equity interest in CLAM Petroleum
B.V.
/(c)/ Prices exclude gains/losses from hedging activities.
/(d)/ Represents Marathon's equity interest in Sakhalin Energy
Investment Company Ltd.
U-35
<PAGE>
Five-Year Operating Summary -- Marathon Group CONTINUED
<TABLE>
<CAPTION>
1998/(a)/ 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
U.S. Refinery Operations (thousands of barrels per day)
In-use crude oil capacity at year-end 935 575 570 570 570
Refinery runs -- crude oil refined 894 525 511 503 491
-- other charge and blend stocks 127 99 96 94 107
In-use crude oil capacity utilization rate 96% 92% 90% 88% 86%
Source of Crude Processed (thousands of barrels per day)
United States 317 202 229 254 218
Europe 15 10 12 6 31
Middle East and Africa 394 241 193 183 171
Other International 168 72 79 58 70
------- ------- ------- ------- -------
Total 894 525 513 501 490
Refined Product Yields (thousands of barrels per day)
Gasoline 545 353 345 339 340
Distillates 270 154 155 146 146
Propane 21 13 13 12 13
Feedstocks and special products 64 36 35 38 33
Heavy fuel oil 49 35 30 31 38
Asphalt 68 39 36 36 30
------- ------- ------- ------- -------
Total 1,017 630 614 602 600
Refined Products Yields (% breakdown)
Gasoline 54% 56% 56% 57% 57%
Distillates 27 24 25 24 24
Other products 19 20 19 19 19
------- ------- ------- ------- -------
Total 100% 100% 100% 100% 100%
U.S. Refined Product Sales (thousands of barrels per day)
Gasoline 671 452 468 445 443
Distillates 318 198 192 180 183
Propane 21 12 12 12 16
Feedstocks and special products 67 40 37 44 32
Heavy fuel oil 49 34 31 31 38
Asphalt 72 39 35 35 31
------- ------- ------- ------- -------
Total 1,198 775 775 747 743
Matching buy/sell volumes included in above 39 51 71 47 73
Refined Products Sales by Class of Trade (as a % of total sales)
Wholesale -- independent private-brand
marketers and consumers 65% 61% 62% 61% 62%
Marathon and Ashland brand jobbers and dealers 11 13 13 13 13
Speedway SuperAmerica retail outlets 24 26 25 26 25
------- ------- ------- ------- -------
Total 100% 100% 100% 100% 100%
Refined Products (dollars per barrel)
Average sales price $21.43 $26.38 $27.43 $23.80 $ 22.75
Average cost of crude oil throughput 13.02 19.00 21.94 18.09 16.59
Petroleum Inventories at year-end (thousands of barrels)
Crude oil, raw materials and natural gas liquids 35,630 19,351 20,047 22,224 22,987
Refined products 32,334 20,598 21,283 22,102 23,657
U.S. Refined Product Marketing Outlets at year-end
MAP operated terminals 88 51 51 51 51
Retail -- Marathon and Ashland brand outlets 3,117 2,465 2,392 2,380 2,356
-- Speedway SuperAmerica outlets 2,257 1,544 1,592 1,627 1,659
Pipelines (miles of common carrier pipelines)/(b)/
Crude Oil -- gathering lines 2,827 1,003 1,052 1,115 1,115
-- trunklines 4,859 2,665 2,665 2,666 2,672
Products -- trunklines 2,861 2,310 2,310 2,311 2,311
------- ------- ------- ------- -------
Total 10,547 5,978 6,027 6,092 6,098
Pipeline Barrels Handled (millions)/(c)/
Crude Oil -- gathering lines 47.8 43.9 43.2 43.8 43.4
-- trunklines 571.9 369.6 378.7 371.3 353.0
Products -- trunklines 329.7 262.4 274.8 252.3 282.2
------- ------- ------- ------- -------
Total 949.4 675.9 696.7 667.4 678.6
River Operations
Barges -- owned/leased 169 -- -- -- --
Boats -- owned/leased 8 -- -- -- --
</TABLE>
/(a)/ 1998 statistics include 100% of MAP and should be
considered when compared to prior periods.
/(b)/ Pipelines for downstream operations also include non-common
carrier, leased and equity affiliates.
/(c)/ Pipeline barrels handled on owned common carrier pipelines,
excluding equity affiliates.
U-36
<PAGE>
Five-Year Operating Summary -- U. S. Steel Group
<TABLE>
<CAPTION>
(Thousands of net tons, unless otherwise noted) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Raw Steel Production
Gary, IN 6,468 7,428 6,840 7,163 6,768
Mon Valley, PA 2,594 2,561 2,746 2,740 2,669
Fairfield, AL 2,152 2,361 1,862 2,260 2,240
------ ------ ------ ------ ------
Total 11,214 12,350 11,448 12,163 11,677
Raw Steel Capability
Continuous cast 12,800 12,800 12,800 12,500 11,990
Total production as % of total capability 87.6 96.5 89.4 97.3 97.4
Hot Metal Production 9,743 10,591 9,716 10,521 10,328
Coke Production/(a)/ 4,835 5,757 6,777 6,770 6,777
Iron Ore Pellets -- Minntac, MN
Shipments 15,446 16,319 14,962 15,218 16,174
Coal Production 8,150 7,528 7,283 7,509 7,424
Coal Shipments 7,670 7,811 7,117 7,502 7,698
Steel Shipments by Product
Sheet and semi-finished steel products 7,608 8,170 8,677 8,721 7,988
Tubular, plate and tin mill products 3,078 3,473 2,695 2,657 2,580
------ ------ ------ ------ ------
Total 10,686 11,643 11,372 11,378 10,568
Total as % of domestic steel industry 10.3 10.9 11.3 11.7 11.1
Steel Shipments by Market
Steel service centers 2,563 2,746 2,831 2,564 2,780
Transportation 1,785 1,758 1,721 1,636 1,952
Further conversion:
Joint ventures 1,473 1,568 1,542 1,332 1,308
Trade customers 1,140 1,378 1,227 1,084 1,058
Containers 794 856 874 857 962
Construction 987 994 865 671 722
Oil, gas and petrochemicals 509 810 746 748 367
Export 382 453 493 1,515 355
All other 1,053 1,080 1,073 971 1,064
------ ------ ------ ------ ------
Total 10,686 11,643 11,372 11,378 10,568
</TABLE>
/(a)/ The reduction in coke production in 1997 and 1998 reflected
U. S. Steel's entry into a strategic partnership with two
limited partners on June 1, 1997, to acquire an interest in
three coke batteries at its Clairton (Pa.) Works.
U-37
<PAGE>
<TABLE>
<CAPTION>
Five-Year Financial Summary
(Dollars in millions, except as noted) 1998/(a)/ 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Statement of Operations
Revenues $ 28,335 $ 22,588 $ 22,977 $ 20,413 $ 19,055
Income from operations 1,517 1,705 1,779 726 1,174
Includes:
Inventory market valuation charges (credits) 267 284 (209) (70) (160)
Gain on ownership change in MAP 245 -- -- -- --
Impairment of long-lived assets -- -- -- 675 --
Income from continuing operations $ 674 $ 908 $ 946 $ 217 $ 532
Income (loss) from discontinued operations -- 80 6 4 (31)
Extraordinary loss -- -- (9) (7) --
-------- -------- -------- -------- --------
Net Income $ 674 $ 988 $ 943 $ 214 $ 501
Applicable to Marathon Stock
Income (loss) before extraordinary loss $ 310 $ 456 $ 671 $ (87) $ 315
Income (loss) before extraordinary loss
per share -- basic (in dollars) 1.06 1.59 2.33 (.31) 1.10
-- diluted (in dollars) 1.05 1.58 2.31 (.31) 1.10
Net income (loss) 310 456 664 (92) 315
Net income (loss) per share -- basic (in dollars) 1.06 1.59 2.31 (.33) 1.10
-- diluted (in dollars) 1.05 1.58 2.29 (.33) 1.10
Dividends paid per share (in dollars) .84 .76 .70 .68 .68
Applicable to Steel Stock
Income before extraordinary loss $ 355 $ 449 $ 253 $ 279 $ 176
Income before extraordinary loss
per share -- basic (in dollars) 4.05 5.24 3.00 3.53 2.35
-- diluted (in dollars) 3.92 4.88 2.97 3.43 2.33
Net income 355 449 251 277 176
Net income per share -- basic (in dollars) 4.05 5.24 2.98 3.51 2.35
-- diluted (in dollars) 3.92 4.88 2.95 3.41 2.33
Dividends paid per share (in dollars) 1.00 1.00 1.00 1.00 1.00
Balance Sheet Position at year-end
Cash and cash equivalents $ 146 $ 54 $ 55 $ 131 $ 48
Total assets 21,133 17,284 16,980 16,743 17,517
Capitalization:
Notes payable $ 145 $ 121 $ 81 $ 40 $ 1
Total long-term debt 3,991 3,403 4,212 4,937 5,599
Minority interest in MAP 1,590 -- -- -- --
Preferred stock of subsidiary and
trust preferred securities 432 432 250 250 250
Redeemable Delhi Stock -- 195 -- -- --
Preferred stock 3 3 7 7 112
Common stockholders' equity 6,402 5,397 5,015 4,321 4,190
-------- -------- -------- -------- --------
Total capitalization $ 12,563 $ 9,551 $ 9,565 $ 9,555 $ 10,152
% of total debt to capitalization/(b)/ 36.4 41.4 47.5 54.7 57.6
Cash Flow Data
Net cash from operating activities $ 1,803 $ 1,458 $ 1,649 $ 1,632 $ 817
Capital expenditures 1,580 1,373 1,168 1,016 1,033
Disposal of assets 86 481 443 157 293
Dividends paid 342 316 307 295 301
Employee Data
Total employment costs/(c)(d)/ $ 2,372 $ 2,289 $ 2,179 $ 2,186 $ 2,281
Average number of employees/(c)(d)/ 44,860 41,620 41,553 42,133 42,596
Number of pensioners at year-end 95,429 97,051 99,713 102,449 105,227
</TABLE>
/(a)/ 1998 statistics, other than employee data, include 100% of MAP, which
should be considered when making comparisons to prior periods.
/(b)/ Total debt represents the sum of notes payable, total long-term debt and
preferred stock of subsidiary and trust preferred securities.
/(c)/ Excludes the Delhi Companies sold in 1997.
/(d)/ Data for 1998 includes Ashland employees from the date of their payroll
transfer to MAP, which occurred at various times throughout 1998. These
employees were contracted to MAP in 1998, prior to their payroll
transfer.
U-38
<PAGE>
Management's Discussion and Analysis
USX Corporation ("USX") is a diversified company engaged
primarily in the energy business through its Marathon Group, and in
the steel business through its U. S. Steel Group.
Effective October 31, 1997, USX sold Delhi Gas Pipeline
Corporation and other subsidiaries of USX that comprised all of the
USX -- Delhi Group ("Delhi Companies"). On January 26, 1998, USX
used the $195 million net proceeds from the sale to redeem all of
the 9.45 million outstanding shares of USX-Delhi Group Common
Stock. For additional information, see Note 5 to the USX
Consolidated Financial Statements.
During 1997, Marathon Oil Company ("Marathon") and Ashland Inc.
("Ashland") agreed to combine the major elements of their refining,
marketing and transportation ("RM&T") operations. On January 1,
1998, Marathon transferred certain RM&T net assets to Marathon
Ashland Petroleum LLC ("MAP"), a new consolidated subsidiary. Also
on January 1, 1998, Marathon acquired certain RM&T net assets from
Ashland in exchange for a 38 percent interest in MAP. Financial
measures such as revenues, income from operations and capital
expenditures in 1998 include 100 percent of MAP and are not
comparable to prior period amounts. Income from continuing
operations, net income and related per share amounts for 1998 are
net of the minority interest. For further discussion of MAP and pro
forma information, see Note 3 to the USX Consolidated Financial
Statements.
On August 11, 1998, Marathon acquired Tarragon Oil and Gas
Limited ("Tarragon"), a Canadian oil and gas exploration and
production company. The purchase price included $686 million in
cash payments, the assumption of $345 million in debt and the
issuance of Exchangeable Shares of an indirect Canadian subsidiary
of Marathon valued at $29 million. The Exchangeable Shares are
exchangeable at any time on a one-for-one basis for shares of USX
-- Marathon Group Common Stock ("Marathon Stock"). On November 4,
1998, USX sold 17 million shares of Marathon Stock. The proceeds to
USX of $528 million, were used to reduce indebtedness incurred to
fund the Tarragon acquisition. Financial measures such as revenues,
income from operations and capital expenditures in 1998 include
operations of Marathon Canada Limited, formerly known as Tarragon,
commencing August 12, 1998. For further discussion of Tarragon and
pro forma information, see Note 3 to the USX Consolidated Financial
Statements.
Management's Discussion and Analysis of USX Consolidated
Financial Statements provides certain information about the
Marathon and U. S. Steel Groups, particularly in Management's
Discussion and Analysis of Operations by Group. More expansive
Group information is provided in Management's Discussion and
Analysis of the Marathon Group and U. S. Steel Group, which are
included in the USX 1998 Form 10-K. Management's Discussion and
Analysis should be read in conjunction with the USX Consolidated
Financial Statements and Notes to USX Consolidated Financial
Statements.
Certain sections of Management's Discussion and Analysis include
forward-looking statements concerning trends or events potentially
affecting USX. These statements typically contain words such as
"anticipates", "believes", "estimates", "expects" or similar words
indicating that future outcomes are uncertain. In accordance with
"safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995, these statements are accompanied by cautionary
language identifying important factors, though not necessarily all
such factors, that could cause future outcomes to differ materially
from those set forth in the forward-looking statements. For
additional risk factors affecting the businesses of USX, see
Supplementary Data -- Disclosures About Forward-Looking Statements
in the USX 1998 Form 10-K.
U-39
<PAGE>
Management's Discussion and Analysis CONTINUED
Management's Discussion and Analysis of Income
Revenues for each of the last three years are summarized in the
following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues/(a)(b)/
Marathon Group $22,075 $15,754 $16,394
U. S. Steel Group 6,283 6,941 6,670
Eliminations (23) (107) (87)
------- ------- -------
Total USX Corporation revenues 28,335 22,588 22,977
Less:
Matching crude oil and refined product buy/sell transactions/(c)/ 3,948 2,436 2,912
Consumer excise taxes on petroleum products and merchandise/(c)/ 3,581 2,736 2,768
------- ------- -------
Revenues adjusted to exclude above items $20,806 $17,416 $17,297
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/Consists of sales, dividend and affiliate income, gain on
ownership change in MAP, net gains on disposal of assets, gain
on affiliate stock offering and other income.
/(b)/Effective October 31, 1997, USX sold the Delhi Companies.
Excludes revenues of the Delhi Companies, which have been
reclassified as discontinued operations for 1997 and 1996.
/(c)/Included in both revenues and costs and expenses for the
Marathon Group and USX Consolidated, resulting in no effect on
income.
Adjusted revenues increased by $3,390 million in 1998 as
compared with 1997, reflecting a 37 percent increase for the
Marathon Group, partially offset by a 9 percent decrease for the U.
S. Steel Group. Adjusted revenues increased by $119 million in 1997
as compared with 1996, reflecting a 4 percent increase for the U.
S. Steel Group, partially offset by a 1 percent decrease for the
Marathon Group. For further discussion, see Management's Discussion
and Analysis of Operations by Group, herein.
Income from operations for each of the last three years are
summarized in the following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reportable segments
Marathon Group
Exploration & production $ 278 $ 773 $ 900
Refining, marketing & transportation 896 563 249
Other energy related businesses 33 48 57
------ ------ ------
Income for reportable segments--Marathon Group 1,207 1,384 1,206
U. S. Steel Group
U. S. Steel Operations 330 618 248
------ ------ ------
Income for reportable segments--USX Corporation 1,537 2,002 1,454
Items not allocated to reportable segments:
Marathon Group (269) (452) 90
U. S. Steel Group 249 155 235
------ ------ ------
Total income from operations--USX Corporation $1,517 $1,705 $1,779
</TABLE>
For further discussion, see Management's Discussion and Analysis
of Operations by Group, herein.
U-40
<PAGE>
Management's Discussion and Analysis CONTINUED
Net interest and other financial costs for each of the last
three years are summarized in the following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Interest and other financial income $ 39 $ 5 $ 7
Interest and other financial costs 318 352 428
----- ----- -----
Net interest and other financial costs 279 347 421
Less:
Favorable (unfavorable) adjustment to
carrying value of Indexed Debt/(a)/ 44 10 (6)
----- ----- -----
Net interest and other financial costs
adjusted to exclude above item $ 323 $ 357 $ 415
</TABLE>
/(a)/ In December 1996, USX issued $117 million in aggregate
principal amount of 6-3/4% Notes Due February 1, 2000
("Indexed Debt"), mandatorily exchangeable at maturity for
common stock of RTI International Metals, Inc. (formerly RMI
Titanium Company) ("RTI") or for the equivalent amount of
cash, at USX's option. The carrying value of indexed debt is
adjusted quarterly to settlement value based on changes in
the value of RTI common stock. Any resulting adjustment is
charged or credited to income and included in interest and
other financial costs. At December 31, 1998, the adjusted
carrying value of Indexed Debt was $69 million. USX's 26
percent interest in RTI continues to be accounted for under
the equity method.
Excluding the effect of the adjustment to the carrying value of
Indexed Debt, net interest and other financial costs decreased by
$34 million in 1998 as compared with 1997, and by $58 million in
1997 as compared with 1996. The decrease in 1998 was primarily due
to increased interest income levels and increased capitalized
interest on Exploration & Production projects, partially offset by
increased interest costs resulting from higher average debt levels.
The decrease in 1997 was primarily due to decreased interest costs
resulting from lower average debt levels and increased capitalized
interest on Exploration & Production projects. For additional
information, see Note 7 to the USX Consolidated Financial
Statements.
The provision for estimated income taxes was $315 million in
1998, compared with $450 million in 1997 and $412 million in 1996.
The decrease in 1998 was primarily due to a decline in income from
continuing operations. The 1998 provision included $33 million of
favorable adjustments related to foreign operations. Provisions
included credits other than foreign tax credits of $24 million and
$48 million in 1997 and 1996, respectively (primarily
nonconventional source fuel credits). A significant portion of the
reduction in these credits in 1997 as compared with 1996 resulted
from USX's entry into a strategic partnership with two limited
partners to acquire an interest in three coke batteries at its U.
S. Steel Group's Clairton (Pa.) Works. For reconciliation of the
federal statutory rate to total provisions on income from
continuing operations, see Note 13 to the USX Consolidated
Financial Statements.
Extraordinary loss in 1996 reflected unfavorable aftertax
effects of early extinguishment of debt. In December 1996, USX
irrevocably called for redemption on January 30, 1997, 8-1/2%
Sinking Fund Debentures Due 2006, with a carrying value of $120
million, resulting in an extraordinary loss of $9 million, net of
an income tax benefit of $5 million.
Income from discontinued operations reflects aftertax income of
the Delhi Group. Income in 1997 included an $81 million gain on
disposal of the Delhi Companies (net of income taxes). For
additional discussion, see Note 5 to the USX Consolidated Financial
Statements.
Net income was $674 million in 1998, $988 million in 1997 and
$943 million in 1996. Excluding the gain on change of ownership in
MAP in 1998, the effects of the $81 million gain on disposal
related to discontinued operations in 1997, and adjustments to the
inventory market valuation reserve in each of 1998, 1997 and 1996,
net income decreased by $462 million in 1998 as compared with 1997,
and increased by $275 million in 1997 as compared with 1996.
Noncash credit from exchange of preferred stock was $10 million,
or 12 cents per share of Steel Stock, in 1997. In May 1997, USX
exchanged 3.9 million 6.75% Convertible Quarterly Income Preferred
Securities ("Trust Preferred Securities") of USX Capital Trust I
for an equivalent number of shares of its outstanding 6.50%
Cumulative Convertible Preferred Stock ("6.50% Preferred Stock").
The
U-41
<PAGE>
Management's Discussion and Analysis CONTINUED
$10 million noncash credit reflects the difference between the
carrying value of the 6.50% Preferred Stock and the fair value of
the Trust Preferred Securities at the date of the exchange. See
Note 25 to the USX Consolidated Financial Statements for additional
discussion.
Management's Discussion and Analysis of Financial Condition, Cash Flows and
Liquidity
Current assets increased by $734 million from year-end 1997,
primarily reflecting increased receivables and inventories
resulting from the addition of Ashland RM&T receivables and
inventories. These additions were partially offset by general
declines in receivables and inventories resulting primarily from
lower commodity prices, and lower operating levels for the U. S.
Steel Group. Inventories were reduced by a $267 million increase to
the inventory market valuation reserve reflecting lower year-end
commodity prices.
Current liabilities increased by $96 million from year-end 1997,
primarily reflecting increased payables resulting from the addition
of Ashland RM&T payables, partially offset by a decrease in long-
term debt due within one year.
Net property, plant and equipment increased by $2,867 million
from year-end 1997, primarily reflecting the addition of Ashland's
RM&T assets and the acquisition of Tarragon.
Total long-term debt and notes payable increased by $612 million
from year-end 1997, mainly reflecting borrowings against a
revolving credit agreement to fund the acquisition of Tarragon in
August 1998. At December 31, 1998, USX had $700 million of
borrowings against its long-term revolving credit agreement of
$2,350 million.
Minority interest in Marathon Ashland Petroleum LLC represents
Ashland's 38% interest in MAP.
Stockholders' equity increased by $1,005 million from year-end
1997 mainly reflecting 1998 net income of $674 million and $528
million in proceeds from the public issuance of 17 million shares
of Marathon Stock in November 1998, partially offset by dividends
paid.
Net cash provided from operating activities was $1,803 million
in 1998, $1,458 million in 1997 and $1,649 million in 1996. Cash
provided from operating activities in 1998 included proceeds of $38
million for the insurance litigation settlement pertaining to the
1995 Gary Works #8 blast furnace explosion. Cash provided from
operating activities in 1997 included a payment of $390 million
resulting from termination of a Marathon Group and Delhi Group
accounts receivable sales program, payments of $199 million to fund
employee benefit plans related to the U. S. Steel Group, and
insurance recoveries of $40 million related to a 1996 hearth
breakout at the Gary Works No. 13 blast furnace. Cash provided from
operating activities in 1996 included a payment of $59 million to
the Internal Revenue Service for certain agreed and unagreed
adjustments relating to the tax year 1990, payments of $39 million
related to certain state tax issues, and a payment of $28 million
related to settlement of the Pickering litigation. Excluding the
effects of these adjustments, cash provided from operating
activities decreased by $242 million in 1998 as compared with 1997,
primarily due to lower net income and unfavorable working capital
changes, and increased by $232 million in 1997 as compared with
1996, due primarily to favorable working capital changes, improved
profitability and reduced interest payments, partially offset by
increased income taxes paid. For additional discussion of 1997
funding of U. S. Steel benefit plans, see Benefit Plan Activity,
herein.
U-42
<PAGE>
Management's Discussion and Analysis CONTINUED
Capital expenditures for each of the last three years are
summarized in the following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Marathon Group
Exploration & production ("upstream")
Domestic $ 652 $ 647 $ 424
International 187 163 80
Refining, marketing & transportation ("downstream") 410 205 234
Other 21 23 13
------ ------ ------
Subtotal Marathon Group 1,270 1,038 751
U. S. Steel Group 310 261 337
Discontinued operations -- 74 80
------ ------ ------
Total USX Corporation capital expenditures $1,580 $1,373 $1,168
</TABLE>
Marathon Group's domestic upstream capital expenditures in 1998
mainly included continuing development of Viosca Knoll 786
("Petronius"), Green Canyon 244 ("Troika") and Green Canyon 112/113
("Stellaria") in the Gulf of Mexico. International upstream capital
expenditures included development of the Tchatamba South field,
offshore Gabon. Downstream capital expenditures in 1998 were
primarily for upgrading and expanding retail marketing outlets and
refinery modification projects.
U. S. Steel Group capital expenditures in 1998 included a blast
furnace reline at Gary Works, an upgrade to the galvanizing line at
Fairless Works, replacement of coke battery thruwalls at Gary
Works, conversion of the Fairfield Works pipe mill to use round
instead of square blooms, and environmental expenditures primarily
at Fairfield Works and Gary Works.
Capital expenditures in 1999 are expected to be approximately
$1.6 billion. Expenditures for the Marathon Group are expected to
be approximately $1.3 billion. Domestic upstream projects planned
for 1999 include continuing development of projects in the Gulf of
Mexico and natural gas development in East Texas and throughout the
western United States. International upstream projects include
development of properties offshore Gabon and in Canada. Downstream
spending is expected to be primarily for upgrades and expansions of
retail marketing outlets and refinery improvements.
Capital expenditures for the U. S. Steel Group in 1999 are
expected to be approximately $290 million. Planned projects include
improvements at Gary Works, Mon Valley Works and Fairfield Works
and environmental expenditures.
Investments in affiliates of $115 million in 1998, mainly
reflected funding of MAP's acquisition of an interest in Southcap
Pipe Line Company and U. S. Steel's entry into a joint venture in
Slovakia with VSZ a.s.
Investments in affiliates in 1999 are expected to be
approximately $80 million. Projected investments include continued
development of the Sakhalin II project.
Contract commitments to acquire property, plant and equipment
and long-term investments at December 31, 1998, totaled $812
million compared with $533 million at December 31, 1997.
The above statements with respect to 1999 capital expenditures
and investments are forward-looking statements reflecting
management's best estimates based on information currently
available. To the extent this information proves to be inaccurate,
the timing and levels of future expenditures and investments could
differ materially from those included in the forward-looking
statements. Factors that could cause future capital expenditures
and investments to differ materially include changes in industry
supply and demand, general economic conditions, the availability of
business opportunities and levels of cash flow from operations for
each of the Groups. The timing of completion or cost of particular
capital projects could be affected by unforeseen hazards such as
weather conditions, explosions or fires, or by delays in obtaining
government or partner approval. In addition, levels of investments
may be affected by the ability of equity affiliates to obtain
third-party financing.
Proceeds from disposal of assets were $86 million in 1998,
compared with $481 million in 1997 and $443 million in 1996.
Proceeds in 1997 included $361 million resulting from USX's entry
into a strategic partnership with two limited partners to acquire
an interest in three coke batteries at its
U-43
<PAGE>
Management's Discussion and Analysis CONTINUED
U. S. Steel Group's Clairton Works and $15 million from the sale of
the plate mill at the U. S. Steel Group's former Texas Works.
Proceeds in 1996 primarily reflected the sale of the U. S. Steel
Group's investment in National-Oilwell (an oil field service joint
venture); the sale of a portion of its investment in RTI common
stock; disposal of the Marathon Group's interests in Alaskan oil
properties and certain domestic and international oil and gas
production properties; and the sale of the Marathon Group's equity
interest in a domestic pipeline company.
The net change in restricted cash was a net withdrawal of $174
million in 1998, which was primarily the result of redeeming all of
the outstanding shares of USX-Delhi Group Common Stock with the
$195 million of net proceeds from the sale of the Delhi Companies
that had been classified as restricted cash in 1997. The net
deposit of $97 million in 1997 mainly represents the deposit of the
$195 million of net proceeds from the sale of the Delhi Companies,
partially offset by cash withdrawn from an interest-bearing escrow
account that was established in 1996 in connection with the
disposal of oil production properties in Alaska.
Financial obligations (the net of debt repayments, borrowings,
commercial paper and revolving credit arrangements on the
Consolidated Statement of Cash Flows) increased by $315 million in
1998, compared with decreases of $734 million in 1997 and $673
million in 1996. The increase in 1998 is primarily the result of
borrowings against a revolving credit agreement to fund the
acquisition of Tarragon in August 1998. The decrease in financial
obligations in 1997 and 1996 primarily reflected cash flows
provided from operating activities and asset sales in excess of
cash used for capital expenditures and dividend payments (and with
respect to 1997, in excess of $249 million of cash used for
investments in equity affiliates).
Issuance of long-term debt and Trust Preferred Securities for
each of the last three years is summarized in the following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Aggregate principal amounts of:
6.85% Notes due 2008 $ 400 $ -- $ --
Trust preferred securities/(a)/ -- 182
Indexed debt/(b)/ -- -- 117
Environmental bonds and capital leases/(c)/ 280 -- 78
----- ----- -----
Total $ 680 $ 182 $ 195
</TABLE>
/(a)/In 1997, USX exchanged 3.9 million 6.75% Convertible
Quarterly Income Preferred Securities ("Trust Preferred
Securities") of USX Capital Trust I for an equivalent number of
shares of USX's 6.50% Cumulative Convertible Preferred Stock.
This was a noncash transaction. For additional discussion, see
Note 26 to the USX Consolidated Financial Statements.
/(b)/See Note 17 to the USX Consolidated Financial Statements
for a description of Indexed Debt.
/(c)/Issued to refinance an equivalent amount of environmental
improvement refunding bonds and capital leases.
USX filed with the Securities and Exchange Commission a shelf
registration statement, which became effective July 31, 1998, that
allows USX to offer and issue unsecured debt securities, common and
preferred stock and warrants in an aggregate principal amount of up
to $1 billion in one or more separate offerings on terms to be
determined at the time of sale. Including this shelf registration
statement, USX had a total of $986 million available under existing
shelf registration statements at December 31, 1998. In January
1999, USX issued $300 million in aggregate principal amount of
6.65% Notes due 2006, reducing the availability under existing
shelf registration statements to $686 million.
In the event of a change in control of USX, debt and guaranteed
obligations totaling $4.0 billion at year-end 1998 may be declared
immediately due and payable or required to be collateralized. See
Notes 12, 14 and 17 to the USX Consolidated Financial Statements.
Dividends paid increased by $26 million in 1998 as compared with
1997, due primarily to a two-cents-per-share increase in the
quarterly Marathon Stock dividend rate effective January 1998.
Dividends paid increased by $9 million in 1997 as compared with
1996, due primarily to the full-year effect of a two-cents-per-
share increase in the quarterly Marathon Stock dividend rate
effective October 1996. The increase was partially offset by
decreased dividends on preferred stock, reflecting 6.50% Preferred
Stock exchanged for Trust Preferred Securities during 1997.
U-44
<PAGE>
Management's Discussion and Analysis CONTINUED
Benefit Plan Activity
USX contributed $49 million in 1997 to fund the U. S. Steel
Group's principal pension plan for the 1996 plan year. Also in
1997, USX contributed $80 million for elective funding of retiree
life insurance of union and nonunion participants, and $70 million
to the United Steelworkers of America ("USWA") Voluntary Employee
Benefit Association Trust ("VEBA"). A total of $40 million of the
$70 million VEBA contribution represented prefunding for the years
1998 and 1999.
Debt and Preferred Stock Ratings
Standard & Poor's Corp. currently rates USX and Marathon
Oil Company ("Marathon") senior debt as investment grade, following
an upgrade in November 1996 to BBB- from BB+. USX's subordinated
debt and preferred stock were also upgraded to BB+ from BB-.
Moody's Investors Services, Inc., following upgrades in June 1998,
currently rates USX's and Marathon's senior debt as investment
grade at Baa2, USX's subordinated debt at Baa3 and USX's preferred
stock as Ba1. Duff & Phelps Credit Rating Co. currently rates USX's
senior notes as investment grade at BBB and USX's subordinated debt
as BBB-.
Derivative Instruments
See Quantitative and Qualitative Disclosures About Market Risk
for discussion of derivative instruments and associated market
risk.
Liquidity
USX management believes that its short-term and long-term
liquidity is adequate to satisfy its obligations as of December 31,
1998, and to complete currently authorized capital spending
programs. Future requirements for USX's business needs, including
the funding of capital expenditures, debt maturities for the years
1999, 2000 and 2001, and any amounts that may ultimately be paid in
connection with contingencies (which are discussed in Note 29 to
the USX Consolidated Financial Statements), are expected to be
financed by a combination of internally generated funds, proceeds
from the sale of stock, borrowings or other external financing
sources.
USX management's opinion concerning liquidity and USX's ability
to avail itself in the future of the financing options mentioned in
the above forward-looking statements are based on currently
available information. To the extent that this information proves
to be inaccurate, future availability of financing may be adversely
affected. Factors that affect the availability of financing include
the performance of each Group (as indicated by levels of cash
provided from operating activities and other measures), the state
of the 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,
levels of USX's outstanding debt and credit ratings by rating
agencies. For a summary of long-term debt, see Note 17 to the USX
Consolidated Financial Statements.
Management's Discussion and Analysis of Environmental Matters, Litigation and
Contingencies
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.
U-45
<PAGE>
Management's Discussion and Analysis CONTINUED
The following table summarizes USX's environmental expenditures
for each of the last three years/(a)/:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Capital
Marathon Group/(b)/ $ 124 $ 81 $ 66
U. S. Steel Group 49 43 90
Discontinued operations -- 10 9
----- ----- -----
Total capital $ 173 $ 134 $ 165
Compliance
Operating & maintenance
Marathon Group/(b)/ $ 126 $ 84 $ 75
U. S. Steel Group 198 196 199
Discontinued operations -- 4 4
----- ----- -----
Total operating & maintenance 324 284 278
Remediation/(c)/
Marathon Group/(b)/ 10 19 26
U. S. Steel Group 19 29 33
----- ----- -----
Total remediation 29 48 59
Total compliance $ 353 $ 332 $ 337
</TABLE>
/(a)/Amounts for the Marathon Group are calculated based on
American Petroleum Institute survey guidelines. Amounts for
the U. S. Steel Group are based on previously established U.S.
Department of Commerce survey guidelines.
/(b)/Amounts in 1998 include 100% of MAP
/(c)/Amounts do not include noncash provisions recorded for
environmental remediation, but include spending charged against
such reserves, net of recoveries where permissible.
USX's environmental capital expenditures accounted for 11%, 10%
and 14% of total consolidated capital expenditures in 1998, 1997
and 1996, respectively.
USX's environmental compliance expenditures averaged 1% of total
consolidated costs and expenses in 1998, and 2% in both 1997 and
1996. Remediation spending primarily reflected ongoing clean-up
costs for soil and groundwater contamination associated with
underground storage tanks and piping at retail gasoline stations,
and remediation activities at former and present operating
locations.
The Resource Conservation and Recovery Act ("RCRA") establishes
standards for the management of solid and hazardous wastes. Besides
affecting current waste disposal practices, RCRA also addresses the
environmental effects of certain past waste disposal operations,
the recycling of wastes and the regulation of storage tanks.
A significant portion of USX's currently identified
environmental remediation projects relate to the remediation of
former and present operating locations. These projects include
continuing remediation at an in situ uranium mining operation, the
remediation of former coke-making facilities, a closed and
dismantled refinery site and the closure of permitted hazardous and
non-hazardous waste landfills.
USX has been notified that it is a potentially responsible party
("PRP") at 46 waste sites under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") as of December
31, 1998. In addition, there are 25 sites where USX has received
information requests or other indications that USX may be a PRP
under CERCLA but where sufficient information is not presently
available to confirm the existence of liability. There are also 126
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, 16
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. See
Note 29 to the USX Consolidated Financial Statements.
U-46
<PAGE>
Management's Discussion and Analysis CONTINUED
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.
In 1998, USX entered into a consent decree with the
Environmental Protection Agency ("EPA") which resolved alleged
violations of the Clean Water Act National Pollution Discharge
Elimination System ("NPDES") permit at Gary Works and provides for
a sediment remediation project for a section of the Grand Calumet
River that runs through Gary Works. Contemporaneously, USX entered
into a consent decree with the public trustees which resolves
potential liability for natural resource damages on the same
section of the Grand Calumet River. USX has agreed to pay civil
penalties of $2.9 million for the alleged water act violations and
$0.5 million in natural resource damages assessment costs, which
will be paid in 1999. In addition, USX will pay the EPA $1 million
at the end of the remediation project for future monitoring costs.
During the negotiations leading up to the settlement with EPA,
capital improvements were made to upgrade plant systems to comply
with the NPDES requirements. The sediment remediation project is an
approved final interim measure under the corrective action program
for Gary Works and is expected to cost approximately $30 million
over the next six years. Estimated remediation and monitoring costs
for this project have been accrued.
New or expanded environmental requirements, which could increase
USX's environmental costs, may arise in the future. USX intends to
comply with all legal requirements regarding the environment, but
since many of them are not fixed or presently determinable (even
under existing legislation) and may be affected by future
legislation, it is not possible to predict accurately the ultimate
cost of compliance, including remediation costs which may be
incurred and penalties which may be imposed. However, based on
presently available information, and existing laws and regulations
as currently implemented, USX does not anticipate that
environmental compliance expenditures (including operating and
maintenance and remediation) will materially increase in 1999. USX
expects environmental capital expenditures in 1999 to be
approximately $96 million, or approximately 5% of total estimated
consolidated capital expenditures. Predictions beyond 1999 can only
be broad-based estimates which have varied, and will continue to
vary, due to the ongoing evolution of specific regulatory
requirements, the possible imposition of more stringent
requirements and the availability of new technologies, among other
matters. Based upon currently identified projects, USX anticipates
that environmental capital expenditures in 2000 will total
approximately $110 million; however, actual expenditures may vary
as the number and scope of environmental projects are revised as a
result of improved technology or changes in regulatory
requirements, and could increase if additional projects are
identified or additional requirements are imposed.
Effective January 1, 1997, USX adopted American Institute of
Certified Public Accountants Statement of Position No. 96-1 --
"Environmental Remediation Liabilities", which requires that
companies include certain direct costs and post-closure monitoring
costs in accruals for remediation liabilities. USX income from
operations in the first quarter of 1997 included charges of $27
million (net of expected recoveries) related to adoption, primarily
for accruals of post-closure monitoring costs, study costs and
administrative costs. See Note 2 to the USX Consolidated Financial
Statements for additional discussion.
Income from operations in 1997 also included net favorable
effects of $13 million related to other environmental accrual
adjustments.
U-47
<PAGE>
Management's Discussion and Analysis CONTINUED
USX is the subject of, or party to, a number of pending or
threatened legal actions, contingencies and commitments involving a
variety of matters. 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.
Outlook and Year 2000
For Outlook with respect to the Marathon Group and U. S. Steel
Group, see Management's Discussion and Analysis of Operations by
Group, herein.
For discussion of the Year 2000 issue as it affects the Marathon
Group and the U. S. Steel Group, see Management's Discussion and
Analysis of Operations by Group, herein.
Accounting Standards
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position No. 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal
Use" ("SOP 98-1"). SOP 98-1 provides guidelines for companies to
capitalize or expense costs incurred to develop or obtain internal-
use software. USX adopted SOP 98-1 effective January 1, 1999. The
incremental impact on results of operations of adoption of SOP 98-1
is likely to be initially favorable since certain qualifying costs
will be capitalized and amortized over future periods.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities". This new
standard requires recognition of all derivatives as either assets
or liabilities at fair value. This new standard may result in
additional volatility in both current period earnings and 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.
Management's Discussion and Analysis of Operations by Group
The Marathon Group
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 LLC
("MAP"), owned 62% by Marathon; and other energy related
businesses.
The Marathon Group's 1998 financial performance was
significantly impacted by the lowest oil prices in 24 years, lower
natural gas prices and decreased refining crack spreads (the
difference between light products prices and crude costs).
Nevertheless, in 1998, Marathon upstream operations achieved nearly
a 20% growth in worldwide liquids production and MAP had a highly
successful first year of operations, achieving annual repeatable
operating efficiencies of approximately $150 million.
U-48
<PAGE>
Management's Discussion and Analysis CONTINUED
Marathon Group revenues for each of the last three years are
summarized in the following table, which is covered by the report
of independent accountants.
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Sales by product:
Refined products $ 9,091 $ 7,012 $ 7,132
Merchandise 1,873 1,045 1,000
Liquid hydrocarbons 1,818 941 1,111
Natural gas 1,144 1,331 1,194
Transportation and other products 271 167 180
Gain on ownership change in MAP/(a)/ 245 -- --
Other/(b)/ 104 86 97
------- ------- -------
Subtotal 14,546 10,582 10,714
------- ------- -------
Matching buy/sell transactions/(c)(e)/ 3,948 2,436 2,912
Excise taxes/(d)(e)/ 3,581 2,736 2,768
------- ------- -------
Total revenues $22,075 $15,754 $16,394
</TABLE>
/(a)/See Note 3 to the USX Consolidated Financial Statements for
a discussion of the gain on ownership change in MAP.
/(b)/Includes dividend and affiliate income, net gains on
disposal of assets and other income.
/(c)/Matching crude oil and refined products buy/sell
transactions settled in cash.
/(d)/Consumer excise taxes on petroleum products and
merchandise.
/(e)/Included in both revenues and costs and expenses, resulting
in no effect on income.
In 1998, Marathon Group revenues included 100% of MAP revenues,
and MCL's revenues commencing August 12, 1998. On a pro forma
basis, assuming the acquisitions of Tarragon's operations and
Ashland's RM&T net assets had occurred on January 1, 1997, revenues
(excluding matching buy/sell transactions and excise taxes) for
1997 would have been $16,278 million.
Revenues (excluding matching buy/sell transactions and excise
taxes) decreased by $1,732 million in 1998 from pro forma 1997. The
decrease in 1998 mainly reflected lower prices for refined
products, lower worldwide liquid hydrocarbon prices and lower
domestic natural gas prices, partially offset by higher liquid
hydrocarbon sales volumes. The increase in liquid hydrocarbon sales
volumes was due to a higher volume of upstream production being
sold to third parties.
Revenues (excluding matching buy/sell transactions and excise
taxes) decreased $132 million in 1997 (as reported) from 1996,
mainly due to lower average refined product prices and lower
worldwide liquid hydrocarbon prices and volumes, partially offset
by increased volumes of refined products and higher domestic
natural gas volumes and prices.
U-49
<PAGE>
Management's Discussion and Analysis CONTINUED
Marathon Group income from operations for each of the last three
years is summarized in the following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Exploration & production ("E&P")
Domestic $ 190 $ 500 $ 547
International 88 273 353
------ ------ ------
Income for E&P reportable segment 278 773 900
Refining, marketing & transportation/(a)/ 896 563 249
Other energy related businesses/(b)/ 33 48 57
------ ------ ------
Income for reportable segments 1,207 1,384 1,206
Items not allocated to reportable segments:
Administrative expenses/(c)/ (106) (168) (133)
IMV reserve adjustment/(d)/ (267) (284) 209
Gain on ownership change & transition charges--MAP/(e)/ 223 -- --
Int'l investment write-offs, suspended exploration
well write-offs & gas contract settlement/(f)/ (119) -- --
Other items (net) -- -- 14
------ ------ ------
Total income from operations $ 938 $ 932 $1,296
</TABLE>
/(a)/In 1998, segment income includes 100% of MAP and is not
comparable to prior periods.
/(b)/Includes marketing and transportation of domestic natural gas
and crude oil, and power generation.
/(c)/Includes the portion of the Marathon Group's administrative
costs not charged to the operating components and the portion
of USX corporate general and administrative costs allocated to
the Marathon Group.
/(d)/The inventory market valuation ("IMV") reserve reflects the
extent to which the recorded LIFO cost basis of crude oil and
refined products inventories exceeds net realizable value.
/(e)/The gain on ownership change and one-time transition charges
relate to the formation of MAP. For additional discussion of
the gain on ownership change in MAP, see Note 3 to the USX
Consolidated Financial Statements.
/(f)/Includes a write-off of certain non-revenue producing
international investments and several exploratory wells which
had encountered hydrocarbons, but had been suspended pending
further evaluation. It also includes a gain from the
resolution of a contract dispute with a purchaser of
Marathon's natural gas production from certain domestic
properties.
In 1998, Marathon Group income from operations included 100% of
MAP, and MCL's results of operations commencing August 12, 1998. On
a pro forma basis, assuming the acquisitions of Ashland's RM&T net
assets and Tarragon's operations had occurred on January 1, 1997,
income for reportable segments for 1997 would have been $1,728
million. Income for reportable segments decreased by $521 million
in 1998 from pro forma 1997 and increased by $178 million in 1997
(as reported) from 1996. The decrease in 1998 was primarily due to
lower worldwide liquid hydrocarbon prices, lower domestic natural
gas prices and lower refining crack spreads, partially offset by
higher liquid hydrocarbon production. The increase in 1997 was
primarily due to higher average refined product margins and higher
worldwide natural gas prices, partially offset by lower worldwide
liquid hydrocarbon production and prices and higher worldwide
exploration expense.
U-50
<PAGE>
Management's Discussion and Analysis CONTINUED
<TABLE>
<CAPTION>
Average Volumes and Selling Prices
1998 1997 1996
<S> <C> <C> <C>
(thousands of barrels per day)
Net liquids production/(a)/ --U.S. 135 115 122
--International/(b)/ 61 49 59
--Worldwide ----- ------ ------
196 164 181
(millions of cubic feet per day)
Net natural gas production --U.S. 744 722 676
--International--equity 441 423 499
--International--other/(c)/ 23 32 32
----- ------ ------
--Total Consolidated 1,208 1,177 1,207
--Equity affiliate 33 42 45
----- ------ ------
--Worldwide 1,241 1,219 1,252
(dollars per barrel)
Liquid hydrocarbons/(a)(d)/ --U.S. $10.42 $16.88 $18.58
--International 12.24 18.77 20.34
(dollars per mcf)
Natural gas/(d)/ --U.S. $ 1.79 $ 2.20 $ 2.09
--International equity 1.94 2.00 1.97
(thousands of barrels per day)
Refined products sold/(e)/ 1,198 775 775
Matching buy/sell volumes included in above 39 51 71
</TABLE>
/(a)/Includes crude oil, condensate and natural gas liquids.
/(b)/Represents equity tanker liftings, truck deliveries and direct deliveries.
/(c)/Represents gas acquired for injection and subsequent resale.
/(d)/Prices exclude gains/losses from hedging activities.
/(e)/In 1998, refined products sold and matching buy/sell volumes include 100%
of MAP and are not comparable to prior periods.
Domestic E&P income decreased by $310 million in 1998 from 1997
following a decrease of $47 million in 1997 from 1996. The decrease
in 1998 was primarily due to lower liquid hydrocarbon and natural
gas prices, partially offset by increased liquid hydrocarbon
production and natural gas volumes. The 17%, or 20,000 barrels per
day ("bpd"), increase in liquid hydrocarbon production was mainly
attributable to new production in the Gulf of Mexico, while the
increase in natural gas volumes was mainly attributable to
properties in east Texas.
The decrease in 1997 was primarily due to lower liquid
hydrocarbon prices and production and higher exploration expense,
partially offset by increased natural gas production and prices.
The lower liquid hydrocarbon production was mostly due to the 1996
disposal of oil producing properties in Alaska. The increase in
natural gas volumes was mainly attributable to properties in east
Texas, Oklahoma and Wyoming.
International E&P income decreased by $185 million in 1998
following a decrease of $80 million in 1997. The decrease in 1998
was primarily due to lower liquid hydrocarbon and natural gas
prices and higher exploration and operating expenses. These items
were partially offset by increased liquid hydrocarbon production
and natural gas volumes. The 24%, or 12,000 bpd, increase in liquid
hydrocarbon production was mainly attributable to the acquired
production in Canada and new operations in Gabon. The increase in
natural gas volumes was mainly attributable to acquired production
in Canada.
The decrease in 1997 was primarily due to lower liquid
hydrocarbon volumes, lower natural gas volumes and lower liquid
hydrocarbon prices. These items were partially offset by reduced
pipeline and terminal expenses and reduced DD&A expenses, due
largely to the lower volumes. The lower liquid hydrocarbon volumes
primarily reflected lower production in the U.K. North Sea, while
the lower natural gas volumes were mainly due to natural field
declines in Ireland and Norway.
U-51
<PAGE>
Management's Discussion and Analysis CONTINUED
Refining, marketing and transportation ("downstream") reportable
segment income in 1998 included 100 percent of MAP. On a pro forma
basis, assuming the acquisition of Ashland's R&M net assets had
occurred on January 1, 1997, income for the reportable segments of
the combined downstream operations of Marathon and Ashland for 1997
would have been $869 million. On this basis, 1998 downstream
reportable segment income of $896 million was slightly higher than
pro forma 1997 downstream reportable segment income. During 1998,
the effects of lower refining crack spreads were offset by strong
performances from MAP's asphalt and retail operations, realization
of operating efficiencies as a result of combining Marathon and
Ashland's downstream operations and lower energy costs.
Downstream reportable segment income in 1997 increased $314
million over 1996 due mainly to improved refined product margins as
favorable effects of reduced crude oil and other feedstock costs
more than offset a decrease in refined product sales prices.
Other energy related businesses reportable segment income
decreased by $15 million in 1998 following a decrease of $9 million
in 1997. The decrease in 1998 was mainly due to a gain on the sale
of an equity interest in a domestic pipeline company included in
1997 reportable segment income.
Items not allocated to reportable segments
Administrative expenses decreased by $62 million in 1998
following an increase of $35 million in 1997 from 1996. The
decrease in 1998 mainly reflected an increase in administrative
costs charged to the RM&T reportable segment, lower accruals for
employee benefit and compensation plans and lower litigation
accruals. The increase in 1997 mainly reflected higher accruals for
employee benefit and compensation plans, including Marathon's
performance-based variable pay plan.
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 was also lowered.
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.
Outlook--Marathon Group
The outlook regarding the Marathon Group's upstream revenues and
income is largely dependent upon future prices and volumes of
liquid hydrocarbons and natural gas. Prices have historically been
volatile and have frequently been affected by unpredictable changes
in supply and demand resulting from fluctuations in worldwide
economic activity and political developments in the world's major
oil and gas producing and consuming areas. During 1998, worldwide
liquid hydrocarbon and natural gas prices realized by Marathon were
significantly lower than 1997. In 1998, West Texas Intermediate
crude oil postings reached their lowest levels in 24 years. The
continuation of this depressed pricing environment in 1999 will
adversely impact upstream results. Expected increases in liquid
hydrocarbon and natural gas production should partially offset the
effects of these lower prices. Continued lower prices could
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.
U-52
<PAGE>
Management's Discussion and Analysis CONTINUED
In 1999, worldwide liquid hydrocarbon production, including
Marathon's share of equity affiliates, is expected to increase by
17 percent, to average approximately 230,000 bpd. Most of the
increase is anticipated in the second half of the year. This
primarily reflects projected new production from the Phase I
development of the Piltun-Astokhskoye ("P-A") field in mid-1999
(discussed below), start-up of the Tchatamba South field in the
third quarter of 1999 and a full year of production by MCL,
partially offset by natural production declines of mature fields.
In 1999, worldwide natural gas volumes, including Marathon's share
of equity affiliates, are expected to increase by 11 percent, to
approximately 1.38 billion cubic feet per day. This primarily
reflects increases in North American gas production, offset by
natural declines in mature international fields, primarily in
Ireland and Norway. In 2000, worldwide liquid hydrocarbon
production and natural gas volumes are expected to remain
consistent with 1999 levels. In 2001, liquid hydrocarbon production
is expected to increase by 10 to 15 percent over 2000 production
levels and natural gas volumes are expected to increase by
approximately 4 percent over 2000 levels. These projections are
based on known discoveries and do not include any additions from
potential or future acquisitions or future wildcat drilling.
Petronius, in the Gulf of Mexico, was originally scheduled to
begin production in the second quarter of 1999, but the project was
delayed when the last platform topsides module fell into the sea
during installation work. The lost module will have to be replaced.
Third party insurance is expected to cover costs associated with
the replacement and installation on the platform. First production
is now expected to begin in the fourth quarter of 2000.
Marathon holds a 37.5% interest in Sakhalin Energy Investment
Company Ltd. ("Sakhalin Energy"), an incorporated joint venture
company responsible for the overall management of the Sakhalin II
project. This project includes development of the P-A oil field and
the Lunskoye gas-condensate field, which are located 8-12 miles
offshore Sakhalin Island in the Russian Far East Region. The
Russian State Reserves Committee has approved estimated combined
reserves for the P-A and Lunskoye fields of one billion gross
barrels of liquid hydrocarbons and 14 trillion cubic feet of
natural gas.
In 1997, a Development Plan for the P-A license area, Phase I:
Astokh Feature was approved. Offshore drilling and production
facilities for the Astokh Feature were set in place on September 1,
1998. Drilling of development wells commenced in December of 1998.
First production from the Astokh Feature is scheduled for mid-1999,
with sales forecast to average 45,000 gross bpd of oil annually as
early as 2000. This rate is based on six months of offshore loading
operations during the ice-free weather window at an estimated daily
rate of 90,000 gross barrels. Marathon's equity share of reserves
from primary production in the Astokh Feature is 80 million barrels
of oil.
The approved Development Plan also provides for further
appraisal work for the remainder of the P-A field. An appraisal
well was drilled during the summer weather window in 1998 and the
results are being evaluated. Conceptual design work for further
development of the P-A field, including pressure maintenance for
the Astokh Feature, continues. With respect to the Lunskoye field,
appraisal work and efforts to secure long-term gas sales markets
continue. Commencement of gas production from the Lunskoye field,
which will be contingent upon the conclusion of a gas sales
contract, is anticipated to occur in 2005 or later.
Late in 1997, the Sakhalin Energy consortium arranged a limited
recourse project financing facility of $348 million. Sakhalin
Energy borrowed the full amount of this facility in 1998 to fund
Phase I expenditures and to repay amounts previously advanced to
Sakhalin Energy by its shareholders.
In the area of significant Russian legislation, the Russian
Parliament passed a Production Sharing Agreement ("PSA") Amendments
Law and a PSA Enabling Law, which brings other Russian legislation
into conformance with the PSA Law. These laws were signed by
President Yeltsin and enacted in 1999.
At December 31, 1998, Marathon's investment in the Sakhalin II
project was $275 million.
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
U-53
<PAGE>
Management's Discussion and Analysis CONTINUED
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. Key external
factors look promising for the refining and marketing industry.
Demand for petroleum products is expected to grow modestly, due to
a leveling of fuel efficiency in the passenger car fleet,
increasing sales of light-truck and sport-utility vehicles which
average fewer miles per gallon than passenger cars, and an
increasing number of vehicle miles traveled. Refinery utilization
rates are strong, reflecting the increased demand, which should be
beneficial for MAP's refining margins. Also, increased highway
construction funding should benefit MAP, the largest U.S. supplier
of asphalt.
As a result of Marathon and Ashland combining major elements of
their downstream operations, MAP achieved approximately $150
million in annual repeatable pre-tax operating efficiencies in 1998
and has targeted an additional $100 million in 1999. MAP presently
expects to derive efficiencies of $350 million annually on a pre-
tax basis in 2001. This exceeds its original goal of achieving
efficiencies of $200 million annually on a pre-tax basis.
Efficiencies will continue to be identified in the logistical,
retail marketing, wholesale marketing and refining operations, as
well as administrative functions, that Marathon and Ashland
transferred to MAP.
MAP and a third party are constructing facilities to produce 800
million pounds per year of polymer grade propylene and
polypropylene at the Garyville refinery. MAP is building and will
own and operate facilities to produce polymer grade propylene. The
third party is constructing and will own and operate the
polypropylene facilities and market its output. Production of the
polymer grade propylene is scheduled to begin in the second quarter
of 1999.
MAP plans to build a pipeline from its Catlettsburg refinery to
Columbus, Ohio. The wholly owned pipeline is expected to initially
move about 50,000 bpd of refined products into central Ohio.
Construction is expected to commence in the summer of 1999 after
final regulatory approvals. The pipeline is expected to be
operational in the first half of 2000.
A project to increase crude throughput and light product output
is being undertaken at MAP's Robinson, IL refinery. This project is
expected to be completed in 2001.
The above statements with respect to demand for petroleum
products, the amount and timing of efficiencies to be realized by
MAP, and the statements with respect to the propylene, pipeline and
refinery improvement projects are forward looking statements. Some
factors that could potentially cause actual results to differ
materially from present expectations include (among others) the
price of petroleum products, unanticipated costs or delays
associated with implementing shared technology, completing
logistical infrastructure projects, leveraging procurement
strategies, levels of cash flow from operations, obtaining the
necessary construction and environmental permits, unforeseen
hazards such as weather conditions and regulatory constraints.
Year 2000 Readiness Disclosure
The Marathon Group is executing action plans which include:
. prioritizing and focusing on those computerized and automated
systems and processes critical to the operations in terms of
material operational, safety, environmental and financial risk to
the company.
. allocating and committing appropriate resources to fix the
problem.
U-54
<PAGE>
Management's Discussion and Analysis CONTINUED
. developing detailed contingency plans for those computerized and
automated systems and processes 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
Readiness efforts and critical systems testing is 92% complete
for Information Technology (IT) systems. The remaining systems are
to be completed by end of the third quarter of 1999. Responses have
been received from over 80% of the Marathon Group's third party
software vendors, with 99% indicating that they are or will be Year
2000 ready and will provide updated software on a timely basis.
The Marathon Group has completed the inventory on 93% of the
Non-Information Technology (Non-IT) systems. Assessment of these
inventories is being completed to identify those systems that will
require remediation. All Non-IT systems are scheduled to be ready
by the end of the third quarter of 1999 with minor exceptions.
Plant maintenance shutdowns scheduled for the fourth quarter of
1999 will allow us to complete any final readiness efforts.
The following chart provides the percent of completion for the
inventory of systems and processes that may be affected by the Year
2000 ("Y2K Inventory"), analysis performed to determine the Year
2000 date impact of inventoried systems and processes ("Y2K Impact
Assessment") and the Year 2000 readiness of the Marathon Group's
Year 2000 inventory ("Y2K Readiness of Overall Inventory"). The
percent of completion for Y2K Readiness of Overall Inventory
includes all inventory items not date impacted, those items already
Year 2000 ready and those corrected and made Year 2000 ready
through the renovation/replacement, testing and implementation
activities; however, the implementation of certain Year 2000 ready
IT and Non-IT systems has been deferred until 1999, to avoid
unnecessary disruption of operations.
<TABLE>
<CAPTION>
Percent Completed
Y2K
Y2K Readiness
Impact of
Y2K Assess- Overall
As of January 31, 1999 Inventory ment Inventory
<S> <C> <C> <C>
Information technology 100% 100% 92%
Non-information technology 93% 60% 52%
</TABLE>
Third Parties
Third parties are suppliers, customers and vendors, excluding
third party software vendors discussed previously. Contacts have
been made with all critical third parties to determine if they will
be able to provide services to the Marathon Group after the Year
2000. Follow-up continues with those third parties not responding
or returning an unacceptable response. If it is determined that
there is a significant risk, an effort will be made to work with
such parties. If this is not successful, a new provider of the same
services will be sought.
The Costs to Address Year 2000 Issues
The estimated costs associated with Year 2000 readiness, are
approximately $36 million, including $19 million of incremental
costs. This reflects an increase of $8 million from the previously
reported estimate of total incremental costs. The estimated cost
increase results primarily from increased use of external
consultants and increased internal staffing of Y2K operational
teams. Total costs incurred as of January 31, 1999, were $17
million, including $8 million of incremental costs. As
U-55
<PAGE>
Management's Discussion and Analysis CONTINUED
Y2K impact assessment nears completion and the renovation planning,
readiness implementation and testing evolve, the estimated costs
may change.
The Risks of the Company's Year 2000 Issues
The most reasonably likely worst case Year 2000 scenario would
be the inability of 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.
Contingency Planning
Representatives of the Marathon Group have participated with a
work group of the API Year 2000 Task force to develop a contingency
plan format. This format includes guidelines to develop a plan that
will cover the Year 2000 areas of concern. Many business unit
contingency planning teams have been formed and are actively
working on contingency plans for the systems and processes critical
to the operations in terms of material operational, safety,
environmental and financial risk to the company. These plans are to
be completed and tested, when practical, by the end of the third
quarter of 1999.
The foregoing Year 2000 discussion includes forward-looking
statements of the Marathon Group's efforts and management's
expectations 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.
The U. S. Steel Group
The U. S. Steel Group includes U. S. Steel, which is engaged in
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.
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, VSZ U. S. Steel, s. r.o. and RTI International Metals,
Inc. ("RTI").
In 1998, segment income for U. S. Steel operations decreased
primarily due to lower average steel product prices, lower shipment
volumes, and less efficient operating levels, resulting from an
increase in imports and weak tubular markets.
U. S. Steel Group revenues for each of the last three years are
summarized in the following table, which is covered by the report
of independent accountants.
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Sales by product:
Sheet and semi-finished steel products $3,501 $3,820 $3,677
Tubular, plate, and tin mill products 1,513 1,754 1,635
Raw materials (coal, coke and iron ore) 591 671 757
Other/(a)/ 578 570 466
Income from affiliates 46 69 66
Gain on disposal of assets 54 57 16
Gain on affiliate stock offering/(b)/ -- -- 53
------ ------ ------
Total revenues $6,283 $6,941 $6,670
</TABLE>
/(a)/Includes revenue from the sale of steel production
byproducts, engineering and consulting services, real estate
development and resource management.
/(b)/For further details, see Note 9 to the USX Consolidated
Financial Statements.
U-56
<PAGE>
Management's Discussion and Analysis CONTINUED
Total revenues decreased by $658 million in 1998 from 1997
primarily due to lower average realized prices, lower steel
shipment volumes, and lower income from affiliates. Total revenues
increased by $271 million in 1997 from 1996 primarily due to higher
average steel product prices and higher shipment volumes.
U. S. Steel Group income from operations for the last three
years was:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Segment income for U. S. Steel operations/(a)/ $ 330 $ 618 $ 248
Items not allocated to segment:
Pension credits 373 313 330
Administrative expenses (24) (33) (28)
Costs related to former business activities/(b)/ (100) (125) (120)
Gain on affiliate stock offering/(c)/ -- -- 53
----- ----- -----
Total income from operations $ 579 $ 773 $ 483
</TABLE>
/(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. Results in 1997
included charges of $9 million related to environmental
accruals and the adoption of SOP 96-1.
/(c)/For further details, see Note 9 to the USX Consolidated
Financial Statements.
Segment income for U. S. Steel operations
Segment income for U. S. Steel operations, which decreased $288
million in 1998 from 1997, included a net favorable $30 million for
an insurance litigation settlement pertaining to the 1995 Gary
(Ind.) Works No. 8 blast furnace explosion and charges of $10
million related to a voluntary workforce reduction plan. Results in
1997 included a benefit of $40 million in insurance settlement
payments related to the 1996 hearth breakout at Gary Works No. 13
blast furnace and a $15 million gain on the sale of the plate mill
at U. S. Steel's former Texas Works. In addition to the effects of
these items, the decrease in segment income in 1998 for U. S. Steel
operations was primarily due to lower average steel prices, lower
shipments, less efficient operating levels, the cost effects of the
10 day outage at Gary Works No. 13 blast furnace following a tap
hole failure, and lower income from affiliates. These unfavorable
items were partially offset by lower 1998 accruals for profit
sharing.
The increase in imports and weak tubular markets negatively
affected steel shipment levels, steel product prices and operating
levels in 1998. U. S. Steel shipments declined 8% in 1998 compared
to 1997. In 1998, raw steel production was negatively affected by a
planned reline at Gary Works No. 6 blast furnace, an unplanned
blast furnace outage at the Gary Works No. 13 blast furnace, and
the idling of certain facilities to control inventory as a result
of the increase in imports. In 1998, raw steel capability
utilization averaged 87.6%, compared to 96.5% in 1997.
Segment income for U. S. Steel operations increased $370 million
in 1997 compared to 1996. Results in 1996 included $39 million of
charges related to repair of the Gary Works No. 13 blast furnace
and $13 million of charges related to a voluntary workforce
reduction at the Fairless (Pa.) Works. In addition to the effects
of these items, the increase in 1997 was primarily due to higher
steel shipments, higher average realized steel prices, and improved
operating efficiencies, including the full year availability of the
Gary Works No. 13 blast furnace. These improvements were partially
offset by higher 1997 accruals for profit sharing.
The Gary Works No. 13 blast furnace, which represents about half
of Gary Works iron producing capacity and roughly one-fourth of U.
S. Steel's iron capacity, was idled on April 2, 1996 due to a
hearth breakout. In addition to direct repair costs, 1996 operating
results were adversely affected by production inefficiencies at
Gary, as well as at other U. S. Steel plants, reduced shipments and
higher costs for purchased iron and semifinished steel. The total
effect of this unplanned outage on 1996 segment income is estimated
to have been more than $100 million. USX maintained property damage
and business interruption insurance coverages for the No. 13 blast
furnace hearth breakout and the 1995 Gary Works No. 8 blast furnace
explosion, subject to a $50 million deductible per occurrence for
U-57
<PAGE>
Management's Discussion and Analysis CONTINUED
recoverable items. In 1998, USX and its insurance companies settled
the Gary Works No. 8 blast furnace loss for approximately $30
million (net of charges and reserves) in excess of the deductible.
In 1997, USX and its insurance companies settled the Gary Works No.
13 blast furnace loss for $40 million in excess of the deductible.
Segment income for U. S. Steel operations included pension costs
(which are primarily noncash) allocated to the ongoing operations
of U. S. Steel of $187 million, $169 million, and $172 million in
1998, 1997 and 1996, respectively. Pension costs in 1998 included
$10 million for termination benefits associated to a voluntary
early retirement program, the settlements for which will
principally occur in the first half of 1999.
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 $373
million in 1998, compared to $313 million and $330 million in 1997
and 1996 respectively.
Pension credits, combined with pension costs included in segment
income for U. S. Steel operations, resulted in net pension credits
of $186 million in 1998, $144 million in 1997 and $158 million in
1996. Net pension credits are expected to be approximately $205
million in 1999. 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 11 to the USX Consolidated
Financial Statements.
Outlook for 1999 U. S. Steel Group
U. S. Steel expects that shipment volumes and average steel
product prices will continue to be impacted by the effects of high
levels of low priced steel imports and growing domestic minimill
production capability for flat rolled products. Scrap prices are
currently at low levels and provide minimills a cost advantage. 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 adversely impact U. S. Steel Group's
product prices and shipment levels.
On August 1, 1999, U. S. Steel, along with several major steel
competitors, faces the expiration of the labor agreement with the
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
30%, 24% and 23% of the domestic steel market for the years 1998,
1997 and 1996, respectively. In November 1998, steel imports
accounted for an estimated 37% of the domestic steel market. Steel
imports of hot rolled and cold rolled steel increased 42% in 1998,
compared to 1997. Steel imports of plates increased 75% in 1998,
compared to 1997.
The preceding 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.
U-58
<PAGE>
Management's Discussion and Analysis CONTINUED
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 our 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.
<TABLE>
<CAPTION>
Percent Completed
Y2K
Y2K Readiness
Impact of
Y2K Assess- Overall
As of January 31, 1999 Inventory ment Inventory
<S> <C> <C> <C>
Information technology 100% 98% 95%
Non-information technology 100% 84% 81%
</TABLE>
Third Parties
The U. S. Steel Group continues to review its third party
(including, but not limited to outside processors, process control
systems and hardware suppliers, telecommunication providers, and
transportation carriers) relationships to determine those critical
to its operations. The majority of contacts have been made with
critical third parties to determine if they will be able to provide
their product and service to the U. S. Steel Group after the Year
2000. An aggressive follow-up process with those third parties not
responding or returning an unacceptable response is underway.
Communications with U. S. Steel Group'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 the third
U-59
<PAGE>
Management's Discussion and Analysis CONTINUED
parties, an effort will be made to work with the third parties to
resolve the issue, or a new provider of the same products or
services will be investigated and secured. As of December 31, 1998,
the U. S. Steel Group has sent out approximately 700 inquiries and
received over 600 responses.
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 January 31, 1999, were
$14 million, including $6 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.
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.
The Delhi Group
Effective October 31, 1997, USX sold Delhi Gas Pipeline
Corporation and other subsidiaries of USX that comprise all of the
Delhi Group.
U-60
<PAGE>
Quantitative and Qualitative Disclosures About Market Risk
Management Opinion Concerning Derivative Instruments
USX employs a strategic approach of limiting its use of
derivative instruments principally to hedging activities, whereby
gains and losses are generally offset by price changes in the
underlying commodity. Based on this approach, combined with risk
assessment procedures and internal controls, management believes
that its use of derivative instruments does not expose USX to
material risk; however, the use of derivative instruments for
hedging activities could materially affect USX's results of
operations in particular quarterly or annual periods. This is
primarily because use of such instruments may limit the company's
ability to benefit from favorable price movements. However,
management believes that use of these instruments will not have a
material adverse effect on financial position or liquidity. For a
summary of accounting policies related to derivative instruments,
see Note 1 to the USX Consolidated Financial Statements.
Commodity Price Risk and Related Risks
In the normal course of its business, USX is exposed to market
risk or price fluctuations related to the purchase, production or
sale of crude oil, natural gas, refined products and steel
products. To a lesser extent, USX is exposed to the risk of price
fluctuations on coal, coke, natural gas liquids, electricity,
petroleum feedstocks and certain nonferrous metals used as raw
materials. USX is also exposed to effects of price fluctuations on
the value of its commodity inventories.
USX's market risk strategy has generally been to obtain
competitive prices for its products and services and allow
operating results to reflect market price movements dictated by
supply and demand. However, USX uses fixed-price contracts and
derivative commodity instruments to manage a relatively small
portion of its commodity price risk. USX uses fixed-price contracts
for portions of its natural gas production to manage exposure to
fluctuations in natural gas prices. In addition, USX uses
derivative commodity instruments such as exchange-traded futures
contracts and options, and over-the-counter ("OTC") commodity swaps
and options to manage exposure to market risk related to the
purchase, production or sale of crude oil, natural gas, refined
products, certain nonferrous metals and electricity. USX's
strategic approach is to limit the use of these instruments
principally to hedging activities. Accordingly, gains and losses on
derivative commodity instruments are generally offset by the
effects of price changes in the underlying commodity. However,
certain derivative commodity instruments have the effect of
restoring the equity portion of fixed-price sales of natural gas to
variable market-based pricing. These instruments are used as part
of USX's overall risk management programs.
U-61
<PAGE>
Quantitative and Qualitative Disclosures
About Market Risk continued
Sensitivity analyses of the incremental effects on pretax income
of hypothetical 10% and 25% changes in commodity prices for open
derivative commodity instruments as of December 31, 1998, are
provided in the following table:/(a)/
<TABLE>
<CAPTION>
(Dollars in millions)
Incremental Decrease in
Pretax Income Assuming a
Hypothetical Price
Change of/(a)/
<S> <C> <C>
Derivative Commodity Instruments 10% 25%
Marathon Group/(b)(c):/
Crude oil (price increase)/(d)/ $2.6 $12.8
Natural gas (price decrease)/(d)/ 9.4 24.0
Refined products (price increase)/(d)/ 1.9 6.5
U. S. Steel Group:
Natural gas (price decrease)/(d)/ $2.3 $ 5.6
Zinc (price decrease)/(d)/ 1.6 3.9
Nickel (price decrease)/(d)/ .1 .2
Tin (price decrease)/(d)/ .1 .2
Heating oil (price decrease)/(d)/ -- .1
</TABLE>
/(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 December 31,
1998. Marathon Group and U. S. Steel Group management evaluate
their portfolios of derivative commodity instruments on an
ongoing basis and add or revise strategies to reflect anticipated
market conditions and changes in risk profiles. Changes to the
portfolios subsequent to December 31, 1998, would cause future
pretax income effects to differ from those presented in the
table.
/(b)/ The number of net open contracts varied throughout 1998,
from a low of 1,268 contracts at January 1, to a high of 17,359
contracts at September 24, and averaged 8,171 for the year. The
derivative commodity instruments used and hedging positions taken
also varied throughout 1998, and will continue to vary in the
future. Because of these variations in the composition of the
portfolio over time, the number of open contracts, by itself,
cannot be used to predict future income effects.
/(c)/ The calculation of sensitivity amounts for basis swaps assumes
that the physical and paper indices are perfectly correlated.
Gains and losses on options are based on changes in intrinsic
value only.
/(d)/ The direction of the price change used in calculating the
sensitivity amount for each commodity reflects that which would
result in the largest incremental decrease in pretax income when
applied to the derivative commodity instruments used to hedge
that commodity.
While derivative commodity instruments are generally used to
reduce risks from unfavorable commodity price movements, they also
may limit the opportunity to benefit from favorable movements.
During the fourth quarter of 1996, certain hedging strategies
matured which limited the Marathon Group's ability to benefit from
favorable market price increases on the sales of equity crude oil
and natural gas production, resulting in pretax hedging losses of
$33 million. In total, Marathon's upstream operations recorded net
pretax hedging losses of $3 million in 1998, compared with net
losses of $3 million in 1997, and net losses of $38 million in
1996.
Marathon's downstream operations generally use derivative
commodity instruments to lock-in costs of certain raw material
purchases, to protect carrying values of inventories and to protect
margins on fixed-price sales of refined products. In total,
Marathon's downstream operations recorded net pretax hedging gains,
net of the 38% minority interest in MAP, of $28 million in 1998,
compared with net gains of $29 million in 1997, and net losses of
$22 million in 1996. Essentially, all of these upstream and
downstream gains and losses were offset by changes in the prices of
the underlying hedged commodities, with the net effect
approximating the targeted results of the hedging strategies.
The U. S. Steel Group uses OTC commodity swaps to manage
exposure to market risk related to the purchase of natural gas,
heating oil and certain nonferrous metals. The U. S. Steel Group
recorded net pretax hedging losses of $6 million in 1998, compared
with net gains of $5 million in 1997 and net gains of $21 million
in 1996. These gains and losses were offset by changes in the
realized prices of the underlying hedged commodities.
U-62
<PAGE>
Quantitative and Qualitative Disclosures
About Market Risk continued
For additional quantitative information relating to derivative
commodity instruments, including aggregate contract values and fair
values, where appropriate, see Note 27 to the USX Consolidated
Financial Statements.
USX is subject to basis risk, caused by factors that affect the
relationship between commodity futures prices reflected in
derivative commodity instruments and the cash market price of the
underlying commodity. Natural gas transaction prices are frequently
based on industry reference prices that may vary from prices
experienced in local markets. For example, New York Mercantile
Exchange ("NYMEX") contracts for natural gas are priced at
Louisiana's Henry Hub, while the underlying quantities of natural
gas may be produced and sold in the Western United States at prices
that do not move in strict correlation with NYMEX prices. To the
extent that commodity price changes in one region are not reflected
in other regions, derivative commodity instruments may no longer
provide the expected hedge, resulting in increased exposure to
basis risk. These regional price differences could yield favorable
or unfavorable results. OTC transactions are being used to manage
exposure to a portion of basis risk.
USX is subject to liquidity risk, caused by timing delays in
liquidating contract positions due to a potential inability to
identify a counterparty willing to accept an offsetting position.
Due to the large number of active participants, liquidity risk
exposure is relatively low for exchange-traded transactions.
Interest Rate Risk
USX is subject to the effects of interest rate fluctuations on
certain of its non-derivative financial instruments. A sensitivity
analysis of the projected incremental effect of a hypothetical 10%
decrease in year-end 1998 interest rates on the fair value of USX's
non-derivative financial instruments, is provided in the following
table:
<TABLE>
<CAPTION>
(Dollars in millions)
As of December 31, 1998 Incremental
Increase in
Carrying Fair Fair
Non-Derivative Financial Instruments/(a)/ Value/(b)/ Value/(b)/ Value/(c)/
<S> <C> <C> <C>
Financial assets:
Investments and long-term receivables/(d)/ $ 124 $ 180 $ --
Financial liabilities:
Long-term debt (including amounts due within one year)/(e)/ $3,896 $ 4,203 $ 158
Preferred stock of subsidiary/(f)/ 250 249 20
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust/(f)/ 182 165 13
------ ------- -------
Total $4,328 $ 4,617 $ 191
</TABLE>
/(a)/ Fair values of cash and cash equivalents, receivables,
notes payable, accounts payable and accrued interest, approximate
carrying value and are relatively insensitive to changes in
interest rates due to the short-term maturity of the instruments.
Accordingly, these instruments are excluded from the table.
/(b)/ See Note 28 to the USX Consolidated Financial Statements.
/(c)/ Reflects, by class of financial instrument, the estimated
incremental effect of a hypothetical 10% decrease in interest
rates at December 31, 1998, on the fair value of USX's non-
derivative financial instruments. For financial liabilities, this
assumes a 10% decrease in the weighted average yield to maturity
of USX's long-term debt at December 31, 1998.
/(d)/ For additional information, see Note 15 to the USX
Consolidated Financial Statements.
/(e)/ Fair value was based on market prices where available, or
current borrowing rates for financings with similar terms and
maturities. For additional information, see Note 17 to the USX
Consolidated Financial Statements.
/(f)/ See Note 25 to the USX Consolidated Financial Statements.
At December 31, 1998, USX's portfolio of long-term debt was
comprised primarily of fixed-rate instruments. Therefore, the fair
value of the portfolio is relatively sensitive to effects of
interest rate fluctuations. This sensitivity is illustrated by the
$120 million increase in the fair value of long-term debt assuming
a hypothetical 10% decrease in interest rates. However, USX's
sensitivity to interest rate declines and corresponding increases
in the fair value of its debt portfolio would unfavorably affect
USX's results and cash flows only to the extent that USX elected to
repurchase or otherwise retire all or a portion of its fixed-rate
debt portfolio at prices above carrying value.
U-63
<PAGE>
Quantitative and Qualitative Disclosures
About Market Risk continued
Foreign Currency Exchange Rate Risk
USX is subject to the risk of price fluctuations related to
anticipated revenues and operating costs, firm commitments for
capital expenditures and existing assets or liabilities denominated
in currencies other than U.S. dollars. USX has not generally used
derivative instruments to manage this risk. However, USX has made
limited use of forward currency contracts to manage exposure to
certain currency price fluctuations. At December 31, 1998, USX had
open Canadian dollar forward purchase contracts with a total
carrying value of $36 million. A 10% increase in the December 31,
1998, Canadian dollar to U.S. dollar forward rate, would result in
a charge to income of $3 million.
Equity Price Risk
USX is subject to equity price risk resulting from its issuance
in December 1996 of $117 million of 6-3/4% Exchangeable Notes Due
February 1, 2000 ("Indexed Debt"). At maturity, USX must exchange
the notes for shares of RTI International Metals, Inc. (formerly
RMI Titanium Company) ("RTI") common stock, or redeem the notes for
the equivalent amount of cash. Each quarter, USX adjusts the
carrying value of Indexed Debt to settlement value, based on
changes in the value of RTI common stock. Any resulting adjustment
is charged or credited to income and included in interest and other
financial costs. During 1998, USX recorded a favorable adjustment
of $44 million. At year-end 1998, a hypothetical 10% increase in
the value of RTI common stock would have resulted in a $7 million
unfavorable effect on pretax income. USX holds a 26% interest in
RTI which is accounted for under the equity method. At December 31,
1998, USX's investment in RTI common stock had a fair market value
of $77 million and USX's carrying value of the Indexed Debt was $69
million. The unfavorable effects on income described above would
generally be offset by changes in the market value of USX's
investment in RTI. However, under the equity method of accounting,
USX cannot recognize in income these changes in the market value
until the investment is liquidated.
Safe Harbor
USX's quantitative and qualitative disclosures about market risk
include forward-looking statements with respect to management's
opinion about risks associated with USX's use of derivative
instruments. These statements are based on certain assumptions with
respect to market prices and industry supply of and demand for
crude oil, 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.
U-64
<PAGE>
Marathon Group
Index to Financial Statements, Supplementary Data,
Management's Discussion and Analysis, and
Quantitative and Qualitative Disclosures About Market Risk
Page
----
Management's Report.......................................... M-1
Audited Financial Statements:
Report of Independent Accountants............................ M-1
Statement of Operations...................................... M-2
Balance Sheet................................................ M-3
Statement of Cash Flows...................................... M-4
Notes to Financial Statements................................ M-5
Selected Quarterly Financial Data............................ M-21
Principal Unconsolidated Affiliates.......................... M-21
Supplementary Information.................................... M-21
Five-Year Operating Summary.................................. M-22
Five-Year Financial Summary.................................. M-24
Management's Discussion and Analysis......................... M-25
Quantitative and Qualitative Disclosures About Market Risk... M-37
<PAGE>
Management's Report
The accompanying financial statements of the Marathon Group are
the responsibility of and have been prepared by USX Corporation
(USX) in conformity with generally accepted accounting principles.
They necessarily include some amounts that are based on best
judgments and estimates. The Marathon Group financial information
displayed in other sections of this report is consistent with these
financial statements.
USX seeks to assure the objectivity and integrity of its
financial records by careful selection of its managers, by
organizational arrangements that provide an appropriate division of
responsibility and by communications programs aimed at assuring
that its policies and methods are understood throughout the
organization.
USX has a comprehensive formalized system of internal
accounting controls designed to provide reasonable assurance that
assets are safeguarded and that financial records are reliable.
Appropriate management monitors the system for compliance, and the
internal auditors independently measure its effectiveness and
recommend possible improvements thereto. In addition, as part of
their audit of the financial statements, USX's independent
accountants, who are elected by the stockholders, review and test
the internal accounting controls selectively to establish a basis
of reliance thereon in determining the nature, extent and timing of
audit tests to be applied.
The Board of Directors pursues its oversight role in the
area of financial reporting and internal accounting control through
its Audit Committee. This Committee, composed solely of
nonmanagement directors, regularly meets (jointly and separately)
with the independent accountants, management and internal auditors
to monitor the proper discharge by each of its responsibilities
relative to internal accounting controls and the consolidated and
group financial statements.
Thomas J. Usher Robert M. Hernandez Kenneth L. Matheny
Chairman, Board of Directors Vice Chairman Vice President
& Chief Executive Officer & Chief Financial Officer & Comptroller
Report of Independent Accountants
To the Stockholders of USX Corporation:
In our opinion, the accompanying financial statements appearing
on pages M-2 through M-20 present fairly, in all material respects,
the financial position of the Marathon Group at December 31, 1998
and 1997, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These
financial statements are the responsibility of USX' s management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The Marathon Group is a business unit of USX Corporation
(as described in Note 1, page M-5); accordingly, the financial
statements of the Marathon Group should be read in connection with
the consolidated financial statements of USX Corporation.
PricewaterhouseCoopers LLP
600 Grant Street, Pittsburgh,
Pennsylvania 15219-2794
February 9, 1999
M-1
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Revenues:
Sales (Note 7) $21,726 $15,668 $16,297
Dividend and affiliate income 50 36 33
Gain on disposal of assets 28 37 55
Gain on ownership change in
Marathon Ashland Petroleum LLC (Note 5) 245 -- --
Other income 26 13 9
------- ------- -------
Total revenues 22,075 15,754 16,394
------- ------- -------
Costs and expenses:
Cost of sales (excludes items shown below) 15,325 10,392 11,188
Selling, general and administrative expenses 505 355 309
Depreciation, depletion and amortization 941 664 693
Taxes other than income taxes 3,786 2,938 2,971
Exploration expenses 313 189 146
Inventory market valuation charges (credits) (Note 21) 267 284 (209)
------- ------- -------
Total costs and expenses 21,137 14,822 15,098
------- ------- -------
Income from operations 938 932 1,296
Net interest and other financial costs (Note 8) 237 260 305
Minority interest in income of
Marathon Ashland Petroleum LLC (Note 5) 249 -- --
------- ------- -------
Income before income taxes and extraordinary loss 452 672 991
Provision for estimated income taxes (Note 19) 142 216 320
------- ------- -------
Income before extraordinary loss 310 456 671
Extraordinary loss (Note 9) -- -- 7
------- ------- -------
Net income $ 310 $ 456 $ 664
Income Per Common Share
1998 1997 1996
Basic:
Income before extraordinary loss $ 1.06 $ 1.59 $ 2.33
Extraordinary loss -- -- .02
------- ------- -------
Net income $ 1.06 $ 1.59 $ 2.31
Diluted:
Income before extraordinary loss $ 1.05 $ 1.58 $ 2.31
Extraordinary loss -- -- .02
------- ------- -------
Net income $ 1.05 $ 1.58 $ 2.29
</TABLE>
See Note 23, for a description and computation of income per common
share.
The accompanying notes are an integral part of these financial
statements.
M-2
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet
(Dollars in millions) December 31 1998 1997
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (Note 6) $ 137 $ 36
Receivables, less allowance for doubtful accounts
of $3 and $2 1,277 856
Inventories (Note 21) 1,310 980
Other current assets 252 146
------- -------
Total current assets 2,976 2,018
Investments and long-term receivables (Note 20) 603 455
Property, plant and equipment -- net (Note 17) 10,429 7,566
Prepaid pensions (Note 15) 241 290
Other noncurrent assets 295 236
------- -------
Total assets $14,544 $10,565
Liabilities
Current liabilities:
Notes payable $ 132 $ 108
Accounts payable 1,980 1,348
Distribution payable to minority shareholder of
Marathon Ashland Petroleum LLC (Note 6) 103 --
Payroll and benefits payable 150 142
Accrued taxes 95 102
Deferred income taxes (Note 19) 4 61
Accrued interest 87 84
Long-term debt due within one year (Note 13) 59 417
------- -------
Total current liabilities 2,610 2,262
Long-term debt (Note 13) 3,456 2,476
Long-term deferred income taxes (Note 19) 1,450 1,318
Employee benefits (Note 15) 553 375
Deferred credits and other liabilities 389 332
Preferred stock of subsidiary (Note 10) 184 184
Minority interest in Marathon Ashland Petroleum LLC (Note 5) 1,590 --
Common Stockholders' Equity (Note 18) 4,312 3,618
------- -------
Total liabilities and common stockholders' equity $14,544 $10,565
</TABLE>
The accompanying notes are an integral part of these financial
statements.
M-3
<PAGE>
<TABLE>
<CAPTION>
Statement of Cash Flows
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Increase (decrease) in cash and cash
equivalents
Operating activities:
Net income $ 310 $ 456 $ 664
Adjustments to reconcile to net cash provided
from operating activities:
Minority interest in income of
Marathon Ashland Petroleum LLC -- net of distributions 38 -- --
Depreciation, depletion and amortization 941 664 693
Exploratory dry well costs 186 78 54
Inventory market valuation charges (credits) 267 284 (209)
Pensions and other postretirement benefits 34 6 12
Deferred income taxes 26 30 104
Gain on ownership change in
Marathon Ashland Petroleum LLC (245) -- --
Gain on disposal of assets (28) (37) (55)
Changes in: Current receivables -- sold -- (340) --
-- operating turnover 240 97 (119)
Inventories (13) 18 72
Current accounts payable and accrued expenses (233) 11 211
All other -- net (92) (21) 76
------- ------- ----------
Net cash provided from operating activities 1,431 1,246 1,503
------- ------- ----------
Investing activities:
Capital expenditures (1,270) (1,038) (751)
Acquisition of Tarragon Oil and Gas Limited (686) -- --
Disposal of assets 65 60 282
Restricted cash -- withdrawals 11 108 --
-- deposits (32) (10) (98)
Affiliates -- investments (42) (193) (31)
-- loans and advances (103) (46) (6)
-- repayments of loans and advances 63 5 15
All other -- net (10) 1 9
------- ------- ----------
Net cash used in investing activities (2,004) (1,113) (580)
------- ------- ----------
Financing activities (Note 4):
Increase (decrease) in Marathon Group's portion of
USX consolidated debt 329 97 (769)
Specifically attributed debt:
Borrowings 366 -- --
Repayments (389) (39) (1)
Marathon Stock issued 613 34 2
Dividends paid (246) (219) (201)
------- ------- ----------
Net cash provided from (used in) financing activities 673 (127) (969)
------- ------- ----------
Effect of exchange rate changes on cash 1 (2) 1
------- ------- ----------
Net increase (decrease) in cash and cash equivalents 101 4 (45)
Cash and cash equivalents at beginning of year 36 32 77
------- ------- ----------
Cash and cash equivalents at end of year $ 137 $ 36 $ 32
</TABLE>
See Note 14, for supplemental cash flow information.
The accompanying notes are an integral part of these financial
statements.
M-4
<PAGE>
Notes to Financial Statements
1. Basis of Presentation
After the redemption of the USX -- Delhi Group stock on January
26, 1998, USX Corporation (USX) has two classes of common stock:
USX -- Marathon Group Common Stock (Marathon Stock) and USX --
U. S. Steel Group Common Stock (Steel Stock), which are intended
to reflect the performance of the Marathon Group and the U. S.
Steel Group, respectively.
The financial statements of the Marathon Group include
the financial position, results of operations and cash flows for
the businesses of Marathon Oil Company (Marathon) and certain other
subsidiaries of USX, and a portion of the corporate assets and
liabilities and related transactions which are not separately
identified with ongoing operating units of USX. The Marathon Group
financial statements are prepared using the amounts included in the
USX consolidated financial statements. For a description of the
Marathon Group's operating segments, see Note 11.
Although the financial statements of the Marathon Group
and the U. S. Steel Group separately report the assets, liabilities
(including contingent liabilities) and stockholders' equity of USX
attributed to each such Group, such attribution of assets,
liabilities (including contingent liabilities) and stockholders'
equity between the Marathon Group and the U. S. Steel Group for the
purpose of preparing their respective financial statements does not
affect legal title to such assets or responsibility for such
liabilities. Holders of Marathon Stock and Steel Stock are holders
of common stock of USX and continue to be subject to all the risks
associated with an investment in USX and all of its businesses and
liabilities. Financial impacts arising from one Group that affect
the overall cost of USX's capital could affect the results of
operations and financial condition of the other Group. In addition,
net losses of either Group, as well as dividends and distributions
on any class of USX Common Stock or series of preferred stock and
repurchases of any class of USX Common Stock or series of preferred
stock at prices in excess of par or stated value, will reduce the
funds of USX legally available for payment of dividends on both
classes of Common Stock. Accordingly, the USX consolidated
financial information should be read in connection with the
Marathon Group financial information.
2. Summary of Principal Accounting Policies
Principles applied in consolidation -- These financial
statements include the accounts of the businesses comprising the
Marathon Group. The Marathon Group and the U. S. Steel Group
financial statements, taken together, comprise all of the accounts
included in the USX consolidated financial statements.
Investments in unincorporated oil and gas joint ventures,
undivided interest pipelines and jointly owned gas processing
plants are consolidated on a pro rata basis.
Investments in other entities over which the Marathon
Group has significant influence are accounted for using the equity
method of accounting and are carried at the Marathon Group's share
of net assets plus loans and advances.
Investments in other companies whose stock is publicly
traded are carried at market value. The difference between the cost
of these investments and market value is recorded in other
comprehensive income (net of tax). Investments in companies whose
stock has no readily determinable fair value are carried at cost.
Use of estimates -- Generally accepted accounting principles
require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at year-end and the reported
amounts of revenues and expenses during the year. Significant items
subject to such estimates and assumptions include the carrying
value of long-lived assets; valuation allowances for receivables,
inventories and deferred income tax assets; environmental
liabilities; liabilities for potential tax deficiencies and
potential litigation claims and settlements; and assets and
obligations related to employee benefits. Additionally, certain
estimated liabilities are recorded when management commits to a
plan to close an operating facility or to exit a business activity.
Actual results could differ from the estimates and assumptions
used.
Revenue recognition -- Revenues principally include sales,
dividend and affiliate income, gains or losses on the disposal of
assets and gains or losses from changes in ownership interests.
Sales are recognized when products are shipped or
services are provided to customers. Consumer excise taxes on
petroleum products and merchandise and matching crude oil and
refined products buy/sell transactions settled in cash are included
in both revenues and costs and expenses, with no effect on income.
M-5
<PAGE>
Dividend and affiliate income includes the Marathon
Group's proportionate share of income from equity method
investments and dividend income from other investments. Dividend
income is recognized when dividend payments are received.
When long-lived assets depreciated on an individual basis
are sold or otherwise disposed of, any gains or losses are
reflected in income. Such gains or losses on the disposal of long-
lived assets are recognized when title passes to the buyer and, if
applicable, all significant regulatory approvals are received.
Proceeds from disposal of long-lived assets depreciated on a group
basis are credited to accumulated depreciation, depletion and
amortization with no immediate effect on income.
Gains or losses from a change in ownership of a
consolidated subsidiary or an unconsolidated affiliate are
recognized in revenues in the period of change.
Cash and cash equivalents -- Cash and cash equivalents include
cash on hand and on deposit and investments in highly liquid debt
instruments with maturities generally of three months or less.
Inventories -- Inventories are carried at lower of cost or market.
Cost of inventories is determined primarily under the last-in,
first-out (LIFO) method.
Derivative instruments -- The Marathon Group engages in commodity
and currency risk management activities within the normal course of
its business as an end-user of derivative instruments (Note 25).
Management is authorized to manage exposure to price fluctuations
related to the purchase, production or sale of crude oil, natural
gas, refined products and electricity through the use of a variety
of derivative financial and nonfinancial instruments. Derivative
financial instruments require settlement in cash and include such
instruments as over-the-counter (OTC) commodity swap agreements and
OTC commodity options. Derivative nonfinancial instruments require
or permit settlement by delivery of commodities and include
exchange-traded commodity futures contracts and options. At times,
derivative positions are closed, prior to maturity, simultaneous
with the underlying physical transaction and the effects are
recognized in income accordingly. The Marathon Group's practice
does not permit derivative positions to remain open if the
underlying physical market risk has been removed. Derivative
instruments relating to fixed price sales of equity production are
marked-to-market in the current period and the related income
effects are included within income from operations. All other
changes in the market value of derivative instruments are deferred,
including both closed and open positions, and are subsequently
recognized in income, as sales or cost of sales, in the same period
as the underlying transaction. Premiums on all commodity-based
option contracts are initially recorded based on the amount paid or
received; the options' market value is subsequently recorded as a
receivable or payable, as appropriate. The margin receivable
accounts required for open commodity contracts reflect changes in
the market prices of the underlying commodity and are settled on a
daily basis.
Forward exchange contracts are used to manage currency
risks related to commitments for capital expenditures and existing
assets or liabilities denominated in a foreign currency. Gains or
losses related to firm commitments are deferred and included with
the underlying transaction; all other gains or losses are
recognized in income in the current period as sales, cost of sales,
interest income or expense, or other income, as appropriate.
Forward exchange contract values are included in receivables or
payables, as appropriate.
Recorded deferred gains or losses are reflected within
other current and noncurrent assets or accounts payable and
deferred credits and other liabilities. Cash flows from the use of
derivative instruments are reported in the same category as the
hedged item in the statement of cash flows.
Exploration and development -- The Marathon Group follows the
successful efforts method of accounting for oil and gas exploration
and development.
Gas balancing -- The Marathon Group follows the sales method of
accounting for gas production imbalances.
Long-lived assets -- Depreciation and depletion of oil and gas
producing properties are computed using predetermined rates based
upon estimated proved oil and gas reserves applied on a units-of-
production method. Other items of property, plant and equipment are
depreciated principally by the straight-line method.
The Marathon Group evaluates impairment of its oil and
gas producing assets primarily on a field-by-field basis. Other
assets are evaluated on an individual asset basis or by logical
groupings of assets. Assets deemed to be impaired are written down
to their fair value, including any related goodwill, using
discounted future cash flows and, if available, comparable market
values.
Environmental liabilities -- The Marathon Group provides for
remediation costs and penalties when the responsibility to
remediate is probable and the amount of associated costs is
reasonably determinable. Generally, the timing of remediation
accruals coincides with completion of a feasibility study or the
commitment to a formal plan of action. Remediation liabilities are
accrued based on estimates of known environmental exposure and are
discounted in certain instances. If recoveries of remediation costs
from third parties are probable, a receivable is recorded.
Estimated abandonment and dismantlement costs of offshore
production platforms are accrued based upon estimated proved oil
and gas reserves on a units-of-production method.
M-6
<PAGE>
Insurance -- The Marathon Group is insured for catastrophic
casualty and certain property and business interruption exposures,
as well as those risks required to be insured by law or contract.
Costs resulting from noninsured losses are charged against income
upon occurrence.
Reclassifications -- Certain reclassifications of prior years'
data have been made to conform to 1998 classifications.
3. New Accounting Standards
The following accounting standards were adopted by USX:
Reporting comprehensive income -- Effective January 1, 1998, USX
adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income". This Standard establishes
requirements for reporting and display of comprehensive income
and its components in the financial statements. Comprehensive
income is defined as the change in equity of a business
enterprise during a period from transactions and other events
from nonowner sources. It includes all changes in equity during
a period except those resulting from investments by and
distributions to owners. See disclosures of comprehensive income
at Note 18 and on page U-7 of the USX consolidated financial
statements.
Disclosures of operating segments -- USX adopted in 1998,
Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information", which establishes new standards for reporting
information about operating segments and related disclosures
about products and services, geographic areas and major
customers. The most significant new requirement of this Standard
is that reportable operating segments be based on an
enterprise's internally reported business segments. See
disclosures of operating segments at Note 11.
Disclosures of postretirement benefits -- USX adopted in 1998,
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits"
(SFAS No. 132), which revises and standardizes the reporting
requirements for postretirement benefits. However, the Standard
does not change the measurement and recognition of those
benefits. The Marathon Group has complied with SFAS No. 132 by
disclosing pension and other postretirement benefits at Note 15.
Environmental remediation liabilities -- Effective January 1,
1997, USX adopted American Institute of Certified Public
Accountants Statement of Position No. 96-1, "Environmental
Remediation Liabilities" (SOP 96-1), which provides additional
interpretation of existing accounting standards related to
recognition, measurement and disclosure of environmental
remediation liabilities. As a result of adopting SOP 96-1, the
Marathon Group identified additional environmental remediation
liabilities of $11 million. Estimated receivables for
recoverable costs related to adoption of SOP 96-1 were $4
million. The net unfavorable effect of adoption on the Marathon
Group's income from operations at January 1, 1997, was $7
million.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
(SFAS No. 133). This new Standard requires recognition of all
derivatives as either assets or liabilities at fair value. SFAS No.
133 may result in additional volatility in both current period
earnings and other comprehensive income as a result of recording
recognized and unrecognized gains and losses resulting from changes
in the fair value of derivative instruments. SFAS No. 133 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 employed by the
Marathon Group and the level of activity related to forward
exchange contracts and commodity-based derivative instruments in
recent periods, the Marathon Group does not anticipate the effect
of adoption to have a material impact on either financial position
or results of operations. The Marathon Group plans to adopt SFAS
No. 133 effective January 1, 2000, as required.
M-7
<PAGE>
4. Corporate Activities
Financial activities -- As a matter of policy, USX manages most
financial activities on a centralized, consolidated basis. Such
financial activities include the investment of surplus cash; the
issuance, repayment and repurchase of short-term and long-term
debt; the issuance, repurchase and redemption of preferred stock;
and the issuance and repurchase of common stock. Transactions
related primarily to invested cash, short-term and long-term debt
(including convertible debt), related net interest and other
financial costs, and preferred stock and related dividends are
attributed to the Marathon Group, the U. S. Steel Group and, prior
to November 1, 1997, the Delhi Group based upon the cash flows of
each group for the periods presented and the initial capital
structure of each group. Most financing transactions are attributed
to and reflected in the financial statements of all groups. See
Note 10, for the Marathon Group's portion of USX's financial
activities attributed to all groups. However, transactions such as
leases, certain collaterized financings, certain indexed debt
instruments, financial activities of consolidated entities which
are less than wholly owned by USX and transactions related to
securities convertible solely into any one class of common stock
are or will be specifically attributed to and reflected in their
entirety in the financial statements of the group to which they
relate.
Corporate general and administrative costs -- Corporate general
and administrative costs are allocated to the Marathon Group, the
U. S. Steel Group and, prior to November 1, 1997, the Delhi Group
based upon utilization or other methods management believes to be
reasonable and which consider certain measures of business
activities, such as employment, investments and sales. The costs
allocated to the Marathon Group were $28 million in 1998, $37
million in 1997 and $30 million in 1996, and primarily consist of
employment costs including pension effects, professional services,
facilities and other related costs associated with corporate
activities.
Income taxes -- All members of the USX affiliated group are
included in the consolidated United States federal income tax
return filed by USX. Accordingly, the provision for federal income
taxes and the related payments or refunds of tax are determined on
a consolidated basis. The consolidated provision and the related
tax payments or refunds have been reflected in the Marathon Group,
the U. S. Steel Group and, prior to November 1, 1997, the Delhi
Group financial statements in accordance with USX's tax allocation
policy. In general, such policy provides that the consolidated tax
provision and related tax payments or refunds are allocated among
the Marathon Group, the U. S. Steel Group and, prior to November 1,
1997, the Delhi Group, for group financial statement purposes,
based principally upon the financial income, taxable income,
credits, preferences and other amounts directly related to the
respective groups.
For tax provision and settlement purposes, tax benefits
resulting from attributes (principally net operating losses and
various tax credits), which cannot be utilized by one of the groups
on a separate return basis but which can be utilized on a
consolidated basis in that year or in a carryback year, are
allocated to the group that generated the attributes. To the extent
that one of the groups is allocated a consolidated tax attribute
which, as a result of expiration or otherwise, is not ultimately
utilized on the consolidated tax return, the prior years'
allocation of such attribute is adjusted such that the effect of
the expiration is borne by the group that generated the attribute.
Also, if a tax attribute cannot be utilized on a consolidated basis
in the year generated or in a carryback year, the prior years'
allocation of such consolidated tax effects is adjusted in a
subsequent year to the extent necessary to allocate the tax
benefits to the group that would have realized the tax benefits on
a separate return basis. As a result, the allocated group amounts
of taxes payable or refundable are not necessarily comparable to
those that would have resulted if the groups had filed separate tax
returns.
5. Business Combinations
In August 1998, Marathon acquired Tarragon Oil and Gas Limited
(Tarragon), a Canadian oil and gas exploration and production
company. Securityholders of Tarragon received, at their election,
Cdn$14.25 for each Tarragon share, or the economic equivalent in
Exchangeable Shares of an indirect Canadian subsidiary of Marathon,
which are exchangeable solely on a one-for-one basis into Marathon
Stock. The purchase price included cash payments of $686 million,
issuance of 878,074 Exchangeable Shares valued at $29 million and
the assumption of $345 million in debt.
The Exchangeable Shares are exchangeable at the option of
the holder at any time and automatically redeemable on August 11,
2003 (and, in certain circumstances, as early as August 11, 2001).
The holders of Exchangeable Shares are entitled to receive declared
dividends equivalent to dividends declared from time to time by USX
on Marathon Stock.
Marathon accounted for the acquisition using the purchase
method of accounting. The 1998 results of operations include the
operations of Marathon Canada Limited, formerly known as Tarragon,
commencing August 12, 1998.
M-8
<PAGE>
During 1997, Marathon and Ashland Inc. (Ashland) agreed
to combine the major elements of their refining, marketing and
transportation (RM&T) operations. On January 1, 1998, Marathon
transferred certain RM&T net assets to Marathon Ashland Petroleum
LLC (MAP), a new consolidated subsidiary. Also on January 1, 1998,
Marathon acquired certain RM&T net assets from Ashland in exchange
for a 38% interest in MAP. The acquisition was accounted for under
the purchase method of accounting. The purchase price was
determined to be $1.9 billion, based upon an external valuation.
The change in Marathon's ownership interest in MAP resulted in a
gain of $245 million, which is included in 1998 revenues.
In connection with the formation of MAP, Marathon and
Ashland entered into a Limited Liability Company Agreement dated
January 1, 1998 (the LLC Agreement). The LLC Agreement provides for
an initial term of MAP expiring on December 31, 2022 (25 years from
its formation). The term will automatically be extended for ten-
year periods, unless a termination notice is given by either party.
Also in connection with the formation of MAP, the parties
entered into a Put/Call, Registration Rights and Standstill
Agreement (the Put/Call Agreement). The Put/Call Agreement provides
that at any time after December 31, 2004, Ashland will have the
right to sell to Marathon all of Ashland's ownership interest in
MAP, for an amount in cash and/or Marathon or USX debt or equity
securities equal to the product of 85% (90% if equity securities
are used) of the fair market value of MAP at that time, multiplied
by Ashland's percentage interest in MAP. Payment could be made at
closing, or at Marathon's option, in three equal annual
installments, the first of which would be payable at closing. At
any time after December 31, 2004, Marathon will have the right to
purchase all of Ashland's ownership interests in MAP, for an amount
in cash equal to the product of 115% of the fair market value of
MAP at that time, multiplied by Ashland's percentage interest in
MAP.
The following unaudited pro forma data for the Marathon
Group includes the results of operations of Tarragon for 1998 and
1997, and the Ashland RM&T net assets for 1997, giving effect to
the acquisitions as if they had been consummated at the beginning
of the years presented. The pro forma data is based on historical
information and does not necessarily reflect the actual results
that would have occurred nor is it necessarily indicative of future
results of operations.
<TABLE>
<CAPTION>
(In millions, except per share amounts) 1998 1997
<S> <C> <C>
Revenues $22,169 $23,333
Net income 279/(a)/ 457/(a)/
Net income per common share --
Basic and diluted .95 1.58
</TABLE>
/(a)/ Excluding the pro forma inventory market valuation adjustment,
pro forma net income would have been $383 million in 1998 and
$619 million in 1997. Reported net income, excluding the
reported inventory market valuation adjustment, would have
been $414 million in 1998 and $635 million in 1997.
6. Transactions Between MAP and Ashland
At December 31, 1998, MAP included in their cash and cash
equivalents, a $103 million demand note invested with Ashland,
which is payable March 15, 1999.
During 1998, MAP's petroleum products' sales to Ashland
were $185 million and MAP's purchases of products and services from
Ashland were $45 million. These transactions were conducted on an
arm's-length basis.
At December 31, 1998, MAP had current receivables from
Ashland of $22 million and current payables, including
distributions payable, to Ashland of $106 million.
7. Revenues
<TABLE>
<CAPTION>
The items below are included in revenues and costs and expenses,
with no effect on income.
(In millions) 1998 1997 1996
<S> <C> <C> <C>
Matching crude oil and refined product
buy/sell transactions settled in cash $3,948 $2,436 $2,912
Consumer excise taxes on petroleum products
and merchandise 3,581 2,736 2,768
</TABLE>
M-9
<PAGE>
8. Other Items
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
<S> <C> <C> <C>
Net interest and other financial costs
Interest and other financial income/(a)/:
Interest income $ 30 $ 7 $ 4
Other 4 (6) (1)
----- ----- -----
Total 34 1 3
----- ----- -----
Interest and other financial costs/(a)/:
Interest incurred 285 232 260
Less interest capitalized 40 24 3
----- ----- -----
Net interest 245 208 257
Interest on tax issues 5 7 4
Financial costs on preferred stock of subsidiary 17 16 16
Amortization of discounts 4 4 7
Expenses on sales of accounts receivable -- 19 20
Other -- 7 4
----- ----- -----
Total 271 261 308
----- ----- -----
Net interest and other financial costs/(a)/ $ 237 $ 260 $ 305
</TABLE>
/(a)/ See Note 4, for discussion of USX net interest and other
financial costs attributable to the Marathon Group.
Foreign currency transactions
For 1998, 1997 and 1996, the aggregate foreign currency
transaction gains (losses) included in determining net income
were $13 million, $4 million and $(24) million, respectively.
9. Extraordinary Loss
On December 30, 1996, USX irrevocably called for redemption on
January 30, 1997, $120 million of debt, resulting in a 1996
extraordinary loss to the Marathon Group of $7 million, net of a $4
million income tax benefit.
10. Financial Activities Attributed to Groups
The following is the portion of USX financial activities
attributed to the Marathon Group. These amounts exclude amounts
specifically attributed to the Marathon Group.
<TABLE>
<CAPTION>
Marathon Group Consolidated USX (a)
(In millions) December 31 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 4 $ 5 $ 4 $ 6
Receivables/(b)/ -- 9 -- 10
Other noncurrent assets/(b)/ 7 7 8 8
------ ------ ------ ------
Total assets $ 11 $ 21 $ 12 $ 24
Notes payable $ 132 $ 108 $ 145 $ 121
Accounts payable -- 1 -- 1
Accrued interest 80 79 88 89
Long-term debt due within one year (Note 13) 59 417 66 466
Long-term debt (Note 13) 3,456 2,452 3,762 2,704
Preferred stock of subsidiary 184 184 250 250
------ ------ ------ ------
Total liabilities $3,911 $3,241 $4,311 $3,631
</TABLE>
<TABLE>
<CAPTION>
Marathon Group (c) Consolidated USX
(In millions) 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Net interest and other financial costs (Note 8) $ 295 $ 246 $ 277 $ 324 $ 309 $ 376
</TABLE>
/(a)/ For details of USX long-term debt and preferred stock of
subsidiary, see Notes 17 and 25, respectively, to the USX
consolidated financial statements.
/(b)/ Primarily reflects 1997 forward currency contracts used to
manage currency risks related to USX debt and interest
denominated in a foreign currency.
/(c)/ The Marathon Group's net interest and other financial costs
reflect weighted average effects of all financial activities
attributed to all groups.
M-10
<PAGE>
11. Segment Information
The Marathon Group's operations consists of three reportable operating segments:
1) Exploration and Production -- explores for and produces crude oil and natural
gas on a worldwide basis; 2) Refining, Marketing and Transportation -- refines,
markets and transports crude oil and petroleum products, primarily in the
Midwest and southeastern United States through MAP; and 3) Other Energy Related
Businesses. Other Energy Related Businesses is an aggregation of two segments
which fall below the quantitative reporting thresholds: 1) Natural Gas and Crude
Oil Marketing and Transportation -- markets and transports its own and third-
party natural gas and crude oil in the United States; and 2) Power Generation--
develops, constructs and operates independent electric power projects worldwide.
For information on sales by product line, see table of revenues on page M-25 of
Management's Discussion and Analysis.
Segment income represents income from operations allocable to operating
segments. USX corporate general and administrative costs are not allocated to
operating segments. These costs primarily consist of employment costs including
pension effects, professional services, facilities and other related costs
associated with corporate activities. Certain general and administrative costs
related to all Marathon Group operating segments in excess of amounts billed to
MAP under service contracts and amounts charged out to operating segments under
Marathon's shared services procedures also are not allocated to operating
segments. Additionally, the following items are not allocated to operating
segments: inventory market valuation adjustments and gain on ownership change in
MAP.
<TABLE>
<CAPTION>
Refining, Other
Exploration Marketing Energy
and and Related
(In millions) Production Transportation Businesses Total
<S> <C> <C> <C> <C>
1998
Revenues:
Customer $2,085 $19,290 $306 $21,681
Intersegment/(a)/ 144 10 17 171
Intergroup/(a)/ 13 -- 7 20
Equity in earnings of unconsolidated affiliates 2 12 14 28
Other 26 40 11 77
------ ------- ---- -------
Total revenues $2,270 $19,352 $355 $21,977
====== ======= ==== =======
Segment income $ 278 $ 896 $ 33 $ 1,207
Significant noncash items included in segment income:
Depreciation, depletion and amortization/(b)/ 581 272 6 859
Pension expenses/(c)/ 3 16 2 21
Capital expenditures/(d)/ 839 410 8 1,257
Affiliates -- investments/(d)/ -- 22 17 39
1997
Revenues:
Customer $1,575 $13,606 $381 $15,562
Intersegment/(a)/ 619 -- -- 619
Intergroup/(a)/ 99 -- 6 105
Equity in earnings of unconsolidated affiliates 14 4 7 25
Other 7 20 30 57
------ ------- ---- -------
Total revenues $2,314 $13,630 $424 $16,368
====== ======= ==== =======
Segment income $ 773 $ 563 $ 48 $ 1,384
Significant noncash items included in segment income:
Depreciation, depletion and amortization/(b)/ 469 173 7 649
Pension expenses/(c)/ 3 8 1 12
Capital expenditures/(d)/ 810 205 6 1,021
Affiliates -- investments/(d)/ 114 -- 73 187
1996
Revenues:
Customer $1,765 $14,130 $299 $16,194
Intersegment/(a)/ 776 -- -- 776
Intergroup/(a)/ 83 -- 4 87
Equity in earnings of unconsolidated affiliates 6 8 11 25
Other 10 13 13 36
------ ------- ---- -------
Total revenues $2,640 $14,151 $327 $17,118
====== ======= ==== =======
Segment income $ 900 $ 249 $ 57 $ 1,206
Significant noncash items included in segment income:
Depreciation, depletion and amortization/(b)/ 499 173 6 678
Pension expenses/(c)/ 2 8 1 11
Capital expenditures/(d)/ 504 234 3 741
Affiliates -- investments/(d)/ 20 -- 11 31
</TABLE>
/(a)/ Intersegment and intergroup sales and transfers were conducted on an
arm's-length basis.
/(b)/ Differences between segment totals and group totals represent amounts
included in administrative expenses and, in 1998, international
exploration and production property impairments.
/(c)/ Differences between segment totals and group totals represent amounts
included in administrative expenses.
/(d)/ Differences between segment totals and group totals represent amounts
related to corporate administrative activities.
M-11
<PAGE>
The following schedule reconciles segment revenues and income to amounts
reported in the Marathon Group financial statements:
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
<S> <C> <C> <C>
Revenues:
Revenues of reportable segments $21,977 $16,368 $17,118
Items not allocated to segments:
Gain on ownership change in MAP 245 -- --
Other 24 -- 35
Elimination of intersegment revenues (171) (619) (776)
Administrative revenues -- 5 17
------- ------- -------
Total Group revenues $22,075 $15,754 $16,394
======= ======= =======
Income:
Income for reportable segments $ 1,207 $ 1,384 $ 1,206
Items not allocated to segments:
Gain on ownership change in MAP 245 -- --
Administrative expenses (106) (168) (133)
Inventory market valuation adjustments (267) (284) 209
Other/(a)/ (141) -- 14
------- ------- -------
Total Group income from operations $ 938 $ 932 $ 1,296
</TABLE>
/(a)/ Represents international exploration and production property impairments,
suspended exploration well write-offs, gas contract settlement and MAP
transition charges in 1998. Represents net gains on certain asset sales,
charges for withdrawal from a nonprofit oil spill response group and
certain state tax adjustments in 1996.
Geographic Area:
The information below summarizes the operations in different geographic areas.
Transfers between geographic areas are at prices which approximate market.
<TABLE>
<CAPTION>
Revenues
----------
Within Between
Geographic Geographic
(In millions) Year Areas Areas Total Assets/(a)/
<S> <C> <C> <C> <C> <C>
United States 1998 $21,296 $ -- $21,296 $ 7,675
1997 15,034 -- 15,034 5,588
1996 15,509 -- 15,509 5,192
United Kingdom 1998 532 -- 532 1,788
1997 698 -- 698 1,932
1996 859 -- 859 2,002
Other Foreign Countries 1998 247 420 667 1,497
1997 22 39 61 444
1996 26 43 69 270
Eliminations 1998 -- (420) (420) --
1997 -- (39) (39) --
1996 -- (43) (43) --
Total 1998 $22,075 $ -- $22,075 $10,960
1997 15,754 -- 15,754 7,964
1996 16,394 -- 16,394 7,464
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Includes property, plant and equipment and investments in affiliates.
12. Leases
Future minimum commitments for operating leases having remaining
noncancelable lease terms in excess of one year are as follows:
<TABLE>
<CAPTION>
(In millions)
<S> <C>
1999 $ 113
2000 188
2001 79
2002 64
2003 43
Later years 138
Sublease rentals (15)
----
Total minimum lease payments $ 610
</TABLE>
Operating lease rental expense:
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
<S> <C> <C> <C>
Minimum rental $ 157 $ 102 $ 96
Contingent rental 10 10 10
Sublease rentals (7) (7) (6)
----- ----- -----
Net rental expense $ 160 $ 105 $ 100
</TABLE>
M-12
<PAGE>
The Marathon Group leases a wide variety of facilities
and equipment under operating leases, including land and building
space, office equipment, production facilities and transportation
equipment. Most long-term leases include renewal options and, in
certain leases, purchase options. In the event of a change in
control of USX, as defined in the agreements, or certain other
circumstances, operating lease obligations totaling $107 million
may be declared immediately due and payable.
13. Long-Term Debt
The Marathon Group's portion of USX's consolidated long-term
debt is as follows:
<TABLE>
<CAPTION>
Marathon Group Consolidated USX/(a)/
(In millions) December 31 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Specifically attributed debt/(b)/:
Sale-leaseback financing and capital leases $ -- $ 24 $ 95 $ 123
Indexed debt less unamortized discount -- -- 68 110
------ ------ ------ ------
Total -- 24 163 233
Less amount due within one year -- -- 5 5
------ ------ ------ ------
Total specifically attributed long-term debt $ -- $ 24 $ 158 $ 228
Debt attributed to groups/(c)/ $3,537 $2,889 $3,853 $3,194
Less unamortized discount 22 20 25 24
Less amount due within one year 59 417 66 466
------ ------ ------ ------
Total long-term debt attributed to groups $3,456 $2,452 $3,762 $2,704
Total long-term debt due within one year $ 59 $ 417 $ 71 $ 471
Total long-term debt due after one year 3,456 2,476 3,920 2,932
</TABLE>
/(a)/ See Note 17, to the USX consolidated financial statements
for details of interest rates, maturities and other terms of
long-term debt.
/(b)/ As described in Note 4, certain financial activities are
specifically attributed only to the Marathon Group and the
U. S. Steel Group.
/(c)/ Most long-term debt activities of USX Corporation and its
wholly owned subsidiaries are attributed to all groups (in
total, but not with respect to specific debt issues) based
on their respective cash flows (Notes 4, 10 and 14).
<TABLE>
<CAPTION>
14. Supplemental Cash Flow Information
(In millions) 1998 1997 1996
<S> <C> <C> <C>
Cash used in operating activities included:
Interest and other financial costs paid (net of amount capitalized) $ (260) $ (257) $ (339)
Income taxes paid, including settlements with other groups (154) (178) (74)
USX debt attributed to all groups -- net:
Commercial paper:
Issued $ 1,650 $ -- $ 1,422
Repayments (950) -- (1,555)
Credit agreements:
Borrowings 15,836 10,454 10,356
Repayments (15,867) (10,449) (10,340)
Other credit arrangements -- net 55 36 (36)
Other debt:
Borrowings 671 10 78
Repayments (1,053) (741) (705)
-------- -------- --------
Total $ 342 $ (690) $ (780)
Marathon Group activity $ 329 $ 97 $ (769)
U. S. Steel Group activity 13 (561) (31)
Delhi Group activity -- (226) 20
-------- -------- --------
Total $ 342 $ (690) $ (780)
Noncash investing and financing activities:
Marathon Stock issued for Dividend Reinvestment Plan
and employee stock plans $ 3 $ 5 $ 2
Acquisition of Tarragon
-- Exchangeable Shares issued 29 -- --
-- liabilities assumed 433 -- --
Acquisition of Ashland RM&T net assets
-- 38% interest in MAP 1,900 -- --
-- liabilities assumed 1,038 -- --
Disposal of assets liabilities assumed by buyers -- 5 25
Marathon Stock issued for Exchangeable Shares 11 -- --
</TABLE>
M-13
<PAGE>
15. Pensions and Other Postretirement Benefits
The Marathon Group has noncontributory defined benefit pension
plans covering substantially all employees. Benefits under these
plans are based primarily upon years of service and final average
pensionable earnings. Certain subsidiaries provide benefits for
employees covered by other plans based primarily upon employees'
service and career earnings.
The Marathon Group also has defined benefit retiree
health and life insurance plans (other benefits) covering most
employees upon their retirement. Health benefits are provided, for
the most part, through comprehensive hospital, surgical and major
medical benefit provisions subject to various cost sharing
features. Life insurance benefits are provided to certain nonunion
and most union represented retiree beneficiaries primarily based on
employees' annual base salary at retirement. Other benefits have
not been prefunded.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
(In millions) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Change in benefit obligations
Benefit obligations at January 1 $ 771 $ 627 $ 381 $ 306
Service cost 48 31 12 6
Interest cost 57 45 31 22
Plan amendments 6 36 (30) --
Actuarial losses 121 85 141 63
Acquisition 145 -- 98 --
Benefits paid (68) (53) (17) (16)
------- ------- ----- -----
Benefit obligations at December 31 $ 1,080 $ 771 $ 616 $ 381
Change in plan assets
Fair value of plan assets at January 1 $ 1,150 $ 989
Actual return on plan assets 199 217
Acquisition 55 --
Employer contributions (6) (5)
Benefits paid (67) (51)
------- -------
Fair value of plan assets at December 31 $ 1,331 $ 1,150
Funded status of plans at December 31 $ 251/(a)/ $ 379/(a)/ $(616) $(381)
Unrecognized net gain from transition (35) (40) -- --
Unrecognized prior service costs (credits) 48 45 (45) (18)
Unrecognized actuarial (gains) losses (88) (115) 211 73
Additional minimum liability/(b)/ (18) (14) -- ---
------- ------- ----- -----
Prepaid (accrued) benefit cost $ 158 $ 255 $(450) $(326)
</TABLE>
/(a)/ Includes several small plans that have accumulated
benefit obligations in excess of plan assets:
<TABLE>
<S> <C> <C>
Projected benefit obligation (PBO) $ (52) $ (82)
Plan assets -- 24
------- -------
PBO in excess of plan assets $ (52) $ (58)
/(b)/ Additional minimum liability recorded
was offset by the following:
Intangible asset $ 2 $ 3
Accumulated other comprehensive income (losses):
Beginning of year $ (7) $ (5)
Change during year (net of tax) (3) (2)
------- -------
Balance at end of year $ (10) $ (7)
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
(In millions) 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit cost (credit)
Service cost $ 48 $ 31 $ 35 $ 12 $ 6 $ 8
Interest cost 57 45 45 31 22 23
Return on plan assets -- actual (199) (217) (139) -- -- --
-- deferred gain 92 132 55 -- -- --
Amortization of unrecognized gains (2) (3) (3) -- (3) (3)
Other plans 5 4 4 -- -- --
----- ----- ----- ----- ----- -----
Net periodic benefit cost (credit) $ 1 $ (8) $ (3) $ 43 $ 25 $ 28
</TABLE>
M-14
<PAGE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------ ----------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Actuarial assumptions at December 31:
Discount rate 6.5% 7.0% 6.5% 7.0%
Expected annual return on plan assets 9.5% 9.5% 9.5% 9.5%
Increase in compensation rate 5.0% 5.0% 5.0% 5.0%
</TABLE>
For measurement purposes, an 8% annual rate of increase
in the per capita cost of covered health care benefits was assumed
for 1999. The rate was assumed to decrease gradually to 5% for 2005
and remain at that level thereafter.
A one-percentage-point change in assumed health care cost
trend rates would have the following effects:
<TABLE>
<CAPTION>
1-Percentage- 1-Percentage-
(In millions) Point Increase Point Decrease
<S> <C> <C>
Effect on total of service and interest cost components $ 7 $ (4)
Effect on other postretirement benefit obligations 96 (76)
</TABLE>
16. Dividends
In accordance with the USX Certificate of Incorporation,
dividends on the Marathon Stock and Steel Stock are limited to the
legally available funds of USX. Net losses of either Group, as well
as dividends and distributions on any class of USX Common Stock or
series of preferred stock and repurchases of any class of USX
Common Stock or series of preferred stock at prices in excess of
par or stated value, will reduce the funds of USX legally available
for payment of dividends on both classes of Common Stock. Subject
to this limitation, the Board of Directors intends to declare and
pay dividends on the Marathon Stock based on the financial
condition and results of operations of the Marathon Group, although
it has no obligation under Delaware law to do so. In making its
dividend decisions with respect to Marathon Stock, the Board of
Directors considers among other things, the long-term earnings and
cash flow capabilities of the Marathon Group as well as the
dividend policies of similar publicly traded energy companies.
17. Property, Plant and Equipment
<TABLE>
<CAPTION>
(In millions) December 31 1998 1997
<S> <C> <C>
Production $14,707 $13,219
Refining 2,251 1,703
Marketing 2,103 1,442
Transportation 1,402 626
Other 265 243
------- -------
Total 20,728 17,233
Less accumulated depreciation, depletion and amortization 10,299 9,667
------- -------
Net $10,429 $ 7,566
Gross assets acquired under capital leases were fully depreciated
at December 31, 1998 and 1997.
</TABLE>
18. Common Stockholders' Equity
<TABLE>
<CAPTION>
(In millions, except per share data) 1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $3,618 $ 3,340 $ 2,872
Net income 310 456 664
Marathon Stock issued 617 39 4
Exchangeable Shares:
Issued 29 -- --
Exchanged for Marathon Stock (12) -- --
Dividends on Marathon Stock
(per share: $.84 in 1998, $.76 in 1997 and $.70 in 1996) (248) (219) (201)
Deferred compensation 2 1 --
Accumulated other comprehensive income (loss)/(a)/:
Foreign currency translation adjustments 2 -- --
Minimum pension liability adjustments (Note 15) (3) (2) 1
Unrealized holding gains (losses) on investments (3) 3 --
------ ------- -------
Balance at end of year $4,312 $ 3,618 $ 3,340
</TABLE>
/(a)/ See page U-7 of the USX consolidated financial statements
relative to the annual activity of these adjustments and
gains (losses). Total comprehensive income for the Marathon
Group for the years 1998, 1997 and 1996 was $306 million,
$457 million and $665 million, respectively.
M-15
<PAGE>
19. Income Taxes
Income tax provisions and related assets and liabilities
attributed to the Marathon Group are determined in accordance with
the USX group tax allocation policy (Note 4).
Provisions (credits) for estimated income taxes were:
<TABLE>
<CAPTION>
1998 1997 1996
(In millions) Current Deferred Total Current Deferred Total Current Deferred Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal $ 83 $ 19 $102 $171 $ (5) $ 166 $ 193 $ 13 $ 206
State and local 30 9 39 3 7 10 12 9 21
Foreign 3 (2) 1 12 28 40 11 82 93
---- ----- ---- ---- ----- ----- ------ ----- ------
Total $116 $ 26 $142 $186 $ 30 $ 216 $ 216 $ 104 $ 320
</TABLE>
A reconciliation of federal statutory tax rate (35%) to total
provisions follows:
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
<S> <C> <C> <C>
Statutory rate applied to income before income taxes $ 158 $ 235 $ 347
Effects of foreign operations, including foreign tax credits (26) (8) (14)
State and local income taxes after federal income tax effects 25 6 14
Credits other than foreign tax credits (9) (9) (8)
Effects of partially owned companies (4) (6) (10)
Nondeductible business and amortization expenses 2 3 3
Dispositions of subsidiary investments -- -- (8)
Adjustment of prior years' income taxes (5) (4) (6)
Adjustment of valuation allowances -- (4) --
Other 1 3 2
----- ------ ------
Total provisions $ 142 $ 216 $ 320
</TABLE>
Deferred tax assets and liabilities resulted from the following:
<TABLE>
<CAPTION>
(In millions) December 31 1998 1997
<S> <C> <C>
Deferred tax assets:
Minimum tax credit carryforwards $ 15 $ 42
State tax loss carryforwards (expiring in 1999 through 2018) 54 52
Foreign tax loss carryforwards (portion of which expire in 1999 through 2013) 414 483
Employee benefits 201 172
Expected federal benefit for:
Crediting certain foreign deferred income taxes 528 249
Deducting state and other foreign deferred income taxes 51 53
Contingency and other accruals 140 148
Investments in subsidiaries and affiliates 59 14
Other 66 38
Valuation allowances:
Federal (30) --
State (29) (39)
Foreign (260) (272)
------ ------
Total deferred tax assets/(a)/ 1,209 940
------ ------
Deferred tax liabilities:
Property, plant and equipment 2,137 1,820
Inventory 170 199
Prepaid pensions 125 129
Other 150 112
------ ------
Total deferred tax liabilities 2,582 2,260
------ ------
Net deferred tax liabilities $1,373 $1,320
</TABLE>
/(a)/ USX expects to generate sufficient future taxable income
to realize the benefit of the Marathon Group's deferred tax
assets. In addition, the ability to realize the benefit of
foreign tax credits is based upon certain assumptions concerning
future operating conditions (particularly as related to
prevailing oil prices), income generated from foreign sources and
USX's tax profile in the years that such credits may be claimed.
The consolidated tax returns of USX for the years 1990
through 1994 are under various stages of audit and administrative
review by the IRS. USX believes it has made adequate provision for
income taxes and interest which may become payable for years not
yet settled.
Pretax income (loss) included $(75) million, $250 million
and $341 million attributable to foreign sources in 1998, 1997 and
1996, respectively.
Undistributed earnings of certain consolidated foreign
subsidiaries at December 31, 1998, amounted to $132 million. No
provision for deferred U.S. income taxes has been made for these
subsidiaries because the Marathon Group intends to permanently
reinvest such earnings in those foreign operations. If such
earnings were not permanently reinvested, a deferred tax liability
of $46 million would have been required.
M-16
<PAGE>
20. Investments and Long-Term Receivables
<TABLE>
<CAPTION>
(In millions) December 31 1998 1997
<S> <C> <C>
Equity method investments $ 498 $ 366
Other investments 33 32
Receivables due after one year 46 49
Deposits of restricted cash 21 --
Other 5 8
------ -----
Total $ 603 $ 455
</TABLE>
Summarized financial information of affiliates accounted
for by the equity method of accounting follows:
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
<S> <C> <C> <C> <C>
Income data -- year:
Revenues $ 347 $ 562 $ 405
Operating income 132 114 95
Net income 79 52 53
Balance sheet data -- December 31:
Current assets $ 262 $ 170
Noncurrent assets 2,233 1,470
Current liabilities 243 236
Noncurrent liabilities 1,254 721
</TABLE>
Dividends and partnership distributions received from
equity affiliates were $23 million in 1998, $21 million in 1997 and
$24 million in 1996.
Marathon Group purchases from equity affiliates totaled
$64 million, $37 million and $49 million in 1998, 1997 and 1996,
respectively. Marathon Group sales to equity affiliates were
immaterial in 1998, $10 million in 1997 and $6 million in 1996.
21. Inventories
<TABLE>
<CAPTION>
(In millions) December 31 1998 1997
<S> <C> <C>
Crude oil and natural gas liquids $ 731 $ 452
Refined products and merchandise 1,023 735
Supplies and sundry items 107 77
------ ------
Total (at cost) 1,861 1,264
Less inventory market valuation reserve 551 284
------ ------
Net inventory carrying value $1,310 $ 980
</TABLE>
Inventories of crude oil and refined products are valued
by the LIFO method. The LIFO method accounted for 88% and 91% of
total inventory value at December 31, 1998 and 1997, respectively.
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.
22. Stock-Based Compensation Plans and Stockholder Rights Plan
USX Stock-Based Compensation Plans and Stockholder Rights Plan
are discussed in Note 21, and Note 23, respectively, to the USX
consolidated financial statements.
In 1996, USX adopted SFAS No. 123, Accounting for Stock-
Based Compensation and elected to continue to follow the accounting
provisions of APB No. 25, as discussed in Note 2, to the USX
consolidated financial statements. The Marathon Group's actual
stock-based compensation expense (credit) was $(3) million in 1998,
$20 million in 1997 and $6 million in 1996. Incremental
compensation expense, as determined under SFAS No. 123, was not
material ($.02 or less per share for all years presented).
Therefore, pro forma net income and earnings per share data have
been omitted.
M-17
<PAGE>
23. Income Per Common Share
The method of calculating net income per share for the Marathon
Stock, the Steel Stock and, prior to November 1, 1997, the Delhi
Stock reflects the USX Board of Directors' intent that the
separately reported earnings and surplus of the Marathon Group, the
U. S. Steel Group and the Delhi Group, as determined consistent
with the USX Certificate of Incorporation, are available for
payment of dividends to the respective classes of stock, although
legally available funds and liquidation preferences of these
classes of stock do not necessarily correspond with these amounts.
Basic net income per share is based on the weighted
average number of common shares outstanding. Diluted net income per
share assumes conversion of convertible securities for the
applicable periods outstanding and assumes exercise of stock
options, provided in each case, the effect is not antidilutive.
<TABLE>
<CAPTION>
1998 1997 1996
Computation of Income Per Share Basic Diluted Basic Diluted Basic Diluted
<S> <C> <C> <C> <C> <C> <C>
Net income (millions):
Income before extraordinary loss $ 310 $ 310 $ 456 $ 456 $ 671 $ 671
Extraordinary loss -- -- -- -- 7 7
-------- -------- -------- -------- -------- --------
Net income 310 310 456 456 664 664
Effect of dilutive securities --
Convertible debentures -- -- -- 3 -- 14
-------- -------- -------- -------- -------- --------
Net income assuming conversions $ 310 $ 310 $ 456 $ 459 $ 664 $ 678
======== ======== ======== ======== ======== ========
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 292,876 292,876 288,038 288,038 287,460 287,460
Effect of dilutive securities:
Convertible debentures -- -- -- 1,936 -- 8,975
Stock options -- 559 -- 546 -- 133
-------- -------- -------- -------- -------- --------
Average common shares and dilutive effect 292,876 293,435 288,038 290,520 287,460 296,568
======== ======== ======== ======== ======== ========
Per share:
Income before extraordinary loss $ 1.06 $ 1.05 $ 1.59 $ 1.58 $ 2.33 $ 2.31
Extraordinary loss -- -- -- -- .02 .02
-------- -------- -------- -------- -------- --------
Net income $ 1.06 $ 1.05 $ 1.59 $ 1.58 $ 2.31 $ 2.29
======== ======== ======== ======== ======== ========
</TABLE>
24. Intergroup Transactions
Sales and purchases -- Marathon Group sales to other groups totaled
$21 million, $105 million and $87 million in 1998, 1997 and 1996,
respectively. Marathon Group purchases from other groups totaled $2
million in 1998, $18 million in 1997 and $9 million in 1996. At
December 31, 1998 and 1997, Marathon Group receivables included $3
million related to transactions with the U. S. Steel Group. Since
October 31, 1997, transactions with the Delhi Companies are third-
party transactions.
Income taxes receivable from/payable to the U. S. Steel Group --
At December 31, 1998 and 1997, amounts receivable or payable for
income taxes were included in the balance sheet as follows:
<TABLE>
<CAPTION>
(In millions) December 31 1998 1997
<S> <C> <C>
Current:
Receivables $ 2 $ 2
Accounts payable -- 22
Noncurrent:
Deferred credits and other liabilities 97 97
</TABLE>
These amounts have been determined in accordance with the
tax allocation policy described in Note 4. Amounts classified as
current are settled in cash in the year succeeding that in which
such amounts are accrued. Noncurrent amounts represent estimates of
intergroup tax effects of certain issues for years that are still
under various stages of audit and administrative review. Such tax
effects are not settled among the groups until the audit of those
respective tax years is closed. The amounts ultimately settled for
open tax years will be different than recorded noncurrent amounts
based on the final resolution of all of the audit issues for those
years.
25. Derivative Instruments
The Marathon Group uses commodity-based derivative instruments
to manage exposure to price fluctuations related to the anticipated
purchase or production and sale of crude oil, natural gas, refined
products and electricity. The derivative instruments used, as a
part of an overall risk management program, include exchange-traded
futures contracts and options, and instruments which require
settlement in cash such as OTC commodity swaps and OTC options.
While risk management activities generally reduce market risk
exposure due to unfavorable commodity price changes for raw
material purchases and products sold, such activities can also
encompass strategies which assume certain price risk in isolated
transactions.
The Marathon Group uses forward exchange contracts to
minimize its exposure to foreign currency price fluctuations.
M-18
<PAGE>
The Marathon Group remains at risk for possible changes
in the market value of the derivative instrument; however, such
risk should be mitigated by price changes in the underlying hedged
item. The Marathon Group is also exposed to credit risk in the
event of nonperformance by counterparties. The credit worthiness of
counterparties is subject to continuing review, including the use
of master netting agreements to the extent practical, and full
performance is anticipated.
The following table sets forth quantitative information
by class of derivative instrument:
<TABLE>
<CAPTION>
Fair Carrying Recorded
Value Amount Deferred Aggregate
Assets Assets Gain or Contract
(In millions) (Liabilities)/(a)/ (Liabilities) (Loss) Values/(b)/
<S> <C> <C> <C> <C>
December 31, 1998:
Exchange-traded commodity futures $ -- $ -- $ (2) $ 104
Exchange-traded commodity options 3 /(c)/ 2 3 776
OTC commodity swaps/(d)/ (2) /(e)/ (2) -- 243
OTC commodity options 3 3 3 147
---- ---- ---- ------
Total commodities $ 4 $ 3 $ 4 $1,270
==== ==== ==== ======
Forward exchange contracts/(f)/:
-- receivable $ 36 $ 36 $ -- $ 36
December 31, 1997:
Exchange-traded commodity futures $ -- $ -- $ -- $ 30
Exchange-traded commodity options 1 /(c)/ 1 2 129
OTC commodity swaps (2) /(e)/ (2) (3) 30
OTC commodity options -- -- -- 6
---- ---- ---- ------
Total commodities $ (1) $ (1) $ (1) $ 195
==== ==== ==== ======
Forward exchange contracts/(g)/:
-- receivable $10 $ 9 $ -- $ 52
-- payable (1) (1) (1) 5
---- ---- ---- ------
Total currencies $ 9 $ 8 $ (1) $ 57
---- ---- ---- ------
</TABLE>
/(a)/ The fair value amounts for OTC positions are based on
various indices or dealer quotes. The fair value amounts
for currency contracts are based on dealer quotes of
forward prices covering the remaining duration of the
forward exchange contract. The exchange-traded futures
contracts and certain option contracts do not have a
corresponding fair value since changes in the market prices
are settled on a daily basis.
/(b)/ Contract or notional amounts do not quantify risk exposure,
but are used in the calculation of cash settlements under
the contracts. The contract or notional amounts do not
reflect the extent to which positions may offset one
another.
/(c)/ Includes fair values as of December 31, 1998 and 1997, for
assets of $23 million and $3 million and liabilities of
$(20) million and $(2) million, respectively.
/(d)/ The OTC swap arrangements vary in duration with certain
contracts extending into 2008.
/(e)/ Includes fair values as of December 31, 1998 and 1997, for
assets of $29 million and $1 million and liabilities of
$(31) million and $(3) million, respectively.
/(f)/ The forward exchange contracts relating to foreign
operations have various maturities ending in December 1999.
/(g)/ The forward exchange contracts relating to foreign
denominated debt matured in 1998.
26. Fair Value of Financial Instruments
Fair value of the financial instruments disclosed herein is not
necessarily representative of the amount that could be realized or
settled, nor does the fair value amount consider the tax
consequences of realization or settlement. The following table
summarizes financial instruments, excluding derivative financial
instruments disclosed in Note 25, by individual balance sheet
account. As described in Note 4, the Marathon Group's specifically
attributed financial instruments and the Marathon Group's portion
of USX's financial instruments attributed to all groups are as
follows:
<TABLE>
<CAPTION>
1998 1997
Fair Carrying Fair Carrying
(In millions) December 31 Value Amount Value Amount
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 137 $ 137 $ 36 $ 36
Receivables 1,277 1,277 856 856
Investments and long-term receivables 157 101 143 86
------ ------ ------ ------
Total financial assets $1,571 $1,515 $1,035 $ 978
Financial liabilities:
Notes payable $ 132 $ 132 $ 108 $ 108
Accounts payable 1,980 1,980 1,348 1,348
Distribution payable to minority shareholder of MAP 103 103 -- --
Accrued interest 87 87 84 84
Long-term debt (including amounts due within one year) 3,797 3,515 3,198 2,869
Preferred stock of subsidiary 183 184 187 184
------ ------ ------ ------
Total financial liabilities $6,282 $6,001 $4,925 $4,593
</TABLE>
M-19
<PAGE>
Fair value of financial instruments classified as current
assets or liabilities approximates carrying value due to the short-
term maturity of the instruments. Fair value of investments and
long-term receivables was based on discounted cash flows or other
specific instrument analysis. Fair value of preferred stock of
subsidiary was based on market prices. Fair value of long-term debt
instruments was based on market prices where available or current
borrowing rates available for financings with similar terms and
maturities.
The Marathon Group's unrecognized financial instruments
consist of financial guarantees. It is not practicable to estimate
the fair value of these forms of financial instrument obligations
because there are no quoted market prices for transactions which
are similar in nature. For details relating to financial guarantees
see Note 27.
27. Contingencies and Commitments
USX is the subject of, or party to, a number of pending or
threatened legal actions, contingencies and commitments relating to
the Marathon Group involving a variety of matters, including laws
and regulations relating to the environment. Certain of these
matters are discussed below. The ultimate resolution of these
contingencies could, individually or in the aggregate, be material
to the Marathon Group financial statements. However, management
believes that USX will remain a viable and competitive enterprise
even though it is possible that these contingencies could be
resolved unfavorably to the Marathon Group.
Environmental matters --
The Marathon Group is subject to federal, state, local
and foreign laws and regulations relating to the environment. These
laws generally provide for control of pollutants released into the
environment and require responsible parties to undertake
remediation of hazardous waste disposal sites. Penalties may be
imposed for noncompliance. At December 31, 1998 and 1997, accrued
liabilities for remediation totaled $48 million and $52 million,
respectively. It is not presently possible to estimate the ultimate
amount of all remediation costs that might be incurred or the
penalties that may be imposed. Receivables for recoverable costs
from certain states, under programs to assist companies in cleanup
efforts related to underground storage tanks at retail marketing
outlets, were $41 million at December 31, 1998, and $42 million at
December 31, 1997.
For a number of years, the Marathon Group has made
substantial capital expenditures to bring existing facilities into
compliance with various laws relating to the environment. In 1998
and 1997, such capital expenditures totaled $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 December 31, 1998 and 1997, accrued liabilities for
platform abandonment and dismantlement totaled $141 million and
$128 million, respectively.
Guarantees --
Guarantees by USX and its consolidated subsidiaries of
the liabilities of affiliated entities of the Marathon Group
totaled $131 million and $23 million at December 31, 1998 and 1997,
respectively. As of December 31, 1998, the largest guarantee for a
single affiliate was $131 million.
At December 31, 1998 and 1997, the Marathon Group's pro
rata share of obligations of LOOP LLC and various pipeline
affiliates secured by throughput and deficiency agreements totaled
$164 million and $165 million, respectively. Under the agreements,
the Marathon Group is required to advance funds if the affiliates
are unable to service debt. Any such advances are prepayments of
future transportation charges.
Commitments --
At December 31, 1998 and 1997, the Marathon Group's
contract commitments to acquire property, plant and equipment and
long-term investments totaled $624 million and $377 million,
respectively.
The Marathon Group is a party to a 15-year transportation
services agreement with a natural gas transmission company. The
contract requires the Marathon Group to pay a minimum annual demand
charge of approximately $5 million starting in the year 2000 and
concluding in the year 2014. The payments are required even if the
transportation facility is not utilized.
M-20
<PAGE>
Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1998 1997
(In millions, except
per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $5,353 $5,662 $5,562 $5,498 $3,920 $3,944 $3,787 $4,103
Income (loss) from operations (132) 215 453 402 94 360 243 235
Includes:
Inventory market valuation
charges (credits) 245 50 (3) (25) 147 (41) 64 114
Gain on ownership
change in MAP -- (1) (2) 248 -- -- -- --
Net income (loss) (86) 51 162 183 38 192 118 108
Marathon Stock data:
- --------------------
Net income (loss) per share:
Basic $ (.29) $ .18 $ .56 $ .63 $ .14 $ .67 $ .41 $ .37
Diluted (.29) .17 .56 .63 .13 .66 .41 .37
Dividends paid per share .21 .21 .21 .21 .19 .19 .19 .19
Price range of Marathon
Stock /(a)/:
--Low 26-11/16 25 32-3/16 31 29 28-15/16 25-5/8 23-3/4
--High 38-1/8 37-1/8 38-7/8 40-1/2 38-7/8 38-3/16 31-1/8 28-1/2
</TABLE>
/(a)/ Composite tape.
Principal Unconsolidated Affiliates (Unaudited)
<TABLE>
<CAPTION>
December 31, 1998
Company Country Ownership Activity
<S> <C> <C> <C>
CLAM Petroleum BV Netherlands 50% Oil & Gas Production
Kenai LNG Corporation United States 30% Natural Gas Liquification
LOCAP, Inc. United States 50%/(a)/ Pipeline & Storage Facilities
LOOP LLC United States 47%/(a)/ Offshore Oil Port
Minnesota Pipe Line Company United States 33%/(a)/ Pipeline Facility
Nautilus Pipeline Company, LLC United States 24% Natural Gas Transmission
Odyssey Pipeline LLC United States 29% Pipeline Facility
Poseidon Oil Pipeline Company LLC United States 28% Crude Oil Transportation
Sakhalin Energy Investment Company Ltd. Russia 38% Oil & Gas Development
</TABLE>
/(a)/ Represents the ownership of MAP.
Supplementary Information on Oil and Gas Producing Activities (Unaudited)
See the USX consolidated financial statements for Supplementary Information on
Oil and Gas Producing Activities relating to the Marathon Group, pages U-30
through U-34.
M-21
<PAGE>
Five-Year Operating Summary
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Liquid Hydrocarbon Production (thousands of barrels per day)
United States (by region)
Alaska -- -- 8 9 9
Gulf Coast 55 29 30 33 12
Southern 6 8 9 11 12
Central 4 5 4 8 9
Mid-Continent Yates 23 25 25 24 23
Mid-Continent Other 21 21 20 19 18
Rocky Mountain 26 27 26 28 27
------ ------ ------ ------ -------
Total United States 135 115 122 132 110
------ ------ ------ ------ -------
International
Abu Dhabi -- -- -- -- 1
Canada 6 -- -- --
Egypt 8 8 8 5 7
Indonesia -- -- -- 10 3
Gabon 5 -- -- -- --
Norway 1 2 3 2 2
Tunisia -- -- -- 2 3
United Kingdom 41 39 48 54 46
------ ------ ------ ------ -------
Total International 61 49 59 73 62
------ ------ ------ ------ -------
Total 196 164 181 205 172
Natural gas liquids included in above 17 17 17 17 15
Net Natural Gas Production (millions of cubic feet per day)
United States (by region)
Alaska 144 151 145 133 123
Gulf Coast 84 78 88 94 79
Southern 208 189 161 142 134
Central 117 119 109 105 110
Mid-Continent 125 125 122 112 89
Rocky Mountain 66 60 51 48 39
------ ------ ------ ------ -------
Total United States 744 722 676 634 574
------ ------ ------ ------ -------
International
Canada 65 -- -- -- --
Egypt 16 11 13 15 17
Ireland 168 228 259 269 263
Norway 27 54 87 81 81
United Kingdom -- equity 165 130 140 98 39
-- other/(a)/ 23 32 32 35 --
------ ------ ------ ------ -------
Total International 464 455 531 498 400
------ ------ ------ ------ -------
Consolidated 1,208 1,177 1,207 1,132 974
Equity affiliate/(b)/ 33 42 45 44 40
------ ------ ------ ------ -------
Total 1,241 1,219 1,252 1,176 1,014
Average Sales Prices
Liquid Hydrocarbons (dollars per barrel)/(c)/
United States $10.42 $16.88 $18.58 $14.59 $13.53
International 12.24 18.77 20.34 16.66 15.61
Natural Gas (dollars per thousand cubic feet)/(c)/
United States $1.79 $2.20 $2.09 $1.63 $1.94
International 1.94 2.00 1.97 1.80 1.58
Net Proved Reserves at year-end (developed and undeveloped)
Liquid Hydrocarbons (millions of barrels)
United States 568 609 589 558 553
International 316 187 203 206 242
------ ------ ------ ------ -------
Consolidated 884 796 792 764 795
Equity affiliate/(d)/ 80 82 -- -- --
------ ------ ------ ------ -------
Total 964 878 792 764 795
Developed reserves as % of total net reserves 70% 75% 78% 88% 90%
Natural Gas (billions of cubic feet)
United States 2,151 2,220 2,239 2,210 2,127
International 1,796 1,071 1,199 1,379 1,527
------ ------ ------ ------ -------
Consolidated 3,947 3,291 3,438 3,589 3,654
Equity affiliate (b) 110 111 132 131 153
------ ------ ------ ------ -------
Total 4,057 3,402 3,570 3,720 3,807
Developed reserves as % of total net reserves 79% 83% 83% 80% 79%
</TABLE>
/(a)/ Represents gas acquired for injection and subsequent resale.
/(b)/ Represents Marathon's equity interest in CLAM Petroleum B.V.
/(c)/ Prices exclude gains losses from hedging activities.
/(d)/ Represents Marathon's equity interest in Sakhalin Energy
Investment Company Ltd.
M-22
<PAGE>
Five-Year Operating Summary CONTINUED
<TABLE>
<CAPTION>
1998/(a)/ 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
U.S. Refinery Operations
(thousands of barrels per day)
In-use crude oil capacity at year-end 935 575 570 570 570
Refinery runs -- crude oil refined 894 525 511 503 491
-- other charge and blend stocks 127 99 96 94 107
In-use crude oil capacity utilization rate 96% 92% 90% 88% 86%
Source of Crude Processed
(thousands of barrels per day)
United States 317 202 229 254 218
Europe 15 10 12 6 31
Middle East and Africa 394 241 193 183 171
Other International 168 72 79 58 70
------- ------- ------- ------- -------
Total 894 525 513 501 490
Refined Product Yields (thousands
of barrels per day)
Gasoline 545 353 345 339 340
Distillates 270 154 155 146 146
Propane 21 13 13 12 13
Feedstocks and special products 64 36 35 38 33
Heavy fuel oil 49 35 30 31 38
Asphalt 68 39 36 36 30
------- ------- ------- ------- -------
Total 1,017 630 614 602 600
Refined Products Yields (% breakdown)
Gasoline 54% 56% 56% 57% 57%
Distillates 27 24 25 24 24
Other products 19 20 19 19 19
------- ------- ------- ------- -------
Total 100% 100% 100% 100% 100%
U.S. Refined Product Sales
(thousands of barrels per day)
Gasoline 671 452 468 445 443
Distillates 318 198 192 180 183
Propane 21 12 12 12 16
Feedstocks and special products 67 40 37 44 32
Heavy fuel oil 49 34 31 31 38
Asphalt 72 39 35 35 31
------- ------- ------- ------- -------
Total 1,198 775 775 747 743
Matching buy sell/volumes included in above 39 51 71 47 73
Refined Products Sales by Class
of Trade (as a % of total sales)
Wholesale -- independent private-brand
marketers and consumers 65% 61% 62% 61% 62%
Marathon and Ashland brand jobbers and dealers 11 13 13 13 13
Speedway SuperAmerica retail outlets 24 26 25 26 25
------- ------- ------- ------- -------
Total 100% 100% 100% 100% 100%
Refined Products (dollars per barrel)
Average sales price $21.43 $26.38 $27.43 $23.80 $ 22.75
Average cost of crude oil throughput 13.02 19.00 21.94 18.09 16.59
Petroleum Inventories at year-end
(thousands of barrels)
Crude oil, raw materials and natural gas liquids 35,630 19,351 20,047 22,224 22,987
Refined products 32,334 20,598 21,283 22,102 23,657
U.S. Refined Product Marketing
Outlets at year-end
MAP operated terminals 88 51 51 51 51
Retail -- Marathon and Ashland brand outlets 3,117 2,465 2,392 2,380 2,356
-- Speedway SuperAmerica outlets 2,257 1,544 1,592 1,627 1,659
Pipelines (miles of common carrier pipelines)/(b)/
Crude Oil -- gathering lines 2,827 1,003 1,052 1,115 1,115
-- trunklines 4,859 2,665 2,665 2,666 2,672
Products -- trunklines 2,861 2,310 2,310 2,311 2,311
------- ------- ------- ------- -------
Total 10,547 5,978 6,027 6,092 6,098
Pipeline Barrels Handled
(millions)/(c)/
Crude Oil -- gathering lines 47.8 43.9 43.2 43.8 43.4
-- trunklines 571.9 369.6 378.7 371.3 353.0
Products -- trunklines 329.7 262.4 274.8 252.3 282.2
------- ------- ------- ------- -------
Total 949.4 675.9 696.7 667.4 678.6
River Operations
Barges -- owned/leased 169 -- -- -- --
Boats -- owned/leased 8 -- -- -- --
</TABLE>
/(a)/ 1998 statistics include 100% of MAP and should be
considered when compared to prior periods.
/(b)/ Pipelines for downstream operations also include non-common
carrier, leased and equity affiliates.
/(c)/ Pipeline barrels handled on owned common carrier pipelines,
excluding equity affiliates.
M-23
<PAGE>
Five-Year Financial Summary
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
(Dollars in millions, except as noted) 1998/(a)/ 1997 1996 1995 1994
Revenues
Sales by product:
Refined products $ 9,091 $ 7,012 $ 7,132 $ 6,127 $ 5,622
Merchandise 1,873 1,045 1,000 941 869
Liquid hydrocarbons 1,818 941 1,111 881 800
Natural gas 1,144 1,331 1,194 950 670
Transportation and other products 271 167 180 197 183
Gain on ownership change in MAP 245 -- -- -- --
Other/(b)/ 104 86 97 42 192
------- ------- ------- ------- -------
Subtotal 14,546 10,582 10,714 9,138 8,336
Matching buy sell transactions/(c)/ 3,948 2,436 2,912 2,067 2,071
Excise taxes/(c)/ 3,581 2,736 2,768 2,708 2,542
------- ------- ------- ------- -------
Total revenues $22,075 $15,754 $16,394 $13,913 $12,949
Income From Operations
Exploration and production (E&P)
Domestic $ 190 $ 500 $ 547 $ 306 $ 158
International 88 273 353 178 74
------- ------- ------- ------- -------
Income for E&P reportable segment 278 773 900 484 232
Refining, marketing and transportation 896 563 249 259 293
Other energy related businesses 33 48 57 60 34
------- ------- ------- ------- -------
Income for reportable segments 1,207 1,384 1,206 803 559
Items not allocated to reportable segments:
Administrative expenses (106) (168) (133) (85) (69)
Inventory market valuation adjustments (267) (284) 209 70 160
Gain on ownership change & transition
charges -- MAP 223 -- -- -- --
Int'l. write-offs, exploration well
write-offs & gas contract settlement (119) -- -- -- --
Impairment of long-lived assets -- -- -- (659) --
Other items -- -- 14 18 126
------- ------- ------- ------- -------
Income from operations 938 932 1,296 147 776
Minority interest in income of MAP 249 -- -- -- --
Net interest and other financial costs 237 260 305 337 300
Provision (credit) for income taxes 142 216 320 (107) 155
------- ------- ------- ------- -------
Income (Loss) Before Extraordinary Loss $ 310 $ 456 $ 671 $ (83) $ 321
Per common share -- basic (in dollars) 1.06 1.59 2.33 (.31) 1.10
-- diluted (in dollars) 1.05 1.58 2.31 (.31) 1.10
Net Income (Loss) $ 310 $ 456 $ 664 $ (88) $ 321
Per common share -- basic (in dollars) 1.06 1.59 2.31 (.33) 1.10
-- diluted (in dollars) 1.05 1.58 2.29 (.33) 1.10
Balance Sheet Position at year-end
Current assets $ 2,976 $ 2,018 $ 2,046 $ 1,888 $ 1,737
Net property, plant and equipment 10,429 7,566 7,298 7,521 8,471
Total assets 14,544 10,565 10,151 10,109 10,951
Short-term debt 191 525 323 384 56
Other current liabilities 2,419 1,737 1,819 1,641 1,656
Long-term debt 3,456 2,476 2,642 3,367 3,983
Minority interest in MAP 1,590 -- -- -- --
Common stockholders' equity 4,312 3,618 3,340 2,872 3,163
Per share (in dollars) 13.95 12.53 11.62 9.99 11.01
Cash Flow Data
Net cash from operating activities $ 1,431 $ 1,246 $ 1,503 $ 1,044 $ 720
Capital expenditures 1,270 1,038 751 642 753
Disposal of assets 65 60 282 77 263
Dividends paid 246 219 201 199 201
Employee Data/(d)/
Marathon Group:
Total employment costs $ 1,054 $ 854 $ 790 $ 781 $ 856
Average number of employees 24,344 20,695 20,461 21,015 21,005
Number of pensioners at year-end 3,378 3,099 3,203 3,378 3,495
Speedway SuperAmerica LLC (SSA):
(Included in Marathon Group totals)
Total employment costs $ 283 $ 263 $ 241 $ 229 $ 221
Average number of employees 12,831 12,816 12,474 12,087 11,669
Number of pensioners at year-end 212 215 207 206 199
Stockholder Data at year-end
Number of common shares
outstanding (in millions) 308.5 288.8 287.5 287.4 287.2
Registered shareholders (in thousands) 77.3 84.0 92.1 101.2 110.4
Market price of common stock $30.125 $33.750 $23.875 $19.500 $16.375
</TABLE>
/(a)/ 1998 statistics, other than employee data, include 100% of
MAP, which should be considered when making comparisons to
prior periods.
/(b)/ Includes dividend and affiliate income, net gains on
disposal of assets and other income.
/(c)/ These items are included in both revenues and costs and
expenses, resulting in no effect on income.
/(d)/ Employee Data for 1998 includes Ashland employees from the
date of their payroll transfer to MAP, which occurred at
various times throughout 1998. These employees were
contracted to MAP in 1998, prior to their payroll transfer.
As of December 31, 1998, active employees for the Marathon
Group were 32,862, which included 28,449 MAP employees. Of
the MAP total, 21,586 were employees of SSA.
M-24
<PAGE>
Management's Discussion and Analysis
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 LLC
("MAP"), owned 62% by Marathon; and other energy related
businesses. Effective August 11, 1998, Marathon acquired Tarragon
Oil and Gas Limited ("Tarragon"), a Canadian oil and gas
exploration and production company. Results for 1998 include the
operations of Marathon Canada Limited ("MCL"), formerly known as
Tarragon, commencing August 12, 1998. For 1998, certain financial
measures such as revenues, income from operations and capital
expenditures include 100% of MAP and are not comparable to prior
period amounts. Net income and related per share amounts for 1998
are net of Ashland's 38% minority interest in MAP's income. For
further discussion of MAP and MCL, see Note 5 to the Marathon Group
Financial Statements. The Management's Discussion and Analysis
should be read in conjunction with the Marathon Group's Financial
Statements and Notes to Financial Statements.
The Marathon Group's 1998 financial performance was
significantly impacted by the lowest oil prices in 24 years, lower
natural gas prices and decreased refining crack spreads (the
difference between light products prices and crude costs).
Nevertheless, in 1998, Marathon upstream operations achieved nearly
a 20% growth in worldwide liquids production and MAP had a highly
successful first year of operations, achieving annual repeatable
operating efficiencies of approximately $150 million.
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.
Management's Discussion and Analysis of Income and Operations
Revenues for each of the last three years are summarized in the
following table, which is covered by the report of independent
accountants:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Sales by product:
Refined products $ 9,091 $ 7,012 $ 7,132
Merchandise 1,873 1,045 1,000
Liquid hydrocarbons 1,818 941 1,111
Natural gas 1,144 1,331 1,194
Transportation and other products 271 167 180
Gain on ownership change in MAP/(a)/ 245 -- --
Other/(b)/ 104 86 97
------- ------- -------
Subtotal 14,546 10,582 10,714
------- ------- -------
Matching buy/sell transactions/(c)(e)/ 3,948 2,436 2,912
Excise taxes/(d)(e)/ 3,581 2,736 2,768
------- ------- -------
Total revenues $22,075 $15,754 $16,394
</TABLE>
/(a)/ See Note 5 to the Marathon Group Financial Statements for a
discussion of the gain on ownership change in MAP.
/(b)/ Includes dividend and affiliate income, net gains on
disposal of assets and other income.
/(c)/ Matching crude oil and refined products buy/sell
transactions settled in cash.
/(d)/ Consumer excise taxes on petroleum products and
merchandise.
/(e)/ Included in both revenues and costs and expenses, resulting
in no effect on income.
In 1998, Marathon Group revenues included 100% of MAP revenues,
and MCL's revenues commencing August 12, 1998. On a pro forma
basis, assuming the acquisitions of Tarragon's operations and
Ashland's RM&T net assets had occurred on January 1, 1997, revenues
(excluding matching buy/sell transactions and excise taxes) for
1997 would have been $16,278 million.
M-25
<PAGE>
Management's Discussion and Analysis continued
Revenues (excluding matching buy/sell transactions and excise
taxes) decreased by $1,732 million in 1998 from pro forma 1997. The
decrease in 1998 mainly reflected lower prices for refined
products, lower worldwide liquid hydrocarbon prices and lower
domestic natural gas prices, partially offset by higher liquid
hydrocarbon sales volumes. The increase in liquid hydrocarbon sales
volumes was due to a higher volume of upstream production being
sold to third parties.
Revenues (excluding matching buy/sell transactions and excise
taxes) decreased $132 million in 1997 (as reported) from 1996,
mainly due to lower average refined product prices and lower
worldwide liquid hydrocarbon prices and volumes, partially offset
by increased volumes of refined products and higher domestic
natural gas volumes and prices.
Income from operations for each of the last three years is
summarized in the following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Exploration & production ("E&P")
Domestic $ 190 $ 500 $ 547
International 88 273 353
------ ------ ------
Income for E&P reportable segment 278 773 900
Refining, marketing & transportation/(a)/ 896 563 249
Other energy related businesses/(b)/ 33 48 57
------ ------ ------
Income for reportable segments 1,207 1,384 1,206
Items not allocated to reportable segments:
Administrative expenses/(c)/ (106) (168) (133)
IMV reserve adjustment/(d)/ (267) (284) 209
Gain on ownership change & transition charges -- MAP/(e)/ 223 -- --
Int'l investment write-offs, suspended exploration
well write-offs & gas contract settlement/(f)/ (119) -- --
Other items (net) -- -- 14
------ ------ ------
Total income from operations $ 938 $ 932 $1,296
</TABLE>
/(a)/ In 1998, segment income includes 100% of MAP and is not
comparable to prior periods.
/(b)/ Includes marketing and transportation of domestic natural
gas and crude oil, and power generation.
/(c)/ Includes the portion of the Marathon Group's administrative
costs not charged to the operating components and the portion
of USX corporate general and administrative costs allocated
to the Marathon Group.
/(d)/ The inventory market valuation ("IMV") reserve reflects the
extent to which the recorded LIFO cost basis of crude oil and
refined products inventories exceeds net realizable value.
/(e)/ The gain on ownership change and one-time transition
charges relate to the formation of MAP. For additional
discussion of the gain on ownership change in MAP, see Note 5
to the Marathon Group Financial Statements.
/(f)/ Includes a write-off of certain non-revenue producing
international investments and several exploratory wells which
had encountered hydrocarbons, but had been suspended pending
further evaluation. It also includes a gain from the
resolution of a contract dispute with a purchaser of
Marathon's natural gas production from certain domestic
properties.
In 1998, Marathon Group income from operations included 100% of
MAP, and MCL's results of operations commencing August 12, 1998. On
a pro forma basis, assuming the acquisitions of Ashland's RM&T net
assets and Tarragon's operations had occurred on January 1, 1997,
income for reportable segments for 1997 would have been $1,728
million. Income for reportable segments decreased by $521 million
in 1998 from pro forma 1997 and increased by $178 million in 1997
(as reported) from 1996. The decrease in 1998 was primarily due to
lower worldwide liquid hydrocarbon prices, lower domestic natural
gas prices and lower refining crack spreads, partially offset by
higher liquid hydrocarbon production. The increase in 1997 was
primarily due to higher average refined product margins and higher
worldwide natural gas prices, partially offset by lower worldwide
liquid hydrocarbon production and prices and higher worldwide
exploration expense.
M-26
<PAGE>
Management's Discussion and Analysis continued
Average Volumes and Selling Prices
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C> <C>
(thousands of barrels per day)
Net liquids production/(a)/ -U.S. 135 115 122
-International/(b)/ 61 49 59
------------------------- ------ ------ ------
-Worldwide 196 164 181
(millions of cubic feet per day)
Net natural gas production -U.S. 744 722 676
-International - equity 441 423 499
-International - other/(c)/ 23 32 32
------ ------ ------
-Total Consolidated 1,208 1,177 1,207
-Equity affiliate 33 42 45
------ ------ ------
-Worldwide 1,241 1,219 1,252
(dollars per barrel)
Liquid hydrocarbons/(a)(d)/ -U.S. $10.42 $16.88 $18.58
-International 12.24 18.77 20.34
(dollars per mcf)
Natural gas/(d)/ -U.S. $ 1.79 $ 2.20 $ 2.09
-International - equity 1.94 2.00 1.97
(thousands of barrels per day)
Refined products sold/(e)/ 1,198 775 775
Matching buy/sell volumes included in above 39 51 71
</TABLE>
/(a)/ Includes crude oil, condensate and natural gas liquids.
/(b)/ Represents equity tanker liftings, truck deliveries and
direct deliveries.
/(c)/ Represents gas acquired for injection and subsequent
resale.
/(d)/ Prices exclude gains/losses from hedging activities.
/(e)/ In 1998, refined products sold and matching buy/sell
volumes include 100% of MAP and are not comparable to prior
periods.
Domestic E&P income decreased by $310 million in 1998 from 1997
following a decrease of $47 million in 1997 from 1996. The decrease
in 1998 was primarily due to lower liquid hydrocarbon and natural
gas prices, partially offset by increased liquid hydrocarbon
production and natural gas volumes. The 17%, or 20,000 barrels per
day ("bpd"), increase in liquid hydrocarbon production was mainly
attributable to new production in the Gulf of Mexico, while the
increase in natural gas volumes was mainly attributable to
properties in east Texas.
The decrease in 1997 was primarily due to lower liquid
hydrocarbon prices and production and higher exploration expense,
partially offset by increased natural gas production and prices.
The lower liquid hydrocarbon production was mostly due to the 1996
disposal of oil producing properties in Alaska. The increase in
natural gas volumes was mainly attributable to properties in east
Texas, Oklahoma and Wyoming.
International E&P income decreased by $185 million in 1998
following a decrease of $80 million in 1997. The decrease in 1998
was primarily due to lower liquid hydrocarbon and natural gas
prices and higher exploration and operating expenses. These items
were partially offset by increased liquid hydrocarbon production
and natural gas volumes. The 24%, or 12,000 bpd, increase in liquid
hydrocarbon production was mainly attributable to the acquired
production in Canada and new operations in Gabon. The increase in
natural gas volumes was mainly attributable to acquired production
in Canada.
The decrease in 1997 was primarily due to lower liquid
hydrocarbon volumes, lower natural gas volumes and lower liquid
hydrocarbon prices. These items were partially offset by reduced
pipeline and terminal expenses and reduced DD&A expenses, due
largely to the lower volumes. The lower liquid hydrocarbon volumes
primarily reflected lower production in the U.K. North Sea, while
the lower natural gas volumes were mainly due to natural field
declines in Ireland and Norway.
Refining, marketing and transportation ("downstream") reportable
segment income in 1998 included 100 percent of MAP. On a pro forma
basis, assuming the acquisition of Ashland's RM&T net assets had
occurred on January 1, 1997, income for the reportable segments of
the combined downstream operations of Marathon and Ashland for 1997
would have been $869 million. On this basis, 1998 downstream
reportable segment income of $896 million was slightly higher than
pro forma 1997 downstream reportable segment income. During 1998,
the effects of lower refining crack
<PAGE>
Management's Discussion and Analysis continued
spreads were offset by strong performances from MAP's asphalt and
retail operations, realization of operating efficiencies as a
result of combining Marathon and Ashland's downstream operations
and lower energy costs.
Downstream reportable segment income in 1997 increased $314
million over 1996 due mainly to improved refined product margins as
favorable effects of reduced crude oil and other feedstock costs
more than offset a decrease in refined product sales prices.
Other energy related businesses reportable segment income
decreased by $15 million in 1998 following a decrease of $9 million
in 1997. The decrease in 1998 was mainly due to a gain on the sale
of an equity interest in a domestic pipeline company included in
1997 reportable segment income.
Items not allocated to reportable segments
Administrative expenses decreased by $62 million in 1998
following an increase of $35 million in 1997 from 1996. The
decrease in 1998 mainly reflected an increase in administrative
costs charged to the RM&T reportable segment, lower accruals for
employee benefit and compensation plans and lower litigation
accruals. The increase in 1997 mainly reflected higher accruals for
employee benefit and compensation plans, including Marathon's
performance-based variable pay plan.
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 was also lowered.
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 for 1998, 1997 and 1996
are set forth in the following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Interest and other financial income $ 34 $ 1 $ 3
Interest and other financial costs (271) (261) (308)
----- ----- -----
Net interest and other financial costs $(237) $(260) $(305)
</TABLE>
In 1998, net interest and other financial costs decreased
primarily due to increased interest income and higher capitalized
interest on upstream projects, partially offset by higher interest
and other financial costs resulting from the debt incurred for the
Tarragon acquisition. In 1997, net interest and other financial
costs decreased primarily due to lower average debt levels and
higher capitalized interest on worldwide exploration and production
projects. For additional details, see Note 8 to the Marathon Group
Financial Statements.
The provision for estimated income taxes of $142 million in 1998
included $24 million of favorable income tax accrual adjustments
relating to foreign operations.
An extraordinary loss on extinguishment of debt of $7 million in
1996 represents the portion of the loss on early extinguishment of
USX debt attributed to the Marathon Group. For additional
information, see Note 9 to the Marathon Group Financial Statements.
Net income decreased by $146 million in 1998 from 1997,
following a decrease of $208 million in 1997 from 1996, primarily
reflecting the factors discussed above.
M-28
<PAGE>
Management's Discussion and Analysis continued
Management's Discussion and Analysis of Financial Condition, Cash Flows and
Liquidity
Current assets increased $958 million from year-end 1997,
primarily due to an increase in receivables, inventories and cash
and cash equivalents. The accounts receivable and inventory
increases were mainly due to the acquisition of Ashland's RM&T net
assets.
Current liabilities increased $348 million from year-end 1997.
This increase included an increase in accounts payable, which was
primarily due to the acquisition of Ashland's RM&T net assets and
an increase in the distribution payable to the minority interest
owner of MAP, which was paid in early January 1999. These were
partially offset by a decrease in long-term debt due within a year.
Net property, plant and equipment increased $2,863 million from
year-end 1997, primarily due to the acquisitions of Ashland's RM&T
net assets and Tarragon. Net property, plant and equipment for each
of the last three years is summarized in the following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Exploration and production
Domestic $ 3,688 $3,469 $3,181
International 3,027 2,156 2,197
------- ------ ------
Total exploration and production 6,715 5,625 5,378
Refining, marketing and transportation 3,517 1,755 1,741
Other/(a)/ 197 186 179
------- ------ ------
Total $10,429 $7,566 $7,298
</TABLE>
/(a)/ Includes other energy related businesses and other
miscellaneous corporate net property, plant and equipment.
Total long-term debt and notes payable at December 31, 1998 were
$3.6 billion, an increase of $646 million from year-end 1997. This
increase is mainly due to the Tarragon acquisition. Virtually all
of the debt is a direct obligation of, or is guaranteed by, USX.
Net cash provided from operating activities totaled $1,431
million in 1998, compared with $1,246 million in 1997 and $1,503
million in 1996. Operating cash flow in 1997 included the impact of
terminating Marathon's participation in an accounts receivable
sales program, resulting in a cash outflow of $340 million, while
1996 included payments of $39 million related to certain state tax
issues. Excluding the effects of these items, net cash from
operating activities decreased by $155 million in 1998 from 1997
and increased by $44 million in 1997 from 1996. The decrease in
1998 was mainly due to unfavorable working capital changes. The
increase in 1997 mainly reflected improved net income (excluding
the IMV reserve adjustment and other noncash items), partially
offset by increased income tax payments.
Capital expenditures, excluding the acquisition of Tarragon, for
each of the last three years are summarized in the following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Exploration and production ("upstream")
Domestic $ 652 $ 647 $ 424
International 187 163 80
------ ------ -----
Total exploration and production 839 810 504
Refining, marketing and transportation ("downstream")/(a)/ 410 205 234
Other/(b)/ 21 23 13
------ ------ -----
Total $1,270 $1,038 $ 751
</TABLE>
/(a)/ Amounts for 1998 include 100% of MAP.
/(b)/ Includes other energy related businesses and other
miscellaneous corporate capital expenditures.
During 1998, domestic upstream capital spending mainly included
continuing development of Viosca Knoll 786 ("Petronius"), Green
Canyon 244 ("Troika") and Green Canyon 112/113 ("Stellaria") in the
Gulf of Mexico. International upstream projects included continued
development of the Tchatamba South field, offshore Gabon.
Downstream spending by MAP consisted of upgrades and expansions of
retail marketing outlets and refinery modifications.
Capital expenditures in 1999 are expected to be approximately
$1.3 billion which is consistent with 1998 levels; however,
Marathon's plans will remain responsive to the economic conditions
impacting the petroleum industry. Domestic upstream projects
planned for 1999 include continued
M-29
<PAGE>
Management's Discussion and Analysis continued
development of Petronius and Stellaria in the Gulf of Mexico and
natural gas developments in East Texas and other gas basins
throughout the western United States. International upstream
projects include oil and natural gas developments in Canada and
completion of the Tchatamba South development. Downstream spending
by MAP will primarily consist of upgrades and expansions of retail
marketing outlets, refinery improvements and expansion and
enhancement of logistic systems.
Investments in affiliates of $42 million in 1998 mainly
reflected MAP's acquisition of an interest in Southcap Pipe Line
Company for $22 million and continued investment in pipeline and
power projects.
Loans and advances to affiliates of $103 million in 1998
primarily reflected continued funding of Sakhalin Energy Investment
Company Ltd. ("Sakhalin Energy") in conjunction with the Sakhalin
II project.
Repayments of loans and advances to affiliates of $63 million in
1998 were primarily a result of repayments by Sakhalin Energy of
advances made by Marathon in conjunction with the Sakhalin II
project.
In 1999, net investments in affiliates are expected to be
approximately $80 million, primarily reflecting continued
development spending for the Sakhalin II project.
Contract commitments for property, plant and equipment
acquisitions and long-term investments at year-end 1998 were $624
million, compared with $377 million at year-end 1997. The 1998
increase was primarily due to increased commitments for domestic
production in the Gulf Coast.
The above statements with respect to future capital expenditures
and investments are forward-looking statements, reflecting
management's best estimates, based on information currently
available. To the extent this information proves to be inaccurate,
the timing and levels of future spending could differ materially
from those included in the forward-looking statements. Factors that
could cause future capital expenditures and investments to differ
materially from present expectations include continued low prices,
worldwide supply and demand for petroleum products, general
worldwide economic conditions, levels of cash flow from operations,
available business opportunities, unforeseen hazards such as
weather conditions, and/or by delays in obtaining government or
partner approvals.
The acquisition of Tarragon Oil and Gas Limited included cash
payments of $686 million. For further discussion of Tarragon, see
Note 5 to the Marathon Group Financial Statements.
Cash from disposal of assets was $65 million in 1998, compared
with $60 million in 1997 and $282 million in 1996. Proceeds in 1998
were mainly from the sales of domestic production properties and
equipment. Proceeds in 1997 were mainly from the sales of interests
in various domestic upstream properties, certain investments and an
interest in a domestic pipeline company. Proceeds in 1996 primarily
reflected the sales of interests in certain domestic and
international oil and gas production properties and the sale of an
equity interest in a domestic pipeline company.
The net change in restricted cash was a net deposit of $21
million in 1998 compared to a net withdrawal of $98 million in
1997. The 1998 amount represents cash deposited from the sales of
domestic production properties and equipment, partially offset by
cash withdrawn for the purchase of offshore production leases. The
1997 amount represents cash withdrawn from an interest-bearing
escrow account that was established in the fourth quarter of 1996
in connection with the 1996 disposal of oil production properties
in Alaska.
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 $306 million in 1998. Financial
obligations increased primarily because capital expenditures, cash
payments for Tarragon, dividend payments and the increase in cash
and cash equivalents exceeded cash from operating activities and
proceeds from the issuance of USX -- Marathon Group Common Stock.
For further details, see USX Consolidated Management's Discussion
and Analysis of Financial Condition and Results of Operations.
Dividends paid in 1998 increased by $27 million from 1997,
primarily due to the two cents per share increase in the quarterly
USX -- Marathon Group Common Stock dividend rate. This increase was
initially declared in January 1998.
Derivative Instruments
See Quantitative and Qualitative Disclosures About Market Risk
for a discussion of derivative instruments and associated market
risk.
M-30
<PAGE>
Management's Discussion and Analysis continued
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.
Management's Discussion and Analysis of Environmental Matters, Litigation and
Contingencies
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.
Marathon Group environmental expenditures for each of the last
three years were/(a)/:
<TABLE>
<CAPTION>
(Dollars in millions) 1998/(b)/ 1997 1996
<S> <C> <C> <C>
Capital $124 $ 81 $ 66
Compliance
Operating & maintenance 126 84 75
Remediation/(c)/ 10 19 26
---- ----- -----
Total $260 $ 184 $ 167
</TABLE>
/(a)/ Amounts are determined based on American Petroleum
Institute survey guidelines.
/(b)/ Amounts for 1998 include 100% of MAP.
/(c)/ These amounts include spending charged against such
reserves, net of recoveries, where permissible, but do not
include noncash provisions recorded for environmental
remediation.
The Marathon Group's environmental capital expenditures
accounted for 10% of total capital expenditures in 1998 (excluding
the acquisition of Tarragon), 8% in 1997 and 9% in 1996.
During 1996 through 1998, compliance expenditures represented 1%
of the Marathon Group's total operating costs. Remediation spending
during this period was primarily related to retail marketing
outlets which incur ongoing clean-up costs for soil and groundwater
contamination associated with underground storage tanks and piping.
USX has been notified that it is a potentially responsible party
("PRP") at 17 waste sites related to the Marathon Group under the
Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA") as of December 31, 1998. In addition, there are 8
sites related to the Marathon Group where USX has received
information requests or other indications that USX may be a PRP
under CERCLA but where sufficient information is not presently
available to confirm the existence of liability.
There are also 92 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, 16 were associated with
properties conveyed to MAP by Ashland for which Ashland has
retained liability for all costs associated with remediation.
At many of these sites, USX is one of a number of parties
involved and the total cost of remediation, as well as USX's share
thereof, is frequently dependent upon the outcome of investigations
and remedial studies. The Marathon Group accrues for environmental
remediation activities when the responsibility to remediate is
probable and the amount of associated costs is reasonably
determinable. As environmental remediation matters proceed toward
ultimate resolution or as additional remediation obligations arise,
charges in excess of those previously accrued may be required. See
Note 27 to the Marathon Group Financial Statements.
Effective January 1, 1997, USX adopted the American Institute of
Certified Public Accountants Statement of Position No. 96-1 --
"Environmental Remediation Liabilities" -- which requires that
companies include direct costs in accruals for remediation
liabilities. Income from operations in 1997 included first quarter
charges of $7 million (net of expected recoveries) related to such
adoption, primarily for accruals of post-closure monitoring costs,
study costs and administrative costs. See Note 3 to the Marathon
Group Financial Statements for additional discussion.
M-31
<PAGE>
Management's Discussion and Analysis continued
New or expanded environmental requirements, which could increase
the Marathon Group's environmental costs, may arise in the future.
USX intends to comply with all legal requirements regarding the
environment, but since many of them are not fixed or presently
determinable (even under existing legislation) and may be affected
by future legislation, it is not possible to predict accurately the
ultimate cost of compliance, including remediation costs which may
be incurred and penalties which may be imposed. However, based on
presently available information, and existing laws and regulations
as currently implemented, the Marathon Group does not anticipate
that environmental compliance expenditures (including operating and
maintenance and remediation) will materially increase in 1999. The
Marathon Group's environmental capital expenditures are expected to
be approximately $64 million in 1999. Predictions beyond 1999 can
only be broad-based estimates which have varied, and will continue
to vary, due to the ongoing evolution of specific regulatory
requirements, the possible imposition of more stringent
requirements and the availability of new technologies, among other
matters. Based upon currently identified projects, the Marathon
Group anticipates that environmental capital expenditures will be
approximately $82 million in 2000; however, actual expenditures may
vary as the number and scope of environmental projects are revised
as a result of improved technology or changes in regulatory
requirements and could increase if additional projects are
identified or additional requirements are imposed.
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 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 which are
discussed in Note 27 to the Marathon Group Financial Statements.
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 Management's Discussion and Analysis of USX Consolidated
Financial Condition, Cash Flows and Liquidity.
Outlook
The outlook regarding the Marathon Group's upstream revenues and
income is largely dependent upon future prices and volumes of
liquid hydrocarbons and natural gas. Prices have historically been
volatile and have frequently been affected by unpredictable changes
in supply and demand resulting from fluctuations in worldwide
economic activity and political developments in the world's major
oil and gas producing and consuming areas. During 1998, worldwide
liquid hydrocarbon and natural gas prices realized by Marathon were
significantly lower than 1997. In 1998, West Texas Intermediate
crude oil postings reached their lowest levels in 24 years. The
continuation of this depressed pricing environment in 1999 will
adversely impact upstream results. Expected increases in liquid
hydrocarbon and natural gas production should partially offset the
effects of these lower prices. Continued lower prices could
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.
In 1999, worldwide liquid hydrocarbon production, including
Marathon's share of equity affiliates, is expected to increase by
17 percent, to average approximately 230,000 bpd. Most of the
increase is anticipated in the second half of the year. This
primarily reflects projected new production from the Phase I
development of the Piltun-Astokhskoye ("P-A") field in mid-1999
(discussed below), start-up of the Tchatamba South field in the
third quarter of 1999 and a full year of production by MCL,
partially offset by natural production declines of mature fields.
In 1999, worldwide natural gas volumes,
M-32
<PAGE>
Management's Discussion and Analysis continued
including Marathon's share of equity affiliates, are expected to
increase by 11 percent, to approximately 1.38 billion cubic feet
per day. This primarily reflects increases in North American gas
production, offset by natural declines in mature international
fields, primarily in Ireland and Norway. In 2000, worldwide liquid
hydrocarbon production and natural gas volumes are expected to
remain consistent with 1999 levels. In 2001, liquid hydrocarbon
production is expected to increase by 10 to 15 percent over 2000
production levels and natural gas volumes are expected to increase
by approximately 4 percent over 2000 levels. These projections are
based on known discoveries and do not include any additions from
potential or future acquisitions or future wildcat drilling.
Petronius, in the Gulf of Mexico, was originally scheduled to
begin production in the second quarter of 1999, but the project was
delayed when the last platform topsides module fell into the sea
during installation work. The lost module will have to be replaced.
Third party insurance is expected to cover costs associated with
the replacement and installation on the platform. First production
is now expected to begin in the fourth quarter of 2000.
Marathon holds a 37.5% interest in Sakhalin Energy Investment
Company Ltd. ("Sakhalin Energy"), an incorporated joint venture
company responsible for the overall management of the Sakhalin II
project. This project includes development of the P-A oil field and
the Lunskoye gas-condensate field, which are located 8-12 miles
offshore Sakhalin Island in the Russian Far East Region. The
Russian State Reserves Committee has approved estimated combined
reserves for the P-A and Lunskoye fields of one billion gross
barrels of liquid hydrocarbons and 14 trillion cubic feet of
natural gas.
In 1997, a Development Plan for the P-A license area, Phase I:
Astokh Feature was approved. Offshore drilling and production
facilities for the Astokh Feature were set in place on September 1,
1998. Drilling of development wells commenced in December of 1998.
First production from the Astokh Feature is scheduled for mid-1999,
with sales forecast to average 45,000 gross bpd of oil annually as
early as 2000. This rate is based on six months of offshore loading
operations during the ice-free weather window at an estimated daily
rate of 90,000 gross barrels. Marathon's equity share of reserves
from primary production in the Astokh Feature is 80 million barrels
of oil.
The approved Development Plan also provides for further
appraisal work for the remainder of the P-A field. An appraisal
well was drilled during the summer weather window in 1998 and the
results are being evaluated. Conceptual design work for further
development of the P-A field, including pressure maintenance for
the Astokh Feature, continues. With respect to the Lunskoye field,
appraisal work and efforts to secure long-term gas sales markets
continue. Commencement of gas production from the Lunskoye field,
which will be contingent upon the conclusion of a gas sales
contract, is anticipated to occur in 2005 or later.
Late in 1997, the Sakhalin Energy consortium arranged a limited
recourse project financing facility of $348 million. Sakhalin
Energy borrowed the full amount of this facility in 1998 to fund
Phase I expenditures and to repay amounts previously advanced to
Sakhalin Energy by its shareholders.
In the area of significant Russian legislation, the Russian
Parliament passed a Production Sharing Agreement ("PSA") Amendments
Law and a PSA Enabling Law, which brings other Russian legislation
into conformance with the PSA Law. These laws were signed by
President Yeltsin and enacted in 1999.
At December 31, 1998, Marathon's investment in the Sakhalin II
project was $275 million.
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.
M-33
<PAGE>
Management's Discussion and Analysis continued
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. Key external
factors look promising for the refining and marketing industry.
Demand for petroleum products is expected to grow modestly, due to
a leveling of fuel efficiency in the passenger car fleet,
increasing sales of light-truck and sport-utility vehicles which
average fewer miles per gallon than passenger cars, and an
increasing number of vehicle miles traveled. Refinery utilization
rates are strong, reflecting the increased demand, which should be
beneficial for MAP's refining margins. Also, increased highway
construction funding should benefit MAP, the largest U.S. supplier
of asphalt.
As a result of Marathon and Ashland combining major elements of
their downstream operations, MAP achieved approximately $150
million in annual repeatable pre-tax operating efficiencies in 1998
and has targeted an additional $100 million in 1999. MAP presently
expects to derive efficiencies of $350 million annually on a pre-
tax basis in 2001. This exceeds its original goal of achieving
efficiencies of $200 million annually on a pre-tax basis.
Efficiencies will continue to be identified in the logistical,
retail marketing, wholesale marketing and refining operations, as
well as administrative functions, that Marathon and Ashland
transferred to MAP.
MAP and a third party are constructing facilities to produce 800
million pounds per year of polymer grade propylene and
polypropylene at the Garyville refinery. MAP is building and will
own and operate facilities to produce polymer grade propylene. The
third party is constructing and will own and operate the
polypropylene facilities and market its output. Production of the
polymer grade propylene is scheduled to begin in the second quarter
of 1999.
MAP plans to build a pipeline from its Catlettsburg refinery to
Columbus, Ohio. The wholly owned pipeline is expected to initially
move about 50,000 bpd of refined products into central Ohio.
Construction is expected to commence in the summer of 1999 after
final regulatory approvals. The pipeline is expected to be
operational in the first half of 2000.
A project to increase crude throughput and light product output
is being undertaken at MAP's Robinson, IL refinery. This project is
expected to be completed in 2001.
The above statements with respect to demand for petroleum
products, the amount and timing of efficiencies to be realized by
MAP, and the statements with respect to the propylene, pipeline and
refinery improvement projects are forward looking statements. Some
factors that could potentially cause actual results to differ
materially from present expectations include (among others) the
price of petroleum products, unanticipated costs or delays
associated with implementing shared technology, completing
logistical infrastructure projects, leveraging procurement
strategies, levels of cash flow from operations, obtaining the
necessary construction and environmental permits, unforeseen
hazards such as weather conditions and regulatory constraints.
Year 2000 Readiness Disclosure
The Marathon Group is executing action plans which include:
. prioritizing and focusing on those computerized and automated
systems and processes critical to the operations in terms of
material operational, safety, environmental and financial risk to
the company.
. allocating and committing appropriate resources to fix the
problem.
. developing detailed contingency plans for those computerized and
automated systems and processes 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.
M-34
<PAGE>
Management's Discussion and Analysis continued
State of Readiness
Readiness efforts and critical systems testing is 92% complete
for Information Technology (IT) systems. The remaining systems are
to be completed by end of the third quarter of 1999. Responses
have been received from over 80% of the Marathon Group's third
party software vendors, with 99% indicating that they are or will
be Year 2000 ready and will provide updated software on a timely
basis.
The Marathon Group has completed the inventory on 93% of the
Non-Information Technology (Non-IT) systems. Assessment of these
inventories is being completed to identify those systems that will
require remediation. All Non-IT systems are scheduled to be ready
by the end of the third quarter of 1999 with minor exceptions.
Plant maintenance shutdowns scheduled for the fourth quarter of
1999 will allow us to complete any final readiness efforts.
The following chart provides the percent of completion for the
inventory of systems and processes that may be affected by the Year
2000 ("Y2K Inventory"), analysis performed to determine the Year
2000 date impact of inventoried systems and processes ("Y2K Impact
Assessment") and the Year 2000 readiness of the Marathon Group's
Year 2000 inventory ("Y2K Readiness of Overall Inventory"). The
percent of completion for Y2K Readiness of Overall Inventory
includes all inventory items not date impacted, those items already
Year 2000 ready and those corrected and made Year 2000 ready
through the renovation/replacement, testing and implementation
activities; however, the implementation of certain Year 2000 ready
IT and Non-IT systems has been deferred until 1999, to avoid
unnecessary disruption of operations.
<TABLE>
<CAPTION>
Percent Completed
Y2K
Y2K Readiness
Impact of
Y2K Assess- Overall
As of January 31, 1999 Inventory ment Inventory
<S> <C> <C> <C>
Information technology 100% 100% 92%
Non-information technology 93% 60% 52%
</TABLE>
Third Parties
Third parties are suppliers, customers and vendors, excluding
third party software vendors discussed previously. Contacts have
been made with all critical third parties to determine if they will
be able to provide their service to the Marathon Group after the
year 2000. Follow-up continues with those third parties not
responding or returning an unacceptable response. If it is
determined that there is a significant risk, an effort will be made
to work with such parties. If this is not successful, a new
provider of the same services will be sought.
The Costs to Address Year 2000 Issues
The estimated costs associated with Year 2000 readiness, are
approximately $36 million, including $19 million of incremental
costs. This reflects an increase of $8 million from the previously
reported estimate of total incremental costs. The estimated cost
increase results primarily from increased use of external
consultants and increased internal staffing of Y2K operational
teams. Total costs incurred as of January 31, 1999, were $17
million, including $8 million of incremental costs. As Y2K impact
assessment nears completion and the renovation planning, readiness
implementation and testing evolve, the estimated costs may change.
The Risks of the Company's Year 2000 Issues
The most reasonably likely worst case Year 2000 scenario would
be the inability of 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.
M-35
<PAGE>
Management's Discussion and Analysis continued
Contingency Planning
Representatives of the Marathon Group have participated with a
work group of the API Year 2000 Task force to develop a contingency
plan format. This format includes guidelines to develop a plan that
will cover the Year 2000 areas of concern. Many business unit
contingency planning teams have been formed and are actively
working on contingency plans for the systems and processes critical
to the operations in terms of material operational, safety,
environmental and financial risk to the company. These plans are to
be completed and tested, when practical, by the end of the third
quarter of 1999.
The foregoing Year 2000 discussion includes forward-looking
statements of the Marathon Group's efforts and management's
expectations 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.
Accounting Standards
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position No. 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal
Use" ("SOP 98-1"). SOP 98-1 provides guidelines for companies to
capitalize or expense costs incurred to develop or obtain internal-
use software. USX adopted SOP 98-1 effective January 1, 1999. The
incremental impact on results of operations of adoption of SOP 98-1
is likely to be initially favorable since certain qualifying costs
will be capitalized and amortized over future periods.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities". This new
standard requires recognition of all derivatives as either assets
or liabilities at fair value. This new standard may result in
additional volatility in both current period earnings and 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.
M-36
<PAGE>
Quantitative and Qualitative Disclosures About Market Risk
Management Opinion Concerning Derivative Instruments
USX employs a strategic approach of limiting its use of
derivative instruments principally to hedging activities, whereby
gains and losses are generally offset by price changes in the
underlying commodity. Based on this approach, combined with risk
assessment procedures and internal controls, management believes
that its use of derivative instruments does not expose the Marathon
Group to material risk; however, the Marathon Group's use of
derivative instruments for hedging activities could materially
affect the Marathon Group's results of operations in particular
quarterly or annual periods. This is primarily because use of such
instruments may limit the company's ability to benefit from
favorable price movements. However, management believes that use of
these instruments will not have a material adverse effect on
financial position or liquidity. For a summary of accounting
policies related to derivative instruments, see Note 2 to the
Marathon Group Financial Statements.
Commodity Price Risk and Related Risks
In the normal course of its business, the Marathon Group is
exposed to market risk or price fluctuations related to the
purchase, production or sale of crude oil, natural gas and refined
products. To a lesser extent, the Marathon Group is exposed to the
risk of price fluctuations on natural gas liquids, electricity and
petroleum feedstocks used as raw materials. The Marathon Group is
also exposed to effects of price fluctuations on the value of its
commodity inventories.
The Marathon Group's market risk strategy has generally been to
obtain competitive prices for its products and services and allow
operating results to reflect market price movements dictated by
supply and demand. However, the Marathon Group uses fixed-price
contracts and derivative commodity instruments to manage a
relatively small portion of its commodity price risk. The Marathon
Group uses fixed-price contracts for portions of its natural gas
production to manage exposure to fluctuations in natural gas
prices. In addition, the Marathon Group uses derivative commodity
instruments such as exchange-traded futures contracts and options,
and over-the-counter ("OTC") commodity swaps and options to manage
exposure to market risk related to the purchase, production or sale
of crude oil, natural gas, refined products and electricity. The
Marathon Group's strategic approach is to limit the use of these
instruments principally to hedging activities. Accordingly, gains
and losses on derivative commodity instruments are generally offset
by the effects of price changes in the underlying commodity.
However, certain derivative commodity instruments have the effect
of restoring the equity portion of fixed-price sales of natural gas
to variable market-based pricing. These instruments are used as
part of the Marathon Group's overall risk management programs.
M-37
<PAGE>
Quantitative and qualitative Disclosures
About Market Risk continued
Sensitivity analyses of the incremental effects on pretax income
of hypothetical 10% and 25% changes in commodity prices for open
derivative commodity instruments for the Marathon Group as of
December 31, 1998, are provided in the following table/(a)/:
<TABLE>
<CAPTION>
(Dollars in millions)
Incremental Decrease in
Pretax Income Assuming a
Hypothetical Price
Change of/(a)/
<S> <C> <C>
Derivative Commodity Instruments 10% 25%
Marathon Group/(b)(c)/:
Crude oil (price increase)/(d)/ $2.6 $12.8
Natural gas (price decrease)/(d)/ 9.4 24.0
Refined products (price increase)/(d)/ 1.9 6.5
</TABLE>
/(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 December 31,
1998. Marathon Group management evaluates its portfolio of
derivative commodity instruments on an ongoing basis and adds or
revises strategies to reflect anticipated market conditions and
changes in risk profiles. Changes to the portfolio subsequent to
December 31, 1998, would cause future pretax income effects to
differ from those presented in the table.
/(b)/ The number of net open contracts varied throughout 1998,
from a low of 1,268 contracts at January 1, to a high of 17,359
contracts at September 24, and averaged 8,171 for the year. The
derivative commodity instruments used and hedging positions taken
also varied throughout 1998, and will continue to vary in the
future. Because of these variations in the composition of the
portfolio over time, the number of open contracts, by itself,
cannot be used to predict future income effects.
/(c)/ The calculation of sensitivity amounts for basis swaps assumes
that the physical and paper indices are perfectly correlated.
Gains and losses on options are based on changes in intrinsic
value only.
/(d)/ The direction of the price change used in calculating the
sensitivity amount for each commodity reflects that which would
result in the largest incremental decrease in pretax income when
applied to the derivative commodity instruments used to hedge
that commodity.
While derivative commodity instruments are generally used to
reduce risks from unfavorable commodity price movements, they also
may limit the opportunity to benefit from favorable movements.
During the fourth quarter of 1996, certain hedging strategies
matured which limited the Marathon Group's ability to benefit from
favorable market price increases on the sales of equity crude oil
and natural gas production, resulting in pretax hedging losses of
$33 million. In total, Marathon's upstream operations recorded net
pretax hedging losses of $3 million in 1998, compared with net
losses of $3 million in 1997, and net losses of $38 million in
1996.
Marathon's downstream operations generally use derivative
commodity instruments to lock-in costs of certain raw material
purchases, to protect carrying values of inventories and to protect
margins on fixed-price sales of refined products. In total,
Marathon's downstream operations recorded net pretax hedging gains,
net of the 38% minority interest in MAP, of $28 million in 1998,
compared with net gains of $29 million in 1997, and net losses of
$22 million in 1996. Essentially, all of these upstream and
downstream gains and losses were offset by changes in the prices of
the underlying hedged commodities, with the net effect
approximating the targeted results of the hedging strategies. For
additional quantitative information relating to derivative
commodity instruments, including aggregate contract values and fair
values, where appropriate, see Note 25 to the Marathon Group
Financial Statements.
The Marathon Group is subject to basis risk, caused by factors
that affect the relationship between commodity futures prices
reflected in derivative commodity instruments and the cash market
price of the underlying commodity. Natural gas transaction prices
are frequently based on industry reference prices that may vary
from prices experienced in local markets. For example, New York
Mercantile Exchange ("NYMEX") contracts for natural gas are priced
at Louisiana's Henry Hub, while the underlying quantities of
natural gas may be produced and sold in the Western United States
at prices that do not move in strict correlation with NYMEX prices.
To the extent that commodity price changes in one region are not
reflected in other regions, derivative commodity instruments may no
longer provide the expected hedge, resulting in increased exposure
to basis risk. These regional price differences could yield
favorable or unfavorable results. OTC transactions are being used
to manage exposure to a portion of basis risk.
M-38
<PAGE>
Quantitative and qualitative Disclosures
About Market Risk continued
The Marathon Group is subject to liquidity risk, caused by
timing delays in liquidating contract positions due to a potential
inability to identify a counterparty willing to accept an
offsetting position. Due to the large number of active
participants, liquidity risk exposure is relatively low for
exchange-traded transactions.
Interest Rate Risk
USX is subject to the effects of interest rate fluctuations on
certain of its non-derivative financial instruments. A sensitivity
analysis of the projected incremental effect of a hypothetical 10%
decrease in year-end 1998 interest rates on the fair value of the
Marathon Group's specifically attributed non-derivative financial
instruments and the Marathon Group's portion of USX's non-
derivative financial instruments attributed to both groups, is
provided in the following table:
<TABLE>
<CAPTION>
(Dollars in millions)
As of December 31, 1998 Incremental
Increase in
Carrying Fair Fair
Non-Derivative Financial Instruments/(a)/ Value/(b)/ Value/(b)/ Value/(c)/
<S> <C> <C> <C>
Financial assets:
Investments and long-term receivables/(d)/ $ $101 $ 157 $ --
Financial liabilities:
Long-term debt (including amounts due within one year)/(e)/ $ 3,515 $ 3,797 $ 141
Preferred stock of subsidiary/(f)/ 184 183 15
------- ------- -------
Total $ 3,699 $ 3,980 $ 156
</TABLE>
/(a)/ Fair values of cash and cash equivalents, receivables,
notes payable, accounts payable and accrued interest, approximate
carrying value and are relatively insensitive to changes in
interest rates due to the short-term maturity of the instruments.
Accordingly, these instruments are excluded from the table.
/(b)/ See Note 26 to the Marathon Group Financial Statements.
/(c)/ Reflects, by class of financial instrument, the estimated
incremental effect of a hypothetical 10% decrease in interest
rates at December 31, 1998, on the fair value of non-derivative
financial instruments. For financial liabilities, this assumes a
10% decrease in the weighted average yield to maturity of USX's
long-term debt at December 31, 1998.
/(d)/ For additional information, see Note 20 to the Marathon
Group Financial Statements.
/(e)/ Fair value was based on market prices where available, or
current borrowing rates for financings with similar terms and
maturities. For additional information, see Note 13 to the
Marathon Group Financial Statements.
/(f)/ See Note 25 to the USX Consolidated Financial Statements.
At December 31, 1998, USX's portfolio of long-term debt was
comprised primarily of fixed-rate instruments. Therefore, the fair
value of the portfolio is relatively sensitive to effects of
interest rate fluctuations. This sensitivity is illustrated by the
$107 million increase in the fair value of long-term debt assuming
a hypothetical 10% decrease in interest rates. However, USX's
sensitivity to interest rate declines and corresponding increases
in the fair value of its debt portfolio would unfavorably affect
USX's results and cash flows only to the extent that USX elected to
repurchase or otherwise retire all or a portion of its fixed-rate
debt portfolio at prices above carrying value.
M-39
<PAGE>
Quantitative and qualitative Disclosures
About Market Risk continued
Foreign Currency Exchange Rate Risk
USX is subject to the risk of price fluctuations related to
anticipated revenues and operating costs, firm commitments for
capital expenditures and existing assets or liabilities denominated
in currencies other than U.S. dollars. USX has not generally used
derivative instruments to manage this risk. However, USX has made
limited use of forward currency contracts to manage exposure to
certain currency price fluctuations. At December 31, 1998, USX had
open Canadian dollar forward purchase contracts with a total
carrying value of $36 million. A 10% increase in the December 31,
1998, Canadian dollar to U.S. dollar forward rate would result in a
charge to income of $3 million. The entire amount of these
contracts is attributed to the Marathon Group.
Equity Price Risk
At December 31, 1998, 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 of 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.
M-40
<PAGE>
U. S. Steel Group
Index to Financial Statements, Supplementary Data,
Management's Discussion and Analysis, and Quantitative and
Qualitative Disclosures About Market Risk
Page
----
Management's Report........................................... S-1
Audited Financial Statements:
Report of Independent Accountants............................ S-1
Statement of Operations...................................... S-2
Balance Sheet................................................ S-3
Statement of Cash Flows...................................... S-4
Notes to Financial Statements................................ S-5
Selected Quarterly Financial Data............................. S-21
Principal Unconsolidated Affiliates........................... S-22
Supplementary Information..................................... S-22
Five-Year Operating Summary................................... S-23
Five-Year Financial Summary................................... S-24
Management's Discussion and Analysis.......................... S-25
Quantitative and Qualitative Disclosures About Market Risk.... S-38
<PAGE>
Management's Report
The accompanying financial statements of the U. S. Steel Group
are the responsibility of and have been prepared by USX Corporation
(USX) in conformity with generally accepted accounting principles.
They necessarily include some amounts that are based on best
judgments and estimates. The U. S. Steel Group financial
information displayed in other sections of this report is
consistent with these financial statements.
USX seeks to assure the objectivity and integrity of its
financial records by careful selection of its managers, by
organizational arrangements that provide an appropriate division of
responsibility and by communications programs aimed at assuring
that its policies and methods are understood throughout the
organization.
USX has a comprehensive formalized system of internal
accounting controls designed to provide reasonable assurance that
assets are safeguarded and that financial records are reliable.
Appropriate management monitors the system for compliance, and the
internal auditors independently measure its effectiveness and
recommend possible improvements thereto. In addition, as part of
their audit of the financial statements, USX's independent
accountants, who are elected by the stockholders, review and test
the internal accounting controls selectively to establish a basis
of reliance thereon in determining the nature, extent and timing of
audit tests to be applied.
The Board of Directors pursues its oversight role in the area of
financial reporting and internal accounting control through its
Audit Committee. This Committee, composed solely of nonmanagement
directors, regularly meets (jointly and separately) with the
independent accountants, management and internal auditors to
monitor the proper discharge by each of its responsibilities
relative to internal accounting controls and the consolidated and
group financial statements.
<TABLE>
<CAPTION>
Thomas J. Usher Robert M. Hernandez Kenneth L. Matheny
<S> <C> <C>
Chairman, Board of Directors Vice Chairman Vice President
& Chief Executive Officer & Chief Financial Officer & Comptroller
</TABLE>
Report of Independent Accountants
To the Stockholders of USX Corporation:
In our opinion, the accompanying financial statements appearing
on pages S-2 through S-20 present fairly, in all material respects,
the financial position of the U. S. Steel Group at December 31,
1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles. These
financial statements are the responsibility of USX's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The U. S. Steel Group is a business unit of USX
Corporation (as described in Note 1, page S-5); accordingly, the
financial statements of the U. S. Steel Group should be read in
connection with the consolidated financial statements of USX
Corporation.
PricewaterhouseCoopers LLP
600 Grant Street, Pittsburgh, Pennsylvania 15219-2794
February 9, 1999
S-1
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Revenues:
Sales $6,184 $6,814 $6,533
Income from affiliates 46 69 66
Gain on disposal of assets 54 57 16
Gain on affiliate stock offering (Note 5) -- -- 53
Other income (loss) (1) 1 2
------ ------ ------
Total revenues 6,283 6,941 6,670
------ ------ ------
Costs and expenses:
Cost of sales (excludes items shown below) 5,410 5,762 5,829
Selling, general and administrative expenses (credits) (Note 12) (201) (137) (165)
Depreciation, depletion and amortization 283 303 292
Taxes other than income taxes 212 240 231
------ ------ ------
Total costs and expenses 5,704 6,168 6,187
------ ------ ------
Income from operations 579 773 483
Net interest and other financial costs (Note 7) 42 87 116
------ ------ ------
Income before income taxes and extraordinary loss 537 686 367
Provision for estimated income taxes (Note 15) 173 234 92
------ ------ ------
Income before extraordinary loss 364 452 275
Extraordinary loss (Note 6) -- -- 2
------ ------ ------
Net income 364 452 273
Noncash credit from exchange of preferred stock (Note 19) -- 10 --
Dividends on preferred stock (9) (13) (22)
------ ------ ------
Net income applicable to Steel Stock $ 355 $ 449 $ 251
</TABLE>
Income Per Common Share Applicable to Steel Stock
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Basic:
Income before extraordinary loss $4.05 $5.24 $3.00
Extraordinary loss -- -- .02
----- ----- -----
Net income $4.05 $5.24 $2.98
Diluted:
Income before extraordinary loss $3.92 $4.88 $2.97
Extraordinary loss -- -- .02
----- ----- -----
Net income $3.92 $4.88 $2.95
</TABLE>
See Note 23, for a description and computation of income per common share.
The accompanying notes are an integral part of these financial statements.
S-2
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet
(Dollars in millions) December 31 1998 1997
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 9 $ 18
Receivables, less allowance for doubtful accounts
of $9 and $13 (Note 22) 392 588
Inventories (Note 14) 698 705
Deferred income tax benefits (Note 15) 176 220
------ -----------
Total current assets 1,275 1,531
Investments and long-term receivables,
less reserves of $10 and $15 (Note 16) 743 670
Property, plant and equipment--net (Note 18) 2,500 2,496
Long-term deferred income tax benefits (Note 15) -- 19
Prepaid pensions (Note 12) 2,172 1,957
Other noncurrent assets 3 21
------ -----------
Total assets $6,693 $6,694
Liabilities
Current liabilities:
Notes payable $ 13 $ 13
Accounts payable 501 687
Payroll and benefits payable 330 379
Accrued taxes 150 190
Accrued interest 10 11
Long-term debt due within one year (Note 11) 12 54
------ -----------
Total current liabilities 1,016 1,334
Long-term debt (Note 11) 464 456
Employee benefits (Note 12) 2,315 2,338
Deferred credits and other liabilities 557 536
Preferred stock of subsidiary (Note 10) 66 66
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely junior subordinated
convertible debentures of USX (Note 19) 182 182
Stockholders' Equity (Note 20)
Preferred stock 3 3
Common stockholders' equity 2,090 1,779
------ -----------
Total stockholders' equity 2,093 1,782
------ -----------
Total liabilities and stockholders' equity $6,693 $6,694
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-3
<PAGE>
<TABLE>
<CAPTION>
Statement of Cash Flows
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents
Operating activities:
Net income $ 364 $ 452 $ 273
Adjustments to reconcile to net cash provided
from operating activities:
Depreciation, depletion and amortization 283 303 292
Pensions and other postretirement benefits (215) (349) (164)
Deferred income taxes 158 193 150
Gain on disposal of assets (54) (57) (16)
Gain on affiliate stock offering -- -- (53)
Changes in: Current receivables -- sold (30) -- --
-- operating turnover 232 (24) (10)
Inventories 7 (57) (47)
Current accounts payable and accrued expenses (285) 61 (193)
All other -- net (88) (52) (146)
----- ----- -----
Net cash provided from operating activities 372 470 86
----- ----- -----
Investing activities:
Capital expenditures (310) (261) (337)
Disposal of assets 21 420 161
Restricted cash -- withdrawals 35 -- --
-- deposits (35) -- --
Affiliates -- investments (73) (26) (1)
All other -- net 21 7 38
----- ----- -----
Net cash provided from (used in) investing activities (341) 140 (139)
----- ----- -----
Financing activities (Note 4):
Increase (decrease) in U. S. Steel Group's portion of
USX consolidated debt 13 (561) (31)
Specifically attributed debt:
Borrowings -- -- 113
Repayments (4) (6) (5)
Steel Stock issued 55 48 51
Preferred stock repurchased (8) -- --
Dividends paid (96) (96) (104)
----- ----- -----
Net cash provided from (used in) financing activities (40) (615) 24
----- ----- -----
Net decrease in cash and cash equivalents (9) (5) (29)
Cash and cash equivalents at beginning of year 18 23 52
----- ----- -----
Cash and cash equivalents at end of year $ 9 $ 18 $ 23
</TABLE>
See Note 9, for supplemental cash flow information.
The accompanying notes are an integral part of these financial statements.
S-4
<PAGE>
Notes to Financial Statements
1. Basis of Presentation
After the redemption of the USX -- Delhi Group stock on January
26, 1998, USX Corporation (USX) has two classes of common stock:
USX -- U. S. Steel Group Common Stock (Steel Stock) and USX --
Marathon Group Common Stock (Marathon Stock), which are intended to
reflect the performance of the U. S. Steel Group and the Marathon
Group, respectively.
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. The
U. S. Steel Group financial statements are prepared using the
amounts included in the USX consolidated financial statements. For
a description of the U. S. Steel Group's operating segment, see
Note 8.
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 the purpose of preparing their respective financial
statements does not affect legal title to such assets or
responsibility for such liabilities. Holders of Steel Stock and
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 and distributions on any class of USX
Common Stock or series of preferred stock and repurchases of any
class of USX Common Stock or series of preferred stock at prices in
excess of par or stated value, will reduce the funds of USX legally
available for payment of dividends on both classes of Common Stock.
Accordingly, the USX consolidated financial information should be
read in connection with the U. S. Steel Group financial
information.
2. Summary of Principal Accounting Policies
Principles applied in consolidation -- These financial
statements include the accounts of the U. S. Steel Group. The U. S.
Steel Group and the Marathon Group financial statements, taken
together, comprise all of the accounts included in the USX
consolidated financial statements.
Investments in entities over which the U. S. Steel Group
has significant influence are accounted for using the equity method
of accounting and are carried at the U. S. Steel Group's share of
net assets plus loans and advances. Investments in companies whose
stock has no readily determinable fair value are carried at cost.
Use of estimates -- Generally accepted accounting principles
require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at year-end and the reported
amounts of revenues and expenses during the year. Significant items
subject to such estimates and assumptions include the carrying
value of long-lived assets; valuation allowances for receivables,
inventories and deferred income tax assets; environmental
liabilities; liabilities for potential tax deficiencies and
potential litigation claims and settlements; and assets and
obligations related to employee benefits. Additionally, certain
estimated liabilities are recorded when management commits to a
plan to close an operating facility or to exit a business activity.
Actual results could differ from the estimates and assumptions
used.
Revenue recognition -- Revenues principally include sales,
dividend and affiliate income, gains or losses on the disposal of
assets and gains or losses from changes in ownership interests.
Sales are recognized when products are shipped or
services are provided to customers. Income from affiliates includes
the U. S. Steel Group's proportionate share of income from equity
method investments.
When long-lived assets depreciated on an individual basis
are sold or otherwise disposed of, any gains or losses are
reflected in income. Such gains or losses on the disposal of long-
lived assets are recognized when title passes to the buyer and, if
applicable, all significant regulatory approvals are received.
Proceeds from disposal of long-lived assets depreciated on a group
basis are credited to accumulated depreciation, depletion and
amortization with no immediate effect on income.
Gains or losses from a change in ownership of an
unconsolidated affiliate are recognized in revenues in the period
of change.
S-5
<PAGE>
Cash and cash equivalents -- Cash and cash equivalents include
cash on hand and on deposit and highly liquid debt instruments with
maturities generally of three months or less.
Inventories -- Inventories are carried at lower of cost or
market. Cost of inventories is determined primarily under the last-
in, first-out (LIFO) method.
Derivative instruments -- The U. S. Steel Group engages in
commodity risk management activities within the normal course of
its business as an end-user of derivative instruments (Note 25).
Management is authorized to manage exposure to price fluctuations
related to the purchase of natural gas, refined products and
nonferrous metals through the use of a variety of derivative
financial and nonfinancial instruments. Derivative financial
instruments require settlement in cash and include such instruments
as over-the-counter (OTC) commodity swap agreements and OTC
commodity options. Derivative nonfinancial instruments require or
permit settlement by delivery of commodities and include exchange-
traded commodity futures contracts and options. At times,
derivative positions are closed, prior to maturity, simultaneous
with the underlying physical transaction and the effects are
recognized in income accordingly. The U. S. Steel Group's practice
does not permit derivative positions to remain open if the
underlying physical market risk has been removed. Changes in the
market value of derivative instruments are deferred, including both
closed and open positions, and are subsequently recognized in
income as cost of sales in the same period as the underlying
transaction. Premiums on all commodity-based option contracts are
initially recorded based on the amount paid or received; the
options' market value is subsequently recorded as a receivable or
payable, as appropriate. The margin receivable accounts required
for open commodity contracts reflect changes in the market prices
of the underlying commodity and are settled on a daily basis.
Forward exchange contracts are used to manage currency
risks related to commitments for capital expenditures and existing
assets or liabilities denominated in a foreign currency. Gains or
losses related to firm commitments are deferred and included with
the underlying transaction; all other gains or losses are
recognized in income in the current period as sales, cost of sales,
interest income or expense, or other income, as appropriate.
Forward exchange contract values are included in receivables or
payables, as appropriate.
Recorded deferred gains or losses are reflected within
other current and noncurrent assets or accounts payable and
deferred credits and other liabilities. Cash flows from the use of
derivative instruments are reported in the same category as the
hedged item in the statement of cash flows.
Long-lived assets -- Depreciation is generally computed using a
modified straight-line method based upon estimated lives of assets
and production levels. The modification factors range from a
minimum of 85% at a production level below 81% of capability, to a
maximum of 105% for a 100% production level. No modification is
made at the 95% production level, considered the normal long-range
level.
Depletion of mineral properties is based on rates which
are expected to amortize cost over the estimated tonnage of
minerals to be removed.
The U. S. Steel Group evaluates impairment of its long-lived
assets on an individual asset basis or by logical groupings of
assets. Assets deemed to be impaired are written down to their fair
value, including any related goodwill, using discounted future cash
flows and, if available, comparable market values.
Environmental remediation -- The U. S. Steel Group provides for
remediation costs and penalties when the responsibility to
remediate is probable and the amount of associated costs is
reasonably determinable. Generally, the timing of remediation
accruals coincides with completion of a feasibility study or the
commitment to a formal plan of action. Remediation liabilities are
accrued based on estimates of known environmental exposure and are
discounted in certain instances.
Postemployment benefits -- The U. S. Steel Group recognizes an
obligation to provide postemployment benefits, primarily for
disability-related claims covering indemnity and medical payments.
The obligation for these claims and the related periodic costs are
measured using actuarial techniques and assumptions, including an
appropriate discount rate, analogous to the required methodology
for measuring pension and other postretirement benefit obligations.
Actuarial gains and losses are deferred and amortized over future
periods.
Insurance -- The U. S. Steel Group is insured for catastrophic
casualty and certain property and business interruption exposures,
as well as those risks required to be insured by law or contract.
Costs resulting from noninsured losses are charged against income
upon occurrence.
Reclassifications -- Certain reclassifications of prior years'
data have been made to conform to 1998 classifications.
3. New Accounting Standards
The following accounting standards were adopted by USX:
Reporting comprehensive income -- Effective January 1,
1998, USX adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income". This Standard
establishes requirements for reporting and display of
comprehensive income and its components in the financial
statements. Comprehensive income is defined as the change in
equity of a business enterprise during a period from
transactions and other events from nonowner sources. It includes
all changes in equity during a period except those resulting
from investments by and distributions to owners. See disclosures
of comprehensive income at Note 20 and on page U-7 of the USX
consolidated financial statements.
S-6
<PAGE>
Disclosures of operating segments -- USX adopted in 1998,
Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information", which establishes new standards for reporting
information about operating segments and related disclosures
about products and services, geographic areas and major
customers. The most significant new requirement of this Standard
is that reportable operating segments be based on an
enterprise's internally reported business segments. See
disclosures of operating segments at Note 8.
Disclosures of postretirement benefits -- USX adopted in 1998,
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits"
(SFAS No. 132), which revises and standardizes the reporting
requirements for postretirement benefits. However, the Standard
does not change the measurement and recognition of those
benefits. The U. S. Steel Group has complied with SFAS No. 132
by disclosing pension and other postretirement benefits at Note
12.
Environmental remediation liabilities -- Effective January 1,
1997, USX adopted American Institute of Certified Public
Accountants Statement of Position No. 96-1, "Environmental
Remediation Liabilities" (SOP 96-1), which provides additional
interpretation of existing accounting standards related to
recognition, measurement and disclosure of environmental
remediation liabilities. As a result of adopting SOP 96-1, the
U. S. Steel Group identified additional environmental
remediation liabilities of $35 million, of which $28 million was
discounted to a present value of $13 million and $7 million was
not discounted. Assumptions used in the calculation of the
present value amount included an inflation factor of 2% and an
interest rate of 7% over a range of 22 to 30 years. The net
unfavorable effect of adoption on the U. S. Steel Group's income
from operations at January 1, 1997, was $20 million.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
(SFAS No. 133). This new Standard requires recognition of all
derivatives as either assets or liabilities at fair value. SFAS No.
133 may result in additional volatility in both current period
earnings and other comprehensive income as a result of recording
recognized and unrecognized gains and losses resulting from changes
in the fair value of derivative instruments. SFAS No. 133 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 employed by the
U. S. Steel Group and the level of activity related to commodity-
based derivative instruments in recent periods, the U. S. Steel
Group does not anticipate the effect of adoption to have a material
impact on either financial position or results of operations. The
U. S. Steel Group plans to adopt SFAS No. 133 effective January 1,
2000, as required.
4. Corporate Activities
Financial activities -- As a matter of policy, USX manages most
financial activities on a centralized, consolidated basis. Such
financial activities include the investment of surplus cash; the
issuance, repayment and repurchase of short-term and long-term
debt; the issuance, repurchase and redemption of preferred stock;
and the issuance and repurchase of common stock. Transactions
related primarily to invested cash, short-term and long-term debt
(including convertible debt), related net interest and other
financial costs, and preferred stock and related dividends are
attributed to the U. S. Steel Group, the Marathon Group and, prior
to November 1, 1997, the Delhi Group based upon the cash flows of
each group for the periods presented and the initial capital
structure of each group. Most financing transactions are attributed
to and reflected in the financial statements of the groups. See
Note 10, for the U. S. Steel Group's portion of USX's financial
activities attributed to the groups. However, transactions such as
leases, certain collateralized financings, certain indexed debt
instruments, financial activities of consolidated entities which
are less than wholly owned by USX and transactions related to
securities convertible solely into any one class of common stock
are or will be specifically attributed to and reflected in their
entirety in the financial statements of the group to which they
relate.
Corporate general and administrative costs -- Corporate general
and administrative costs are allocated to the U. S. Steel Group,
the Marathon Group and, prior to November 1, 1997, the Delhi Group
based upon utilization or other methods management believes to be
reasonable and which consider certain measures of business
activities, such as employment, investments and sales. The costs
allocated to the U. S. Steel Group were $24 million in 1998, $33
million in 1997 and $28 million in 1996, and primarily consist of
employment costs including pension effects, professional services,
facilities and other related costs associated with corporate
activities.
Income taxes -- All members of the USX affiliated group are
included in the consolidated United States federal income tax
return filed by USX. Accordingly, the provision for federal income
taxes and the related payments or refunds of tax are determined on
a consolidated basis. The consolidated provision and the related
tax payments or refunds have been reflected in the U. S. Steel
Group, the
S-7
<PAGE>
Marathon Group and, prior to November 1, 1997, the Delhi Group
financial statements in accordance with USX's tax allocation
policy. In general, such policy provides that the consolidated tax
provision and related tax payments or refunds are allocated among
the U. S. Steel Group, Marathon Group and, prior to November 1,
1997, the Delhi Group, for group financial statement purposes,
based principally upon the financial income, taxable income,
credits, preferences and other amounts directly related to the
respective groups.
For tax provision and settlement purposes, tax benefits
resulting from attributes (principally net operating losses and
various tax credits), which cannot be utilized by one of the groups
on a separate return basis but which can be utilized on a
consolidated basis in that year or in a carryback year, are
allocated to the group that generated the attributes. To the extent
that one of the groups is allocated a consolidated tax attribute
which, as a result of expiration or otherwise, is not ultimately
utilized on the consolidated tax return, the prior years'
allocation of such attribute is adjusted such that the effect of
the expiration is borne by the group that generated the attribute.
Also, if a tax attribute cannot be utilized on a consolidated basis
in the year generated or in a carryback year, the prior years'
allocation of such consolidated tax effects is adjusted in a
subsequent year to the extent necessary to allocate the tax
benefits to the group that would have realized the tax benefits on
a separate return basis. As a result, the allocated group amounts
of taxes payable or refundable are not necessarily comparable to
those that would have resulted if the groups had filed separate tax
returns.
5. Gain on Affiliate Stock Offering
In 1996, an aggregate of 6.9 million shares of RTI International
Metals, Inc. (RTI) (formerly RMI Titanium Company) common stock was
sold in a public offering at a price of $18.50 per share and total
net proceeds of $121 million. Included in the offering were 2.3
million shares sold by USX for net proceeds of $40 million. The U.
S. Steel Group recognized a total pretax gain of $53 million, of
which $34 million was attributable to the shares sold by USX and
$19 million was attributable to the increase in value of its
investment as a result of the shares sold by RTI. The income tax
effect related to the total gain was $19 million. As a result of
this transaction, USX's ownership in RTI decreased from
approximately 50% to 27%. The U. S. Steel Group continues to
account for its investment in RTI under the equity method of
accounting.
6. Extraordinary Loss
On December 30, 1996, USX irrevocably called for redemption on
January 30, 1997, $120 million of debt, resulting in a 1996
extraordinary loss to the U. S. Steel Group of $2 million, net of a
$1 million income tax benefit.
7. Net Interest and Other Financial Costs
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
<S> <C> <C> <C>
Interest and other financial income/(a)/ --
Interest income $ 5 $ 4 $ 4
----- ----- -----
Interest and other financial costs/(a)/:
Interest incurred 40 57 85
Less interest capitalized 6 7 8
----- ----- -----
Net interest 34 50 77
Interest on tax issues 16 13 10
Financial costs on trust preferred securities 13 10 --
Financial costs on preferred stock of subsidiary 5 5 5
Amortization of discounts 2 2 2
Expenses on sales of accounts receivable (Note 22) 21 21 20
Adjustment to settlement value of indexed debt (44) (10) 6
----- ----- -----
Total 47 91 120
----- ----- -----
Net interest and other financial costs/(a)/ $ 42 $ 87 $ 116
</TABLE>
/(a)/ See Note 4, for discussion of USX net interest and other
financial costs attributable to the U. S. Steel Group.
S-8
<PAGE>
8. Segment Information
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. For information on sales by product line, see table of
revenues on page S-25 of Management's Discussion and Analysis.
Segment income represents income from operations allocable to
U. S. Steel and does not include net interest and other financial
costs, provisions for estimated income taxes and USX corporate
general and administrative costs. These corporate costs primarily
consist of employment costs including pension effects, professional
services, facilities and other related costs associated with
corporate activities. Also, certain general and administrative
costs associated with former businesses and the gain on affiliate
stock offering are not allocated to the segment. In addition,
pension credits associated with pension plan assets and liabilities
allocated to pre-1987 retirees and former businesses are not
allocated to the segment. The following table represents the
operations of U. S. Steel:
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
<S> <C> <C> <C>
Revenues:
Customer $6,180 $6,812 $6,535
Intergroup/(a)/ 2 2 --
Equity in earnings of unconsolidated affiliates 46 69 66
Other 55 58 16
------ ------ ------
Total revenues $6,283 $6,941 $6,617
====== ====== ======
Segment income $ 330 $ 618 $ 248
Significant noncash items included in segment income:
Depreciation, depletion and amortization 283 303 292
Pension expenses/(b)/ 187 169 172
Capital expenditures/(c)/ 305 256 336
Affiliates -- investments/(c)/ 71 26 --
</TABLE>
/(a)/ Intergroup sales and transfers were conducted on an arm's-
length basis.
/(b)/ Differences between segment total and group total represent
unallocated pension credits and amounts included in
administrative expenses.
/(c)/ Differences between segment total and group total represent
amounts related to corporate administrative activities.
The following schedule reconciles segment revenues and
income to amounts reported in the U. S. Steel Group's financial
statements:
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
<S> <C> <C> <C>
Revenues:
Revenues of reportable segment $6,283 $6,941 $6,617
Items not allocated to segment
Gain on affiliate stock offering -- -- 53
----- ------ ------
Total Group revenues $6,283 $6,941 $6,670
===== ====== ======
Income:
Income for reportable segment $ 330 $ 618 $ 248
Items not allocated to segment:
Gain on affiliate stock offering -- -- 53
Administrative expenses (24) (33) (28)
Pension credits 373 313 330
Costs related to former businesses activities (100) (125) (120)
------ ------ ------
Total Group income from operations $ 579 $ 773 $ 483
</TABLE>
S-9
<PAGE>
<TABLE>
<CAPTION>
Geographic Area:
The information below summarizes the operations in different geographic areas.
Revenues
------------------------------
Within Between
Geographic Geographic
(In millions) Year Areas Areas Total Assets/(a)/
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
United States 1998 $6,266 $ -- $6,266 $3,043
1997 6,926 -- 6,926 3,023
1996 6,642 -- 6,642 3,024
Foreign Countries 1998 17 -- 17 69
1997 15 -- 15 1
1996 28 -- 28 2
Total 1998 $6,283 $ -- $6,283 $3,112
1997 6,941 -- 6,941 3,024
1996 6,670 -- 6,670 3,026
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Includes property, plant and equipment and investments in affiliates.
9. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
<S> <C> <C> <C>
Cash used in operating activities included:
Interest and other financial costs paid (net of amount capitalized) $ (76) $ (99) $ (129)
Income taxes paid, including settlements with other groups (29) (48) (53)
USX debt attributed to all groups -- net:
Commercial paper:
Issued $ 1,650 $ -- $ 1,422
Repayments (950) -- (1,555)
Credit agreements:
Borrowings 15,836 10,454 10,356
Repayments (15,867) (10,449) (10,340)
Other credit arrangements -- net 55 36 (36)
Other debt:
Borrowings 671 10 78
Repayments (1,053) (741) (705)
-------- -------- --------
Total $ 342 $ (690) $ (780)
U. S. Steel Group activity $ 13 $ (561) $ (31)
Marathon Group activity 329 97 (769)
Delhi Group activity -- (226) 20
-------- -------- --------
Total $ 342 $ (690) $ (780)
Noncash investing and financing activities:
Steel Stock issued for Dividend Reinvestment Plan and
employee stock plans $ 2 $ 5 $ 4
Disposal of assets -- notes received 2 -- 12
Trust preferred securities exchanged for preferred stock -- 182 --
</TABLE>
S-10
<PAGE>
10. Financial Activities Attributed to Groups
The following is the portion of USX financial activities
attributed to the U. S. Steel Group. These amounts exclude amounts
specifically attributed to the U. S. Steel Group.
<TABLE>
<CAPTION>
U. S. Steel Group Consolidated USX/(a)/
----------------------- -----------------------
(In millions) December 31 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Cash and cash equivalents $ -- $ 1 $ 4 $ 6
Receivables/(b)/ -- 1 -- 10
Other noncurrent assets/(b)/ 1 1 8 8
----- ----- ------ ------
Total assets $ 1 $ 3 $ 12 $ 24
Notes payable $ 13 $ 13 $ 145 $ 121
Accounts payable -- -- -- 1
Accrued interest 8 10 88 89
Long-term debt due within one year (Note 11) 7 49 66 466
Long-term debt (Note 11) 306 252 3,762 2,704
Preferred stock of subsidiary 66 66 250 250
----- ----- ------ ------
Total liabilities $ 400 $ 390 $4,311 $3,631
<CAPTION>
U. S. Steel Group/(c)/ Consolidated USX
------------------------ ------------------------
(In millions) 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Net interest and other financial costs (Note 7) $ 29 $ 46 $ 81 $ 324 $ 309 $ 376
</TABLE>
/(a)/ For details of USX long-term debt and preferred stock of
subsidiary, see Notes 17 and 25, respectively, to the USX
consolidated financial statements.
/(b)/ Primarily reflects 1997 forward currency contracts used to
manage currency risks related to USX debt and interest
denominated in a foreign currency.
/(c)/ The U. S. Steel Group's net interest and other financial
costs reflect weighted average effects of all financial
activities attributed to all groups.
<TABLE>
<CAPTION>
11. Long-Term Debt
The U. S. Steel Group's portion of USX's consolidated
long-term debt is as follows:
U. S. Steel Group Consolidated USX/(a)/
----------------- --------------------
(In millions) December 31 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Specifically attributed debt/(b)/:
Sale-leaseback financing and capital leases $ 95 $ 99 $ 95 $ 123
Indexed debt less unamortized discount 68 110 68 110
----- ----- ------ ---------
Total 163 209 163 233
Less amount due within one year 5 5 5 5
----- ----- ------ ---------
Total specifically attributed long-term debt $ 158 $ 204 $ 158 $ 228
Debt attributed to groups/(c)/ $ 316 $ 305 $3,853 $3,194
Less unamortized discount 3 4 25 24
Less amount due within one year 7 49 66 466
----- ----- ------ ---------
Total long-term debt attributed to groups $ 306 $ 252 $3,762 $2,704
Total long-term debt due within one year $ 12 $ 54 $ 71 $ 471
Total long-term debt due after one year 464 456 3,920 2,932
</TABLE>
/(a)/ See Note 17, to the USX consolidated financial statements
for details of interest rates, maturities and other terms of
long-term debt.
/(b)/ As described in Note 4, certain financial activities are
specifically attributed only to the U. S. Steel Group and the
Marathon Group.
/(c)/ Most long-term debt activities of USX Corporation and its
wholly owned subsidiaries are attributed to all groups (in total,
but not with respect to specific debt issues) based on their
respective cash flows (Notes 4, 9 and 10).
S-11
<PAGE>
12. Pensions and Other Postretirement Benefits
The U. S. Steel Group has noncontributory defined benefit
pension plans covering substantially all employees. Benefits under
these plans are based upon years of service and final average
pensionable earnings, or a minimum benefit based upon years of
service, whichever is greater. In addition, pension benefits are
also provided to most salaried employees based upon a percent of
total career pensionable earnings. Certain of these plans provide
benefits to USX corporate employees, and the related costs or
credits for such employees are allocated to all groups (Note 4).
The U. S. Steel Group also participates in multiemployer plans,
most of which are defined benefit plans associated with coal
operations.
The U. S. Steel Group also has defined benefit retiree
health and life insurance plans (other benefits) covering most
employees upon their retirement. Health benefits are provided, for
the most part, through comprehensive hospital, surgical and major
medical benefit provisions subject to various cost sharing
features. Life insurance benefits are provided to nonunion retiree
beneficiaries primarily based on employees' annual base salary at
retirement. These plans provide benefits to USX corporate
employees, and the related costs for such employees are allocated
to all groups (Note 4). For union retirees, benefits are provided
for the most part based on fixed amounts negotiated in labor
contracts with the appropriate unions. Except for certain life
insurance benefits paid from reserves held by insurance carriers
and benefits required to be funded by union contracts, most other
benefits have not been prefunded.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
--------------------- ------------------
(In millions) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Change in benefit obligations
Benefit obligations at January 1 $ 7,314 $ 7,258 $ 2,070 $ 2,111
Service cost 71 65 15 15
Interest cost 487 517 141 153
Plan amendments 8 1 -- --
Actuarial (gains) losses 516 377 23 (74)
Settlement, curtailment and termination benefits 10 4 7 --
Benefits paid (857) (908) (143) (135)
-------- -------- ------- -------
Benefit obligations at December 31 $ 7,549 $ 7,314 $ 2,113 $ 2,070
Change in plan assets
Fair value of plan assets at January 1 $ 9,775 $ 8,860 $ 258 $ 111
Actual return on plan assets 1,308 1,755 31 19
Employer contributions -- 49 -- 150
Benefits paid (840) (889) (24) (22)
-------- -------- ------- -------
Fair value of plan assets at December 31 $ 10,243 $ 9,775 $ 265 $ 258
Funded status of plans at December 31 $ 2,694/(a)/ $ 2,461/(a)/ $(1,848) $(1,812)
Unrecognized net gain from transition (140) (209) -- --
Unrecognized prior service cost 518 583 7 11
Unrecognized actuarial gains (905) (878) (292) (327)
Additional minimum liability/(b)/ (57) (65) -- --
-------- -------- ------- -------
Prepaid (accrued) benefit cost $ 2,110 $ 1,892 $(2,133) $(2,128)
/(a)/ Includes several small plans that have accumulated
benefit obligations in excess of plan assets:
Projected benefit obligation (PBO) $ (68) $ (69)
Plan assets -- --
-------- --------
PBO in excess of plan assets $ (68) $ (69)
/(b)/ Additional minimum liability recorded
was offset by the following:
Intangible asset $ 16 $ 27
-------- --------
Accumulated other comprehensive income (losses):
Beginning of year $ (25) $ (17)
Change during year (net of tax) (2) (8)
-------- --------
Balance at end of year $ (27) $ (25)
</TABLE>
S-12
<PAGE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------------------ -------------------------------------
(In millions) 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit cost (credit)
Service cost $ 71 $ 65 $ 69 $ 15 $ 15 $ 18
Interest cost 487 517 523 141 153 160
Return on plan assets -- actual (1,308) (1,755) (1,136) (31) (19) (12)
-- deferred gain 539 1,012 367 10 8 1
Amortization of unrecognized (gains) losses 9 6 10 (12) (9) 5
Multiemployer and other plans 1 2 2 13/(a)/ 15/(a)/ 15/(a)/
Settlement and termination costs 10/(b)/ 4 6 -- -- --
----- ------- ------- ------ ------- ------
Net periodic benefit cost (credit) $(191) $ (149) $ (159) $ 136 $ 163 $ 187
</TABLE>
/(a)/ Represents payments to a multiemployer health care benefit plan created
by the Coal Industry Retiree Health Benefit Act of 1992 based on assigned
beneficiaries receiving benefits. The present value of this unrecognized
obligation is broadly estimated to be $103 million, including the effects
of future medical inflation, and this amount could increase if additional
beneficiaries are assigned .
/(b)/ Represents costs of the 1998 voluntary early retirement program.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------ ----------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Actuarial assumptions at December 31:
Discount rate 6.5% 7.0% 6.5% 7.0%
Expected annual return on plan assets 9.0% 9.5% 9.0% 9.5%
Increase in compensation rate 4.0% 4.0% 4.0% 4.0%
</TABLE>
For measurement purposes, an 8% annual rate of increase in the
per capita cost of covered health care benefits was assumed for
1999. The rate was assumed to decrease gradually to 5% for 2005 and
remain at that level thereafter.
A one-percentage-point change in assumed health care cost
trend rates would have the following effects:
<TABLE>
<CAPTION>
1-Percentage- 1-Percentage-
(In millions) Point Increase Point Decrease
<S> <C> <C>
Effect on total of service and interest cost components $ 16 $ (13)
Effect on other postretirement benefit obligations 192 (161)
</TABLE>
13. Intergroup Transactions
Sales and purchases -- U. S. Steel Group sales to the Marathon
Group totaled $2 million in 1998 and 1997. U. S. Steel Group
purchases from the Marathon Group totaled $21 million, $29 million
and $21 million in 1998, 1997 and 1996, respectively. At December
31, 1998 and 1997, U. S. Steel Group accounts payable included $3
million related to transactions with the Marathon Group. These
transactions were conducted on an arm's-length basis.
Income taxes receivable from/payable to the Marathon Group -- At
December 31, 1998 and 1997, amounts receivable or payable for
income taxes were included in the balance sheet as follows:
<TABLE>
<CAPTION>
(In millions) December 31 1998 1997
<S> <C> <C>
Current:
Receivables $ -- $ 22
Accounts payable 2 2
Noncurrent:
Investments and long-term receivables 97 97
</TABLE>
These amounts have been determined in accordance with the tax
allocation policy described in Note 4. Amounts classified as
current are settled in cash in the year succeeding that in which
such amounts are accrued. Noncurrent amounts represent estimates of
intergroup tax effects of certain issues for years that are still
under various stages of audit and administrative review. Such tax
effects are not settled among the groups until the audit of those
respective tax years is closed. The amounts ultimately settled for
open tax years will be different than recorded noncurrent amounts
based on the final resolution of all of the audit issues for those
years.
14. Inventories
<TABLE>
<CAPTION>
(In millions) December 31 1998 1997
<S> <C> <C>
Raw materials $ 185 $ 130
Semi-finished products 282 331
Finished products 182 187
Supplies and sundry items 49 57
----- -----
Total $ 698 $ 705
</TABLE>
At December 31, 1998 and 1997, respectively, the LIFO method
accounted for 94% and 93% of total inventory value. Current
acquisition costs were estimated to exceed the above inventory
values at December 31 by approximately $310 million and $300
million in 1998 and 1997, respectively.
S-13
<PAGE>
15. Income Taxes
Income tax provisions and related assets and liabilities
attributed to the U. S. Steel Group are determined in accordance
with the USX group tax allocation policy (Note 4).
Provisions (credits) for estimated income taxes were:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ---------
(In millions) Current Deferred Total Current Deferred Total Current Deferred Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal $19 $ 149 $168 $37 $ 168 $ 205 $ (51) $ 138 $ 87
State and local 3 9 12 4 25 29 -- 12 12
Foreign (7) -- (7) -- -- -- (7) -- (7)
--- ----- ---- --- ----- ------ ----- ----- ------
Total $15 $ 158 $173 $41 $ 193 $ 234 $ (58) $ 150 $ 92
</TABLE>
A reconciliation of federal statutory tax rate (35%) to total provisions
follows:
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
<S> <C> <C> <C>
Statutory rate applied to income before income taxes $ 188 $ 240 $ 129
Excess percentage depletion (11) (10) (7)
Effects of foreign operations, including foreign tax credits (11) (3) (2)
State and local income taxes after federal income tax effects 8 19 8
Credits other than foreign tax credits (3) (15) (40)
Nondeductible business expenses 1 2 2
Effects of partially owned companies -- (3) (6)
Adjustment of prior years' income taxes -- 6 9
Adjustment of valuation allowances -- (1) --
Other 1 (1) (1)
----- ------- ------
Total provisions $ 173 $ 234 $ 92
</TABLE>
Deferred tax assets and liabilities resulted from the following:
<TABLE>
<CAPTION>
(In millions) December 31 1998 1997
<S> <C> <C>
Deferred tax assets:
Minimum tax credit carryforwards $ 185 $ 180
State tax loss carryforwards (expiring in 1999 through 2018) 64 75
Employee benefits 969 907
Receivables, payables and debt 52 59
Contingency and other accruals 48 50
Other 12 15
Valuation allowances -- state (44) (52)
-------- -----------
Total deferred tax assets/(a)/ 1,286 1,234
-------- -----------
Deferred tax liabilities:
Property, plant and equipment 272 242
Prepaid pensions 792 661
Inventory 16 13
Investments in subsidiaries and affiliates 116 88
Federal effect of state deferred tax assets 3 6
Other 40 21
-------- -----------
Total deferred tax liabilities 1,239 1,031
-------- -----------
Net deferred tax assets $ 47 $ 203
</TABLE>
/(a)/ USX expects to generate sufficient future taxable income to realize the
benefit of the U. S. Steel Group's deferred tax assets.
The consolidated tax returns of USX for the years 1990 through
1994 are under various stages of audit and administrative review by
the IRS. USX believes it has made adequate provision for income
taxes and interest which may become payable for years not yet
settled.
S-14
<PAGE>
16. Investments and Long-Term Receivables
<TABLE>
<CAPTION>
(In millions) December 31 1998 1997
<S> <C> <C>
Equity method investments $ 564 $ 472
Other investments 48 56
Receivables due after one year 10 22
Income tax receivable from the Marathon Group (Note 13) 97 97
Other 24 23
------ ------
Total $ 743 $ 670
</TABLE>
Summarized financial information of affiliates accounted for by the equity
method of accounting follows:
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
<S> <C> <C> <C>
Income data -- year:
Revenues $3,163 $3,143 $2,868
Operating income 193 228 223
Net income 97 139 140
Balance sheet data -- December 31:
Current assets $1,028 $ 924
Noncurrent assets 2,149 2,006
Current liabilities 631 627
Noncurrent liabilities 883 800
</TABLE>
Dividends and partnership distributions received from equity
affiliates were $19 million in 1998, $13 million in 1997 and $25
million in 1996.
U. S. Steel Group purchases of transportation services and
semi-finished steel from equity affiliates totaled $331 million,
$424 million and $460 million in 1998, 1997 and 1996, respectively.
At December 31, 1998 and 1997, U. S. Steel Group payables to these
affiliates totaled $15 million and $21 million, respectively. U. S.
Steel Group sales of steel and raw materials to equity affiliates
totaled $725 million, $802 million and $824 million in 1998, 1997
and 1996, respectively. At December 31, 1998 and 1997, U. S. Steel
Group receivables from these affiliates were $177 million and $149
million, respectively. Generally, these transactions were conducted
under long-term, market-based contractual arrangements.
17. Leases
Future minimum commitments for capital leases (including sale-
leasebacks accounted for as financings) and for operating leases
having remaining noncancelable lease terms in excess of one year
are as follows:
<TABLE>
<CAPTION>
Capital Operating
(In millions) Leases Leases
<S> <C> <C>
1999 $ 10 $ 116
2000 11 105
2001 11 121
2002 11 52
2003 11 39
Later years 117 70
Sublease rentals -- (1)
----- -----
Total minimum lease payments 171 $ 502
=====
Less imputed interest costs (76)
-----
Present value of net minimum lease payments
included in long-term debt $ 95
</TABLE>
Operating lease rental expense:
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
<S> <C> <C> <C>
Minimum rental $ 136 $ 135 $ 131
Contingent rental 19 15 5
Sublease rentals (1) (1) (2)
----- ----- -----------
Net rental expense $ 154 $ 149 $ 134
</TABLE>
The U. S. Steel Group leases a wide variety of facilities
and equipment under operating leases, including land and building
space, office equipment, production facilities and transportation
equipment. Most long-term leases include renewal options and, in
certain leases, purchase options. In the event of a change in
control of USX, as defined in the agreements, or certain other
circumstances, lease obligations totaling $8 million may be
declared immediately due and payable.
S-15
<PAGE>
18. Property, Plant and Equipment
<TABLE>
<CAPTION>
(In millions) December 31 1998 1997
<S> <C> <C>
Land and depletable property $ 151 $ 161
Buildings 469 477
Machinery and equipment 7,711 7,548
Leased assets 108 109
------ -----------
Total 8,439 8,295
Less accumulated depreciation, depletion and amortization 5,939 5,799
------ -----------
Net $2,500 $2,496
</TABLE>
Amounts in accumulated depreciation, depletion and amortization
for assets acquired under capital leases (including sale-leasebacks
accounted for as financings) were $77 million and $70 million at
December 31, 1998 and 1997, respectively.
19. Trust Preferred Securities
In 1997, USX exchanged approximately 3.9 million 6.75%
Convertible Quarterly Income Preferred Securities (Trust Preferred
Securities) of USX Capital Trust I, a Delaware statutory business
trust (Trust), for an equivalent number of shares of its 6.50%
Cumulative Convertible Preferred Stock (6.50% Preferred Stock)
(Exchange). The Exchange resulted in the recording of Trust
Preferred Securities at a fair value of $182 million and a noncash
credit to Retained Earnings of $10 million.
USX owns all of the common securities of the Trust, which
was formed for the purpose of the Exchange. (The Trust Common
Securities and the Trust Preferred Securities are together referred
to as the Trust Securities.) The Trust Securities represent
undivided beneficial ownership interests in the assets of the
Trust, which consist solely of USX 6.75% Convertible Junior
Subordinated Debentures maturing March 31, 2037 (Debentures),
having an aggregate principal amount equal to the aggregate initial
liquidation amount ($50.00 per security and $203 million in total)
of the Trust Securities issued by the Trust. Interest and principal
payments on the Debentures will be used to make quarterly
distributions and to pay redemption and liquidation amounts on the
Trust Preferred Securities. The quarterly distributions, which
accumulate at the rate of 6.75% per annum on the Trust Preferred
Securities and the accretion from fair value to the initial
liquidation amount, are charged to income and included in net
interest and other financial costs.
Under the terms of the Debentures, USX has the right to defer
payment of interest for up to 20 consecutive quarters and, as a
consequence, monthly distributions on the Trust Preferred
Securities will be deferred during such period. If USX exercises
this right, then, subject to limited exceptions, it may not pay any
dividend or make any distribution with respect to any shares of its
capital stock.
The Trust Preferred Securities are convertible at any time
prior to the close of business on March 31, 2037 (unless such right
is terminated earlier under certain circumstances) at the option of
the holder, into shares of Steel Stock at a conversion price of
$46.25 per share of Steel Stock (equivalent to a conversion ratio
of 1.081 shares of Steel Stock for each Trust Preferred Security),
subject to adjustment in certain circumstances.
The Trust Preferred Securities may be redeemed at any time at
the option of USX, at a premium of 103.25% of the initial
liquidation amount through March 31, 1999, and thereafter,
declining annually to the initial liquidation amount on April 1,
2003, and thereafter. They are mandatorily redeemable at March 31,
2037, or earlier under certain circumstances.
Payments related to quarterly distributions and to the payment
of redemption and liquidation amounts on the Trust Preferred
Securities by the Trust are guaranteed by USX on a subordinated
basis. In addition, USX unconditionally guarantees the Trust's
Debentures. The obligations of USX under the Debentures, and the
related indenture, trust agreement and guarantee constitute a full
and unconditional guarantee by USX of the Trust's obligations under
the Trust Preferred Securities.
S-16
<PAGE>
20. Stockholders' Equity
<TABLE>
<CAPTION>
(In millions, except per share data) 1998 1997 1996
<S> <C> <C> <C>
Preferred stock:
Balance at beginning of year $ 3 $ 7 $ 7
Exchanged for trust preferred securities -- (4) --
------ ------ -------
Balance at end of year $ 3 $ 3 $ 7
Common stockholders' equity:
Balance at beginning of year $1,779 $1,559 $1,337
Net income 364 452 273
6.50% preferred stock:
Repurchased (8) -- --
Exchanged for trust preferred securities (Note 19) -- (188) --
Steel Stock issued 59 53 55
Dividends on preferred stock (9) (13) (22)
Dividends on Steel Stock (per share $1.00) (88) (86) (85)
Deferred compensation -- -- 1
Accumulated other comprehensive income (loss)/(a)/:
Foreign currency translation adjustments (5) -- --
Minimum pension liability adjustments (Note 12) (2) (8) --
Other -- 10 --
------ ------ -------
Balance at end of year $2,090 $1,779 $1,559
Total stockholders' equity $2,093 $1,782 $1,566
</TABLE>
/(a)/ See page U-7 of the USX consolidated financial statements relative to the
annual activity of these adjustments. Total comprehensive income for the
U. S. Steel Group for the years 1998, 1997 and 1996 was $357 million,
$444 million and $273 million, respectively.
21. Dividends
In accordance with the USX Certificate of Incorporation,
dividends on the Steel Stock and Marathon Stock are limited to the
legally available funds of USX. Net losses of either Group, as well
as dividends and distributions on any class of USX Common Stock or
series of preferred stock and repurchases of any class of USX
Common Stock or series of preferred stock at prices in excess of
par or stated value, will reduce the funds of USX legally available
for payment of dividends on both classes of Common Stock. Subject
to this limitation, the Board of Directors intends to declare and
pay dividends on the Steel Stock based on the financial condition
and results of operations of the U. S. Steel Group, although it has
no obligation under Delaware law to do so. In making its dividend
decisions with respect to Steel Stock, the Board of Directors
considers, among other things, the long-term earnings and cash flow
capabilities of the U. S. Steel Group as well as the dividend
policies of similar publicly traded steel companies.
Dividends on the Steel Stock are further limited to the
Available Steel Dividend Amount. At December 31, 1998, the
Available Steel Dividend Amount was at least $3,336 million. The
Available Steel Dividend Amount will be increased or decreased, as
appropriate, to reflect U. S. Steel Group net income, dividends,
repurchases or issuances with respect to the Steel Stock and
preferred stock attributed to the U. S. Steel Group and certain
other items.
22. Sales of Receivables
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 December 31, 1998, the amount sold
under the program that had not been collected was $320 million,
which will be forwarded to the buyers at the end of the agreement
in 1999, 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 amount sold under the
program averaged $347 million in 1998 and $350 million in 1997 and
1996. The buyers have rights to a pool of receivables that must be
maintained at a level of at least 115% of the program size. The U.
S. Steel Group does not generally require collateral for accounts
receivable, but significantly reduces credit risk through credit
extension and collection policies, which include analyzing the
financial condition of potential customers, establishing credit
limits, monitoring payments and aggressively pursuing delinquent
accounts. 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.
S-17
<PAGE>
23. Income Per Common Share
The method of calculating net income per share for the Steel
Stock, the Marathon Stock and, prior to November 1, 1997, the Delhi
Stock reflects the USX Board of Directors' intent that the
separately reported earnings and surplus of the U. S. Steel Group,
the Marathon Group and the Delhi Group, as determined consistent
with the USX Certificate of Incorporation, are available for
payment of dividends to the respective classes of stock, although
legally available funds and liquidation preferences of these
classes of stock do not necessarily correspond with these amounts.
Basic net income per share is calculated by adjusting net
income for dividend requirements of preferred stock and, in 1997,
the noncash credit on exchange of preferred stock and is based on
the weighted average number of common shares outstanding.
Diluted net income per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes
exercise of stock options, provided in each case, the effect is not
antidilutive.
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ---------------- ----------------
Basic Diluted Basic Diluted Basic Diluted
-------- ------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Computation of Income Per Share
-------------------------------
Net income (millions):
Income before extraordinary loss $ 364 $ 364 $ 452 $ 452 $ 275 $ 275
Dividends on preferred stock (9) -- (13) -- (22) (22)
Noncash credit from exchange of preferred stock -- -- 10 -- -- --
Extraordinary loss -- -- -- -- (2) (2)
------- ------- ------- ------- ------- -------
Net income applicable to Steel Stock 355 364 449 452 251 251
Effect of dilutive securities:
Trust preferred securities -- 8 -- 6 -- --
Convertible debentures -- -- -- 2 -- 3
------- ------- ------- ------- ------- -------
Net income assuming conversions $ 355 $ 372 $ 449 $ 460 $ 251 $ 254
======= ======= ======= ======= ======= =======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 87,508 87,508 85,672 85,672 84,025 84,025
Effect of dilutive securities:
Trust preferred securities -- 4,256 -- 2,660 -- --
Preferred stock -- 3,143 -- 4,811 -- --
Convertible debentures -- -- -- 1,025 -- 1,925
Stock options -- 36 -- 35 -- 12
------- ------- ------- ------- ------- -------
Average common shares and dilutive effect 87,508 94,943 85,672 94,203 84,025 85,962
======= ======= ======= ======= ======= =======
Per share:
Income before extraordinary loss $ 4.05 $ 3.92 $ 5.24 $ 4.88 $ 3.00 $ 2.97
Extraordinary loss -- -- -- -- .02 .02
------- ------- ------- ------- ------- -------
Net income $ 4.05 $ 3.92 $ 5.24 $ 4.88 $ 2.98 $ 2.95
======= ======= ======= ======= ======= =======
</TABLE>
24. Stock-Based Compensation Plans and Stockholder Rights Plan
USX Stock-Based Compensation Plans and Stockholder Rights Plan are
discussed in Note 21, and Note 23, respectively, to the USX
consolidated financial statements.
In 1996, USX adopted SFAS No. 123, Accounting for Stock-Based
Compensation and elected to continue to follow the accounting
provisions of APB No. 25, as discussed in Note 2, to the USX
consolidated financial statements. The U. S. Steel Group's actual
stock-based compensation expense was $-0- in 1998, $8 million in
1997 and $2 million in 1996. Incremental compensation expense, as
determined under SFAS No. 123, was not material ($.02 or less per
share for all years presented). Therefore, pro forma net income and
earnings per share data have been omitted.
S-18
<PAGE>
25. Derivative Instruments
The U. S. Steel Group uses derivative instruments, such as
commodity swaps, to manage exposure to price fluctuations relevant
to the cost of natural gas, refined products and nonferrous metals
used in steel operations.
The U. S. Steel Group remains at risk for possible changes in
the market value of the derivative instrument; however, such risk
should be mitigated by price changes in the underlying hedged item.
The U. S. Steel Group is also exposed to credit risk in the event
of nonperformance by counterparties. The credit worthiness of
counterparties is subject to continuing review, including the use
of master netting agreements to the extent practical, and full
performance is anticipated.
The following table sets forth quantitative information by
class of derivative instrument:
<TABLE>
<CAPTION>
Fair Carrying Recorded
Value Amount Deferred Aggregate
Assets Assets Gain or Contract
(In millions) (Liabilities)/(a)/ (Liabilities) (Loss) Values /(b)/
<S> <C> <C> <C> <C>
December 31, 1998:
OTC commodity swaps/(c)/ $(7) $(7) $(7) $ 54
December 31, 1997:
OTC commodity swaps $(1) $(1) $(1) $ 20
---- ---- ---- -------
Forward exchange contract/(d)/:
receivable $ 1 $ 1 $-- $ 7
</TABLE>
/(a)/ The fair value amounts are based on exchange-traded index
prices and dealer quotes.
/(b)/ Contract or notional amounts do not quantify risk exposure,
but are used in the calculation of cash settlements under the contracts.
/(c)/ The OTC swap arrangements vary in duration with certain
contracts extending into 2000.
/(d)/ The forward exchange contract matured in 1998.
26. Fair Value of Financial Instruments
Fair value of the financial instruments disclosed herein is not
necessarily representative of the amount that could be realized or
settled, nor does the fair value amount consider the tax
consequences of realization or settlement. The following table
summarizes financial instruments, excluding derivative financial
instruments disclosed in Note 25, by individual balance sheet
account. As described in Note 4, the U. S. Steel Group's
specifically attributed financial instruments and the U. S. Steel
Group's portion of USX's financial instruments attributed to all
groups are as follows:
<TABLE>
<CAPTION>
1998 1997
Fair Carrying Fair Carrying
(In millions) December 31 Value Amount Value Amount
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 9 $ 9 $ 18 $ 18
Receivables 392 392 588 588
Investments and long-term receivables 120 120 131 131
------ ------ ------ --------
Total financial assets $ 521 $ 521 $ 737 $ 737
Financial liabilities:
Notes payable $ 13 $ 13 $ 13 $ 13
Accounts payable 501 501 687 687
Accrued interest 10 10 11 11
Long-term debt (including amounts due within one year) 406 381 448 412
Preferred stock of subsidiary and trust
preferred securities 231 248 248 248
------ ------ ------ --------
Total financial liabilities $1,161 $1,153 $1,407 $1,371
</TABLE>
Fair value of financial instruments classified as current
assets or liabilities approximates carrying value due to the short-
term maturity of the instruments. Fair value of investments and
long-term receivables was based on discounted cash flows or other
specific instrument analysis. Fair value of preferred stock of
subsidiary and trust preferred securities was based on market
prices. Fair value of long-term debt instruments was based on
market prices where available or current borrowing rates available
for financings with similar terms and maturities.
The U. S. Steel Group's unrecognized financial instruments
consist of receivables sold and financial guarantees. It is not
practicable to estimate the fair value of these forms of financial
instrument obligations because there are no quoted market prices
for transactions which are similar in nature. For details relating
to sales of receivables see Note 22, and for details relating to
financial guarantees see Note 27.
S-19
<PAGE>
27. Contingencies and Commitments
USX is the subject of, or party to, a number of pending or
threatened legal actions, contingencies and commitments relating to
the 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.
Environmental matters --
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. Accrued liabilities for remediation
totaled $97 million and $106 million at December 31, 1998 and 1997,
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 1998
and 1997, such capital expenditures totaled $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 --
Guarantees by USX of the liabilities of affiliated entities of
the U. S. Steel Group totaled $81 million at December 31, 1998, and
$50 million at December 31, 1997. In the event that any defaults of
guaranteed liabilities occur, USX has access to its interest in the
assets of the affiliates to reduce potential U. S. Steel Group
losses resulting from these guarantees. As of December 31, 1998,
the largest guarantee for a single affiliate was $53 million.
Commitments --
At December 31, 1998 and 1997, the U. S. Steel Group's
contract commitments to acquire property, plant and equipment
totaled $188 million and $156 million, respectively.
USX entered into a 15-year take-or-pay arrangement in 1993,
which requires the U. S. Steel Group to accept pulverized coal each
month or pay a minimum monthly charge of approximately $1.3
million. Charges for deliveries of pulverized coal totaled $23
million in 1998 and $24 million in 1997. If USX elects to terminate
the contract early, a maximum termination payment of $108 million,
which declines over the duration of the agreement, may be required.
Other --
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.
S-20
<PAGE>
Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1998 1997
(In millions, except per
share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $1,357 $1,497 $1,733 $1,696 $ 1,838 $ 1,735 $ 1,737 $1,631
Income from operations 95 105 217 162 252 197 193 131
Net income 76 65 136 87 152 116 97 87
Steel Stock data:
- ---------------------------
Net income applicable
to Steel Stock $ 74 $ 63 $ 133 $ 85 $ 149 $ 114 $ 105 $ 81
-- Per share: basic .83 .72 1.53 .98 1.74 1.32 1.23 .96
diluted .81 .71 1.46 .95 1.64 1.25 1.06 .93
Dividends paid per share .25 .25 .25 .25 .25 .25 .25 .25
Price range of Steel
Stock/(a)/:
-- Low 21-5/8 20- 7/16 31 28-7/16 26-7/8 34-3/16 25-3/8 26-3/8
-- High 27-3/4 33-1/2 43-1/16 42-1/8 36-15/16 40-3/4 35-5/8 33-3/8
</TABLE>
/(a)/ Composite tape.
S-21
<PAGE>
Principal Unconsolidated Affiliates (Unaudited)
<TABLE>
<CAPTION>
December 31, 1998
Company Country Ownership Activity
<S> <C> <C> <C>
Clairton 1314B Partnership, L.P. United States 10% Coke & Coke By-Products
Double Eagle Steel Coating Company United States 50% Steel Processing
PRO-TEC Coating Company United States 50% Steel Processing
RTI International Metals, Inc./(a)/ United States 26% Titanium & Specialty Metals
Transtar, Inc. United States 46% Transportation
USS/Kobe Steel Company United States 50% Steel Products
USS-POSCO Industries United States 50% Steel Processing
VSZ U. S. Steel, s. r.o. Slovakia 50% Tin Mill Products
Worthington Specialty Processing United States 50% Steel Processing
</TABLE>
/(a)/ Formerly RMI Titanium Company.
Supplementary Information on Mineral Reserves (Unaudited)
See the USX consolidated financial statements for Supplementary Information on
Mineral Reserves relating to the U. S. Steel Group, page U-30.
S-22
<PAGE>
Five-Year Operating Summary
<TABLE>
<CAPTION>
(Thousands of net tons, unless otherwise noted) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Raw Steel Production
Gary, IN 6,468 7,428 6,840 7,163 6,768
Mon Valley, PA 2,594 2,561 2,746 2,740 2,669
Fairfield, AL 2,152 2,361 1,862 2,260 2,240
------ ------ ------ ------ ------
Total 11,214 12,350 11,448 12,163 11,677
Raw Steel Capability
Continuous cast 12,800 12,800 12,800 12,500 11,990
Total production as % of total capability 87.6 96.5 89.4 97.3 97.4
Hot Metal Production 9,743 10,591 9,716 10,521 10,328
Coke Production/(a)/ 4,835 5,757 6,777 6,770 6,777
Iron Ore Pellets -- Minntac, MN
Shipments 15,446 16,319 14,962 15,218 16,174
Coal Production 8,150 7,528 7,283 7,509 7,424
Coal Shipments 7,670 7,811 7,117 7,502 7,698
Steel Shipments by Product
Sheet and semi-finished steel products 7,608 8,170 8,677 8,721 7,988
Tubular, plate and tin mill products 3,078 3,473 2,695 2,657 2,580
------ ------ ------ ------ ------
Total 10,686 11,643 11,372 11,378 10,568
Total as % of domestic steel industry 10.3 10.9 11.3 11.7 11.1
Steel Shipments by Market
Steel service centers 2,563 2,746 2,831 2,564 2,780
Transportation 1,785 1,758 1,721 1,636 1,952
Further conversion:
Joint ventures 1,473 1,568 1,542 1,332 1,308
Trade customers 1,140 1,378 1,227 1,084 1,058
Containers 794 856 874 857 962
Construction 987 994 865 671 722
Oil, gas and petrochemicals 509 810 746 748 367
Export 382 453 493 1,515 355
All other 1,053 1,080 1,073 971 1,064
------ ------ ------ ------ ------
Total 10,686 11,643 11,372 11,378 10,568
</TABLE>
/(a)/ The reduction in coke production in 1997 and 1998 reflected
U. S. Steel's entry into a strategic partnership with two
limited partners on June 1, 1997, to acquire an interest in
three coke batteries at its Clairton (Pa.) Works.
S-23
<PAGE>
Five-Year Financial Summary
<TABLE>
<CAPTION>
(Dollars in millions, except as noted) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Revenues
Sales by product:
Sheet and semi-finished
steel products $ 3,501 $ 3,820 $ 3,677 $ 3,623 $ 3,335
Tubular, plate and tin mill products 1,513 1,754 1,635 1,677 1,518
Raw materials (coal, coke and iron ore) 591 671 757 731 754
Other/(a)/ 578 570 466 425 463
Income from affiliates 46 69 66 80 59
Gain on disposal of assets 54 57 16 21 12
Gain on affiliate stock offering -- -- 53 -- --
------- ------- ------- ------- ---------
Total revenues $ 6,283 $ 6,941 $ 6,670 $ 6,557 $ 6,141
Income From Operations
Segment income for
U. S. Steel operations $ 330 $ 618 $ 248 $ 472 $ 277
Items not allocated to segment:
Gain on affiliate stock offering -- -- 53 -- --
Administration expenses (24) (33) (28) (43) (36)
Pension credits 373 313 330 294 287
Costs of former businesses (100) (125) (120) (141) (140)
------- ------- ------- ------- ---------
Total income from operations 579 773 483 582 388
Net interest and other financial costs 42 87 116 129 140
Provision for income taxes 173 234 92 150 47
Income Before Extraordinary Loss $ 364 $ 452 $ 275 $ 303 $ 201
Per common share -- basic (in dollars) 4.05 5.24 3.00 3.53 2.35
-- diluted (in dollars) 3.92 4.88 2.97 3.43 2.33
Net Income $ 364 $ 452 $ 273 $ 301 $ 201
Per common share -- basic (in dollars) 4.05 5.24 2.98 3.51 2.35
-- diluted (in dollars) 3.92 4.88 2.95 3.41 2.33
Pension Costs Included in
U. S. Steel Operations $ 187 $ 169 $ 172 $ 164 $ 163
Balance Sheet Position at year-end
Current assets $ 1,275 $ 1,531 $ 1,428 $ 1,444 $ 1,780
Net property, plant and equipment 2,500 2,496 2,551 2,512 2,536
Total assets 6,693 6,694 6,580 6,521 6,480
Short-term debt 25 67 91 101 21
Other current liabilities 991 1,267 1,208 1,418 1,246
Long-term debt 464 456 1,014 923 1,432
Employee benefits 2,315 2,338 2,430 2,424 2,496
Trust preferred securities and
preferred stock of subsidiary 248 248 64 64 64
Common stockholders' equity 2,090 1,779 1,559 1,337 913
Per share (in dollars) 23.66 20.56 18.37 16.10 12.01
Cash Flow Data
Net cash from operating activities $ 372 $ 470 $ 86 $ 587 $ 78
Capital expenditures 310 261 337 324 248
Disposal of assets 21 420 161 67 19
Dividends paid 96 96 104 93 98
Employee Data
Total employment costs $ 1,305 $ 1,417 $ 1,372 $ 1,381 $ 1,402
Average employment cost
(dollars per hour) 30.42 31.56 30.35 31.24 31.15
Average number of employees 20,267 20,683 20,831 20,845 21,310
Number of pensioners at year-end 92,051 93,952 96,510 99,062 101,732
Stockholder Data at year-end
Number of common shares
outstanding (in millions) 88.3 86.6 84.9 83.0 76.0
Registered shareholders (in thousands) 60.2 65.1 71.0 76.7 81.2
Market price of common stock $23.000 $31.250 $31.375 $30.750 $ 35.500
</TABLE>
/(a)/ Includes revenue from the sale of steel production by-
products, engineering and consulting services, real estate
development and resource management.
S-24
<PAGE>
Management's Discussion and Analysis
The U. S. Steel Group includes U. S. Steel, which is engaged in
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.
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, VSZ U. S. Steel, s. r.o. and RTI International Metals,
Inc. ("RTI"). Management's Discussion and Analysis should be read
in conjunction with the U. S. Steel Group's Financial Statements
and Notes to Financial Statements.
In 1998, segment income for U. S. Steel operations decreased
primarily due to lower average steel product prices, lower shipment
volumes, and less efficient operating levels, resulting from an
increase in imports and weak tubular markets.
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 Form 10-K.
Management's Discussion and Analysis of Income
Revenues for each of the last three years are summarized in the
following table, which is covered by the report of independent
accountants.
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Sales by product:
Sheet and semi-finished steel products $3,501 $3,820 $3,677
Tubular, plate, and tin mill products 1,513 1,754 1,635
Raw materials (coal, coke and iron ore) 591 671 757
Other/(a)/ 578 570 466
Income from affiliates 46 69 66
Gain on disposal of assets 54 57 16
Gain on affiliate stock offering/(b)/ -- -- 53
------ ------ ------
Total revenues $6,283 $6,941 $6,670
</TABLE>
/(a)/Includes revenue from the sale of steel production by-
products, engineering and consulting services, real estate
development and resource management.
/(b)/For further details, see Note 5 to the U. S. Steel Group
Financial Statements.
Total revenues decreased by $658 million in 1998 from 1997
primarily due to lower average realized prices, lower steel
shipment volumes, and lower income from affiliates. Total revenues
increased by $271 million in 1997 from 1996 primarily due to higher
average steel product prices and higher shipment volumes.
S-25
<PAGE>
Management's Discussion and Analysis of Income CONTINUED
Income from operations for the U. S. Steel Group for the last
three years was:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Segment income for U. S. Steel operations/(a)/ $ 330 $ 618 $ 248
Items not allocated to segment:
Pension credits 373 313 330
Administrative expenses (24) (33) (28)
Costs related to former business activities/(b)/ (100) (125) (120)
Gain on affiliate stock offering/(c)/ -- -- 53
----- ----- -----
Total income from operations $ 579 $ 773 $ 483
</TABLE>
/(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. Results in 1997
included charges of $9 million related to environmental
accruals and the adoption of SOP 96-1.
/(c)/For further details, see Note 5 to the U. S. Steel Group
Financial Statements.
Segment income for U. S. Steel operations
Segment income for U. S. Steel operations, which decreased $288
million in 1998 from 1997, included a net favorable $30 million for
an insurance litigation settlement pertaining to the 1995 Gary
(Ind.) Works No. 8 blast furnace explosion and charges of $10
million related to a voluntary workforce reduction plan. Results in
1997 included a benefit of $40 million in insurance settlement
payments related to the 1996 hearth breakout at Gary Works No. 13
blast furnace and a $15 million gain on the sale of the plate mill
at U. S. Steel's former Texas Works. In addition to the effects of
these items, the decrease in segment income in 1998 for U. S. Steel
operations was primarily due to lower average steel prices, lower
shipments, less efficient operating levels, the cost effects of the
10 day outage at Gary Works No. 13 blast furnace following a tap
hole failure, and lower income from affiliates. These unfavorable
items were partially offset by lower 1998 accruals for profit
sharing.
The increase in imports and weak tubular markets negatively
affected steel shipment levels, steel product prices and operating
levels in 1998. U. S. Steel shipments declined 8% in 1998 compared
to 1997. In 1998, raw steel production was negatively affected by a
planned reline at Gary Works No. 6 blast furnace, an unplanned
blast furnace outage at the Gary Works No. 13 blast furnace, and
the idling of certain facilities to control inventory as a result
of the increase in imports. In 1998, raw steel capability
utilization averaged 87.6%, compared to 96.5% in 1997.
Segment income for U. S. Steel operations increased $370 million
in 1997 compared to 1996. Results in 1996 included $39 million of
charges related to repair of the Gary Works No. 13 blast furnace
and $13 million of charges related to a voluntary workforce
reduction at the Fairless (Pa.) Works. In addition to the effects
of these items, the increase in 1997 was primarily due to higher
steel shipments, higher average realized steel prices, and improved
operating efficiencies, including the full year availability of the
Gary Works No. 13 blast furnace. These improvements were partially
offset by higher 1997 accruals for profit sharing.
S-26
<PAGE>
Management's Discussion and Analysis of Income CONTINUED
The Gary Works No. 13 blast furnace, which represents about half
of Gary Works iron producing capacity and roughly one-fourth of U.
S. Steel's iron capacity, was idled on April 2, 1996 due to a
hearth breakout. In addition to direct repair costs, 1996 operating
results were adversely affected by production inefficiencies at
Gary, as well as at other U. S. Steel plants, reduced shipments and
higher costs for purchased iron and semifinished steel. The total
effect of this unplanned outage on 1996 segment income is estimated
to have been more than $100 million. USX maintained property damage
and business interruption insurance coverages for the No. 13 blast
furnace hearth breakout and the 1995 Gary Works No. 8 blast
furnace explosion, subject to a $50 million deductible per
occurrence for recoverable items. In 1998, USX and its insurance
companies settled the Gary Works No. 8 blast furnace loss for
approximately $30 million (net of charges and reserves) in excess
of the deductible. In 1997, USX and its insurance companies settled
the Gary Works No. 13 blast furnace loss for $40 million in excess
of the deductible.
Segment income for U. S. Steel operations included pension costs
(which are primarily noncash) allocated to the ongoing operations
of U. S. Steel of $187 million, $169 million, and $172 million in
1998, 1997 and 1996, respectively. Pension costs in 1998 included
$10 million for termination benefits associated to a voluntary
early retirement program, the settlements for which will
principally occur in the first half of 1999.
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 $373
million in 1998, compared to $313 million and $330 million in 1997
and 1996, respectively.
Pension credits, combined with pension costs included in segment
income for U. S. Steel operations, resulted in net pension credits
of $186 million in 1998, $144 million in 1997 and $158 million in
1996. Net pension credits are expected to be approximately $205
million in 1999. 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 12 to the U. S. Steel Group
Financial Statements.
Net interest and other financial costs for each of the last
three years are summarized in the following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Net interest and other financial costs $ 42 $ 87 $ 116
Less:
Favorable (unfavorable) adjustment to
carrying value of Indexed Debt/(a)/ 44 10 (6)
----- ----- -----
Net interest and other financial costs
adjusted to exclude above item $ 86 $ 97 $ 110
</TABLE>
/(a)/In December 1996, USX issued $117 million of 6-3/4%
Exchangeable Notes Due February 1, 2000 ("Indexed Debt")
indexed to the price of RTI common stock. At maturity, USX
must exchange these notes for shares of RTI common stock, or
redeem the notes for the equivalent amount of cash. The
carrying value of Indexed Debt is adjusted quarterly to
settlement value, based on changes in the value of RTI common
stock. Any resulting adjustment is charged or credited to
income and included in interest and other financial costs.
USX's 26% interest in RTI continues to be accounted for under
the equity method.
S-27
<PAGE>
Management's Discussion and Analysis of Income CONTINUED
Adjusted net interest and other financial costs decreased by $11
million in 1998 as compared with 1997, and by $13 million in 1997
as compared with 1996, due primarily to lower average debt levels.
The provision for estimated income taxes in 1998 decreased
compared to 1997 due to a decline in income from operations, and a
$9 million favorable foreign tax adjustment in 1998 as a result of
a favorable resolution of foreign tax litigation. The provision for
estimated income taxes in 1997 increased compared to 1996 due to
improved income from operations, a reduction in estimated tax
credits other than foreign tax credits (primarily nonconventional
source fuel credits) and an increase in estimated state income tax
expense. A significant portion of the reduction in the
nonconventional source fuel credits resulted from U. S. Steel
Group's entry into a strategic partnership with two limited
partners to acquire an interest in three coke batteries at its
Clairton (Pa.) Works. For further discussion on income taxes, see
Note 15 to the U. S. Steel Group Financial Statements.
The extraordinary loss on extinguishment of debt of $2 million
in 1996 represents the portion of the loss on early extinguishment
of USX debt attributed to the U. S. Steel Group. For additional
information, see Note 6 to the U. S. Steel Group Financial
Statements.
Net income in 1998 was $364 million, compared with net income of
$452 million in 1997 and net income of $273 million in 1996. Net
income decreased $88 million in 1998 from 1997, compared with a
increase of $179 million in 1997 from 1996. The changes in net
income primarily reflect the factors discussed above.
Noncash credit from exchange of preferred stock totaled $10
million in 1997. On May 16, 1997, USX exchanged approximately 3.9
million 6.75% Convertible Quarterly Income Preferred Securities
("Trust Preferred Securities") of USX Capital Trust I, for an
equivalent number of shares of its outstanding 6.50% Cumulative
Convertible Preferred Stock ("6.50% Preferred Stock"). The noncash
credit from exchange of preferred stock represents the difference
between the carrying value of the 6.50% Preferred Stock ($192
million) and the fair value of the Trust Preferred Securities of
USX Capital Trust I ($182 million), at the date of the exchange.
For additional discussion on the exchange, see Note 19 to the U. S.
Steel Group Financial Statements.
Management's Discussion and Analysis of Financial Condition, Cash Flows and
Liquidity
Current assets at year-end 1998 decreased $256 million from
year-end 1997 primarily due to lower trade receivables (which were
impacted by a decline in revenues) and lower deferred income taxes.
Current liabilities in 1998 decreased $318 million from 1997
primarily due to decreased accounts payable, payroll and benefits
payable, and accrued taxes, which were impacted by a decline in
revenues and income. The decline in income resulted in lower profit
sharing accruals in 1998.
Total long-term debt and notes payable at December 31, 1998 of
$489 million was $34 million lower than year-end 1997. Total long-
term debt and notes payable included favorable adjustments to
carrying value of Indexed Debt of $44 million and $10 million in
1998 and 1997, respectively. Excluding these adjustments, total
debt did not change substantially in 1998. Virtually all of the
debt is a direct obligation of, or is guaranteed by, USX.
S-28
<PAGE>
Management's Discussion and Analysis of Income CONTINUED
Net cash provided from operating activities in 1998 was $372
million compared with $470 million in 1997. The 1998 period
included proceeds of $38 million for the insurance litigation
settlement pertaining to the 1995 Gary Works No. 8 blast furnace
explosion and the payment of $30 million for the repurchase of sold
accounts receivable. The 1997 period included payments of $80
million in elective funding of retiree life insurance of union and
nonunion participants, $70 million to the United Steelworkers of
America ("USWA") Voluntary Employee Benefit Association Trust
(VEBA) ($40 million represented prefunding for years 1998 and
1999), $49 million to fund the U. S. Steel Group's principal
pension plan for the 1996 plan year and receipts of $40 million in
insurance recoveries related to the 1996 Gary Works No. 13 hearth
breakout. Excluding these items, net cash provided from operating
activities decreased $265 million in 1998 due mainly to decreased
profitability and unfavorable working capital changes.
The U. S. Steel Group's net cash provided from operating
activities in 1996 reflects payment of $59 million to the Internal
Revenue Service for certain agreed and unagreed adjustments
relating to the tax year 1990, and a payment of $28 million related
to settlement of the Pickering litigation. Excluding these items,
net cash provided from operating activities increased $456 million
in 1997 due mainly to increased profitability and favorable working
capital changes.
Capital expenditures in 1998 included a reline of the Gary Works
No. 6 blast furnace, an upgrade to the galvanizing line at Fairless
Works, replacement of coke battery thruwalls at Gary Works,
conversion of the Fairfield pipemill to use round instead of square
blooms and additional environmental expenditures primarily at
Fairfield Works and Gary Works. Capital expenditures in 1997
included a blast furnace reline at Mon Valley Works, a new heat
treat line for plates at Gary Works and additional environmental
expenditures primarily at Gary Works. Capital expenditures in 1996
included a blast furnace reline and new galvanizing line at
Fairfield Works, environmental expenditures primarily at Gary
Works, and certain spending related to the Gary No. 13 blast
furnace hearth breakout. Contract commitments for capital
expenditures at year-end 1998 were $188 million, compared with $156
million at year-end 1997.
Capital expenditures for 1999 are expected to be approximately
$290 million including a new 64" pickle line and upgrades to the
cold rolling mill at Mon Valley Works, the upgrade of the hot strip
mill coilers and replacement of coke battery thruwalls at Gary
Works, the basic oxygen furnace emissions project at Fairfield
Works, the new customer service center in Detroit to support the
automotive business, and additional environmental expenditures,
primarily at Gary Works.
The preceding statement concerning expected 1999 capital
expenditures is a forward-looking statement. This forward-looking
statement is based on assumptions, which can be affected by (among
other things) levels of cash flow from operations, unforeseen
hazards such as weather conditions, explosions or fires, and delays
in obtaining government or partner approval, which could delay the
timing of completion of particular capital projects. Accordingly,
actual results may differ materially from current expectations in
the forward-looking statement.
Net cash used in investments in affiliates in 1998 of $73
million mainly 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. Net cash used in investments in affiliates in 1997 of
$26 million included funding of equity affiliate capital projects
(mainly the construction of a second galvanizing line at PRO-TEC),
partially offset by dividends from equity affiliates. Investments
in affiliates in 1996 used net cash of $1 million.
S-29
<PAGE>
Management's Discussion and Analysis of Income CONTINUED
Cash from disposal of assets totaled $21 million in 1998,
compared with $420 million in 1997 and $161 million in 1996. The
1997 proceeds included $361 million from U. S. Steel's entry into a
strategic partnership with two limited partners to acquire an
interest in three coke batteries at its Clairton Works. The 1996
proceeds reflected the sale of U. S. Steel Group's investment in
National-Oilwell and a portion of its investment in RTI common
stock.
In 1996, an aggregate of 6.9 million shares of RTI common stock
was sold in a public offering. Included in the offering were 2.3
million shares sold by USX for net proceeds of $40 million. USX
currently owns approximately 26% of the outstanding common stock of
RTI. For additional information, see Note 5 to the U. S. Steel
Group Financial Statements.
Financial obligations increased by $9 million in 1998 compared
with a decrease of $567 million in 1997, and an increase of $77
million in 1996. Financial obligations consist of the U. S. Steel
Group's portion of USX debt and preferred stock of a subsidiary
attributed to both groups as well as debt and financing agreements
specifically attributed to the U. S. Steel Group. The decrease in
1997 primarily reflected the net effects of cash from operating
activities, asset sales and capital expenditures. For a discussion
of USX financing activities attributed to both groups, see
Management's Discussion and Analysis of USX Consolidated Financial
Condition, Cash Flows and Liquidity.
Pension Activity
USX contributed $49 million in 1997 to fund the U. S. Steel
Group's principal pension plan for the 1996 plan year.
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.
Management's Discussion and Analysis of 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.
S-30
<PAGE>
Management's Discussion and Analysis of Income CONTINUED
The U. S. Steel Group's environmental expenditures for the last
three years were/(a)/:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Capital $ 49 $ 43 $ 90
Compliance
Operating & maintenance 198 196 199
Remediation/(b)/ 19 29 33
----- ----- -----
Total U. S. Steel Group $ 266 $ 268 $ 322
</TABLE>
/(a)/Based on previously established U. S. Department of
Commerce survey guidelines.
/(b)/These amounts include spending charged against such reserves,
net of recoveries where permissible, but do not include
noncash provisions recorded for environmental remediation.
The U. S. Steel Group's environmental capital expenditures
accounted for 16%, 16% and 27% of total capital expenditures in
1998, 1997 and 1996, respectively.
Compliance expenditures represented 4% of the U. S. Steel
Group's total costs and expenses in 1998, 1997 and 1996.
Remediation spending during 1996 to 1998 was mainly related to
remediation activities at former and present operating locations.
These projects include continuing remediation at an in situ uranium
mining operation and former coke-making facilities and the closure
of permitted hazardous and non-hazardous waste landfills.
The Resource Conservation and Recovery Act ("RCRA") establishes
standards for the management of solid and hazardous wastes. Besides
affecting current waste disposal practices, RCRA also addresses the
environmental effects of certain past waste disposal operations,
the recycling of wastes and the regulation of storage tanks.
The U. S. Steel Group is in the study phase of RCRA corrective
action programs at its Fairless Works and its former Geneva Works.
A RCRA corrective action program has been initiated at its Gary
Works and its Fairfield Works. Until the studies are completed at
these facilities, USX is unable to estimate the cost of remediation
activities, if any, that will be required.
USX has been notified that it is a potential responsible party
("PRP") at 29 waste sites related to the U. S. Steel Group under
the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") as of December 31, 1998. In addition,
there are 17 sites related to the U. S. Steel Group where USX has
received information requests or other indications that USX may be
a PRP under CERCLA but where sufficient information is not
presently available to confirm the existence of liability or make
any judgment as to the amount thereof. There are also 34 additional
sites related to the U. S. Steel Group where remediation is being
sought under other environmental statutes, both federal and state,
or where private parties are seeking remediation through
discussions or litigation. At many of these sites, USX is one of a
number of parties involved and the total cost of remediation, as
well as USX's share thereof, is frequently dependent upon the
outcome of investigations and remedial studies. The U. S. Steel
Group accrues for environmental remediation activities when the
responsibility to remediate is probable and the amount of
associated costs is reasonably determinable. As environmental
remediation matters proceed toward ultimate resolution or as
additional remediation obligations arise, charges in excess of
those previously accrued may be required. See Note 27 to the U. S.
Steel Group Financial Statements.
In 1998, USX entered into a consent decree with the
Environmental Protection Agency ("EPA") which resolved alleged
violations of the Clean Water Act National Pollution Discharge
Elimination System ("NPDES") permit at Gary Works and provides for
a sediment remediation project for a section
S-31
<PAGE>
Management's Discussion and Analysis of Income CONTINUED
of the Grand Calumet River that runs through Gary Works.
Contemporaneously, USX entered into a consent decree with the
public trustees which resolves potential liability for natural
resource damages on the same section of the Grand Calumet River.
USX has agreed to pay civil penalties of $2.9 million for the
alleged water act violations and $0.5 million in natural resource
damages assessment costs, which will be paid in 1999. In addition,
USX will pay the EPA $1 million at the end of the remediation
project for future monitoring costs. During the negotiations
leading up to the settlement with EPA, capital improvements were
made to upgrade plant systems to comply with the NPDES
requirements. The sediment remediation project is an approved final
interim measure under the corrective action program for Gary Works
and is expected to cost approximately $30 million over the next six
years. Estimated remediation and monitoring costs for this project
have been accrued.
In 1997, USX adopted American Institute of Certified Public
Accountants Statement of Position No. 96-1 -- "Environmental
Remediation Liabilities", which resulted in a $20 million charge.
For additional information, see Note 3 to the U. S. Steel Group
Financial Statements.
New or expanded environmental requirements, which could increase
the U. S. Steel Group's environmental costs, may arise in the
future. USX intends to comply with all legal requirements regarding
the environment, but since many of them are not fixed or presently
determinable (even under existing legislation) and may be affected
by future legislation, it is not possible to predict accurately the
ultimate cost of compliance, including remediation costs which may
be incurred and penalties which may be imposed. However, based on
presently available information, and existing laws and regulations
as currently implemented, the U. S. Steel Group does not anticipate
that environmental compliance expenditures (including operating and
maintenance and remediation) will materially increase in 1999. The
U. S. Steel Group's capital expenditures for environmental are
expected to be approximately $32 million in 1999 and are expected
to be spent on projects primarily at Gary Works and Fairfield
Works. Predictions beyond 1999 can only be broad-based estimates
which have varied, and will continue to vary, due to the ongoing
evolution of specific regulatory requirements, the possible
imposition of more stringent requirements and the availability of
new technologies to remediate sites, among other matters. Based
upon currently identified projects, the U. S. Steel Group
anticipates that environmental capital expenditures will be
approximately $28 million in 2000; however, actual expenditures may
vary as the number and scope of environmental projects are revised
as a result of improved technology or changes in regulatory
requirements and could increase if additional projects are
identified or additional requirements are imposed.
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 27 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.
Management's Discussion and Analysis of Operations
Average realized steel prices were 2.1% lower in 1998 versus
1997 due primarily to U. S. Steel realizing lower prices on sheet
products. In 1997, average realized steel prices were 2.6% higher
versus 1996 due primarily to U. S. Steel realizing higher prices
for tubular and sheet products.
S-32
<PAGE>
Management's Discussion and Analysis of Income CONTINUED
Steel shipments were 10.7 million tons in 1998, 11.6 million
tons in 1997, and 11.4 million tons in 1996. U. S. Steel Group
shipments comprised approximately 10% of the domestic steel market
in 1998. In 1998, U. S. Steel shipments were negatively affected by
an increase in imports and weak tubular markets. Exports accounted
for approximately 4% of U. S. Steel Group shipments in 1998, 1997
and 1996.
Raw steel production was 11.2 million tons in 1998, compared
with 12.3 million tons in 1997 and 11.4 million tons in 1996. Raw
steel production averaged 88% of capability in 1998, compared with
97% of capability in 1997 and 89% of capability in 1996. In 1998,
raw steel production was negatively affected by a planned reline at
Gary Works No. 6 blast furnace, an unplanned blast furnace outage
at the Gary Works No. 13 blast furnace, and the idling of certain
facilities as a result of the increase in imports. U. S. Steel
Group curtailed its production by keeping the Gary Works No. 6
blast furnace out of service after a scheduled reline was completed
in mid-August, 1998, until February, 1999. In addition, raw steel
production was cut back at Mon Valley Works and Fairfield Works. In
1996, raw steel production was negatively affected by an unplanned
blast furnace outage at the Gary Works No. 13 blast furnace. U. S.
Steel's stated annual raw steel production capability was 12.8
million tons in 1998, 1997 and 1996.
In addition to cutting back raw steel production in 1998, U. S.
Steel suspended one of Minntac's five taconite pellet production
lines in Minnesota, idled the Fairfield Works pipe mill for several
multiple week periods, and curtailed selected sheet facilities at
Fairless Works (the curtailments at Fairless Works represented
about 70 percent of operations as of December 31, 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. This preliminary determination of injury is
subject to further investigation by the ITC and U.S. Department of
Commerce ("Commerce"). On February 12, 1999, Commerce announced
preliminary anti-dumping duty margins on hot rolled imports from
Japan (ranging from approximately 25% to 67%) and Brazil (ranging
from approximately 50% to 71%) and preliminary countervailing duty
margins on imports from Brazil (ranging from more than 6% to more
than 9%). On February 22, 1999, Commerce announced preliminary
anti-dumping duty margins on hot rolled imports from Russia
(ranging from approximately 71% to more than 217%). However,
Commerce announced at the same time that it had initialed an
agreement with Russia to suspend the anti-dumping investigation on
hot rolled imports from Russia. This agreement, if approved, allows
the annual import of 750,000 metric tons of hot rolled steel
product from Russia at a minimum price ranging from $255 to $280
FOB per metric ton. U. S. Steel is opposed to this agreement and is
reviewing all available remedies to challenge this agreement. U. S.
Steel will pursue the hot rolled import case against Russia to
obtain the issuance of final determinations by Commerce and the
ITC. The preliminary injury determination and the preliminary anti-
dumping and countervailing duty margin determinations are subject
to further investigation by the ITC and Commerce. It is presently
expected that Commerce will issue its final anti-dumping and
countervailing duty margin determinations on April 28, 1999 and the
ITC will issue its final injury determination on June 2, 1999.
S-33
<PAGE>
Management's Discussion and Analysis of Income CONTINUED
In addition to announcing the preliminary anti-dumping duty
margins on hot rolled imports from Russia and the proposed
suspension agreement on those imports, Commerce also announced on
February 22, 1999 that it had initialed an agreement with Russia to
restrict imports of major steel products, other than hot rolled and
cut-to-length plate, from Russia. U. S. Steel is opposed to this
agreement.
Plate products accounted for 10%, 8% and 9% of U. S. Steel Group
shipments in 1998, 1997 and 1996, respectively. On November 5,
1996, two other domestic steel plate producers filed anti-dumping
cases with Commerce and the ITC asserting that People's Republic of
China, the Russia Federation, Ukraine, and South Africa have
engaged in unfair trade practices with respect to the export of
carbon cut-to-length plate to the United States. U. S. Steel Group
has supported these cases. Commerce issued final affirmative
determination of dumping for each country in October 1997, finding
substantial dumping margins on cut-to-length steel plate imports
from those countries. In December 1997, the ITC voted unanimously
that the United States industry producing cut-to-length carbon
steel plate was injured due to imports of dumped cut-to-length
plate from the four countries. The United States has negotiated
suspension agreements that limit imports of cut-to-length carbon
steel plate from the four countries to a total of approximately
440,000 tons per year for the next five years, a reduction of about
two-thirds from 1996 import levels, and provide for an average 10-
15% increase in import prices to remove the injurious impact of the
imports. Any violation or abrogation of the suspension agreements
will result in imposition of the dumping duties found by Commerce.
On February 16, 1999, U. S. Steel, along with Bethlehem Steel
Corporation, IPSCO, Inc., Tuscaloosa Steel Company, and the USWA,
filed trade cases against South Korea, France, Italy, Macedonia,
India, the Czech Republic, Japan, and Indonesia, contending that
dumped and subsidized cut-to-length plate are being imported into
the United States from these countries.
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.
For additional information regarding levels of imported steel, see
discussion of "Outlook for 1999" below.
U. S. Steel Mining Company, LLC ("U. S. Steel Mining") entered
into a five year contract with the United Mine Workers of America
("UMWA"), effective January 1, 1998, covering approximately 1,000
employees. This agreement followed that of other major mining
companies.
The U. S. Steel Group depreciates steel assets by modifying
straight-line depreciation based on the level of production.
Depreciation charges for 1998, 1997, and 1996 were 93%, 102%, and
94%, respectively, of straight-line depreciation based on
production levels for each of the years. See Note 2 to the U. S.
Steel Group Financial Statements.
Outlook for 1999
U. S. Steel expects that shipment volumes and average steel
product prices will continue to be impacted by the effects of high
levels of low priced steel imports and growing domestic minimill
production capability for flat rolled products. Scrap prices are
currently at low levels and provide minimills a cost advantage. 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 adversely impact U. S. Steel Group's
product prices and shipment levels.
S-34
<PAGE>
Management's Discussion and Analysis of Income CONTINUED
On August 1, 1999, U. S. Steel, along with several major steel
competitors, faces the expiration of the labor agreement with the
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
30%, 24% and 23% of the domestic steel market for the years 1998,
1997 and 1996, respectively. In November 1998, steel imports
accounted for an estimated 37% of the domestic steel market. Steel
imports of hot rolled and cold rolled steel increased 42% in 1998,
compared to 1997. Steel imports of plates increased 75% in 1998,
compared to 1997.
The preceding 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.
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 our 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
S-35
<PAGE>
Management's Discussion and Analysis of Income CONTINUED
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.
<TABLE>
<CAPTION>
Percent Completed
Y2K
Y2K Readiness
Impact of
Y2K Assess- Overall
As of January 31, 1999 Inventory ment Inventory
<S> <C> <C> <C>
Information technology 100% 98% 95%
Non-information technology 100% 84% 81%
</TABLE>
Third Parties
The U. S. Steel Group continues to review its third party
(including, but not limited to outside processors, process control
systems and hardware suppliers, telecommunication providers, and
transportation carriers) relationships to determine those critical
to its operations. The majority of contacts have been made with
critical third parties to determine if they will be able to provide
their product and service to the U. S. Steel Group after the Year
2000. An aggressive follow-up process with those third parties not
responding or returning an unacceptable response is underway.
Communications with U. S. Steel Group'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 the third parties, an effort will be made to work with the
third parties to resolve the issue, or a new provider of the same
products or services will be investigated and secured. As of
December 31, 1998, the U. S. Steel Group has sent out approximately
700 inquiries and received over 600 responses.
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 January 31, 1999, were
$14 million, including $6 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.
S-36
<PAGE>
Management's Discussion and Analysis of Income CONTINUED
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.
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 Standards
In March 1998, the American Institute of Certified Public
Accountants issued its Statement of Position No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 provides guidelines for
companies to capitalize or expense costs incurred to develop or
obtain internal-use software. Effective January 1, 1999, USX
adopted SOP 98-1. The incremental impact on results of operations
of adoption of SOP 98-1 is likely to be initially favorable since
certain qualifying costs will be capitalized and amortized over
future periods.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities". This new
standard requires recognition of all derivatives as either assets
or liabilities at fair value. This new standard may result in
additional volatility in both current period earnings and 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.
S-37
<PAGE>
Quantitative and Qualitative Disclosures About Market Risk
Management Opinion Concerning Derivative Instruments
USX employs a strategic approach of limiting its use of
derivative instruments principally to hedging activities, whereby
gains and losses are generally offset by price changes in the
underlying commodity. Based on this approach, combined with risk
assessment procedures and internal controls, management believes
that its use of derivative instruments does not expose the U. S.
Steel Group to material risk; however, the U. S. Steel Group's use
of derivative instruments for hedging activities could materially
affect the U. S. Steel Group's results of operations in particular
quarterly or annual periods. This is primarily because use of such
instruments may limit the company's ability to benefit from
favorable price movements. However, management believes that use of
these instruments will not have a material adverse effect on
financial position or liquidity. For a summary of accounting
policies related to derivative instruments, see Note 2 to the U. S.
Steel Group Financial Statements.
Commodity Price Risk and Related Risks
In the normal course of its business, the U. S. Steel Group is
exposed to market risk or price fluctuations related to the
production and sale of steel products. To a lesser extent, the U.
S. Steel Group is exposed to price risk related to the purchase,
production or sale of coal and coke and the purchase of natural
gas, steel scrap and certain nonferrous metals used as raw
materials. The U. S. Steel Group is also exposed to effects of
price fluctuations on the value of its raw material and steel
product inventories.
The U. S. Steel Group's market risk strategy has generally been
to obtain competitive prices for its products and services and
allow operating results to reflect market price movements dictated
by supply and demand. However, the U. S. Steel Group uses
derivative commodity instruments (primarily over-the-counter
commodity swaps) to manage exposure to fluctuations in the purchase
price of natural gas, heating oil and certain nonferrous metals.
The use of these instruments has not been significant in relation
to the U. S. Steel Group's overall business activity.
Sensitivity analyses of the incremental effects on pretax income
of hypothetical 10% and 25% decreases in commodity prices for open
derivative commodity instruments as of December 31, 1998, are
provided in the following table/(a)/:
<TABLE>
<CAPTION>
(Dollars in millions)
Incremental Decrease in
Pretax Income Assuming a
Hypothetical Price
Change of/(a)/
Derivative Commodity Instruments 10% 25%
<S> <C> <C>
Natural gas $2.3 $5.6
Zinc 1.6 3.9
Nickel .1 .2
Tin .1 .2
Heating oil -- .1
</TABLE>
/(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% decreases in closing commodity prices for each open
contract position at December 31, 1998. U. S. Steel Group
management evaluates its portfolio of derivative commodity
instruments on an ongoing basis and adds or revises
strategies to reflect anticipated market conditions and
changes in risk profiles. Changes to the portfolio subsequent
to December 31, 1998, would cause future pretax income
effects to differ from those presented in the table.
S-38
<PAGE>
Quantitative and Qualitative Disclosures
About Market Risk CONTINUED
While these derivative commodity instruments are generally used
to reduce risks from unfavorable commodity price movements, they
also may limit the opportunity to benefit from favorable movements.
The U. S. Steel Group recorded net pretax hedging losses of $6
million in 1998, compared with net gains of $5 million in 1997, and
net gains of $21 million in 1996. These gains and losses were
offset by changes in the realized prices of the underlying hedged
commodities. For additional quantitative information relating to
derivative commodity instruments, including aggregate contract
values and fair values, where appropriate, see Note 25 to the U. S.
Steel Group Financial Statements.
Interest Rate Risk
USX is subject to the effects of interest rate fluctuations on
certain of its non-derivative financial instruments. A sensitivity
analysis of the projected incremental effect of a hypothetical 10%
decrease in year-end 1998 interest rates on the fair value of the
U. S. Steel Group's specifically attributed non-derivative
financial instruments and the U. S. Steel Group's portion of USX's
non-derivative financial instruments attributed to both groups, is
provided in the following table:
<TABLE>
<CAPTION>
(Dollars in millions)
As of December 31, 1998 Incremental
Increase in
Carrying Fair Fair
Non-Derivative Financial Instruments/(a)/ Value/(b)/ Value/(b)/ Value/(c)/
<S> <C> <C> <C>
Financial assets:
Investments and long-term receivables/(d)/ $ 23 $ 23 $ --
Financial liabilities:
Long-term debt (including amounts due within one year)/(e)/ $381 $406 $ 17
Preferred stock of subsidiary/(f)/ 66 66 5
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust/(f)/ 182 165 13
---- ---- -----
Total $629 $637 $ 35
</TABLE>
/(a)/ Fair values of cash and cash equivalents, receivables,
notes payable, accounts payable and accrued interest,
approximate carrying value and are relatively insensitive to
changes in interest rates due to the short-term maturity of
the instruments. Accordingly, these instruments are excluded
from the table.
/(b)/ See Note 26 to the U. S. Steel Group Financial Statements.
/(c)/ Reflects, by class of financial instrument, the estimated
incremental effect of a hypothetical 10% decrease in interest
rates at December 31, 1998, on the fair value of
non-derivative financial instruments. For financial
liabilities, this assumes a 10% decrease in the weighted
average yield to maturity of USX's long-term debt at December
31, 1998.
/(d)/ For additional information, see Note 16 to the U. S. Steel
Group Financial Statements.
/(e)/ Fair value was based on market prices where available, or
current borrowing rates for financings with similar terms and
maturities. For additional information, see Note 11 to the U.
S. Steel Group Financial Statements.
/(f)/ See Note 25 to the USX Consolidated Financial Statements.
At December 31, 1998, USX's portfolio of long-term debt was
comprised primarily of fixed-rate instruments. Therefore, the fair
value of the portfolio is relatively sensitive to effects of
interest rate fluctuations. This sensitivity is illustrated by the
$13 million increase in the fair value of long-term debt assuming a
hypothetical 10% decrease in interest rates. However, USX's
sensitivity to interest rate declines and corresponding increases
in the fair value of its debt portfolio would unfavorably affect
USX's results and cash flows only to the extent that USX elected to
repurchase or otherwise retire all or a portion of its fixed-rate
debt portfolio at prices above carrying value.
S-39
<PAGE>
Quantitative and Qualitative Disclosures
About Market Risk CONTINUED
Foreign Currency Exchange Rate Risk
At December 31, 1998, the U. S. Steel Group had no material
exposure to foreign currency exchange rate risk.
Equity Price Risk
The U. S. Steel Group is subject to equity price risk resulting
from USX's issuance in December 1996 of $117 million of 6-3/4%
Exchangeable Notes Due February 1, 2000 ("Indexed Debt"). At
maturity, USX must exchange the notes for shares of RTI
International Metals, Inc. (formerly RMI Titanium Company) ("RTI")
common stock, or redeem the notes for the equivalent amount of
cash. Each quarter, USX adjusts the carrying value of Indexed Debt
to settlement value, based on changes in the value of RTI common
stock. Any resulting adjustment is charged or credited to income
and included in interest and other financial costs. During 1998,
USX recorded a favorable adjustment of $44 million. At year-end
1998, a hypothetical 10% increase in the value of RTI common stock
would have resulted in a $7 million unfavorable effect on pretax
income. USX holds a 26% interest in RTI which is accounted for
under the equity method. At December 31, 1998, USX's investment in
RTI common stock had a fair market value of $77 million and USX's
carrying value of the Indexed Debt was $69 million. The unfavorable
effects on income described above would generally be offset by
changes in the market value of USX's investment in RTI. However,
under the equity method of accounting, USX cannot recognize in
income these changes in the market value until the investment is
liquidated. The entire effect of adjustments to the carrying value
of Indexed Debt is reflected in 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 of and demand for steel products and certain raw materials.
To the extent that these assumptions prove to be inaccurate, future
outcomes with respect to U. S. Steel Group's hedging programs may
differ materially from those discussed in the forward-looking
statements.
S-40
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors of USX required by this item is
incorporated by reference to the material appearing under the heading "Election
of Directors" in USX's Proxy Statement dated March 8, 1999, for the 1999 Annual
Meeting of Stockholders.
The executive officers of USX or its subsidiaries and their ages as of
February 1, 1999, are as follows:
<TABLE>
<CAPTION>
USX - Corporate
<S> <C> <C>
Albert E. Ferrara, Jr.... 50 Vice President-Strategic Planning
Edward F. Guna........... 50 Vice President & Treasurer
Robert M. Hernandez...... 54 Vice Chairman & Chief Financial Officer
Kenneth L. Matheny....... 51 Vice President & Comptroller
Dan D. Sandman........... 50 General Counsel, Secretary and Senior Vice President-Human Resources
& Public Affairs
Terrence D. Straub....... 53 Vice President-Governmental Affairs
Thomas J. Usher.......... 56 Chairman of the Board of Directors & Chief Executive Officer
Charles D. Williams...... 63 Vice President-Investor Relations
USX - Marathon Group
Ronald G. Becker......... 45 Vice President-Natural Gas & Crude Oil Sales - Marathon Oil Company
Victor G. Beghini........ 64 Vice Chairman-Marathon Group and President-Marathon Oil Company
Carl P. Giardini......... 63 Executive Vice President-Exploration & Production-Marathon Oil Company
Ron S. Keisler........... 52 Senior Vice President-Worldwide Exploration-Marathon Oil Company
William F. Madison....... 56 Senior Vice President-Worldwide Production-Marathon Oil Company
John T. Mills............ 51 Senior Vice President-Finance & Administration-Marathon Oil Company
John V. Parziale......... 58 Senior Vice President-Planning & Technical Resources-Marathon Oil Company
William F. Schwind, Jr... 54 General Counsel & Secretary-Marathon Oil Company
USX - U. S. Steel Group
Charles G. Carson, III... 56 Vice President-Environmental Affairs
John J. Connelly......... 52 Vice President-International Business
Roy G. Dorrance.......... 53 Executive Vice President-Sheet Products
Charles C. Gedeon........ 58 Executive Vice President-Raw Materials & Diversified Businesses
Gretchen R. Haggerty..... 43 Vice President-Accounting & Finance
Bruce A. Haines.......... 54 Vice President-Technology & Management Services
J. Paul Kadlic........... 57 Vice President-Sales
Stephan K. Todd.......... 53 General Counsel
Thomas W. Sterling, III.. 51 Vice President-Employee Relations
Paul J. Wilhelm.......... 56 President-U. S. Steel Group
</TABLE>
All of the executive officers have held responsible management or
professional positions with USX or its subsidiaries for more than the past five
years.
52
<PAGE>
Item 11. MANAGEMENT REMUNERATION
Information required by this item is incorporated by reference to the
material appearing under the heading "Executive Compensation and Other
Information" in USX's Proxy Statement dated March 8, 1999, for the 1999 Annual
Meeting of Stockholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the
material appearing under the headings, "Security Ownership of Certain Beneficial
Owners" and "Security Ownership of Directors and Executive Officers" in USX's
Proxy Statement dated March 8, 1999, for the 1999 Annual Meeting of
Stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the
material appearing under the heading "Transactions" in USX's Proxy Statement
dated March 8, 1999, for the 1999 Annual Meeting of Stockholders.
53
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. Documents Filed as Part of the Report
1. Financial Statements
Financial Statements filed as part of this report are listed on the
Index to Financial Statements, Supplementary Data, Management's
Discussion and Analysis, and Quantitative and Qualitative Disclosures
About Market Risk of USX Consolidated, the Marathon Group and the U.
S. Steel Group, immediately preceding pages U-1, M-1 and S-1,
respectively.
2. Financial Statement Schedules and Supplementary Data
Financial Statement Schedules are omitted because they are not
applicable or the required information is contained in the
applicable financial statements or notes thereto.
Supplementary Data -
Summarized Financial Information of Marathon Oil Company is
provided on page 60.
Disclosures About Forward-Looking Statements are provided
beginning on page 61.
B. Reports on Form 8-K
Form 8-K dated November 5, 1998, reporting under Item 5. Other
Events, the announcement of third quarter 1998 earnings and filing
the related press releases.
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, an 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.
C. Exhibits
Exhibit No.
2. Plan of Acquisition, Reorganization, Arrangement
Liquidation or Succession
Stock Purchase and Sale Agreement.......Incorporated by reference to
Exhibit 2 to the USX
Form 8-K dated
October 22, 1997.
54
<PAGE>
3. Articles of Incorporation and By-Laws
(a) 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.
(b) 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.
(c) Amendment to USX By-Laws adopted by
the Board of Directors on
February 23, 1999.........................
4. Instruments Defining the Rights of Security
Holders, Including Indentures
(a) Credit Agreement dated as of
August 18, 1994, as amended by an Amended
and Restated Credit Agreement dated
August 7, 1996.............................Incorporated by reference
to Exhibit 4(a) to USX
Reports on Form 10-Q for
the quarters ended
September 30, 1994, and
June 30, 1996.
(b) Amended and Restated Rights Agreement......Incorporated by reference
to Form 8 Amendment to
Form 8-A filed on
October 5, 1992.
(c) Pursuant to 17 CFR 229.601(b)(4)(iii),
instruments with respect to long-term debt
issues have been omitted where the amount
of securities authorized under such
instruments does not exceed 10% of the
total consolidated assets of USX. USX
hereby agrees to furnish a copy of any
such instrument to the Commission upon
its request.
10. Material Contracts
(a) USX 1986 Stock Option Incentive Plan, As
Amended May 28, 1991.......................Incorporated by reference
to Exhibit 10(b) to the USX
Form 10-K for the year
ended December 31, 1991.
(b) USX 1990 Stock Plan, As
Amended April 28, 1998.....................Incorporated by reference
to Annex II to the USX
Proxy Statement dated March
9, 1998.
(c) USX Annual Incentive Compensation
Plan, As Amended March 26, 1991............Incorporated by reference
to Exhibit 10(d) to the USX
Form 10-K for the year
ended December 31, 1991.
55
<PAGE>
(d) USX Senior Executive Officer Annual
Incentive Compensation Plan, As Amended
April 28, 1998.............................Incorporated by reference
to Annex I to the USX Proxy
Statement dated March 9,
1998.
(e) Marathon Oil Company Annual Incentive
Compensation Plan..........................Incorporated by reference
to Exhibit 10(e) to the USX
Form 10-K for the year
ended December 31, 1992.
(f) USX Executive Management
Supplemental Pension Program, As Amended
October 27, 1998...........................
(g) USX Supplemental Thrift Program, As Amended
November 1, 1994...........................Incorporated by reference
to Exhibit 10(h) to the USX
Form 10-K for the year
ended December 31, 1994.
(h) Limited Liability Company Agreement
of Marathon Ashland Petroleum LLC
dated January 1, 1998......................Incorporated by reference
to Exhibit 10.1 of USX Form
8-K dated January 1, 1998.
(i) Put/Call, Registration Rights and Standstill
Agreement of Marathon Ashland Petroleum LLC
dated January 1, 1998......................Incorporated by reference
to Exhibit 10.2 of USX Form
8-K dated January 1, 1998.
(j) Form of agreements Between the Corporation
and Various Officers.......................Incorporated by reference
to Exhibit 10(h) to the USX
Form 10-K for the year
ended December 31, 1995.
(k) USX Deferred Compensation Plan
For Non-Employee Directors
effective January 1, 1997..................Incorporated by reference
to Exhibit 10 (K) to the
USX Form 10-K for the years
ended December 31, 1996.
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
21. List of Significant Subsidiaries
23. Consent of Independent Accountants
27. Financial Data Schedule
56
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacity indicated on March 8, 1999.
USX CORPORATION
By /s/ Kenneth L. Matheny
------------------------------
Kenneth L. Matheny
Vice President & Comptroller
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
Chairman of the Board of Directors,
/s/ Thomas J. Usher Chief Executive Officer and Director
- -----------------------------
Thomas J. Usher
Vice Chairman & Chief Financial Officer
/s/ Robert M. Hernandez and Director
- -----------------------------
Robert M. Hernandez
/s/ Kenneth L. Matheny Vice President & Comptroller
- -----------------------------
Kenneth L. Matheny
/s/ Neil A. Armstrong Director
- -----------------------------
Neil A. Armstrong
/s/ Victor G. Beghini Director
- -----------------------------
Victor G. Beghini
/s/ Jeanette G. Brown Director
- -----------------------------
Jeanette G. Brown
/s/ Charles A. Corry Director
- -----------------------------
Charles A. Corry
/s/ Charles R. Lee Director
- -----------------------------
Charles R. Lee
/s/ Paul E. Lego Director
- -----------------------------
Paul E. Lego
Director
- -----------------------------
Ray Marshall
/s/ John F. McGillicuddy Director
- -----------------------------
John F. McGillicuddy
/s/ John M. Richman Director
- -----------------------------
John M. Richman
/s/ Seth E. Schofield Director
- -----------------------------
Seth E. Schofield
/s/ John W. Snow Director
- -----------------------------
John W. Snow
/s/ Paul J. Wilhelm Director
- -----------------------------
Paul J. Wilhelm
/s/ Douglas C. Yearley Director
- -----------------------------
Douglas C. Yearley
</TABLE>
57
<PAGE>
Glossary of Certain Defined Terms
The following definitions apply to terms used in this document:
Arnold...................Ewing Bank Block 963
bcf......................billion cubic feet
BOE......................barrels of oil equivalent
bpd......................barrels per day
CAA......................Clean Air Act, as amended by the 1990 Amendments
Carnegie.................Carnegie Natural Gas Company
CERCLA...................Comprehensive Environmental Response, Compensation, and
Liability Act
CIPCO....................Carnegie Interstate Pipeline Company
Clairton Partnership.....Clairton 1314B Partnership, L.P.
CLAM.....................CLAM Petroleum B.V.
CWA......................Clean Water Act
DD&A.....................depreciation, depletion and amortization
Delhi Companies..........Delhi Gas Pipeline Company and other subsidiaries of
USX that comprised all of the Delhi Group
Delhi Stock..............USX-Delhi Group Common Stock
DESCO....................Double Eagle Steel Coating Company
DOE......................Department of Energy
DOJ......................U.S. Department of Justice
downstream...............refining, marketing and transportation operations
exploratory..............wildcat and delineation, i.e., exploratory wells
IMV......................Inventory Market Valuation
Indexed Debt.............6-3/4% Exchangeable Notes Due February 1, 2000
Kobe.....................Kobe Steel Ltd.
LNG......................liquefied natural gas
MACT.....................Maximum Achievable Control Technology
MAP......................Marathon Ashland Petroleum LLC
Marathon.................Marathon Oil Company
Marathon Power...........Marathon Power Company, Ltd.
Marathon Stock...........USX-Marathon Group Common Stock
mcf......................thousand cubic feet
MCL......................Marathon Canada Limited
Minntac..................U.S. Steel's iron ore operations at Mt. Iron, Minn.
MIPS.....................8-3/4% Cumulative Monthly Income Preferred Stock
mmcfd....................million cubic feet per day
NOV......................Notice of Violation
Oyster...................Ewing Bank Block 917
P-A......................Piltun-Astokhskoye
PaDER....................Pennsylvania Department of Environmental Resources
Petronius................Viosca Knoll Block 786
POSCO....................Pohang Iron & Steel Co., Ltd.
PRO-TEC..................PRO-TEC Coating Company, a USX and Kobe
joint venture.
PRP......................potentially responsible party
RCRA.....................Resource Conservation and Recovery Act
RFI......................RCRA Facility Investigation
RI/FS....................Remedial Investigation and Feasibility Study
RM&T.....................refining, marketing and transportation
RTI......................RTI International Metals, Inc. (formerly RMI Titanium
Company)
SAGE.....................Scottish Area Gas Evacuation
Sakhalin Energy..........Sakhalin Energy Investment Company Ltd.
SG&A.....................selling, general and administrative
SSA......................Speedway SuperAmerica LLC
Steel Stock..............USX-U. S. Steel Group Common Stock
Tarragon.................Tarragon Oil and Gas Limited
Trust Preferred
Securities.............6.75% Convertible Quarterly Income
Preferred Securities of USX
Capital Trust I
upstream.................exploration and production operations
USS-POSCO................USS-POSCO Industries, USX and Pohang Iron & Steel
Co., Ltd., joint venture.
USS/Kobe.................USX and Kobe Steel Ltd. joint venture.
USTs.....................underground storage tanks
VSZ U. S. Steel s. r.o...U.S. Steel and VSZ a.s. joint venture in Kosice,
Slovakia
58
<PAGE>
Supplementary Data
Summarized Financial Information of Marathon Oil Company
Included below is the summarized financial information of Marathon Oil
Company, a wholly owned subsidiary of USX Corporation.
<TABLE>
<CAPTION>
(In millions)
----------------------------
Year Ended December 31
----------------------------
1998(b) 1997 1996
---------- ------- -------
<S> <C> <C> <C>
Income Data:
Revenues(a)................................... $22,048 $15,715 $16,350
Income from operations........................ 964 961 1,320
Total income before extraordinary loss........ 281 430 618
Net income.................................... 281 430 608
</TABLE>
<TABLE>
<CAPTION>
December 31
--------------------
1998(b) 1997
------- -------
<S> <C> <C>
Balance Sheet Data:
Assets:
Current assets............................... $ 4,742 $ 3,436
Noncurrent assets............................ 11,420 8,413
------- -------
Total assets................................ $16,162 $11,849
======= =======
Liabilities and stockholder's equity:
Current liabilities.......................... $ 2,543 $ 1,997
Noncurrent liabilities....................... 9,428 7,569
Preferred stock of subsidiary................ 17 -
Minority interest in Marathon Ashland........
Petroleum LLC............................... 1,590 -
Stockholder's equity......................... 2,584 2,283
------- -------
Total liabilities and stockholder's equity.. $16,162 $11,849
======= =======
</TABLE>
(a) Consists of sales, dividend and affiliate income, gain on ownership change
in MAP, net gains on disposal of assets and other income.
(b) Amounts in 1998 include 100% of MAP and are not comparable to prior
periods.
59
<PAGE>
Supplementary Data
Disclosures About Forward-Looking Statements
USX includes forward-looking statements concerning trends, market forces,
commitments, material events or other contingencies potentially affecting USX or
the businesses of its Marathon Group or U. S. Steel Group in reports filed with
the Securities and Exchange Commission, external documents or oral
presentations. In order to take advantage of "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, USX is filing the following
cautionary language identifying important factors (though not necessarily all
such factors) that could cause actual outcomes to differ materially from
information set forth in forward-looking statements made by, or on behalf of,
USX, its representatives and its individual Groups.
Cautionary Language Concerning Forward-Looking Statements
USX
Forward-looking statements with respect to USX may include, but are not
limited to, comments about general business strategies, financing decisions or
corporate structure. The following discussion is intended to identify important
factors (though not necessarily all such factors) that could cause future
outcomes to differ materially from those set forth in forward-looking
statements.
Liquidity Factors
USX's ability to finance its future business requirements through
internally generated funds, proceeds from the sale of stock, borrowings and
other external financing sources is affected by the performance of each of its
Groups (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 and actions, the
overall U.S. financial climate, and, in particular, with respect to borrowings,
by USX's outstanding debt and credit ratings by investor services. To the extent
that USX Management's assumptions concerning these factors prove to be
inaccurate, USX's liquidity position could be materially adversely affected.
Other Factors
Holders of USX-Marathon Group Common Stock or USX-U. S. Steel Group Common
Stock are holders of common stock of USX and are subject to all the risks
associated with an investment in USX and all of its businesses and liabilities.
Financial impacts, arising from either of the groups, which affect the overall
cost of USX's capital could affect the results of operations and financial
condition of all groups.
For further discussion of certain of the factors described herein, see Item
1. Business, Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters, Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations and Item 7A. Quantitative and Qualitative
Information About Market Risk.
USX-Marathon Group
Forward-looking statements with respect to the Marathon Group may include,
but are not limited to, levels of revenues, gross margins, income from
operations, net income or earnings per share; levels of capital, exploration,
environmental or maintenance expenditures; the success or timing of completion
of ongoing or anticipated capital, exploration or maintenance projects; volumes
of production, sales, throughput or shipments of liquid hydrocarbons, natural
gas and refined products; levels of worldwide prices of liquid hydrocarbons,
natural gas and refined products; levels of reserves, proved or otherwise, of
liquid hydrocarbons or natural gas; the acquisition or divestiture of assets;
the effect of restructuring or reorganization of business components; the
potential effect of judicial proceedings on the business and financial
condition; and the anticipated effects of actions of third parties such as
competitors, or federal, state or local regulatory authorities.
60
<PAGE>
Forward-looking statements typically contain words such as "anticipates",
"believes", "estimates", "expects", "forecasts", "predicts" or "projects" or
variations of these words, suggesting that future outcomes are uncertain. The
following discussion is intended to identify important factors (though not
necessarily all such factors) that could cause future outcomes to differ
materially from those set forth in forward-looking statements with respect to
the Marathon Group.
The oil and gas industry is characterized by a large number of companies,
none of which is dominant within the industry, but a number of which have
greater resources than Marathon. Marathon must compete with these companies for
the rights to explore for oil and gas. Marathon's expectations as to revenues,
margins and income are based upon assumptions as to future prices and volumes of
liquid hydrocarbons, natural gas and refined products. Prices have historically
been volatile and have frequently been driven by unpredictable changes in supply
and demand resulting from fluctuations in economic activity and political
developments in the world's major oil and gas producing areas, including OPEC
member countries. Any substantial decline in such prices could have a material
adverse effect on Marathon's results of operations. A decline in such prices
could also adversely affect the quantity of liquid hydrocarbons and natural gas
that can be economically produced and the amount of capital available for
exploration and development.
The Marathon Group uses commodity-based derivative instruments such as
exchange-traded futures contracts and options and over-the-counter commodity
swaps and options to manage exposure to market price risk. The Marathon Group's
strategic approach is to limit the use of these instruments principally to
hedging activities. Accordingly, gains and losses on futures contracts and swaps
generally offset the effects of price changes in the underlying commodity. While
commodity-based derivative instruments are generally used to reduce risks from
unfavorable commodity price movements, they also may limit the opportunity to
benefit from favorable movements. Levels of hedging activity vary among oil
industry competitors and could affect the Marathon Group's competitive position
with respect to those competitors.
Factors Affecting Exploration and Production Operations
Projected production levels for liquid hydrocarbons and natural gas are
based on a number of assumptions, including (among others) prices, supply and
demand, regulatory constraints, reserve estimates, production decline rates for
mature fields, reserve replacement rates, drilling rig availability and
geological and operating considerations. These assumptions may prove to be
inaccurate. Exploration and production operations are subject to various
hazards, including explosions, fires and uncontrollable flows of oil and gas.
Offshore production and marine operations in areas such as the Gulf of Mexico,
the North Sea, Gabon and the Russian Far East Region are also subject to severe
weather conditions such as hurricanes or violent storms or other hazards.
Development of new production properties in countries outside the United States
may require protracted negotiations with host governments and are frequently
subject to political considerations, such as tax regulations, which could
adversely affect the economics of projects.
Factors Affecting Refining, Marketing and Transportation Operations
Marathon conducts domestic refining, marketing and transportation
operations primarily through its consolidated subsidiary, Marathon Ashland
Petroleum LLC ("MAP"). MAP's operations are conducted mainly in the Midwest,
Southeast, Ohio River Valley and the upper Great Plains. The profitability of
these operations depends largely on the margin between the cost of crude oil and
other feedstocks refined and the selling prices of refined products. MAP is a
purchaser of crude oil in order to satisfy its refinery throughput requirements.
As a result, its overall profitability could be adversely affected by rising
crude oil and other feedstock prices which are not recovered in the marketplace.
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 refined products. Gross margins on merchandise sold at
retail outlets tend to moderate the volatility experienced in the retail sale of
gasoline and diesel fuel. Environmental regulations, particularly the 1990
Amendments to the Clean Air Act, have imposed (and are expected to continue to
impose) increasingly stringent and costly requirements on refining and marketing
operations which may have an adverse effect on margins. Refining, marketing and
transportation operations are subject to business interruptions due to
unforeseen events such as explosions, fires,
61
<PAGE>
crude oil or refined product spills, inclement weather, or labor disputes. They
are also subject to the additional hazards of marine operations, such as
capsizing, collision and damage or loss from severe weather conditions.
Technology Factors
Longer-term projections of corporate strategy, including the viability,
timing or expenditures required for capital projects, can be affected by changes
in technology, especially innovations in processes used in the exploration,
production or refining of hydrocarbons. While specific future changes are
difficult to project, recent innovations affecting the oil industry include the
development of three-dimensional seismic imaging and deep-water and horizontal
drilling capabilities.
Other Factors
Holders of USX-Marathon Group Common Stock are holders of common stock of
USX and are subject to all the risks associated with an investment in USX and
all of its businesses and liabilities. Financial impacts, arising from either of
the groups, which affect the overall cost of USX's capital could affect the
results of operations and financial condition of both groups.
For further discussion of certain of the factors described herein, and
their potential effects on the businesses of the Marathon Group, see Item 1.
Business, Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.
USX-U. S. Steel Group
Forward-looking statements with respect to the U. S. Steel Group may
include, but are not limited to, projections of levels of revenues, income from
operations or income from operations per ton, net income or earnings per share;
levels of capital, environmental or maintenance expenditures; the success or
timing of completion of ongoing or anticipated capital or maintenance projects;
levels of raw steel production capability, prices, production, shipments, or
labor and raw material costs; the acquisition, idling, shutdown or divestiture
of assets or businesses; the effect of restructuring or reorganization of
business components; the effect of potential judicial proceedings on the
business and financial condition; and the effects of actions of third parties
such as competitors, or federal, state or local regulatory authorities.
Forward-looking statements typically contain words such as "anticipates",
"believes", "estimates", "expects", "forecasts", "predicts" or "projects", or
variations of these words, suggesting that future outcomes are uncertain. The
following discussion is intended to identify important factors (though not
necessarily all such factors) that could cause future outcomes to differ
materially from those set forth in forward-looking statements with respect to
the U. S. Steel Group.
Market Factors
The U. S. Steel Group's expectations as to levels of production and
revenues, gross margins, income from operations and income from operations per
ton are based upon assumptions as to future product prices and mix, and levels
of raw steel production capability, production and shipments. These assumptions
may prove to be inaccurate.
The steel industry is characterized by excess world supply which has
restricted the ability of U. S. Steel and the industry to raise prices during
periods of economic growth and resist price decreases during economic
contraction. Over the next several years, construction of additional flat-rolled
steel production facilities could result in increased domestic capacity of up to
three million tons over 1998 levels.
Several of the additional facilities are minimills which are less expensive
to build than integrated facilities, and are typically staffed by non-unionized
work forces with lower base labor costs and more flexible work
62
<PAGE>
rules. Through the use of thin slab casting technology, minimill competitors are
increasingly able to compete directly with integrated producers of higher value-
added products. Such competition could adversely affect the U. S. Steel Group's
future product prices and shipment levels.
The domestic steel industry has, in the past, been adversely affected by
unfairly traded imports. Steel imports to the United States accounted for an
estimated 30%, 24% and 23% of the domestic steel market in the first eleven
months of 1998, and for the years 1997 and 1996, respectively. Foreign
competitors typically have lower labor costs, and are often owned, controlled or
subsidized by their governments, allowing their production and pricing decisions
to be influenced by political and economic policy considerations as well as
prevailing market conditions. Increases in levels of imported steel could
adversely affect future market prices and demand levels for domestic steel.
The U. S. Steel Group also competes in many markets with producers of
substitutes for steel products, including aluminum, cement, composites, glass,
plastics and wood. The emergence of additional substitutes for steel products
could adversely affect future prices and demand for steel products.
The businesses of the U. S. Steel Group are aligned with cyclical
industries such as the automotive, appliance, containers, construction and
energy industries. As a result, future downturns in the U.S. economy could
adversely affect the profitability of the U. S. Steel Group.
Operating and Cost Factors
The operations of the U. S. Steel Group are subject to planned and
unplanned outages due to maintenance, equipment malfunctions or work stoppages;
and various hazards, including explosions, fires and severe weather conditions,
which could disrupt operations or the availability of raw materials, resulting
in reduced production volumes and increased production costs.
Labor costs for the U. S. Steel Group are affected by collective bargaining
agreements. U. S. Steel entered into a five and one-half year contract with the
United Steel Workers of America, effective February 1, 1994, covering
approximately 15,000 employees. The contract provided for reopener negotiations
of specific payroll items. These negotiations were resolved by following the
settlements reached by other major integrated producers (including the timing of
a final lump-sum bonus payment in July 1999), with revised contract terms
becoming effective as of February 1, 1997. This agreement expires on August 1,
1999. To the extent that increased costs associated with any renegotiated issues
are not recoverable through the sales prices of products, future income from
operations would be adversely affected. Any labor interruptions resulting from
the expiration of this agreement would have an adverse effect on operations,
financial results and cash flow.
Income from operations for the U. S. Steel Group includes periodic pension
credits (which are primarily noncash) which are not allocated to the operating
segment and pension costs which are included in segment income for U. S. Steel
operations. The resulting net pension credits totaled $186 million, $144 million
and $158 million in 1998, 1997 and 1996, respectively. 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 that these credits decline
in the future, income from operations would be adversely affected.
The U. S. Steel Group provides health care and life insurance benefits to
most employees upon retirement. Most of these benefits have not been prefunded.
The accrued liability for such benefits as of December 31, 1998, was $2,133
million. To the extent that competitors do not provide similar benefits, or have
been relieved of obligations to provide such benefits following bankruptcy
reorganization, the competitive position of the U. S. Steel Group may be
adversely affected, depending on future costs of health care.
63
<PAGE>
Legal and Environmental Factors
The profitability of the U. S. Steel Group's operations could be affected
by a number of contingencies, including legal actions. The ultimate resolution
of these contingencies could, individually or in the aggregate, be material to
the U. S. Steel Group financial statements.
The businesses of the U. S. Steel Group are subject to numerous
environmental laws. Certain current and former U. S. Steel Group operating
facilities, have been in operation for many years, and could require significant
future accruals and expenditures to meet existing and future requirements under
these laws. 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.
Other Factors
Holders of USX-U. S. Steel Group Common Stock are holders of common stock
of USX and are subject to all the risks associated with an investment in USX and
all of its businesses and liabilities. Financial impacts, arising from either of
the groups, which affect the overall cost of USX's capital could affect the
results of operations and financial condition of both groups.
For further discussion of certain of the factors described herein, and
their potential effects on the businesses of the U.S. Steel Group, see Item 1.
Business, Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.
64
<PAGE>
Exhibit 3(c)
USX CORPORATION
AMENDMENT TO USX BY-LAWS ADOPTED BY THE
BOARD OF DIRECTORS ON FEBRUARY 23, 1999
---------------------------------------
ARTICLE I. Stockholders
Section 3. Nomination of Directors.
Only persons who are nominated in accordance with the following procedures
shall be eligible for election to the Board of Directors. Nominations for
election to the Board of Directors of the Corporation at a meeting of
stockholders may be made by the Board of Directors or by any stockholder of
record of the Corporation entitled to vote generally for the election of
directors at such meeting who complies with the notice procedures set forth in
this Section 3. Such nominations, other than those made by or on behalf of the
Board of Directors, shall be made by notice in writing delivered or mailed by
first class United States mail, postage prepaid, to the Secretary, and received
not less than 45 days nor more than 75 days prior to the first anniversary of
the date on which the Corporation first mailed its proxy materials for the
preceding year's annual meeting of stockholders; provided, however, that if the
date of the annual meeting is advanced more than 30 days prior to or delayed by
more than 30 days after the anniversary of the preceding year's annual meeting,
notice by the stockholder to be timely must be so delivered not later than the
close of business on the later of (i) the 90th day prior to such annual meeting
or (ii) the 10th day following the day on which public announcement of the date
of such meeting is first made. Such notice shall set forth (a) as to each
proposed nominee (i) the name, age, business address and, if known, residence
address of each such nominee, (ii) the principal occupation or employment of
each such nominee, (iii) the number of shares of each class of the capital stock
of the Corporation which are beneficially owned by each such nominee, and (iv)
any other information concerning the nominee that must be disclosed as to
nominees in proxy solicitations pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (including such person's written consent to be
named as a nominee and to serve as a director if elected); and (b) as to the
stockholder giving the notice (i) the name and address, as they appear on the
Corporation's books, of such stockholder and (ii) the number of shares of each
class of the capital stock of the Corporation which are beneficially owned by
such stockholder. The Corporation may require any proposed nominee to furnish
such other information as may reasonably be required by the Corporation to
determine the eligibility of such proposed nominee to serve as a director of the
Corporation.
The Chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
Section 4. Notice of Business at Annual Meetings
At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be (a) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board of Directors, (b) otherwise properly brought before the meeting by or
at the direction of the Board of Directors, or (c) otherwise properly brought
before the meeting by a stockholder of record. For business to be properly
brought before an annual meeting by a stockholder of record, if such business
relates to the election of directors of the Corporation, the procedures in
Article I, Section 3 must be complied with. If such business relates to any
other matter, the stockholder must have given timely notice thereof in writing
to the Secretary. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than 45 days nor more than 75 days prior to the first anniversary of the
date on which the Corporation first mailed its proxy materials for the preceding
year's annual meeting of stockholders; provided, however, that if the date of
the annual meeting is advanced more than 30 days prior to or delayed by more
than 30 days after the anniversary of the preceding year's annual meeting,
notice by the stockholder to be timely must be so delivered not later than the
<PAGE>
Exhibit 3(c) (Contd.)
close of business on the later of (i) the 90th day prior to such annual meeting
or (ii) the 10th day following the day on which public announcement of the date
of such meeting is first made. A stockholder's notice to the Secretary shall
set forth as to each matter the stockholder proposes to bring before the annual
meeting (a) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (b) the name and address, as they appear on the Corporation's books, of
the stockholder proposing such business, (c) the number of shares of each class
of the capital stock of the Corporation which are beneficially owned by the
stockholder, and (d) any material interest of the stockholder in such business.
Notwithstanding anything in the By-Laws to the contrary, no business shall be
conducted at any annual meeting except in accordance with the procedures set
forth in this Section 4 and in Section 3 of this Article I, except that any
stockholder proposal which complies with Rule 14a-8 of the proxy rules (or any
successor provision) promulgated under the Securities Exchange Act of 1934, as
amended, and is to be included in the Corporation's proxy statement for an
annual meeting of stockholders shall be deemed to comply with the requirements
of this Section 4.
<PAGE>
Exhibit 10(f)
USX CORPORATION
EXECUTIVE MANAGEMENT
SUPPLEMENTAL PENSION PROGRAM, AS AMENDED OCTOBER 27, 1998
---------------------------------------------------------
The term "Member" as used herein means an employee of USX Corporation
(hereinafter "the Corporation") or a Subsidiary Company who is (a) a member of
the Executive Management Group as established from time to time by the USX Board
of Directors or (b) a key manager designated by name as a "Member" under this
Program by the Compensation Committee of the USX Board of Directors.
The terms "continuous service", "allowed service", "surviving spouse" and
"Subsidiary Company" as used herein mean Continuous Service, Allowed Service,
and surviving spouse as determined under, and Subsidiary Company as defined in,
the United States Steel 1994 Salaried Pension Rules adopted under the United
States Steel Corporation Plan for Non-Union Employee Pension Benefits
(hereinafter "the Plan"); provided, however, that the term "continuous service"
for the purpose of determining the amount of the supplemental pension and
supplemental surviving spouse benefit under this Program shall exclude the
Member's continuous service that (1) is creditable under a pension plan adopted
by the Corporation or a Subsidiary Company, if the pension plan includes bonus
payments as creditable earnings for pension purposes, or (2) occurs following
the date an employee ceases to be a member of the Executive Management Group or
ceases to be designated as a Member under this Program by the USX Compensation
Committee. Any benefits payable with respect to a former Member shall be based
on bonuses received before such employee ceases to be a Member and shall be
calculated in accordance with the provisions of the Plan in effect as of the
date such employee ceases to be a Member. Notwithstanding the above, no
benefits payable with respect to a key manager designated for coverage under
this Program shall be based on any bonuses paid to such key manager prior to the
date of his designation.
Any member who retires or otherwise terminates employment under conditions
of eligibility for a pension, other than a deferred vested pension, pursuant to
the provisions of the Plan, excluding any Member who retires without the consent
of the Corporation prior to age 60 pursuant to the 30-year sole option
provisions, will be eligible to receive the supplemental pension provided under
this Program. In no event shall the supplemental pension be less than the
Member's accrued benefit under this Program.
The surviving spouse of any Member who has accrued at least 15 years of
continuous service and who dies (i) prior to retirement, (ii) after retirement
under conditions of eligibility for an immediate pension pursuant to the
provisions of the Plan, excluding any Member who retires without the consent of
the Corporation prior to age 60 pursuant to the 30-year sole option provisions,
will be eligible to receive the supplemental surviving spouse benefit provided
under this Program.
Average Earnings as used herein shall be equal to the total bonuses paid or
credited to the Member pursuant to the USX Corporation Annual Incentive
Compensation Plan (or such other payments or deferrals as shall have been
designated as creditable under the Program by the Compensation Committee of the
Board of Directors of the Corporation) with respect to the three calendar years
for which total bonus payments or deferrals (or such other payments) were the
highest out of the last ten consecutive calendar years immediately prior to the
calendar year in which retirement or death occurs (or, if earlier, the date the
Member ceased to accrue continuous service for the purpose of determining the
amount of benefits under this Program) divided by thirty-six. Bonus payments or
deferrals (or such other payments) will be considered as having been made for
the calendar year in which the applicable services were performed rather than
for the calendar year in which the bonus payment was actually received.
The Average Earnings used in the determination of benefits under this
Program as of retirement will be recalculated using any bonus payable for the
calendar year in which retirements occurs if such bonus produces Average
Earnings greater than that determined at retirement.
<PAGE>
Exhibit 10(f) (Contd.)
The Supplemental Pension provided under this Program shall be determined by
multiplying Average Earnings by a percentage which shall be equal to the sum of
1.54% for each year of continuous service and each year of allowed service.
The Supplemental Surviving Spouse Benefit provided under this Program shall
be equal to 50% of the Supplemental Pension (i) that would have been payable to
the Member had the Member retired as of the date of death in the case of death
prior to retirement, or (ii) that was being paid to the Member in the case of
death after retirement. Payments shall be payable monthly for the life of the
surviving spouse and shall commence with the month following the month in which
the Member's death occurs.
Except as a Member elects, prior to the earlier of retirement or death, to
have both the benefits payable to him and the benefits payable to his surviving
spouse paid on a monthly basis or to have the benefits payable to him (but not
the benefits payable to his surviving spouse) paid on a monthly basis, he shall
receive a lump sum distribution of both the monthly pension and monthly
surviving spouse benefits payable. The lump sum distribution shall be equal to
the present value of the amounts payable to the Member and the Member's spouse
based on the joint life expectancy of said individuals, using tables adopted by
the Corporation, or the life expectancy of the Member's spouse in the event of
the employee's death prior to retirement or in the event that the Member has
elected to receive his monthly benefits in the form of an annuity but has not
made the same election on behalf of his spouse with respect to surviving spouse
benefits, and the interest rate established under the Pension Benefit Guaranty
Corporation regulations to determine the present value of immediate annuities in
the event of plan termination. Any lump sum distribution shall be payable
within 60 days following retirement, or death, and shall represent full and
final settlement of all benefits provided hereunder.
Effective November 1, 1998, notwithstanding anything to the contrary
contained herein, no benefits will be payable under this program to any Member
who retires under a voluntary early retirement program authorized by the Board
of Directors on October 27, 1998.
Benefits provided by this Program shall be paid out of general assets of
the Member's Employing Company.
The Vice President-Administration of the United States Steel and Carnegie
Pension Fund is responsible for administration of this Program.
The Corporation may at any time, and from time-to-time, by action of its
Board of Directors, modify or amend, in whole or in part, or terminate any or
all of the provisions of this Program.
<PAGE>
Exhibit 12.1
USX Corporation
Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
TOTAL ENTERPRISE BASIS -- Unaudited
Continuing Operations
(Dollars in Millions)
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C>
Portion of rentals representing interest...... $ 105 $ 82 $ 78 $ 76 $ 83
Capitalized interest.......................... 46 31 11 13 58
Other interest and fixed charges.............. 328 312 382 452 456
Pretax earnings which would be required to
cover preferred stock dividend requirements
of parent.................................... 15 20 36 46 49
------ ------ ------ ----- ------
Combined fixed charges and preferred stock
dividends (A)................................ $ 494 $ 445 $ 507 $ 587 $ 646
====== ====== ====== ===== ======
Earnings -- pretax income with
applicable adjustments (B)................... $1,662 $1,745 $1,837 $ 877 $1,300
====== ====== ====== ===== ======
Ratio of (B) to (A)........................... 3.36 3.92 3.62 1.49 2.01
====== ====== ====== ===== ======
- -------------------
</TABLE>
<PAGE>
Exhibit 12.2
Computation of Ratio of Earnings to Fixed Charges
TOTAL ENTERPRISE BASIS -- Unaudited
Continuing Operations
(Dollars in Millions)
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C>
Portion of rentals representing interest.. $ 105 $ 82 $ 78 $ 76 $ 83
Capitalized interest...................... 46 31 11 13 58
Other interest and fixed charges.......... 328 312 382 452 456
------ ------ ------ ----- ------
Total fixed charges (A)................... $ 479 $ 425 $ 471 $ 541 $ 597
====== ====== ====== ===== ======
Earnings -- pretax income with
applicable adjustments (B)............... $1,662 $1,745 $1,837 $ 877 $1,300
====== ====== ====== ===== ======
Ratio of (B) to (A)....................... 3.47 4.11 3.90 1.62 2.18
====== ====== ====== ===== ======
</TABLE>
<PAGE>
Exhibit 21. List of Significant Subsidiaries
The following subsidiaries were 100 percent owned and were consolidated by the
Corporation at December 31, 1998:
State or other jurisdiction
Name of subsidiary in which incorporated
--------------------------------------- ---------------------------
Carnegie Interstate Pipeline Company Delaware
Carnegie Natural Gas Company Pennsylvania
Carnegie Production Company Pennsylvania
Marathon Canada Limited Canada
Marathon Guaranty Corporation Delaware
Marathon International Oil Company Delaware
Marathon International Petroleum Ireland Limited Cayman Islands
Marathon Oil Company Ohio
Marathon Oil U.K., Ltd. Delaware
Marathon Petroleum Ashrafi, Ltd. Delaware
Marathon Petroleum Company (Norway) Delaware
Marathon Petroleum Egypt, Ltd. Delaware
Marathon Petroleum Investment, Ltd. Delaware
Marathon Sakhalin Limited Cayman Islands
U. S. Steel Mining Company, LLC Delaware
United States Steel International, Inc. New Jersey
USX Capital LLC Turks & Caicos Islands
USX Capital Trust I Delaware
USX Engineers and Consultants, Inc. Delaware
USX Portfolio Delaware, Inc. Delaware
The following subsidiary was 62 percent owned and was consolidated by the
Corporation at December 31, 1998:
Marathon Ashland Petroleum LLC Delaware
<PAGE>
Exhibit 21. (Contd.)
The following companies or joint ventures were not consolidated at December
31, 1998:
<TABLE>
<CAPTION>
Company Country % Ownership Activity
------- ------- ----------- --------
<S> <C> <C> <C>
Clairton 1314B Partnership, L.P. United States 10% Coke & Coke By-Products
CLAM Petroleum B.V. Netherlands 50% Oil & Gas Production
Double Eagle Steel Coating Company United States 50% Steel Processing
Kenai LNG Corporation United States 30% Natural Gas Liquification
LOCAP, Inc. United States 50% (a) Pipeline & Storage Facilities
LOOP LLC United States 47% (a) Offshore Oil Port
Minnesota Pipe Line Company United States 33% (a) Pipeline Facility
Nautilus Pipeline Company, LLC United States 24% Natural Gas Transmission
Odyssey Pipeline LLC United States 29% Pipeline Facility
Poseidon Oil Pipeline Company LLC United States 28% Crude Oil Transportation
PRO-TEC Coating Company United States 50% Steel Processing
RTI International Metals, Inc. (b) United States 26% Titanium & Specialty Metals
Sakhalin Energy Investment Company Ltd. Russia 38% Oil & Gas Development
Transtar, Inc. United States 46% Transportation
USS/Kobe Steel Company United States 50% Steel Products
USS-POSCO Industries United States 50% Steel Processing
VSZ U. S. Steel, s. r.o. Slovakia 50% Tin Mill Products
Worthington Specialty Processing United States 50% Steel Processing
</TABLE>
(a) Represents MAP's total ownership interest.
(b) Formerly RMI Titanium Company
The names of other subsidiaries, both consolidated and unconsolidated, have
been omitted as these unnamed subsidiaries, considered in the aggregate as a
single subsidiary, do not constitute a significant subsidiary.
<PAGE>
Exhibit 23.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the prospectuses
constituting part of the Registration Statements listed below of our reports
dated February 9, 1999, relating to the Consolidated Financial Statements of USX
Corporation, the Financial Statements of the Marathon Group and the Financial
Statements of the U. S. Steel Group, appearing on pages U-1, M-1 and S-1
respectively, of this Form 10-K:
On Form S-3: Relating to:
File No. 33-34703 Marathon Group Dividend Reinvestment Plan
33-43719 U. S. Steel Group Dividend Reinvestment Plan
33-57997 Marathon Group Dividend Reinvestment Plan
33-60172 U. S. Steel Group Dividend Reinvestment Plan
333-56867 USX Corporation Debt Securities, Preferred
Stock and Common Stock
On Form S-8: Relating to:
File No. 33-6248 1986 Stock Option Plan
33-41864 1990 Stock Plan
33-54333 Parity Investment Bonus
33-60667 Parity Investment Bonus
33-56828 Marathon Oil Company Thrift Plan
33-52917 Savings Fund Plan
333-00429 Savings Fund Plan
333-29699 1990 Stock Plan
333-29709 Marathon Oil Company Thrift Plan
333-52751 1990 Stock Plan
PRICEWATERHOUSECOOPERS LLP
600 Grant Street
Pittsburgh, PA 15219-2794
March 8, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 146
<SECURITIES> 0
<RECEIVABLES> 1,675
<ALLOWANCES> 12
<INVENTORY> 2,008
<CURRENT-ASSETS> 4,206
<PP&E> 29,167
<DEPRECIATION> 16,238
<TOTAL-ASSETS> 21,133
<CURRENT-LIABILITIES> 3,619
<BONDS> 3,920
432
3
<COMMON> 397<F1>
<OTHER-SE> 6,005
<TOTAL-LIABILITY-AND-EQUITY> 21,133
<SALES> 27,887
<TOTAL-REVENUES> 28,335
<CGS> 20,712
<TOTAL-COSTS> 26,818
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 279
<INCOME-PRETAX> 989
<INCOME-TAX> 315
<INCOME-CONTINUING> 674
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 674
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F3>
<FN>
<F1>Consists of Marathon Stock issued, $308; Steel Stock issued, $88; Securities
Exchangeable solely into Marathon Stock, $1.
<F2>Basic earnings (loss) per share applicable to Marathon Stock, $1.06; Steel
Stock, $4.05.
<F3>Diluted earnings (loss) per share applicable to marathon Stock, $1.05; Steel
Stock, $3.92.
</FN>
</TABLE>
