-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Koy9mk4s3gZwXG6Ycs5BcJljIqCfVBmbFFkaEIHLi15e4UQjTjMyj3VGeAhj8vwg qzZppEshvyf7vIKmkC1paQ== 0000101778-98-000013.txt : 19981109 0000101778-98-000013.hdr.sgml : 19981109 ACCESSION NUMBER: 0000101778-98-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: USX CORP CENTRAL INDEX KEY: 0000101778 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 250996816 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05153 FILM NUMBER: 98738970 BUSINESS ADDRESS: STREET 1: 600 GRANT ST CITY: PITTSBURGH STATE: PA ZIP: 15219-4776 BUSINESS PHONE: 4124331121 FORMER COMPANY: FORMER CONFORMED NAME: UNITED STATES STEEL CORP/DE DATE OF NAME CHANGE: 19860714 10-Q 1 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ------------ to ------------ USX CORPORATION - -------------------------------------------------------------------------------- ---- (Exact name of registrant as specified in its charter) Delaware 1-5153 25-0996816 --------------- ------------ ------------------- (State or other (Commission (IRS Employer jurisdiction of File Number) Identification No.) incorporation) 600 Grant Street, Pittsburgh, PA 15219-4776 - --------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (412) 433-1121 ------------------------------ (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes..X..No..... Common stock outstanding at October 31, 1998 follows: USX-Marathon Group - 291,453,594 shares USX-U. S. Steel Group - 88,336,441 shares 2 USX CORPORATION SEC FORM 10-Q QUARTER ENDED September 30, 1998 --------------------------- INDEX Page ----- ---- PART I - FINANCIAL INFORMATION A. Consolidated Corporation Item 1. Financial Statements: Consolidated Statement of Operations 4 Consolidated Balance Sheet 6 Consolidated Statement of Cash Flows 8 Selected Notes to Consolidated Financial Statements 9 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends and Ratio of Earnings to Fixed Charges 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 3. Quantitative and Qualitative Disclosures about Market Risk 27 Financial Statistics 29 B. Marathon Group Item 1. Financial Statements: Marathon Group Statement of Operations 30 Marathon Group Balance Sheet 31 Marathon Group Statement of Cash Flows 32 Selected Notes to Financial Statements 33 Item 2. Marathon Group Management's Discussion and Analysis of Financial Condition and Results of Operations 38 Item 3. Quantitative and Qualitative Disclosures about Market Risk 51 Supplemental Statistics 53 3 USX CORPORATION SEC FORM 10-Q QUARTER ENDED September 30, 1998 --------------------------- INDEX Page ----- ---- PART I - FINANCIAL INFORMATION (Continued) C. U. S. Steel Group Item 1. Financial Statements: U. S. Steel Group Statement of Operations 55 U. S. Steel Group Balance Sheet 56 U. S. Steel Group Statement of Cash Flows 57 Selected Notes to Financial Statements 58 Item 2. U. S. Steel Group Management's Discussion and Analysis of Financial Condition and Results of Operations 62 Item 3. Quantitative and Qualitative Disclosures about Market Risk 73 Supplemental Statistics 75 PART II - OTHER INFORMATION Item 1. Legal Proceedings 76 Item 2 Changes in Securities and the Use of Proceeds 76 Item 5. Other Information 77 Item 6. Exhibits and Reports on Form 8-K 78 4 Part I - Financial Information A. Consolidated Corporation USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) ------------------------------------------------
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 1998 1997 1998 1997 - -------------------------------------------------------------------------------- REVENUES: Sales $7,127 $5,603 $21,228 $16,725 Dividend and affiliate income 12 18 83 61 Gain on disposal of assets 14 31 58 57 Gain on ownership change in Marathon Ashland Petroleum LLC (1) - 245 - Other income 4 5 21 11 ------ ------ ------ ------- Total revenues 7,156 5,657 21,635 16,854 ------ ------ ------ ------- COSTS AND EXPENSES: Cost of sales (excludes items shown below) 5,297 3,934 15,765 11,952 Selling, general and administrative expenses 81 66 233 163 Depreciation, depletion and amortization 293 235 921 722 Taxes other than income taxes 1,069 851 2,937 2,392 Exploration expenses 46 55 203 129 Inventory market valuation charges (credits) 50 (41) 22 137 ------ ------ ------ ------- Total costs and expenses 6,836 5,100 20,081 15,495 ------ ------ ------ ------- INCOME FROM OPERATIONS 320 557 1,554 1,359 Net interest and other financial costs 73 86 226 272 Minority interest in income of Marathon Ashland Petroleum LLC 70 - 282 - ------ ------ ------ ------ INCOME BEFORE INCOME TAXES 177 471 1,046 1,087 Provision for estimated income taxes 61 163 362 369 ------ ------ ------ ------ INCOME FROM CONTINUING OPERATIONS 116 308 684 718 LOSS FROM DISCONTINUED OPERATIONS (net of income tax) - (1) - (1) ------ ------ ------ ------ NET INCOME 116 307 684 717 Noncash credit from exchange of preferred stock - - - 10 Dividends on preferred stock (2) (2) (7) (10) ------ ------ ------ ------ NET INCOME APPLICABLE TO COMMON STOCKS $114 $305 $677 $717 ====== ====== ====== ====== Selected notes to financial statements appear on pages 9-16.
5 USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF OPERATIONS (Continued) (Unaudited) INCOME PER COMMON SHARE ------------------------------------------------------------
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions, except per share amounts) 1998 1997 1998 1997 - -------------------------------------------------------------------------------- APPLICABLE TO MARATHON STOCK: Net income $51 $192 $396 $418 - Per share - basic .18 .67 1.37 1.45 - diluted .17 .66 1.36 1.44 Dividends paid per share .21 .19 .63 .57 Weighted average shares, in thousands - Basic 291,320 288,095 289,928 287,853 - Diluted 291,803 291,857 290,528 294,090 APPLICABLE TO STEEL STOCK: Net income $63 $114 $281 $300 - Per share - basic .72 1.32 3.22 3.50 - diluted .71 1.25 3.11 3.24 Dividends paid per share .25 .25 .75 .75 Weighted average shares, in thousands - Basic 88,099 85,770 87,223 85,463 - Diluted 92,359 93,952 94,717 94,176 Selected notes to financial statements appear on pages 9-16.
6 USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET (Unaudited) ----------------------------------------
ASSETS September 30 December 31 (Dollars in millions) 1998 1997 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $488 $54 Receivables, less allowance for doubtful accounts of $11 and $15 1,947 1,417 Inventories 2,400 1,685 Deferred income tax benefits 230 229 Other current assets 111 87 ------ ------ Total current assets 5,176 3,472 Investments and long-term receivables, less reserves of $12 and $15 1,266 1,028 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $15,988 and $15,466 12,712 10,062 Prepaid pensions 2,429 2,247 Other noncurrent assets 265 280 Cash restricted for redemption of Delhi Stock - 195 ------ ------ Total assets $21,848 $17,284 ====== ====== Selected notes to financial statements appear on pages 9-16.
7 USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET (Continued) (Unaudited) --------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY September 30 December 31 (Dollars in millions) 1998 1997 - -------------------------------------------------------------------------------- LIABILITIES Current liabilities: Notes payable $259 $121 Accounts payable 2,840 2,011 Payroll and benefits payable 477 521 Accrued taxes 285 304 Accrued interest 56 95 Long-term debt due within one year 72 471 ------ ------ Total current liabilities 3,989 3,523 Long-term debt, less unamortized discount 4,556 2,932 Long-term deferred income taxes 1,586 1,353 Employee benefits 2,892 2,713 Deferred credits and other liabilities 685 736 Preferred stock of subsidiary 250 250 USX obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely junior subordinated convertible debentures of USX 182 182 Minority interest in Marathon Ashland Petroleum LLC 1,726 - Redeemable Delhi Stock - 195 STOCKHOLDERS' EQUITY Preferred stock - 6.50% Cumulative Convertible issued - 2,780,687 shares and 2,962,037 shares ($148 liquidation preference) 3 3 Common stocks: Marathon Stock issued - 291,344,009 shares and 288,786,343 shares 291 289 Steel Stock issued - 88,336,441 shares and 86,577,799 shares 88 86 Securities exchangeable solely into Marathon Stock issued - 589,049 shares 1 - Additional paid-in capital 4,076 3,924 Retained earnings 1,566 1,138 Deferred compensation adjustments - (3) Accumulated other comprehensive income (loss) (43) (37) ------ ------ Total stockholders' equity 5,982 5,400 ------ ------ Total liabilities and stockholders' equity $21,848 $17,284 ====== ====== Selected notes to financial statements appear on pages 9-16.
8 USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) ------------------------------------------------
Nine Months Ended September 30 (Dollars in millions) 1998 1997 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income $684 $717 Adjustments to reconcile to net cash provided from operating activities: Minority interest in income of Marathon Ashland Petroleum LLC - net of distributions 71 - Depreciation, depletion and amortization 921 740 Exploratory dry well costs 111 57 Inventory market valuation charges 22 137 Pensions (181) (196) Postretirement benefits other than pensions 13 11 Deferred income taxes 249 107 Gain on disposal of assets (58) (58) Gain on ownership change in Marathon Ashland Petroleum LLC (245) - Changes in: Current receivables 133 116 Inventories (148) (121) Current accounts payable and accrued expenses (141) (50) All other - net (67) (105) ------ ------ Net cash provided from operating activities 1,364 1,355 ------ ------ INVESTING ACTIVITIES: Capital expenditures (1,063) (887) Acquisition of Tarragon Oil and Gas Limited (686) - Disposal of assets 61 430 Investments in equity affiliates - net (118) (217) Withdrawals of restricted cash - net 159 97 All other - net - 9 ------ ------ Net cash used in investing activities (1,647) (568) ------ ------ FINANCING ACTIVITIES: Commercial paper and revolving credit arrangements - net 1,439 6 Other debt - borrowings 827 - - repayments (1,230) (588) Common stock - issued 139 47 - repurchased (195) - Preferred stock repurchased (8) - Dividends paid (256) (238) ------ ------ Net cash provided from (used in) financing activities 716 (773) ------ ------ EFFECT OF EXCHANGE RATE CHANGES ON CASH 1 (2) ------ ------ NET INCREASE IN CASH AND CASH EQUIVALENTS 434 12 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 54 55 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $488 $67 ====== ====== Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $(288) $(340) Income taxes paid (181) (275) Selected notes to financial statements appear on pages 9-16.
9 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (Unaudited) 1. The information furnished in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. Additional information is contained in the USX Annual Report on Form 10-K for the year ended December 31, 1997. 2. Effective January 1, 1998, USX adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130). This statement establishes standards for reporting and display of comprehensive income and its components in the financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events from nonowner sources. It includes all changes in equity during a period except those resulting from investments by and distributions to owners. Total comprehensive income for the third quarter and nine months of 1998 was $113 million and $678 million, respectively. Total comprehensive income for the same 1997 periods was $307 million and $717 million, respectively. Effective January 1, 1997, USX adopted American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" (SOP 96-1), which provides additional interpretation of existing accounting standards related to recognition, measurement and disclosure of environmental remediation liabilities. As a result of adopting SOP 96-1, USX identified additional environmental remediation liabilities of $46 million, of which $28 million was discounted to a present value of $13 million and $18 million was not discounted. Assumptions used in the calculation of the present value amount included an inflation factor of 2% and an interest rate of 7% over a range of 22 to 30 years. Estimated receivables for recoverable costs related to adoption of SOP 96-1 were $4 million. The net unfavorable effect of adoption on income from operations at January 1, 1997, was $27 million. 3. Effective October 31, 1997, USX sold its stock in Delhi Gas Pipeline Corporation and other subsidiaries of USX that comprised all of the Delhi Group. The net proceeds of the sale of $195 million were used to redeem all shares of USX-Delhi Group Common Stock (Delhi Stock) and were distributed to the holders thereof on January 26, 1998. 10 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 4. Inventories are carried at lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method.
(In millions) ------------------------ September 30 December 31 1998 1997 ------------ ----------- Raw materials $926 $582 Semi-finished products 312 331 Finished products 1,303 922 Supplies and sundry items 165 134 ------ ------ Total (at cost) 2,706 1,969 Less inventory market valuation reserve 306 284 ------ ------ Net inventory carrying value $2,400 $1,685 ====== ======
The inventory market valuation reserve reflects the extent that the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. The reserve is decreased to reflect increases in market prices and inventory turnover and increased to reflect decreases in market prices. Changes in the inventory market valuation reserve result in noncash charges or credits to costs and expenses. For additional information, see discussion of results of operations in the Marathon Group's Management's Discussion and Analysis of Financial Condition and Results of Operations. 5. The method of calculating net income per share for the Marathon Stock, Steel Stock and, prior to November 1, 1997, the Delhi Stock reflects the USX Board of Directors' intent that the separately reported earnings and surplus of the Marathon Group, the U. S. Steel Group and the Delhi Group, as determined consistent with the USX Certificate of Incorporation, are available for payment of dividends on the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. The financial statements of the Marathon Group, the U. S. Steel Group and the Delhi Group, taken together, include all accounts which comprise the corresponding consolidated financial statements of USX. Basic net income per share is calculated by adjusting net income for dividend requirements of preferred stock and, in 1997, the noncash credit on exchange of preferred stock and is based on the weighted average number of common shares outstanding. Diluted net income per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options, provided in each case, the effect is not antidilutive. 11 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 5. (Continued)
COMPUTATION OF INCOME PER COMMON SHARE Third Quarter Ended September 30 1998 1997 Basic Diluted Basic Diluted - -------------------------------------------------------------------------------- CONTINUING OPERATIONS Marathon Group Net income (millions): Net income $51 $51 $192 $192 Effect of dilutive securities - Convertible Debentures - - - 1 ------ ------ ------ ------ Net income assuming conversions $51 $51 $192 $193 ====== ====== ====== ====== Shares of common stock outstanding (thousands): Average number of common shares outstanding 291,320 291,320 288,095 288,095 Effect of dilutive securities: Convertible debentures - - - 3,154 Stock options - 483 - 608 ------ ------ ------ ------ Average common shares and dilutive effect 291,320 291,803 288,095 291,857 ====== ====== ====== ====== Net income per share $.18 $.17 $.67 $.66 ====== ====== ====== ====== U. S. Steel Group Net income (millions): Net income $65 $65 $116 $116 Dividends on preferred stock (2) (2) (2) - ------ ------ ------ ------ Net income applicable to Steel Stock 63 63 114 116 Effect of dilutive convertible securities - 2 - 2 ------ ------ ------ ------ Net income assuming conversions $63 $65 $114 $118 ====== ====== ====== ====== Shares of common stock outstanding (thousands): Average number of common shares outstanding 88,099 88,099 85,770 85,770 Effect of dilutive securities: Trust preferred securities - 4,256 - 4,256 Preferred stock - - - 3,216 Convertible debentures - - - 631 Stock options - 4 - 79 ------ ------ ------ ------ Average common shares and dilutive effect 88,099 92,359 85,770 93,952 ====== ====== ====== ====== Net income per share $.72 $.71 $1.32 $1.25 ====== ====== ====== ======
12
USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 5. (Continued) COMPUTATION OF INCOME PER COMMON SHARE Nine Months Ended September 30 1998 1997 Basic Diluted Basic Diluted - -------------------------------------------------------------------------------- CONTINUING OPERATIONS Marathon Group Net income (millions): Net income $396 $396 $418 $418 Effect of dilutive securities - Convertible debentures - - - 6 ------ ------ ------ ------ Net income assuming conversions $396 $396 $418 $424 ====== ====== ====== ====== Shares of common stock outstanding (thousands): Average number of common shares outstanding 289,928 289,928 287,853 287,853 Effect of dilutive securities: Convertible debentures - - - 5,752 Stock options - 600 - 485 ------ ------ ------ ------ Average common shares and dilutive effect 289,928 290,528 287,853 294,090 ====== ====== ====== ====== Net income per share $1.37 $1.36 $1.45 $1.44 ====== ====== ====== ====== U. S. Steel Group Net income (millions): Net income $288 $288 $300 $300 Dividends on preferred stock (7) - (10) - Noncash credit from exchange of preferred stock - - 10 - ------ ------ ------ ------ Net income applicable to Steel Stock 281 288 300 300 Effect of dilutive convertible securities - 7 - 5 ------ ------ ------ ------ Net income assuming conversions $281 $295 $300 $305 ====== ====== ====== ====== Shares of common stock outstanding (thousands): Average number of common shares outstanding 87,223 87,223 85,463 85,463 Effect of dilutive securities: Trust preferred securities - 4,256 - 2,128 Preferred stock - 3,190 - 5,345 Convertible debentures - - - 1,200 Stock options - 48 - 40 ------ ------ ------ ------ Average common shares and dilutive effect 87,223 94,717 85,463 94,176 ====== ====== ====== ====== Net income per share $3.22 $3.11 $3.50 $3.24 ====== ====== ====== ======
13 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 6. In August 1998, Marathon Oil Company (Marathon) acquired Tarragon Oil and Gas Limited (Tarragon), a Canadian oil and gas exploration and production company. Securityholders of Tarragon received, at their election, Cdn$14.25 for each Tarragon share, or the economic equivalent in Exchangeable Shares of an indirect Canadian subsidiary of Marathon, which are exchangeable solely on a one-for-one basis into Marathon Stock. The purchase price included cash payments of $686 million, issuance of approximately 878,000 Exchangeable Shares valued at $29 million and the assumption of $345 million in debt. USX accounted for the acquisition using the purchase method of accounting. Third quarter 1998 results of operations include the operations of Marathon Canada Limited, formerly known as Tarragon, commencing August 12, 1998. During 1997, Marathon and Ashland Inc. (Ashland) agreed to combine the major elements of their refining, marketing and transportation (RM&T) operations. On January 1, 1998, Marathon transferred certain RM&T net assets to Marathon Ashland Petroleum LLC (MAP), a new consolidated subsidiary. Also on January 1, 1998, Marathon acquired certain RM&T net assets from Ashland in exchange for a 38% interest in MAP. The acquisition was accounted for under the purchase method of accounting. The purchase price was determined to be $1.9 billion, based upon an external valuation. The change in Marathon's ownership interest in MAP resulted in a gain of $245 million, which is included in the first nine months of 1998 revenues. The following unaudited pro forma data for USX includes the results of operations of Tarragon for 1998 and 1997, and the Ashland RM&T net assets for 1997, giving effect to the acquisitions as if they had been consummated at the beginning of the years presented. The pro forma data is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations.
(In millions, except per share amounts) Third Quarter Nine Months Ended Ended September 30 September 30 1998(a) 1997(a) 1998(a) 1997(a) ------- ------- ------- ------- Revenues $7,173 $7,517 $21,729 $22,617 Net income (b) 107 298 653 709 Net income per common share of Marathon Stock: Basic .14 .63 1.26 1.42 Diluted .14 .63 1.25 1.41 (a) Pro forma data is based on USX and Tarragon results of operations for the quarters and nine months ended September 30, 1998 and 1997, and USX and Ashland RM&T results of operations for the quarter and nine months ended September 30, 1997. (b) Excluding the pro forma inventory market valuation reserve adjustment, pro forma net income would have been $661 million and $786 million for the 1998 and 1997 nine months, respectively ($126 million and $274 million in the third quarter of 1998 and 1997, respectively.) Reported 1998 and 1997 net income for the nine months, excluding the reported inventory market valuation reserve adjustment, was $692 million and $803 million, respectively ($135 million and $281 million in the third quarter of 1998 and 1997, respectively).
14 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 7. The items below are included in both revenues and costs and expenses, resulting in no effect on income.
(In millions) ------------------------------- Third Quarter Nine Months Ended Ended September 30 September 30 1998 1997 1998 1997 ---- ---- ---- ---- Matching crude oil and refined product buy/sell transactions settled in cash $1,012 $539 $2,994 $1,845 Consumer excise taxes on petroleum products and merchandise 963 738 2,614 2,057
8. Income from operations includes net periodic pension credits of $151 million and $117 million in the first nine months of 1998 and 1997, respectively ($53 million and $41 million in the third quarter of 1998 and 1997, respectively.) These pension credits are primarily noncash and for the most part are included in selling, general and administrative expenses. 9. The provision for estimated income taxes for the periods reported is based on tax rates and amounts which recognize management's best estimate of current and deferred tax assets and liabilities. The nine months 1998 provision for estimated income taxes was decreased by a $9 million foreign tax adjustment as a result of a favorable resolution of foreign tax litigation. 10. At September 30, 1998, USX had $1,300 million in borrowings against its $2,350 million long-term revolving credit agreement. Effective as of July 31, 1998, MAP entered into two revolving credit agreements totaling $500 million. There were no borrowings against these agreements at September 30, 1998. USX has a short-term credit agreement totaling $125 million at September 30, 1998. Interest is based on the bank's prime rate or London Interbank Offered Rate (LIBOR), and carries a facility fee of .15%. Certain other banks provide short-term lines of credit totaling $200 million which require a .125% fee or maintenance of compensating balances of 3%. At September 30, 1998, there were $50 million in borrowings against these facilities. In the event of a change in control of USX, debt obligations totaling $4,176 million at September 30, 1998, may be declared immediately due and payable. 11. In the third quarter of 1998, USX borrowed $1.3 billion under its revolving credit agreement. These borrowings were primarily related to the funding of the Tarragon acquisition. In the first quarter of 1998, USX issued $400 million in aggregate principal amount of 6.85% Notes due 2008. 15 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 12. USX has an agreement (the program) to sell an undivided interest in certain accounts receivable of the U. S. Steel Group. Payments are collected from the sold accounts receivable; the collections are reinvested in new accounts receivable for the buyers; and a yield, based on defined short-term market rates, is transferred to the buyers. At September 30, 1998, the amount sold under the program that had not been collected was $350 million, which will be forwarded to the buyers at the end of the agreement, or in the event of earlier contract termination. If USX does not have a sufficient quantity of eligible accounts receivable to reinvest in for the buyers, the size of the program will be reduced accordingly. The buyers have rights to a pool of receivables that must be maintained at a level of at least 115% of the program's size. In the event of a change in control of USX, as defined in the agreement, USX may be required to forward payments collected on sold accounts receivable to the buyers. 13. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the consolidated financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. USX is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At September 30, 1998, and December 31, 1997, accrued liabilities for remediation totaled $149 million and $158 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in cleanup efforts related to underground storage tanks at retail marketing outlets, were $40 million at September 30, 1998, and $42 million at December 31, 1997. For a number of years, USX has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the first nine months of 1998 and for the years 1997 and 1996, such capital expenditures totaled $111 million, $134 million and $165 million, respectively. USX anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. At September 30, 1998, and December 31, 1997, accrued liabilities for platform abandonment and dismantlement totaled $140 million and $128 million, respectively. 16 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 13. (Continued) Guarantees by USX of the liabilities of affiliated entities totaled $191 million at September 30, 1998. In the event that any defaults of guaranteed liabilities occur, USX has access to its interest in the assets of most of the affiliates to reduce losses resulting from these guarantees. As of September 30, 1998, the largest guarantee for a single affiliate was $119 million. At September 30, 1998, USX's pro rata share of obligations of LOOP LLC and various pipeline affiliates secured by throughput and deficiency agreements totaled $164 million. Under the agreements, USX is required to advance funds if the affiliates are unable to service debt. Any such advances are prepayments of future transportation charges. Contract commitments to acquire property, plant and equipment and long-term investments at September 30, 1998, totaled $917 million compared with $533 million at December 31, 1997. 14. On November 4, 1998, USX sold 17 million shares of Marathon Stock. Closing of the transaction is expected to be made on Tuesday, November 10, 1998. Net proceeds to USX are expected to be approximately $528 million, which will be used to reduce indebtedness incurred to fund the Tarragon acquisition. The net proceeds will be reflected in their entirety in the Marathon Group financial statements. 17 USX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS TOTAL ENTERPRISE BASIS - (Unaudited) Continuing Operations ----------------------------------------------------------
Nine Months Ended September 30 Year Ended December 31 - --------------------- ------------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- 3.81 4.13 3.92 3.62 1.49 2.01 (a) ==== ==== ==== ==== ==== ==== ==== (a) Earnings did not cover combined fixed charges and preferred stock dividends by $356 million for 1993.
USX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES TOTAL ENTERPRISE BASIS - (Unaudited) Continuing Operations -------------------------------------------------
Nine Months Ended September 30 Year Ended December 31 - --------------------- ------------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- 3.94 4.34 4.11 3.90 1.62 2.18 (a) ==== ==== ==== ==== ==== ==== ==== (a) Earnings did not cover fixed charges by $312 million for 1993.
18 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- USX Corporation ("USX") is a diversified company engaged primarily in the energy business through its Marathon Group and in the steel business through its U. S. Steel Group. The following discussion should be read in conjunction with the third quarter and first nine months of 1998 USX Consolidated Financial Statements and selected notes. For net income per common share amounts applicable to USX's two classes of common stock, USX-Marathon Group Common Stock ("Marathon Stock") and USX-U. S. Steel Group Common Stock ("Steel Stock"), see Consolidated Statement of Operations - Income per Common Share. For group results, see Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group and the U. S. Steel Group. For operating statistics, see Supplemental Statistics following Management's Discussion and Analysis of Financial Condition and Results of Operations for the respective groups. During 1997, Marathon Oil Company ("Marathon") and Ashland Inc.("Ashland") agreed to combine the major elements of their refining, marketing and transportation ("RM&T") operations. On January 1, 1998, Marathon transferred certain RM&T net assets to Marathon Ashland Petroleum LLC ("MAP"), a new consolidated subsidiary. Also, on January 1, 1998, Marathon acquired certain RM&T net assets from Ashland in exchange for a 38 percent interest in MAP. Financial measures such as revenues, income from operations and capital expenditures in 1998 include 100 percent of MAP and are not comparable to prior period amounts. Net income and related per share amounts for 1998 are net of the minority interest. For further discussion of MAP and pro forma information, see Note 6 to the USX Consolidated Financial Statements and Marathon Group Supplemental Statistics on pages 53 and 54. On August 11, 1998, Marathon acquired Tarragon Oil and Gas Limited ("Tarragon"), a Canadian oil and gas exploration and production company. The purchase price included $686 million in cash payments, the assumption of $345 million in debt and the issuance of Exchangeable Shares of an indirect Canadian subsidiary of Marathon valued at $29 million. The Exchangeable Shares are exchangeable at any time on a one-for-one basis for shares of Marathon Stock. The Tarragon acquisition was initially funded with borrowings against USX's long-term revolving credit agreement. On November 4, 1998, USX sold 17 million shares of Marathon Stock. Net proceeds to USX are expected to be approximately $528 million, which will be used to reduce indebtedness incurred to fund the Tarragon acquisition. Third quarter results include operations of Marathon Canada Limited, formerly known as Tarragon, commencing August 12, 1998. For further discussion of Tarragon and pro forma information, see Note 6 to the USX Consolidated Financial Statements and Marathon Group Supplemental Statistics on pages 53 and 54. Certain sections of Management's Discussion and Analysis include forward- looking statements concerning trends or events potentially affecting USX. These statements typically contain words such as "anticipates", "believes", "estimates", "expects" or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in the forward-looking statements. For additional risk factors affecting the businesses of USX, see Supplementary Data - Disclosures About Forward-Looking Statements in the USX 1997 Form 10-K. 19 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Results of Operations - --------------------- Revenues for the third quarter and first nine months of 1998 and 1997 are set forth in the following table:
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 1998 1997 1998 1997 ------ ------ ------ ------ Revenues (a) Marathon Group $5,662 $3,944 $16,722 $11,834 U. S. Steel Group 1,497 1,735 4,926 5,103 Eliminations (3) (22) (13) (83) ------ ------ ------- ------- Total USX Corporation revenues $7,156 $5,657 $21,635 $16,854 Less: Excise taxes (b)(c) 963 738 2,614 2,057 Matching buy/sell transactions (b)(d) 1,012 539 2,994 1,845 ------ ------ ------ ------ Revenues excluding above items $5,181 $4,380 $16,027 $12,952 ====== ====== ====== ====== - ------ (a) Amounts for the third quarter and first nine months of 1997 were reclassified to conform to 1998 classifications. (b) Included in both revenues and costs and expenses for the Marathon Group and USX Consolidated. (c) Consumer excise taxes on petroleum products and merchandise. (d) Matching crude oil and refined products buy/sell transactions settled in cash.
Revenues (excluding excise taxes and matching buy/sell transactions) increased by $801 million in the third quarter of 1998 as compared with the third quarter of 1997, primarily reflecting an increase of $1,020 million for the Marathon Group, and a decrease of $238 million for the U. S. Steel Group. Revenues (excluding excise taxes and matching buy/sell transactions) increased by $3,075 million in the first nine months of 1998 as compared with the first nine months of 1997, primarily reflecting an increase of $3,182 million for the Marathon Group, and a decrease of $177 million for the U. S. Steel Group. For discussion of revenues by group see Management's Discussion and Analysis of Financial Condition and Results of Operations for the U. S. Steel Group and Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group, which includes discussion of pro forma revenues, giving effect to the assumed acquisition of Ashland's RM&T net assets on January 1, 1997, for the third quarter and first nine months of 1997, and the assumed acquisition of Tarragon on January 1, of each year for the periods presented. 20 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Income from operations and certain items included in income from operations for the third quarter and first nine months of 1998 and 1997 are set forth in the following table:
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 1998 1997 1998 1997 ------ ------ ------ ------ Income from operations (a) $320 $557 $1,554 $1,359 Less: certain favorable (unfavorable) items for Marathon Group Inventory market valuation reserve adjustment (b) (50) 41 (22) (137) Write-off of certain international investments net of a favorable domestic contract settlement (c) - - (76) - Gain on ownership change net of one-time transition charges - MAP (d) - - 223 - U. S. Steel Group Insurance litigation settlement for Gary Works No. 8 blast furnace (net of related charges and reserves) (e) - - 30 - Insurance settlement related to the 1996 hearth breakout at Gary Works No. 13 blast furnace - 25 - 40 Effect of adoption of SOP 96-1 (f) - - - (20) Other environmental accrual adjustments - net - - - 11 ----- ----- ----- ----- Subtotal (50) 66 155 (106) ----- ----- ----- ----- Income from operations adjusted to exclude above items $370 $491 $1,399 $1,465 ===== ===== ===== ===== - ------ (a) Amounts for the third quarter and first nine months of 1997 were reclassified to conform to 1998 classifications. (b) The inventory market valuation ("IMV") reserve reflects the extent to which the recorded LIFO cost basis of crude oil and refined product inventories exceeds net realizable value. For additional discussion of the IMV reserve adjustment, see Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group. (c) This represents a write-off of certain non-revenue producing international investments and the gain from the resolution of contract disputes with a purchaser of the Marathon Group's natural gas production from certain domestic properties. (d) The gain on ownership change and one-time transition charges relate to the formation of MAP. For additional discussion of the gain on ownership change in MAP, see Note 6 to the USX Consolidated Financial Statements. (e) Settlement of litigation against USX's property insurers to recover losses related to a 1995 explosion at the Gary Works No. 8 blast furnace. (f) American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" ("SOP 96-1") provides additional guidance on recognition, measurement and disclosure of remediation liabilities.
21 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Adjusted income from operations decreased by $121 million in the third quarter of 1998 as compared with the third quarter of 1997, reflecting decreases of $67 million for the U. S. Steel Group and $54 million for the Marathon Group. Adjusted income from operations decreased by $66 million in the first nine months of 1998 as compared with the first nine months of 1997, reflecting decreases of $36 million for the U. S. Steel Group and $30 million for the Marathon Group. For discussion of adjusted income from operations by group see Management's Discussion and Analysis of Financial Condition and Results of Operations for the U. S. Steel Group and Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group, which includes discussion of pro forma adjusted income from operations, giving effect to the assumed acquisition of Ashland's RM&T net assets on January 1, 1997, for the third quarter and first nine months of 1997, and the assumed acquisition of Tarragon on January 1, of each year for the periods presented. Net interest and other financial costs for the third quarter and first nine months of 1998 and 1997 are set forth in the following table:
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 1998 1997 1998 1997 ------ ------ ------ ------ Interest and other financial income $11 $3 $33 $2 Interest and other financial costs (84) (89) (259) (274) ----- ------ ------ ------ Net interest and other financial costs (73) (86) (226) (272) Less: Adjustment to carrying value of indexed debt(a) 11 - 7 6 ----- ------ ------ ------ Net interest and other financial costs adjusted to exclude above item $(84) $(86) $(233) $(278) ===== ====== ====== ====== - ------ (a) In December 1996, USX issued $117 million in aggregate principal amount of 6-3/4% Notes Due February 1, 2000 ("indexed debt"), mandatorily exchangeable at maturity for common stock of RTI International Metals, Inc. (formerly RMI Titanium Company) ("RTI") (or for the equivalent amount of cash, at USX's option). The carrying value of indexed debt is adjusted quarterly to settlement value based on changes in the value of RTI common stock. Any resulting adjustment is charged or credited to income and included in interest and other financial costs. USX's 27 percent interest in RTI continues to be accounted for under the equity method.
Excluding the adjustment to the carrying value of indexed debt, net interest and other financial costs decreased by $2 million and $45 million in the third quarter and first nine months of 1998, respectively, as compared with the third quarter and first nine months of 1997, due primarily to increased interest income and capitalized interest on upstream projects for the Marathon Group, and lower average debt levels for the U. S. Steel Group. Provision for estimated income taxes in the first nine months of 1998 was reduced by a $9 million foreign tax adjustment as a result of a favorable resolution of foreign tax litigation for the U. S. Steel Group. 22 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Net income decreased $191 million and $33 million in the third quarter and first nine months of 1998, respectively, as compared to the third quarter and first nine months of 1997, mainly due to the items discussed above. Noncash credit from exchange of preferred stock was $10 million in the first nine months of 1997. On May 16, 1997, USX exchanged approximately 3.9 million 6.75% Convertible Quarterly Income Preferred Securities ("Trust Preferred Securities") of USX Capital Trust I, for an equivalent number of shares of its outstanding 6.50% Cumulative Convertible Preferred Stock (6.50% Preferred Stock). The $10 million noncash credit reflects the difference between the carrying value of the 6.50% Preferred Stock ($192 million) and the fair value of the Trust Preferred Securities ($182 million), at the date of the exchange. Dividends to Stockholders - ------------------------- On October 27, 1998, the USX Board of Directors (the "Board") declared dividends of 21 cents per share on Marathon Stock and 25 cents per share on Steel Stock, payable December 10, 1998, to stockholders of record at the close of business on November 18, 1998. The Board also declared a dividend of $0.8125 per share on USX's 6.50% Cumulative Convertible Preferred Stock, payable December 31, 1998, to stockholders of record at the close of business on December 1, 1998. On October 27, 1998, Marathon Oil Canada Limited, an indirect subsidiary of Marathon Oil Company, declared a dividend of CDN $0.3235 per share on its non- voting Exchangeable Shares, payable December 10, 1998, to stockholders of record at the close of business on November 18, 1998. Cash Flows - ---------- Net cash provided from operating activities totaled $1,364 million in the first nine months of 1998, compared with $1,355 million in the first nine months of 1997. The Marathon Group had an $80 million increase in net cash provided from operating activities in the first nine months of 1998 as compared to the first nine months of 1997. The increase was primarily due to an increase in net income (excluding the IMV reserve adjustment, the gain on ownership change in MAP and other noncash items), partially offset by distributions by MAP to Ashland. The U. S. Steel Group had a $60 million decrease in net cash provided from operating activities in the first nine months of 1998 as compared to the first nine months of 1997. The decrease was primarily due to unfavorable working capital changes. Cash from the disposal of assets was $61 million in the first nine months of 1998, compared with $430 million in the first nine months of 1997. The 1997 proceeds included $361 million resulting from USX's entry into a strategic partnership with two limited partners to acquire an interest in three coke batteries at the U. S. Steel Group's Clairton Works. The net withdrawals of restricted cash were $159 million in the first nine months of 1998, compared to $97 million in the first nine months of 1997. The 1998 amount primarily represents the withdrawal from restricted cash of $195 million for the redemption of all of the shares of USX-Delhi Group Common Stock in the first quarter of 1998. The $97 million withdrawal in 1997 mainly represents cash withdrawn from an interest-bearing escrow account that was established in the fourth quarter of 1996 in connection with the disposal of Marathon Group oil production properties in Alaska. 23 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Capital expenditures for property, plant and equipment in the first nine months of 1998 were $1,063 million, compared with $887 million in the first nine months of 1997. For further details, see USX Corporation - Financial Statistics on page 29, and Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group and the U. S. Steel Group. Net investments in equity affiliates was $118 million in the first nine months of 1998, compared with $217 million in the first nine months of 1997. Net investments in equity affiliates in 1998 decreased $145 million for the Marathon Group. Net investments in 1998 were reduced by $59 million as a result of repayments by Sakhalin Energy Investment Company, Ltd. of advances made by Marathon in conjunction with the Sakhalin II project in Russia. The 1997 amount included the acquisition of an additional 7.5% interest in Sakhalin II project, investments in the Nautilus natural gas and Odyssey crude oil pipeline systems in the Gulf of Mexico and the purchase of a 50 percent interest in an Ecuadorian power generation company. Net cash invested in equity affiliates for the U. S. Steel Group increased $46 million, primarily due to the funding for the entry into a joint venture in Slovakia. Contract commitments to acquire property, plant and equipment and long-term investments at September 30, 1998, totaled $917 million compared with $533 million at December 31, 1997. USX's total long-term debt, preferred stock of subsidiary, USX obligated preferred securities of a subsidiary trust and notes payable was $5.319 billion at September 30, 1998, an increase of $1.363 billion from December 31, 1997. The increase from December 31, 1997, was primarily the result of borrowings of $1.3 billion against a long-term revolving credit agreement and the issuance of $400 million of 6.85% notes due in 2008, partially offset by a net reduction of current maturities of long-term debt totaling $399 million. The borrowings against the long-term credit agreement were primarily related to the funding of the Tarragon acquisition. Debt and Preferred Stock Ratings - -------------------------------- In June 1998, Moody's Investors Services, Inc. upgraded the ratings on USX's and Marathon's senior debt to Baa2 from Baa3, on USX's subordinated debt to Baa3 from Ba2, and on USX's preferred stock to Ba1 from Ba2. Liquidity - --------- At September 30, 1998, USX had $1.3 billion of borrowings against its $2.35 billion long-term revolving credit agreement. These borrowings were primarily related to the Tarragon acquisition. Effective as of July 31, 1998, MAP entered into two revolving credit agreements totaling $500 million. There were no borrowings against these agreements at September 30, 1998. At September 30, 1998, USX had no borrowings against its $125 million short-term credit agreement and $50 million of borrowings against additional short-term lines of credit. USX filed with the Securities and Exchange Commission a shelf registration statement, which became effective July 31, 1998, which allows USX to offer and issue unsecured debt securities, common and preferred stock and warrants in an aggregate principal amount of up to $1 billion in one or more separate offerings on terms to be determined at the time of sale. Including this shelf registration statement, USX had a total of $1.543 billion available under existing shelf registration statements at July 31, 1998. 24 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- On August 12, 1998, USX filed a prospectus relating to approximately $29 million of USX-Marathon Group Common Stock ("Marathon Stock"). This stock is only to be issued in exchange for the Exchangeable Shares issued in connection with the Tarragon acquisition. On November 4, 1998, USX sold 17 million shares of Marathon Stock. Closing of the transaction is expected to be made on Tuesday, November 10, 1998. Net proceeds to USX are expected to be approximately $528 million, which will be used to reduce indebtedness incurred to fund the Tarragon acquisition. The net proceeds will be reflected in their entirety in the Marathon Group Financial Statements. As a result of the actions described in the preceding two paragraphs, as of November 4, 1998, USX has approximately $1 billion available under existing shelf registrations. USX management believes that its short-term and long-term liquidity is adequate to satisfy its obligations as of September 30, 1998, and to complete currently authorized capital spending programs. Future requirements for USX's business needs, including the funding of capital expenditures, debt maturities for the balance of 1998 and years 1999 and 2000, and any amounts that may ultimately be paid in connection with contingencies (which are discussed in Note 13 to the USX Consolidated Financial Statements), are expected to be financed by a combination of internally generated funds, proceeds from the sale of stock, borrowings or other external financing sources. USX management's opinion concerning liquidity and USX's ability to avail itself in the future of the financing options mentioned in the above forward- looking statements are based on currently available information. To the extent that this information proves to be inaccurate, future availability of financing may be adversely affected. Factors that could affect the availability of financing include the performance of each group (as measured by various factors including cash provided from operating activities), the state of worldwide debt and equity markets, investor perceptions and expectations of past and future performance, the overall U.S. financial climate, and, in particular, with respect to borrowings, by levels of USX's outstanding debt and credit ratings by rating agencies. Environmental Matters, Contingencies and Commitments - ---------------------------------------------------- USX has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of USX's products and services, operating results will be adversely affected. USX believes that domestic competitors of the U. S. Steel Group and substantially all the competitors of the Marathon Group are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and the specific products and services it provides. USX has been notified that it is a potentially responsible party ("PRP") at 43 waste sites under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of September 30, 1998. In addition, there are 25 sites where USX has received information requests or other indications that USX may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability. 25 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- There are also 119 additional sites, excluding retail marketing outlets, where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. Of these sites, 15 were associated with properties conveyed to MAP by Ashland for which Ashland has retained liability for all costs associated with remediation. At many sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. USX accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. In October 1998, the National Enforcement Investigation Center of the United States Environmental Protection Agency conducted a multi-media inspection of MAP's Detroit refinery. The inspection covered compliance with the Clean Air Act (New Source Performance Standards, Prevention of Significant Deterioration, and the National Emission Standards for Hazardous Air Pollutants for Benzene), the Clean Water Act (Permit exceedances for the Waste Water Treatment Plant), reporting obligations under the Emergency Planning and Community Right-to-Know Act and the handling of process waste. Although MAP has been informally advised as to certain compliance issues, it is not known when findings on the results of the inspection will be issued. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment (see Note 13 to the USX Consolidated Financial Statements for a discussion of certain of these matters). The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the USX Consolidated Financial Statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably. See discussion of Liquidity herein. Outlook - ------- See Outlook in Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group and the U. S. Steel Group. Year 2000 Readiness Disclosure - ------------------------------ See Year 2000 Readiness Disclosure in Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group and the U. S. Steel Group. Accounting Standards - -------------------- In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" which introduces a "management approach" for identifying reportable operating segments of an enterprise. USX will adopt the standard, effective with its 1998 annual financial statements. 26 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". USX will adopt the standard, effective with its 1998 annual financial statements. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidelines for companies to capitalize or expense costs incurred to develop or obtain internal-use software. USX will adopt SOP 98-1 effective January 1, 1999. The incremental impact on results of operations of adoption of SOP 98-1 has not been determined, although it is likely that it will be initially favorable since certain qualifying costs will be capitalized and amortized over future periods. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". This new standard requires recognition of all derivatives as either assets or liabilities at fair value. This new standard may result in additional volatility in both current period earnings and Stockholders' Equity as a result of recording recognized and unrecognized gains and losses resulting from changes in the fair value of derivative instruments. At adoption this new standard requires a comprehensive review of all outstanding derivative instruments to determine whether or not their use meets the hedge accounting criteria. It is possible that there will be derivative instruments employed in our businesses that do not meet all of the designated hedge criteria and they will be reflected in income on a mark-to-market basis. Based upon the strategies currently used by USX and the level of activity related to commodity- based derivative instruments in recent periods, USX does not anticipate the effect of adoption to have a material impact on either financial position or results of operations. USX plans to adopt the standard effective January 1, 2000, as required. 27 USX CORPORATION AND SUBSIDIARY COMPANIES QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------- Commodity Price Risk and Related Risks - -------------------------------------- Sensitivity analysis of the incremental effects on pretax income of hypothetical 10% and 25% changes in commodity prices for open derivative commodity instruments as of September 30, 1998 are provided in the following table: (a)
Incremental Decrease in Pretax Income Assuming a Hypothetical Price Change of(a) (Dollars in millions) 10% 25% - -------------------------------------------------------------------------------- Derivative Commodity Instruments Marathon Group (b) (c) Crude oil (price increase) (d) $10.0 $26.2 Natural gas (price decrease) (d) 2.8 1.2 Refined products (price increase) (d) 4.7 15.6 U. S. Steel Group Natural gas (price decrease) (d) $3.5 $8.8 Zinc (price decrease) (d) .8 2.1 Heating oil (price decrease) (d) .2 .4 Nickel (price decrease) (d) .1 .2 Tin (price decrease) (d) .1 .2 (a) Gains and losses on derivative commodity instruments are generally offset by price changes in the underlying commodity. Effects of these offsets are not reflected in the sensitivity analyses. Amounts reflect the estimated incremental effect on pretax income of hypothetical 10% and 25% changes in closing commodity prices for each open contract position at September 30, 1998. Marathon Group and U. S. Steel Group management evaluate their portfolios of derivative commodity instruments on an ongoing basis and add or revise strategies to reflect anticipated market conditions and changes in risk profiles. Changes to the portfolios subsequent to September 30, 1998, would cause future pretax income effects to differ from those presented in the table. (b) The number of net open contracts varied throughout the third quarter of 1998, from a low of 6,250 contracts at August 26, to a high of 17,359 contracts at September 24, and averaged 9,790 for the quarter. The derivative commodity instruments used and hedging positions taken also varied throughout the third quarter of 1998, and will continue to vary in the future. Because of these variations in the composition of the portfolio over time, the number of open contracts, by itself, cannot be used to predict future income effects. (c) The calculation of sensitivity amounts for basis swaps assumes that the physical and paper indices are perfectly correlated. Gains and losses on options are based on changes in intrinsic value only. (d) The direction of the price change used in calculating the sensitivity amount for each commodity reflects that which would result in the largest incremental decrease in pretax income when applied to the derivative commodity instruments used to hedge that commodity.
28 USX CORPORATION AND SUBSIDIARY COMPANIES QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------- Interest Rate Risk - ------------------ As of September 30, 1998, the discussion of USX's interest rate risk has not changed materially from that presented in Quantitative and Qualitative Disclosures About Market Risk included in the USX 1997 Form 10-K. Foreign Currency Exchange Rate Risk - ----------------------------------- USX is subject to the risk of price fluctuations related to firm commitments for capital expenditures and existing assets or liabilities denominated in currencies other than U.S. dollars. USX has not generally used derivative instruments to manage this risk. However, USX has made limited use of forward currency contracts to manage exposure to certain currency price fluctuations. At September 30, 1998, USX had no forward currency contracts. Equity Price Risk - ----------------- USX is subject to equity price risk resulting from its issuance in December 1996 of $117 million of 6 3/4% Exchangeable Notes Due February 1, 2000 ("Indexed Debt"). At maturity, USX must exchange the notes for shares of RTI International Metals, Inc. (formerly RMI Titanium Company) ("RTI") common stock, or redeem the notes for the equivalent amount of cash. Each quarter, USX adjusts the carrying value of Indexed Debt to settlement value, based on changes in the value of RTI common stock. Any resulting adjustment is charged or credited to income and included in interest and other financial costs. At September 30, 1998, a hypothetical 10% increase in the value of RTI common stock would have resulted in an $11 million unfavorable effect on pretax income. USX holds a 27% interest in RTI which is accounted for under the equity method. The unfavorable effects on income described above would generally be offset by changes in the market value of USX's investment in RTI. However, under the equity method of accounting, USX cannot recognize in income these changes in the market value until the investment is liquidated. Safe Harbor - ----------- USX's quantitative and qualitative disclosures about market risk include forward-looking statements with respect to management's opinion about risks associated with USX's use of derivative instruments, and projected changes in the size and composition of the Marathon Group and U. S. Steel Group hedge portfolios. These forward-looking statements are based on certain assumptions with respect to market prices and industry supply of and demand for crude oil, natural gas, refined products, steel products and certain raw materials. To the extent that these assumptions prove to be inaccurate, future outcomes with respect to USX's hedging programs may differ materially from those discussed in the forward-looking statements. 29
USX CORPORATION FINANCIAL STATISTICS (Unaudited) -------------------------------- Third Quarter Nine Months Ended Ended September 30 September 30 -------------- -------------- (Dollars in millions) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------ REVENUES Marathon Group (a) $5,662 $3,944 $16,722 $11,834 U. S. Steel Group 1,497 1,735 4,926 5,103 Eliminations (3) (22) (13) (83) ------- ------- ------- ------- Total $7,156 $5,657 $21,635 $16,854 INCOME FROM OPERATIONS Marathon Group (a) $215 $360 $1,070 $838 U. S. Steel Group 105 197 484 521 ------ ------ ------ ------ Total $320 $557 $1,554 $1,359 CASH FLOW DATA - -------------- CAPITAL EXPENDITURES Marathon Group (a) $285 $263 $835 $652 U. S. Steel Group 92 59 228 176 Discontinued Operations - 21 - 59 ------ ------ ------ ------ Total $377 $343 $1,063 $887 INVESTMENTS IN EQUITY AFFILIATES - NET Marathon Group (a) $49 $60 $52 $197 U. S. Steel Group 3 5 66 20 ------ ------ ------ ------ Total $52 $65 $118 $217 - ------ (a) Amounts in 1998 include 100 percent of MAP.
30 Part I - Financial Information (Continued): B. Marathon Group
MARATHON GROUP OF USX CORPORATION STATEMENT OF OPERATIONS (Unaudited) ----------------------------------- Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions, except per share amounts) 1998 1997 1998 1997 - -------------------------------------------------------------------------------- REVENUES: Sales $5,647 $3,924 $16,399 $11,773 Dividend and affiliate income 9 6 37 22 Gain on disposal of assets 3 10 19 29 Gain on ownership change in Marathon Ashland Petroleum LLC (1) - 245 - Other income 4 4 22 10 ------ ------ ------ ------- Total revenues 5,662 3,944 16,722 11,834 ------ ------ ------ ------- COSTS AND EXPENSES: Cost of sales (excludes items shown below) 3,988 2,523 11,575 7,760 Selling, general and administrative expenses 132 96 383 263 Depreciation, depletion and amortization 222 163 701 497 Taxes other than income taxes 1,009 788 2,768 2,210 Exploration expenses 46 55 203 129 Inventory market valuation charges (credits) 50 (41) 22 137 ------ ------ ------ ------- Total costs and expenses 5,447 3,584 15,652 10,996 ------ ------ ------ ------- INCOME FROM OPERATIONS 215 360 1,070 838 Net interest and other financial costs 63 64 166 202 Minority interest in income of Marathon Ashland Petroleum LLC 70 - 282 - ------ ------ ------ ------ INCOME BEFORE INCOME TAXES 82 296 622 636 Provision for estimated income taxes 31 104 226 218 ------ ------ ------ ------ NET INCOME $51 $192 $396 $418 ====== ====== ====== ====== MARATHON STOCK DATA: Net income per share - basic $.18 $.67 $1.37 $1.45 - diluted .17 .66 1.36 1.44 Dividends paid per share .21 .19 .63 .57 Weighted average shares, in thousands - Basic 291,320 288,095 289,928 287,853 - Diluted 291,803 291,857 290,528 294,090 Selected notes to financial statements appear on pages 33-37.
31
MARATHON GROUP OF USX CORPORATION BALANCE SHEET (Unaudited) --------------------------------- September 30 December 31 (Dollars in millions) 1998 1997 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $465 $36 Receivables, less allowance for doubtful accounts of $5 and $2 1,507 856 Inventories 1,624 980 Other current assets 169 146 ------ ------ Total current assets 3,765 2,018 Investments and long-term receivables 600 455 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $10,095 and $9,667 10,223 7,566 Prepaid pensions 303 290 Other noncurrent assets 232 236 ------ ------ Total assets $15,123 $10,565 ====== ====== LIABILITIES Current liabilities: Notes payable $238 $108 Accounts payable 2,223 1,348 Payroll and benefits payable 144 142 Accrued taxes 91 102 Deferred income taxes 66 61 Accrued interest 49 84 Long-term debt due within one year 61 417 ------ ------ Total current liabilities 2,872 2,262 Long-term debt, less unamortized discount 4,055 2,476 Long-term deferred income taxes 1,447 1,318 Employee benefits 563 375 Deferred credits and other liabilities 339 332 Preferred stock of subsidiary 184 184 Minority interest in Marathon Ashland Petroleum LLC 1,726 - COMMON STOCKHOLDERS' EQUITY 3,937 3,618 ------ ------ Total liabilities and common stockholders' equity $15,123 $10,565 ====== ====== Selected notes to financial statements appear on pages 33-37.
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MARATHON GROUP OF USX CORPORATION STATEMENT OF CASH FLOWS (Unaudited) ----------------------------------- Nine Months Ended September 30 (Dollars in millions) 1998 1997 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income $396 $418 Adjustments to reconcile to net cash provided from operating activities: Minority interest in income of Marathon Ashland Petroleum LLC - net of distributions 71 - Depreciation, depletion and amortization 701 497 Exploratory dry well costs 111 57 Inventory market valuation charges 22 137 Pensions (10) (14) Postretirement benefits other than pensions 17 8 Deferred income taxes 140 65 Gain on disposal of assets (19) (29) Gain on ownership change in Marathon Ashland Petroleum LLC (245) - Changes in: Current receivables 13 99 Inventories (77) (58) Current accounts payable and accrued expenses (34) (136) All other - net (15) (53) ------ ------ Net cash provided from operating activities 1,071 991 ------ ------ INVESTING ACTIVITIES: Capital expenditures (835) (652) Acquisition of Tarragon Oil and Gas Limited (686) - Disposal of assets 44 39 Investments in equity affiliates - net (52) (197) Withdrawals (deposits) of restricted cash - net (20) 97 All other - net (13) - ------ ------ Net cash used in investing activities (1,562) (713) ------ ------ FINANCING ACTIVITIES: Increase (decrease) in Marathon Group's portion of USX consolidated debt 1,018 (72) Specifically attributed debt - borrowings 365 - - repayments (365) (40) Marathon Stock issued 84 18 Dividends paid (183) (164) ------ ------ Net cash provided from (used in) financing activities 919 (258) ------ ------ EFFECT OF EXCHANGE RATE CHANGES ON CASH 1 (2) ------ ------ NET INCREASE IN CASH AND CASH EQUIVALENTS 429 18 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 36 32 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $465 $50 ====== ====== Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $(227) $(238) Income taxes paid, including settlements with other groups (149) (187) Selected notes to financial statements appear on pages 33-37.
33 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS -------------------------------------- (Unaudited) 1. The information furnished in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. Additional information is contained in the USX Annual Report on Form 10-K for the year ended December 31, 1997. 2. Effective January 1, 1998, USX adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130). This statement establishes standards for reporting and display of comprehensive income and its components in the financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events from nonowner sources. It includes all changes in equity during a period except those resulting from investments by and distributions to owners. The Marathon Group's total comprehensive income for the third quarter and nine months of 1998 was $49 million and $393 million, respectively. Total comprehensive income for the same 1997 periods was $192 million and $419 million, respectively. Effective January 1, 1997, USX adopted American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" (SOP 96-1), which provides additional interpretation of existing accounting standards related to recognition, measurement and disclosure of environmental remediation liabilities. As a result of adopting SOP 96-1, the Marathon Group identified additional environmental remediation liabilities of $11 million. Estimated receivables for recoverable costs related to adoption of SOP 96-1 were $4 million. The net unfavorable effect of adoption on the Marathon Group's income from operations at January 1, 1997, was $7 million. 3. The financial statements of the Marathon Group include the financial position, results of operations and cash flows for the businesses of Marathon Oil Company (Marathon) and certain other subsidiaries of USX, and a portion of the corporate assets and liabilities and related transactions which are not separately identified with ongoing operating units of USX. These financial statements are prepared using the amounts included in the USX consolidated financial statements. Corporate amounts reflected in these financial statements are determined based upon methods which management believes to be reasonable. The accounting policies applicable to the preparation of the financial statements of the Marathon Group may be modified or rescinded in the sole discretion of the Board of Directors of USX (Board), although the Board has no present intention to do so. The Board may also adopt additional policies depending on the circumstances. 34 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 3. (Continued) Although the financial statements of the Marathon Group and the U. S. Steel Group separately report the assets, liabilities (including contingent liabilities) and stockholders' equity of USX attributed to each such Group, such attribution of assets, liabilities (including contingent liabilities) and stockholders' equity among the Marathon Group and the U. S. Steel Group for the purpose of preparing their respective financial statements does not affect legal title to such assets and responsibility for such liabilities. Holders of USX-Marathon Group Common Stock (Marathon Stock) and USX-U. S. Steel Group Common Stock (Steel Stock) are holders of common stock of USX and continue to be subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts arising from one Group that affect the overall cost of USX's capital could affect the results of operations and financial condition of the other Group. In addition, net losses of either Group, as well as dividends or distributions on any class of USX Common Stock or series of Preferred Stock and repurchases of any class of USX Common Stock or series of Preferred Stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on both classes of Common Stock. Accordingly, the USX consolidated financial information should be read in connection with the Marathon Group financial information. The financial statement provision for estimated income taxes and related tax payments or refunds have been reflected in the Marathon Group, the U. S. Steel Group and, prior to November 1, 1997, the Delhi Group financial statements in accordance with USX's tax allocation policy for such groups. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated among the Marathon Group, the U. S. Steel Group and, prior to November 1, 1997, the Delhi Group for group financial statement purposes, based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to the respective groups. The provision for estimated income taxes for the Marathon Group is based on tax rates and amounts which recognize management's best estimate of current and deferred tax assets and liabilities. Differences between the combined interim tax provisions of the Marathon, U. S. Steel and Delhi Groups and USX consolidated are allocated to each group based on the relationship of the individual group provisions to the combined interim provisions. 4. The method of calculating net income per share for the Marathon Stock, Steel Stock and, prior to November 1, 1997, Delhi Stock reflects the Board's intent that the separately reported earnings and surplus of the Marathon Group, the U. S. Steel Group and the Delhi Group, as determined consistent with the USX Certificate of Incorporation, are available for payment of dividends on the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. Basic net income per share is based on the weighted average number of common shares outstanding. 35 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 4. (Continued) Diluted net income per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options, provided in each case, the effect is not antidilutive. See Note 5 of the Notes to USX Consolidated Financial Statements for the computation of income per common share. 5. The items below are included in both revenues and costs and expenses, resulting in no effect on income.
(In millions) ------------------------------- Third Quarter Nine Months Ended Ended September 30 September 30 1998 1997 1998 1997 ---- ---- ---- ---- Matching crude oil and refined product buy/sell transactions settled in cash $1,012 $539 $2,994 $1,845 Consumer excise taxes on petroleum products and merchandise 963 738 2,614 2,057
6. In August 1998, Marathon acquired Tarragon Oil and Gas Limited (Tarragon), a Canadian oil and gas exploration and production company. Securityholders of Tarragon received, at their election, Cdn$14.25 for each Tarragon share, or the economic equivalent in Exchangeable Shares of an indirect Canadian subsidiary of Marathon, which are exchangeable solely on a one-for-one basis into Marathon Stock. The purchase price included cash payments of $686 million, issuance of approximately 878,000 Exchangeable Shares valued at $29 million and the assumption of $345 million in debt. Marathon accounted for the acquisition using the purchase method of accounting. Third quarter 1998 results of operations include the operations of Marathon Canada Limited, formerly known as Tarragon, commencing August 12, 1998. During 1997, Marathon and Ashland Inc. (Ashland) agreed to combine the major elements of their refining, marketing and transportation (RM&T) operations. On January 1, 1998, Marathon transferred certain RM&T net assets to Marathon Ashland Petroleum LLC (MAP), a new consolidated subsidiary. Also on January 1, 1998, Marathon acquired certain RM&T net assets from Ashland in exchange for a 38% interest in MAP. The acquisition was accounted for under the purchase method of accounting. The purchase price was determined to be $1.9 billion, based upon an external valuation. The change in Marathon's ownership interest in MAP resulted in a gain of $245 million, which is included in the first nine months of 1998 revenues. The following unaudited pro forma data for the Marathon Group includes the results of operations of Tarragon for 1998 and 1997, and the Ashland RM&T net assets for 1997, giving effect to the acquisitions as if they had been consummated at the beginning of the years presented. The pro forma data is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations. 36 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 6. (Continued)
(In millions, except per share amounts) Third Quarter Nine Months Ended Ended September 30 September 30 1998(a) 1997(a) 1998(a) 1997(a) ------- ------- ------- ------- Revenues $5,679 $5,804 $16,816 $17,597 Net income (b) 42 183 365 410 Net income per common share: Basic .14 .63 1.26 1.42 Diluted .14 .63 1.25 1.41 (a) Pro forma data is based on the Marathon Group and Tarragon results of operations for the quarters and nine months ended September 30, 1998 and 1997, and the Marathon Group and Ashland RM&T results of operations for the quarter and nine months ended September 30, 1997. (b) Excluding the pro forma inventory market valuation reserve adjustment, pro forma net income would have been $373 million and $487 million for the 1998 and 1997 nine months, respectively ($61 million and $159 million in the third quarter of 1998 and 1997, respectively.) Reported 1998 and 1997 net income for the nine months, excluding the reported inventory market valuation reserve adjustment, was $404 million and $504 million, respectively ($70 million and $166 million in the third quarter of 1998 and 1997, respectively).
7. Inventories are carried at the lower of cost or market. Cost of inventories of crude oil and refined products is determined under the last- in, first-out (LIFO) method.
(In millions) ------------------------ September 30 December 31 1998 1997 ----------- ----------- Crude oil and natural gas liquids $739 $452 Refined products and merchandise 1,082 735 Supplies and sundry items 109 77 ------ ------ Total (at cost) 1,930 1,264 Less inventory market valuation reserve 306 284 ------ ------ Net inventory carrying value $1,624 $980 ====== ======
The inventory market valuation reserve reflects the extent that the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. The reserve is decreased to reflect increases in market prices and inventory turnover and increased to reflect decreases in market prices. Changes in the inventory market valuation reserve result in noncash charges or credits to costs and expenses. For additional information, see discussion of results of operations in the Marathon Group's Management's Discussion and Analysis of Financial Condition and Results of Operations. 37 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 8. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Marathon Group involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Marathon Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Marathon Group. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. The Marathon Group is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At September 30, 1998, and December 31, 1997, accrued liabilities for remediation totaled $51 million and $52 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in cleanup efforts related to underground storage tanks at retail marketing outlets, were $40 million at September 30, 1998, and $42 million at December 31, 1997. For a number of years, the Marathon Group has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the nine months of 1998 and for the years 1997 and 1996, such capital expenditures totaled $73 million, $81 million and $66 million, respectively. The Marathon Group anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. At September 30, 1998, and December 31, 1997, accrued liabilities for platform abandonment and dismantlement totaled $140 million and $128 million, respectively. Guarantees by USX of the liabilities of an affiliated entity of the Marathon Group totaled $119 million at September 30, 1998. At September 30, 1998, the Marathon Group's pro rata share of obligations of LOOP LLC and various pipeline affiliates secured by throughput and deficiency agreements totaled $164 million. Under the agreements, the Marathon Group is required to advance funds if the affiliates are unable to service debt. Any such advances are prepayments of future transportation charges. The Marathon Group's contract commitments to acquire property, plant and equipment and long-term investments at September 30, 1998, totaled $679 million compared with $377 million at December 31, 1997. 9. On November 4, 1998, USX sold 17 million shares of Marathon Stock. Closing of the transaction is expected to be made on Tuesday, November 10, 1998. Net proceeds to USX are expected to be approximately $528 million, which will be used to reduce indebtedness incurred to fund the Tarragon acquisition. The net proceeds will be reflected in their entirety in the Marathon Group financial statements. 38 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The Marathon Group includes Marathon Oil Company ("Marathon") and certain other subsidiaries of USX Corporation ("USX"), which are engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of petroleum products; and other energy related businesses. Management's Discussion and Analysis should be read in conjunction with the third quarter and first nine months 1998 USX consolidated financial information and the Marathon Group Financial Statements and selected notes. The discussion of Results of Operations should be read in conjunction with the Supplemental Statistics provided on pages 53 and 54. During 1997, Marathon and Ashland Inc. ("Ashland") agreed to combine the major elements of their refining, marketing and transportation ("RM&T") operations. On January 1, 1998, Marathon transferred certain RM&T net assets to Marathon Ashland Petroleum LLC ("MAP"), a new consolidated subsidiary. Also, on January 1, 1998, Marathon acquired certain RM&T net assets from Ashland in exchange for a 38 percent interest in MAP. Financial measures such as revenues, income from operations and capital expenditures in 1998 include 100 percent of MAP and are not comparable to prior period amounts. Net income and related per share amounts for 1998 are net of the minority interest. For further discussion of MAP, see Note 6 to the Marathon Group Financial Statements. On August 11, 1998, Marathon acquired Tarragon Oil and Gas Limited ("Tarragon"), a Canadian oil and gas exploration and production company. The purchase price included $686 million in cash payments, the assumption of $345 million in debt and the issuance of Exchangeable Shares of an indirect Canadian subsidiary of Marathon valued at $29 million. The Exchangeable Shares are exchangeable at any time on a one-for-one basis for shares of Marathon stock. The Tarragon acquisition was initially funded with borrowings against USX's long-term revolving credit agreement. On November 4, 1998, USX sold 17 million shares of Marathon stock. Net proceeds to USX are expected to be approximately $528 million, which will be used to reduce indebtedness incurred to fund the Tarragon acquisition. Third quarter results include the operations of Marathon Canada Limited ("MCL"), formerly known as Tarragon, commencing August 12, 1998. For further discussion of Tarragon and pro forma information, see Note 6 to the Marathon Group Financial Statements and Supplemental Statistics on page 54. Certain sections of Management's Discussion and Analysis may include forward-looking statements concerning trends or events potentially affecting the businesses of the Marathon Group. These statements typically contain words such as "believes", "estimates", "expects" or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in forward-looking statements. 39 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Results of Operations - --------------------- Revenues for the third quarter and first nine months of 1998 and 1997 are summarized in the following table:
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 1998 1997 1998 1997 ----- ----- ----- ----- Refined products $2,356 $1,854 $6,997 $5,264 Merchandise 510 276 1,386 780 Liquid hydrocarbons 493 205 1,332 713 Natural gas 257 270 872 990 Transportation and other (a) 72 62 282 185 Gain on ownership change in MAP (b) (1) - 245 - ------ ------ ------ ------ Subtotal 3,687 2,667 11,114 7,932 Excise taxes (c) (e) 963 738 2,614 2,057 Matching buy/sell transactions (d) (e) 1,012 539 2,994 1,845 ------ ------ ------ ------ Total Revenues (a) $5,662 $3,944 $16,722 $11,834 ====== ====== ====== ====== - -------- (a)Amounts for third quarter and first nine months of 1997 were reclassified to conform to 1998 classifications. (b)See Note 6 to the Marathon Group Financial Statements for a discussion of the gain on ownership change in MAP. (c)Consumer excise taxes on petroleum products and merchandise. (d)Matching crude oil and refined products buy/sell transactions settled in cash. (e)Included in both revenues and costs and expenses, resulting in no effect on income.
In 1998, Marathon Group revenues included 100 percent of MAP revenues, and MCL's revenues commencing August 12, 1998. On a pro forma basis, giving effect to the assumed acquisitions of Tarragon's operations and Ashland's RM&T net assets on January 1, 1997, revenues (excluding matching buy/sell transactions and excise taxes) for the third quarter and first nine months of 1997 would have been $4,131 million and $12,219 million, respectively. Revenues in the third quarter and first nine months of 1998 were lower than pro forma revenues in the same periods of 1997, primarily due to lower worldwide liquid hydrocarbon prices, lower domestic natural gas prices, and lower refined product prices, partially offset by higher liquid hydrocarbon sales volumes. In addition, for the first nine months of 1998, these decreases were partially offset by the gain on ownership change in MAP. For additional information regarding pro forma revenues, see Supplemental Statistics on page 54. 40 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Income from Operations and certain items included in income from operations for the third quarter and first nine months of 1998 and 1997 are set forth in the following table:
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 1998 1997 1998 1997 ----- ----- ----- ----- Income from Operations (a) $215 $360 $1,070 $838 Less: certain favorable (unfavorable) items IMV reserve adjustment (b) (50) 41 (22) (137) Write-off of certain international investments net of a favorable domestic contract settlement (c) - - (76) - Gain on ownership change net of one-time transition charges - MAP (d) - - 223 - ------ ------ ------ ------ Subtotal (50) 41 125 (137) ------ ------ ------ ------ Income from operations adjusted to exclude above items $265 $319 $945 $975 ====== ====== ====== ====== - -------- (a)Amounts for third quarter and first nine months of 1997 were reclassified to conform to 1998 classifications. (b)The inventory market valuation ("IMV") reserve reflects the extent to which the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. For additional details of this noncash adjustment, see discussion below. (c)This represents a write-off of certain non-revenue producing international investments and the gain from the resolution of contract disputes with a purchaser of the Marathon Group's natural gas production from certain domestic properties. (d)The gain on ownership change and one-time transition charges relate to the formation of MAP. For additional discussion of the gain on ownership change in MAP, see Note 6 to the Marathon Group Financial Statements.
In 1998, Marathon Group income from operations included 100 percent of MAP, and MCL's results of operations commencing August 12, 1998. On a pro forma basis, giving effect to the assumed acquisitions of Tarragon's operations and Ashland's RM&T net assets on January 1, 1997, income from operations for third quarter 1997, excluding the effects of the pro forma IMV reserve adjustment, would have been $461 million. Third quarter 1998 adjusted income from operations of $265 million was lower than adjusted pro forma income from operations for third quarter 1997 primarily due to lower RM&T income from operations and lower worldwide exploration and production income from operations. These decreases were partially offset by lower administrative expenses. 41 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- On a pro forma basis, adjusted income from operations, for the first nine months of 1997, excluding the effects of the pro forma IMV reserve adjustment, would have been $1,276 million. The first nine months of 1998 adjusted income from operations of $945 million was lower than adjusted pro forma income from operations in the comparable 1997 period primarily due to lower worldwide exploration and production income from operations. This decrease was partially offset by lower administrative expenses and increased RM&T income from operations in 1998. For additional information regarding pro forma income from operations, see Supplemental Statistics on page 54. With respect to the IMV reserve adjustment, when U. S. Steel Corporation acquired Marathon Oil Company in March 1982, crude oil and refined product prices were at historically high levels. In applying the purchase method of accounting, the Marathon Group's crude oil and refined product inventories were revalued by reference to current prices at the time of the acquisition, and this became the new LIFO cost basis of the inventories. Generally accepted accounting principles require that inventories be reported at the lower of recorded cost or current market value. Accordingly, the Marathon Group has established an IMV reserve to reduce the cost basis of its inventories to current market value. Quarterly adjustments to the IMV reserve result in noncash charges or credits to income from operations. These adjustments affect the comparability of financial results from period to period as well as comparisons with other energy companies, many of which do not have such adjustments. Therefore, the Marathon Group reports separately the effects of the IMV reserve adjustments on financial results. In management's opinion, the effects of such adjustments should be considered separately when evaluating operating performance. When Marathon acquired the crude oil and refined product inventories associated with Ashland's RM&T operations in January 1998, the Marathon Group established a new LIFO cost basis for those inventories. The acquisition cost of these inventories lowered the overall average cost of the Marathon Group's combined RM&T inventories. As a result, the price threshold at which an IMV reserve will be recorded has also been lowered. This acquisition resulted in a one-time reduction in the IMV reserve, resulting in a net favorable IMV reserve adjustment of $25 million in first quarter 1998. Third quarter income from operations for domestic exploration and production ("upstream") decreased by $43 million in 1998 from 1997. Results in the first nine months, excluding a favorable natural gas contract settlement, decreased $217 million from the same period in 1997. The decreases in both periods were due mainly to lower liquid hydrocarbon and natural gas prices, partially offset by increased liquid hydrocarbon volumes. In addition, the decrease in third quarter was also offset by lower exploration expenses. Third quarter results were negatively impacted by three tropical storms in September that moved through the Gulf of Mexico and resulted in temporary shut-ins of offshore production facilities. As a result of these storms, reported production for the quarter was reduced by an estimated 8,000 barrels per day ("bpd") and 12 million cubic feet of natural gas per day ("mmcfpd"). Third quarter income from operations for international upstream operations decreased by $24 million in 1998 from 1997. The decline was mainly due to lower liquid hydrocarbon prices, partially offset by increased liquid hydrocarbon sales volumes primarily reflecting the acquisition of Tarragon and new production in Gabon and the United Kingdom. 42 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Third quarter 1998 results include the operations of MCL, commencing August 12, 1998. Tarragon production averaged 15,900 bpd and 158 mmcfpd from August 12, 1998 through the end of the quarter. See Note 6 to the attached Marathon Group Financial Statements for additional information regarding the Tarragon acquisition. International upstream income from operations in the first nine months, excluding the impairment of certain international investments in the first quarter, decreased $121 million from the same period in 1997. This decrease was mainly due to lower liquid hydrocarbon prices, higher exploration expense, higher depreciation, depletion and amortization, and lower natural gas volumes, partially offset by increased liquid hydrocarbon sales volumes. In 1998, income from operations for refining, marketing, and transportation ("downstream") operations include 100 percent of MAP. Third quarter 1998 income from operations for downstream operations, excluding the effects of the IMV reserve adjustment, was $224 million, compared to $231 million in the prior-year period. On a pro forma basis, giving effect to the assumed acquisition of Ashland's RM&T net assets on January 1, 1997, income from operations for the combined downstream operations of Marathon and Ashland for third quarter 1997, excluding the effects of the pro forma IMV reserve adjustment, would have been $358 million. Income from operations for the first nine months of 1998 for downstream operations, excluding the effects of special items, was $749 million compared to $475 million in the prior-year period. On a pro forma basis, downstream income from operations for the first nine months of 1997, excluding the effects of the pro forma IMV reserve adjustment, would have been $729 million. Refined product margins in third quarter 1998 were lower compared to the same period in 1997. In addition, third quarter results were negatively impacted by three tropical storms in September that moved through the Gulf of Mexico and resulted in temporary shut-ins of the Louisiana Offshore Oil Port and the Garyville refinery. As a result, refinery crude runs were curtailed by nearly 10,000 bpd for the quarter. For additional information regarding pro forma downstream income from operations, see Supplemental Statistics on page 54. Other energy related businesses recorded income from operations of $6 million in third quarter 1998 compared to $8 million for the prior-year period. Income from operations for the first nine months of 1998 was $23 million compared to $39 million for the prior-year period. The first nine months 1997 included an $8 million gain on the sales of the Marathon Group's interests in a domestic pipeline company. Administrative expenses in the third quarter decreased by $22 million in 1998 from 1997, primarily as a result of an increase in the administrative costs being charged to MAP and reported in RM&T that were previously reported in Administrative and lower accruals for employee benefit and compensation plans. Administrative expenses for the first nine months of 1998 decreased $50 million from the same period in 1997. In addition to the factors discussed previously, the decrease was also due to lower litigation accruals. 43 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Net interest and other financial costs for the third quarter and first nine months of 1998 and 1997 are set forth in the following table:
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 1998 1997 1998 1997 ----- ----- ----- ----- Interest and other financial income $11 $2 $29 $0 Interest and other financial costs (74) (66) (195) (202) ------ ------ ------ ------ Net interest and other financial costs $(63) $(64) $(166) $(202) ====== ====== ===== =====
In third quarter 1998, interest and other financial costs increased primarily due to higher debt levels resulting from the acquisition of Tarragon, partially offset by higher capitalized interest. Net interest and other financial costs decreased in first nine months 1998 mainly due to increased interest income and capitalized interest on upstream projects. Capitalized interest was $10 million and $30 million in third quarter and first nine months 1998, respectively, compared with $5 million and $11 million in the same periods in 1997. Net income for the third quarter decreased by $141 million in 1998 from 1997 and by $22 million in the first nine months of 1998 as compared to the same periods in 1997. Excluding the after-tax effects of the IMV reserve adjustment and other special items, financial results decreased by $96 million for the third quarter and $196 million for the first nine months of 1998 from 1997, primarily reflecting the factors discussed above. For pro forma information, see Supplemental Statistics on page 54. Cash Flows - ---------- Net cash provided from operating activities totaled $1,071 million in the first nine months of 1998, compared with $991 million in the first nine months of 1997. The $80 million increase mainly reflected an increase in net income (excluding the IMV reserve adjustment, the gain on ownership change in MAP and other noncash items), partially offset by distributions by MAP to Ashland. Capital expenditures in the first nine months of 1998 totaled $835 million, compared with $652 million in the comparable 1997 period. Capital expenditures in 1998 include 100 percent of MAP. The increase in the first nine months of 1998 was approximately equal for downstream and upstream projects. The acquisition of Tarragon Oil and Gas Limited included cash payments of $686 million. For further discussion of Tarragon, see Note 6 to the Marathon Group Financial Statements. 44 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Deposits of restricted cash were $20 million in the first nine months of 1998 compared to withdrawals of $97 million in the comparable 1997 period. The 1998 amount represents cash deposited from the sales of domestic production properties and equipment. The 1997 amount represents cash withdrawn from an interest-bearing escrow account that was established in the fourth quarter of 1996 in connection with the 1996 disposal of oil production properties in Alaska. Net investments in equity affiliates were $52 million in the first nine months of 1998, compared with $197 million in the comparable 1997 period. In September 1998, MAP increased its ownership interest in the Capline crude oil pipeline through the acquisition of an interest in Southcap Pipe Line Company for $22 million. With this investment in Southcap, MAP's ownership in the Capline system increased from 32.6% to 37.2%. Net investments in 1998 were reduced by $59 million as a result of repayments by Sakhalin Energy Investment Company, Ltd. (Sakhalin) of advances made by Marathon in conjunction with the Sakhalin II project in Russia. The 1997 amount included Marathon's acquisition of an additional 7.5% interest in Sakhalin, investments in the Nautilus natural gas and Odyssey crude oil pipeline systems in the Gulf of Mexico, and the purchase of a 50% interest in an Ecuadorian power generation company. Contract commitments for property, plant and equipment acquisitions and long-term investments at September 30, 1998, totaled $679 million compared with $377 million at December 31, 1997. Financial obligations increased by $1,018 million in the first nine months of 1998. For further details, see USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. Financial obligations consist of the Marathon Group's portion of USX debt and preferred stock of a subsidiary attributed to both groups, as well as debt specifically attributed to the Marathon Group. Dividends paid in the first nine months of 1998 increased by $19 million from the first nine months of 1997 reflecting the two cents per share increase in the quarterly USX-Marathon Group Common Stock dividend rate. This increase was initially declared in January 1998. Liquidity - --------- For discussion of USX's liquidity and capital resources, see USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. 45 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Environmental Matters, Contingencies and Commitments - ---------------------------------------------------- The Marathon Group has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the Marathon Group's products and services, operating results will be adversely affected. The Marathon Group believes that substantially all of its competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and whether or not it is engaged in the petrochemical business or the marine transportation of crude oil and refined products. USX has been notified that it is a potentially responsible party ("PRP") at 16 waste sites related to the Marathon Group under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of September 30, 1998. In addition, there are 8 sites related to the Marathon Group where USX has received information requests or other indications that USX may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability. There are also 84 additional sites, excluding retail marketing outlets, related to the Marathon Group where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. Of these sites, 15 were associated with properties conveyed to MAP by Ashland for which Ashland has retained liability for all costs associated with remediation. At many sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. The Marathon Group accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. In October 1998, the National Enforcement Investigation Center of the United States Environmental Protection Agency conducted a multi-media inspection of MAP's Detroit refinery. The inspection covered compliance with the Clean Air Act (New Source Performance Standards, Prevention of Significant Deterioration, and the National Emission Standards for Hazardous Air Pollutants for Benzene), the Clean Water Act (Permit exceedances for the Waste Water Treatment Plant), reporting obligations under the Emergency Planning and Community Right-to-Know Act and the handling of process waste. It is not known at this time as to when MAP will be notified as to the conclusion of the inspection. Although MAP has been informally advised as to certain compliance issues, it is not known when findings on the results of the inspection will be issued. 46 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Marathon Group involving a variety of matters, including laws and regulations relating to the environment (see Note 8 to the Marathon Group Financial Statements for a discussion of certain of these matters). The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Marathon Group Financial Statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Marathon Group. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. Outlook - ------- The outlook regarding the Marathon Group's upstream revenues and income is largely dependent upon future prices and volumes of liquid hydrocarbons and natural gas. Prices have historically been volatile and have frequently been affected by unpredictable changes in supply and demand resulting from fluctuations in worldwide economic activity and political developments in the world's major oil and gas producing and consuming areas. During third quarter 1998, liquid hydrocarbon prices were significantly lower than third quarter 1997 prices. This decline had an adverse effect on the Marathon Group's upstream results in the third quarter and first nine months of 1998. Upstream results will continue to be adversely affected if liquid hydrocarbon prices stay at their current levels or decline further. A prolonged decline in liquid hydrocarbon and natural gas prices could also adversely affect the quantity of crude oil and natural gas reserves that can be economically produced and the amount of capital available for exploration and development. Worldwide liquid hydrocarbon production for 1998 is currently estimated to be 200,000 bpd, primarily reflecting delays in attaining full production in the Troika field and the effects of three tropical storms in September 1998. Natural gas volumes are expected to be approximately 1.25 bcfpd. In 1999, liquid hydrocarbon production is estimated to be approximately 250,000 bpd and natural gas volumes are expected to be approximately 1.4 bcfpd. In 2001, liquid hydrocarbon production is expected to increase by 5 to 8 percent over 1999 production levels and natural gas sales are expected to increase by approximately 5 percent over 1999 levels. These estimates include the effects of the Tarragon acquisition. With the Tarragon acquisition, 1998 reserve replacement is anticipated to exceed 200%. Progress continues on development of the 1995 discovery on Viosca Knoll 786 ("Petronius") in the deepwater Gulf. The Petronius project is estimated to have recoverable reserves of 95 million gross barrels of oil equivalent. Initial production is expected in second quarter 1999. Offshore Gabon, production commenced from the 1995 discovery on Tchatamba Marin in late January 1998 and is expected to average about 10,000 gross bpd for the year due to start-up problems with platform processing equipment. Marathon holds a 37.5% interest in Sakhalin Energy Investment Company, Ltd. ("Sakhalin"), an incorporated joint venture company responsible for the overall management of the Sakhalin II project. This project includes development of the Piltun-Astokhskoye ("P-A") oil field and the Lunskoye gas-condensate field, which are located 10-12 miles offshore Sakhalin Island in the Russian Far East Region. A development plan for the P-A field was approved in 1997 which provides for an initial development of the Astokh Feature. Progress continues on this first phase 47 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- of development with the Molikpaq, an offshore drilling and production vessel, set in place on September 1, 1998. Development drilling from the Molikpaq is expected to begin in fourth quarter 1998 and first production from the Astokh Feature is on schedule for mid-1999. Marathon's investment in Sakhalin was $233 million at September 30, 1998. The above discussion includes forward-looking statements with respect to anticipated 1998 reserve replacement and liquid hydrocarbon production and natural gas sales for 1998 and 1999. These statements are based on a number of assumptions, including (among others) prices, amount of capital available for exploration and development, worldwide supply and demand for petroleum products, regulatory constraints, reserve estimates, production decline rates of mature fields, timing of commencing production from new wells, timing and results of future development drilling, reserve replacement rates, other geological, operating and economic considerations. In addition, development of new production properties in countries outside the United States may require protracted negotiations with host governments and is frequently subject to political considerations, such as tax regulations, which could adversely affect the economics of projects. With respect to the Sakhalin II project in Russia, Sakhalin Energy continues to seek to have certain Russian laws and normative acts at the Russian Federation and local levels brought into compliance with the existing Production Sharing Agreement Law. To the extent these assumptions prove inaccurate and/or negotiations and other considerations are not satisfactorily resolved, actual results could be materially different than present expectations. Downstream income of the Marathon Group is largely dependent upon the margin between the cost of crude oil and other feedstocks refined and the selling prices of refined products. Refined product margins have been historically volatile and vary with the level of economic activity in the various marketing areas, the regulatory climate and the available supply of crude oil and refined products. The integration process at MAP continues and management anticipates MAP will exceed its initial goal of deriving efficiencies of $200 million annually on a pre-tax basis. MAP expects annual repeatable pre-tax operating efficiencies to reach $130 million in 1998, with an additional $100 million expected in 1999. The current focus is on actively integrating the logistical, retail marketing, wholesale marketing and refining operations, as well as administrative functions, that Marathon and Ashland transferred to MAP. The above statements with respect to the amount and timing of efficiencies to be realized by MAP are forward looking statements. Some factors that could potentially cause actual results to differ materially from present expectations include unanticipated costs or delays associated with implementing shared technology, completing logistical infrastructure projects and leveraging volume procurement synergies. Following an internal review, MAP implemented a maintenance and safety improvement program in second quarter 1998 at the Catlettsburg (KY), Canton (OH), and St. Paul Park (MN) refineries. This program will be substantially completed by the end of 1998. The costs of the program, as well as the effects of reduced production levels, will not have a material negative impact on the profitability of either MAP or the Marathon Group. 48 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Year 2000 Readiness Disclosure - ------------------------------ The Marathon Group is executing action plans which include: * prioritizing and focusing on those computerized and automated systems and processes critical to the operations in terms of material operational, safety, environmental and financial risk to the company. * allocating and committing appropriate resources to fix the problem. * communicating with, and aggressively pursuing, critical third parties to help ensure the Year 2000 readiness of their products and services through use of mailings, telephone contacts, and the inclusion of Year 2000 readiness language in purchase orders and contracts. * performing rigorous Year 2000 tests of critical systems. * participating in, and exchanging Year 2000 information with industry trade associations, such as the American Petroleum Institute (API). * engaging qualified outside engineering and information technology consulting firms to assist in the Year 2000 inventory, assessment and readiness. State of Readiness The majority of Information Technology (IT) systems readiness efforts and critical systems testing are scheduled to be completed by the end of 1998. The remaining systems are to be completed by end of the third quarter of 1999. We have received responses from over 74% of our third party software vendors, with 99% indicating that they are or will be Year 2000 ready and will provide updated software on a timely basis. The majority of the Non-Information Technology (Non-IT) systems are scheduled to be inventoried by the end of 1998. All Non-IT systems are scheduled to be ready by the end of the third quarter of 1999 with minor exceptions. Plant maintenance shutdowns scheduled for the fourth quarter of 1999 will allow us to complete any final readiness efforts. The chart below provides the percent of completion for the inventory of systems and processes that may be affected by the Year 2000 ("Y2K Inventory"), analysis performed to determine the Year 2000 date impact of inventoried systems and processes ("Y2K Impact Assessment") and the Year 2000 readiness of the Marathon Group's Year 2000 inventory ("Y2K Readiness of Overall Inventory"). The percent of completion for Y2K Readiness of Overall Inventory includes all inventory items not date impacted, those items already Year 2000 ready and those corrected and made Year 2000 ready through the renovation/replacement, testing and implementation activities; however, the implementation of certain IT and Non-IT systems has been deferred until 1999 for operational reasons. 49 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------------------------------------------
Percent Completed Y2K Y2K Readiness End of Third Quarter 1998 Impact of Y2K Assess- Overall Inventory ment Inventory ------ ------ ------ Information Technology 100% 100% 89% Non-Information Technology 40% 38% 18%
Third Parties Third parties are suppliers, customers and vendors, excluding third party software vendors discussed previously. Contacts have been made with all critical third parties to determine if they will be able to provide their service to the Marathon Group after the Year 2000. An aggressive follow-up has started with those third parties not responding or returning an unacceptable response. If it is determined that there is a significant risk, an effort will be made to work with this third party. If this is not successful, a new provider of the same services will be found. The Costs to Address Year 2000 Issues The estimated costs associated with Year 2000 readiness, are approximately $28 million, including $11 million of incremental costs. Total costs incurred as of September 30, 1998, were $6 million, including $2 million of incremental costs. As Y2K impact assessment nears completion and the renovation planning, readiness implementation and testing evolve, the estimated costs may change. The Risks of the Company's Year 2000 Issues The most reasonably likely worst case Year 2000 scenario would be the inability of our third party suppliers, such as utility providers, telecommunication companies, and other critical suppliers, such as drilling equipment suppliers, platform suppliers and pipeline carriers, to continue providing their products and services. This could pose the greatest material operational, safety, environmental and/or financial risk to the company. In addition, we are concerned with the lack of accurate and timely Year 2000 date impact information from suppliers of automation and process control systems and processes. Without quality information from suppliers, specifically on embedded chip technology, some Year 2000 problems could go undetected until after January 1, 2000. Contingency Planning Representatives of the Marathon Group have participated with a work group of the API Year 2000 Task force to develop a contingency plan format. This format includes a template and other guidelines to help develop a plan that will cover the Year 2000 areas of concern. These plans are to be completed and tested, when practical, by the end of the third quarter of 1999. 50 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The foregoing Year 2000 discussion includes forward-looking statements of the Marathon Group's efforts and management's expectations relating to Year 2000 readiness. The Marathon Group's ability to achieve Year 2000 readiness and the level of incremental costs associated therewith, could be adversely impacted by, among other things, the availability and cost of programming and testing resources, vendors' ability to install or modify proprietary hardware and software and unanticipated problems identified in the ongoing Year 2000 readiness review. Accounting Standards - -------------------- In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" which introduces a "management approach" for identifying reportable operating segments of an enterprise. USX will adopt the standard, effective with its 1998 annual financial statements. In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". USX will adopt the standard, effective with its 1998 annual financial statements. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidelines for companies to capitalize or expense costs incurred to develop or obtain internal-use software. USX will adopt SOP 98-1 effective January 1, 1999. The incremental impact on results of operations of adoption of SOP 98-1 has not been determined, although it is likely that it will be initially favorable since certain qualifying costs will be capitalized and amortized over future periods. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". This new standard requires recognition of all derivatives as either assets or liabilities at fair value. This new standard may result in additional volatility in both current period earnings and Stockholders' Equity as a result of recording recognized and unrecognized gains and losses resulting from changes in the fair value of derivative instruments. At adoption this new standard requires a comprehensive review of all outstanding derivative instruments to determine whether or not their use meets the hedge accounting criteria. It is possible that there will be derivative instruments employed in our businesses that do not meet all of the designated hedge criteria and they will be reflected in income on a mark-to-market basis. Based upon the strategies currently used by USX and the level of activity related to commodity- based derivative instruments in recent periods, USX does not anticipate the effect of adoption to have a material impact on either financial position or results of operations of the Marathon Group. USX plans to adopt the standard effective January 1, 2000, as required. 51 MARATHON GROUP OF USX CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------- Commodity Price Risk and Related Risks - -------------------------------------- Sensitivity analysis of the incremental effects on pretax income of hypothetical 10% and 25% changes in commodity prices for open derivative commodity instruments as of September 30, 1998 are provided in the following table: (a)
Incremental Decrease in Pretax Income Assuming a Hypothetical Price Change of(a) (Dollars in millions) 10% 25% - -------------------------------------------------------------------------------- Derivative Commodity Instruments Marathon Group (b) (c) Crude oil (price increase) (d) $10.0 $26.2 Natural gas (price decrease) (d) 2.8 1.2 Refined products (price increase) (d) 4.7 15.6 (a) Gains and losses on derivative commodity instruments are generally offset by price changes in the underlying commodity. Effects of these offsets are not reflected in the sensitivity analyses. Amounts reflect the estimated incremental effect on pretax income of hypothetical 10% and 25% changes in closing commodity prices for each open contract position at September 30, 1998. Marathon Group management evaluates its portfolio of derivative commodity instruments on an ongoing basis and adds or revises strategies to reflect anticipated market conditions and changes in risk profiles. Changes to the portfolio subsequent to September 30, 1998, would cause future pretax income effects to differ from those presented in the table. (b) The number of net open contracts for the Marathon Group varied throughout the third quarter of 1998, from a low of 6,250 contracts at August 26, to a high of 17,359 contracts at September 24, and averaged 9,790 for the quarter. The derivative commodity instruments used and hedging positions taken also varied throughout the third quarter of 1998, and will continue to vary in the future. Because of these variations in the composition of the portfolio over time, the number of open contracts, by itself, cannot be used to predict future income effects. (c) The calculation of sensitivity amounts for basis swaps assumes that the physical and paper indices are perfectly correlated. Gains and losses on options are based on changes in intrinsic value only. (d) The direction of the price change used in calculating the sensitivity amount for each commodity reflects that which would result in the largest incremental decrease in pretax income when applied to the derivative commodity instruments used to hedge that commodity.
52 MARATHON GROUP OF USX CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------- Interest Rate Risk - ------------------ As of September 30, 1998, the discussion of Marathon's interest rate risk has not changed materially from that presented in Quantitative and Qualitative Disclosures About Market Risk included in the USX 1997 Form 10-K. Foreign Currency Exchange Rate Risk - ----------------------------------- The Marathon Group is subject to the risk of price fluctuations related to firm commitments for capital expenditures and existing assets or liabilities denominated in currencies other than U.S. dollars. USX has not generally used derivative instruments to manage this risk. However, USX has made limited use of forward currency contracts to manage exposure to certain currency price fluctuations. At September 30, 1998, USX had no forward currency contracts. Equity Price Risk - ----------------- As of September 30, 1998, the discussion of Marathon's equity price risk has not changed materially from that presented in Quantitative and Qualitative Disclosures About Market Risk included in the USX 1997 Form 10-K. Safe Harbor - ----------- The Marathon Group's quantitative and qualitative disclosures about market risk include forward-looking statements with respect to management's opinion about risks associated with USX's use of derivative instruments, and projected changes in the size and composition of the Marathon Group's hedge portfolio. These forward-looking statements are based on certain assumptions with respect to market prices and industry supply of and demand for crude oil, natural gas, refined products and certain raw materials. To the extent that these assumptions prove to be inaccurate, future outcomes with respect to the Marathon Group's hedging programs may differ materially from those discussed in the forward-looking statements. 53
MARATHON GROUP OF USX CORPORATION SUPPLEMENTAL STATISTICS (Unaudited) ----------------------------------- Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 1998 1997(a) 1998 1997(a) - -------------------------------------------------------------------------------- INCOME (LOSS) FROM OPERATIONS (b) Exploration & Production Domestic $44 $87 $159 $376 International 16 40 98 219 Refining, Marketing & Transportation(c) 224 231 749 475 Other Energy Related Businesses(d) 6 8 23 39 Administrative (25) (47) (84) (134) ------ ------ ------ ------ $265 $319 $945 $975 Int'l. Write-off & Domestic Contract Settlement - - (76) - Gain on Ownership Chg. & Transition Charges-MAP - - 223 - Inventory Market Val. Res. Adjustment. (50) 41 (22) (137) ------ ------ ------ ------ Total Marathon Group $215 $360 $1,070 $838 CAPITAL EXPENDITURES (c) $285 $263 $835 $652 INVESTMENTS IN EQUITY AFFILIATES-NET 49 60 52 197 OPERATING STATISTICS Net Liquid Hydrocarbon Production (e): Domestic 137.2 113.8 133.7 113.9 International (Liftings) 72.0 47.2 59.2 50.7 ------ ------ ------ ------ Worldwide 209.2 161.0 192.9 164.6 Net Natural Gas Production (f): Domestic 728.8 698.2 733.4 716.8 International - Equity 408.6 340.3 413.3 425.6 International - Other (g) 20.8 35.3 23.7 33.0 ------- ------- ------- ------- Total Consolidated 1158.2 1073.8 1170.4 1175.4 Equity Affiliate 23.2 33.4 34.0 42.5 ------- ------- ------- ------- Worldwide 1181.4 1107.2 1204.4 1217.9 Average Equity Sales Prices (h): Liquid Hydrocarbons (per Bbl) Domestic $10.23 $15.94 $10.72 $17.10 International 11.66 18.12 12.59 18.89 Natural Gas (per Mcf) Domestic (j) $1.68 $1.87 $1.82 $2.14 International 1.90 1.87 2.04 2.01 Natural Gas Sales (f) (i): Domestic 1067.6 1074.1 1122.1 1147.2 International 429.4 375.6 437.0 458.6 ------- ------- ------- ------- Total Consolidated 1497.0 1449.7 1559.1 1605.8 Equity Affiliate 23.2 33.4 34.0 42.5 ------- ------- ------- ------- Worldwide 1520.2 1483.1 1593.1 1648.3 Crude Oil Refined (e) (c) 885.5 562.6 904.6 513.2 Refined Products Sold (e) (c) 1228.6 793.3 1183.7 758.8 Matching buy/sell volumes included in refined products sold (e) (c) 35.6 35.9 38.4 48.4 - -------------- (a) Certain 1997 amounts have been reclassified to conform to 1998 classifications (b) Income from operations for operating components includes operating income previously reported, plus dividend and affiliate income and other income. (c) In 1998, income from operations, capital expenditures, refined products sold, crude oil refined and matching buy/sell volumes include 100 percent of MAP and are not comparable to prior periods. For further discussion of MAP, see Note 6 to the Marathon Group Statement Of Operations. (d) Includes domestic natural gas and crude oil marketing and transportation, and power generation (e) Thousands of barrels per day (f) Millions of cubic feet per day (g) Represents gas acquired for injection and subsequent resale (h) Prices exclude gains and losses from hedging activities (i) Represents equity, royalty and resale volumes (j) The third quarter 1997 amount includes an unfavorable $.13 adjustment relating to a contract dispute.
54 MARATHON GROUP OF USX CORPORATION SUPPLEMENTAL STATISTICS (Unaudited) ----------------------------------- The following unaudited pro forma data for the Marathon Group includes the pro forma results of operations of Tarragon for 1998 and 1997, and the Ashland RM&T net assets for 1997, giving effect to the acquisitions as if they had been consummated at the beginning of the years presented. The pro forma data is based on historical information and does not necessarily reflect the actual results that would have occurred, nor is it necessarily indicative of future results of operations. See Note 6 to the Marathon Group Financial Statements for additional information.
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions, except per share amounts) 1998 1997 1998 1997 - -------------------------------------------------------------------------------- Marathon Group: Revenues $5,679 $5,804 $16,816 $17,597 Income from operations (a) 258 461 1,084 1,276 Net income (b) 42 183 365 410 Net income per common share: Basic .14 .63 1.26 1.42 Diluted .14 .63 1.25 1.41 RM&T Operations (c) (d): Income from operations (a) $224 $358 $749 $729 Thousands of barrels per day: Crude oil refined 885.5 909.6 904.6 855.7 Refined products sold 1228.6 1220.7 1183.7 1170.8 Matching buy/sell volumes include in refined products sold 35.6 49.7 38.4 68.9 (a) Excludes the inventory market valuation reserve adjustments. (b) Excluding the inventory market valuation reserve adjustment, pro forma net income would have been $61 million and $373 million for the 1998 third quarter and nine months, respectively and $159 million and $487 million for the 1997 third quarter and nine months, respectively. (c) Pro forma data is based on results of operations from RM&T assets contributed to MAP by Marathon and Ashland, purchase accounting effects and other pro forma adjustments and reclassifications. (d) Results for 1998 are actuals. There are no pro forma effects in 1998, since MAP commenced operations January 1, 1998.
55 Part I - Financial Information (Continued): C. U. S. Steel Group
U. S. STEEL GROUP OF USX CORPORATION STATEMENT OF OPERATIONS (Unaudited) ------------------------------------ Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions, except per share amounts) 1998 1997 1998 1997 - -------------------------------------------------------------------------------- REVENUES: Sales $1,483 $1,701 $4,842 $5,035 Income from affiliates 3 12 46 39 Gain on disposal of assets 11 21 39 28 Other income (loss) - 1 (1) 1 ------ ------ ------ ------- Total revenues 1,497 1,735 4,926 5,103 ------ ------ ------ ------- COSTS AND EXPENSES: Cost of sales (excludes items shown below) 1,312 1,433 4,203 4,275 Selling, general and administrative expenses (credits) (51) (30) (150) (100) Depreciation, depletion and amortization 71 72 220 225 Taxes other than income taxes 60 63 169 182 ------ ------ ------ ------- Total costs and expenses 1,392 1,538 4,442 4,582 ------ ------ ------ ------- INCOME FROM OPERATIONS 105 197 484 521 Net interest and other financial costs 10 22 60 70 ------ ------ ------ ------ INCOME BEFORE INCOME TAXES 95 175 424 451 Provision for estimated income taxes 30 59 136 151 ------ ------ ------ ------ NET INCOME 65 116 288 300 Noncash credit from exchange of preferred stock - - - 10 Dividends on preferred stock (2) (2) (7) (10) ------ ------ ------ ------ NET INCOME APPLICABLE TO STEEL STOCK $63 $114 $281 $300 ====== ====== ====== ====== STEEL STOCK DATA: Net income per share - Basic $.72 $1.32 $3.22 $3.50 - Diluted .71 1.25 3.11 3.24 Dividends paid per share .25 .25 .75 .75 Weighted average shares, in thousands - Basic 88,099 85,770 87,223 85,463 - Diluted 92,359 93,952 94,717 94,176 Selected notes to financial statements appear on pages 58-61.
56
U. S. STEEL GROUP OF USX CORPORATION BALANCE SHEET (Unaudited) ------------------------------------ September 30 December 31 (Dollars in millions) 1998 1997 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $23 $18 Receivables, less allowance for doubtful accounts of $6 and $13 441 588 Inventories 776 705 Deferred income tax benefits 214 220 Other current assets 1 - ------ ------ Total current assets 1,455 1,531 Investments and long-term receivables, less reserves of $12 and $15 763 670 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $5,893 and $5,799 2,489 2,496 Prepaid pensions 2,126 1,957 Other noncurrent assets 33 40 ------ ------ Total assets $6,866 $6,694 ====== ====== LIABILITIES Current liabilities: Notes payable $21 $13 Accounts payable 618 687 Payroll and benefits payable 333 379 Accrued taxes 171 190 Accrued interest 7 11 Long-term debt due within one year 11 54 ------ ------ Total current liabilities 1,161 1,334 Long-term debt, less unamortized discount 501 456 Employee benefits 2,329 2,338 Deferred credits and other liabilities 582 536 Preferred stock of subsidiary 66 66 USX obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely junior subordinated convertible debentures of USX 182 182 STOCKHOLDERS' EQUITY Preferred stock 3 3 Common stockholders' equity 2,042 1,779 ------ ------ Total stockholders' equity 2,045 1,782 ------ ------ Total liabilities and stockholders' equity $6,866 $6,694 ====== ====== Selected notes to financial statements appear on pages 58-61.
57
U. S. STEEL GROUP OF USX CORPORATION STATEMENT OF CASH FLOWS (Unaudited) ------------------------------------ Nine Months Ended September 30 (Dollars in millions) 1998 1997 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income $288 $300 Adjustments to reconcile to net cash provided from operating activities: Depreciation, depletion and amortization 220 225 Pensions (171) (184) Postretirement benefits other than pensions (4) 3 Deferred income taxes 109 37 Gain on disposal of assets (39) (28) Changes in: Current receivables 148 47 Inventories (71) (66) Current accounts payable and accrued expenses (132) 70 All other - net (55) (51) ------ ------ Net cash provided from operating activities 293 353 ------ ------ INVESTING ACTIVITIES: Capital expenditures (228) (176) Disposal of assets 17 390 Investments in equity affiliates - net (66) (20) Deposits of restricted cash - net (16) - All other - net 13 9 ------ ------ Net cash provided from (used in) investing activities (280) 203 ------ ------ FINANCING ACTIVITIES: Increase (decrease) in U. S. Steel Group's portion of USX consolidated debt 21 (513) Specifically attributed debt repayments (3) (6) Steel Stock issued 55 29 Preferred stock repurchased (8) - Dividends paid (73) (72) ------ ------ Net cash used in financing activities (8) (562) ------ ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5 (6) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 18 23 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $23 $17 ====== ====== Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $(61) $(82) Income taxes paid, including settlements with other groups (32) (88) Selected notes to financial statements appear on pages 58-61.
58 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS -------------------------------------- (Unaudited) 1. The information furnished in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. Additional information is contained in the USX Annual Report on Form 10-K for the year ended December 31, 1997. 2. Effective January 1, 1998, USX adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130). This statement establishes standards for reporting and display of comprehensive income and its components in the financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events from nonowner sources. It includes all changes in equity during a period except those resulting from investments by and distributions to owners. The U. S. Steel Group's total comprehensive income for the third quarter and nine months of 1998 was $64 million and $285 million, respectively. Total comprehensive income for the same 1997 periods was $116 million and $299 million, respectively. Effective January 1, 1997, USX adopted American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" (SOP 96-1), which provides additional interpretation of existing accounting standards related to recognition, measurement and disclosure of environmental remediation liabilities. As a result of adopting SOP 96-1, the U. S. Steel Group identified additional environmental remediation liabilities of $35 million, of which $28 million was discounted to a present value of $13 million and $7 million was not discounted. Assumptions used in the calculation of the present value amount included an inflation factor of 2% and an interest rate of 7% over a range of 22 to 30 years. The net unfavorable effect of adoption on income from operations at January 1, 1997, was $20 million. 3. The financial statements of the U. S. Steel Group include the financial position, results of operations and cash flows for all businesses of USX other than the businesses, assets and liabilities included in the Marathon Group and a portion of the corporate assets and liabilities and related transactions which are not separately identified with ongoing operating units of USX. These financial statements are prepared using the amounts included in the USX consolidated financial statements. Corporate amounts reflected in these financial statements are determined based upon methods which management believes to be reasonable. The accounting policies applicable to the preparation of the financial statements of the U. S. Steel Group may be modified or rescinded in the sole discretion of the Board of Directors of USX (Board), although the Board has no present intention to do so. The Board may also adopt additional policies depending on the circumstances. 59 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 3. (Continued) Although the financial statements of the U. S. Steel Group and the Marathon Group separately report the assets, liabilities (including contingent liabilities) and stockholders' equity of USX attributed to each such Group, such attribution of assets, liabilities (including contingent liabilities) and stockholders' equity among the U. S. Steel Group and the Marathon Group for purposes of preparing their respective financial statements does not affect legal title to such assets and responsibility for such liabilities. Holders of USX-U. S. Steel Group Common Stock (Steel Stock) and USX-Marathon Group Common Stock (Marathon Stock) are holders of common stock of USX and continue to be subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts arising from one Group that affect the overall cost of USX's capital could affect the results of operations and financial condition of the other Group. In addition, net losses of either Group, as well as dividends or distributions on any class of USX Common Stock or series of Preferred Stock and repurchases of any class of USX Common Stock or series of Preferred Stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on both classes of Common Stock. Accordingly, the USX consolidated financial information should be read in connection with the U. S. Steel Group financial information. The financial statement provision for estimated income taxes and related tax payments or refunds have been reflected in the U. S. Steel Group, the Marathon Group and, prior to November 1, 1997, the Delhi Group financial statements in accordance with USX's tax allocation policy for such groups. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated among the U. S. Steel Group, the Marathon Group and, prior to November 1, 1997, the Delhi Group for group financial statement purposes, based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to the respective groups. The provision for estimated income taxes for the U. S. Steel Group is based on tax rates and amounts which recognize management's best estimate of current and deferred tax assets and liabilities. Differences between the combined interim tax provisions of the U. S. Steel, Marathon and Delhi Groups and USX consolidated are allocated to each group based on the relationship of the individual group provisions to the combined interim provisions. The nine months 1998 provision for estimated income taxes was decreased by a $9 million foreign tax adjustment as a result of a favorable resolution of foreign tax litigation. 60 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 4. The method of calculating net income per share for the Steel Stock, Marathon Stock and, prior to November 1, 1997, Delhi Stock reflects the Board's intent that the separately reported earnings and surplus of the U. S. Steel Group, the Marathon Group and the Delhi Group, as determined consistent with the USX Certificate of Incorporation, are available for payment of dividends on the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. Basic net income per share is calculated by adjusting net income for dividend requirements of preferred stock and, in 1997, the noncash credit on exchange of preferred stock and is based on the weighted average number of common shares outstanding. Diluted net income per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options, provided in each case, the effect is not antidilutive. See Note 5, of the Notes to USX Consolidated Financial Statements for the computation of income per common share. 5. Income from operations includes net periodic pension credits of $153 million and $114 million in the first nine months of 1998 and 1997, respectively, ($51 million and $40 million in the third quarter of 1998 and 1997, respectively). These pension credits are primarily noncash and for the most part are included in selling, general and administrative expenses. 6. Inventories are carried at the lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method.
(In millions) ------------------------- September 30 December 31 1998 1997 ----------- ----------- Raw materials $187 $130 Semi-finished products 312 331 Finished products 221 187 Supplies and sundry items 56 57 ---- ---- Total $776 $705 ==== ====
7. The U. S. Steel Group participates in an agreement (the program) to sell an undivided interest in certain accounts receivable. Payments are collected from the sold accounts receivable; the collections are reinvested in new accounts receivable for the buyers; and a yield, based on defined short-term market rates, is transferred to the buyers. At September 30, 1998, the amount sold under the program that had not been collected was $350 million, which will be forwarded to the buyers at the end of the agreement, or in the event 61 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 7. (Continued) of earlier contract termination. If the U. S. Steel Group does not have a sufficient quantity of eligible accounts receivable to reinvest in for the buyers, the size of the program will be reduced accordingly. The buyers have rights to a pool of receivables that must be maintained at a level of at least 115% of the program size. In the event of a change in control of USX, as defined in the agreement, the U. S. Steel Group may be required to forward payments collected on sold accounts receivable to the buyers. 8. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the U. S. Steel Group involving a variety of matters including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the U. S. Steel Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the U. S. Steel Group. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. The U. S. Steel Group is subject to federal, state and local laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At September 30, 1998, and December 31, 1997, accrued liabilities for remediation totaled $98 million and $106 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. For a number of years, the U. S. Steel Group has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the first nine months of 1998 and for the years 1997 and 1996, such capital expenditures totaled $38 million, $43 million and $90 million, respectively. The U. S. Steel Group anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. Guarantees by USX of the liabilities of affiliated entities of the U. S. Steel Group totaled $72 million at September 30, 1998. In the event that any defaults of guaranteed liabilities occur, USX has access to its interest in the assets of the affiliates to reduce U. S. Steel Group losses resulting from these guarantees. As of September 30, 1998, the largest guarantee for a single affiliate was $44 million. The U. S. Steel Group's contract commitments to acquire property, plant and equipment at September 30, 1998, totaled $238 million compared with $156 million at December 31, 1997. 62 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ----------------------------------------------- The U. S. Steel Group includes U. S. Steel, which is primarily engaged in the production and sale of steel mill products, coke and taconite pellets. The U. S. Steel Group also includes the management of mineral resources, domestic coal mining and engineering and consulting services (together with U. S. Steel, the "Steel & Related Businesses"). Steel & Related - Equity Affiliates includes Transtar Inc. and joint ventures such as USS/Kobe Steel Company ("USS/Kobe"), USS-POSCO Industries ("USS-POSCO") and PRO-TEC Coating Company ("PRO-TEC"). Other businesses that are part of the U. S. Steel Group include real estate development and management, and leasing and financing activities. Management's Discussion and Analysis should be read in conjunction with the third quarter and first nine months of 1998 USX consolidated financial information and the U. S. Steel Group Financial Statements and selected notes. The discussion of Results of Operations should be read in conjunction with the Supplemental Statistics provided on page 75. Certain sections of Management's Discussion and Analysis include forward- looking statements concerning trends or events potentially affecting the businesses of the U. S. Steel Group. These statements typically contain words such as "anticipates", "believes", "estimates", "expects" or similar words indicating that future outcomes are not known with certainty and subject to risk factors that could cause these outcomes to differ significantly from those projected. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in forward-looking statements. For additional risk factors affecting the businesses of the U. S. Steel Group, see Supplementary Data - Disclosures About Forward-Looking Statements in USX's 1997 Form 10-K. Results of Operations - --------------------- Revenues for the third quarter and first nine months of 1998 and 1997 are set forth in the following table:
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 1998 1997 1998 1997 ------ ------ ------ ------ Steel & Related Businesses $1,477 $1,702 $4,818 $5,009 Steel & Related - Equity Affiliates - 8 29 29 ----- ----- ----- ----- Subtotal - Steel & Related 1,477 1,710 4,847 5,038 Administrative & Other Businesses 20 25 79 65 ----- ----- ----- ----- Total Revenues (a) $1,497 $1,735 $4,926 $5,103 ====== ====== ====== ====== - ------ (a) Amounts for the third quarter and first nine months of 1997 were reclassified to conform to 1998 classifications.
Total revenues decreased $238 million and $177 million in the third quarter and first nine months of 1998, respectively, compared with the same periods in 1997. The decrease in revenues resulted from lower shipment levels and lower average steel product prices. An unprecedented surge in imports, weak tubular markets, and the effects of the General Motors strike negatively affected shipment levels, steel product prices and operating levels in the third quarter. 63 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Income from operations (IFO) and certain items included in income from operations for the third quarter and first nine months of 1998 and 1997 are set forth in the following table:
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 1998 1997 1998 1997 ------ ------ ------ ------ Total income from operations (a) $105 $197 $484 $521 Less: certain favorable (unfavorable) items for Insurance litigation settlement No. 8 blast furnace (net of related charges and reserves)(b) - - 30 - Insurance settlement related to the 1996 hearth breakout at the Gary Works No. 13 blast furnace - 25 - 40 Effect of adoption of SOP 96-1 (c) - - - (20) Other environmental accrual adjustments - net - - - 11 ----- ----- ----- ----- Subtotal - 25 30 31 ----- ----- ----- ----- IFO adjusted to exclude above items $105 $172 $454 $490 ===== ===== ===== ===== - ----- (a) Consists of operating income, affiliate income, net gains on disposal of assets and other income. Amounts for 1997 were reclassified in 1998 to include affiliate income and other income. (b) Settlement of litigation against the company's property insurers to recover losses related to a 1995 explosion at the Gary Works No. 8 blast furnace. (c) American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" ("SOP 96-1") provides additional guidance on recognition, measurement and disclosure of remediation liabilities. For additional information, see Note 2 to the U. S. Steel Group Financial Statements.
Adjusted income from operations for the U. S. Steel Group decreased $67 million and $36 million, respectively, in the third quarter and first nine months of 1998 compared with the same periods in 1997. The decreases were primarily due to lower results from Steel and Related Businesses, partially offset by higher results from Administrative and Other Businesses.
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 1998 1997 1998 1997 ------ ------ ------ ------ Steel & Related Businesses $32 $140 $235 $354 Steel & Related - Equity Affiliates - 8 29 29 ----- ----- ----- ----- Subtotal - Steel & Related 32 148 264 383 Administrative & Other Businesses 73 49 220 138 ----- ----- ----- ----- Total income from operations $105 $197 $484 $521 ===== ===== ===== =====
64 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Income from operations for Steel & Related Businesses decreased $108 million in the third quarter of 1998 compared with the third quarter of 1997. Results in the third quarter 1997 included a favorable $25 million in final settlement payments related to the 1996 hearth breakout at the Gary Works No. 13 blast furnace. Excluding the settlement, income from operations for the third quarter 1998 decreased $83 million from the same period in 1997. The decrease was primarily due to lower shipment levels, lower average steel product prices, and less efficient operating levels. An unprecedented surge in imports, weak tubular markets, and the effects of the General Motors strike negatively affected shipment levels, steel product prices and operating levels in the third quarter. Income from operations for Steel & Related Businesses decreased $119 million in the first nine months of 1998 compared with the same period in 1997. Results in the first nine months of 1998 included a favorable $30 million (net of charges and reserves) insurance litigation settlement pertaining to the 1995 Gary (Ind.) Works No. 8 blast furnace explosion. Results in the first nine months of 1997 included $40 million in favorable insurance settlement payments related to a 1996 hearth breakout at Gary Works No. 13 blast furnace. Excluding these favorable items, income from operations for Steel & Related Businesses in the first nine months of 1998 decreased $109 million from the same period in 1997. The decrease was primarily due to lower average steel prices, lower steel shipments, and the cost effects of the planned reline at Gary Works No. 6 blast furnace and the 10 day outage at Gary Works No. 13 blast furnace following a tap hole failure. The surge in the level of steel imports, weak tubular markets and the General Motors strike contributed to lower average steel prices and reduced shipments in the third quarter and first nine months of 1998. Income from operations for Steel and Related - Equity Affiliates decreased $8 million in the third quarter of 1998, compared with the same period in 1997. The decrease was mainly due to lower income generated by USS-POSCO and PRO-TEC, partially offset by income from VSZ U. S. Steel s. r.o. (for additional information on VSZ U. S. Steel, see "Net cash used in investments in equity affiliates" on page 66). Equity affiliates, especially USS-POSCO and USS/Kobe, were also negatively impacted by the surge in imports and weak tubular markets. Administrative and Other Businesses includes the portion of pension credits, postretirement benefit costs and certain other expenses principally attributable to the former businesses of the U. S. Steel Group as well as USX corporate general and administrative costs allocated to the U. S. Steel Group. Income from operations for Administrative and Other Businesses increased $24 million and $82 million in the third quarter and first nine months of 1998, respectively, compared with the same periods in 1997. Income from operations for Administrative and Other Businesses for the first nine months of 1997 included net charges of $9 million related to environmental accruals and the adoption of SOP 96-1. Excluding these charges, income from operations for the first nine months of 1998 increased $73 million from the same period in 1997 primarily due to higher pension credits, higher equity income from RTI International Metals, Inc. (formerly RMI Titanium Company) ("RTI") primarily due to a one-time tax adjustment and higher income from USX Realty Development, partially offset by lower income from USX Credit. The pension credits referred to in Administrative and Other Businesses, combined with pension costs for ongoing operating units of the U. S. Steel Group, resulted in net pension credits (which are primarily noncash) of $153 million and $114 million in the first nine months of 1998 and 1997, respectively. To the extent that these credits decline in the future, income from operations would be adversely affected. 65 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Net interest and other financial costs for the third quarter and first nine months of 1998 and 1997 are set forth in the following table:
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 1998 1997 1998 1997 ------ ------ ------ ------ Interest and other financial income $- $1 $4 $2 Interest and other financial costs (10) (23) (64) (72) ----- ----- ----- ----- Net interest and other financial costs (10) (22) (60) (70) Less: Favorable (unfavorable) adjustments to carrying value of indexed debt (a) 11 - 7 6 ----- ----- ----- ----- Net interest and other financial costs adjusted to exclude above item $(21) $(22) $(67) $(76) ===== ===== ===== ===== - ----- (a) In December 1996, USX issued $117 million of 6-3/4% Exchangeable Notes Due February 1, 2000, ("indexed debt") indexed to the price of RTI common stock. At maturity, USX must exchange these notes for shares of RTI common stock, or redeem the notes for the equivalent amount of cash. The carrying value of indexed debt is adjusted quarterly to settlement value, based on changes in the value of RTI common stock. Any resulting adjustment is charged or credited to income and included in interest and other financial costs. USX's 27% interest in RTI continues to be accounted for under the equity method.
Adjusted net interest and other financial costs decreased by $1 million and $9 million in the third quarter and first nine months of 1998, respectively, as compared with the same period in 1997, due primarily to lower average debt levels in the U. S. Steel Group. The provision for estimated income taxes in the first nine months of 1998 included a $9 million favorable foreign tax adjustment as a result of a favorable resolution of foreign tax litigation. Net income decreased $51 million and $12 million in the third quarter and first nine months of 1998, respectively, as compared with the same periods in 1997. Noncash credit from exchange of preferred stock totaled $10 million in the first nine months of 1997. On May 16, 1997, USX exchanged approximately 3.9 million 6.75% Convertible Quarterly Income Preferred Securities ("Trust Preferred Securities") of USX Capital Trust I, for an equivalent number of shares of its outstanding 6.50% Cumulative Convertible Preferred Stock ("6.50% Preferred Stock"). The noncash credit from exchange of preferred stock represents the difference between the carrying value of the 6.50% Preferred Stock ($192 million) and the fair value of the Trust Preferred Securities of USX Capital Trust I ($182 million), at the date of the exchange. 66 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- Operating Statistics - -------------------- Third quarter 1998 steel shipments of 2.6 million tons and raw steel production of 2.7 million tons decreased 11% and 6%, respectively, from the same period in 1997. First nine months of 1998 steel shipments of 8.3 million tons and raw steel production of 8.8 million tons both decreased 4%, from the same period in 1997. Raw steel capability utilization in the third quarter and first nine months of 1998 averaged 84.6% and 91.6%, respectively, compared to 90.4% and 95.6% in the same period in 1997. Production and raw steel capability utilization in the third quarter and first nine months of 1998 were negatively impacted by a surge in imports and by the planned and unplanned blast furnace outages at Gary Works. As a result of current market conditions, U. S. Steel Group has curtailed its production operations by keeping the Gary Works No. 6 blast furnace out of service even though a scheduled reline was completed in Mid-August, cutting back raw steel production at Mon Valley Works and Fairfield Works, suspending one of Minntac's five taconite pellet production lines in Minnesota, and taking the Fairfield pipe mill down for several multiple-week periods. Cash Flows - ----------- Net cash provided from operating activities in the first nine months of 1998 was $293 million, compared with $353 million in the same period in 1997. The first nine months of 1998 included proceeds of $38 million for the insurance litigation settlement pertaining to the 1995 Gary Works No. 8 blast furnace explosion. The first nine months of 1997 included payments of $49 million to fund the U. S. Steel Group's principal pension plan for the 1996 plan year and receipts of $40 million in insurance recoveries related to the Gary Works No. 13 blast furnace breakout. Excluding these items, net cash provided from operating activities decreased $107 million due primarily to unfavorable working capital changes. Capital expenditures in the first nine months of 1998 were $228 million, compared with $176 million in the same period in 1997. Contract commitments to acquire property, plant and equipment at September 30, 1998, totaled $238 million compared with $156 million at December 31, 1997. Cash from the disposal of assets in 1997 included proceeds of $361 million from U. S. Steel's entry into a strategic partnership with two limited partners to acquire an interest in three coke batteries at its Clairton Works. Net cash used in investments in equity affiliates of $66 million mainly reflects funding for entry into a joint venture in Slovakia with VSZ a.s. ("VSZ"). In February 1998, the 50-50 joint venture, doing business as VSZ U. S. Steel, s. r.o., took over ownership and commenced operation of an existing tin mill facility at VSZ's Ocel plant in Kosice, with annual production capability of 140,000 metric tons. The joint venture plans to add 200,000 annual metric tons of new tin mill production capability in the next two years. Financing of the expansion may be subject to future economic and steel market developments and the level of partners' support that potential lenders may require. Financial obligations increased by $18 million in the first nine months of 1998. Financial obligations consist of the U. S. Steel Group's portion of USX debt and preferred stock of a subsidiary attributed to both groups, as well as debt and financing agreements specifically attributed to the U. S. Steel Group. Liquidity - --------- For discussion of USX's liquidity and capital resources, see Management's Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and Liquidity. 67 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- Environmental Matters, Contingencies and Commitments - ---------------------------------------------------- The U. S. Steel Group has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. In recent years, these expenditures have been mainly for process changes in order to meet Clean Air Act obligations, although ongoing compliance costs have also been significant. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the U. S. Steel Group's products and services, operating results will be adversely affected. The U. S. Steel Group believes that all of its domestic competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and the specific products and services it provides. To the extent that competitors are not required to undertake equivalent costs in their operations, the competitive position of the U. S. Steel Group could be adversely affected. USX has been notified that it is a potential responsible party ("PRP") at 27 waste sites related to the U. S. Steel Group under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of September 30, 1998. In addition, there are 17 sites related to the U. S. Steel Group where USX has received information requests or other indications that USX may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability or make any judgment as to the amount thereof. There are also 35 additional sites related to the U. S. Steel Group where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. At many of these sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. The U. S. Steel Group accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. In 1990 a consent decree was signed by USX which, among other things, required USX to study and implement a program to remediate the sediment in a portion of the Grand Calumet River. On August 6, 1998, USX announced the signing of a new consent decree under the federal Clean Water Act. The consent decree provides for a sediment remediation project involving a five-mile stretch of the Grand Calumet River that runs through Gary Works. The program cost, which has been accrued, is approximately $30 million. The sediment remediation project is scheduled for completion by 2003. In addition, USX disclosed the completion of a series of wastewater capital projects at Gary Works costing approximately $25 million, which are necessary to comply with the new consent decree. The wastewater capital projects will improve the plant's ability to prevent releases of process materials into the river. In addition, USX also signed a consent decree with the public trustees to settle natural resource damage claims for the portion of the Grand Calumet River that runs through Gary Works. This settlement obligates USX to purchase and restore several parcels of property. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the U. S. Steel Group involving a variety of matters, including laws and regulations relating to the environment, certain of which are discussed in Note 9 to the U. S. Steel Group Financial Statements. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the U. S. Steel Group Financial Statements. However, management believes that USX will remain a viable and competitive 68 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- enterprise even though it is possible that these contingencies could be resolved unfavorably to the U. S. Steel Group. Outlook - ------- Shipment volumes and average steel product prices in the fourth quarter for the U. S. Steel Group and its domestic joint ventures are expected to be lower than the fourth quarter of 1997 largely due to the continued surge in steel imports and weak tubular markets. Faced with weak economies and markets, foreign steelmakers are exporting their material to the United States at record levels during 1998. The level of imports in the third quarter 1998, may have caused domestic steel customers to build inventories, which could result in weakness in steel demand in the fourth quarter. Growing domestic production and finishing capability for flat-rolled products and high levels of imports could continue to have an adverse effect on the U. S. Steel Group's product prices and shipment levels. In addition, any weakness in the U.S. economy for capital goods and consumer durables could further reduce U. S. Steel Group's product prices and shipment levels. As a result of current market conditions and depressed order levels, U. S. Steel Group has curtailed its production operations by keeping the Gary Works No. 6 blast furnace out of service even though a scheduled reline was completed in Mid-August, cutting back raw steel production at Mon Valley Works and Fairfield Works, suspending one of Minntac's five taconite pellet production lines in Minnesota, and taking the Fairfield pipe mill down for several multiple-week periods. Also, U. S. Steel Group plans to curtail operations at Fairless Works by 70 percent by indefinitely idling selected sheet finishing facilities. Further curtailments may be required. Such curtailments will negatively impact unit manufacturing costs. In addition, U. S. Steel Group has offered a Voluntary Early Retirement Program to approximately 550 non-union employees which is expected to result in a charge to net income in the fourth quarter 1998, currently estimated to be less than $10 million. Steel imports to the United States accounted for an estimated 28%, 24% and 23% of the domestic steel market in the first eight months of 1998, and for the years 1997 and 1996, respectively. During July and August of 1998, steel imports surged and accounted for 35% and 34%, respectively, of the domestic steel market. On September 30, 1998, U. S. Steel joined with 11 other producers and the United Steelworkers of America to file trade cases against Japan, Russia, and Brazil. Those filings contend that millions of tons of unfairly traded hot-rolled carbon sheet products have caused serious injury to the domestic steel industry through rapidly falling prices and lost business. Information is continuing to be evaluated and the filing of additional trade cases is anticipated. The preceding statements concerning anticipated steel demand, steel pricing, steel production and manufacturing costs, results of operation and shipment levels are forward-looking and are based upon assumptions as to future demand, product prices and mix, and levels of steel production capability, production and shipments. These assumptions can be affected by imports, domestic and international economies, domestic production capacity, and customer demand. In the event these assumptions prove to be inaccurate, actual results may differ significantly from those presently anticipated. 69 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- Year 2000 Readiness Disclosure - ------------------------------ A multi-functional Year 2000 task force continues to execute a preparedness plan which addresses readiness requirements for business computer systems, technical infrastructure, end-user computing, third parties, manufacturing, environmental operations, systems products produced and sold, and dedicated R&D test facilities. The U. S. Steel Group is executing a Year 2000 readiness plan which includes: * prioritizing and focusing on those computerized and automated systems and processes critical to the operations in terms of material safety, operational, environmental, quality and financial risk to the company. * allocating and committing appropriate resources to fix the problem. * communicating with, and aggressively pursuing, critical third parties to help ensure the Year 2000 readiness of their products and services through use of mailings, telephone contacts, on-site assessments and the inclusion of Year 2000 readiness language in purchase orders and contracts. * performing rigorous Year 2000 tests of critical systems. * participating in, and exchanging Year 2000 information with industry trade associations, such as the American Iron & Steel Institute, Association of Iron & Steel Engineers and the Steel Industry Systems Association. * engaging qualified outside engineering and information technology consulting firms to assist in the Year 2000 impact assessment and readiness effort. State of Readiness The U. S. Steel Group's objective is to achieve 90% Year 2000 readiness for Information Technology (IT) and 80% for non-IT systems and processes by the end of 1998. Certain systems/processes are to be replaced and/or upgraded with third-party Year 2000 ready products and services. All systems and processes are targeted to be Year 2000 ready, including integration testing, by the end of the third quarter, 1999. This schedule may be impacted by the availability of information and services from third-party suppliers/vendors on the Year 2000 readiness of their products and services. Generally, the year 1999 will be primarily devoted to Year 2000 systems and integration testing, tracking of the readiness of third parties, developing contingency plans and verifying the state of Year 2000 readiness. The chart below provides the percent of completion for the inventory of systems and processes that may be affected by the year 2000 ("Y2K Inventory"), the analysis performed to determine the Year 2000 date impact of inventoried systems and processes ("Y2K Impact Assessment") and the year 2000 readiness of the U. S. Steel Group`s year 2000 inventory ("Y2K Readiness of Overall Inventory"). The percent of completion for Y2K Readiness of Overall Inventory includes all inventory items not date impacted, those items already Year 2000 ready and those 70 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- corrected and made Year 2000 ready through the renovation/replacement, testing and implementation activities.
Percent Completed Y2K Y2K Readiness Impact of Y2K Assess- Overall End of Third Quarter 1998 Inventory ment Inventory ------ ------ ------ Information Technology 100% 95% 84% Non-Information Technology 100% 75% 70%
Third Parties The U. S. Steel Group continues to review its third party (including, but not limited to outside processors, process control systems and hardware suppliers, and transportation carriers)relationships to determine those critical to its operations. The majority of contacts have been made with critical third parties to determine if they will be able to provide their product and service to the U. S. Steel Group after the Year 2000. An aggressive follow-up process with those third parties not responding or returning an unacceptable response is underway. Communications with U. S. Steel Group third parties is an on-going process which includes mailings, telephone contacts and on-site visits. If it is determined that there is a significant risk with the third parties, an effort will be made to work with the third parties to resolve the issue, or a new provider of the same products or services will be investigated and secured. Through the end of the third quarter the U. S. Steel Group sent out approximately 700 inquiries and received over 450 responses. The Costs to Address Year 2000 Issues The estimated costs associated with Year 2000 readiness, are approximately $25 million, including $10 million in incremental cost. Total costs incurred as of September 30, 1998, were $9 million, including $5 million of incremental costs. As Y2K Impact Assessment nears completion and the renovation planning, readiness implementation and testing evolve, the estimated costs may change. Year 2000 Risks to the Company The most reasonably likely worst case Year 2000 scenario would be the inability of our third party suppliers, such as utility providers, telecommunication companies, outside processors, and other critical suppliers, to continue providing their products and services. This could pose the greatest material safety, operational, environmental, quality and/or financial risk to the company. 71 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- In addition, the lack of accurate and timely Year 2000 date impact information from suppliers of automation and process control systems and processes is a concern to the U. S. Steel Group. Without timely and quality information from suppliers, specifically on embedded chip technology, schedules for attaining readiness can be impacted and some Year 2000 problems could go undetected during the transition to the new century. Contingency Planning Guidelines have been issued to all business units for creating contingency plans to address those critical facets of their operation that can cause a material safety, operational, environmental, or financial risk to the company. These plans are to be completed and tested, when practical, by the middle of 1999. Representatives of the U. S. Steel Group are participating with a Year 2000 subcommittee of the Association of Iron & Steel Engineers to develop a contingency plan format for process control systems. This format will include a contingency plan template and other guidelines to help entities develop a plan that will cover the associated Year 2000 areas of concern. This discussion includes forward-looking statements of the U. S. Steel Group's efforts and management's expectations relating to Year 2000 readiness. The Steel Group's ability to achieve Year 2000 readiness and the level of incremental costs associated therewith, could be adversely impacted by, among other things, the availability and cost of programming and testing resources, vendors' ability to install or modify proprietary hardware and software and unanticipated problems identified in the ongoing Year 2000 readiness review. Accounting Standard - ------------------- In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" which introduces a "management approach" for identifying reportable operating segments of an enterprise. USX will adopt the standard, effective with its 1998 annual financial statements. In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". USX will adopt the standard effective with its 1998 annual financial statements. In March 1998, the American Institute of Certified Public Accountants issued its Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidelines for companies to capitalize or expense costs incurred to develop or obtain internal-use software. USX will adopt SOP 98-1 effective January 1, 1999. The incremental impact on results of operations of adoption of SOP 98-1 has not been determined, although it is likely that it will be initially favorable since certain qualifying costs will be capitalized and amortized over future periods. 72 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". This new standard requires recognition of all derivatives as either assets or liabilities at fair value. This new standard may result in additional volatility in both current period earnings and Stockholders' Equity as a result of recording recognized and unrecognized gains and losses resulting from changes in the fair value of derivative instruments. At adoption this new standard requires a comprehensive review of all outstanding derivative instruments to determine whether or not their use meets the hedge accounting criteria. It is possible that there will be derivative instruments employed in our businesses that do not meet all of the designated hedge criteria and they will be reflected in income on a mark-to-market basis. Based upon the strategies currently used by USX and the level of activity related to commodity- based derivative instruments in recent periods, USX does not anticipate the effect of adoption to have a material impact on either financial position or results of operations for the U. S. Steel Group. USX plans to adopt the standard effective January 1, 2000, as required. 73 U. S. STEEL GROUP OF USX CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ------------------------------------- Commodity Price Risk and Related Risks - -------------------------------------- Sensitivity analysis of the incremental effects on pretax income of hypothetical 10% and 25% changes in commodity prices for open derivative commodity instruments as of September 30, 1998 are provided in the following table: (a)
Incremental Decrease in Pretax Income Assuming a Hypothetical Price Change of(a) (Dollars in millions) 10% 25% - -------------------------------------------------------------------------------- Derivative Commodity Instruments U. S. Steel Group Natural gas (price decrease) (b) $3.5 $8.8 Zinc (price decrease) (b) .8 2.1 Heating oil (price decrease) (b) .2 .4 Nickel (price decrease) (b) .1 .2 Tin (price decrease) (b) .1 .2 (a) Gains and losses on derivative commodity instruments are generally offset by price changes in the underlying commodity. Effects of these offsets are not reflected in the sensitivity analyses. Amounts reflect the estimated incremental effect on pretax income of hypothetical 10% and 25% changes in closing commodity prices for each open contract position at September 30, 1998. U. S. Steel Group management evaluates its portfolio of derivative commodity instruments on an ongoing basis and adds or revises strategies to reflect anticipated market conditions and changes in risk profiles. Changes to the portfolios subsequent to September 30, 1998, would cause future pretax income effects to differ from those presented in the table. (b) The direction of the price change used in calculating the sensitivity amount for each commodity reflects that which would result in the largest incremental decrease in pretax income when applied to the derivative commodity instruments used to hedge that commodity.
74 U. S. STEEL GROUP OF USX CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ------------------------------------- Interest Rate Risk - ------------------ As of September 30, 1998, the discussion of the U. S. Steel Group's interest rate risk has not changed materially from that presented in Quantitative and Qualitative Disclosures About Market Risk included in the USX 1997 Form 10-K. Equity Price Risk - ----------------- USX is subject to equity price risk resulting from its issuance in December 1996 of $117 million of 6 3/4% Exchangeable Notes Due February 1, 2000 ("Indexed Debt"). At maturity, USX must exchange the notes for shares of RTI International Metals, Inc. (formerly RMI Titanium Company) ("RTI") common stock, or redeem the notes for the equivalent amount of cash. Each quarter, USX adjusts the carrying value of Indexed Debt to settlement value, based on changes in the value of RTI common stock. Any resulting adjustment is charged or credited to income and included in interest and other financial costs. At September 30, 1998, a hypothetical 10% increase in the value of RTI common stock would have resulted in an $11 million unfavorable effect on pretax income. USX holds a 27% interest in RTI which is accounted for under the equity method. The unfavorable effects on income described above would generally be offset by changes in the market value of USX's investment in RTI. However, under the equity method of accounting, USX cannot recognize in income these changes in the market value until the investment is liquidated. Safe Harbor - ----------- The U. S. Steel Group's quantitative and qualitative disclosures about market risk include forward-looking statements with respect to management's opinion about risks associated with USX's use of derivative instruments, and projected changes in the size and composition of the U. S. Steel Group's hedge portfolio. These forward-looking statements are based on certain assumptions with respect to market prices and industry supply of and demand for steel products and certain raw materials. To the extent that these assumptions prove to be inaccurate, future outcomes with respect to the U. S. Steel Group's hedging programs may differ materially from those discussed in the forward- looking statements. 75 U.S. STEEL GROUP OF USX CORPORATION SUPPLEMENTAL STATISTICS (Unaudited) ----------------------------------- ($ in Millions)
Third Quarter Nine Months Ended Ended September 30 September 30 1998 1997(e) 1998 1997(e) ------ ------ ------ ------ REVENUES $1,497 $1,735 $4,926 $5,103 INCOME FROM OPERATIONS Steel and Related Businesses (a) $32 $140 $235 $354 Steel and Related-Equity Affiliates - 8 29 29 ---- ---- ---- ---- Subtotal - Steel & Related $32 $148 $264 $383 Administrative and Other (b) 73 49 220 138 ---- ---- ---- ---- Total U. S. Steel Group $105 $197 $484 $521 CAPITAL EXPENDITURES $92 $59 $228 $176 OPERATING STATISTICS (Steel & Related Businesses) Steel Shipments (c) 2,554 2,861 8,344 8,670 Raw Steel-Production (c) 2,729 2,915 8,774 9,157 Raw Steel-Capability Utilization (d) 84.6% 90.4% 91.6% 95.6% - ------------ (a) Includes the production and sale of steel products, coke and taconite pellets; domestic coal mining; the management of mineral resources; and engineering and consulting services. (b) Includes pension credits, other postretirement benefit costs and certain other expenses principally attributable to former business units of the U. S. Steel Group. Also includes results of real estate development and management, and leasing and financing activities and equity income from RTI International Metals, Inc. (formerly RMI Titanium Company). (c) Thousands of net tons. (d) Based on annual raw steel production capability of 12.8 million tons. (e) Certain 1997 amounts have been reclassified to conform to 1998 classifications.
76 Part II - Other Information - ---------------------------- Item 1. LEGAL PROCEEDINGS Marathon Group Federal Offshore Claim On July 18, 1997, the United States Court of Federal Claims (Case No. 92-331C) entered a final judgment in the amount of $78 million in favor of Marathon Oil Company and against the United States of America. The U.S. Government was effectively ordered to return lease bonuses that Marathon paid in 1981 for interests in five oil and gas leases offshore North Carolina. The lawsuit filed in May 1992 alleged, inter alia, that the federal government breached the leases through passage of legislation which disrupted the company's rights to explore, develop, and produce hydrocarbons from the leases. In October 1998, the U. S. Government' appeal to the U. S. Court of Appeals of the Federal Circuit was granted and the judgment was reversed. Marathon intends to file a motion for reconsideration. Reference is made to the Form 10-Q's for the first and second quarters of 1998 for updated information on the Aloha Stadium Litigation and the Posted Price Litigation. Item 2. CHANGES IN SECURITIES AND THE USE OF PROCEEDS On August 12, 1998, Marathon Oil Canada Limited, an indirect subsidiary of the registrant, issued 878,000 Exchangeable Shares in exchange for shares of Tarragon Oil and Gas Limited, an Ontario Corporation in connection with the acquisition of Tarragon by Marathon. The issuance of the shares was exempt from the registration provision of the Securities Act pursuant to Section 3(a)(10) of the Act. The Exchangeable Shares are exchangeable at any time on a one- for-one basis for shares of USX-Marathon Group Common Stock. The shares of Marathon Stock issuable upon exchange have been registered under the Securities Act (File No. 333-56867), prospectus supplement dated August 12, 1998). 77 Part II - Other Information (Continued): - --------------------------- Item 5. OTHER INFORMATION (Continued) Marathon Group SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION OF MARATHON OIL COMPANY Supplementary Data --------------------------------------------------------------------- (Unaudited) The following summarized consolidated financial information of Marathon Oil Company, a wholly owned subsidiary of USX, is included in this Form 10-Q in satisfaction of the reporting obligation of Marathon which has debt securities registered under the Securities Exchange Act. All such securities are guaranteed by USX.
(In millions) ------------------------------- Third Quarter Nine Months Ended Ended September 30 September 30 1998 1997 1998 1997 ---- ---- ---- ---- INCOME DATA: Revenues $5,658 $3,935 $16,703 $11,803 Income from operations 225 371 1,093 862 Net income 45 219 366 423
(In millions) ------------------------ September 30 December 31 1998 1997 ----------- ----------- BALANCE SHEET DATA: Assets: Current assets $5,309 $3,436 Noncurrent assets 11,206 8,413 ------ ------ Total assets $16,515 $11,849 ====== ====== Liabilities and Stockholders' Equity: Current liabilities $2,971 $1,997 Noncurrent liabilities 9,150 7,569 Preferred stock of subsidiary 19 - Minority interest in consolidated subsidiary 1,726 - Stockholders' equity 2,649 2,283 ------ ------ Total liabilities and stockholders' equity $16,515 $11,849 ====== ======
78 Part II - Other Information (Continued): - ---------------------------------------- Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 3.1 USX Restated Certificate of Incorporation dated September 1, 1996........... Incorporated by reference to Exhibit 3.1 to the USX Report on Form 10-Q for the quarter ended March 31, 1997. 3.2 USX By-Laws, effective as of July 30, 1996................ Incorporated by reference to Exhibit 3(a) to the USX Report on Form 10-Q for the quarter ended June 30, 1996. 4.1Amended and Restated Rights Agreement........................ Incorporated by reference to USX's Form 8 Amendment to Form 8-A filed on October 9, 1992 (File No. 1-5153). 12.1 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 12.2 Computation of Ratio of Earnings to Fixed Charges 27. Financial Data Schedule (b) REPORTS ON FORM 8-K Form 8-K dated July 13, 1998, reporting under Item 5. Other Events, the schedule for the special meeting of Tarragon Oil and Gas Limited ("Tarragon") securityholders to vote on the approval of the acquisition of Tarragon by the Marathon Oil Company subsidiary of USX Corporation, and under Item 7. Financial Statements and Exhibits, unaudited pro forma financial statements excerpted from Tarragon's Notice of Special Meeting, Notice of Motion and Information Circular. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned chief accounting officer thereunto duly authorized. USX CORPORATION By /s/ Kenneth L. Matheny Kenneth L. Matheny Vice President & Comptroller November 6, 1998 EX-12.1 2 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) Nine Months Ended Year Ended December 31 September 30 -------------------------------- 1998 1997 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- Portion of rentals representing interest $62 $60 $82 $78 $76 $83 $81 Capitalized interest 35 16 31 11 13 58 105 Other interest and fixed charges 240 243 312 382 452 456 365 Pretax earnings which would be required to cover preferred stock dividend requirements of parent 12 17 20 36 46 49 44 ---- ---- ---- ---- ---- ---- ---- Combined fixed charges and preferred stock dividends (A) $349 $336 $445 $507 $587 $646 $595 ==== ==== ==== ==== ==== ==== ==== Earnings-pretax income with applicable adjustments (B) $1329 $1386 $1745 $1837 $877 $1300 $239 ==== ==== ==== ==== ==== ==== ==== Ratio of (B) to (A) 3.81 4.13 3.92 3.62 1.49 2.01 (a) ==== ==== ==== ==== ==== ==== ==== (a) Earnings did not cover combined fixed charges and preferred stock dividends by $356 million for 1993.
EX-12.2 3 Exhibit 12.2
USX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES TOTAL ENTERPRISE BASIS - (Unaudited) Continuing Operations ------------------------------------------------- (Dollars in Millions) Nine Months Ended Year Ended December 31 September 30 -------------------------------- 1998 1997 1997 1996 1995 1994 1993 ---- ---- ---- ----- ---- ---- ---- Portion of rentals representing interest $62 $60 $82 $78 $76 $83 $81 Capitalized interest 35 16 31 11 13 58 105 Other interest and fixed charges 240 243 312 382 452 456 365 ---- ---- ---- ---- ----- ---- ---- Total fixed charges (A) $337 $319 $425 $471 $541 $597 $551 ==== ==== ==== ==== ==== ==== ==== Earnings-pretax income with applicable adjustments (B) $1329 $1386 $1745 $1837 $877 $1300 $239 ==== ==== ==== ==== ==== ==== ==== Ratio of (B) to (A) 3.94 4.34 4.11 3.90 1.62 2.18 (a) ==== ==== ==== ==== ==== ==== ==== (a) Earnings did not cover fixed charges by $312 million for 1993.
EX-27 4
5 1,000,000 9-MOS DEC-31-1998 SEP-30-1998 488 0 1958 11 2400 5176 28700 15988 21848 3989 4556 182 3 380 5599 21848 21228 21635 20081 20081 0 0 226 1046 362 684 0 0 0 684 0 0 Consists of Marathon Stock issued, $291; Steel Stock issued, $88; Securities exchangeable solely into Marathon Stock issued, $1. Basic earnings per share applicable to Marathon Stock, $1.37; Steel Stock, $3.22. Diluted earnings per share applicable to Marathon Stock, $1.36; Steel Stock, $3.11.
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