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FORM 10-K 1999
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------------ -----------
COMMISSION FILE NUMBER 1-5153
USX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 25-0996816
(State of Incorporation) (I.R.S. Employer Identification No.)
600 GRANT STREET, PITTSBURGH, PA 15219-4776
(Address of principal executive offices)
TEL. NO. (412) 433-1121
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:*
========================================================================================================================
TITLE OF EACH CLASS
- ------------------------------------------------------------------------------------------------------------------------
USX-MARATHON GROUP 6-3/4% EXCHANGEABLE NOTES DUE 2000**
COMMON STOCK, PAR VALUE $1.00 8-3/4% CUMULATIVE MONTHLY INCOME PREFERRED SHARES,
USX-U. S. STEEL GROUP SERIES A (LIQUIDATION PREFERENCE $25 PER SHARE)***(a)
COMMON STOCK, PAR VALUE $1.00 6.75% CONVERTIBLE QUARTERLY INCOME PREFERRED
6.50% CUMULATIVE CONVERTIBLE PREFERRED SECURITIES (INITIAL LIQUIDATION AMOUNT $50 PER
(LIQUIDATION PREFERENCE $50.00 PER SHARE) SECURITY)****(a)
7% GUARANTEED NOTES DUE 2002 OF MARATHON OIL
COMPANY (a)
========================================================================================================================
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR AT LEAST THE PAST 90 DAYS. YES X NO
----- -----
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K (Section 229.405 of THIS CHAPTER) IS NOT CONTAINED HEREIN, AND
WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [ ]
AGGREGATE MARKET VALUE OF COMMON STOCK HELD BY NON-AFFILIATES AS OF JANUARY 31,
2000: $10 BILLION. THE AMOUNT SHOWN IS BASED ON THE CLOSING PRICES OF THE
REGISTRANT'S COMMON STOCKS ON THE NEW YORK STOCK EXCHANGE COMPOSITE TAPE ON THAT
DATE. SHARES OF COMMON STOCK HELD BY EXECUTIVE OFFICERS AND DIRECTORS OF THE
REGISTRANT ARE NOT INCLUDED IN THE COMPUTATION. HOWEVER, THE REGISTRANT HAS MADE
NO DETERMINATION THAT SUCH INDIVIDUALS ARE "AFFILIATES" WITHIN THE MEANING OF
RULE 405 UNDER THE SECURITIES ACT OF 1933.
THERE WERE 311,767,181 SHARES OF USX-MARATHON GROUP COMMON STOCK AND 88,398,114
SHARES OF USX-U. S. STEEL GROUP COMMON STOCK OUTSTANDING AS OF JANUARY 31, 2000.
DOCUMENTS INCORPORATED BY REFERENCE:
PROXY STATEMENT DATED MARCH 13, 2000 IS INCORPORATED IN PART III.
PROXY STATEMENT DATED MARCH 9, 1998 IS INCORPORATED IN PART IV.
- ------------
* THESE SECURITIES ARE LISTED ON THE NEW YORK STOCK EXCHANGE. IN
ADDITION, THE COMMON STOCKS ARE LISTED ON THE CHICAGO STOCK EXCHANGE
AND THE PACIFIC EXCHANGE.
** THESE NOTES WERE EXCHANGED ON FEBRUARY 1, 2000 FOR SHARES OF COMMON
STOCK OF RTI INTERNATIONAL METALS, INC.
*** ISSUED BY USX CAPITAL LLC.
**** ISSUED BY USX CAPITAL TRUST I.
(a) OBLIGATIONS OF MARATHON OIL COMPANY, USX CAPITAL LLC AND USX CAPITAL
TRUST I, ALL WHOLLY OWNED SUBSIDIARIES OF THE REGISTRANT, HAVE BEEN
GUARANTEED BY THE REGISTRANT.
INDEX
PART I
NOTE ON PRESENTATION........................................................... 2
Item 1. BUSINESS
USX CORPORATION.......................................................... 3
MARATHON GROUP........................................................... 5
U. S. STEEL GROUP........................................................ 27
Item 2. PROPERTIES .................................................................... 37
Item 3. LEGAL PROCEEDINGS
MARATHON GROUP........................................................... 37
U. S. STEEL GROUP........................................................ 40
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................ 45
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...................................................... 46
Item 6. SELECTED FINANCIAL DATA
USX CONSOLIDATED......................................................... 48
MARATHON GROUP........................................................... 50
U. S. STEEL GROUP........................................................ 51
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
USX CONSOLIDATED......................................................... U-39
MARATHON GROUP........................................................... M-25
U. S. STEEL GROUP........................................................ S-25
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
USX CONSOLIDATED......................................................... U-60
MARATHON GROUP........................................................... M-37
U. S. STEEL GROUP........................................................ S-38
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
USX CONSOLIDATED......................................................... U-1
MARATHON GROUP........................................................... M-1
U. S. STEEL GROUP........................................................ S-1
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................................... 52
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................. 53
Item 11. MANAGEMENT REMUNERATION........................................................ 54
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.............................................................. 54
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................. 54
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K................................................................. 55
SIGNATURES..................................................................................... 58
GLOSSARY OF CERTAIN DEFINED TERMS.............................................................. 59
SUPPLEMENTARY DATA
SUMMARIZED FINANCIAL INFORMATION OF MARATHON OIL COMPANY................................... 61
DISCLOSURES ABOUT FORWARD-LOOKING STATEMENTS............................................... 62
NOTE ON PRESENTATION
USX Corporation ("USX" or the "Corporation") is a diversified company
principally engaged in the energy business through its Marathon Group and in
the steel business through its U. S. Steel Group. USX has two classes of
common stock, USX - Marathon Group Common Stock ("Marathon Stock") and USX
- - U. S. Steel Group Common Stock ("Steel Stock"). Each class of Common Stock
is intended to provide stockholders of that class with a separate security
reflecting the performance of the related group.
Effective October 31, 1997, USX sold Delhi Gas Pipeline Corporation
and other subsidiaries of USX that comprised all of the USX - Delhi Group
("Delhi Companies"). On January 26, 1998, USX used the $195 million net
proceeds from the sale to redeem all of the 9.45 million outstanding shares
of USX-Delhi Group Common Stock.
USX continues to include consolidated financial information in its
periodic reports required by the Securities Exchange Act of 1934, in its
annual shareholder reports and in other financial communications. The
consolidated financial statements are supplemented with separate financial
statements of the Marathon Group and the U. S. Steel Group, together with the
related Management's Discussion and Analyses, descriptions of business and
other financial and business information to the extent such information is
required to be presented in the report being filed. The financial information
of the Marathon Group and U. S. Steel Group and certain financial information
relating to the Delhi Companies, taken together, includes all accounts which
comprise the corresponding consolidated financial information of USX.
For consolidated financial reporting purposes, USX consists of the
Marathon Group and the U. S. Steel Group. The attribution of assets,
liabilities (including contingent liabilities) and stockholders' equity
between the Marathon Group and the U. S. Steel Group for the purpose of
preparing their respective financial statements does not affect legal title
to such assets and responsibility for such liabilities. Holders of Marathon
Stock and Steel Stock are holders of common stock of USX and continue to be
subject to all of the risks associated with an investment in USX and all of
its businesses and liabilities. Financial impacts arising from either of the
Groups that affect the overall cost of USX's capital could affect the results
of operations and financial condition of both groups. In addition, net losses
of any Group, as well as dividends and distributions on any class of USX
common stock or series of preferred stock and repurchases of any class of USX
common stock or series of preferred stock at prices in excess of par or
stated value, will reduce the funds of USX legally available for payment of
dividends on both classes of USX common stock. Accordingly the USX
consolidated financial information should be read in connection with the
Marathon Group and the U. S. Steel Group financial information.
For information regarding accounting matters and policies affecting
the Marathon Group and the U. S. Steel Group financial statements, see
"Financial Statements and Supplementary Data - Notes to Financial Statements
- - 1. Basis of Presentation and - 4. Corporate Activities" for each respective
group. For information regarding dividend limitations and dividend policies
affecting holders of Marathon Stock and Steel Stock, see "Market for
Registrant's Common Equity and Related Stockholder Matters."
For a Glossary of Certain Defined Terms used in this document, see
page 59.
FORWARD-LOOKING STATEMENTS
Certain sections of USX's Form 10-K, particularly Item 1. Business,
Item 3. Legal Proceedings, Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations and Item 7A. Quantitative and
Qualitative Disclosures About Market Risk, include forward-looking statements
concerning trends or events potentially affecting USX. These statements
typically contain words such as "anticipates", "believes", "estimates",
"expects" or similar words indicating that future outcomes are uncertain. In
accordance with "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995, these statements are accompanied by cautionary language
identifying important factors, though not necessarily all such factors, that
could cause future outcomes to differ materially from those set forth in
forward-looking statements. For additional factors affecting the businesses
of USX, see Supplementary Data - Disclosures About Forward-Looking Statements.
2
PART I
ITEM 1. BUSINESS
USX CORPORATION
USX Corporation was incorporated in 1901 and is a Delaware corporation.
Executive offices are located at 600 Grant Street, Pittsburgh, PA 15219-4776.
The terms "USX" and "Corporation" when used herein refer to USX Corporation or
USX Corporation and its subsidiaries, as required by the context.
GROUPS
For consolidated reporting purposes, USX consists of the Marathon Group
and the U. S. Steel Group. Effective October 31, 1997, USX sold Delhi Gas
Pipeline Corporation and other subsidiaries of USX that comprised all of the
Delhi Group. See "Financial Statements and Supplementary Data - Notes to USX
Consolidated Financial Statements - 5. Discontinued Operations" on page U-11.
The businesses of the Marathon Group and the U. S. Steel Group, are as follows:
- The Marathon Group includes Marathon Oil Company ("Marathon") and
certain other subsidiaries of USX, which are engaged in worldwide
exploration and production of crude oil and natural gas; domestic
refining, marketing and transportation of petroleum products
primarily through Marathon Ashland Petroleum LLC ("MAP"), owned
62 percent by Marathon; and other energy related businesses.
Marathon Group revenues as a percentage of total USX consolidated
revenues were 82 percent in 1999, 78 percent in 1998 and 69
percent in 1997.
- The U. S. Steel Group includes U. S. Steel, which is engaged in
the production and sale of steel mill products, coke and taconite
pellets; the management of mineral resources; domestic coal
mining; real estate development; and engineering and consulting
services. Certain business activities are conducted through joint
ventures and partially owned companies, such as USS-POSCO
Industries, PRO-TEC Coating Company, Transtar, Inc., Clairton
1314B Partnership, VSZ U. S. Steel, s. r.o., and Republic
Technologies International, LLC. U. S. Steel Group revenues as a
percentage of total USX consolidated revenues were 18 percent in
1999, 22 percent in 1998 and 31 percent in 1997.
3
A three-year summary of financial highlights for the groups is provided
below.
INCOME ASSETS
FROM NET AT CAPITAL
REVENUES(a)(b) OPERATIONS(b)(c) INCOME YEAR-END EXPENDITURES
------------- ---------------- ------ -------- -------------
(MILLIONS)
Marathon Group
1999 $ 24,327 $ 1,713 $ 654 $ 15,705 $ 1,378
1998 21,977 938 310 14,544 1,270
1997 15,846 932 456 10,565 1,038
U. S. Steel Group
1999 5,314 150 44 7,525 287
1998 6,283 579 364 6,749 310
1997 6,941 773 452 6,694 261
Adjustments for
Discontinued
Operations and
Eliminations (d)
1999 (58) - - (268) -
1998 (23) - - (160) -
1997 (107) - 80 25 74
Total USX Corporation
1999 $ 29,583 $ 1,863 $ 698 $ 22,962 $ 1,665
1998 28,237 1,517 674 21,133 1,580
1997 22,680 1,705 988 17,284 1,373
- ----------------
(a) Consists of sales, dividend and affiliate income, gain on ownership change
in MAP, net gains on disposal of assets and other income.
(b) Excludes amounts for the companies comprising the Delhi Group of USX (sold
in 1997; see footnote (d) below), which have been classified as
discontinued operations.
(c) Includes the following favorable (unfavorable) amounts: adjustments to the
inventory market valuation reserve for the Marathon Group of $551 million,
($267) million, and ($284) million in 1999, 1998, and 1997, respectively;
and gain on ownership change in MAP of $17 million in 1999 and $245 million
in 1998.
(d) Effective October 31, 1997, USX sold Delhi Gas Pipeline Corporation and
other subsidiaries of USX that comprised all of the Delhi Group.
For additional financial information about the Groups, see "Financial
Statements and Supplementary Data - Notes to USX Consolidated Financial
Statements - 9. Group and Segment Information" on page U-13.
The total number of active USX Headquarters employees not assigned to a
specific group at year-end 1999 was 234.
A narrative description of the primary businesses of the Marathon Group
and the U. S. Steel Group is provided below.
4
MARATHON GROUP
The Marathon Group is comprised of Marathon Oil Company and certain
other subsidiaries of USX which are engaged in worldwide exploration and
production of crude oil and natural gas; domestic refining, marketing and
transportation of petroleum products primarily through Marathon Ashland
Petroleum LLC ("MAP"), owned 62 percent by Marathon Oil Company; and other
energy related businesses. Marathon Group revenues as a percentage of total USX
consolidated revenues were 82 percent in 1999, 78 percent in 1998 and 69 percent
in 1997.
The following table summarizes Marathon Group revenues for each of the
last three years:
REVENUES (a)
(MILLIONS) 1999 1998 1997
---- ---- ----
Sales by product:
Refined products................................... $ 10,873 $ 8,750 $ 7,012
Merchandise........................................ 2,088 1,873 1,045
Liquid hydrocarbons................................ 2,159 1,818 941
Natural gas........................................ 1,381 1,144 1,331
Transportation and other products.................. 199 271 167
Gain on ownership change in MAP (b).................. 17 245 -
Other (c)............................................ 98 104 86
--------- --------- --------
Subtotal............................................. 16,815 14,205 10,582
Excise taxes (d) (f)................................. 3,973 3,824 2,828
Matching buy/sell transactions (e) (f)............... 3,539 3,948 2,436
--------- --------- --------
Total revenues.................................. $ 24,327 $ 21,977 $ 15,846
========= ========= ========
- -------------------------------------------------------------------------------
(a) Amounts in 1999 and 1998 include 100 percent of MAP.
(b) See Note 5 to the Marathon Group Financial Statements for a discussion of
the gain on ownership change in MAP.
(c) Includes dividend and affiliate income, net gains on disposal of assets and
other income.
(d) Consumer excise taxes on petroleum products and merchandise.
(e) Matching crude oil and refined products buy/sell transactions settled in
cash.
(f) Included in both revenues and costs and expenses, resulting in no effect on
income.
For additional financial information about USX's operating segments,
see "Financial Statements and Supplementary Data - Notes to USX Consolidated
Financial Statements - 9., Group and Segment Information" on page U-13.
EXPLORATION AND PRODUCTION
OIL AND NATURAL GAS EXPLORATION AND DEVELOPMENT
Marathon is currently conducting exploration and development activities
in 14 countries. Principal exploration activities are in the United States, the
United Kingdom, Angola, Canada, Congo, Denmark, Ireland, the Netherlands and
Tunisia. Principal development activities are in the United States, the United
Kingdom, Canada, Gabon, Ireland, the Netherlands and Russia. Marathon is also
pursuing opportunities in Western Africa, South America and the Middle East.
During 1999, exploration activities resulted in discoveries in the
United States, Ireland and the Netherlands.
The following table sets forth, by geographic area, the number of net
productive and dry development and exploratory wells completed in each of the
last three years (references to "net" wells or production indicate Marathon's
ownership interest or share as the context requires):
5
NET PRODUCTIVE AND DRY WELLS COMPLETED (a)
1999 1998 1997
---- ---- ----
United States
Development (b) - Oil 11 28 44
- Gas 54 58 76
- Dry 1 2 3
-- -- --
Total 66 88 123
Exploratory - Oil 5 7 4
- Gas 9 5 13
- Dry 13 8 10
--- -- ---
Total 27 20 27
--- --- ---
Total United States 93 108 150
International (c)
Development (b) - Oil 42 7 5
- Gas 55 7 1
- Dry 11 2 -
--- -- ---
Total 108 16 6
Exploratory - Oil 2 5 4
- Gas 14 4 -
- Dry 16 15 5
--- --- --
Total 32 24 9
--- --- --
Total International 140 40 15
--- --- ---
Total Worldwide 233 148 165
=== === ===
- -------------------------------------------------------------------------------
(a) Includes the number of wells completed during the year regardless of the
year in which drilling was initiated. A dry well is a well found to be
incapable of producing hydrocarbons in sufficient quantities to justify
completion. A productive well is a well that is not a dry well.
(b) Indicates wells drilled in the proved area of an oil or gas reservoir.
(c) Includes Marathon's equity interest in CLAM Petroleum B.V. ("CLAM") and
Sakhalin Energy Investment Company Ltd. ("Sakhalin Energy").
UNITED STATES
In the United States during 1999, Marathon drilled 40 gross (29 net)
wildcat and delineation ("exploratory") wells of which 22 gross (15 net) wells
encountered hydrocarbons. Of these 22 wells, 2 gross (2 net) wells were
temporarily suspended, and will be reported in the Net Productive and Dry Wells
Completed table when completed. Principal domestic exploratory and development
activities were in the U.S. Gulf of Mexico and the states of Alaska, New Mexico,
Oklahoma and Texas.
Exploration expenditures during the three-year period ended December
31, 1999, totaled $528 million in the United States, of which $141 million was
incurred in 1999. Development expenditures during the three-year period ended
December 31, 1999, totaled $1,113 million in the United States, of which $205
million was incurred in 1999.
6
The following is a summary of recent, significant exploration and
development activity in the United States including discussion, as deemed
appropriate, of completed wells, drilling wells and wells under evaluation.
GULF OF MEXICO - Marathon continues to consider the Gulf of Mexico
("Gulf") as a core area for domestic growth in oil and gas production and has
committed significant resources to exploit its opportunities.
On August 12, 1999, Marathon announced a deepwater natural gas
discovery on the Camden Hills prospect, located in the deepwater Gulf on
Mississippi Canyon Block 348. The well was drilled to a depth of 15,080 feet and
encountered over 200 feet of gas pay. In February 2000, Marathon confirmed the
discovery with an appraisal well. Current plans are focusing on project
development options. Marathon is the operator and has a 50.03 percent working
interest in this block.
Progress continues on the Viosca Knoll Block 786 ("Petronius")
development in the deepwater Gulf. In 1999, efforts focused on rebuilding the
lost platform deck module, which was dropped during installation in 1998. Third
party insurance has covered substantially all rebuilding costs associated with
this incident. The platform module is scheduled to be completed in the first
quarter of 2000 and offshore installation should occur in the second quarter of
2000. The Petronius project is estimated to have proved reserves of 57 million
gross barrels of oil equivalent ("BOE"). The previous estimate of 95 million
gross recoverable BOE included reserves attributable to a pressure maintenance
program. Reserves resulting from the Petronius pressure maintenance program will
be considered proved only when such project is in operation and shows successful
results. Following commencement of production and the implementation of the
pressure maintenance program, both scheduled for third quarter 2000, Petronius
proved reserves will be reassessed. Marathon holds a 50 percent working interest
in this project.
In 2000, Marathon plans to drill eight deepwater exploratory wells. To
support the drilling of deepwater prospects, Marathon, along with two other
parties, began a five-year commitment in 1999 on the Noble Amos Runner, a
drilling rig capable of drilling in water depths up to 6,600 feet. Additionally,
by the second quarter of 2000, Marathon expects to take receipt of the recently
completed Transocean-Sedco-Forex Cajun Express, capable of drilling in water up
to 8,500 feet. Marathon has a three-year commitment to utilize this rig.
ALASKA - To offset the impact of limited rig availability and
relatively high day rates in the Cook Inlet area, Marathon has contracted the
fabrication of a new onshore drilling rig. The Glacier drilling rig is expected
to be in service by the second quarter of 2000 and will support Marathon's
increased development and exploration activities in Alaska. With the completion
of the Cook Inlet Region Incorporation (CIRI) Exploration Agreement, Marathon
gained access to over 600 miles of 2-D seismic and acquired approximately 14
thousand leasehold acres. This acreage includes five active prospects and two
recent Marathon gas discoveries at Wolf Lake and Sterling Deep.
NEW MEXICO - Marathon's New Mexico gas production is at a record high
due to successful development activity in the Indian Basin field. In 2000, 15
additional development wells are planned for this field. Marathon's Indian Basin
gas plant is presently operating at maximum capacity following a 1999 expansion.
OKLAHOMA - A 1998 Marathon exploration gas discovery in the Granite
Wash formation resulted in significant development drilling in 1999. Marathon's
current production from five wells in this area is 14 net million cubic feet per
day ("mmcfd"). In 2000, 15 development wells are planned in the Granite Wash
formation. In addition, the Carter Knox field net gas rate increased by 45
percent in 1999. With a strategic 2000 acquisition, the net rate for this field
now exceeds 60 gross mmcfd. In 2000, 15 development wells are planned for the
Carter Knox field.
TEXAS - In East Texas, Marathon continued an active gas reserves
development program in the Austin Chalk trend. This play utilizes horizontal
drilling to significantly enhance the per-well rates and reserve recoveries in
the fractured Austin Chalk.
7
INTERNATIONAL
Outside the United States during 1999, Marathon drilled 71 gross (49
net) exploratory wells in 5 countries. Of these 71 wells, 47 gross (33 net)
wells encountered hydrocarbons, of which 38 gross (26 net) wells were
temporarily suspended and will be reported in the Net Productive and Dry Wells
Completed table when completed.
Marathon's expenditures for international oil and natural gas
exploration activities, including Marathon's 50 percent equity interest in CLAM
and 37.5 percent equity interest in Sakhalin Energy, during the three-year
period ended December 31, 1999, totaled $342 million, of which $118 million was
incurred in 1999. Marathon's international development expenditures, including
CLAM and Sakhalin Energy, during the three-year period ended December 31, 1999,
totaled $714 million, of which $235 million was incurred in 1999.
The following is a summary of recent, significant exploration and
development activity outside the United States, including discussion, as deemed
appropriate, of completed wells, drilling wells and wells under evaluation.
UNITED KINGDOM - Marathon is continuing its development of the Brae
area in the U.K. North Sea where it is the operator and owns a 41.6 percent
revenue interest in the South, Central and North Brae fields, a 38.5 percent
revenue interest in the East Brae field and a 28.1 percent revenue interest in
the West Brae/Sedgwick joint development project. Marathon has interests in 30
blocks in the U.K. North Sea and other offshore areas.
Three exploration wells were drilled offshore the U.K. in 1999, one was
dry, one was a non-commercial discovery and the third is being evaluated
further. Two exploration wells are planned for U.K. acreage in 2000.
ANGOLA - In May 1999, Marathon was awarded an interest in Blocks 31 and
32 offshore Angola. The blocks, which are located approximately 90 miles
northwest of Luanda in water depths between 5,400 and 9,200 feet, are adjacent
to Blocks 15 and 17 where major discoveries by others have been made. Marathon
holds a 10 percent working interest in these blocks, which are operated by
co-venturers. In December 1999, a 3-D seismic program started on Block 31. A
seismic program for Block 32 is presently planned for 2000.
CANADA - In May 1999, Marathon Canada Limited ("MCL") was awarded three
exploration licenses offshore Nova Scotia. Marathon has a 30, 33.75 and 37.5
percent interest in Exploration Licenses ("EL") 2377, 2384 and 2376,
respectively and will be the operator of EL 2377. In 2000, 3-D seismic data for
EL 2377 and 2376 will be acquired and evaluated.
In its first full year of operations, MCL completed an aggressive
exploration and development program in the onshore western Canada region. The
1999 program resulted in net reserve additions of 27 million BOE. In 2000, MCL
plans to continue the exploitation of this region with a significant drilling
program.
CONGO - In February 2000, Marathon acquired a 15 percent equity
interest in the Mer Profonde Nord Permit, which is operated by a co-venturer.
This permit is located approximately 30 miles offshore Republic of Congo in
water depths between 500 and 7,000 feet. In 2000, one exploratory well is
planned in this permit.
DENMARK - In June 1998, Marathon acquired one block in Denmark, a new
operating country for Marathon. The geological and field development knowledge
obtained from the Brae/Sedgwick area of the United Kingdom led to the
identification of the areas awarded to Marathon. A 3-D seismic program was
completed in 1999 and the data will be evaluated in 2000.
8
GABON - In September 1999, oil production commenced from the Tchatamba
South field in the Kowe Permit, located 20 miles offshore Gabon. Field reserves
are estimated to be approximately 30 million gross BOE. Marathon is the operator
of this field. Its working interest was proportionately reduced from 75 percent
to 56.25 percent in 1999 after the Gabonese government exercised its right to
obtain a 25 percent interest in the field.
The Tchatamba West discovery was drilled in early 1998, 4.5 miles
northwest of the Tchatamba Marin production facilities. This field has estimated
reserves of seven million gross BOE, and is being developed as a one-well
development tied back to the Tchatamba Marin facility. Production is expected
from this field in the fourth quarter of 2000.
In June 1998, Marathon and its partner announced an oil discovery on
the East Orovinyare prospect, four miles offshore Gabon. The East Orovinyare
No. 1 wildcat well was drilled in the Kowe Permit in 65 feet of water and
encountered an oil column in excess of 400 feet. The first appraisal well, East
Orovinyare No. 2, was drilled in 1998 and tested a combined daily flow rate of
2,460 barrels of 35-degree API gravity of oil. In 1999, a second appraisal well
was drilled, which did not encounter hydrocarbons and reduced the potential size
of the reservoir. Studies are currently underway to determine if an economic
scenario exists for development of this field.
Marathon is the operator and holds a 75 percent working interest in the
Tchatamba West and East Orovinyare fields. Under the terms of the Kowe Permit,
the Gabonese government has the right to obtain a maximum 25 percent working
interest in any development, which would proportionately reduce Marathon's
interest.
During early 1999, an exploratory well was drilled in the deepwater
Akoumba Marin Permit, which did not encounter hydrocarbons. In June 1999,
Marathon relinquished the permit and its 100 percent working interest in this
concession.
In 1998, Marathon acquired a 50 percent working interest in the
Inguessi Permit, which is adjacent to the Kowe Permit. During 1999, Marathon
acquired 139 square miles of 3-D seismic data. This data will be used to
evaluate this permit for future exploration opportunities. Under the terms of
the Inguessi Permit, the Gabonese government has the right to obtain a maximum
10 percent working interest in any development, which would proportionately
reduce Marathon's interest.
IRELAND - In October 1999, gas production commenced from the Southwest
Kinsale field, located in the Irish Celtic Sea approximately 30 miles south of
Cork. Field reserves are estimated to contain approximately 36 billion cubic
feet ("bcf") of recoverable gas. Marathon has a 100 percent working interest in
this field.
In August 1999, Marathon announced that a successful appraisal well was
drilled in the Corrib gas field in Slyne Trough License PL 2/93, located 40
miles off the west coast of Ireland. The well, which was drilled in 1,103 feet
of water to a total depth of 12,274 feet, achieved test rates up to 64 gross
mmcfd of gas. Another appraisal well is planned for the Corrib field in 2000,
which will likely be followed by a field development plan. Marathon owns an 18.5
percent working interest in this field. Also in 1999, Marathon drilled an
unsuccessful exploratory well in Slyne Trough License PL 3/94.
NETHERLANDS - In 1999, Marathon, through its 50 percent equity interest
in CLAM, participated in two exploratory wells and one development well in the
Dutch sector of the North Sea. In August 1999, CLAM announced a second gas
discovery on the Q4 Block in the Dutch sector of the North Sea. The well tested
at 26 to 28 gross mmcfd of gas in two separate zones. Marathon holds a 9.9
percent equity interest in this block.
In 1998, CLAM was awarded two blocks in the Danish sector of the North
Sea. In 1999, 3-D seismic surveys were acquired and two exploration wells are
presently planned for 2000.
9
Independent from its interest in CLAM, in January 1999, Marathon was
awarded the A-15 block in the Netherlands North Sea. Marathon holds a 40 percent
working interest in this block, which is operated by a co-venturer. An
exploration well was drilled in 1999, which tested at 20 gross mmcfd of gas. A
3-D seismic program is presently planned for 2000.
RUSSIA - Marathon holds a 37.5 percent interest in Sakhalin Energy, an
incorporated joint venture company responsible for the overall management of the
Sakhalin II project. This project includes development of the Piltun-Astokhskoye
("P-A") oil field and the Lunskoye gas-condensate field, which are located 8-12
miles offshore Sakhalin Island in the Russian Far East Region. The Russian State
Reserves Committee has approved estimated combined reserves for the P-A and
Lunskoye fields of 1 billion gross barrels of liquid hydrocarbons and 14
trillion cubic feet of natural gas.
In July 1999, oil production commmenced from the P-A field and the
first lifting occurred on September 20, 1999. In late September, production was
shut-in following a failure of the mooring system and resumed only for brief
periods during October and November before operations ceased for the winter in
early December. A re-designed mooring system is expected to be installed in the
second quarter of 2000 and production is expected to resume in June 2000, the
beginning of the ice-free season. In 2000, gross production is expected to
average 36,000 gross barrels per day ("bpd") (on an annualized basis).
Marathon's equity share of reserves from primary production in the Astokh
Feature is 80 million barrels of oil.
Further development of the P-A field continues, including plans to
drill two appraisal and eight development wells in 2000 and to commence
waterflood activity for the Astokh Feature. With respect to the Lunskoye field,
appraisal work and efforts to secure long term gas sales markets continue.
Commencement of gas production from the Lunskoye field, which will be contingent
upon the conclusion of a gas sales contract, is anticipated to occur in 2006 or
later.
At December 31, 1999, Marathon's net investment in the Sakhalin II
project was approximately $400 million.
TUNISIA - Marathon's 60 percent working interest in the South Jenein
Permit in southern Tunisia was formally ratified by the government in 1996. In
2000, one exploratory well is planned for the South Jenein Permit.
The above discussions include forward-looking statements concerning
various projects, drilling plans, expected production and sales levels, reserves
and dates of initial production, which are based on a number of assumptions,
including (among others) prices, amount of capital available for exploration and
development, worldwide supply and demand for petroleum products, regulatory
constraints, reserve estimates, production decline rates of mature fields,
reserve replacement rates, drilling rig availability and other geological,
operating and economic considerations. In addition, development of new
production properties in countries outside the United States may require
protracted negotiations with host governments and is frequently subject to
political considerations and tax regulations, which could adversely affect the
economics of projects. To the extent these assumptions prove inaccurate and/or
negotiations and other considerations are not satisfactorily resolved, actual
results could be materially different than present expectations.
RESERVES
At December 31, 1999, the Marathon Group's net proved liquid
hydrocarbon and natural gas reserves, including equity affiliate interests,
totaled approximately 1.5 billion barrels on a BOE basis, of which 57 percent
were located in the United States. (Natural gas reserves are converted to
barrels of oil equivalent using a conversion factor of six thousand cubic feet
("mcf") of natural gas to one barrel of oil.) On a BOE basis, Marathon replaced
46 percent of its 1999 worldwide oil and gas production. Including dispositions,
Marathon replaced 23 percent of worldwide oil and gas production.
10
The table below sets forth estimated quantities of net proved oil and
gas reserves at the end of each of the last three years.
ESTIMATED QUANTITIES OF NET PROVED OIL AND GAS RESERVES AT DECEMBER 31
DEVELOPED DEVELOPED & UNDEVELOPED
-------------------------- -------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
(MILLIONS OF BARRELS)
Liquid Hydrocarbons
United States.................. 476 489 486 520 549 (d) 590 (d)
Europe......................... 90 119 161 90 122 161
Other International (c)........ 72 67 12 187 194 26
---- ---- ---- ----- ---- ----
Total Consolidated......... 638 675 659 797 865 777
Equity affiliates (a).......... 69 - - 77 80 82
---- ---- ---- ----- ---- ----
WORLDWIDE........................... 707 675 659 874 945 859
==== ==== ==== ===== ==== ====
Developed reserves as % of
total net proved reserves...... 80.9% 71.4% (d) 76.7% (d)
(BILLIONS OF CUBIC FEET)
Natural Gas
United States.................. 1,550 1,678 1,702 2,057 2,163 (d) 2,232 (d)
Europe......................... 741 909 1,024 774 966 1,048
Other International (c)........ 497 534 19 833 830 23
------ ------ ------ ------- ------ ------
Total Consolidated......... 2,788 3,121 2,745 3,664 3,959 3,303
Equity affiliate (b)........... 65 76 78 123 110 111
------ ------ ------ ------- ------ ------
WORLDWIDE........................... 2,853 3,197 2,823 3,787 4,069 3,414
====== ====== ====== ======= ====== ======
Developed reserves as % of
total net proved reserves...... 75.3% 78.6% (d) 82.7% (d)
(MILLIONS OF BARRELS)
Total BOEs
United States.................. 734 769 770 863 910 (d) 962 (d)
Europe......................... 213 270 332 219 282 336
Other International (c)........ 155 156 15 326 332 30
------ ------ ------ ------- ------ ------
Total Consolidated......... 1,102 1,195 1,117 1,408 1,524 1,328
Equity affiliates (a).......... 80 13 13 98 98 100
------ ------ ------ ------- ------ ------
WORLDWIDE........................... 1,182 1,208 1,130 1,506 1,622 1,428
====== ====== ====== ======= ====== ======
Developed reserves as % of
total net proved reserves...... 78.5% 74.5% (d) 79.1% (d)
- -----------------------------------------------------------------------------------------------------
(a) Represents Marathon's equity interests in CLAM and Sakhalin Energy.
(b) Represents Marathon's equity interests in CLAM.
(c) Includes Canada for 1999 and 1998.
(d) Revised to exclude reserves attributable to a pressure maintenance program
for the Petronius field scheduled to commence in third quarter 2000.
The above estimates, which are forward-looking statements, are based
upon a number of assumptions, including (among others) prices, presently known
physical data concerning size and character of the reservoirs, economic
recoverability, production experience and other operating considerations. To the
extent these assumptions prove inaccurate, actual recoveries could be materially
different than current estimates.
For additional details of estimated quantities of net proved oil and
gas reserves at the end of each of the last three years, see "Consolidated
Financial Statements and Supplementary Data - Supplementary Information on Oil
and Gas Producing Activities - Estimated Quantities of Proved Oil and Gas
Reserves" on page U-32. Reports have
11
been filed with the U.S. Department of Energy ("DOE") for the years 1998 and
1997 disclosing the year-end estimated oil and gas reserves. A similar report
will be filed for 1999. The year-end estimates reported to the DOE are the
same as the estimates reported in the USX Consolidated Supplementary Data.
OIL AND GAS ACREAGE
The following table sets forth, by geographic area, the developed and
undeveloped oil and gas acreage held as of December 31, 1999:
GROSS AND NET ACREAGE
DEVELOPED &
DEVELOPED UNDEVELOPED UNDEVELOPED
--------- ----------- -----------
GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ---
(THOUSANDS OF ACRES)
United States............... 2,164 882 3,239 1,854 5,403 2,736
Europe...................... 340 283 2,575 1,141 2,915 1,424
Other International......... 1,319 815 7,965 3,501 9,284 4,316
----- ---- ------ ----- ------ -----
Total Consolidated........ 3,823 1,980 13,779 6,496 17,602 8,476
Equity affiliates (a)....... 445 48 549 159 994 207
---- --- ---- ---- ---- ----
WORLDWIDE................. 4,268 2,028 14,328 6,655 18,596 8,683
- --------------------------------------------------------------------------------------------------------
(a)Represents Marathon's equity interests in CLAM and Sakhalin Energy.
OIL AND NATURAL GAS PRODUCTION
The following tables set forth daily average net production of liquid
hydrocarbons and natural gas for each of the last three years:
NET LIQUID HYDROCARBONS PRODUCTION (a)
(THOUSANDS OF BARRELS PER DAY) 1999 1998 1997
---- ---- ----
United States (b)........................................... 145 135 115
Europe (c).................................................. 31 42 41
Other International (c) (f)................................. 31 19 8
--- --- --
Total Consolidated..................................... 207 196 164
Equity affiliates (CLAM & Sakhalin Energy) (c).............. 1 - -
-- -- --
WORLDWIDE................................................... 208 196 164
==== ==== ====
NET NATURAL GAS PRODUCTION (d)
(MILLIONS OF CUBIC FEET PER DAY)
United States (b)........................................... 755 744 722
Europe (e).................................................. 325 360 412
Other International (e) (f)................................. 163 81 11
---- --- ---
Total Consolidated..................................... 1,243 1,185 1,145
Equity affiliate (CLAM) (e)................................. 36 33 42
--- --- ---
WORLDWIDE................................................... 1,279 1,218 1,187
===== ===== =====
- ----------------------------------------------------------------------------------------------------------
(a) Includes crude oil, condensate and natural gas liquids.
(b) Amounts reflect production from leasehold and plant ownership, after
royalties and interests of others.
(c) Amounts reflect equity tanker liftings, truck deliveries and direct
deliveries of liquid hydrocarbons before royalties, if any; excluding
Canada, Gabon and Sakhalin Energy where amounts are after royalties. The
amounts correspond with the basis for fiscal settlements with governments.
Crude oil purchases, if any, from host governments are not included.
(d) Amounts reflect sales of equity production, only. It excludes volumes
purchased from third parties for resale of 16 mmcfd in 1999 and 23 and 32
mmcfd in 1998 and 1997, respectively.
(e) Amounts reflect production before royalties, excluding Canada where
amounts are after royalties.
(f) Includes Canada for 1999 and 1998.
12
At year-end 1999, Marathon was producing crude oil and/or natural gas
in eight countries, including the United States. Marathon's worldwide liquid
hydrocarbon production, including Marathon's share of equity affiliates
production, increased 12,000 bpd, or approximately 6 percent, from 1998.
Marathon's 2000 worldwide liquid hydrocarbon production is expected to increase
from 1999, to average approximately 210,000 bpd. Most of the increase is
anticipated in the second half of the year. This primarily reflects projected
new production from the start-up of Petronius in the Gulf of Mexico in the third
quarter of 2000 and one full ice-free season of production from the P-A field in
Russia, partially offset by natural production declines of mature fields. In
2001, worldwide liquid hydrocarbon production is expected to increase further to
approximately 230,000 bpd.
Marathon's 1999 worldwide sales of equity natural gas production,
including Marathon's share of CLAM's production, remained consistent with 1998.
In addition to sales of 525 net mmcfd of international equity natural gas
production, Marathon sold 16 net mmcfd of natural gas acquired for injection and
resale during 1999. In 2000 and 2001, Marathon's worldwide natural gas volumes
are projected to be 1.3 billion cubic feet per day ("bcfd") and 1.4 bcfd,
respectively.
The above projections of 2000 and 2001 liquid hydrocarbon production
and natural gas volumes are forward-looking statements. They are based on known
discoveries and do not include any additions from potential or future
acquisitions/dispositions or future wildcat drilling. They are also based on
certain assumptions, including (among others) prices, amount of capital
available for exploration and development, worldwide supply and demand for
petroleum products, regulatory constraints, reserve estimates, production
decline rates of mature fields, timing of commencing production from new wells,
drilling rig availability, reserve replacement rates and other geological,
operating and economical considerations. If these assumptions prove to be
incorrect, actual results could be materially different than present
expectations.
UNITED STATES
Approximately 70 percent of Marathon's 1999 worldwide liquid
hydrocarbon production and equity affiliate liftings and 59 percent of worldwide
natural gas production (including CLAM volumes) were from domestic operations.
The principal domestic producing areas are located in the U.S. Gulf of Mexico
and the states of Alaska, New Mexico, Oklahoma, Texas and Wyoming. Marathon's
ongoing domestic growth strategy is to apply its technical expertise in fields
with undeveloped potential, to dispose of interests in non-core properties with
limited upside potential and high production costs, and to acquire significant
working interests in properties with high development potential.
Marathon continues to apply enhanced recovery and reservoir management
programs and cost containment efforts to maximize liquid hydrocarbon recovery
and profitability in mature fields such as the Yates field in Texas and the
Oregon Basin field in Wyoming. Enhanced recovery efforts for the Yates field
include an ongoing evaluation of thermal recovery techniques.
GULF OF MEXICO - During 1999, Marathon's Gulf production averaged
74,500 net bpd of liquid hydrocarbons and 107 net mmcfd of natural gas,
representing 52 percent and 14 percent of Marathon's total U.S. liquid
hydrocarbon and natural gas production, respectively. Liquid hydrocarbon
production increased by 19,800 net bpd and natural gas production increased by
23 net mmcfd from the prior year, mainly due to increased production from
Troika, Arnold and Oyster, offset by declines from mature fields. At year-end
1999, Marathon held working interests in 14 fields and 31 platforms, 20 of which
Marathon operates.
In early 1999, the initial Troika subsea development project in the
Green Canyon Block 244 field was completed. This field is located in the central
deepwater Gulf and consists of five wells tied back to a co-venturer's platform.
Production from this field averaged 31,100 net bpd and 47 net mmcfd, ranking it
Marathon's top domestic field in 1999. Additional drilling and reserve
development activities are planned for 2000.
13
Ewing Bank 873 is also an important part of Marathon's deepwater
infrastructure. Marathon is the operator and holds a 66.7 percent working
interest. Production averaged 35,400 net bpd and 28 net mmcfd in 1999, compared
with 32,100 net bpd and 24 net mmcfd in 1998, primarily due to increased
production from Arnold and Oyster, two Marathon operated satellite fields that
produce through the Ewing Bank platform. Ewing Bank ranked as Marathon's number
two domestic field in 1999.
In September 1999, production commenced from the Angus field, a
three-well subsea development on Green Canyon Blocks 112 and 113. In January
2000, Marathon sold its 33.34 percent interest in the Angus development and will
report a pre-tax gain of approximately $85 million in the first quarter of 2000.
Marathon's worldwide liquid hydrocarbon production forecasts discussed
previously exclude estimated 2000 and 2001 production from the Angus field.
ALASKA -- Marathon's production from Alaska averaged 148 net mmcfd of
natural gas in 1999, compared with 144 net mmcfd in 1998. Marathon's primary
focus in Alaska is the expansion of its natural gas business through
exploration, exploitation, development and marketing.
NEW MEXICO -- Production in New Mexico, primarily from the Indian Basin
field, averaged 11,900 net bpd and 115 net mmcfd in 1999, compared with 12,500
net bpd and 109 net mmcfd in 1998. The increase in gas production was primarily
due to successful development activity and completion of the plant expansion
project at Indian Basin.
OKLAHOMA -- Gas production for 1999 averaged 127 net mmcfd,
representing 17 percent of Marathon's total U.S. gas production, compared
with 107 net mmcfd in 1998. The increase in gas production was primarily due
to the successful development program in the Anadarko Basin.
TEXAS -- Onshore production for 1999 averaged 27,400 net bpd of liquid
hydrocarbons and 166 net mmcfd of natural gas, representing 19 percent and 22
percent of Marathon's total U.S. liquid hydrocarbon and natural gas production,
respectively. Liquids production volumes decreased by 6,500 net bpd from 1998
levels, and gas volumes decreased by 20 net mmcfd from 1998 levels. The liquid
volume decrease was mainly due to natural production declines and the gas volume
decrease was a result of a reduced level of successful activity in east Texas.
Within Texas, Marathon owns a 49.9 percent working interest in, and is
the operator of, the Yates Field Unit, one of the largest fields in the United
States on the basis of reserves. Marathon's 17,900 net bpd of 1999 liquid
hydrocarbon production from the Yates field accounted for 12 percent of
Marathon's total U.S. liquids production.
WYOMING -- Liquid hydrocarbon production for 1999 averaged 22,200 net
bpd, representing 15 percent of Marathon's total U.S. liquid hydrocarbon
production, down from 23,700 net bpd in 1998. The decrease in 1999 from 1998 was
primarily due to natural production declines. Gas production averaged 57 net
mmcfd in 1999, compared to 61 net mmcfd in 1998, with the decrease due mainly to
natural production declines.
14
INTERNATIONAL
Interests in liquid hydrocarbon and/or natural gas production are held
in the U.K. North Sea, Irish Celtic Sea, the Norwegian North Sea, Canada, Egypt
and Gabon. In addition, Marathon has interests through equity affiliates in the
Netherlands North Sea and Russia.
U.K. NORTH SEA - Marathon's production is primarily from five fields -
South, North, Central, East and West Brae. Production from the Brae area
averaged 31,100 net bpd of liquid hydrocarbons in 1999, compared with 40,900 net
bpd in 1998. The decrease is mainly within South, North and Central Brae,
reflecting the expected decline of these mature fields.
The Brae A facilities act as the host platform for the underlying South
Brae field, adjacent Central Brae field and West Brae/Sedgwick fields. North
Brae, which is produced via the Brae B platform, and East Brae are gas
condensate fields. These fields are produced using the gas cycling technique.
Although partial cycling continues, the majority of North Brae gas is being
transferred to the East Brae reservoir for pressure maintenance and sales.
The strategic location of the Brae A, Brae B and East Brae platforms
and pipeline infrastructure has generated significant third-party business since
1986. Currently, there are 15 agreements with third-party fields contracted to
the Brae system. In addition to generating processing and pipeline tariff
revenue, third-party business also has a favorable impact on Brae area
operations by optimizing infrastructure usage and extending the economic life of
the facilities.
Participation in the Scottish Area Gas Evacuation ("SAGE") system
provides pipeline transportation and onshore processing for Brae-area gas. The
Brae group owns 50 percent of SAGE, which has a total wet gas capacity of
approximately 1.0 bcfd. The other 50 percent is owned by the Beryl group, which
operates the system. Pipelines connect the Brae, Britannia, Beryl and Scott
fields to the SAGE gas processing terminal at St. Fergus in northeast Scotland.
Marathon's total United Kingdom gas sales from all sources averaged 184
net mmcfd in 1999, compared with 188 net mmcfd in 1998. Sales of Brae-area gas
through the SAGE pipeline system averaged 182 net mmcfd for the year 1999 and
185 net mmcfd for the year 1998. Of these totals, 166 mmcfd and 162 mmcfd was
Brae-area equity gas in 1999 and 1998, respectively, and 16 and 23 mmcfd was gas
acquired for injection and subsequent resale in 1999 and 1998, respectively.
15
IRELAND -- Marathon holds a 100 percent working interest in the Kinsale
Head and Ballycotton fields in the Irish Celtic Sea. Natural gas sales from
these maturing fields were 132 net mmcfd in 1999, compared with 168 net mmcfd in
1998. This production decline is expected to be partially offset by compressor
modifications implemented in 1999 and 2000, which are expected to improve
recovery from Kinsale Head, and by the new production from the Southwest Kinsale
field.
NORWAY -- In the Norwegian North Sea, Marathon holds a 23.8 percent
working interest in the Heimdal field, which had 1999 sales of 26 net mmcfd of
natural gas and 500 net bpd of condensate, compared with 1998 sales of 27 net
mmcfd of natural gas and 900 net bpd of condensate. Heimdal production ceased at
the end of September 1999. The Heimdal platform is now being redeveloped as a
center for transportation and processing of third party business, with future
third party revenue commencing in late 2001.
CANADA -- Production in Canada averaged 17,200 bpd and 150 mmcfd in
1999, compared with 16,000 bpd and 166 mmcfd from August 12, 1998 through
year-end 1998.
EGYPT -- In September 1999, Marathon sold its interests in two fields
in Egypt, effective June 1, 1999. The transaction included a 50 percent interest
in the Ashrafi oilfield offshore in the southwest Gulf of Suez and a 25 percent
interest in the El Qar'a natural gas and condensate field in the Nile Delta.
Both fields were operated by a co-venturer.
In October 1999, Marathon agreed to sell its 100 percent interest in
the Gebel El Zeit concession and the Ras El Ush field. In November 1999,
Marathon agreed to sell its 60 percent interest in the El Manzala field.
Marathon operated both fields. The transactions are expected to close in the
first quarter of 2000. The sales are subject to final approval by the Egyptian
authorities and satisfaction of customary closing conditions.
GABON -- Production in Gabon averaged 9,000 net bpd of liquid
hydrocarbons in 1999, compared with 4,700 net bpd in 1998. This increase
primarily reflected new production from the Tchatamba South field.
NETHERLANDS -- Marathon's 50 percent equity interest in CLAM provides a
5 percent entitlement in the production from 19 gas fields, which provided sales
of 36 net mmcfd of natural gas in 1999, compared with 33 net mmcfd in 1998.
RUSSIA -- Production in Russia, through Marathon's 37.5 percent equity
interest in Sakhalin Energy, averaged 1,000 net bpd of liquid hydrocarbons with
production commencing from the Piltun--Astokhskoye field in July 1999.
16
The following tables set forth productive wells and service wells for
each of the last three years and drilling wells as of December 31, 1999:
GROSS AND NET WELLS
1999 PRODUCTIVE WELLS (a)
- ---- --------------------
OIL GAS SERVICE WELLS (b) DRILLING WELLS (c)
---------------------------------- ----------------- ------------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- --- ----- ---
United States.............. 8,654 3,205 3,122 1,396 3,617 1,056 52 27
Europe .................. 36 14 65 33 18 7 1 -
Other International (f) 1,590 754 1,746 1,214 461 133 7 5
------ ---- ----- ----- ---- ---- -- --
Total Consolidated 10,280 3,973 4,933 2,643 4,096 1,196 60 32
Equity affiliates (d) 5 2 83 4 1 - 1 1
-- -- --- -- -- -- -- --
WORLDWIDE 10,285 3,975 5,016 2,647 4,097 1,196 61 33
====== ===== ===== ===== ===== ===== == ==
1998 PRODUCTIVE WELLS (a)
- ---- --------------------
OIL GAS SERVICE WELLS (b)
---------------------------------- -----------------
GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ---
United States.............. 9,396 3,616 3,214 1,414 4,062 1,127
Europe .................. 33 13 64 32 22 9
Other International (f) 1,605 826 1,459 1,068 162 111
------ ---- ----- ----- ---- ----
Total Consolidated 11,034 4,455 4,737 2,514 4,246 1,247
Equity affiliate (e) - - 83 4 - -
-- -- --- -- -- --
WORLDWIDE 11,034 4,455 4,820 2,518 4,246 1,247
====== ===== ===== ===== ===== =====
1997 PRODUCTIVE WELLS (a)
- ---- --------------------
OIL GAS SERVICE WELLS (b)
---------------------------------- -----------------
GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ---
United States.............. 9,661 3,755 3,282 1,451 4,100 1,138
Europe .................. 30 12 58 30 21 8
Other International 19 13 7 2 - -
--- --- -- -- -- --
Total Consolidated 9,710 3,780 3,347 1,483 4,121 1,146
Equity affiliate (e) - - 78 5 - -
-- -- --- -- -- --
WORLDWIDE 9,710 3,780 3,425 1,488 4,121 1,146
===== ===== ===== ===== ===== =====
- --------------------------------------------------------------------------------------------------------
(a) Includes active wells and wells temporarily shut-in. Of the gross
productive wells, gross wells with multiple completions operated by
Marathon totaled 478, 518 and 335 in 1999, 1998 and 1997, respectively.
Information on wells with multiple completions operated by other companies
is not available to Marathon.
(b) Consist of injection, water supply and disposal wells.
(c) Consist of exploratory and development wells.
(d) Represents CLAM and Sakhalin Energy.
(e) Represents CLAM.
(f) Includes Canada.
17
The following tables set forth average production costs and sales
prices per unit of production for each of the last three years:
1999 1998 1997
AVERAGE PRODUCTION COSTS (a) ---- ---- ----
(DOLLARS PER BOE)
United States..................................... $3.26 $3.12 $3.93
International -- Europe........................... 4.62 4.29 4.27
-- Other International (c).......... 4.66 4.73 3.40
Total Consolidated................................ $3.73 $3.55 $4.01
-- Equity affiliates (d)............ 10.02 3.99 5.86
WORLDWIDE .................................... $3.83 $3.56 $4.05
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
CRUDE OIL AND CONDENSATE NATURAL GAS LIQUIDS
AVERAGE SALES PRICES (b) ------------------------ -------------------
(DOLLARS PER BARREL)
United States............................ $15.78 $10.60 $17.32 $12.30 $8.64 $13.28
International -- Europe.................. 17.59 12.87 19.37 13.84 11.49 17.85
-- Other International (c). 16.77 11.31 16.62 13.49 8.38 18.12
Total Consolidated....................... $16.21 $11.14 $17.79 $12.67 $9.32 $14.52
-- Equity affiliates (d)... 23.43 - - 13.22 12.65 18.40
WORLDWIDE................................ $16.25 $11.14 $17.79 $12.67 $9.33 $14.55
NATURAL GAS
-----------
(DOLLARS PER THOUSAND CUBIC FEET)
United States ........................... $1.90 $1.79 $2.20
International -- Europe.................. 2.03 2.07 2.00
-- Other International (c). 1.64 1.34 2.10
Total Consolidated....................... $1.90 $1.85 $2.13
-- Equity affiliate (CLAM). 1.87 2.37 2.73
WORLDWIDE ........................... $1.90 $1.86 $2.15
- -----------------------------------------------------------------------------------------------------
(a) Production costs are as defined by the Securities and Exchange Commission
and include property taxes, severance taxes and other costs, but exclude
depreciation, depletion and amortization of capitalized acquisition,
exploration and development costs and certain administrative costs. Natural
gas volumes were converted to barrels of oil equivalent using a conversion
factor of six mcf of natural gas to one barrel of oil.
(b) Prices exclude gains/losses from hedging activities.
(c) Includes Canada for 1999 and 1998.
(d) Represents CLAM and Sakhalin Energy for 1999 and CLAM only for prior years.
18
REFINING, MARKETING AND TRANSPORTATION
Refining, Marketing and Transportation operations are primarily
conducted by MAP and its subsidiaries, including its wholly-owned subsidiaries,
Speedway SuperAmerica LLC and Marathon Ashland Pipe Line LLC. Marathon holds a
62 percent interest in MAP and Ashland Inc. holds a 38 percent interest in MAP.
Since MAP is a consolidated subsidiary of Marathon, operating
statistics and financial data applicable to the Marathon Group's RM&T activities
include 100 percent of MAP's operations, commencing January 1, 1998.
The following discussion of RM&T operations includes historical data
for the three-year period ended December 31, 1999. Operating measures such as
refined product yields and refined product sales in 1999 and 1998 include
100 percent of MAP and are not comparable to 1997.
MAP added more than $100 million in annual, repeatable pre-tax
operating efficiencies in 1999, raising its total to more than $250 million
since it began operations. MAP has an established goal to ultimately achieve
$400 million in annual, repeatable operating efficiencies. While MAP will
continue to work toward this goal, because of the increasing difficulty in
quantifying additional efficiencies, it will no longer report progress toward
attaining this goal.
REFINING
MAP owns and operates seven refineries with an aggregate refining
capacity of 935,000 barrels of crude oil per calendar day. The table below sets
forth the location and daily throughput capacity of each of MAP's refineries as
of December 31, 1999:
IN-USE REFINING CAPACITY
(BARRELS PER DAY)
Garyville, LA................. 232,000
Catlettsburg, KY.............. 222,000
Robinson, IL.................. 192,000
Detroit, MI................... 74,000
Canton, OH.................... 73,000
Texas City, TX................ 72,000
St. Paul Park, MN............. 70,000
---------
TOTAL......................... 935,000
=========
MAP's refineries include crude oil atmospheric and vacuum distillation,
fluid catalytic cracking, catalytic reforming, desulfurization and sulfur
recovery units. The refineries have the capability to process a wide variety of
crude oils and to produce typical refinery products, including reformulated
gasoline. MAP's refineries are integrated via pipelines and barges to maximize
operating efficiency. The transportation links that connect the refineries allow
the movement of intermediate products to optimize operations and the production
of higher margin products. For example, naphtha is moved from Texas City and
Catlettsburg to Robinson where excess reforming capacity is available. Gas oil
is moved from Robinson to Detroit and Cattlettsburg where excess fluid catalytic
cracking unit capacity is available. Light cycle oil is moved from Texas City to
Robinson where excess desulfurization capacity is available.
MAP also produces asphalt cements, polymerized asphalt, asphalt
emulsions and industrial asphalts. MAP manufactures petroleum pitch, primarily
used in the graphite electrode, clay target and refractory industries.
Additionally, MAP manufactures aromatics, aliphatic hydrocarbons, cumene, base
oil and slack wax.
Marathon's 50,000 bpd Indianapolis refinery, which was not contributed
to MAP, has remained idled since October 1993. In 1999, the Indianapolis
refinery was closed.
19
During 1999, MAP's refineries processed 888,000 bpd of crude oil and
139,000 bpd of other charge and blend stocks. The following table sets forth
MAP's refinery production by product group for 1999 and 1998 and Marathon's
refinery production by product group for 1997:
REFINED PRODUCT YIELDS
(THOUSANDS OF BARRELS PER DAY) 1999 1998 1997
---- ---- ----
Gasoline............................................ 566 545 353
Distillates......................................... 261 270 154
Propane............................................. 22 21 13
Feedstocks & Special Products....................... 66 64 36
Heavy Fuel Oil...................................... 43 49 35
Asphalt............................................. 69 68 39
--- --- ---
TOTAL............................................... 1,027 1,017 630
===== ===== ===
Planned maintenance activities requiring temporary shutdown of certain
refinery operating units ("turnarounds") are periodically performed at each
refinery. MAP completed major turnarounds at the St. Paul Park and Catlettsburg
refineries in 1999.
MAP and a third party have developed facilities to produce 800 million
pounds per year of polymer grade propylene and polypropylene at the Garyville
refinery. MAP owns and operates facilities to produce polymer grade propylene,
which began production in June 1999. The third party owns and operates the
polypropylene facilities and markets its output.
MAP is constructing a delayed coker unit at its Garyville, LA refinery.
This unit will allow for the use of heavier, lower cost crude and eliminate the
production of heavy fuel oil. To supply this new unit, MAP reached an agreement
with P.M.I. Comercio Internacional, S.A. de C.V., (PMI), an affiliate of
Petroleos Mexicanos, (PEMEX), to purchase approximately 90,000 bpd of heavy Maya
crude oil. This is a multi-year contract, which will begin upon completion of
the delayed coker unit which is scheduled in the fourth quarter of 2001. In
addition, a project to increase crude throughput and light product output is
being undertaken at MAP's Robinson, IL refinery and is also expected to be
completed in the fourth quarter of 2001.
MARKETING
In 1999, MAP's refined product sales volumes (excluding matching
buy/sell transactions) totaled 18.5 billion gallons (1,206,000 bpd). Excluding
sales related to matching buy/sell transactions, the wholesale distribution of
petroleum products to private brand marketers and to large commercial and
industrial consumers, primarily located in the Midwest, the upper Great Plains
and the Southeast, accounted for about 65 percent of MAP's refined product sales
volumes in 1999. Approximately 48 percent of MAP's gasoline volumes and 78
percent of its distillate volumes were sold on a wholesale basis to independent
unbranded customers in 1999.
The following table sets forth the volume of MAP's consolidated refined
product sales by product group for 1999 and 1998 and Marathon's consolidated
refined product sales by product group for 1997:
REFINED PRODUCT SALES
(THOUSANDS OF BARRELS PER DAY) 1999 1998 1997
---- ---- ----
Gasoline............................................ 714 671 452
Distillates......................................... 331 318 198
Propane............................................. 23 21 12
Feedstocks & Special Products....................... 66 67 40
Heavy Fuel Oil...................................... 43 49 34
Asphalt............................................. 74 72 39
--- --- ---
TOTAL............................................... 1,251 1,198 775
===== ===== ===
Matching Buy/Sell Volumes included in above......... 45 39 51
20
As of December 31, 1999, MAP supplied petroleum products to 3,482
Marathon and Ashland branded retail outlets located primarily in Michigan, Ohio,
Indiana, Kentucky and Illinois. Branded retail outlets are also located in West
Virginia, Wisconsin, Georgia, Florida, Virginia, Tennessee, Minnesota,
Pennsylvania, North Carolina, South Carolina and Alabama.
In 1999, MAP began selling gasoline and diesel fuel under the Marathon
brand in Georgia, Florida and Minnesota. MAP plans to develop a significant
brand presence in these states where it already has the logistical assets in
place to support these jobber owned retail outlets.
In 1999, retail sales of gasoline and diesel fuel were also made
through limited service and self-service stations and truck stops operated in 21
states by a wholly owned MAP subsidiary, Speedway SuperAmerica LLC ("SSA"). As
of December 31, 1999, this subsidiary had 2,433 retail outlets which sold
petroleum products and convenience-store merchandise, primarily under the brand
names "Speedway" and "SuperAmerica". SSA's revenues from the sale of
convenience-store merchandise totaled $2,056 million in 1999, compared with
$1,827 million in 1998. Profits generated from these sales tend to moderate the
margin volatility experienced in the retail sale of gasoline and diesel fuel.
The selection of merchandise varies among outlets - 2,182 of SSA's 2,433 outlets
at December 31, 1999, had convenience stores which sold a variety of food and
merchandise, and the remaining outlets sold selected convenience-store items
such as cigarettes, candy and beverages.
On December 10, 1999, MAP finalized the transaction with Ultramar
Diamond Shamrock ("UDS") to purchase 178 UDS owned-and-operated convenience
stores and 5 product terminals. In addition, MAP was assigned supply contracts
with UDS branded jobbers who supply 242 branded jobber stations in Michigan.
MAP plans to sell 284 SSA gasoline stations located in the Midwest
and Southeast. These non-core marginal assets comprise less than 12 percent
of MAP's owned and operated SSA retail network.
SUPPLY AND TRANSPORTATION
The crude oil processed in MAP's refineries is obtained from negotiated
lease, contract and spot purchases or exchanges. In 1999, MAP's negotiated
lease, contract and spot purchases of U.S. crude oil for refinery input averaged
349,000 bpd including 23,000 bpd acquired from Marathon. In 1999, 61 percent or
539,000 bpd of the crude oil processed by MAP's refineries was from foreign
sources and acquired primarily from various foreign national oil companies,
producing companies and traders, of which approximately 319,000 bpd was acquired
from the Middle East.
During the second quarter of 1999, MAP sold Scurlock Permian LLC, its
crude oil gathering business to Plains Marketing, L.P. Scurlock Permian's crude
oil gathering operations were conducted in an area reaching from the Rocky
Mountains to the Gulf Coast. In addition, Scurlock Permian LLC was engaged in
purchasing, selling and trading crude oil, principally at Midland, Texas;
Cushing, Oklahoma and St. James, Louisiana, three of the major distribution
points for United States crude oil. MAP retained the western Canadian operations
of Scurlock Permian LLC.
MAP operates a system of pipelines and terminals to provide crude oil
to its refineries and refined products to its marketing areas. Ninety-three
light product and asphalt terminals are strategically located throughout the
Midwest, upper Great Plains and Southeast. These facilities are supplied by a
combination of pipelines, barges, rail cars and trucks.
At December 31, 1999, MAP owned, leased or had an ownership interest in
approximately 383 miles of crude oil gathering lines; 4,091 miles of crude oil
trunk lines; and 2,856 miles of products trunk lines. In addition, MAP owned a
46.7 percent interest in LOOP LLC ("LOOP"), which is the owner and operator of
the only U.S. deepwater oil port, located 18 miles off the coast of Louisiana; a
49.9 percent interest in LOCAP Inc. ("LOCAP"), which is the owner and operator
of a crude oil pipeline connecting LOOP and the Capline system; and a 37.2
percent interest in the Capline system, a large diameter crude oil pipeline
extending from St. James, Louisiana to Patoka, Illinois.
21
MAP also has a 33.3 percent ownership interest in Minnesota Pipe Line
Company, which operates a crude oil pipeline in Minnesota. Minnesota Pipe Line
Company provides MAP with access to crude oil common carrier transportation from
Clearbrook, Minnesota to Cottage Grove, Minnesota, which is in the vicinity of
MAP's St. Paul Park, Minnesota, refinery.
MAP's subsidiary, Ohio River Pipe Line LLC ("ORPL"), plans to build a
pipeline from Kenova, West Virginia to Columbus, Ohio. ORPL is a common carrier
pipeline company and the pipeline will be an interstate common carrier pipeline.
The pipeline is expected to initially move about 50,000 bpd of refined petroleum
into the central Ohio region. Construction is currently expected to begin in
late 2000. However, the construction schedule is largely dependent on obtaining
the necessary rights-of-way, of which over 86 percent have been obtained to
date, and final regulatory approvals.
MAP's marine transportation operations include towboats and barges that
transport refined products on the Ohio, Mississippi and Illinois rivers, their
tributaries, and the Intercoastal Waterway. In early 2000, MAP exercised
contract provisions to terminate the long term charters on two single-hulled
80,000-deadweight-ton tankers, which had been "bare boat sub-chartered" to a
third party operator. The initial term of these charters was scheduled to expire
in 2001 and 2002, subject to certain renewal options. In January 2000, the
vessels were returned to the owners.
MAP leases and owns rail cars in various sizes and capacities for
movement and storage of petroleum products. MAP also owns and leases a large
number of tractors, tank trailers and general service trucks.
The above RM&T discussions include forward-looking statements
concerning anticipated operating efficiencies, refinery and pipeline
improvement projects and expected sale of assets. Some factors that could
potentially cause actual results to differ materially from present
expectations include (among others) unanticipated cost or delay associated
with implementing shared technology, completing logistical infrastructure
projects, leveraging procurement strategies, price of petroleum products,
levels of cash flow from operations, obtaining the necessary construction and
environmental permits, unforeseen hazards such as weather conditions,
obtaining the necessary rights-of-way and regulatory approval constraints.
With respect to the expected sale of assets, certain assumptions include
(among others) negotiations with a buyer or buyers, receipt of government
approvals, consent of third parties, satisfaction of customary closing
conditions and other factors. This forward-looking information may prove to
be inaccurate and actual results may differ significantly from those
presently anticipated.
OTHER ENERGY RELATED BUSINESSES
NATURAL GAS AND CRUDE OIL MARKETING AND TRANSPORTATION
Marathon owns and operates, as a common carrier, approximately 174
miles of crude oil gathering lines and 187 miles of crude oil trunk lines that
were not contributed to MAP. Marathon also owns an interest in the following
pipeline systems that were not contributed to MAP. Marathon has a 29 percent
interest in Odyssey Pipeline LLC and a 28 percent interest in Poseidon Oil
Pipeline Company, LLC, both Gulf of Mexico crude oil pipeline systems. Marathon
has a 24 percent interest in Nautilus Pipeline Company, LLC and a 24 percent
interest in Manta Ray Offshore Gathering Company, LLC, both Gulf of Mexico
natural gas pipeline systems. Marathon has a 17 percent interest in Explorer
Pipeline Company and a 2.5 percent interest in Colonial Pipeline Company, both
light product pipeline systems extending from the Gulf of Mexico to the Midwest
and East Coast, respectively.
Marathon has a 30 percent ownership in a Kenai, Alaska, natural gas
liquefication plant and two 87,500 cubic meter tankers used to transport
liquefied natural gas ("LNG") to customers in Japan. Feedstock for the plant is
supplied from a portion of Marathon's equity natural gas production in the Cook
Inlet. LNG is sold under a long-term contract with two of Japan's largest
utility companies which calls for the sale of more than 900 gross bcf over the
term of the contract. Marathon has a 30 percent participation in this contract
which is effective through
March 31, 2004, and provides an option for a five-year extension. During 1999,
LNG deliveries totaled 64 gross bcf (19 net bcf), down from 66 gross bcf (20 net
bcf) in 1998.
22
In addition to the sale of North American equity oil and natural gas
production, Marathon purchases oil and gas from third-party producers and
marketers for resale. This activity helps to maximize the value of Marathon's
equity production, while meeting customers' needs for secure and source-flexible
supplies.
On December 15, 1999, Marathon sold Carnegie Natural Gas Company and
its affiliated subsidiaries. The Carnegie companies were engaged in natural gas
production, transmission, distribution, sales and storage activities in
Pennsylvania and West Virginia.
POWER GENERATION
Marathon, through its wholly owned subsidiary, Marathon Power Company,
Ltd. ("Marathon Power"), pursues development, construction, ownership and
operation of independent electric power projects in the global electrical power
market.
COMPETITION AND MARKET CONDITIONS
The oil and gas industry is characterized by a large number of
companies, none of which is dominant within the industry, but a number of which
have greater resources than Marathon. Marathon must compete with these companies
for the rights to explore for oil and gas. Acquiring the more attractive
exploration opportunities frequently requires competitive bids involving
substantial front-end bonus payments or commitments to work programs. Based on
industry sources, Marathon believes it currently ranks 10th among U.S. based
petroleum corporations on the basis of 1998 worldwide liquid hydrocarbon and
natural gas production.
Marathon through MAP must also compete with a large number of other
companies to acquire crude oil for refinery processing and in the distribution
and marketing of a full array of petroleum products. MAP believes it ranks
fourth among U.S. petroleum companies on the basis of crude oil refining
capacity as of January 1, 2000. MAP competes in three distinct markets --
wholesale, branded and retail distribution -- for the sale of refined products,
and believes it competes with about 50 companies in the wholesale distribution
of petroleum products to private brand marketers and large commercial and
industrial consumers; 11 refiner/marketers in the supply of branded petroleum
products to dealers and jobbers; and over 800 petroleum product retailers in the
retail sale of petroleum products. Marathon also competes in the convenience
store industry through MAP's retail outlets.
The Marathon Group's operating results are affected by price changes in
crude oil, natural gas and petroleum products as well as changes in competitive
conditions in the markets it serves. Generally, operating results from
production operations benefit from higher crude oil and natural gas prices while
refining and marketing margins may be adversely affected by crude oil price
increases. Market conditions in the oil industry are cyclical and subject to
global economic and political events.
EMPLOYEES
The Marathon Group had 32,103 active employees as of December 31, 1999,
which included 28,217 MAP employees. Of the MAP total, 21,939 were employees of
Speedway SuperAmerica, LLC, primarily representing employees at retail marketing
outlets.
Certain hourly employees at the Catlettsburg and Canton refineries are
represented by the Paper, Allied-Industrial, Chemical and Energy Workers
International Union under labor agreements which expire on January 31, 2002,
while certain hourly employees at the Texas City refinery are represented by the
same union under a labor agreement which expires on March 31, 2002. Certain
hourly employees at the St. Paul Park and Detroit refineries are represented by
the International Brotherhood of Teamsters under labor agreements which expire
on May 31, 2002 and January 31, 2003, respectively.
23
PROPERTY, PLANT AND EQUIPMENT ADDITIONS
For property, plant and equipment additions, see "Management's
Discussion and Analysis of Financial Condition, Cash Flows and Liquidity -
Capital Expenditures" for the Marathon Group on page M-30.
ENVIRONMENTAL MATTERS
The Marathon Group maintains a comprehensive environmental policy
overseen by the Public Policy Committee of the USX Board of Directors. The
Health, Environment and Safety organization has the responsibility to ensure
that the Marathon Group's operating organizations maintain environmental
compliance systems that are in accordance with applicable laws and regulations.
The Health, Environment and Safety Management Committee, which is comprised of
officers of the group, is charged with reviewing its overall performance with
various environmental compliance programs. Also, the Marathon Group has formed
an Emergency Management Team, composed of senior management, which will oversee
the response to any major emergency environmental incident throughout the group.
The businesses of the Marathon Group are subject to numerous federal,
state and local laws and regulations relating to the protection of the
environment. These environmental laws and regulations include the Clean Air Act
("CAA") with respect to air emissions, the Clean Water Act ("CWA") with respect
to water discharges, the Resource Conservation and Recovery Act ("RCRA") with
respect to solid and hazardous waste treatment, storage and disposal, the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
with respect to releases and remediation of hazardous substances, and the Oil
Pollution Act of 1990 ("OPA-90") with respect to oil pollution and response. In
addition, many states where the Marathon Group operates have similar laws
dealing with the same matters. These laws and their associated regulations are
constantly evolving and many of them have become more stringent. The ultimate
impact of complying with existing laws and regulations is not always clearly
known or determinable due in part to the fact that certain implementing
regulations for laws such as RCRA and the CAA have not yet been finalized or in
certain instances are undergoing revision. These environmental laws and
regulations, particularly the 1990 Amendments to the CAA, new water quality
standards and stricter fuel regulations could result in increased capital,
operating and compliance costs.
For a discussion of environmental capital expenditures and costs of
compliance for air, water, solid waste and remediation, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Management's Discussion and Analysis of Environmental Matters, Litigation and
Contingencies" on page M-31 and "Legal Proceedings" for the Marathon Group on
page 37.
The Marathon Group has incurred and will continue to incur substantial
capital, operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. To the extent these expenditures, as with
all costs, are not ultimately reflected in the prices of the Marathon Group's
products and services, operating results will be adversely affected. The
Marathon Group believes that substantially all of its competitors are subject to
similar environmental laws and regulations. However, the specific impact on each
competitor may vary depending on a number of factors, including the age and
location of its operating facilities, marketing areas, production processes and
whether or not it is engaged in the petrochemical business or the marine
transportation of crude oil or refined products.
24
AIR
The CAA imposes stringent limits on air emissions, establishes a
federally mandated operating permit program and allows for civil and criminal
enforcement sanctions. The principal impact of the CAA on the Marathon Group is
on its RM&T operations. The CAA also establishes attainment deadlines and
control requirements based on the severity of air pollution in a geographical
area. It is estimated that, from 2000 to 2003, the Marathon Group, which
includes all seven MAP refineries, may spend approximately $90 million in order
to comply with the proposed Maximum Achievable Control Technology ("MACT") Phase
II standards under the CAA. These standards require new control equipment on
Fluid Catalytic Cracking Units and other units. In addition, the standards for
RFG became even more stringent in the year 2000, when Phase II Complex Model RFG
was required. New Tier II Fuels regulations were proposed in late 1999 and the
Environmental Protection Agency ("EPA") has stated that it will finalize these
rules early in 2000. These rules are expected to require reduced sulfur levels
in gasoline. These proposed regulations, as ultimately adopted, would not take
effect until sometime after 2002. It is anticipated that if final regulations
are adopted, consistent with the published proposed regulations then, the
compliance cost for these regulations could amount to a total of several hundred
million dollars spread over a period of several years.
In July 1997, the EPA promulgated more stringent revisions to the
National Ambient Air Quality Standards ("NAAQS") for ozone and particulate
matter. These revisions have been vacated by the Court of Appeals for the
District of Columbia and remanded to the EPA for further action. The EPA has
sought review of the matter by the United States Supreme Court. Additionally, in
1998, the EPA published a nitrogen oxide ("NOx") State Implementation Plan
("SIP") call, which would require some 22 states, including many states where
the Marathon Group has operations, to revise their SIPs to reduce NOx emissions.
This SIP has been stayed pending judicial review. If the new SIP is upheld by
the courts, the effective date for any additional NOx control mechanisms to be
installed should not be until after May 2003. In December 1999, the EPA granted
a petition from several northeastern states requesting that stricter NOx
standards be adopted by midwestern states, including several states where the
Marathon Group has refineries. It is expected that this recent EPA action may be
challenged in court. The impact of the revised NAAQS and NOx standards could be
significant to Marathon, but the potential financial effects cannot be
reasonably estimated until any necessary judicial review is concluded and the
states, as necessary, develop and implement revised SIPs in response to revised
NAAQS and NOx standards.
WATER
The Marathon Group maintains numerous discharge permits as required
under the National Pollutant Discharge Elimination System program of the CWA,
and has implemented systems to oversee its compliance efforts. In addition, the
Marathon Group is regulated under OPA-90 which amended the CWA. Among other
requirements, OPA-90 requires the owner or operator of a tank vessel or a
facility to maintain an emergency plan to respond to releases of oil or
hazardous substances. Also, in case of such releases, OPA-90 requires
responsible companies to pay resulting removal costs and damages, provides for
substantial civil penalties, and imposes criminal sanctions for violations of
this law.
Additionally, OPA-90 requires that new tank vessels entering or
operating in domestic waters be double-hulled, and that existing tank vessels
that are not double-hulled be retrofitted or removed from domestic service,
according to a phase-out schedule. In early 2000, MAP exercised contract
provisions to terminate the long term charters on two single-hulled,
80,000-deadweight-ton tankers, which had been "bare boat sub-chartered" to a
third party operator. The initial term of these charters was scheduled to expire
in 2001 and 2002, subject to certain renewal options. In January 2000, the
vessels were returned to the owners. The Coast Guard National Pollution Funds
Center has granted permission to Marathon and Ashland to self-insure the
financial responsibility amount for liability purposes for MAP's tankers, as
provided in OPA-90. In addition, most of the barges, which are used in MAP's
river transportation operations, meet the double-hulled requirements of OPA-90.
Single-hulled barges owned and operated by MAP are in the process of being
phased out. Displaced single-hulled barges will be divested or recycled into
docks or floats within MAP's system.
25
The Marathon Group operates facilities at which spills of oil and
hazardous substances could occur. Several coastal states in which Marathon
operates have passed state laws similar to OPA-90, but with expanded
liability provisions, including provisions for cargo owner responsibility as
well as ship owner and operator responsibility. Marathon has implemented
emergency oil response plans for all of its components and facilities covered
by OPA-90.
SOLID WASTE
The Marathon Group continues to seek methods to minimize the generation
of hazardous wastes in its operations. RCRA establishes standards for the
management of solid and hazardous wastes. Besides affecting current waste
disposal practices, RCRA also addresses the environmental effects of certain
past waste disposal operations, the recycling of wastes and the regulation of
underground storage tanks ("USTs") containing regulated substances. Since the
EPA has not yet promulgated implementing regulations for all provisions of RCRA
and has not yet made clear the practical application of all the implementing
regulations it has promulgated, the ultimate cost of compliance cannot be
accurately estimated. In addition, new laws are being enacted and regulations
are being adopted by various regulatory agencies on a continuing basis, and the
costs of compliance with these new rules can only be broadly appraised until
their implementation becomes more accurately defined.
REMEDIATION
The Marathon Group operates certain retail outlets where, during the
normal course of operations, releases of petroleum products from USTs have
occurred. Federal and state laws require that contamination caused by such
releases at these sites be assessed and remediated to meet applicable standards.
The enforcement of the UST regulations under RCRA has been delegated to the
states which administer their own UST programs. The Marathon Group's obligation
to remediate such contamination varies, depending upon the extent of the
releases and the stringency of the laws and regulations of the states in which
it operates. A portion of these remediation costs may be recoverable from the
appropriate state UST reimbursement fund once the applicable deductible has been
satisfied. Accruals for remediation expenses and associated reimbursements are
established for sites where contamination has been determined to exist and the
amount of associated costs is reasonably determinable.
As a general rule, Marathon and Ashland retained responsibility for
certain costs of remediation arising out of the prior ownership and operation of
those businesses transferred to MAP. Such continuing responsibility, in certain
situations, may be subject to threshold or sunset agreements which gradually
diminish this responsibility over time.
USX is also involved in a number of remedial actions under RCRA, CERCLA
and similar state statutes related to the Marathon Group. It is possible that
additional matters relating to the Marathon Group may come to USX's attention
which may require remediation.
26
U. S. STEEL GROUP
The U. S. Steel Group includes U. S. Steel, the largest steel producer
in the United States, which is engaged in the production and sale of steel mill
products, coke, and taconite pellets; the management of mineral resources;
domestic coal mining; real estate development; and engineering and consulting
services. Certain business activities are conducted through joint ventures and
partially-owned companies, such as USS-POSCO Industries ("USS-POSCO"), PRO-TEC
Coating Company ("PRO-TEC"), Transtar, Inc. ("Transtar"), Clairton 1314B
Partnership, VSZ U. S. Steel, s. r.o., Republic Technologies International, LLC
("Republic"), and until March 31, 1999, RTI International Metals, Inc. ("RTI").
U. S. Steel Group revenues as a percentage of total USX consolidated revenues
were approximately 18 percent in 1999, 22 percent in 1998 and 31 percent in
1997.
The following table sets forth the total revenues of the U. S. Steel
Group for each of the last three years.
REVENUES
(MILLIONS) 1999 1998 1997
---- ---- ----
Sales by product:
Sheet and Semi-finished Steel Products........... $ 3,345 $ 3,501 $ 3,820
Tubular, Plate, and Tin Mill Products ........... 1,118 1,513 1,754
Raw Materials (Coal, Coke and Iron Ore).......... 505 679 724
Other (a)........................................ 414 490 517
Income (loss) from affiliates......................... (89) 46 69
Gain on disposal of assets............................ 21 54 57
-------- -------- --------
TOTAL U. S. STEEL GROUP REVENUES ................ $ 5,314 $ 6,283 $ 6,941
======== ======== ========
- ------------
(a) Includes revenue from the sale of steel production by-products, engineering
and consulting services, real estate development and resource management.
For additional financial information about USX's industry segments, see
"Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements - 9. Group and Segment Information" on page U -13.
The total number of active U. S. Steel Group employees at year-end 1999
was 18,666. Most hourly and certain salaried employees are represented by the
United Steelworkers of America ("USWA"). In August, members of the USWA ratified
a new five-year labor contract, effective August 1, 1999, covering approximately
14,500 employees. The new labor contract, which includes $2.00 in hourly wage
increases phased in over the term of the agreement beginning in 2000 as well as
pension and other benefit improvements for active and retired employees and
spouses, will result in higher labor and benefit costs for the U. S. Steel Group
each year throughout the term of the contract. Management believes that this
agreement is competitive with labor agreements reached by U. S. Steel's major
domestic integrated competitors and thus does not believe that U. S. Steel's
competitive position with regard to such competitors will be materially
affected.
U. S. Steel Mining Company, LLC ("U. S. Steel Mining") entered into a
five-year contract with the United Mine Workers of America ("UMWA"), effective
January 1, 1998, covering approximately 1,000 employees. This agreement follows
that of other major mining companies.
RECENT DEVELOPMENT
U. S. Steel announced on February 24, 2000, that it entered into a
strategic alliance with e-STEEL Corporation, a leading online exchange for the
global steel industry. e-STEEL provides an easy-to-use, secure web site where
both steel buyers and sellers can initiate, describe, specifically target,
negotiate in real time, and conclude transactions online. U. S. Steel plans to
use the e-STEEL exchange for prime and non-prime transactions. As part of the
agreement, U. S. Steel has taken a minority stake in e-STEEL. e-STEEL also
entered into agreements with USX Engineers and Consultants, Inc., a wholly owned
subsidiary of USX, for joint marketing and implementation of system integration
services.
27
STEEL INDUSTRY BACKGROUND AND COMPETITION
The domestic steel industry is cyclical and highly competitive and is
affected by excess world capacity, which has restricted price increases during
periods of economic growth and led to price decreases during economic
contraction. In addition, the domestic steel industry, including U. S. Steel,
faces competition from producers of materials such as aluminum, cement,
composites, glass, plastics and wood in many markets.
U. S. Steel is the largest steel producer in the United States and
competes with many domestic and foreign steel producers. Domestic competitors
include integrated producers which, like U. S. Steel, use iron ore and coke as
primary raw materials for steel production, and mini-mills which primarily use
steel scrap and, increasingly, iron bearing feedstocks as raw materials.
Mini-mills generally produce a narrower range of steel products than integrated
producers, but typically enjoy certain competitive advantages such as lower
capital expenditures for construction of facilities and non-unionized work
forces with lower employment costs and more flexible work rules. An increasing
number of mini-mills utilize thin slab casting technology to produce flat-rolled
products. Through the use of thin slab casting, mini-mill competitors are
increasingly able to compete directly with integrated producers of flat-rolled
products. Depending on market conditions, the additional production generated by
flat-rolled mini-mills could have an adverse effect on U. S. Steel's selling
prices and shipment levels.
Steel imports to the United States accounted for an estimated 26%, 30%
and 24% of the domestic steel market for the years 1999, 1998 and 1997,
respectively. Steel imports of hot rolled and cold rolled steel decreased 34% in
1999, compared to 1998. Steel imports of plates decreased 52% compared to 1998.
Foreign competitors typically have lower labor costs and are often owned,
controlled or subsidized by their governments, allowing their production and
pricing decisions to be influenced by political and economic policy
considerations as well as prevailing market conditions. While international
trade litigation that was commenced in 1998 and 1999 has provided some relief
from dumped and subsidized steel imports, high levels of imported steel are
expected to continue to have an adverse affect on future market prices and
demand levels for domestic steel.
On September 30, 1998, U. S. Steel joined with 11 other producers, the
USWA and the Independent Steelworkers Union ("ISU") to file trade cases against
hot-rolled carbon steel products from Japan, Russia, and Brazil. A final
antidumping ("AD") order against Japan was issued on June 23, 1999. In the cases
against Brazil, on July 7, 1999, the U. S. Department of Commerce ("Commerce")
announced final countervailing ("CVD") and AD duty determinations and,
contemporaneously, announced that it had entered into agreements with Brazil to
suspend the investigations. In the case against Russia, on July 13, 1999,
Commerce announced final AD duty determinations and, contemporaneously,
announced that it had entered into an agreement with Russia to suspend the
investigation. In addition, Commerce announced that it had also entered into a
comprehensive agreement concerning all steel product imports from Russia except
for plate products and hot-rolled products. Plate products from Russia are
subject to a suspension agreement signed in 1997. On August 16, 1999, U. S.
Steel, along with four other integrated domestic producers, filed appeals with
the U.S. Court of International Trade challenging the hot-rolled carbon steel
suspension agreements with Brazil and Russia.
On February 16, 1999, U. S. Steel joined with four other producers and
the USWA to file trade cases against eight countries (Japan, South Korea, India,
Indonesia, Macedonia, the Czech Republic, France, and Italy) concerning imports
of cut-to-length plate products. AD cases were filed against all the countries
and CVD duty cases were filed against all of the countries except Japan and the
Czech Republic. On April 2, 1999, the U. S. International Trade Commission
("ITC") determined that the volume of imports from Macedonia and the Czech
Republic were negligible, thereby terminating the investigations as to those
countries. On February 11, 2000, final AD orders were issued against all the
remaining countries, and final CVD orders were issued in all of the remaining
CVD cases.
On June 2, 1999, U. S. Steel joined with eight other producers, the
USWA and the ISU to file trade cases against twelve countries (Argentina,
Brazil, China, Indonesia, Japan, Russia, South Africa, Slovakia, Taiwan,
Thailand, Turkey, and Venezuela) concerning imports of cold-rolled sheet
products. AD cases were filed against all the countries and CVD duty cases
were filed against Brazil, Indonesia, Thailand, and Venezuela. On July 19,
1999, the ITC issued its preliminary determination that the domestic industry
was being injured or threatened with injury as the result of imports from all
of the countries. It decided, however, to discontinue the investigations of
subsidies on imports from Indonesia, Thailand, and Venezuela. After having
found preliminary margins against each of the countries in each of the
remaining cases, Commerce has announced final AD
28
margins against Argentina, Brazil, Japan, Russia, South Africa, and Thailand,
and final CVD margins against Brazil. Final decisions from Commerce as to the
remaining countries are expected in the first half of 2000. Commerce has
announced that it has entered into an agreement with Russia to suspend the
investigation. After a final injury hearing, on March 3, 2000, the ITC
determined that the imports from Argentina, Brazil, Japan, Russia, South
Africa, and Thailand were not causing material injury to the domestic
industry, terminating the cases against these countries. The ITC's final
injury determination for the remaining six countries is still pending.
Cold-rolled sheet represents a significant portion of U.S. Steel shipments
and any increase in imports could adversely affect operating results.
On June 30, 1999, U. S. Steel joined with four other producers and the
USWA to file trade cases against five countries (the Czech Republic, Japan,
Mexico, Romania, and South Africa) concerning imports of large and small
diameter carbon and alloy standard, line, and pressure pipe. On August 13, 1999,
the ITC issued its preliminary determination that the domestic industry was
being injured or threatened with injury as the result of imports from all of the
countries and Commerce has announced preliminary duty determinations in each of
the cases. These cases are subject to further investigation by both the ITC and
Commerce.
U. S. Steel intends to file additional antidumping and countervailing
duty petitions if unfairly traded imports adversely impact, or threaten to
adversely impact, the results of the U. S. Steel Group.
On September 1, 1999, Commerce and the ITC published public notices
announcing the initiation of the mandatory five-year "sunset reviews" of
antidumping and countervailing duty orders issued as a result of the
cold-rolled, corrosion-resistant, and cut-to-length plate cases filed by the
domestic industry in 1992. Under the "sunset review" procedure, an order must be
revoked after five years unless Commerce and the ITC determine that dumping or a
countervailable subsidy is likely to continue or recur and that material injury
to the domestic industry is likely to continue or recur. Of the 34 orders issued
concerning the various products imported from various countries, 28 will be the
subject of expedited review at Commerce because there was no response,
inadequate response, or waiver of participation by the respondent parties.
Therefore, at Commerce, only six of the orders (corrosion-resistant,
cold-rolled, and cut-to-length plate from Germany; corrosion-resistant from
Japan; cold-rolled from the Netherlands; and cut-to-length plate from Romania)
will be the subject of a full review. The ITC has indicated that it will conduct
full reviews in all 34 of the cases, despite the fact that responses by some of
the respondent countries were inadequate.
On October 28, 1999, Weirton Steel, along with the USWA and the ISU,
filed a trade case against tin- and chromium-coated steel sheet imports from
Japan. In December 1999, the ITC issued its preliminary determination that the
domestic industry is being injured as a result of the imports from Japan.
Commerce is expected to make an announcement concerning preliminary duty margins
by the end of March 2000. This case is subject to further investigation by both
the ITC and Commerce.
The U. S. Steel Group's businesses are subject to numerous federal,
state and local laws and regulations relating to the storage, handling, emission
and discharge of environmentally sensitive materials. U. S. Steel believes that
its major domestic integrated steel competitors are confronted by substantially
similar conditions and thus does not believe that its relative position with
regard to such other competitors is materially affected by the impact of
environmental laws and regulations. However, the costs and operating
restrictions necessary for compliance with environmental laws and regulations
may have an adverse effect on U. S. Steel's competitive position with regard to
domestic mini-mills and some foreign steel producers and producers of materials
which compete with steel, which may not be required to undertake equivalent
costs in their operations. For further information, see Environmental
Proceedings on page 41, Legal Proceedings on page 40, and Management's
Discussion and Analysis of Environmental Matters, Litigation and Contingencies
on page S-30.
29
BUSINESS STRATEGY
U. S. Steel produces raw steel at Gary Works in Indiana, Mon Valley
Works in Pennsylvania and Fairfield Works in Alabama.
U. S. Steel has responded to competition resulting from excess steel
industry capability by eliminating less efficient facilities, modernizing those
that remain and entering into joint ventures, all with the objective of focusing
production on higher value-added products, where superior quality and special
characteristics are of critical importance. These products include bake
hardenable steels and coated sheets for the automobile and appliance industries,
laminated sheets for the manufacture of motors and electrical equipment,
improved tin mill products for the container industry and oil country tubular
goods. Several recent modernization projects further support U. S. Steel's
objectives of providing value-added products including the dualine coating lines
at Fairfield Works and Mon Valley Works for the construction market; the cold
mill upgrades at Gary Works and Mon Valley Works; the second hot-dip galvanized
sheet line at PRO-TEC and the Fairless Works galvanizing line upgrade for the
automotive market. In 1999, U. S. Steel completed the conversion of the
Fairfield Works bloom caster and pipemill to use round semifinished steel for
tubular production, enhancing U. S. Steel's ability to serve the tubular goods
markets. Additional modernization projects in 1999 included the final upgrade of
the hot dip galvanizing line at Fairless, the start-up of the 64" pickle line at
Mon Valley Works, allowing for the shutdown of older, less productive and higher
cost lines, the upgrade of the hot strip mill coilers at Gary Works and the
basic oxygen furnace emissions project at Fairfield Works. These projects
support U. S. Steel's objective of providing quality value-added products and
services to customers.
In addition to the modernization of its production facilities, USX has
entered into a number of joint ventures with domestic and foreign partners to
take advantage of market or manufacturing opportunities in the sheet, tin mill,
tubular, bar and plate consuming industries.
U. S. Steel continues to pursue lower manufacturing cost objectives
through continuing cost improvement programs. These initiatives include, but are
not limited to, reduced production cycle time, improved yields, increased
customer orientation and improved process control.
U. S. STEEL SEGMENT OPERATIONS
U. S. Steel operates plants which produce steel products in a variety
of forms and grades. Raw steel production was 12.0 million tons in 1999,
compared with 11.2 million tons in 1998 and 12.3 million tons in 1997. Raw steel
produced was nearly 100% continuous cast in 1999, 1998 and 1997. Raw steel
production averaged 94% of capability in 1999, compared with 88% of capability
in 1998 and 97% of capability in 1997. U.S. Steel's stated annual raw steel
production capability was 12.8 millions tons for 1999 (7.7 million at Gary
Works, 2.8 million at Mon Valley Works and 2.3 million at Fairfield Works).
Steel shipments were 10.6 million tons in 1999, 10.7 million tons in
1998 and 11.6 million tons in 1997. U. S. Steel Group shipments comprised
approximately 10.1% of domestic steel shipments in 1999. Exports accounted for
approximately 3% of U. S. Steel Group shipments in 1999 and 4% in both 1998 and
1997.
The following tables set forth significant U. S. Steel shipment data by
major markets and products for each of the last three years. Such data does not
include shipments by joint ventures and other affiliates of USX accounted for by
the equity method.
30
STEEL SHIPMENTS BY MARKET AND PRODUCT
SHEETS TUBULAR,
& SEMI-FINISHED PLATE & TIN
MAJOR MARKET - 1999 STEEL MILL PRODUCTS TOTAL
- -------------------- ----- ------------- -----
(Thousands of Net Tons)
Steel Service Centers.............................. 1,867 589 2,456
Further Conversion:
Trade Customers................................. 1,257 376 1,633
Joint Ventures.................................. 1,818 - 1,818
Transportation (Including Automotive).............. 1,280 225 1,505
Containers......................................... 167 571 738
Construction and Construction Products............. 660 184 844
Oil, Gas and Petrochemicals........................ - 363 363
Export............................................. 246 75 321
All Other.......................................... 819 132 951
------- ------- -------
TOTAL........................................... 8,114 2,515 10,629
======= ======= =======
MAJOR MARKET - 1998
- --------------------
(Thousands of Net Tons)
Steel Service Centers.............................. 1,867 696 2,563
Further Conversion:
Trade Customers................................. 706 434 1,140
Joint Ventures.................................. 1,473 - 1,473
Transportation (Including Automotive).............. 1,438 347 1,785
Containers......................................... 222 572 794
Construction and Construction Products............. 809 178 987
Oil, Gas and Petrochemicals........................ - 509 509
Export............................................. 226 156 382
All Other.......................................... 867 186 1,053
------- ------- -------
TOTAL........................................... 7,608 3,078 10,686
======= ======= =======
MAJOR MARKET - 1997
- --------------------
(Thousands of Net Tons)
Steel Service Centers.............................. 2,020 726 2,746
Further Conversion:
Trade Customers................................. 859 519 1,378
Joint Ventures.................................. 1,568 - 1,568
Transportation (Including Automotive).............. 1,503 255 1,758
Containers......................................... 216 640 856
Construction and Construction Products............. 889 105 994
Oil, Gas and Petrochemicals........................ - 810 810
Export............................................. 236 217 453
All Other.......................................... 879 201 1,080
------- ------- -------
TOTAL........................................... 8,170 3,473 11,643
======= ======= =======
31
The following table lists products and services by facility or business unit:
Gary........................................ Sheets; Tin Mill; Plates; Coke
Fairfield................................... Sheets; Tubular
Mon Valley.................................. Sheets
Fairless.................................... Sheets; Tin Mill
USS-POSCO(a)................................ Sheets; Tin Mill
Lorain Tubular Company, LLC................. Tubular
Republic Technologies International, LLC.(a) Bar
PRO-TEC(a).................................. Galvanized Sheet
VSZ U. S. Steel s. r.o.(a).................. Tin Mill
Clairton.................................... Coke
Clairton 1314B Partnership(a)............... Coke
Transtar(a)................................. Transportation
Minntac..................................... Taconite Pellets
U. S. Steel Mining.......................... Coal
Resource Management......................... Administration of Mineral, Coal and Timber Properties
USX Realty Development...................... Real estate sales, leasing and management
USX Engineers and Consultants............... Engineering and Consulting Services
- --------------------
(a) Equity affiliate
USX and its wholly owned entity, U. S. Steel Mining, have domestic coal
properties with demonstrated bituminous coal reserves of approximately 787
million net tons at year-end 1999 compared with approximately 790 million net
tons at year-end 1998. The reserves are of metallurgical and steam quality in
approximately equal proportions. They are located in Alabama, Illinois, Indiana,
Pennsylvania, Tennessee and West Virginia. Approximately 93% of the reserves are
owned, and the rest are leased. The leased properties are covered by leases
which expire in 2005 and 2012. U. S. Steel Mining's coal production was 6.6
million tons in 1999, compared with 8.2 million tons in 1998 and 7.5 million
tons in 1997. Coal shipments were 6.9 million tons in 1999, compared with 7.7
million tons in 1998 and 7.8 million tons in 1997.
USX controls domestic iron ore properties having demonstrated iron ore
reserves in grades subject to beneficiation processes in commercial use by U. S.
Steel of approximately 726 million tons at year-end 1999, substantially all of
which are iron ore concentrate equivalents available from low-grade iron-bearing
materials. All demonstrated reserves are located in Minnesota. Approximately 32%
of these reserves are owned and the remaining 68% are leased. Most of the leased
reserves are covered by a lease expiring in 2058 and the remaining leases have
expiration dates ranging from 2021 to 2026. U. S. Steel's iron ore operations at
Mt. Iron, Minnesota ("Minntac") produced 14.3 million net tons of taconite
pellets in 1999, 15.8 million net tons in 1998 and 16.3 million net tons in
1997. Taconite pellet shipments were 15.0 million tons in 1999, compared with
15.4 million tons in 1998 and 16.4 million tons in 1997.
USX's Resource Management administers the remaining mineral lands and
timber lands of U. S. Steel and is responsible for the lease or sale of these
lands and their associated resources, which encompass approximately 300,000
acres of surface rights and 1,500,000 acres of mineral rights in 13 states.
USX Engineers and Consultants, Inc. sells technical services worldwide
to the steel, mining, chemical and related industries. Together with its
subsidiary companies, it provides engineering and consulting services for
facility expansions and modernizations, operating improvement projects,
integrated computer systems, coal and lubrication testing and environmental
projects.
USX Realty Development develops real estate for sale or lease and
manages retail and office space, business and industrial parks and residential
and recreational properties.
32
For significant operating data for U. S. Steel Operations for each of
the last five years, see "USX Consolidation Financial Statements and
Supplementary Data - Five-Year Operating Summary - U. S. Steel Group" on page
U-37.
USX participates directly and through subsidiaries in a number of joint
ventures included in the U. S. Steel segment operations. All of the joint
ventures are accounted for under the equity method. Certain of the joint
ventures and other investments are described below, all of which are at least
50% owned except Transtar, Republic, Acero Prime and the Clairton 1314B
Partnership. For financial information regarding joint ventures and other
investments, see "Financial Statements and Supplementary Data - Notes to
Financial Statements - 15. Investments and Long-term Receivables" for the U. S.
Steel Group on page S-15.
USX and Pohang Iron & Steel Co., Ltd. ("POSCO") of South Korea
participate in a joint venture, USS-POSCO, which owns and operates the former
U.S. Steel Pittsburg, California Plant. The joint venture markets high quality
sheet and tin products, principally in the western United States market area.
USS-POSCO produces cold-rolled sheets, galvanized sheets, tin plate and tin-free
steel, with hot bands principally provided by U. S. Steel and POSCO. Total
shipments by USS-POSCO were approximately 1.6 million tons in 1999.
In August of 1999, USX and Kobe Steel, Ltd. ("Kobe") of Japan completed
a transaction that combined the steelmaking and bar producing assets of USS/Kobe
Steel Company ("USS/Kobe"), a joint venture which owned and operated the former
U. S. Steel Lorain, Ohio Works, with companies controlled by Blackstone Capital
Partners II - those companies being Republic Technologies International, Inc.,
Republic Engineered Steels, Inc. and Bar Technologies, Inc. The new company is
known as Republic Technologies International, LLC ("Republic"). In addition, USX
made a $15 million equity investment in Republic. USX owned 50% of USS/Kobe and
now owns approximately 16% of Republic, which produces raw steel, semi-finished
steel products and bar products. The seamless pipe business of USS/Kobe was
excluded from the transaction and reformed as Lorain Tubular Company, LLC, a
joint venture between USX and Kobe. At the close of business on December 31,
1999, USX completed the purchase of Kobe's 50% interest in Lorain Tubular
Company, LLC which will be included in the U. S. Steel Group.
USX and Kobe also participate in another joint venture, PRO-TEC, which
owns and operates two hot-dip galvanizing lines in Leipsic, Ohio. The first
galvanizing line commenced operations in early 1993. In November 1998,
operations commenced on a second hot-dip galvanized sheet line which expanded
PRO-TEC's capacity nearly 400,000 tons a year to 1.0 million tons annually.
Total shipments by PRO-TEC were approximately 925,000 tons in 1999.
USX and Worthington Industries Inc. participate in a joint venture
known as Worthington Specialty Processing which operates a steel processing
facility in Jackson, Michigan. The plant is operated by Worthington Industries,
Inc. The facility contains state-of-the-art technology capable of processing
master steel coils into both slit coils and sheared first operation blanks
including rectangles, trapezoids, parallelograms and chevrons. It is designed to
meet specifications for the automotive, appliance, furniture and metal door
industries. In 1999, Worthington Specialty Processing processed approximately
397,000 tons.
USX and Rouge Steel Company participate in Double Eagle Steel Coating
Company ("DESCO"), a joint venture which operates an electrogalvanizing facility
located in Dearborn, Michigan. This facility enables U. S. Steel to further
supply the automotive demand for steel with corrosion resistant properties. The
facility can coat both sides of sheet steel with zinc or alloy coatings and has
the capability to coat one side with zinc and the other side with alloy.
Capacity is 870,000 tons of electrogalvanized steel annually, with availability
of the facility shared equally by the partners. In 1999, DESCO produced
approximately 790,000 tons of electrogalvanized steel.
USX and Olympic Steel, Inc. formed a 50-50 joint venture in 1997 to
process laser welded sheet steel blanks at a facility in Van Buren, Michigan.
The joint venture conducts business as Olympic Laser Processing. Startup began
in 1998. Effective capacity is approximately 2.4 million parts annually. Laser
welded blanks are used in the automotive industry for an increasing number of
body fabrication applications. U. S. Steel is the venture's primary customer and
is responsible for marketing the laser-welded blanks.
33
USX owns a 46% interest in Transtar, which in 1988 purchased the former
domestic transportation businesses of USX including railroads, a dock company,
USS Great Lakes Fleet, Inc. and Warrior & Gulf Navigation Company. Blackstone
Transportation Partners, L.P. and Blackstone Capital Partners L.P., both
affiliated with The Blackstone Group, together own 53% of Transtar, and the
senior management of Transtar owns the remaining 1%.
USX and VSZ a.s., formed a 50-50 joint venture in Kosice, Slovak
Republic, for the production and marketing of tin mill products to serve an
emerging Central European market. In February 1998, the joint venture, doing
business as VSZ U. S. Steel, s. r.o., took over ownership and commenced
operation of an existing tin mill facility (VSZ's Ocel plant in Kosice) with an
annual production capacity of 140,000 metric tons. In 1999, shipments from the
joint venture were approximately 124,000 metric tons. In 2000, VSZ U. S. Steel,
s. r.o. will resume its planned tin mill expansion of 200,000 metric tons of
capacity.
In 1997, USX entered into the Clairton 1314B Partnership, a strategic
partnership with two limited partners to acquire an interest in three coke
batteries at Clairton Works. The partnership has an annual coke production
capability of 1.5 million tons. In 1999, production of coke totaled 1.4 million
tons. U. S. Steel, the general partner, owns a 9.78% interest in the Clairton
1314B Partnership.
In 1997, USX, through its subsidiary, United States Steel Export
Company de Mexico, along with Feralloy Mexico, S.R.L. de C.V., and Intacero de
Mexico, S.A. de C.V., formed a joint venture for a slitting and warehousing
facility in San Luis Potosi, Mexico. In 1999, the joint venture completed its
first full year of operations, processing approximately 45,000 tons.
On March 31, 1999, USX irrevocably deposited with a trustee the entire
5.5 million common shares it owned in RTI International Metals, Inc.,
terminating its ownership interest in RTI. The deposit of the shares also
resulted in the satisfaction of USX's obligation under its 6-3/4% Exchangeable
Notes due February 1, 2000. Under the terms of the indenture, the trustee
exchanged one RTI share for each note at maturity. All shares were required for
satisfaction of the indexed debt; therefore, none reverted back to USX.
PROPERTY, PLANT AND EQUIPMENT ADDITIONS
For property, plant and equipment additions, including capital leases,
see "Management's Discussion and Analysis of Financial Condition, Cash Flows and
Liquidity - Capital Expenditures" for the U. S. Steel Group on page S-29.
ENVIRONMENTAL MATTERS
The U. S. Steel Group maintains a comprehensive environmental policy
overseen by the Public Policy Committee of the USX Board of Directors. The
Environmental Affairs organization has the responsibility to ensure that the
U. S. Steel Group's operating organizations maintain environmental compliance
systems that are in accordance with applicable laws and regulations. The
Executive Environmental Committee, which is comprised of officers of the
U. S. Steel Group, is charged with reviewing its overall performance with
various environmental compliance programs. Also, the U. S. Steel Group,
largely through the American Iron and Steel Institute, continues its
involvement in the negotiation of various air, water, and waste regulations
with federal, state and local governments to assure the implementation of
cost effective pollution reduction strategies.
The businesses of the U. S. Steel Group are subject to numerous
federal, state and local laws and regulations relating to the protection of
the environment. These environmental laws and regulations include the Clean
Air Act ("CAA") with respect to air emissions; the Clean Water Act ("CWA")
with respect to water discharges; the Resource Conservation and Recovery Act
("RCRA") with respect to solid and hazardous waste treatment, storage and
disposal; and the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") with respect to releases and remediation of
hazardous substances. In addition, all states where the U. S. Steel Group
operates have similar laws dealing with the same matters. These laws are
constantly evolving and becoming increasingly stringent. The ultimate impact
of complying with existing laws and regulations is not always clearly known
or determinable due in part to the fact that certain implementing regulations
for laws such as RCRA and the CAA have not yet been promulgated or in certain
instances are undergoing revision. These environmental laws and regulations,
particularly the CAA, could result in substantially increased capital,
operating and compliance costs.
34
For a discussion of environmental capital expenditures and the cost of
compliance for air, water, solid waste and remediation, see "Management's
Discussion and Analysis of Environmental Matters, Litigation and Contingencies"
on page S-30 and "Legal Proceedings" for the U. S. Steel Group on page 40.
The U. S. Steel Group has incurred and will continue to incur
substantial capital, operating and maintenance, and remediation expenditures as
a result of environmental laws and regulations. In recent years, these
expenditures have been mainly for process changes in order to meet CAA
obligations, although ongoing compliance costs have also been significant. To
the extent these expenditures, as with all costs, are not ultimately reflected
in the prices of the U. S. Steel Group's products and services, operating
results will be adversely affected. U. S. Steel believes that its major domestic
integrated steel competitors are confronted by substantially similar conditions
and thus does not believe that its relative position with regard to such
competitors is materially affected by the impact of environmental laws and
regulations. However, the costs and operating restrictions necessary for
compliance with environmental laws and regulations may have an adverse effect on
U. S. Steel's competitive position with regard to domestic mini-mills and some
foreign steel producers and producers of materials which compete with steel,
which may not be required to undertake equivalent costs in their operations. In
addition, the specific impact on each competitor may vary depending on a number
of factors, including the age and location of its operating facilities and its
production methods. For further information, see "Legal Proceedings" on page 40,
and "Management's Discussion and Analysis of Environmental Matters, Litigation
and Contingencies" on page S-30.
The 1997 Kyoto Global Climate Change Agreement ("Kyoto Protocol")
produced by the United Nations convention on climate change, if ratified by the
U. S. Senate, would require restrictions on greenhouse gas emissions in the
United States. Options that could be considered by federal regulators to force
the reductions necessary to meet these restrictions could escalate energy costs
and thereby increase steel production costs. Until action is taken by the U. S.
Senate to ratify or reject the Kyoto Protocol, it is not possible to estimate
the effect of regulations that may be considered for implementation of emissions
restrictions in the United States.
AIR
The CAA imposed more stringent limits on air emissions, established a
federally mandated operating permit program and allowed for enhanced civil and
criminal enforcement sanctions. The principal impact of the CAA on the U. S.
Steel Group is on the coke-making and primary steel-making operations of U. S.
Steel, as described in this section. The coal mining operations and sales of
U. S. Steel Mining may also be affected.
The CAA requires the regulation of hazardous air pollutants and
development and promulgation of Maximum Achievable Control Technology ("MACT")
Standards. The amendment to the Chrome Electroplating MACT to include the chrome
processes at Gary and Fairless is expected in 2000. The EPA is required to
promulgate MACT standards for integrated iron and steel plants and taconite iron
ore processing by November 15, 2000. The impact of these new standards could be
significant to U. S. Steel, but the cost cannot be reasonably estimated until
the rules are finalized.
The CAA specifically addressed the regulation and control of coke oven
batteries. The National Emission Standard for Hazardous Air Pollutants for coke
oven batteries was finalized in October 1993, setting forth the MACT standard
and, as an alternative, a Lowest Achievable Emission Rate ("LAER") standard.
Effective January 1998, U. S. Steel elected to comply with the LAER standards.
U. S. Steel believes it will be able to meet the current LAER standards. The
LAER standards will be further revised in 2010 and additional health risk-based
standards are expected to be adopted in 2020. EPA is in the process of
developing the Phase II Coke MACT for pushing, quenching and battery stacks
which is scheduled to be finalized in 2000. This MACT will impact U. S. Steel,
but the cost cannot be reasonably estimated at this time.
The CAA also mandates the nationwide reduction of emissions of acid
rain precursors (sulfur dioxide and nitrogen oxides) from fossil fuel-fired
electrical utility plants. Specified emission reductions are to be achieved by
2000. Phase I began on January 1, 1995, and applies to 110 utility plants
specifically listed in the law. Phase II, which begins on January 1, 2000, will
apply to other utility plants which may be regulated under the law. U. S. Steel,
like all other electricity consumers, will be impacted by increased electrical
energy costs that are expected as electric utilities seek rate increases to
comply with the acid rain requirements.
35
In September 1997, the EPA adopted revisions to the National Ambient
Air Quality Standards for ozone and particulate matter which are significantly
more stringent than prior standards. EPA has issued a Nitrogen Oxide ("NOx")
State Implementation Plan ("SIP") Call to require certain states to develop
plans to reduce NOx emissions focusing on large utility and industrial boilers.
The impact of these revised standards could be significant to U. S. Steel, but
the cost cannot be reasonably estimated until the final revised standards and
the NOx SIP Call are issued and, more importantly, the states implement their
State Implementation Plans covering their standards.
In 1999, all of the coal production of U. S. Steel Mining was
metallurgical coal, which is primarily used in coke production. While USX
believes that the new environmental requirements for coke ovens will not have an
immediate effect on U. S. Steel Mining, the requirements may encourage
development of steelmaking processes that reduce the usage of coke. The new
ozone and particulate matter standards could be significant to U. S. Steel
Mining, but the cost is not capable of being reasonably estimated until rules
are proposed or finalized.
WATER
The U. S. Steel Group maintains the necessary discharge permits as
required under the National Pollutant Discharge Elimination System program of
the CWA, and it is in compliance with such permits. In 1998, USX entered into a
consent decree with the Environmental Protection Agency ("EPA") which resolved
alleged violations of the Clean Water Act National Pollution Discharge
Elimination System ("NPDES") permit at Gary Works and provides for a sediment
remediation project for a section of the Grand Calumet River that runs through
Gary Works. Contemporaneously, USX entered into a consent decree with the public
trustees which resolves potential liability for natural resource damages on the
same section of the Grand Calumet River. In 1999, USX paid civil penalties of
$2.9 million for the alleged water act violations and $0.5 million in natural
resource damages assessment costs. In addition, USX will pay the public trustees
$1 million at the end of the remediation project for future monitoring costs and
USX is obligated to purchase and restore several parcels of property that have
been or will be conveyed to the trustees. During the negotiations leading up to
the settlement with EPA, capital improvements were made to upgrade plant systems
to comply with the NPDES requirements. The sediment remediation project is an
approved final interim measure under the corrective action program for Gary
Works and is expected to cost approximately $30 million over the next six years.
Estimated remediation and monitoring costs for this project have been accrued.
SOLID WASTE
The U. S. Steel Group continues to seek methods to minimize the
generation of hazardous wastes in its operations. RCRA establishes standards for
the management of solid and hazardous wastes. Besides affecting current waste
disposal practices, RCRA also addresses the environmental effects of certain
past waste disposal operations, the recycling of wastes and the regulation of
storage tanks. Corrective action under RCRA related to past waste disposal
activities is discussed below under "Remediation."
REMEDIATION
A significant portion of the U. S. Steel Group's currently identified
environmental remediation projects relate to the remediation of former and
present operating locations. These projects include the remediation of the Grand
Calumet River (discussed above), and the closure and remediation of permitted
hazardous and non-hazardous waste landfills.
The U. S. Steel Group is also involved in a number of remedial actions
under CERCLA, RCRA and other federal and state statutes, and it is possible that
additional matters may come to its attention which may require remediation. For
a discussion of remedial actions related to the U. S. Steel Group, see "Legal
Proceedings - U. S. Steel Group Environmental Proceedings."
36
ITEM 2. PROPERTIES
The location and general character of the principal oil and gas
properties, plants, mines, pipeline systems and other important physical
properties of USX are described in the Item 1. Business section of this
document. Except for oil and gas producing properties, which generally are
leased, or as otherwise stated, such properties are held in fee. The plants and
facilities have been constructed or acquired over a period of years and vary in
age and operating efficiency. At the date of acquisition of important
properties, titles were examined and opinions of counsel obtained, but no title
examination has been made specifically for the purpose of this document. The
properties classified as owned in fee generally have been held for many years
without any material unfavorably adjudicated claim.
Several steel production facilities and interests in two liquefied
natural gas tankers are leased. See "Financial Statements and Supplementary Data
- - Notes to Consolidated Financial Statements - 11. Leases" on page U-17.
The basis for estimating oil and gas reserves is set forth in
"Consolidated Financial Statements and Supplementary Data - Supplementary
Information on Oil and Gas Producing Activities - Estimated Quantities of Proved
Oil and Gas Reserves" on pages U-32 and U-33.
USX believes that its surface and mineral rights covering reserves are
adequate to assure the basic legal right to extract the minerals, but may not
yet have obtained all governmental permits necessary to do so.
Unless otherwise indicated, all reserves shown are as of December 31,
1999.
ITEM 3. LEGAL PROCEEDINGS
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments related to the Marathon Group and
the U. S. Steel Group involving a variety of matters, including laws and
regulations relating to the environment. Certain of these matters are included
below in this discussion. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the consolidated financial
statements and/or to the financial statements of the applicable group. However,
management believes that USX will remain a viable and competitive enterprise
even though it is possible that these contingencies could be resolved
unfavorably.
MARATHON GROUP
ENVIRONMENTAL PROCEEDINGS
The following is a summary of proceedings attributable to the Marathon
Group that were pending or contemplated as of December 31, 1999, under federal
and state environmental laws. Except as described herein, it is not possible to
predict accurately the ultimate outcome of these matters; however, management's
belief set forth in the first paragraph under Item 3. "Legal Proceedings" above
takes such matters into account.
Claims under the Comprehensive Environmental Response, Compensation,
and Liability Act ("CERCLA") and related state acts have been raised with
respect to the cleanup of various waste disposal and other sites. CERCLA is
intended to expedite the cleanup of hazardous substances without regard to
fault. Potentially responsible parties ("PRPs") for each site include present
and former owners and operators of, transporters to and generators of the
substances at the site. Liability is strict and can be joint and several.
Because of various factors including the ambiguity of the regulations, the
difficulty of identifying the responsible parties for any particular site, the
complexity of determining the relative liability among them, the uncertainty as
to the most desirable remediation techniques and the amount of damages and
cleanup costs and the time period during which such costs may be incurred, USX
is unable to reasonably estimate its ultimate cost of compliance with CERCLA.
37
Projections, provided in the following paragraphs, of spending for
and/or timing of completion of specific projects are forward-looking statements.
These forward-looking statements are based on certain assumptions including, but
not limited to, the factors provided in the preceding paragraph. To the extent
that these assumptions prove to be inaccurate, future spending for, or timing of
completion of environmental projects may differ materially from those stated in
forward-looking statements.
At December 31, 1999, USX had been identified as a PRP at a total of 15
CERCLA waste sites related to the Marathon Group. Based on currently available
information, which is in many cases preliminary and incomplete, USX believes
that its liability for cleanup and remediation costs in connection with each of
these sites will be under $1 million per site, and most will be under $100,000.
In addition, there are 8 waste sites related to the Marathon Group
where USX has received information requests or other indications that USX may be
a PRP under CERCLA but where sufficient information is not presently available
to confirm the existence of liability.
There are also 110 additional sites, excluding retail marketing
outlets, related to the Marathon Group where remediation is being sought under
other environmental statutes, both federal and state, or where private parties
are seeking remediation through discussions or litigation. Of these sites, 17
were associated with properties conveyed to MAP by Ashland which has retained
liability for all costs associated with remediation. Based on currently
available information, which is in many cases preliminary and incomplete, the
Marathon Group believes that its liability for cleanup and remediation costs in
connection with 16 of these sites will be under $100,000 per site, 33 sites have
potential costs between $100,000 and $1 million per site, 10 sites may involve
remediation costs between $1 million and $5 million per site. In addition,
future costs for cleanup and remediation at one site, described in the following
paragraph is expected to cost more than $5 million. There are 33 sites with
insufficient information to estimate any remediation costs.
There is one site that involves a remediation program in cooperation
with the Michigan Department of Environmental Quality at a closed and dismantled
refinery site located near Muskegon, Michigan. During the next 5 to 10 years,
the Marathon Group anticipates spending between $5 million and $10 million at
this site. Expenditures for 2000 are expected to be approximately $1.8 million,
most of which will be devoted to the implementation of key, interim remedial
measures which will be the cornerstone of a risk-based corrective action plan.
The risk based corrective action plan is presently under development, and will
be submitted to the Michigan Department of Environmental Quality in 2000.
As discussed in Management's Discussion and Analysis of Environmental
Matters, Litigation and Contingencies, on page U-46, in October 1998, the
National Enforcement Investigations Center and Region V of the United States
Environmental Protection Agency ("EPA") conducted a multi-media inspection of
MAP's Detroit refinery. Subsequently, in November 1998, Region V and Illinois
Environmental Protection Agency conducted a multi-media inspection of MAP's
Robinson refinery. These inspections covered compliance with the Clean Air Act
(the Act, as amended by the 1990 Amendments, the "CAA") including New Source
Performance Standards, Prevention of Significant Deterioration, and the National
Emission Standards for Hazardous Air Pollutants for Benzene, the Clean Water Act
(Permit exceedances for the Waste Water Treatment Plant), reporting obligations
under the Emergency Planning and Community Right to Know Act and the handling of
process waste. Although MAP has been advised as to certain compliance issues
regarding MAP's Detroit refinery, it is not known when complete findings on
the results of the inspections will be issued. Thus far, MAP has been served
with two Notices of Violation and three Findings of Violation in connection with
the multi-media inspection at its Detroit refinery and one Finding of Violation
at its Robinson Refinery. The Detroit notices allege violations of the Michigan
State Air Pollution Regulations, the EPA New Source Performance Standards and
National Emission Standards for Hazardous Air Pollutants for benzene. The
Robinson notice alleges noncompliance with a general conduct provision as a
result of acid-gas flaring since 1994. The Robinson Refinery is alleged to have
routine acid gas flaring arising from a failure to properly operate and maintain
the sulfur recovery plant and amine units. MAP can contest the factual and legal
basis for the allegations prior to the EPA taking enforcement action. At this
time, it is not known when complete findings on the results of these multi-media
inspections will be issued.
38
In January 1997, a Notice of Violation ("NOV") was served by the
Illinois Environmental Protection Agency on the Marathon Group, including
Marathon Oil Company (Robinson Refinery and Brand Marketing, now operating
organizations within MAP), Marathon Pipe Line Company (now Marathon Ashland Pipe
Line LLC) and Emro Marketing Company (now Speedway SuperAmerica LLC),
consolidating various alleged violations of federal and state environmental laws
and regulations relating to air, water and soil contamination. Based on the
ongoing negotiations with Illinois Environmental Protection Agency, a penalty in
excess of $100,000 may be assessed against each of these companies. Negotiations
continue with the State Attorney General's office and the Illinois Environmental
Protection Agency to resolve these alleged violations. In two of the matters,
the State Attorney General's office has instituted civil actions against
Speedway SuperAmerica LLC with regards to a UST site in Chicago, Illinois and
violations of the CAA dealing with the installation, testing and reporting of
Stage II Vapor Recovery Systems in certain station sites in Illinois.
In October 1996, EPA Region 5 issued a Finding of Violation against the
Robinson refinery alleging that it does not qualify for an exemption under the
National Emission Standards for Benzene Waste Operations pursuant to the CAA,
because the refinery's Total Annual Benzene releases exceed the limitation of 10
megagrams per year, and as a result, the refinery is in violation of the
emission control, record keeping, and reports requirements. The Marathon Group
contends that it does qualify for the exemption. However, in February 1999, the
U.S. Department of Justice ("DOJ") in Chicago, Illinois, filed a civil complaint
in the U.S. District Court for the Southern District of Illinois alleging six
counts of violations of the CAA with respect to the benzene releases.
In connection with the formation of MAP all three of the refineries
owned by Ashland Inc. ("Ashland") were conveyed effective January 1, 1998, to
MAP or its subsidiaries. Ashland reported in its 1997 Form 10-K, that during
1997, the EPA completed comprehensive inspections of these three refineries,
prior to formation of MAP. These inspections evaluated Ashland's compliance with
federal environmental laws and regulations at those facilities. Ashland reported
in its 1998 Form 10-K, that during 1998, the EPA and Ashland reached an
agreement with respect to the alleged violations discovered during those
inspections. Ashland reported that it agreed to pay $5.864 million in civil
penalties. Ashland also reported that it would undertake specific remedial
projects and improvements at the refinery sites, as well as a number of
supplemental environmental projects involving improvements to the facilities'
operations. Ashland reported that the total cost of these projects is expected
to be $26 million. Under the terms of its agreements with MAP, Ashland has
retained responsibility for matters arising out of these inspections, including
commencement of work as soon as practical on certain enumerated projects.
POSTED PRICE LITIGATION
The Marathon Group, alone or with other energy companies, was named in
a number of lawsuits in State and Federal courts alleging various causes of
action related to crude oil royalty payments. The plaintiff's allegations
included underpayment of royalties and severance taxes, antitrust violations,
and violation of the Texas common purchaser statute. Governmental entities,
individuals and private entities were among the plaintiffs.
A settlement agreement which addressed all private claims (subject to
opt-outs) for a period from January 1, 1986 to September 30, 1998 was approved
by the U. S. District Court for the Southern District of Texas in April 1999.
However, the approval of the settlement has been appealed to the 5th Circuit
Court of Appeals.
Marathon and approximately 20 other oil companies have settled a claim
by the state of Texas that the oil companies allegedly violated Texas' common
purchaser statute and underpaid royalties on oil produced from state lands.
Under the settlement the companies paid a total of $12.6 million.
Marathon was named by relators as a defendant, along with 17 other
energy companies, in a lawsuit under the False Claims Act in the U.S. District
Court of Texas (Eastern District). This case is scheduled for trial in September
2000. Marathon has recently reached an agreement in principle to settle the
case, but finalization of a settlement is expected to take until the fall.
The Marathon Group intends to vigorously defend the remaining cases.
39
MANTEO
On July 18, 1997, the United States Court of Federal Claims, Case No.
92-331C, entered a 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
interest 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 disputed the company's rights to explore,
develop, and produce hydrocarbons from the leases. The Department of Justice
appealed the trial court's decision to the U. S. Court of Appeals for Federal
Claims which reversed the trial court. During the fourth quarter of 1999,
Marathon's request for Writ of Certiorari to the U.S. Supreme Court was granted.
Oral argument is scheduled for March 22, 2000.
U. S. STEEL GROUP
LEGAL PROCEEDINGS
INLAND STEEL PATENT LITIGATION
In July 1991, Inland Steel Company ("Inland") filed an action against
USX and another domestic steel producer in the U. S. District Court for the
Northern District of Illinois, Eastern Division, alleging defendants had
infringed two of Inland's steel-related patents. Inland seeks monetary damages
of up to approximately $50 million and an injunction against future
infringement. USX in its answer and counterclaim alleges the patents are invalid
and not infringed and seeks a declaratory judgment to such effect. In May 1993,
a jury found USX to have infringed the patents. The District Court has yet to
rule on the validity of the patents. In July 1993, the U. S. Patent Office
rejected the claims of the two Inland patents upon a reexamination at the
request of USX and the other steel producer. A further request was submitted by
USX to the Patent Office in October 1993, presenting additional questions as to
patentability which was granted and consolidated for consideration with the
original request. In 1994, the Patent Office issued a decision rejecting all
claims of the Inland patents. On September 21, 1999, the Patent Office Board of
Appeals affirmed the decision of the Patent Office. Inland filed a notice of
appeal with the Court of Appeals for the Federal Circuit on November 17, 1999.
ASBESTOS LITIGATION
USX has been and is a defendant in a large number of cases in which
plaintiffs allege injury resulting from exposure to asbestos. Many of these
cases involve multiple plaintiffs and most have multiple defendants. These
claims fall into three major groups: (1) claims made under the Jones Act and
general maritime law by employees of the Great Lakes or Intercoastal Fleets,
former operations of USX; (2) claims made by persons who did work at U. S. Steel
Group facilities; and (3) claims made by industrial workers allegedly exposed to
an electrical cable product formerly manufactured by USX. To date all actions
resolved have been either dismissed or settled for immaterial amounts. It is not
possible to predict with certainty the outcome of these matters; however, based
upon present knowledge, USX believes that the remaining actions will be
similarly resolved. This statement of belief is a forward-looking statement.
Predictions as to the outcome of pending litigation are subject to substantial
uncertainties with respect to (among other things) factual and judicial
determinations, and actual results could differ materially from those expressed
in the forward-looking statements.
40
ENVIRONMENTAL PROCEEDINGS
The following is a summary of the proceedings attributable to the U. S.
Steel Group that were pending or contemplated as of December 31, 1999, under
federal and state environmental laws. Except as described herein, it is not
possible to accurately predict the ultimate outcome of these matters; however,
management's belief set forth in the first paragraph under "Item 3. Legal
Proceedings" above takes such matters into account.
Claims under CERCLA and related state acts have been raised with
respect to the cleanup of various waste disposal and other sites. CERCLA is
intended to expedite the cleanup of hazardous substances without regard to
fault. PRPs for each site include present and former owners and operators of,
transporters to and generators of the substances at the site. Liability is
strict and can be joint and several. Because of various factors including the
ambiguity of the regulations, the difficulty of identifying the responsible
parties for any particular site, the complexity of determining the relative
liability among them, the uncertainty as to the most desirable remediation
techniques and the amount of damages and cleanup costs and the time period
during which such costs may be incurred, USX is unable to reasonably estimate
its ultimate cost of compliance with CERCLA.
Projections, provided in the following paragraphs, of spending for
and/or timing of completion of specific projects are forward-looking statements.
These forward-looking statements are based on certain assumptions including, but
not limited to, the factors provided in the preceding paragraph. To the extent
that these assumptions prove to be inaccurate, future spending for, or timing of
completion of environmental projects may differ materially from those stated in
forward-looking statements.
At December 31, 1999, USX had been identified as a PRP at a total of 26
CERCLA sites related to the U. S. Steel Group. Based on currently available
information, which is in many cases preliminary and incomplete, USX believes
that its liability for cleanup and remediation costs in connection with 12 of
these sites will be between $100,000 and $1 million per site and 7 will be under
$100,000.
At the remaining 7 sites, USX presently expects that its share in the
remaining cleanup costs at any single site will not exceed $5 million, although
it is not possible to accurately predict the amount of USX's share in any final
allocation of such costs. Following is a summary of the status of these sites:
1. At USX's former Duluth, Minnesota Works, USX spent a total of
approximately $11.2 million through 1999. The Duluth Works was listed
by the Minnesota Pollution Control Agency under the Minnesota
Environmental Response and Liability Act on its Permanent List of
Priorities. The EPA has consolidated and included the Duluth Works site
with the St. Louis River and Interlake sites on the EPA's National
Priorities List. The Duluth Works cleanup has proceeded since 1989. USX
is conducting an engineering study of the estuary sediments and the
construction of a breakwater in the estuary. Depending upon the method
and extent of remediation at this site, future costs are presently
unknown and indeterminable.
2. The Buckeye Reclamation Landfill, near St. Clairsville, Ohio, has been
used at various times as a disposal site for coal mine refuse and
municipal and industrial waste. USX is one of 15 PRPs that have
indicated a willingness to enter into an agreed order with the EPA to
perform a remediation of the site. Implementation of the remedial
design plan, resulting in a long-term cleanup of the site, is estimated
to cost approximately $28.5 million.
One of the PRPs filed suit against the EPA, the Ohio Environmental
Protection Agency, and 13 PRPs including USX. The EPA, in turn, filed
suit against the PRPs to recover $1.5 million in oversight costs. In
May 1996, USX entered into a final settlement agreement to resolve this
litigation and the overall allocation. USX agreed to pay 4.8% of the
estimated costs which would result in USX paying an additional amount
of approximately $1.1 million over a two- to three-year period. To date
USX has spent $750,000 at the site. Remediation commenced in 1999.
3. The D'Imperio/Ewan sites in New Jersey are waste disposal sites where a
former USX subsidiary allegedly disposed of used paint and solvent
wastes. USX has entered into a settlement agreement with the major PRPs
at the sites which fixes USX's share of liability at approximately $1.2
million, $598,000 of which USX has already paid. The balance, which is
expected to be paid over the next several years, has been accrued.
41
4. The Berks Associates/Douglassville Site ("Berks Site") is situated on a
50-acre parcel located on the Schuylkill River in Berks County,
Pennsylvania. Used oil and solvent reprocessing operations were
conducted on the Berks Site between 1941 and 1986. The EPA undertook
the dismantling of the Berks Site's former processing area and
instituted a cost recovery suit in July 1991 against 30 former Berks
Site customers, as PRPs to recover $8 million it expended in the
process area dismantling. The 30 PRPs targeted by the EPA joined over
400 additional PRPs in the EPA's cost recovery litigation. On June 30,
1993, the EPA issued a unilateral administrative order to the original
30 PRPs ordering remediation which the EPA estimates will cost over $70
million. In June 1996, the PRPs proposed an alternative remedy
estimated to cost approximately $20 million. USX expects its share of
these costs to be approximately 7%. In September 1997, USX signed a
consent decree to conduct a feasibility study at the site relating to
the alternative remedy. In 1999, a new Record of Decision was approved
by EPA and the DOJ. Remediation will commence in the spring of 2000.
In February 1996, USX and other Berks Site PRPs were sued by the
Pennsylvania Department of Environmental Resources ("PaDER") for $6
million in past costs.
5. In 1987, the California Department of Health Services ("DHS") issued a
remedial action order for the GBF/Pittsburg landfill near Pittsburg,
California. Records indicate that from 1972 through 1974, Pittsburg
Works arranged for the disposal of approximately 2.6 million gallons of
waste oil, sludge, caustic mud and acid which were eventually taken to
this landfill for disposal. The DHS recently requested that an interim
remediation of one of the plumes of site contamination be carried out
as soon as possible. The Generators' Cooperative Group has agreed to
fund the interim remediation which is expected to cost approximately
$400,000, of which U. S. Steel paid $43,175. Total remediation costs
are estimated to be between $18 million and $32 million. In June, 1997,
the DHS issued a Remedial Action Plan. Work on the Remedial Action Plan
has been deferred while a Group application for an alternative remedy
is being reviewed. The GBF Respondents Group has initiated an action
against parties implicated at the site who have failed to become
involved in cleanup related activities. In 1998, USX entered into an
agreement that establishes USX's liability among the site transporter
and the other participating waste generators at 10.2%. Liability of the
site owner has yet to be established.
6. In 1988, USX and three other PRPs agreed to the issuance of an
administrative order by the EPA to undertake emergency removal work at
the Municipal & Industrial Disposal Co. site in Elizabeth,
Pennsylvania. The cost of such removal, which has been completed, was
approximately $4.2 million, of which USX paid $3.4 million. The EPA has
indicated that further remediation of this site may be required in the
future, but it has not conducted any assessment or investigation to
support what remediation would be required. In October 1991, the PaDER
placed the site on the Pennsylvania State Superfund list and began a
Remedial Investigation ("RI") which was issued in 1997. It is not
possible to estimate accurately the cost of any remediation or USX's
share in any final allocation formula; however, based on presently
available information, USX may have been responsible for as much as 70%
of the waste material deposited at the site. On October 10, 1995, the
U.S. DOJ filed a complaint in the U.S. District Court for Western
Pennsylvania against USX and other Municipal & Industrial Disposal Co.
defendants to recover alleged costs incurred at the site. In June 1996,
USX agreed to pay $245,000 to settle the government's claims for costs
against USX, American Recovery, and Carnegie Natural Gas. In 1996, USX
filed a cost recovery action against parties who did not contribute to
the cost of the removal activity at the site. USX has reached a
settlement in principle with all of the parties except the site owner.
The PRPs are awaiting issuance of the State's Feasibility Study ("FS").
42
7. USX participated with 35 other PRPs in performing removal work at the
Ekotek/Petrochem site in Salt Lake City, Utah under the terms of a 1991
administrative order negotiated with the EPA. The removal work was
completed in 1992 at a cost of over $9 million. In July 1992, the PRP
Remediation Committee negotiated an administrative order on consent to
perform a RI/FS of the site. The RI/FS was completed in 1995. A
remediation plan estimated to cost $16.6 million was proposed by the
EPA in 1995. In 1997, the EPA issued a revised Record of Decision with
a remedial action estimated to cost $12.2 million. USX has contributed
approximately $1.1 million through 1999 towards completing the removal
work and performing the RI/FS. USX's proportionate share of costs
presently being used by the PRP Remediation Committee is approximately
5% of the participating PRPs. The PRP Remediation Committee commenced
cost recovery litigation against approximately 1,100 non-participating
PRPs. Almost all of these defendants have settled their liability or
joined the PRP Remediation Committee. In February 1997, the EPA issued
an administrative order to USX and other PRPs to undertake the proposed
remedial action and to reimburse approximately $5 million to de minimus
PRPs who had earlier settled with the EPA on the basis of a
substantially greater remedial cost estimate. On December 15, 1997,
USX, along with forty other parties, signed a consent decree to clean
up the site. Site cleanup commenced in 1999 and will be substantially
complete in 2000.
In addition, there are 12 sites related to the U. S. Steel Group where
USX has received information requests or other indications that USX may be a PRP
under CERCLA but where sufficient information is not presently available to
confirm the existence of liability.
There are also 32 additional sites related to the U. S. Steel Group
where remediation is being sought under other environmental statutes, both
federal and state, or where private parties are seeking remediation through
discussions or litigation. Based on currently available information, which is in
many cases preliminary and incomplete, the U. S. Steel Group believes that its
liability for cleanup and remediation costs in connection with 4 of these sites
will be under $100,000 per site, another 4 sites have potential costs between
$100,000 and $1 million per site, and 9 sites may involve remediation costs
between $1 million and $5 million. Another of the 32 sites, the Grand Calumet
River remediation at Gary Works described below, is expected to have remediation
costs in excess of $5 million. Potential costs associated with remediation at
the remaining 14 sites are not presently determinable.
The following is a discussion of remediation activities at the U.S.
Steel Group's major facilities:
GARY WORKS
In 1990, a consent decree was signed by USX which, among other things,
required USX to study and implement a program to remediate the sediment in a
portion of the Grand Calumet River. USX has developed a sediment remediation
plan for the section of the Grand Calumet River that runs through Gary Works. As
proposed, this project would require five to six years to complete after
approval and would be followed by an environmental recovery validation. The
estimated program cost, which has been accrued, is approximately $30 million.
USX has entered into a consent decree with the EPA which provides for the
expanded sediment remediation program and resolves alleged violations of the
prior consent decree and National Pollutant Discharge Elimination System permit
since 1990. In 1999, USX paid civil penalties of $2.9 million for alleged
violations of the Clean Water Act at Gary Works. In addition, USX has entered
into a consent decree with the public trustees to settle natural resource damage
claims for the portion of the Grand Calumet River that runs through Gary Works.
This settlement obligates USX to purchase and restore several parcels of
property and pay $1.5 million in past and future assessment and monitoring
costs. In 1999, USX reimbursed past assessment costs of $570,000 and purchased
properties which were conveyed to trustees.
43
In October 1996, USX was notified by the Indiana Department of
Environmental Management ("IDEM") acting as lead trustee, that IDEM and the U.S.
Department of the Interior had concluded a preliminary investigation of
potential injuries to natural resources related to releases of hazardous
substances from various municipal and industrial sources along the east branch
of the Grand Calumet River and Indiana Harbor Canal. The Public Trustees
completed a preassessment screen pursuant to federal regulations and have
determined to perform a NRD Assessment. USX was identified as a PRP along with
15 other companies owning property along the river and harbor canal. USX and
eight other PRPs have formed a joint defense group. The Trustees notified the
public of their plan for assessment and later adopted the plan. The PRP group
and the trustees are working to coordinate trustee and PRP assessment
activities.
On October 23, 1998, a final Administrative Order on Consent was issued
by EPA addressing Corrective Action for Solid Waste Management Units throughout
Gary Works. This order requires USX to perform a RCRA Facility Investigation
("RFI") and a Corrective Measure Study ("CMS") at Gary Works. The Current
Conditions Report, USX's first deliverable, was submitted to EPA in January 1997
and was approved by EPA in 1998. The Phase I RFI work plan was submitted to the
EPA in July 1999. In addition, remediation of contaminated sediments in the Gary
Vessel Slip has been implemented as an interim measure under the corrective
action program. The work is completed and is expected to cost $2.5 million.
IDEM issued NOVs to USS Gary Works in 1994 alleging various violations
of air pollution requirements. In early 1996, USX paid a $6 million penalty and
agreed to install additional pollution control equipment and programs and
implement programs costing over $100 million over a period of several years. In
1999, USS Gary Works entered into an Agreed Order with IDEM to resolve
outstanding air issues which required the payment of $207,400 and the
installation of equipment at the No. 8 Blast Furnace and the No. 1 BOP to reduce
air emissions. In November 1999, IDEM issued to USS Gary Works a NOV alleging
various air violations. USS and IDEM are meeting to discuss these allegations.
In February 1999, the USDOJ and EPA issued a letter demanding a cash
payment of approximately $4 million to resolve a Finding of Violation issued in
1997 alleging improper sampling of benzene waste streams at Gary Coke. USS is
negotiating with USDOJ and EPA to settle the action.
CLAIRTON
In 1987, USX and the PaDER entered into a consent Order to resolve an
incident in January 1985 involving the alleged unauthorized discharge of benzene
and other organic pollutants from Clairton Works in Clairton, Pennsylvania. That
consent Order required USX to pay a penalty of $50,000 and a monthly payment of
$2,500 for five years. In 1990, USX and the PaDER reached agreement to amend the
consent Order. Under the amended Order, USX agreed to remediate the Peters Creek
Lagoon (a former coke plant waste disposal site); to pay a penalty of $300,000;
and to pay a monthly penalty of up to $1,500 each month until the former
disposal site is closed. Remediation costs have amounted to $2.2 million with
another $3.9 million presently projected to complete the project.
FAIRLESS WORKS
In January 1992, USX commenced negotiations with the EPA regarding the
terms of an Administrative Order on consent, pursuant to the RCRA, under which
USX would perform a RFI and a CMS at Fairless Works. A Phase I RFI report was
submitted during the third quarter of 1997. A Phase II/III RFI will be submitted
following EPA approval. The RFI/CMS will determine whether there is a need for,
and the scope of, any remedial activities at Fairless Works.
FAIRFIELD WORKS
In December 1995, USX reached an agreement in principle with the EPA
and the DOJ with respect to alleged RCRA violations at Fairfield Works. A
consent decree was signed by USX and the United States and filed with the court
on December 11, 1997, under which USX will pay a civil penalty of $1 million,
implement two SEPs costing a total of $1.75 million and implement a RCRA
corrective action at the facility. One SEP was completed during 1998 at a cost
of $250,000. The second SEP is underway.
44
MON VALLEY WORKS/EDGAR THOMSON PLANT
In September 1997, USX received a draft consent decree addressing
issues raised in a NOV issued by the EPA in January 1997. The NOV alleged air
quality violations at U. S. Steel's Edgar Thomson Plant, which is part of Mon
Valley Works. The draft consent decree addressed these issues, including various
operational requirements, which EPA believes are necessary to bring the plant
into compliance. USX has begun implementing some of the compliance requirements
identified by EPA. USX paid a cash penalty of $550,000 and agreed to implement
five SEPs valued at approximately $1.5 million in settlement of the government's
allegations. On October 28, 1999, the government lodged the consent decree in
federal court and the decree became effective February 1, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
45
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The principal market on which Marathon Stock and Steel Stock are traded is
the New York Stock Exchange. Information concerning the high and low sales
prices for the common stocks as reported in the consolidated transaction
reporting system and the frequency and amount of dividends paid during the last
two years is set forth in "Consolidated Financial Statements and Supplementary
Data - Selected Quarterly Financial Data (Unaudited)" on page U-29.
As of January 31, 2000, there were 70,803 registered holders of Marathon
Stock and 55,034 registered holders of Steel Stock.
The Board of Directors intends to declare and pay dividends on Marathon
Stock and Steel Stock based on the financial condition and results of operations
of the Marathon Group and the U. S. Steel Group respectively, although it has no
obligation under Delaware law or the USX Restated Certificate of Incorporation
to do so. In determining its dividend policy with respect to Marathon Stock and
Steel Stock, the Board will rely on the separate financial statements of the
Marathon Group and the U. S. Steel Group, respectively. The method of
calculating earnings per share for Marathon Stock and Steel Stock reflects the
Board's intent that separately reported earnings and the surplus the Marathon
Group and the U. S. Steel Group would have if separately calculated, as
determined consistent with the USX Restated Certificate of Incorporation, are
available for payment of dividends to the respective classes of stock, although
the amount of funds legally available under Delaware law for the payment of
dividends on these classes of stock do not necessarily correspond with these
amounts. Dividends on all classes of preferred stock and USX common stock are
limited to legally available funds of USX, which are determined on the basis of
the entire Corporation. Distributions on Marathon Stock and Steel Stock would be
precluded by a failure to pay dividends on any series of preferred stock of USX.
In addition, net losses of either group, as well as dividends or distributions
on either class of USX common stock or series of preferred stock and repurchases
of any class of USX common stock or preferred stock at prices in excess of par
or stated value will reduce the funds of USX legally available for payment of
dividends on the two classes of USX common stock as well as any preferred stock.
Dividends on Steel Stock are further limited to the Available Steel
Dividend Amount. Net losses of the Marathon Group and distributions on Marathon
Stock, and on any preferred stock attributed to the Marathon Group will not
reduce the funds available for declaration and payment of dividends on Steel
Stock unless the legally available funds of USX are less than the Available
Steel Dividend Amount.
See "Financial Statements and Supplementary Data - Notes to Consolidated
Financial Statements - 20. Dividends" on page U-23.
The Board has adopted certain policies with respect to the Marathon Group
and the U. S. Steel Group, including, without limitation, the intention to: (i)
limit capital expenditures of the U. S. Steel Group over the long term to an
amount equal to the internally generated cash flow of the U. S. Steel Group,
including funds generated by sales of assets of the U. S. Steel Group, (ii) sell
assets and provide services between the Marathon Group and the U. S. Steel Group
only on an arm's-length basis and (iii) treat funds generated by sales of
Marathon Stock or Steel Stock and securities convertible into such stock as
assets of the Marathon Group or the U. S. Steel Group, as the case may be, and
apply such funds to acquire assets or reduce liabilities of the Marathon Group
or the U. S. Steel Group, respectively. These policies may be modified or
rescinded by action of the Board, or the Board may adopt additional policies,
without the approval of holders of the two classes of USX common stock, although
the Board has no present intention to do so.
46
FIDUCIARY DUTIES OF THE BOARD; RESOLUTION OF CONFLICTS
Under Delaware law, the Board must act with due care and in the best
interest of all the stockholders, including the holders of the shares of each
class of USX common stock. The interests of the holders of any class of USX
common stock may, under some circumstances, diverge or appear to diverge.
Examples include the optional exchange of Steel Stock for Marathon Stock at the
10% premium, the determination of the record date of any such exchange or for
the redemption of any Steel Stock; the establishing of the date for public
announcement of the liquidation of USX and the commitment of capital among the
Marathon Group and the U. S. Steel Group.
Because the Board owes an equal duty to all common stockholders regardless
of class, the Board is the appropriate body to deal with these matters. In order
to assist the Board in this regard, the Board has adopted policies to serve as
guidelines for the resolution of matters involving a conflict or a potential
conflict, including policies dealing with the payment of dividends, limiting
capital investment in the U. S. Steel Group over the long term to its internally
generated cash flow and allocation of corporate expenses and other matters. The
Board has been advised concerning the applicable law relating to the discharge
of its fiduciary duties to the common stockholders in the context of the
separate classes of USX common stock and has delegated to the Audit Committee of
the Board the responsibility to review matters which relate to this subject and
report to the Board. Under principles of Delaware law and the "business
judgement rule," absent abuse of discretion, a good faith determination made by
a disinterested and adequately informed Board with respect to any matter having
disparate impacts upon holders of Marathon and Steel Stock would be a defense to
any challenge to such determination made by or on behalf of the holders of
either class of USX common stock.
47
ITEM 6. SELECTED FINANCIAL DATA
USX - CONSOLIDATED
DOLLARS IN MILLIONS (EXCEPT PER SHARE DATA)
-------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenues(a) (b).................... $ 29,583 $ 28,237 $ 22,680 $ 22,872 $ 20,293
Income from operations(b) ...... 1,863 1,517 1,705 1,779 726
Includes:
Inventory market valuation
charges (credits)............... (551) 267 284 (209) (70)
Gain on ownership change in MAP. (17) (245) - - -
Impairment of long-lived assets. - - - - 675
Income from continuing operations.. $ 705 $ 674 $ 908 $ 946 $ 217
Income (loss) from
discontinued operations......... - - 80 6 4
Extraordinary losses............... (7) - - (9) (7)
---------- --------- --------- ---------- ---------
Net income ........................ $ 698 $ 674 $ 988 $ 943 $ 214
Noncash credit from exchange of
preferred stock (c)............... - - 10 - -
Dividends on preferred stock....... (9) (9) (13) (22) (28)
--------- --------- --------- --------- ---------
Net income applicable to
common stocks................... $ 689 $ 665 $ 985 $ 921 $ 186
(a) Consists of sales, dividend and affiliate income, gain on ownership change
in MAP, net gains on disposal of assets, gain on affiliate stock offering
and other income.
(b) Excludes amounts for the Delhi Companies (sold in 1997), which have been
reclassified as discontinued operations. See Note 5 to the USX
Consolidated Financial Statements, on page U-11.
(c) See Note 23 to the USX Consolidated Financial Statements, on page U-25.
- --------------------------------------------------------------------------------
COMMON SHARE DATA
MARATHON STOCK:
Income (loss) before extraordinary losses
applicable to Marathon Stock.... $ 654 $ 310 $ 456 $ 671 $ (87)
Per share-basic (in dollars)....... 2.11 1.06 1.59 2.33 (.31)
-Diluted (in dollars)........... 2.11 1.05 1.58 2.31 (.31)
Net income (loss) applicable to
Marathon Stock.................. 654 310 456 664 (92)
Per share-basic (in dollars) ...... 2.11 1.06 1.59 2.31 (.33)
-Diluted (in dollars)........... 2.11 1.05 1.58 2.29 (.33)
Dividends paid per share (in dollars) .84 .84 .76 .70 .68
Common Stockholders' Equity
per share (in dollars).......... 15.38 13.95 12.53 11.62 9.99
48
SELECTED FINANCIAL DATA (CONTD.)
USX - CONSOLIDATED (CONTD.)
DOLLARS IN MILLIONS (EXCEPT PER SHARE DATA)
-------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
STEEL STOCK:
Income before extraordinary losses
applicable to Steel Stock....... $ 42 $ 355 $ 449 $ 253 $ 279
Per share-basic (in dollars) ...... .48 4.05 5.24 3.00 3.53
-Diluted (in dollars)........... .48 3.92 4.88 2.97 3.43
Net income applicable to
Steel Stock..................... 35 355 449 251 277
Per share-basic (in dollars) ...... .40 4.05 5.24 2.98 3.51
-Diluted (in dollars)........... .40 3.92 4.88 2.95 3.41
Dividends paid per share (in dollars) 1.00 1.00 1.00 1.00 1.00
Common Stockholders' Equity
per share (in dollars).......... 23.23 23.66 20.56 18.37 16.10
- -------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA-DECEMBER 31:
Capital expenditures-for year...... $ 1,665 $ 1,580 $ 1,373 $ 1,168 $ 1,016
Total assets.................... 22,962 21,133 17,284 16,980 16,743
Capitalization:
Notes payable................... $ - $ 145 $ 121 $ 81 $ 40
Total long-term debt............ 4,283 3,991 3,403 4,212 4,937
Preferred stock of subsidiary(a). 250 250 250 250 250
Trust preferred securities(a)... 183 182 182 - -
Minority interest in MAP........ 1,753 1,590 - - -
Redeemable Delhi Stock(b)....... - - 195 - -
Preferred stock................. 3 3 3 7 7
Common stockholders' equity........ 6,853 6,402 5,397 5,015 4,321
----- - --------- --------- --------- ---------
Total capitalization............... $ 13,325 $ 12,563 $ 9,551 $ 9,565 $ 9,555
========= ========= ========= ========= =========
Ratio of earnings to fixed charges(c) 4.32 3.56 3.79 3.65 1.58
Ratio of earnings to combined fixed
charges and preferred stock
dividends(c).................... 4.20 3.45 3.63 3.41 1.46
- ---------------
(a) See Note 23 to the USX Consolidated Financial Statements, on page U-25.
(b) On January 26, 1998, USX redeemed all of the outstanding shares of Delhi
Stock. For additional information regarding Delhi Stock, see Income Per
Common Share on page U-3, and Note 5 to the USX Consolidated Financial
Statements, on page U-11.
(c) Amounts represent combined fixed charges and earnings from continuing
operations.
49
SELECTED FINANCIAL DATA (CONTD.)
USX - MARATHON GROUP
DOLLARS IN MILLIONS (EXCEPT PER SHARE DATA)
-------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenues(a)........................ $ 24,327 $ 21,977 $ 15,846 $ 16,289 $ 13,793
Income from operations............. 1,713 938 932 1,296 147
Includes:
Inventory market valuation
charges (credits)............ (551) 267 284 (209) (70)
Gain on ownership change in MAP. (17) (245) - - -
Impairment of long-lived assets. - - - - 659
Income (loss) before extraordinary
losses.......................... 654 310 456 671 (83)
Net income (loss).................. $ 654 $ 310 $ 456 $ 664 $ (88)
Dividends on preferred stock....... - - - - (4)
--------- --------- --------- --------- ---------
Net income (loss) applicable to
Marathon Stock.................. $ 654 $ 310 $ 456 $ 664 $ (92)
- -------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Income (loss) before extraordinary
losses
- basic ........................ $ 2.11 $ 1.06 $ 1.59 $ 2.33 $ (.31)
- diluted....................... 2.11 1.05 1.58 2.31 (.31)
Net income (loss)-basic............ 2.11 1.06 1.59 2.31 (.33)
- diluted....................... 2.11 1.05 1.58 2.29 (.33)
Dividends paid..................... .84 .84 .76 .70 .68
Common stockholders' equity........ 15.38 13.95 12.53 11.62 9.99
- -------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA-DECEMBER 31:
Capital expenditures-for year...... $ 1,378 $ 1,270 $ 1,038 $ 751 $ 642
Total assets....................... 15,705 14,544 10,565 10,151 10,109
Capitalization:
Notes payable................... $ - $ 132 $ 108 $ 59 $ 31
Total long-term debt............ 3,368 3,515 2,893 2,906 3,720
Preferred stock of subsidiary... 184 184 184 182 182
Minority interest in MAP........ 1,753 1,590 - - -
Common stockholders' equity..... 4,800 4,312 3,618 3,340 2,872
--------- --------- --------- --------- ---------
Total capitalization....... $ 10,105 $ 9,733 $ 6,803 $ 6,487 $ 6,805
========= ========= ========= ========= =========
- --------------
(a) Consists of sales, dividend and affiliate income, gain on ownership change
in MAP, net gains on disposal of assets and other income.
50
SELECTED FINANCIAL DATA (CONTD.)
USX - U. S. STEEL GROUP
DOLLARS IN MILLIONS (EXCEPT PER SHARE DATA)
-------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenues(a)...................... $ 5,314 $ 6,283 $ 6,941 $ 6,670 $ 6,557
Income from operations........... 150 579 773 483 582
Includes:
Impairment of long-lived assets - - - - 16
Income before extraordinary
losses......................... 51 364 452 275 303
Net income....................... $ 44 $ 364 $ 452 $ 273 $ 301
Noncash credit from exchange
of preferred stock(b)............ - - 10 - -
Dividends on preferred stock..... (9) (9) (13) (22) (24)
---------- --------- --------- --------- ---------
Net income applicable to
Steel Stock.................... $ 35 $ 355 $ 449 $ 251 $ 277
- -------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Income before extraordinary
losses
-basic......................... $ .48 $ 4.05 $ 5.24 $ 3.00 $ 3.53
-diluted....................... .48 3.92 4.88 2.97 3.43
Net income -basic................ .40 4.05 5.24 2.98 3.51
-diluted....................... .40 3.92 4.88 2.95 3.41
Dividends paid................... 1.00 1.00 1.00 1.00 1.00
Common stockholders' equity...... 23.23 23.66 20.56 18.37 16.10
- -------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA-DECEMBER 31:
Capital expenditures-for year.... $ 287 $ 310 $ 261 $ 337 $ 324
Total assets..................... 7,525 6,749 6,694 6,580 6,521
Capitalization:
Notes payable.................. $ - $ 13 $ 13 $ 18 $ 8
Total long-term debt........... 915 476 510 1,087 1,016
Preferred stock of subsidiary.. 66 66 66 64 64
Trust Preferred Securities..... 183 182 182 - -
Preferred stock................ 3 3 3 7 7
Common stockholders' equity.... 2,053 2,090 1,779 1,559 1,337
---------- --------- --------- --------- ---------
Total capitalization...... $ 3,220 $ 2,830 $ 2,553 $ 2,735 $ 2,432
========== ========= ========= ========= =========
- -------------
(a) Consists of sales, dividend and affiliate income, net gains on disposal of
assets, gain on affiliate stock offering and other income.
(b) See Note 23 to the USX Consolidated Financial Statements, on page U-25.
51
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Indexes to Financial Statements, Supplementary Data, Management's
Discussion and Analysis, and Quantitative and Qualitative Disclosures About
Market Risk of USX Consolidated, the Marathon Group and the U. S. Steel Group
are presented immediately preceding pages U-1, M-1 and S-1, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Indexes to Financial Statements, Supplementary Data, Management's
Discussion and Analysis, and Quantitative and Qualitative Disclosures About
Market Risk for USX Consolidated, the Marathon Group and the U. S. Steel Group
are presented immediately preceding pages U-1, M-1 and S-1, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
52
USX
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, SUPPLEMENTARY
DATA, MANAGEMENT'S DISCUSSION AND ANALYSIS, AND QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PAGE
----
Management's Report............................................................................. U-1
Audited Consolidated Financial Statements:
Report of Independent Accountants.............................................................. U-1
Consolidated Statement of Operations........................................................... U-2
Consolidated Balance Sheet..................................................................... U-4
Consolidated Statement of Cash Flows........................................................... U-5
Consolidated Statement of Stockholders' Equity................................................. U-6
Notes to Consolidated Financial Statements..................................................... U-8
Selected Quarterly Financial Data............................................................... U-29
Principal Unconsolidated Affiliates............................................................. U-30
Supplementary Information....................................................................... U-30
Five-Year Operating Summary -- Marathon Group.................................................... U-35
Five-Year Operating Summary -- U. S. Steel Group................................................. U-37
Five-Year Financial Summary..................................................................... U-38
Management's Discussion and Analysis............................................................ U-39
Quantitative and Qualitative Disclosures About Market Risk...................................... U-60
MANAGEMENT'S REPORT
The accompanying consolidated financial statements of USX
Corporation and Subsidiary Companies (USX) are the responsibility
of and have been prepared by USX in conformity with accounting
principles generally accepted in the United States. They
necessarily include some amounts that are based on best judgments
and estimates. The consolidated financial information displayed in
other sections of this report is consistent with these consolidated
financial statements.
USX seeks to assure the objectivity and integrity of its
financial records by careful selection of its managers, by
organizational arrangements that provide an appropriate division of
responsibility and by communications programs aimed at assuring
that its policies and methods are understood throughout the
organization.
USX has a comprehensive formalized system of internal
accounting controls designed to provide reasonable assurance that
assets are safeguarded and that financial records are reliable.
Appropriate management monitors the system for compliance, and the
internal auditors independently measure its effectiveness and
recommend possible improvements thereto. In addition, as part of
their audit of the consolidated financial statements, USX's
independent accountants, who are elected by the stockholders,
review and test the internal accounting controls selectively to
establish a basis of reliance thereon in determining the nature,
extent and timing of audit tests to be applied.
The Board of Directors pursues its oversight role in the area
of financial reporting and internal accounting control through its
Audit Committee. This Committee, composed solely of nonmanagement
directors, regularly meets (jointly and separately) with the
independent accountants, management and internal auditors to
monitor the proper discharge by each of its responsibilities
relative to internal accounting controls and the consolidated
financial statements.
Thomas J. Usher Robert M. Hernandez Kenneth L. Matheny
CHAIRMAN, BOARD OF DIRECTORS VICE CHAIRMAN VICE PRESIDENT
& CHIEF EXECUTIVE OFFICER & CHIEF FINANCIAL OFFICER & COMPTROLLER
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of USX Corporation:
In our opinion, the accompanying consolidated financial statements
appearing on pages U-2 through U-28 present fairly, in all material
respects, the financial position of USX Corporation and its
subsidiaries at December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years
in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
These financial statements are the responsibility of USX's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits
of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
600 GRANT STREET, PITTSBURGH, PENNSYLVANIA 15219-2794
FEBRUARY 8, 2000
U-1
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
REVENUES:
Sales (NOTE 6) $ 29,534 $ 27,789 $ 22,467
Dividend and affiliate income (loss) (20) 96 105
Net gains on disposal of assets 21 82 94
Gain on ownership change in
Marathon Ashland Petroleum LLC (NOTE 3) 17 245 -
Other income 31 25 14
--------- --------- ---------
Total revenues 29,583 28,237 22,680
--------- --------- ---------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 22,143 20,371 16,047
Selling, general and administrative expenses 203 304 218
Depreciation, depletion and amortization 1,254 1,224 967
Taxes other than income taxes 4,433 4,241 3,270
Exploration expenses 238 313 189
Inventory market valuation charges (credits) (NOTE 17) (551) 267 284
--------- --------- ---------
Total costs and expenses 27,720 26,720 20,975
--------- --------- ---------
INCOME FROM OPERATIONS 1,863 1,517 1,705
Net interest and other financial costs (NOTE 7) 362 279 347
Minority interest in income of
Marathon Ashland Petroleum LLC (NOTE 3) 447 249 -
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 1,054 989 1,358
Provision for estimated income taxes (NOTE 12) 349 315 450
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 705 674 908
--------- --------- ---------
--------- --------- ---------
DISCONTINUED OPERATIONS (NOTE 5):
Loss from operations (net of income tax) - - (1)
Gain on disposal (net of income tax) - - 81
--------- --------- ---------
INCOME FROM DISCONTINUED OPERATIONS - - 80
--------- --------- ---------
Extraordinary losses (NOTE 8) 7 - -
--------- --------- ---------
NET INCOME 698 674 988
Noncash credit from exchange of preferred stock (NOTE 23) - - 10
Dividends on preferred stock (9) (9) (13)
--------- --------- ---------
NET INCOME APPLICABLE TO COMMON STOCKS $ 689 $ 665 $ 985
---------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
U-2
INCOME PER COMMON SHARE
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
CONTINUING OPERATIONS
APPLICABLE TO MARATHON STOCK:
Net income $ 654 $ 310 $ 456
PER SHARE DATA:
Basic 2.11 1.06 1.59
Diluted 2.11 1.05 1.58
-----------------------------------------------------------------------------------------------------------
APPLICABLE TO STEEL STOCK:
Income before extraordinary losses $ 42 $ 355 $ 449
Extraordinary losses 7 - -
--------- --------- ---------
Net income $ 35 $ 355 $ 449
PER SHARE DATA
BASIC:
Income before extraordinary losses $ .48 $ 4.05 $ 5.24
Extraordinary losses .08 - -
--------- --------- ---------
Net income $ .40 $ 4.05 $ 5.24
DILUTED:
Income before extraordinary losses $ .48 $ 3.92 $ 4.88
Extraordinary losses .08 - -
--------- --------- ---------
Net income $ .40 $ 3.92 $ 4.88
-----------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS
APPLICABLE TO DELHI STOCK:
Net income $ 79.7
PER SHARE DATA:
Basic 8.43
Diluted 8.41
-----------------------------------------------------------------------------------------------------------
See Note 22, for a description and computation of income
per common share. THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
U-3
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS) December 31 1999 1998
-----------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents (NOTE 4) $ 133 $ 146
Receivables, less allowance for doubtful accounts of
$12 and $12 (NOTE 16) 2,696 1,663
Inventories (NOTE 17) 2,627 2,008
Deferred income tax benefits (NOTE 12) 303 217
Other current assets 218 172
--------- ---------
Total current assets 5,977 4,206
Investments and long-term receivables, less reserves of
$3 and $10 (NOTE 14) 1,247 1,249
Property, plant and equipment - net (NOTE 13) 12,809 12,929
Prepaid pensions (NOTE 10) 2,629 2,413
Other noncurrent assets 300 336
--------- ---------
Total assets $ 22,962 $ 21,133
-----------------------------------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Notes payable $ - $ 145
Accounts payable 3,397 2,438
Distribution payable to minority shareholder of
Marathon Ashland Petroleum LLC (NOTE 4) - 103
Payroll and benefits payable 468 520
Accrued taxes 283 245
Accrued interest 107 97
Long-term debt due within one year (NOTE 16) 61 71
--------- ---------
Total current liabilities 4,316 3,619
Long-term debt (NOTE 16) 4,222 3,920
Deferred income taxes (NOTE 12) 1,839 1,579
Employee benefits (NOTE 10) 2,809 2,868
Deferred credits and other liabilities 734 720
Preferred stock of subsidiary (NOTE 23) 250 250
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely junior subordinated
convertible debentures of USX (NOTE 23) 183 182
Minority interest in Marathon Ashland Petroleum LLC (NOTE 3) 1,753 1,590
STOCKHOLDERS' EQUITY (Details on pages U-6 and U-7)
Preferred stock (NOTE 24) -
6.50% Cumulative Convertible issued - 2,715,287 shares and
2,767,787 shares ($136 and $138 liquidation preference, respectively) 3 3
Common stocks:
Marathon Stock issued - 311,767,181 shares and 308,458,835 shares
(par value $1 per share, authorized 550,000,000 shares) 312 308
Steel Stock issued - 88,397,714 shares and 88,336,439 shares
(par value $1 per share, authorized 200,000,000 shares) 88 88
Securities exchangeable solely into Marathon Stock -
issued - 288,621 shares and 507,324 shares (NOTE 3) - 1
Additional paid-in capital 4,673 4,587
Deferred compensation - (1)
Retained earnings 1,807 1,467
Accumulated other comprehensive income (loss) (27) (48)
--------- ---------
Total stockholders' equity 6,856 6,405
--------- ---------
Total liabilities and stockholders' equity $ 22,962 $ 21,133
-----------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
U-4
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $ 698 $ 674 $ 988
Adjustments to reconcile to net cash provided
from operating activities:
Extraordinary losses 7 - -
Minority interest in income of
Marathon Ashland Petroleum LLC 447 249 -
Depreciation, depletion and amortization 1,254 1,224 987
Exploratory dry well costs 109 186 78
Inventory market valuation charges (credits) (551) 267 284
Pensions and other postretirement benefits (220) (181) (342)
Deferred income taxes 212 184 228
Gain on disposal of the Delhi Companies - - (287)
Gain on ownership change in
Marathon Ashland Petroleum LLC (17) (245) -
Net gains on disposal of assets (21) (82) (94)
Changes in: Current receivables - sold (320) (30) (390)
- operating turnover (977) 451 16
Inventories (77) (6) (39)
Current accounts payable and accrued expenses 1,240 (497) 91
All other - net 152 (172) (56)
--------- --------- ---------
Net cash provided from operating activities 1,936 2,022 1,464
--------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures (1,665) (1,580) (1,373)
Acquisition of Tarragon Oil and Gas Limited - (686) -
Proceeds from sale of the Delhi Companies - - 752
Disposal of assets 366 86 481
Restricted cash - withdrawals 60 241 108
- deposits (61) (67) (205)
Affiliates- investments (74) (115) (219)
- loans and advances (70) (104) (46)
- returns and repayments 1 71 10
All other - net (25) (4) (3)
--------- --------- ---------
Net cash used in investing activities (1,468) (2,158) (495)
--------- --------- ---------
FINANCING ACTIVITIES:
Commercial paper and revolving credit arrangements - net (381) 724 41
Other debt - borrowings 810 1,036 11
- repayments (242) (1,445) (786)
Common stock - issued 89 668 82
- repurchased - (195) -
Preferred stock repurchased (2) (8) -
Dividends paid (354) (342) (316)
Distributions to minority shareholder of
Marathon Ashland Petroleum LLC (400) (211) -
--------- --------- ---------
Net cash provided from (used in) financing activities (480) 227 (968)
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1) 1 (2)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (13) 92 (1)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 146 54 55
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 133 $ 146 $ 54
-----------------------------------------------------------------------------------------------------------
See Note 18, for supplemental cash flow information.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
U-5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
After the redemption of the USX - Delhi Group Common Stock (Delhi Stock) on
January 26, 1998 (Note 5), USX has two classes of common stock: USX -
Marathon Group Common Stock (Marathon Stock) and USX - U. S. Steel Group
Common Stock (Steel Stock), which are intended to reflect the performance of
the Marathon and U. S. Steel Groups, respectively. (See Note 9, for a
description of the two Groups.) During 1998, USX issued 878,074 Exchangeable
Shares (exchangeable solely into Marathon Stock) related to the purchase of a
Canadian company. (See Note 3.)
On all matters where the holders of Marathon Stock and Steel Stock vote
together as a single class, Marathon Stock has one vote per share and Steel
Stock has a fluctuating vote per share based on the relative market value of
a share of Steel Stock to the market value of a share of Marathon Stock. In
the event of a disposition of all or substantially all the properties and
assets of the U. S. Steel Group, USX must either distribute the net proceeds
to the holders of the Steel Stock as a special dividend or in redemption of
the stock, or exchange the Steel Stock for the Marathon Stock. In the event
of liquidation of USX, the holders of the Marathon Stock and Steel Stock will
share in the funds remaining for common stockholders based on the relative
market capitalization of the respective Marathon Stock and Steel Stock to the
aggregate market capitalization of both classes of common stock.
Dollars in millions Shares in thousands
--------------------------- --------------------------
1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
PREFERRED STOCK (NOTE 24) -
6.50% Cumulative Convertible:
Outstanding at beginning of year $ 3 $ 3 $ 7 2,768 2,962 6,900
Repurchased - - - (53) (194) -
Exchanged for trust preferred securities - - (4) - - (3,938)
------- ------- ------- -------- -------- --------
Outstanding at end of year $ 3 $ 3 $ 3 2,715 2,768 2,962
- ----------------------------------------------------------------------------------------------------------
COMMON STOCKS:
Marathon Stock:
Outstanding at beginning of year $ 308 $ 289 $ 288 308,459 288,786 287,525
Issued in public offering - 17 - 67 17,000 -
Issued for:
Employee stock plans 3 2 1 2,903 2,236 1,209
Dividend Reinvestment and
Direct Stock Purchase Plan - - - 120 66 52
Exchangeable Shares 1 - - 218 371 -
------- ------- ------- -------- -------- --------
Outstanding at end of year $ 312 $ 308 $ 289 311,767 308,459 288,786
---------------------------------------------------------------------------------------------------------
Steel Stock:
Outstanding at beginning of year $ 88 $ 86 $ 85 88,336 86,578 84,885
Issued for:
Employee stock plans - 2 1 62 1,733 1,416
Dividend Reinvestment and
Direct Stock Purchase Plan - - - - 25 277
------- ------- ------- -------- -------- --------
Outstanding at end of year $ 88 $ 88 $ 86 88,398 88,336 86,578
---------------------------------------------------------------------------------------------------------
Delhi Stock:
Outstanding at beginning of year $ - $ - $ 9 - - 9,448
Canceled - employee stock plans - - - - - (3)
Reclassified to redeemable Delhi Stock - - (9) - - (9,445)
------- ------- ------- -------- -------- --------
Outstanding at end of year $ - $ - $ - - - -
---------------------------------------------------------------------------------------------------------
Securities exchangeable solely into
Marathon Stock:
Outstanding at beginning of year $ 1 $ - $ - 507 - -
Issued to acquire Tarragon stock - 1 - - 878 -
Exchanged for Marathon Stock (1) - - (218) (371) -
------- ------- ------- -------- -------- --------
Outstanding at end of year $ - $ 1 $ - 289 507 -
---------------------------------------------------------------------------------------------------------
(Table continued on next page)
U-6
STOCKHOLDERS' EQUITY COMPREHENSIVE INCOME
------------------------- ------------------------
(DOLLARS IN MILLIONS) 1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year $4,587 $3,924 $ 4,150
Marathon Stock issued 92 598 38
Steel Stock issued 2 57 52
Exchangeable Shares:
Issued - 28 -
Exchanged for Marathon Stock (6) (12) -
6.50% preferred stock:
Repurchased (2) (8) -
Exchanged for trust preferred securities - - (188)
Reclassified to redeemable Delhi Stock - - (128)
------- ------- -------
Balance at end of year $4,673 $4,587 $ 3,924
- ---------------------------------------------------------------------------
DEFERRED COMPENSATION (NOTE 19) $ - $ (1) $ (3)
- ---------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year $1,467 $1,138 $ 517
Net income 698 674 988 $ 698 $ 674 $ 988
Dividends on preferred stock (9) (9) (13)
Dividends on Marathon Stock
(per share: $.84 in 1999 and 1998
and $.76 in 1997) (261) (248) (219)
Dividends on Steel Stock (per share $1.00) (88) (88) (86)
Dividends on Delhi Stock (per share $.15) - - (1)
Reclassified to redeemable Delhi Stock - - (58)
Noncash credit from exchange of
preferred stock - - 10
------- ------- -------
Balance at end of year $1,807 $1,467 $ 1,138
- ---------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Minimum pension liability adjustments:
Balance at beginning of year $ (37) $ (32) $ (22)
Changes during year, net of taxes(a) 27 (5) (10) 27 (5) (10)
------- ------- -------
Balance at end of year (10) (37) (32)
------- ------- -------
Foreign currency translation adjustments:
Balance at beginning of year $ (11) $ (8) $ (8)
Changes during year, net of taxes(a) (6) (3) - (6) (3) -
------- ------- -------
Balance at end of year (17) (11) (8)
------- ------- -------
Unrealized holding gains on investments:
Balance at beginning of year $ - $ 3 $ -
Changes during year, net of taxes(a) (1) 2 3 (1) 2 3
Reclassification adjustment
included in net income 1 (5) - 1 (5) -
------- ------- -------
Balance at end of year - - 3
- ---------------------------------------------------------------------------
Total balances at end of year $ (27) $ (48) $ (37)
- ----------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME(b) $ 719 $ 663 $ 981
- ----------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $6,856 $6,405 $ 5,400
- ---------------------------------------------------------------------------
(a) Related income tax provision (credit): 1999 1998 1997
----- ----- -----
Minimum pension liability adjustments $ (13) $ 3 $ 5
Foreign currency translation adjustments 3 4 -
Unrealized holding gains on investments - 2 (1)
(b) Total comprehensive income by Group:
Marathon Group $ 660 $ 306 $ 457
U. S. Steel Group 59 357 444
Delhi Group - - 80
------ ------ -------
Total $ 719 $ 663 $ 981
====== ====== =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
U-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
PRINCIPLES APPLIED IN CONSOLIDATION - The consolidated financial
statements include the accounts of USX Corporation and the
majority-owned subsidiaries which it controls (USX).
Investments in unincorporated oil and gas joint ventures,
undivided interest pipelines and jointly owned gas processing
plants are consolidated on a pro rata basis.
Investments in entities over which USX has significant
influence are accounted for using the equity method of accounting
and are carried at USX's share of net assets plus loans and
advances.
Investments in companies whose stock is publicly traded are
carried at market value. The difference between the cost of these
investments and market value is recorded in other comprehensive
income (net of tax). Investments in companies whose stock has no
readily determinable fair value are carried at cost.
USE OF ESTIMATES - Generally accepted accounting principles
require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at year-end and the reported
amounts of revenues and expenses during the year. Significant
items subject to such estimates and assumptions include the
carrying value of long-lived assets; valuation allowances for
receivables, inventories and deferred income tax assets;
environmental liabilities; liabilities for potential tax
deficiencies and potential litigation claims and settlements; and
assets and obligations related to employee benefits. Additionally,
certain estimated liabilities are recorded when management commits
to a plan to close an operating facility or to exit a business
activity. Actual results could differ from the estimates and
assumptions used.
REVENUE RECOGNITION - Revenues principally include sales, dividend
and affiliate income, gains or losses on the disposal of assets
and gains or losses from changes in ownership interests.
SALES - Sales are recognized when products are shipped or
services are provided to customers. Consumer excise taxes on
petroleum products and merchandise and matching crude oil and
refined products buy/sell transactions settled in cash are
included in both revenues and costs and expenses, with no
effect on income.
DIVIDEND AND AFFILIATE INCOME - Dividend and affiliate income
includes USX's proportionate share of income from equity
method investments and dividend income from other investments.
Dividend income is recognized when dividend payments are
received.
DISPOSAL OF ASSETS - When long-lived assets depreciated on an
individual basis are sold or otherwise disposed of, any gains
or losses are reflected in income. Gains on disposal of long-
lived assets are recognized when earned, which is generally at
the time of closing. If a loss on disposal is expected, such
losses are recognized when long-lived assets are reclassified
as assets held for sale. Proceeds from disposal of long-lived
assets depreciated on a group basis are credited to
accumulated depreciation, depletion and amortization with no
immediate effect on income.
GAS BALANCING - USX follows the sales method of accounting for
gas production imbalances and would recognize a liability if
the existing proved reserves were not adequate to cover the
current imbalance situation.
CHANGES IN OWNERSHIP INTEREST - Gains or losses from a change
in ownership of a consolidated subsidiary or an
unconsolidated affiliate are recognized in revenues in the
period of change.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash
on hand and on deposit and investments in highly liquid debt
instruments with maturities generally of three months or less.
INVENTORIES - Inventories are carried at lower of cost or market.
Cost of inventories is determined primarily under the last-in,
first-out (LIFO) method.
DERIVATIVE INSTRUMENTS - USX uses commodity-based and foreign
currency derivative instruments to manage its exposure to price
risk. Management is authorized to use futures, forwards, swaps
and options related to the purchase, production or sale of crude
oil, natural gas, refined products, nonferrous metals and
electricity. While USX's risk management activities generally
reduce market risk exposure due to unfavorable commodity price
changes for raw material purchases and products sold, such
activities can also encompass strategies which assume price risk.
U-8
COMMODITY-BASED HEDGING TRANSACTIONS - For transactions that qualify for
hedge accounting, the resulting gains or losses are deferred and
subsequently recognized in income from operations, as a component of
sales or cost of sales, in the same period as the underlying physical
transaction. To qualify for hedge accounting, derivative positions
cannot remain open if the underlying physical market risk has been
removed. If such derivative positions remain in place, they would be
marked-to-market and accounted for as trading or other activities.
Recorded deferred gains or losses are reflected within other current and
noncurrent assets or accounts payable and deferred credits and other
liabilities, as appropriate.
COMMODITY-BASED TRADING AND OTHER ACTIVITIES - Derivative instruments
used for trading and other activities are marked-to-market and the
resulting gains or losses are recognized in the current period within
income from operations. This category also includes the use of
derivative instruments that have no offsetting underlying physical
market risk.
FOREIGN CURRENCY TRANSACTIONS - USX uses forward exchange contracts to
manage currency risks. Gains or losses related to firm commitments are
deferred and recognized concurrent with the underlying transaction. All
other gains or losses are recognized in income in the current period as
sales, cost of sales, interest income or expense, or other income, as
appropriate. Forward exchange contracts are recorded as receivables or
payables, as appropriate.
EXPLORATION AND DEVELOPMENT - USX follows the successful
efforts method of accounting for oil and gas exploration
and development.
LONG-LIVED ASSETS - Except for oil and gas producing properties, depreciation
is generally computed on the straight-line method based upon estimated lives
of assets. USX's method of computing depreciation for steel producing assets
modifies straight-line depreciation based on the level of production. The
modification factors range from a minimum of 85% at a production level below
81% of capability, to a maximum of 105% for a 100% production level. No
modification is made at the 95% production level, considered the normal
long-range level.
Depreciation and depletion of oil and gas producing properties are
computed using predetermined rates based upon estimated proved oil and gas
reserves applied on a units-of-production method.
Depletion of mineral properties, other than oil and gas, is based on
rates which are expected to amortize cost over the estimated tonnage of
minerals to be removed.
USX evaluates impairment of its oil and gas producing assets primarily
on a field-by-field basis using undiscounted cash flows based on total proved
reserves. Other assets are evaluated on an individual asset basis or by
logical groupings of assets. Assets deemed to be impaired are written down to
their fair value, including any related goodwill, using discounted future
cash flows and, if available, comparable market values.
ENVIRONMENTAL LIABILITIES - USX provides for remediation costs and penalties
when the responsibility to remediate is probable and the amount of associated
costs is reasonably determinable. Generally, the timing of remediation
accruals coincides with completion of a feasibility study or the commitment
to a formal plan of action. Remediation liabilities are accrued based on
estimates of known environmental exposure and are discounted in certain
instances. If recoveries of remediation costs from third parties are
probable, a receivable is recorded. Estimated abandonment and dismantlement
costs of offshore production platforms are accrued based on production of
estimated proved oil and gas reserves.
POSTEMPLOYMENT BENEFITS - USX recognizes an obligation to provide
postemployment benefits, primarily for disability-related claims covering
indemnity and medical payments. The obligation for these claims and the
related periodic costs are measured using actuarial techniques and
assumptions, including an appropriate discount rate, analogous to the
required methodology for measuring pension and other postretirement benefit
obligations. Actuarial gains and losses are deferred and amortized over
future periods.
INSURANCE - USX is insured for catastrophic casualty and certain property and
business interruption exposures, as well as those risks required to be
insured by law or contract. Costs resulting from noninsured losses are
charged against income upon occurrence.
RECLASSIFICATIONS - Certain reclassifications of prior years' data have been
made to conform to 1999 classifications.
U-9
- --------------------------------------------------------------------------------
2. NEW ACCOUNTING STANDARDS
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.
In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS No. 133). This new Standard
requires recognition of all derivatives as either assets
or liabilities at fair value. SFAS No. 133 may result in
additional volatility in both current period earnings
and other comprehensive income as a result of recording
recognized and unrecognized gains and losses resulting
from changes in the fair value of derivative
instruments. The transition adjustment resulting from
adoption of SFAS No. 133 will be reported as a
cumulative effect of a change in accounting principle.
Under the new Standard, USX may elect not to
designate certain derivative instruments as hedges even
if the strategy qualifies for hedge accounting
treatment. This approach would eliminate the
administrative effort needed to measure effectiveness
and monitor such instruments; however, this approach
also may result in additional volatility in current
period earnings.
USX cannot reasonably estimate the effect of
adoption on either the financial position or results of
operations. It is not possible to estimate what effect
this Statement will have on future results of
operations, although greater period-to-period volatility
is likely. USX plans to adopt the Standard effective
January 1, 2001.
- --------------------------------------------------------------------------------
3. BUSINESS COMBINATIONS
In August 1998, Marathon Oil Company (Marathon) acquired
Tarragon Oil and Gas Limited (Tarragon), a Canadian oil
and gas exploration and production company.
Securityholders of Tarragon received, at their election,
Cdn$14.25 for each Tarragon share, or the economic
equivalent in Exchangeable Shares of an indirect
Canadian subsidiary of Marathon, which are exchangeable
solely on a one-for-one basis into Marathon Stock. The
purchase price included cash payments of $686 million,
issuance of 878,074 Exchangeable Shares valued at $29
million and the assumption of $345 million in debt.
The Exchangeable Shares are exchangeable at the
option of the holder at any time and automatically
redeemable on August 11, 2003 (and, in certain
circumstances, as early as August 11, 2001). The holders
of Exchangeable Shares are entitled to receive declared
dividends equivalent to dividends declared from time to
time by USX on Marathon Stock.
USX accounted for the acquisition using the
purchase method of accounting. The 1998 results of
operations include the operations of Marathon Canada
Limited, formerly known as Tarragon, commencing August
12, 1998.
During 1997, Marathon and Ashland Inc. (Ashland)
agreed to combine the major elements of their refining,
marketing and transportation (RM&T) operations. On
January 1, 1998, Marathon transferred certain RM&T net
assets to Marathon Ashland Petroleum LLC (MAP), a new
consolidated subsidiary. Also on January 1, 1998,
Marathon acquired certain RM&T net assets from Ashland
in exchange for a 38% interest in MAP. The acquisition
was accounted for under the purchase method of
accounting. The purchase price was determined to be $1.9
billion, based upon an external valuation. The change in
Marathon's ownership interest in MAP resulted in a gain
of $245 million, which is included in 1998 revenues. In
accordance with MAP closing agreements, Marathon and
Ashland made capital contributions to MAP for
environmental improvements. The closing agreements
stipulate that ownership interests in MAP will not be
adjusted as a result of such contributions. Accordingly,
Marathon recognized a gain on ownership change of $17
million in 1999.
U-10
In connection with the formation of MAP, Marathon
and Ashland entered into a Limited Liability Company
Agreement dated January 1, 1998 (the LLC Agreement). The
LLC Agreement provides for an initial term of MAP
expiring on December 31, 2022 (25 years from its
formation). The term will automatically be extended for
ten-year periods, unless a termination notice is given
by either party.
Also in connection with the formation of MAP, the
parties entered into a Put/Call, Registration Rights and
Standstill Agreement (the Put/Call Agreement). The
Put/Call Agreement provides that at any time after
December 31, 2004, Ashland will have the right to sell
to Marathon all of Ashland's ownership interest in MAP,
for an amount in cash and/or Marathon or USX debt or
equity securities equal to the product of 85% (90% if
equity securities are used) of the fair market value of
MAP at that time, multiplied by Ashland's percentage
interest in MAP. Payment could be made at closing, or at
Marathon's option, in three equal annual installments,
the first of which would be payable at closing. At any
time after December 31, 2004, Marathon will have the
right to purchase all of Ashland's ownership interests
in MAP, for an amount in cash equal to the product of
115% of the fair market value of MAP at that time,
multiplied by Ashland's percentage interest in MAP.
The following unaudited pro forma data for USX
includes the results of operations of Tarragon for 1998
and 1997, and the Ashland RM&T net assets for 1997,
giving effect to the acquisitions as if they had been
consummated at the beginning of the years presented. The
pro forma data is based on historical information and
does not necessarily reflect the actual results that
would have occurred nor is it necessarily indicative of
future results of operations.
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1998 1997
--------------------------------------------------------------------------------
Revenues $ 28,331 $30,259
Net income 643 (a) 989 (a)
Net income per common share of Marathon Stock -
Basic and diluted .95 1.58
--------------------------------------------------------------------------------
(a)Excluding the pro forma inventory market valuation
adjustment, pro forma net income would have been $747
million in 1998 and $1,151 million in 1997. Reported
net income, excluding the reported inventory market
valuation adjustment, would have been $778 million in
1998 and $1,167 million in
1997.
- --------------------------------------------------------------------------------
4. TRANSACTIONS BETWEEN MAP AND ASHLAND
At December 31, 1999 and 1998, MAP had current
receivables from Ashland of $26 million and $22 million,
respectively, and current payables to Ashland of $2
million at December 31, 1999, and at December 31, 1998,
$106 million, including distributions payable.
At December 31, 1998, MAP's cash and cash
equivalents included a $103 million demand note invested
with Ashland, which was repaid in January 1999.
MAP has a $190 million short-term revolving credit
agreement with Ashland. Interest on borrowings is based
on the Federal Funds Rate in effect each day during the
period plus 0.30 of 1%. At December 31, 1999, there were
no borrowings against this facility.
During 1999 and 1998, MAP's sales to Ashland
consisting primarily of petroleum products, were $198
million and $185 million, respectively, and MAP's
purchases of products and services from Ashland were $25
million and $45 million, respectively. These
transactions were conducted under terms comparable to
those with unrelated parties.
- --------------------------------------------------------------------------------
5. DISCONTINUED OPERATIONS
Effective October 31, 1997, USX sold its stock in Delhi
Gas Pipeline Corporation and other subsidiaries of USX
that comprised all of the Delhi Group (Delhi Companies).
The transaction involved a gross purchase price of $762
million. Under the USX Restated Certificate of
Incorporation (USX Certificate), USX was required to
elect one of three options to return the value of the
net proceeds received in the transaction to the holders
of shares in Delhi Stock (Delhi shareholders). Of the
three options, USX elected to use the net proceeds of
$195 million, or $20.60 per share, to redeem all shares
of Delhi Stock. The net proceeds were distributed to the
Delhi shareholders on January 26, 1998. After the
redemption, 50,000,000 shares of Delhi Stock remain
authorized but unissued.
The sale of the Delhi Companies resulted in a gain
on disposal of $81 million, net of $206 million income
taxes.
The financial results of the Delhi Group have been
reclassified as discontinued operations for 1997 as
presented in the Consolidated Statement of Operations
and are summarized as follows:
(IN MILLIONS) 1997(a)
------------------------------------------------------------
Revenues $ 1,205
Costs and expenses 1,190
---------
Income from operations 15
Net interest and other financial costs 23
---------
Loss before income taxes (8)
Credit for estimated income taxes (7)
---------
Net loss $ (1)
------------------------------------------------------------
(a) Represents ten months of operations.
U-11
- --------------------------------------------------------------------------------
6. REVENUES
The items below are included in revenues and costs and expenses, with no effect on income.
(IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Consumer excise taxes on petroleum products
and merchandise $ 3,973 $ 3,824 $ 2,828
Matching crude oil and refined product
buy/sell transactions settled in cash 3,539 3,948 2,436
-----------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7. OTHER ITEMS
(IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
NET INTEREST AND OTHER FINANCIAL COSTS FROM CONTINUING OPERATIONS
INTEREST AND OTHER FINANCIAL INCOME:
Interest income $ 16 $ 35 $ 11
Other (13) 4 (6)
-------- -------- --------
Total 3 39 5
-------- -------- --------
INTEREST AND OTHER FINANCIAL COSTS:
Interest incurred 326 325 289
Less interest capitalized 26 46 31
-------- -------- --------
Net interest 300 279 258
Interest on tax issues 20 21 20
Financial costs on trust preferred securities 13 13 10
Financial costs on preferred stock of subsidiary 22 22 21
Amortization of discounts 3 6 6
Expenses on sales of accounts receivable 15 21 40
Adjustment to settlement value of indexed debt (13) (44) (10)
Other 5 - 7
-------- -------- --------
Total 365 318 352
-------- -------- --------
NET INTEREST AND OTHER FINANCIAL COSTS $ 362 $ 279 $ 347
-----------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSACTIONS
For 1999, 1998 and 1997, the aggregate foreign
currency transaction gains (losses) included in
determining income from continuing operations were
$(12) million, $13 million and $4 million,
respectively.
- --------------------------------------------------------------------------------
8. EXTRAORDINARY LOSSES
In 1999, USX irrevocably deposited with a trustee the
entire 5.5 million common shares it owned in RTI
International Metals, Inc. (RTI). The deposit of the
shares resulted in the satisfaction of USX's obligation
under its 6 3/4% Exchangeable Notes (indexed debt) due
February 1, 2000. Under the terms of the indenture, the
trustee exchanged one RTI share for each note at
maturity. All shares were required for satisfaction of
the indexed debt; therefore, none reverted back to USX.
As a result of the above transaction, USX recorded
in 1999 an extraordinary loss of $5 million, net of a $3
million income tax benefit, representing prepaid
interest expense and the write-off of unamortized debt
issue costs, and a pretax charge of $22 million,
representing the difference between the carrying value
of the investment in RTI and the carrying value of the
indexed debt, which is included in net gains on disposal
of assets.
In December 1996, USX had issued $117 million of
notes indexed to the common share price of RTI. At
maturity, USX would have been required to exchange the
notes for shares of RTI common stock, or redeem the
notes for the equivalent amount of cash. Since USX's
investment in RTI was attributed to the U. S. Steel
Group, the indexed debt was also attributed to the U. S.
Steel Group. USX had a 26% investment in RTI and
accounted for its investment using the equity method of
accounting.
Republic Technologies International, LLC, an equity
method affiliate of USX, recorded in 1999 an
extraordinary loss related to the early extinguishment
of debt. As a result, USX recorded an extraordinary loss
of $2 million, net of a $1 million income tax benefit,
representing its share of the extraordinary loss.
U-12
- --------------------------------------------------------------------------------
9. GROUP AND SEGMENT INFORMATION
After the redemption of the Delhi Stock on January 26, 1998, USX has two classes
of common stock: Marathon Stock and Steel Stock, which are intended to reflect
the performance of the Marathon Group and the U. S. Steel Group, respectively. A
description of each group and its products and services is as follows:
MARATHON GROUP - The Marathon Group includes Marathon Oil Company and certain
other subsidiaries of USX. Marathon Group revenues as a percentage of total
consolidated USX revenues were 82% in 1999, 78% in 1998 and 69% in 1997.
U. S. STEEL GROUP - The U. S. Steel Group consists of U. S. Steel, the
largest domestic integrated steel producer. U. S. Steel Group revenues as a
percentage of total consolidated USX revenues were 18% in 1999, 22% in 1998
and 31% in 1997.
GROUP OPERATIONS:
Income
From Net Capital
(IN MILLIONS) Year Revenues Operations Income Expenditures Assets
- ---------------------------------------------------------------------------------------------------------------------------------
Marathon Group 1999 $ 24,327 $ 1,713 $ 654 $ 1,378 $ 15,705
1998 21,977 938 310 1,270 14,544
1997 15,846 932 456 1,038 10,565
- ---------------------------------------------------------------------------------------------------------------------------------
U. S. Steel Group 1999 5,314 150 44 287 7,525
1998 6,283 579 364 310 6,749
1997 6,941 773 452 261 6,694
- ---------------------------------------------------------------------------------------------------------------------------------
Adjustments for 1999 (58) - - - (268)
Discontinued 1998 (23) - - - (160)
Operations and 1997 (107) - 80 74 25
Eliminations
- ---------------------------------------------------------------------------------------------------------------------------------
Total USX 1999 $ 29,583 $ 1,863 $ 698 $ 1,665 $ 22,962
Corporation 1998 28,237 1,517 674 1,580 21,133
1997 22,680 1,705 988 1,373 17,284
- ---------------------------------------------------------------------------------------------------------------------------------
SALES BY PRODUCT:
(IN MILLIONS) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Marathon Group
Refined products $ 10,873 $ 8,750 $ 7,012
Merchandise 2,088 1,873 1,045
Liquid hydrocarbons 2,159 1,818 941
Natural gas 1,381 1,144 1,331
Transportation and other products 199 271 167
- ---------------------------------------------------------------------------------------------------------------------------------
U. S. Steel Group
Sheet and semi-finished steel products $ 3,345 $ 3,501 $ 3,820
Tubular, plate and tin mill products 1,118 1,513 1,754
Raw materials (coal, coke and iron ore) 505 679 724
Other(a) 414 490 517
- ---------------------------------------------------------------------------------------------------------------------------------
(a)Includes revenue from the sale of steel production by-products, engineering
and consulting services, real estate development and resource management.
OPERATING SEGMENTS:
USX's reportable operating segments are business units within the Marathon and
U. S. Steel Groups, each providing their own unique products and services. Each
operating segment is independently managed and requires different technology and
marketing strategies. Segment income represents income from operations allocable
to operating segments. The following items included in income from operations
are not allocated to operating segments:
- Gain on ownership change in MAP
- Pension credits associated with pension plan assets and liabilities
allocated to pre-1987 retirees and former businesses
- Certain costs related to former U. S. Steel Group business activities
- Certain general and administrative costs related to all Marathon Group
operating segments in excess of amounts billed to MAP under service
contracts and amounts charged out to operating segments under
Marathon's shared services procedures
- USX corporate general and administrative costs. These costs primarily
consist of employment costs including pension effects, professional
services, facilities and other related costs associated with corporate
activities.
- Inventory market valuation adjustments
- Certain other items not allocated to operating segments for business
performance reporting purposes (see (a) in reconcilement table on page
U-15)
U-13
The Marathon Group's operations consist of three reportable operating segments:
1) Exploration and Production - explores for and produces crude oil and natural
gas on a worldwide basis; 2) Refining, Marketing and Transportation - refines,
markets and transports crude oil and petroleum products, primarily in the
Midwest and southeastern United States through MAP; and 3) Other Energy Related
Businesses. Other Energy Related Businesses is an aggregation of two segments
which fall below the quantitative reporting thresholds: 1) Natural Gas and Crude
Oil Marketing and Transportation - markets and transports its own and
third-party natural gas and crude oil in the United States; and 2) Power
Generation - develops, constructs and operates independent electric power
projects worldwide. The U. S. Steel Group consists of a single operating
segment, U. S. Steel. U. S. Steel is engaged in the production and sale of steel
mill products, coke and taconite pellets; the management of mineral resources;
domestic coal mining; engineering and consulting services; and real estate
development and management.
Refining, Other
Exploration Marketing Energy Total
and and Related Marathon
(IN MILLIONS) Production Transportation Businesses Segments U. S. Steel Total
- ---------------------------------------------------------------------------------------------------------------------------------
1999
Revenues:
Customer $ 3,230 $ 20,210 $ 731 $ 24,171 $ 5,363 $ 29,534
Intersegment(a) 202 47 40 289 - 289
Intergroup(a) 19 - 22 41 17 58
Equity in earnings (losses) of
unconsolidated affiliates (2) 17 26 41 (43) (2)
Other 30 48 15 93 46 139
-------- -------- -------- -------- -------- --------
Total revenues $ 3,479 $ 20,322 $ 834 $ 24,635 $ 5,383 $ 30,018
======== ======== ======== ======== ======== ========
Segment income (loss) $ 618 $ 611 $ 61 $ 1,290 $ (128) $ 1,162
Significant noncash items included in
segment income:
Depreciation, depletion and amortization(b) 638 280 5 923 304 1,227
Pension expenses(c) 3 32 2 37 219 256
Capital expenditures(d) 744 612 4 1,360 286 1,646
Affiliates - investments 56 - 3 59 15 74
- ---------------------------------------------------------------------------------------------------------------------------------
1998
Revenues:
Customer $ 2,085 $ 19,192 $ 306 $ 21,583 $ 6,180 $ 27,763
Intersegment(a) 144 10 17 171 - 171
Intergroup(a) 13 - 7 20 2 22
Equity in earnings of
unconsolidated affiliates 2 12 14 28 46 74
Other 26 40 11 77 55 132
-------- -------- -------- -------- -------- --------
Total revenues $ 2,270 $ 19,254 $ 355 $ 21,879 $ 6,283 $ 28,162
======== ======== ======== ======== ======== ========
Segment income $ 278 $ 896 $ 33 $ 1,207 $ 330 $ 1,537
Significant noncash items included in
segment income:
Depreciation, depletion and amortization(b) 581 272 6 859 283 1,142
Pension expenses(c) 3 16 2 21 187 208
Capital expenditures(d) 839 410 8 1,257 305 1,562
Affiliates - investments(e) - 22 17 39 71 110
- ---------------------------------------------------------------------------------------------------------------------------------
1997
Revenues:
Customer $ 1,575 $ 13,698 $ 381 $ 15,654 $ 6,812 $ 22,466
Intersegment(a) 619 - - 619 - 619
Intergroup(a) 99 - 6 105 2 107
Equity in earnings of
unconsolidated affiliates 14 4 7 25 69 94
Other 7 20 30 57 58 115
-------- -------- -------- -------- -------- --------
Total revenues $ 2,314 $ 13,722 $ 424 $ 16,460 $ 6,941 $ 23,401
======== ======== ======== ======== ======== ========
Segment income $ 773 $ 563 $ 48 $ 1,384 $ 618 $ 2,002
Significant noncash items included in
segment income:
Depreciation, depletion and amortization(b) 469 173 7 649 303 952
Pension expenses(c) 3 8 1 12 169 181
Capital expenditures(d) 810 205 6 1,021 256 1,277
Affiliates - investments(e) 114 - 73 187 26 213
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
(b) Differences between segment totals and consolidated totals represent amounts
included in administrative expenses and, in 1999 and 1998, certain
international and domestic exploration and production property impairments.
(c) Differences between segment totals and consolidated totals represent
unallocated pension credits and amounts included in administrative expenses.
(d) Differences between segment totals and consolidated totals represent amounts
related to corporate administrative activities and, in 1997, discontinued
operations.
(e) Differences between segment totals and consolidated totals represent amounts
related to corporate administrative activities.
U-14
The following reconciles segment revenues and income to amounts reported in
the Groups' financial statements:
Marathon Group U. S. Steel Group
------------------------------------- -------------------------------------
(IN MILLIONS) 1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
REVENUES:
Revenues of reportable segments $ 24,635 $ 21,879 $ 16,460 $ 5,383 $ 6,283 $ 6,941
Items not allocated to segments:
Gain on ownership change in MAP 17 245 - - - -
Losses related to investments in
equity affiliates - - - (69) - -
Other (36) 24 - - - -
Elimination of intersegment revenues (289) (171) (619) - - -
Administrative revenues - - 5 - - -
--------- --------- --------- --------- --------- ---------
Total Group revenues $ 24,327 $ 21,977 $ 15,846 $ 5,314 $ 6,283 $ 6,941
========= ========= ========= ========= ========= =========
INCOME:
Income (loss) for reportable segments $ 1,290 $ 1,207 $ 1,384 $ (128) $ 330 $ 618
Items not allocated to segments:
Gain on ownership change in MAP 17 245 - - - -
Administrative expenses (108) (106) (168) (17) (24) (33)
Pension credits - - - 447 373 313
Costs related to former business activities - - - (83) (100) (125)
Inventory market valuation adjustments 551 (267) (284) - - -
Other(a) (37) (141) - (69) - -
--------- --------- --------- --------- --------- ---------
Total Group income from operations $ 1,713 $ 938 $ 932 $ 150 $ 579 $ 773
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Represents in 1999, for the Marathon Group, primarily certain domestic
exploration and production impairments, costs of a voluntary early
retirement program and net losses on certain asset sales and, for the U.S.
Steel Group, certain losses related to investments in equity method
affiliates. Represents in 1998 certain international exploration and
production property impairments, certain suspended exploration well write-
offs, a gas contract settlement and MAP transition charges.
GEOGRAPHIC AREA:
The information below summarizes the operations in different geographic
areas. Transfers between geographic areas are at prices which approximate
market.
Revenues
--------------------------------------------------
Within Between
(IN MILLIONS) Year Geographic Areas Geographic Areas Total Assets(a)
- ---------------------------------------------------------------------------------------------------------------------------------
Marathon Group:
United States 1999 $ 23,337 $ - $ 23,337 $ 7,555
1998 21,191 - 21,191 7,659
1997 15,123 - 15,123 5,578
Canada 1999 425 521 946 1,112
1998 209 368 577 1,094
United Kingdom 1999 459 - 459 1,581
1998 462 - 462 1,739
1997 593 - 593 1,856
Other Foreign Countries 1999 106 88 194 735
1998 115 52 167 468
1997 130 39 169 530
Eliminations 1999 - (609) (609) -
1998 - (420) (420) -
1997 - (39) (39) -
Total Marathon Group 1999 $ 24,327 $ - $ 24,327 $ 10,983
1998 21,977 - 21,977 10,960
1997 15,846 - 15,846 7,964
- ---------------------------------------------------------------------------------------------------------------------------------
U. S. Steel Group:
United States 1999 $ 5,296 $ - $ 5,296 $ 2,889
1998 6,266 - 6,266 3,043
1997 6,926 - 6,926 3,023
Foreign Countries 1999 18 - 18 63
1998 17 - 17 69
1997 15 - 15 1
Total U. S. Steel Group 1999 $ 5,314 $ - $ 5,314 $ 2,952
1998 6,283 - 6,283 3,112
1997 6,941 - 6,941 3,024
- ---------------------------------------------------------------------------------------------------------------------------------
Adjustments for Discontinued 1999 $ (58) $ - $ (58) $ -
Operations and Eliminations 1998 (23) - (23) -
1997 (107) - (107) -
- ---------------------------------------------------------------------------------------------------------------------------------
Total USX Corporation 1999 $ 29,583 $ - $ 29,583 $ 13,935
1998 28,237 - 28,237 14,072
1997 22,680 - 22,680 10,988
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Includes property, plant and equipment and investments in affiliates.
U-15
- --------------------------------------------------------------------------------
10. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
USX has noncontributory defined benefit pension plans
covering substantially all employees. Benefits under
these plans are primarily based upon years of service
and final average pensionable earnings, or a minimum
benefit based upon years of service, whichever is
greater. In addition, pension benefits based upon a
percent of total career pensionable earnings cover
certain participating salaried employees.
USX also has defined benefit retiree health and
life insurance plans (other benefits) covering most
employees upon their retirement. Health benefits are
provided through comprehensive hospital, surgical and
major medical benefit provisions or through health
maintenance organizations, both subject to various cost
sharing features. Life insurance benefits are provided
to certain nonunion and union represented retiree
beneficiaries primarily based on employees' annual base
salary at retirement. For most union retirees, benefits
are provided for the most part based on fixed amounts
negotiated in labor contracts with the appropriate
unions. Except for certain life insurance benefits paid
from reserves held by insurance carriers and benefits
required to be funded by union contracts, most other
benefits have not been prefunded.
Pension Benefits Other Benefits
----------------------- ---------------------
(IN MILLIONS) 1999 1998 1999 1998
-----------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at January 1 $ 8,629 $ 8,085 $ 2,710 $ 2,451
Service cost 152 119 32 27
Interest cost 540 544 169 172
Plan amendments 399 (a) 14 (30) (20)
Actuarial (gains) losses (1,019) 637 (333) 135
Plan mergers and acquisitions 56 145 11 98
Settlements, curtailments and termination benefits (329) 10 - 7
Benefits paid (844) (925) (185) (160)
--------- --------- --------- ---------
Benefit obligations at December 31 $ 7,584 $ 8,629 $ 2,374 $ 2,710
-----------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1 $11,574 $10,925 $ 265 $ 258
Actual return on plan assets 865 1,507 20 31
Plan merger and acquisitions 38 55 1 -
Employer contributions 2 8 34 -
Trustee distributions(b) (30) (14) - -
Settlements paid (306) - - -
Benefits paid from plan assets (838) (907) (39) (24)
--------- --------- --------- ---------
Fair value of plan assets at December 31 $11,305 $11,574 $ 281 $ 265
-----------------------------------------------------------------------------------------------------------
FUNDED STATUS OF PLANS AT DECEMBER 31 $ 3,721 (c) $ 2,945 (c) $ (2,093) $ (2,445)
Unrecognized net gain from transition (95) (175) - -
Unrecognized prior service costs (credits) 880 566 (53) (28)
Unrecognized net actuarial gains (1,945) (993) (458) (110)
Additional minimum liability(d) (24) (75) - -
--------- --------- --------- ---------
Prepaid (accrued) benefit cost $ 2,537 $ 2,268 $ (2,604) $ (2,583)
-----------------------------------------------------------------------------------------------------------
(a) Results primarily from a new five-year labor
contract with the United Steelworkers of America
ratified in August 1999.
(b) Represents transfers of excess pension assets to
fund retiree health care benefits accounts under
Section 420 of the Internal Revenue Code.
(c) Includes several plans that have accumulated
benefit obligations in excess of plan assets:
Aggregate accumulated benefit obligations $ (53) $ (98)
Aggregate projected benefit obligations (76) (120)
Aggregate plan assets - -
(d) Additional minimum liability recorded was offset by
the following:
Intangible asset $ 9 $ 18
--------- ---------
Accumulated other comprehensive income (losses):
Beginning of year $ (37) $ (32)
Change during year (net of tax) 27 (5)
--------- ---------
Balance at end of year $ (10) $ (37)
-----------------------------------------------------------------------------------------------------------
U-16
Pension Benefits Other Benefits
----------------------------- -------------------------------
(IN MILLIONS) 1999 1998 1997 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC
BENEFIT COST (CREDIT)
Service cost $ 152 $ 119 $ 96 $ 32 $ 27 $ 21
Interest cost 540 544 562 169 172 175
Expected return on plan assets (895) (876) (828) (21) (21) (11)
Amortization --net transition gain (72) (74) (74) - - -
--prior service costs (credits) 87 75 73 (4) 1 1
--actuarial (gains) losses 7 6 4 (5) (13) (13)
Multiemployer and other USX plans 5 6 6 7 (a) 13 (a) 15 (a)
Settlement and termination (gains) losses (42)(b) 10(b) 4 - - -
------- ------- ------- ------- ------- -------
Net periodic benefit cost (credit) $ (218) $ (190) $ (157) $ 178 $ 179 $ 188
-----------------------------------------------------------------------------------------------------------
(a) Represents payments to a multiemployer health care
benefit plan created by the Coal Industry Retiree
Health Benefit Act of 1992 based on assigned
beneficiaries receiving benefits. The present value
of this unrecognized obligation is broadly estimated
to be $90 million, including the effects of future
medical inflation, and this amount could increase if
additional beneficiaries are assigned.
(b) Relates primarily to the 1999 Marathon Group and
1998 U. S. Steel Group voluntary early retirement
programs.
Pension Benefits Other Benefits
----------------------- ---------------------
1999 1998 1999 1998
-----------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE ACTUARIAL ASSUMPTIONS
AT DECEMBER 31:
Discount rate 8.0% 6.5% 8.0% 6.5%
Expected annual return on plan assets 8.6% 9.1% 8.5% 9.0%
Increase in compensation rate 4.1% 4.1% 4.1% 4.1%
-----------------------------------------------------------------------------------------------------------
For measurement purposes, a 7.6% annual rate of
increase in the per capita cost of covered health care
benefits was assumed for 2000. The rate was assumed to
decrease gradually to 5% until 2005 for the U. S. Steel
Group and until 2006 for the Marathon Group and remain
at that level thereafter.
A one-percentage-point change in assumed health
care cost trend rates would have the following effects:
1-Percentage- 1-Percentage-
(IN MILLIONS) Point Increase Point Decrease
-----------------------------------------------------------------------------------------------------------
Effect on total of service and interest cost components $ 22 $ (18)
Effect on other postretirement benefit obligations 207 (175)
-----------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
11. LEASES
Future minimum commitments for capital leases (including
sale-leasebacks accounted for as financings) and for
operating leases having remaining noncancelable lease
terms in excess of one year are as follows:
Capital Operating
(IN MILLIONS) Leases Leases
-----------------------------------------------------------------------------------------------------------
2000 $ 13 $ 302
2001 13 199
2002 13 115
2003 13 76
2004 13 65
Later years 119 200
Sublease rentals - (104)
--------- ---------
Total minimum lease payments 184 $ 853
=========
Less imputed interest costs (77)
---------
Present value of net minimum lease payments
included in long-term debt $ 107
-----------------------------------------------------------------------------------------------------------
Operating lease rental expense from continuing
operations:
(IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Minimum rental $ 266 $ 288 $ 232
Contingent rental 29 29 25
Sublease rentals (12) (14) (14)
--------- --------- ---------
Net rental expense $ 283 $ 303 $ 243
-----------------------------------------------------------------------------------------------------------
USX leases a wide variety of facilities and
equipment under operating leases, including land and
building space, office equipment, production facilities
and transportation equipment. Most long-term leases
include renewal options and, in certain leases, purchase
options. In the event of a change in control of USX, as
defined in the agreements, or certain other
circumstances, operating lease obligations totaling $105
million may be declared immediately due and payable.
U-17
- --------------------------------------------------------------------------------
12. INCOME TAXES
Provisions (credits) for estimated income taxes on
income from continuing operations were:
1999 1998 1997
----------------------------- --------------------------- ----------------------------
(IN MILLIONS) CURRENT DEFERRED TOTAL Current Deferred Total Current Deferred Total
-----------------------------------------------------------------------------------------------------------
Federal $ 107 $ 257 $ 364 $ 102 $ 168 $ 270 $ 208 $ 163 $ 371
State and local 4 1 5 33 18 51 7 32 39
Foreign 26 (46) (20) (4) (2) (6) 12 28 40
------ ------ ------ ------ ------ ------ ------ ------ ------
Total $ 137 $ 212 $ 349 $ 131 $ 184 $ 315 $ 227 $ 223 $ 450
-----------------------------------------------------------------------------------------------------------
A reconciliation of federal statutory tax rate
(35%) to total provisions from continuing operations
follows:
(IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Statutory rate applied to income from continuing operations
before income taxes $ 369 $ 346 $ 475
Effects of foreign operations, including foreign tax credits (20) (37) (11)
State and local income taxes after federal income tax effects 3 33 25
Credits other than foreign tax credits (10) (12) (24)
Excess percentage depletion (7) (11) (10)
Effects of partially owned companies (5) (4) (9)
Dispositions of subsidiary investments 7 - -
Adjustment of prior years' federal income taxes 4 (5) 2
Adjustment of valuation allowances - - (5)
Other 8 5 7
-------- -------- --------
Total provisions on income from continuing operations $ 349 $ 315 $ 450
-----------------------------------------------------------------------------------------------------------
Deferred tax assets and liabilities resulted from
the following:
(IN MILLIONS) December 31 1999 1998
-----------------------------------------------------------------------------------------------------------
Deferred tax assets:
Minimum tax credit carryforwards $ 131 $ 200
State tax loss carryforwards (expiring in 2000 through 2019) 122 118
Foreign tax loss carryforwards (portion of which expire in 2000 through 2014) 382 414
Employee benefits 1,204 1,170
Expected federal benefit for:
Crediting certain foreign deferred income taxes 530 528
Deducting state and other foreign deferred income taxes 36 48
Receivables, payables and debt 82 65
Contingency and other accruals 202 188
Investments in foreign subsidiaries 52 52
Other 45 50
Valuation allowances:
Federal (30) (30)
State (52) (52)
Foreign (282) (260)
-------- --------
Total deferred tax assets(a) 2,422 2,491
-------- --------
Deferred tax liabilities:
Property, plant and equipment 2,339 2,430
Prepaid pensions 1,048 917
Inventory 340 186
Investments in subsidiaries and affiliates 76 94
Other 155 190
-------- --------
Total deferred tax liabilities 3,958 3,817
-------- --------
Net deferred tax liabilities $ 1,536 $ 1,326
-----------------------------------------------------------------------------------------------------------
(a)USX expects to generate sufficient future taxable
income to realize the benefit of its deferred tax
assets. In addition, the ability to realize the
benefit of foreign tax credits is based upon certain
assumptions concerning future operating conditions
(particularly as related to prevailing oil prices),
income generated from foreign sources and USX's tax
profile in the years that such credits may be
claimed.
The consolidated tax returns of USX for the years
1990 through 1997 are under various stages of audit and
administrative review by the IRS. USX believes it has
made adequate provision for income taxes and interest
which may become payable for years not yet settled.
Pretax income (loss) from continuing operations
included $63 million, $(75) million and $250 million
attributable to foreign sources in 1999, 1998 and 1997,
respectively.
Undistributed earnings of certain consolidated
foreign subsidiaries at December 31, 1999, amounted to
$150 million. No provision for deferred U.S. income
taxes has been made for these subsidiaries because USX
intends to permanently reinvest such earnings in those
foreign operations. If such earnings were not
permanently reinvested, a deferred tax liability of $53
million would have been required.
U-18
- --------------------------------------------------------------------------------
13. PROPERTY, PLANT AND EQUIPMENT
(IN MILLIONS) December 31 1999 1998
-----------------------------------------------------------------------------------------------------------
Marathon Group $ 20,860 $ 20,728
U. S. Steel Group 8,748 8,439
--------- ---------
Total 29,608 29,167
Less accumulated depreciation, depletion and amortization 16,799 16,238
--------- ---------
Net $ 12,809 $ 12,929
-----------------------------------------------------------------------------------------------------------
Property, plant and equipment includes gross assets
acquired under capital leases (including sale-leasebacks
accounted for as financings) of $125 million at December
31, 1999, and $108 million at December 31, 1998; related
amounts in accumulated depreciation, depletion and
amortization were $81 million and $77 million,
respectively.
- --------------------------------------------------------------------------------
14. INVESTMENTS AND LONG-TERM RECEIVABLES
(IN MILLIONS) December 31 1999 1998
-----------------------------------------------------------------------------------------------------------
Equity method investments $ 1,055 $ 1,062
Other investments 71 81
Receivables due after one year 67 56
Deposits of restricted cash 22 21
Other 32 29
--------- ---------
Total $ 1,247 $ 1,249
-----------------------------------------------------------------------------------------------------------
Summarized financial information of affiliates
accounted for by the equity method of accounting follows:
(IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Income data - year:
Revenues $ 3,449 $ 3,510 $ 3,705
Operating income 95 324 342
Net income (loss) (74) 176 191
-----------------------------------------------------------------------------------------------------------
Balance sheet data - December 31:
Current assets $ 1,382 $ 1,290
Noncurrent assets 5,008 4,382
Current liabilities 1,481 874
Noncurrent liabilities 2,317 2,137
-----------------------------------------------------------------------------------------------------------
In 1999, USX and Kobe Steel, Ltd. (Kobe Steel)
completed a transaction that combined the steelmaking
and bar producing assets of USS/Kobe Steel Company
(USS/Kobe) with companies controlled by Blackstone
Capital Partners II. The combined entity was named
Republic Technologies International, LLC (Republic). In
addition, USX made a $15 million equity investment in
Republic. USX owned 50% of USS/Kobe and now owns 16% of
Republic. USX accounts for its investment in Republic
under the equity method of accounting. Dividend and
affiliate income (loss) in 1999 includes $47 million in
charges related to the impairment of the carrying value
of USX's investment in USS/Kobe and costs related to the
formation of Republic. The seamless pipe business of
USS/Kobe was excluded from this transaction. That
business, now known as Lorain Tubular Company, LLC,
became a wholly owned subsidiary of USX at the close of
business on December 31, 1999.
Dividends and partnership distributions received
from equity affiliates were $46 million in 1999, $42
million in 1998 and $34 million in 1997.
USX purchases from equity affiliates totaled $411
million, $395 million and $461 million in 1999, 1998 and
1997, respectively. USX sales to equity affiliates
totaled $853 million, $747 million and $838 million in
1999, 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
15. SHORT-TERM CREDIT AGREEMENT
USX has a short-term credit agreement totaling $125
million at December 31, 1999. Interest is based on the
bank's prime rate or London Interbank Offered Rate
(LIBOR), and carries a facility fee of .15%. Certain
other banks provide short-term lines of credit totaling
$150 million which require a .125% fee or maintenance of
compensating balances of 3%. At December 31, 1999, there
were no borrowings against these facilities.
U-19
- --------------------------------------------------------------------------------
16. LONG-TERM DEBT
Interest December 31
(IN MILLIONS) Rates - % Maturity 1999 1998
-----------------------------------------------------------------------------------------------------------
USX Corporation:
Revolving credit facility(a) 2001 $ 300 $ 700
Commercial paper(a) 6.71 165 -
Notes payable 613/20 - 94/5 2000 - 2023 2,525 2,267
Obligations relating to Industrial Development and
Environmental Improvement Bonds and Notes(b) 39/20 - 67/8 2009 - 2033 494 494
Receivables facility(a)(c) 2004 350 -
Indexed debt (NOTE 8) 63/4 - 69
All other obligations, including sale-leaseback
financing and capital leases 2000 - 2012 92 94
Consolidated subsidiaries:
Revolving credit facilities(d) 2000 - 2003 - -
Guaranteed Notes 7 2002 135 135
Guaranteed Loan(e) 91/20 2000 - 2006 223 245
Notes payable 81/2 2000 - 2001 1 2
All other obligations, including capital leases 2000 - 2011 26 11
------- -------
Total(f)(g) 4,311 4,017
Less unamortized discount 28 26
Less amount due within one year 61 71
------- -------
Long-term debt due after one year $4,222 $3,920
-----------------------------------------------------------------------------------------------------------
(a)An amended agreement which terminates in August
2001, provides for borrowing under a $2,350 million
revolving credit facility. Interest is based on
defined short-term market rates. During the term of
this agreement, USX is obligated to pay a variable
facility fee on total commitments, which was .15 % at
December 31, 1999. If the receivables facility
discussed in (c) is not renewed annually, the balance
outstanding of such facility could be refinanced by
the revolving credit facility, or another long-term
debt source; and therefore, is classified as
long-term debt. The commercial paper is supported by
the $2,050 million in unused and available credit
and, accordingly, is classified as long-term debt.
(b)At December 31, 1999, USX had outstanding
obligations relating to Environmental Improvement
Bonds in the amount of $141 million, which were
supported by letter of credit arrangements that could
become short-term obligations under certain
circumstances.
(c)In December 1999, USX entered into an agreement
under which the U. S. Steel Group participates in a
program to sell an undivided interest in certain
accounts receivable. A previous program expired in
October 1999 and was accounted for as a transfer of
receivables. The new program is accounted for as a
secured borrowing. Payments are collected from sold
accounts receivable and invested in new accounts
receivable for the purchaser and a yield, based on
short-term market rates, is transferred to the
purchaser. If the U. S. Steel Group does not have
sufficient eligible receivables to reinvest for the
purchaser, the size of the program is reduced
accordingly. The purchaser has a security interest in
a pool of receivables to secure USX's obligations
under the program. The amounts sold under the
previous receivables' programs averaged $291 million,
$347 million and $705 million for the years 1999,
1998 and 1997, respectively. (The Marathon and Delhi
Groups had a separate accounts receivable program
that was terminated in late 1997.)
(d)MAP has a revolving credit facility for $100 million
that terminates in July 2000 and a $400 million
revolving credit facility that terminates in July
2003. Interest is based on defined short-term market
rates for both facilities. During the terms of the
agreements, MAP is obligated to pay a variable
facility fee on total commitments. At December 31,
1999, the facility fee was .11% for the $100 million
facility and .125% for the $400 million facility. At
December 31, 1999, the unused and available credit
was $429 million, which reflects reductions for
outstanding letters of credit. In the event that MAP
defaults on indebtedness (as defined in the
agreement) in excess of $100 million, USX has
guaranteed the payment of any outstanding
obligations.
(e)The guaranteed loan was used to fund a portion of
the costs in connection with the development of the
East Brae Field and the SAGE pipeline in the North
Sea. A portion of proceeds from a long-term gas sales
contract is dedicated to loan service under certain
circumstances. Prepayment of the loan may be required
under certain situations, including events impairing
the security interest.
(f) Required payments of long-term debt for the years
2001-2004 are $747 million, $210 million, $187
million and $690 million, respectively.
(g)In the event of a change in control of USX, as
defined in the related agreements, debt obligations
totaling $3,332 million may be declared immediately
due and payable. The principal obligations subject to
such a provision are Notes payable - $2,525 million;
and Guaranteed Loan - $223 million. In such event,
USX may also be required to either repurchase the
leased Fairfield slab caster for $104 million or
provide a letter of credit to secure the remaining
obligation.
U-20
- --------------------------------------------------------------------------------
17. INVENTORIES
(IN MILLIONS) December 31 1999 1998
-----------------------------------------------------------------------------------------------------------
Raw materials $ 830 $ 916
Semi-finished products 392 282
Finished products 1,239 1,205
Supplies and sundry items 166 156
--------- ---------
Total (at cost) 2,627 2,559
Less inventory market valuation reserve - 551
--------- ---------
Net inventory carrying value $ 2,627 $ 2,008
-----------------------------------------------------------------------------------------------------------
At December 31, 1999 and 1998, the LIFO method
accounted for 91% and 90%, respectively, of total
inventory value. Current acquisition costs were
estimated to exceed the above inventory values at
December 31 by approximately $570 million and $310
million in 1999 and 1998, respectively.
The inventory market valuation reserve reflects the
extent that the recorded LIFO cost basis of crude oil
and refined products inventories exceeds net realizable
value. The reserve is decreased to reflect increases in
market prices and inventory turnover and increased to
reflect decreases in market prices. Changes in the
inventory market valuation reserve result in noncash
charges or credits to costs and expenses.
- --------------------------------------------------------------------------------
18. SUPPLEMENTAL CASH FLOW INFORMATION
(IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES INCLUDED:
Interest and other financial costs paid
(net of amount capitalized) $ (366) $ (336) $ (382)
Income taxes paid (98) (183) (400)
-----------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER AND REVOLVING CREDIT ARRANGEMENTS -NET:
Commercial paper - issued $ 6,282 $ - $ -
- repayments (6,117) - -
Credit agreements - borrowings 5,529 17,486 10,454
- repayments (5,980) (16,817) (10,449)
Other credit arrangements - net (95) 55 36
---------- --------- ---------
Total $ (381) $ 724 $ 41
-----------------------------------------------------------------------------------------------------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for dividend reinvestment and
employee stock plans $ 6 $ 5 $ 10
Marathon Stock issued for Exchangeable Shares 7 11 -
Trust preferred securities exchanged for preferred stock - - 182
Affiliate preferred stock received in conversion of affiliate loan 142 - -
Disposal of assets:
Deposit of RTI common shares in satisfaction of indexed debt 56 - -
Interest in USS/Kobe contributed to Republic 40 - -
Other disposals of assets:
Notes or common stock received 20 2 -
Liabilities assumed by buyers - - 240
Business combinations:
Acquisition of Tarragon:
Exchangeable Shares issued - 29 -
Liabilities assumed - 433 -
Acquisition of Ashland RM&T net assets:
38% interest in MAP - 1,900 -
Liabilities assumed - 1,038 -
Other acquisitions:
Liabilities assumed 42 - -
Affiliate liabilities consolidated in step acquisition 26 - -
-----------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
19. STOCK-BASED COMPENSATION PLANS
The 1990 Stock Plan, as amended and restated, authorizes
the Compensation Committee of the Board of Directors to
grant restricted stock, stock options and stock
appreciation rights to key management employees. Such
employees are generally granted awards of the class of
common stock intended to reflect the performance of the
group(s) to which their work relates. Up to .5 percent
of the outstanding Marathon Stock and .8 percent of the
outstanding Steel Stock, as determined on December 31 of
the preceding year, are available for grants during each
calendar year the 1990 Plan is in effect. In addition,
awarded shares that do not result in shares being issued
are available for subsequent grant, and any ungranted
shares from prior years' annual allocations are
available for subsequent grant
U-21
during the years the 1990 Plan is in effect. As of
December 31, 1999, 8,744,297 Marathon Stock shares and
2,540,519 Steel Stock shares were available for grants
in 2000. The Stock-Based Compensation Plans' activity
below includes the Delhi Stock prior to its January 1998
redemption (Note 5).
Restricted stock represents stock granted for such
consideration, if any, as determined by the Compensation
Committee, subject to provisions for forfeiture and
restricting transfer. Those restrictions may be removed
as conditions such as performance, continuous service
and other criteria are met. Restricted stock is issued
at the market price per share at the date of grant and
vests over service periods that range from one to five
years.
Deferred compensation is charged to stockholders'
equity when the restricted stock is granted and
subsequently adjusted for changes in the market value of
the underlying stock. The deferred compensation is
expensed over the balance of the vesting period and
adjusted if conditions of the restricted stock grant are
not met.
The following table presents information on
restricted stock grants:
Marathon Stock Steel Stock
------------------------------- -------------------------------
1999 1998 1997 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Number of shares granted 28,798 25,378 20,430 18,272 17,742 11,942
Weighted-average grant-date
fair value per share $ 29.38 $ 34.00 $ 29.38 $ 28.22 $ 37.28 $ 32.00
-----------------------------------------------------------------------------------------------------------
Stock options represent the right to purchase
shares of Marathon Stock, Steel Stock or Delhi Stock at
the market value of the stock at date of grant. Certain
options contain the right to receive cash and/or common
stock equal to the excess of the fair market value of
shares of common stock, as determined in accordance with
the plan, over the option price of shares. Stock options
vest after a one-year service period and expire 10 years
from the date they are granted.
The following is a summary of stock option
activity:
Marathon Stock Steel Stock Delhi Stock
----------------------- --------------------- ---------------------
Shares Price(a) Shares Price(a) Shares Price(a)
--------------------------------------------------------------------------------------------------------
Balance December 31, 1996 5,230,570 $ 23.78 1,345,595 $34.85 326,950 $ 15.60
Granted 756,260 29.38 457,590 32.00 94,250 13.31
Exercised (2,215,665) 23.86 (158,265) 31.85 (6,300) 12.21
Canceled (76,300) 26.91 (11,820) 34.36 (6,650) 15.73
---------- ---------- --------
Balance December 31, 1997 3,694,865 24.81 1,633,100 34.35 408,250 15.13
Granted 987,535 34.00 611,515 37.28
Exercised (594,260) 27.61 (230,805) 32.00
Canceled (13,200) 27.22 (21,240) 35.89
Redeemed - - (408,250) 20.60 (b)
---------- ---------- --------
Balance December 31, 1998 4,074,940 26.62 1,992,570 35.50 -
Granted 1,005,000 29.38 656,400 28.22
Exercised (176,160) 27.27 (2,580) 24.92
Canceled (121,055) 30.19 (20,005) 38.51
---------- ---------- --------
Balance December 31, 1999 4,782,725 27.08 2,626,385 33.67 -
-----------------------------------------------------------------------------------------------------------
(a) Weighted-average exercise price
(b) Redemption price
The weighted-average grant-date fair value per
option for the Marathon Stock was $8.89 in 1999, $10.43
in 1998 and $9.01 in 1997. For the Steel Stock such
amounts were $6.95 in 1999, $8.29 in 1998 and $6.72 in
1997.
The following table represents stock options at
December 31, 1999:
Outstanding Exercisable
---------------------------------------- -------------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of of Shares Remaining Average of Shares Average
Exercise Under Contractual Exercise Under Exercise
Prices Option Life Price Option Price
-----------------------------------------------------------------------------------------------------------
Marathon Stock $ 17.00-23.44 1,679,060 4.6 years $ 20.60 1,679,060 $20.60
25.38-26.88 164,825 1.4 25.45 164,825 25.45
29.08-34.00 2,938,840 7.8 30.88 1,959,335 31.63
---------- ----------
Total 4,782,725 3,803,220
---------- ----------
Steel Stock $ 22.46-28.22 685,340 9.0 years $ 28.07 29,395 $24.82
31.69-34.44 1,073,095 6.2 32.57 1,073,095 32.57
37.28-44.19 867,950 6.8 39.45 867,950 39.45
---------- ----------
Total 2,626,385 1,970,440
-----------------------------------------------------------------------------------------------------------
Actual stock-based compensation expense (credit)
was $(3) million in 1999 and 1998 and $30 million in
1997. Incremental compensation expense, as determined
under a fair value model, was not material ($.02 or less
per share for all years presented). Therefore, pro forma
net income and earnings per share data have been
omitted.
U-22
Effective January 1, 1997, USX created a deferred
compensation plan for non-employee directors of its
Board of Directors. The plan permits participants to
defer some or all of their annual retainers in the form
of common stock units or cash and it requires new
directors to defer at least half of their annual
retainer in the form of common stock units. Common stock
units are book entry units equal in value to a share of
Marathon Stock or Steel Stock. Deferred stock benefits
are distributed in shares of common stock within five
business days after a participant leaves the Board of
Directors. During 1999, 10,541 shares of Marathon Stock
and 3,798 shares of Steel Stock were issued. During 1998
and 1997, no shares of common stock were distributed.
- --------------------------------------------------------------------------------
20. DIVIDENDS
In accordance with the USX Certificate, dividends on the
Marathon Stock and Steel Stock are limited to the
legally available funds of USX. Net losses of any Group,
as well as dividends and distributions on any class of
USX Common Stock or series of preferred stock and
repurchases of any class of USX Common Stock or series
of preferred stock at prices in excess of par or stated
value, will reduce the funds of USX legally available
for payment of dividends on all classes of Common Stock.
Subject to this limitation, the Board of Directors
intends to declare and pay dividends on the Marathon
Stock and Steel Stock based on the financial condition
and results of operations of the related group, although
it has no obligation under Delaware law to do so. In
making its dividend decisions with respect to each of
the Marathon Stock and Steel Stock, the Board of
Directors considers, among other things, the long-term
earnings and cash flow capabilities of the related group
as well as the dividend policies of similar publicly
traded companies.
Dividends on the Steel Stock are further limited to
the Available Steel Dividend Amount. At December 31,
1999, the Available Steel Dividend Amount was at least
$3,300 million. The Available Steel Dividend Amount will
be increased or decreased, as appropriate, to reflect U.
S. Steel Group net income, dividends, repurchases or
issuances with respect to the Steel Stock and preferred
stock attributed to the U. S. Steel Group and certain
other items.
- --------------------------------------------------------------------------------
21. STOCKHOLDER RIGHTS PLAN
On September 28, 1999, USX's Board of Directors adopted
a new Stockholder Rights Plan and declared a dividend
distribution of one right for each outstanding share of
Marathon Stock and Steel Stock (referred to together as
"Voting Stock") to stockholders of record on October 9,
1999. Each right becomes exercisable, at a price of
$110, after any person or group has acquired, obtained
the right to acquire or made a tender or exchange offer
for 15% or more of the outstanding voting power
represented by the outstanding Voting Stock, except
pursuant to a qualifying all-cash tender offer for all
outstanding shares of Voting Stock which results in the
offeror owning shares of Voting Stock representing a
majority of the voting power (other than Voting Stock
beneficially owned by the offeror immediately prior to
the offer). Each right entitles the holder, other than
the acquiring person or group, to purchase one
one-hundredth of a share of Series A Junior Preferred
Stock or, upon the acquisition by any person of 15% or
more of the outstanding voting power represented by the
outstanding Voting Stock, Marathon Stock or Steel Stock
(or, in certain circumstances, other property) having a
market value of twice the exercise price. After a person
or group acquires 15% or more of the outstanding voting
power, if USX engages in a merger or other business
combination where it is not the surviving corporation or
where it is the surviving corporation and the Voting
Stock is changed or exchanged, or if 50% or more of
USX's assets, earnings power or cash flow are sold or
transferred, each right entitles the holder to purchase
common stock of the acquiring entity having a market
value of twice the exercise price. The rights and the
exercise price are subject to adjustment. The rights
will expire on October 9, 2009, unless such date is
extended or the rights are earlier redeemed by USX for
one cent per right at any time prior to the point they
become exercisable. Under certain circumstances, the
Board of Directors has the option to exchange one share
of the respective class of Voting Stock for each
exercisable right.
- --------------------------------------------------------------------------------
22. INCOME PER COMMON SHARE
The method of calculating net income per share for the
Marathon Stock, the Steel Stock and, prior to November
1, 1997, the Delhi Stock reflects the USX Board of
Directors' intent that the separately reported earnings
and surplus of the Marathon Group, the U. S. Steel Group
and the Delhi Group, as determined consistent with the
USX Certificate, are available for payment of dividends
on the respective classes of stock, although legally
available funds and liquidation preferences of these
classes of stock do not necessarily correspond with
these amounts. The financial statements of the Marathon
Group, the U. S. Steel Group and the Delhi Group, taken
together, include all accounts which comprise the
corresponding consolidated financial statements of USX.
Basic net income per share is calculated by
adjusting net income for dividend requirements of
preferred stock and, in 1997, the noncash credit on
exchange of preferred stock and is based on the weighted
average number of common shares outstanding.
Diluted net income per share assumes conversion of
convertible securities for the applicable periods
outstanding and assumes exercise of stock options,
provided in each case, the effect is not antidilutive.
U-23
COMPUTATION OF INCOME PER SHARE
1999 1998 1997
------------------ ------------------ ------------------
Basic Diluted Basic Diluted Basic Diluted
---------------------------------------------------------------------------------------------------------------------
CONTINUING OPERATIONS
MARATHON GROUP
--------------
Net income (millions):
Net income $ 654 $ 654 $ 310 $ 310 $ 456 $ 456
Dilutive effect of convertible debentures - - - - - 3
--------- --------- --------- --------- --------- ---------
Net income assuming conversions $ 654 $ 654 $ 310 $ 310 $ 456 $ 459
========= ========= ========= ========= ========= =========
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 309,696 309,696 292,876 292,876 288,038 288,038
Effect of dilutive securities:
Convertible debentures - - - - - 1,936
Stock options - 314 - 559 - 546
--------- --------- --------- --------- --------- ---------
Average common shares and dilutive effect 309,696 310,010 292,876 293,435 288,038 290,520
========= ========= ========= ========= ========= =========
Net income per share $ 2.11 $ 2.11 $ 1.06 $ 1.05 $ 1.59 $ 1.58
---------------------------------------------------------------------------------------------------------------------
U. S. STEEL GROUP
-----------------
Net income (millions):
Income before extraordinary losses $ 51 $ 51 $ 364 $ 364 $ 452 $ 452
Noncash credit from exchange of preferred stock - - - - 10 -
Dividends on preferred stock (9) (9) (9) - (13) -
Extraordinary losses (7) (7) - - - -
--------- --------- --------- --------- --------- ---------
Net income applicable to Steel Stock 35 35 355 364 449 452
Effect of dilutive securities:
Trust preferred securities - - - 8 - 6
Convertible debentures - - - - - 2
--------- --------- --------- --------- --------- ---------
Net income assuming conversions $ 35 $ 35 $ 355 $ 372 $ 449 $ 460
========= ========= ========= ========= ========= =========
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 88,392 88,392 87,508 87,508 85,672 85,672
Effect of dilutive securities:
Trust preferred securities - - - 4,256 - 2,660
Preferred stock - - - 3,143 - 4,811
Convertible debentures - - - - - 1,025
Stock options - 4 - 36 - 35
--------- --------- --------- --------- --------- ---------
Average common shares and dilutive effect 88,392 88,396 87,508 94,943 85,672 94,203
========= ========= ========= ========= ========= =========
Per share:
Income before extraordinary losses $ .48 $ .48 $ 4.05 $ 3.92 $ 5.24 $ 4.88
Extraordinary losses .08 .08 - - - -
--------- --------- --------- --------- --------- ---------
Net income $ .40 $ .40 $ 4.05 $ 3.92 $ 5.24 $ 4.88
---------------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS
DELHI GROUP
-----------
Net income (millions) $ 79.7 $ 79.7
========= =========
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 9,449 9,449
Stock options - 21
--------- ---------
Average common shares and dilutive effect 9,449 9,470
========= =========
Net income per share $ 8.43 $ 8.41
---------------------------------------------------------------------------------------------------------------------
U-24
- --------------------------------------------------------------------------------
23. PREFERRED STOCK OF SUBSIDIARY AND TRUST PREFERRED SECURITIES
USX Capital LLC, a wholly owned subsidiary of USX, sold
10,000,000 shares (carrying value of $250 million) of
8 3/4% Cumulative Monthly Income Preferred Shares (MIPS)
(liquidation preference of $25 per share) in 1994.
Proceeds of the issue were loaned to USX. USX has the
right under the loan agreement to extend interest
payment periods for up to 18 months, and as a
consequence, monthly dividend payments on the MIPS can
be deferred by USX Capital LLC during any such interest
payment period. In the event that USX exercises this
right, USX may not declare dividends on any share of its
preferred or common stocks. The MIPS are redeemable at
the option of USX Capital LLC and subject to the prior
consent of USX, in whole or in part from time to time,
for $25 per share, and will be redeemed from the
proceeds of any repayment of the loan by USX. In
addition, upon final maturity of the loan, USX Capital
LLC is required to redeem the MIPS. The financial costs
are included in net interest and other financial costs.
In 1997, USX exchanged approximately 3.9 million
6.75% Convertible Quarterly Income Preferred Securities
(Trust Preferred Securities) of USX Capital Trust I, a
Delaware statutory business trust (Trust), for an
equivalent number of shares of its 6.50% Cumulative
Convertible Preferred Stock (6.50% Preferred Stock)
(Exchange). The Exchange resulted in the recording of
Trust Preferred Securities at a fair value of $182
million and a noncash credit to Retained Earnings of $10
million.
USX owns all of the common securities of the Trust,
which was formed for the purpose of the Exchange. (The
Trust Common Securities and the Trust Preferred
Securities are together referred to as the Trust
Securities.) The Trust Securities represent undivided
beneficial ownership interests in the assets of the
Trust, which consist solely of USX 6.75% Convertible
Junior Subordinated Debentures maturing March 31, 2037
(Debentures), having an aggregate principal amount equal
to the aggregate initial liquidation amount ($50.00 per
security and $203 million in total) of the Trust
Securities issued by the Trust. Interest and principal
payments on the Debentures will be used to make
quarterly distributions and to pay redemption and
liquidation amounts on the Trust Preferred Securities.
The quarterly distributions, which accumulate at the
rate of 6.75% per annum on the Trust Preferred
Securities and the accretion from fair value to the
initial liquidation amount, are charged to income and
included in net interest and other financial costs.
Under the terms of the Debentures, USX has the
right to defer payment of interest for up to 20
consecutive quarters and, as a consequence, monthly
distributions on the Trust Preferred Securities will be
deferred during such period. If USX exercises this
right, then, subject to limited exceptions, it may not
pay any dividend or make any distribution with respect
to any shares of its capital stock.
The Trust Preferred Securities are convertible at
any time prior to the close of business on March 31,
2037 (unless such right is terminated earlier under
certain circumstances) at the option of the holder, into
shares of Steel Stock at a conversion price of $46.25
per share of Steel Stock (equivalent to a conversion
ratio of 1.081 shares of Steel Stock for each Trust
Preferred Security), subject to adjustment in certain
circumstances.
The Trust Preferred Securities may be redeemed at
any time at the option of USX, at a premium of 102.60%
of the initial liquidation amount through March 31,
2000, and thereafter, declining annually to the initial
liquidation amount on April 1, 2003, and thereafter.
They are mandatorily redeemable at March 31, 2037, or
earlier under certain circumstances.
Payments related to quarterly distributions and to
the payment of redemption and liquidation amounts on the
Trust Preferred Securities by the Trust are guaranteed
by USX on a subordinated basis. In addition, USX
unconditionally guarantees the Trust's Debentures. The
obligations of USX under the Debentures, and the related
indenture, trust agreement and guarantee constitute a
full and unconditional guarantee by USX of the Trust's
obligations under the Trust Preferred Securities.
- --------------------------------------------------------------------------------
24. PREFERRED STOCK
USX is authorized to issue 40,000,000 shares of
preferred stock, without par value -
6.50% CUMULATIVE CONVERTIBLE PREFERRED STOCK (6.50%
PREFERRED STOCK) - As of December 31, 1999, 2,715,287
shares (stated value of $1.00 per share; liquidation
preference of $50.00 per share) were outstanding. The
6.50% Preferred Stock is convertible at any time, at the
option of the holder, into shares of Steel Stock at a
conversion price of $46.125 per share of Steel Stock,
subject to adjustment in certain circumstances. This
stock is redeemable at USX's sole option, at a price of
$51.30 per share beginning April 1, 1999, and thereafter
at prices declining annually on each April 1 to an
amount equal to $50.00 per share on and after April 1,
2003.
U-25
- --------------------------------------------------------------------------------
25. DERIVATIVE INSTRUMENTS
USX remains at risk for possible changes in the market value of the derivative
instrument; however, such risk should be mitigated by price changes in the
underlying hedged item. USX is also exposed to credit risk in the event of
nonperformance by counterparties. The credit worthiness of counterparties is
subject to continuing review, including the use of master netting agreements to
the extent practical, and full performance is anticipated.
The following table sets forth quantitative information by class of
derivative instrument for derivative instruments categorized as trading or other
than trading:
RECOGNIZED
FAIR CARRYING TRADING RECORDED
VALUE AMOUNT GAIN OR DEFERRED AGGREGATE
ASSETS ASSETS (LOSS) FOR GAIN OR CONTRACT
(IN MILLIONS) (LIABILITIES)(a)(b) (LIABILITIES) THE YEAR (LOSS) VALUES(c)
- ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999:
Exchange-traded commodity futures:
Trading $ - $ - $ 4 $ - $ 8
Other than trading - - - 28 344
Exchange-traded commodity options:
Trading - - 4 - 179
Other than trading (6)(d) (6) - (10) 1,262
OTC commodity swaps(e):
Trading - - - - -
Other than trading 6 (f) 6 - 5 193
OTC commodity options:
Trading - - - - -
Other than trading 4 (g) 4 - 5 238
----------- ----------- ----------- ----------- -----------
Total commodities $ 4 $ 4 $ 8 $ 28 $ 2,224
=========== =========== =========== =========== ===========
Forward exchange contracts(h):
- receivable $ 52 $ 52 $ - $ - $ 51
- ---------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998:
Exchange-traded commodity futures $ - $ - $ (2) $ 104
Exchange-traded commodity options 3 (d) 2 3 776
OTC commodity swaps (9)(f) (9) (7) 297
OTC commodity options 3 (g) 3 3 147
----------- ----------- ----------- -----------
Total commodities $ (3) $ (4) $ (3) $ 1,324
=========== =========== =========== ===========
Forward exchange contracts:
- receivable $ 36 $ 36 $ - $ 36
- ---------------------------------------------------------------------------------------------------------------------------------
(a) The fair value amounts for OTC positions are based on various indices or
dealer quotes. The fair value amounts for currency contracts are based on
dealer quotes of forward prices covering the remaining duration of the
forward exchange contract. The exchange-traded futures contracts and
certain option contracts do not have a corresponding fair value since
changes in the market prices are settled on a daily basis.
(b) The aggregate average fair value of all trading activities for the period
ending December 31, 1999, was $3 million. Detail by class of instrument
was not available.
(c) Contract or notional amounts do not quantify risk exposure, but are used
in the calculation of cash settlements under the contracts. The contract
or notional amounts do not reflect the extent to which positions may
offset one another.
(d) Includes fair values as of December 31, 1999 and 1998, for assets of $11
million and $23 million and for liabilities of $(17) million and $(20)
million, respectively.
(e) The OTC swap arrangements vary in duration with certain contracts extending
into 2008.
(f) Includes fair values as of December 31, 1999 and 1998, for assets of $11
million and $29 million and for liabilities of $(5) million and $(38)
million, respectively.
(g) Includes fair values as of December 31, 1999 and 1998, for assets of $5
million and for liabilities of $(1) million and $(2) million, respectively.
(h) The forward exchange contracts relating to USX's foreign operations have
various maturities ending in December 2000.
U-26
- --------------------------------------------------------------------------------
26. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value of the financial instruments disclosed herein
is not necessarily representative of the amount that
could be realized or settled, nor does the fair value
amount consider the tax consequences of realization or
settlement. The following table summarizes financial
instruments, excluding derivative financial instruments
disclosed in Note 25, by individual balance sheet
account:
1999 1998
------------------------- ------------------------
FAIR CARRYING Fair Carrying
(IN MILLIONS) December 31 VALUE AMOUNT Value Amount
-----------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and cash equivalents $ 133 $ 133 $ 146 $ 146
Receivables 2,696 2,696 1,663 1,663
Investments and long-term receivables 190 134 180 124
-------- -------- -------- --------
Total financial assets $ 3,019 $ 2,963 $ 1,989 $ 1,933
-----------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Notes payable $ - $ - $ 145 $ 145
Accounts payable 3,397 3,397 2,438 2,438
Distribution payable to minority shareholder of MAP - - 103 103
Accrued interest 107 107 97 97
Long-term debt (including amounts due within one year) 4,278 4,176 4,203 3,896
Preferred stock of subsidiary and trust
preferred securities 408 433 414 432
-------- -------- -------- --------
Total financial liabilities $ 8,190 $ 8,113 $ 7,400 $ 7,111
-----------------------------------------------------------------------------------------------------------
Fair value of financial instruments classified as
current assets or liabilities approximates carrying
value due to the short-term maturity of the instruments.
Fair value of investments and long-term receivables was
based on discounted cash flows or other specific
instrument analysis. Fair value of preferred stock of
subsidiary and trust preferred securities was based on
market prices. Fair value of long-term debt instruments
was based on market prices where available or current
borrowing rates available for financings with similar
terms and maturities.
USX's unrecognized financial instruments consist of
receivables sold in 1998 and financial guarantees. It is
not practicable to estimate the fair value of these
forms of financial instrument obligations because there
are no quoted market prices for transactions which are
similar in nature. For details relating to financial
guarantees, see Note 27.
- --------------------------------------------------------------------------------
27. CONTINGENCIES AND COMMITMENTS
USX is the subject of, or party to, a number of pending
or threatened legal actions, contingencies and
commitments involving a variety of matters, including
laws and regulations relating to the environment.
Certain of these matters are discussed below. The
ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the
consolidated financial statements. However, management
believes that USX will remain a viable and competitive
enterprise even though it is possible that these
contingencies could be resolved unfavorably.
ENVIRONMENTAL MATTERS -
USX is subject to federal, state, local and foreign
laws and regulations relating to the environment. These
laws generally provide for control of pollutants
released into the environment and require responsible
parties to undertake remediation of hazardous waste
disposal sites. Penalties may be imposed for
noncompliance. At December 31, 1999 and 1998, accrued
liabilities for remediation totaled $170 million and
$145 million, respectively. It is not presently possible
to estimate the ultimate amount of all remediation costs
that might be incurred or the penalties that may be
imposed. Receivables for recoverable costs from certain
states, under programs to assist companies in cleanup
efforts related to underground storage tanks at retail
marketing outlets, were $52 million at December 31,
1999, and $41 million at December 31, 1998.
For a number of years, USX has made substantial
capital expenditures to bring existing facilities into
compliance with various laws relating to the
environment. In 1999 and 1998, such capital expenditures
totaled $78 million and $132 million, respectively. USX
anticipates making additional such expenditures in the
future; however, the exact amounts and timing of such
expenditures are uncertain because of the continuing
evolution of specific regulatory requirements.
At December 31, 1999 and 1998, accrued liabilities
for platform abandonment and dismantlement totaled $152
million and $141 million, respectively.
U-27
GUARANTEES -
Guarantees of the liabilities of affiliated
entities by USX and its consolidated subsidiaries
totaled $219 million at December 31, 1999, and $212
million at December 31, 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 potential losses resulting from these
guarantees. As of December 31, 1999, the largest
guarantee for a single affiliate was $131 million.
At December 31, 1999 and 1998, USX's pro rata share
of obligations of LOOP LLC and various pipeline
affiliates secured by throughput and deficiency
agreements totaled $146 million and $164 million,
respectively. Under the agreements, USX is required to
advance funds if the affiliates are unable to service
debt. Any such advances are prepayments of future
transportation charges.
COMMITMENTS -
At December 31, 1999 and 1998, contract commitments
to acquire property, plant and equipment and long-term
investments totaled $568 million and $812 million,
respectively.
USX entered into a 15-year take-or-pay arrangement
in 1993, which requires USX to accept pulverized coal
each month or pay a minimum monthly charge of
approximately $1 million. Charges for deliveries of
pulverized coal totaled $23 million in both 1999 and
1998. If USX elects to terminate the contract early, a
maximum termination payment of $102 million, which
declines over the duration of the agreement, may be
required.
USX is a party to a 15-year transportation services
agreement with a natural gas transmission company. The
contract requires USX to pay a minimum annual demand
charge of approximately $5 million starting in the year
2000 and concluding in the year 2014. The payments are
required even if the transportation facility is not
utilized.
U-28
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1999 1998
------------------------------------------------- ----------------------------------------------
(IN MILLIONS, EXCEPT PER 4TH Qtr. 3RD Qtr. 2ND Qtr. 1ST Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
SHARE DATA)
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues $ 8,950 $ 7,813(a) $6,766 $ 6,054 $6,686(b) $7,091(b) $ 7,260(b) $7,200(b)
Income (loss) from operations 425 535 502 401 (37) 320 670 564
Includes:
Inventory market valuation
charges (credits) - (136) (66) (349) 245 50 (3) (25)
Gain on ownership change
in MAP (6) (11) - - - 1 2 (248)
Income (loss) before
extraordinary losses 205 201(a) 189 110 (10) 116 298 270
Net Income (Loss) 205 199 189 105 (10) 116 298 270
- ---------------------------------------------------------------------------------------------------------------------------------
MARATHON STOCK DATA:
- --------------------
Net income (loss) $ 171 $ 230 $ 134 $ 119 $ (86) $ 51 $ 162 $ 183
- Per share: basic .55 .74 .43 .38 (.29) .18 .56 .63
diluted .55 .74 .43 .38 (.29) .17 .56 .63
Dividends paid per share .21 .21 .21 .21 .21 .21 .21 .21
Price range of Marathon Stock(c):
- Low 23-5/8 28-1/2 25-13/16 19-5/8 26-11/16 25 32-3/16 31
- High 30-5/8 33-7/8 32-3/4 31-3/8 38-1/8 37-1/8 38-7/8 40-1/2
- ---------------------------------------------------------------------------------------------------------------------------------
STEEL STOCK DATA:
- -----------------
Income (loss) before
extraordinary losses
applicable to Steel Stock $ 32 $ (31)(a) $ 52 $ (11) $ 74 $ 63 $ 133 $ 85
- Per share: basic .35 (.35)(a) .60 (.13) .83 .72 1.53 .98
diluted .35 (.35)(a) .59 (.13) .81 .71 1.46 .95
Dividends paid per share .25 .25 .25 .25 .25 .25 .25 .25
Price range of Steel Stock(c):
- Low 21-3/4 24-9/16 23-1/2 22-1/4 21-5/8 20-7/16 31 28-7/16
- High 33 30-1/16 34-1/4 29-1/8 27-3/4 33-1/2 43-1/16 42-1/8
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Restated to reflect current classifications.
(b) Reclassified to conform to 1999 classifications.
(c) Composite tape.
U-29
PRINCIPAL UNCONSOLIDATED AFFILIATES (UNAUDITED)
December 31, 1999
Company Country Ownership Activity
- ---------------------------------------------------------------------------------------------------------------------------------
Clairton 1314B Partnership, L.P. United States 10% Coke & Coke By-Products
CLAM Petroleum B.V. Netherlands 50% Oil & Gas Production
Double Eagle Steel Coating Company United States 50% Steel Processing
Kenai LNG Corporation United States 30% Natural Gas Liquification
LOCAP, Inc. United States 50% (a) Pipeline & Storage Facilities
LOOP LLC United States 47% (a) Offshore Oil Port
Manta Ray Offshore Gathering Company, LLC United States 24% Natural Gas Transmission
Minnesota Pipe Line Company United States 33% (a) Pipeline Facility
Nautilus Pipeline Company, LLC United States 24% Natural Gas Transmission
Odyssey Pipeline LLC United States 29% Pipeline Facility
Poseidon Oil Pipeline Company, LLC United States 28% Crude Oil Transportation
PRO-TEC Coating Company United States 50% Steel Processing
Republic Technologies International, LLC United States 16% Steel Products
Sakhalin Energy Investment Company Ltd. Russia 38% Oil & Gas Development
Transtar, Inc. United States 46% Transportation
USS-POSCO Industries United States 50% Steel Processing
VSZ U. S. Steel, s. r.o. Slovak Republic 50% Tin Mill Products
Worthington Specialty Processing United States 50% Steel Processing
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Represents the ownership of MAP.
SUPPLEMENTARY INFORMATION ON MINERAL RESERVES (UNAUDITED)
MINERAL RESERVES (OTHER THAN OIL AND GAS)
(Caption)
Reserves at December 31(a) Production
-------------------------- -------------------------
(MILLION TONS) 1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Iron(b) 726.1 738.6 754.8 14.3 15.8 16.8
Coal(c) 787.4 789.7 798.8 6.2 7.3 7.5
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Commercially recoverable reserves include demonstrated (measured and
indicated) quantities which are expressed in recoverable net product tons.
(b) In 1999, iron ore reserves decreased due to production, lease activity and
engineering revisions. In 1998, iron ore reserves decreased due to
production and engineering revisions.
(c) In 1999 and 1998, coal reserves decreased due to production, lease activity
and engineering revisions.
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
CAPITALIZED COSTS AND ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION(a)
UNITED OTHER EQUITY
(IN MILLIONS) December 31 STATES EUROPE INTL. CONSOLIDATED AFFILIATES TOTAL
- ----------------------------------------------------------------------------------------------------------------------
1999
Capitalized costs:
Proved properties $ 8,270 $ 4,465 $ 1,270 $ 14,005 $ 612 $ 14,617
Unproved properties 349 55 187 591 123 714
--------- --------- --------- ---------- --------- ---------
Total 8,619 4,520 1,457 14,596 735 15,331
--------- --------- --------- ---------- --------- ---------
Accumulated depreciation,
depletion and amortization:
Proved properties 5,019 2,859 136 8,014 169 8,183
Unproved properties 78 - 6 84 - 84
--------- --------- --------- ---------- --------- ---------
Total 5,097 2,859 142 8,098 169 8,267
--------- --------- --------- ---------- --------- ---------
Net capitalized costs $ 3,522 $ 1,661 $ 1,315 $ 6,498 $ 566 $ 7,064
- -----------------------------------------------------------------------------------------------------------------------
1998
Capitalized costs:
Proved properties $ 8,366 $ 4,430 $ 1,288 $14,084 $ 628 $ 14,712
Unproved properties 400 43 90 533 7 540
--------- --------- --------- ---------- --------- ---------
Total 8,766 4,473 1,378 14,617 635 15,252
--------- --------- --------- ---------- --------- ---------
Accumulated depreciation,
depletion and amortization:
Proved properties 5,020 2,685 135 7,840 156 7,996
Unproved properties 91 - 5 96 - 96
--------- --------- --------- ---------- --------- ---------
Total 5,111 2,685 140 7,936 156 8,092
--------- --------- --------- ---------- --------- ---------
Net capitalized costs $ 3,655 $ 1,788 $ 1,238 $ 6,681 $ 479 $ 7,160
- -----------------------------------------------------------------------------------------------------------------------
(a) Prior year amounts have been changed to conform with current year
reporting practices.
U-30
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED) CONTINUED
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING
ACTIVITIES, EXCLUDING CORPORATE OVERHEAD AND INTEREST COSTS(a)
UNITED OTHER EQUITY
(IN MILLIONS) STATES EUROPE INTL. CONSOLIDATED AFFILIATES TOTAL
- ---------------------------------------------------------------------------------------------------------------
1999: Revenues:
Sales(b) $ 474 $ 431 $ 198 $ 1,103 $ 33 $ 1,136
Transfers 882 - 88 970 - 970
--------- --------- --------- ------- ------- ---------
Total revenues 1,356 431 286 2,073 33 2,106
Expenses:
Production costs (322) (137) (99) (558) (25) (583)
Exploration expenses (134) (42) (51) (227) (4) (231)
Depreciation, depletion
and amortization(c) (378) (143) (99) (620) (13) (633)
Other expenses (28) (7) (15) (50) - (50)
--------- --------- -------- ------ ------- ---------
Total expenses (862) (329) (264) (1,455) (42) (1,497)
Other production-related
earnings(d) 1 4 4 9 1 10
--------- --------- -------- ------ ------- ---------
Results before income taxes 495 106 26 627 (8) 619
Income taxes (credits) 168 33 (7) 194 (3) 191
--------- --------- -------- ------ ------- ---------
Results of operations $ 327 $ 73 $ 33 $ 433 $ (5) $ 428
- ---------------------------------------------------------------------------------------------------------------
1998: Revenues:
Sales(b) $ 518 $ 454 $ 71 $ 1,043 $ 28 $ 1,071
Transfers 536 - 51 587 - 587
--------- --------- --------- --------- --------- ---------
Total revenues 1,054 454 122 1,630 28 1,658
Expenses:
Production costs (295) (153) (57) (505) (8) (513)
Exploration expenses(e) (179) (45) (86) (310) (5) (315)
Depreciation, depletion
and amortization(c) (339) (150) (68) (557) (8) (565)
Other expenses (37) (3) (11) (51) - (51)
--------- --------- --------- --------- --------- ---------
Total expenses (850) (351) (222) (1,423) (21) (1,444)
Other production-related
earnings(d) 1 15 3 19 1 20
--------- --------- --------- --------- --------- ---------
Results before income taxes 205 118 (97) 226 8 234
Income taxes (credits) 61 22 (28) 55 3 58
--------- --------- --------- --------- --------- ---------
Results of operations $ 144 $ 96 $ (69) $ 171 $ 5 $ 176
- ----------------------------------------------------------------------------------------------------------------
1997: Revenues:
Sales(b) $ 581 $ 572 $ 21 $ 1,174 $ 42 $ 1,216
Transfers 724 - 38 762 - 762
--------- --------- --------- --------- -------- ---------
Total revenues 1,305 572 59 1,936 42 1,978
Expenses:
Production costs (337) (162) (12) (511) (15) (526)
Exploration expenses (127) (34) (25) (186) (1) (187)
Depreciation, depletion
and amortization (300) (130) (16) (446) (8) (454)
Other expenses (32) (3) (13) (48) - (48)
--------- --------- --------- --------- --------- ---------
Total expenses (796) (329) (66) (1,191) (24) (1,215)
Other production-related
earnings(d) - 28 1 29 1 30
--------- --------- --------- --------- --------- ---------
Results before income taxes 509 271 (6) 774 19 793
Income taxes (credits) 170 79 4 253 4 257
--------- --------- --------- --------- --------- ---------
Results of operations $ 339 $ 192 $ (10) $ 521 $ 15 $ 536
- ---------------------------------------------------------------------------------------------------------------
(a) Includes the results of using derivative instruments to manage commodity
and foreign currency risks.
(b) Includes net gains on asset dispositions and natural gas contract
settlements, as of December 31, 1999, 1998 and 1997, of $2 million,
$43 million and $7 million respectively.
(c) Includes domestic property impairments of $16 million as of December 31,
1999 and international property impairments of $10 million as of
December 31, 1998.
(d) Includes revenues, net of associated costs, from third-party activities
that are an integral part of USX's production operations. Third-party
activities may include the processing and/or transportation of third-party
production, and the purchase and subsequent resale of gas utilized in
reservoir management.
(e) Includes international property impairments and suspended exploration well
write-offs of $73 million.
U-31
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED) CONTINUED
COSTS INCURRED FOR PROPERTY ACQUISITION, EXPLORATION AND
DEVELOPMENT - INCLUDING CAPITAL EXPENDITURES(a)
UNITED OTHER EQUITY
(IN MILLIONS) STATES EUROPE INTL. CONSOLIDATED AFFILIATES TOTAL
- -------------------------------------------------------------------------------------------------------------
1999: Property acquisition:
Proved $ 17 $ - $ 10 $ 27 $ - $ 27
Unproved 56 12 107 175 - 175
Exploration 141 47 64 252 7 259
Development 205 34 117 356 84 440
- -------------------------------------------------------------------------------------------------------------
1998: Property acquisition:
Proved $ 3 $ 3 $ 1,051 $ 1,057 $ - $ 1,057
Unproved 82 - 57 139 - 139
Exploration 217 39 75 331 11 342
Development 431 39 46 516 165 681
- -------------------------------------------------------------------------------------------------------------
1997: Property acquisition:
Proved $ 16 $ - $ - $ 16 $ - $ 16
Unproved 50 - - 50 - 50
Exploration 170 53 43 266 3 269
Development 477 67 27 571 135 706
- -------------------------------------------------------------------------------------------------------------
(a) Prior year amounts have been changed to conform with current year
reporting practices.
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
The following estimates of net reserves have been determined by
deducting royalties of various kinds from USX's gross reserves. The reserve
estimates are believed to be reasonable and consistent with presently known
physical data concerning size and character of the reservoirs and are subject
to change as additional knowledge concerning the reservoirs becomes
available. The estimates include only such reserves as can reasonably be
classified as proved; they do not include reserves which may be found by
extension of proved areas or reserves recoverable by secondary or tertiary
recovery methods unless these methods are in operation and are showing
successful results. Undeveloped reserves consist of reserves to be recovered
from future wells on undrilled acreage or from existing wells where
relatively major expenditures will be required to realize production. USX did
not have any quantities of oil and gas reserves subject to long-term supply
agreements with foreign governments or authorities in which USX acts as
producer.
UNITED OTHER EQUITY
(MILLIONS OF BARRELS) STATES EUROPE INTL. CONSOLIDATED AFFILIATES TOTAL
- -----------------------------------------------------------------------------------------------------------
LIQUID HYDROCARBONS
Proved developed and
undeveloped reserves:
Beginning of year - 1997(a) 570 177 26 773 - 773
Purchase of reserves in place 2 - - 2 - 2
Revisions of previous estimates 9 (1) 3 11 - 11
Improved recovery 22 - - 22 - 22
Extensions, discoveries and
other additions 31 - - 31 82 113
Production (42) (15) (3) (60) - (60)
Sales of reserves in place (2) - - (2) - (2)
-------- -------- -------- -------- -------- --------
End of year - 1997 590 161 26 777 82 859
Purchase of reserves in place 1 - 156 (b) 157 - 157
Revisions of previous estimates (1) (28) 1 (28) (2) (30)
Improved recovery 3 - - 3 - 3
Extensions, discoveries and
other additions 10 4 18 32 - 32
Production (49) (15) (7) (71) - (71)
Sales of reserves in place (5) - - (5) - (5)
-------- -------- -------- -------- -------- --------
End of year - 1998 549 122 194 865 80 945
Purchase of reserves in place 14 - 7 21 - 21
Revisions of previous estimates 2 (20) - (18) (3) (21)
Improved recovery 11 - 1 12 - 12
Extensions, discoveries and
other additions 9 - 5 14 - 14
Production (53) (12) (11) (76) - (76)
Sales of reserves in place (12) - (9) (21) - (21)
-------- -------- -------- -------- -------- --------
End of year - 1999 520 90 187 797 77 874
- ----------------------------------------------------------------------------------------------------------
Proved developed reserves:
Beginning of year - 1997 443 163 11 617 - 617
End of year - 1997 486 161 12 659 - 659
End of year - 1998 489 119 67 675 - 675
End of year - 1999 476 90 72 638 69 707
- ----------------------------------------------------------------------------------------------------------
(a) Revised to exclude reserves attributable to a pressure maintenance
program for the Petronius field scheduled to commence in third quarter
2000.
(b) Represents reserves related to the acquisition of Tarragon Oil and
Gas Limited in August 1998.
U-32
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED) CONTINUED
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
(CONTINUED)
UNITED OTHER EQUITY
(BILLIONS OF CUBIC FEET) STATES EUROPE INTL. CONSOLIDATED AFFILIATES TOTAL
-----------------------------------------------------------------------------------------------------------
NATURAL GAS
Proved developed and
undeveloped reserves:
Beginning of year - 1997(a) 2,251 1,178 21 3,450 132 3,582
Purchase of reserves in place 31 - - 31 - 31
Revisions of previous estimates (39) 9 6 (24) (6) (30)
Improved recovery - - - - - -
Extensions, discoveries and
other additions 262 - - 262 - 262
Production (264) (139) (4) (407) (15) (422)
Sales of reserves in place (9) - - (9) - (9)
-------- -------- -------- -------- -------- --------
End of year - 1997 2,232 1,048 23 3,303 111 3,414
Purchase of reserves in place 10 - 782 (b) 792 - 792
Revisions of previous estimates (16) 10 (1) (7) 5 (2)
Improved recovery - - - - - -
Extensions, discoveries and
other additions 238 32 55 325 5 330
Production (272) (124) (29) (425) (11) (436)
Sales of reserves in place (29) - - (29) - (29)
-------- -------- -------- -------- -------- --------
End of year - 1998 2,163 966 830 3,959 110 4,069
Purchase of reserves in place 5 - 11 16 - 16
Revisions of previous estimates (83) (81) (3) (167) 13 (154)
Improved recovery 8 - 2 10 - 10
Extensions, discoveries and
other additions 281 - 94 375 13 388
Production (275) (111) (59) (445) (13) (458)
Sales of reserves in place (42) - (42) (84) - (84)
-------- -------- -------- -------- -------- --------
End of year - 1999 2,057 774 833 3,664 123 3,787
-----------------------------------------------------------------------------------------------------------
Proved developed reserves:
Beginning of year - 1997 1,720 1,133 16 2,869 100 2,969
End of year - 1997 1,702 1,024 19 2,745 78 2,823
End of year - 1998 1,678 909 534 3,121 76 3,197
End of year - 1999 1,550 741 497 2,788 65 2,853
-----------------------------------------------------------------------------------------------------------
(a) Revised to exclude reserves attributable to a
pressure maintenance program for the Petronius field
scheduled to commence in third quarter 2000.
(b) Represents reserves related to the acquisition of
Tarragon Oil and Gas Limited in August 1998.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH
FLOWS AND CHANGES THEREIN RELATING TO PROVED OIL AND
GAS RESERVES
Estimated discounted future net cash flows and
changes therein were determined in accordance with
Statement of Financial Accounting Standards No. 69.
Certain information concerning the assumptions used in
computing the valuation of proved reserves and their
inherent limitations are discussed below. USX believes
such information is essential for a proper understanding
and assessment of the data presented.
FUTURE CASH INFLOWS are computed by applying
year-end prices of oil and gas relating to USX's proved
reserves to the year-end quantities of those reserves.
Future price changes are considered only to the extent
provided by contractual arrangements in existence at
year-end.
The assumptions used to compute the proved reserve
valuation do not necessarily reflect USX's expectations
of actual revenues to be derived from those reserves nor
their present worth. Assigning monetary values to the
estimated quantities of reserves, described on the
preceding page, does not reduce the subjective and
ever-changing nature of such reserve estimates.
Additional subjectivity occurs when determining
present values because the rate of producing the
reserves must be estimated. In addition to uncertainties
inherent in predicting the future, variations from the
expected production rate also could result directly or
indirectly from factors outside of USX's control, such
as unintentional delays in development, environmental
concerns, changes in prices or regulatory controls.
The reserve valuation assumes that all reserves
will be disposed of by production. However, if reserves
are sold in place or subjected to participation by
foreign governments, additional economic considerations
also could affect the amount of cash eventually
realized.
FUTURE DEVELOPMENT AND PRODUCTION COSTS, including
abandonment and dismantlement costs, are computed by
estimating the expenditures to be incurred in developing
and producing the proved oil and gas reserves at the end
of the year, based on year-end costs and assuming
continuation of existing economic conditions.
FUTURE INCOME TAX EXPENSES are computed by applying
the appropriate year-end statutory tax rates, with
consideration of future tax rates already legislated, to
the future pretax net cash flows relating to USX's
proved oil and gas reserves. Permanent differences in
oil and gas related tax credits and allowances are
recognized.
DISCOUNT was derived by using a discount rate of 10
percent a year to reflect the timing of the future net
cash flows relating to proved oil and gas reserves.
U-33
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED) CONTINUED
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH
FLOWS RELATING TO PROVED OIL AND GAS RESERVES
(CONTINUED)(a)
United Other Equity
(IN MILLIONS) States Europe Intl. Consolidated Affiliates Total
-----------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999:
Future cash inflows $ 15,393 $ 4,426 $ 5,242 $ 25,061 $ 2,154 $ 27,215
Future production costs (4,646) (1,864) (1,107) (7,617) (850) (8,467)
Future development costs (445) (86) (315) (846) (88) (934)
Future income tax expenses (3,102) (987) (1,581) (5,670) (328) (5,998)
--------- --------- --------- --------- --------- ---------
Future net cash flows 7,200 1,489 2,239 10,928 888 11,816
10% annual discount for
estimated timing of cash flows (3,371) (374) (862) (4,607) (372) (4,979)
--------- --------- --------- --------- --------- ---------
Standardized measure of
discounted future net cash
flows relating to proved oil
and gas reserves $ 3,829 $ 1,115 $ 1,377 $ 6,321 $ 516 $ 6,837
-----------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998:
Future cash inflows $ 8,442 $ 3,850 $ 2,686 $ 14,978 $ 1,036 $ 16,014
Future production costs (3,731) (2,240) (950) (6,921) (586) (7,507)
Future development costs (559) (130) (323) (1,012) (124) (1,136)
Future income tax expenses (816) (630) (542) (1,988) (45) (2,033)
--------- --------- --------- --------- --------- ---------
Future net cash flows 3,336 850 871 5,057 281 5,338
10% annual discount for
estimated timing of cash flows (1,462) (256) (392) (2,110) (136) (2,246)
--------- --------- --------- --------- --------- ---------
Standardized measure of
discounted future net cash
flows relating to proved oil
and gas reserves $ 1,874 $ 594 $ 479 $ 2,947 $ 145 $ 3,092
-----------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997:
Future cash inflows $ 13,589 $ 6,189 $ 484 $ 20,262 $ 1,714 $ 21,976
Future production costs (4,705) (2,310) (172) (7,187) (643) (7,830)
Future development costs (700) (162) (18) (880) (200) (1,080)
Future income tax expenses (2,316) (1,371) (62) (3,749) (232) (3,981)
--------- --------- --------- --------- --------- ---------
Future net cash flows 5,868 2,346 232 8,446 639 9,085
10% annual discount for
estimated timing of cash flows (2,623) (1,011) (52) (3,686) (367) (4,053)
--------- --------- --------- --------- --------- ---------
Standardized measure of
discounted future net cash
flows relating to proved oil
and gas reserves $ 3,245 $ 1,335 $ 180 $ 4,760 $ 272 $ 5,032
-----------------------------------------------------------------------------------------------------------
SUMMARY OF CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO
PROVED OIL AND GAS RESERVES(a)(b)
Consolidated Equity Affiliates Total
------------------------- ------------------------- ---------------------------
(IN MILLIONS) 1999 1998 1997 1999 1998 1997 1999 1998 1997
------------------------------------------------------------------------------------------------------------
Sales and transfers of
oil and gas produced,
net of production costs $(1,516) $(1,125) $(1,424) $ (8) $ (20) $ (28) $(1,524) $(1,145) $(1,452)
Net changes in prices and
production costs related
to future production 5,891 (3,579) (3,669) 484 (372) (36) 6,375 (3,951) (3,705)
Extensions, discoveries and
improved recovery, less
related costs 566 284 458 9 4 263 575 288 721
Development costs incurred
during the period 356 516 571 84 165 135 440 681 706
Changes in estimated future
development costs (42) (285) (300) (52) (100) (121) (94) (385) (421)
Revisions of previous
quantity estimates (346) (110) 43 (8) (2) (5) (354) (112) 38
Net changes in purchases and
sales of minerals in place 68 637 14 - - - 68 637 14
Accretion of discount 382 623 1,051 18 39 13 400 662 1,064
Net change in income taxes (1,995) 825 1,246 (117) 57 (29) (2,112) 882 1,217
Other 10 401 (776) (39) 102 (4) (29) 503 (780)
------------------------------------------------------------------------------------------------------------
Net change for the year 3,374 (1,813) (2,786) 371 (127) 188 3,745 (1,940) (2,598)
Beginning of year 2,947 4,760 7,546 145 272 84 3,092 5,032 7,630
------------------------------------------------------------------------------------------------------------
End of year $ 6,321 $ 2,947 $ 4,760 $ 516 $ 145 $ 272 $ 6,837 $ 3,092 $5,032
------------------------------------------------------------------------------------------------------------
(a) Revised to exclude reserves attributable to a
pressure maintenance program for the Petronius field
scheduled to commence in third quarter 2000.
(b) Prior year amounts have been changed to conform with
current year reporting practices.
U-34
FIVE-YEAR OPERATING SUMMARY - MARATHON GROUP
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------------------------
NET LIQUID HYDROCARBON PRODUCTION (thousands of barrels per day)
United States (by region)
Alaska - - - 8 9
Gulf Coast 74 55 29 30 33
Southern 5 6 8 9 11
Central 4 4 5 4 8
Mid-Continent - Yates 18 23 25 25 24
Mid-Continent - Other 20 21 21 20 19
Rocky Mountain 24 26 27 26 28
-----------------------------------------------
Total United States 145 135 115 122 132
-----------------------------------------------
International
Canada 17 6 - - -
Egypt 5 8 8 8 5
Indonesia - - - - 10
Gabon 9 5 - - -
Norway - 1 2 3 2
Tunisia - - - - 2
United Kingdom 31 41 39 48 54
-----------------------------------------------
Total International 62 61 49 59 73
-----------------------------------------------
Consolidated 207 196 164 181 205
Equity affiliate(a) 1 - - - -
-----------------------------------------------
Total 208 196 164 181 205
Natural gas liquids included in above 19 17 17 17 17
--------------------------------------------------------------------------------------------------------------------
NET NATURAL GAS PRODUCTION (millions of cubic feet per day)
United States (by region)
Alaska 148 144 151 145 133
Gulf Coast 107 84 78 88 94
Southern 178 208 189 161 142
Central 134 117 119 109 105
Mid-Continent 129 125 125 122 112
Rocky Mountain 59 66 60 51 48
-----------------------------------------------
Total United States 755 744 722 676 634
-----------------------------------------------
International
Canada 150 65 - - -
Egypt 13 16 11 13 15
Ireland 132 168 228 259 269
Norway 26 27 54 87 81
United Kingdom - equity 168 165 130 140 98
- other(b) 16 23 32 32 35
-----------------------------------------------
Total International 505 464 455 531 498
-----------------------------------------------
Consolidated 1,260 1,208 1,177 1,207 1,132
Equity affiliate(c) 36 33 42 45 44
-----------------------------------------------
Total 1,296 1,241 1,219 1,252 1,176
--------------------------------------------------------------------------------------------------------------------
AVERAGE SALES PRICES
Liquid Hydrocarbons (dollars per barrel)(d)(e)
United States $15.44 $10.42 $16.88 $18.58 $14.59
International 16.90 12.24 18.77 20.34 16.66
Natural Gas (dollars per thousand cubic feet)(d)(e)
United States $ 1.90 $ 1.79 $ 2.20 $ 2.09 $ 1.63
International 1.90 1.94 2.00 1.97 1.80
--------------------------------------------------------------------------------------------------------------------
NET PROVED RESERVES AT YEAR-END (developed and undeveloped)
Liquid Hydrocarbons (millions of barrels)
United States 520 549(f) 590(f) 570(f) 558
International 277 316 187 203 206
-----------------------------------------------
Consolidated 797 865 777 773 764
Equity affiliate(a) 77 80 82 - -
-----------------------------------------------
Total 874 945 859 773 764
Developed reserves as % of total net reserves 81% 71%(f) 77%(f) 80%(f) 88%
--------------------------------------------------------------------------------------------------------------------
Natural Gas (billions of cubic feet)
United States 2,057 2,163(f) 2,232(f) 2,251(f) 2,210
International 1,607 1,796 1,071 1,199 1,379
-----------------------------------------------
Consolidated 3,664 3,959 3,303 3,450 3,589
Equity affiliate(c) 123 110 111 132 131
-----------------------------------------------
Total 3,787 4,069 3,414 3,582 3,720
Developed reserves as % of total net reserves 75% 79% 83% 83% 80%
--------------------------------------------------------------------------------------------------------------------
(a) Represents Marathon's equity interest in Sakhalin Energy
Investment Company Ltd. and CLAM Petroleum B.V.
(b) Represents gas acquired for injection and subsequent resale.
(c) Represents Marathon's equity interest in CLAM Petroleum B.V.
(d) Prices exclude gains/losses from hedging activities.
(e) Prices exclude equity affiliates and purchase/resale gas.
(f) Revised to exclude reserves attributable to a pressure
maintenance program for the Petronius field scheduled to
commence in third quarter 2000.
U-35
FIVE-YEAR OPERATING SUMMARY - MARATHON GROUP CONTINUED
1999(a) 1998(a) 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
U.S. REFINERY OPERATIONS (thousands of barrels per day)
In-use crude oil capacity at year-end 935 935 575 570 570
Refinery runs - crude oil refined 888 894 525 511 503
- other charge and blend stocks 139 127 99 96 94
In-use crude oil capacity utilization rate 95% 96% 92% 90% 88%
-----------------------------------------------------------------------------------------------------------
SOURCE OF CRUDE PROCESSED (thousands of barrels per day)
United States 349 317 202 229 254
Europe 7 15 10 12 6
Middle East and Africa 363 394 241 193 183
Other International 169 168 72 79 58
--------------------------------------------
Total 888 894 525 513 501
-----------------------------------------------------------------------------------------------------------
REFINED PRODUCT YIELDS (thousands of barrels per day)
Gasoline 566 545 353 345 339
Distillates 261 270 154 155 146
Propane 22 21 13 13 12
Feedstocks and special products 66 64 36 35 38
Heavy fuel oil 43 49 35 30 31
Asphalt 69 68 39 36 36
----------------------------------------------
Total 1,027 1,017 630 614 602
-----------------------------------------------------------------------------------------------------------
REFINED PRODUCTS YIELDS (% breakdown)
Gasoline 55% 54% 56% 56% 57%
Distillates 25 27 24 25 24
Other products 20 19 20 19 19
--------------------------------------------
Total 100% 100% 100% 100% 100%
-----------------------------------------------------------------------------------------------------------
U.S. REFINED PRODUCT SALES (thousands of barrels per day)
Gasoline 714 671 452 468 445
Distillates 331 318 198 192 180
Propane 23 21 12 12 12
Feedstocks and special products 66 67 40 37 44
Heavy fuel oil 43 49 34 31 31
Asphalt 74 72 39 35 35
----------------------------------------------
Total 1,251 1,198 775 775 747
Matching buy/sell volumes included in above 45 39 51 71 47
-----------------------------------------------------------------------------------------------------------
REFINED PRODUCTS SALES BY CLASS OF TRADE (as a % of
total sales)
Wholesale - independent private-brand
marketers and consumers 66% 65% 61% 62% 61%
Marathon and Ashland brand jobbers and dealers 11 11 13 13 13
Speedway SuperAmerica retail outlets 23 24 26 25 26
--------------------------------------------
Total 100% 100% 100% 100% 100%
-----------------------------------------------------------------------------------------------------------
REFINED PRODUCTS (dollars per barrel)
Average sales price $24.59 $20.65(b) $26.38 $27.43 $23.80
Average cost of crude oil throughput 18.66 13.02 19.00 21.94 18.09
-----------------------------------------------------------------------------------------------------------
PETROLEUM INVENTORIES AT YEAR-END (thousands of barrels)
Crude oil, raw materials and natural gas liquids 34,255 35,630 19,351 20,047 22,224
Refined products 32,853 32,334 20,598 21,283 22,102
-----------------------------------------------------------------------------------------------------------
U.S. REFINED PRODUCT MARKETING OUTLETS AT YEAR-END
MAP operated terminals 93 88 51 51 51
Retail - Marathon and Ashland brand outlets 3,482 3,117 2,465 2,392 2,380
- Speedway SuperAmerica outlets 2,433 2,257 1,544 1,592 1,627
-----------------------------------------------------------------------------------------------------------
PIPELINES (miles of common carrier pipelines)(c)
Crude Oil - gathering lines 557 2,827 1,003 1,052 1,115
- trunklines 4,720 4,859 2,665 2,665 2,666
Products - trunklines 2,856 2,861 2,310 2,310 2,311
----------------------------------------------
Total 8,133 10,547 5,978 6,027 6,092
-----------------------------------------------------------------------------------------------------------
PIPELINE BARRELS HANDLED (millions)(d)
Crude Oil - gathering lines 30.4 47.8 43.9 43.2 43.8
- trunklines 545.7 571.9 369.6 378.7 371.3
Products - trunklines 331.9 329.7 262.4 274.8 252.3
----------------------------------------------
Total 908.0 949.4 675.9 696.7 667.4
-----------------------------------------------------------------------------------------------------------
RIVER OPERATIONS
Barges - owned/leased 169 169 - - -
Boats - owned/leased 8 8 - - -
-----------------------------------------------------------------------------------------------------------
(a) 1999 and 1998 statistics include 100% of MAP and
should be considered when compared to prior periods.
(b) Reclassified to conform to 1999 classifications.
(c) Pipelines for downstream operations also include
non-common carrier, leased and equity affiliates.
(d) Pipeline barrels handled on owned common carrier
pipelines, excluding equity affiliates.
U-36
FIVE-YEAR OPERATING SUMMARY - U. S. STEEL GROUP
(THOUSANDS OF NET TONS, UNLESS OTHERWISE NOTED) 1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
RAW STEEL PRODUCTION
Gary, IN 7,102 6,468 7,428 6,840 7,163
Mon Valley, PA 2,821 2,594 2,561 2,746 2,740
Fairfield, AL 2,109 2,152 2,361 1,862 2,260
------------------------------------------------------
Total 12,032 11,214 12,350 11,448 12,163
----------------------------------------------------------------------------------------------------------
RAW STEEL CAPABILITY
Continuous cast 12,800 12,800 12,800 12,800 12,500
Total production as % of total capability 94.0 87.6 96.5 89.4 97.3
----------------------------------------------------------------------------------------------------------
HOT METAL PRODUCTION 10,344 9,743 10,591 9,716 10,521
----------------------------------------------------------------------------------------------------------
COKE PRODUCTION(a) 4,619 4,835 5,757 6,777 6,770
----------------------------------------------------------------------------------------------------------
IRON ORE PELLETS - MINNTAC, MN
Shipments 15,025 15,446 16,403 14,962 15,218
----------------------------------------------------------------------------------------------------------
COAL PRODUCTION 6,632 8,150 7,528 7,283 7,509
----------------------------------------------------------------------------------------------------------
COAL SHIPMENTS 6,924 7,670 7,811 7,117 7,502
----------------------------------------------------------------------------------------------------------
STEEL SHIPMENTS BY PRODUCT
Sheet and semi-finished steel products 8,114 7,608 8,170 8,677 8,721
Tubular, plate and tin mill products 2,515 3,078 3,473 2,695 2,657
------------------------------------------------------
Total 10,629 10,686 11,643 11,372 11,378
Total as % of domestic steel industry 10.1 10.5 10.9 11.3 11.7
----------------------------------------------------------------------------------------------------------
STEEL SHIPMENTS BY MARKET
Steel service centers 2,456 2,563 2,746 2,831 2,564
Transportation 1,505 1,785 1,758 1,721 1,636
Further conversion:
Joint ventures 1,818 1,473 1,568 1,542 1,332
Trade customers 1,633 1,140 1,378 1,227 1,084
Containers 738 794 856 874 857
Construction 844 987 994 865 671
Oil, gas and petrochemicals 363 509 810 746 748
Export 321 382 453 493 1,515
All other 951 1,053 1,080 1,073 971
------------------------------------------------------
Total 10,629 10,686 11,643 11,372 11,378
----------------------------------------------------------------------------------------------------------
AVERAGE STEEL PRICE PER TON $420 $469 $479 $467 $466
----------------------------------------------------------------------------------------------------------
(a) The reduction in coke production after 1996
reflected U. S. Steel's entry into a strategic
partnership with two limited partners on June 1,
1997, to acquire an interest in three coke batteries
at its Clairton (Pa.) Works.
U-37
FIVE-YEAR FINANCIAL SUMMARY
(DOLLARS IN MILLIONS, EXCEPT AS NOTED) 1999(a) 1998(a) 1997 1996 1995
---------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Revenues $ 29,583 $ 28,237(b) $22,680(b) $ 22,872(b) $ 20,293(b)
Income from operations 1,863 1,517 1,705 1,779 726
Includes:
Inventory market valuation charges (credits) (551) 267 284 (209) (70)
Gain on ownership change in MAP (17) (245) - - -
Impairment of long-lived assets - - - - 675
Income from continuing operations $ 705 $ 674 $ 908 $ 946 $ 217
Income from discontinued operations - - 80 6 4
Extraordinary losses (7) - - (9) (7)
-----------------------------------------------------------
NET INCOME $ 698 $ 674 $ 988 $ 943 $ 214
---------------------------------------------------------------------------------------------------------------
APPLICABLE TO MARATHON STOCK
Income (loss) before extraordinary loss $ 654 $ 310 $ 456 $ 671 $ (87)
Income (loss) before extraordinary loss
per share - basic (in dollars) 2.11 1.06 1.59 2.33 (.31)
- diluted (in dollars) 2.11 1.05 1.58 2.31 (.31)
Net income (loss) 654 310 456 664 (92)
Net income (loss) per share - basic (in dollars) 2.11 1.06 1.59 2.31 (.33)
- diluted (in dollars) 2.11 1.05 1.58 2.29 (.33)
Dividends paid per share (in dollars) .84 .84 .76 .70 .68
--------------------------------------------------------------------------------------------------------------
APPLICABLE TO STEEL STOCK
Income before extraordinary losses $ 42 $ 355 $ 449 $ 253 $ 279
Income before extraordinary losses
per share - basic (in dollars) .48 4.05 5.24 3.00 3.53
- diluted (in dollars) .48 3.92 4.88 2.97 3.43
Net income 35 355 449 251 277
Net income per share - basic (in dollars) .40 4.05 5.24 2.98 3.51
- diluted (in dollars) .40 3.92 4.88 2.95 3.41
Dividends paid per share (in dollars) 1.00 1.00 1.00 1.00 1.00
--------------------------------------------------------------------------------------------------------------
BALANCE SHEET POSITION AT YEAR-END
Cash and cash equivalents $ 133 $ 146 $ 54 $ 55 $ 131
Total assets 22,962 21,133 17,284 16,980 16,743
Capitalization:
Notes payable $ - $ 145 $ 121 $ 81 $ 40
Total long-term debt 4,283 3,991 3,403 4,212 4,937
Preferred stock of subsidiary and
trust preferred securities 433 432 432 250 250
Minority interest in MAP 1,753 1,590 - - -
Redeemable Delhi Stock - - 195 - -
Preferred stock 3 3 3 7 7
Common stockholders' equity 6,853 6,402 5,397 5,015 4,321
----------------------------------------------------------
Total capitalization $ 13,325 $ 12,563 $ 9,551 $ 9,565 $ 9,555
--------------------------------------------------------------------------------------------------------------
% of total debt to capitalization(c) 35.4 36.4 41.4 47.5 54.7
--------------------------------------------------------------------------------------------------------------
CASH FLOW DATA
Net cash from operating activities $ 1,936 $ 2,022(b) $ 1,464(b) $ 1,655(b) $ 1,631(b)
Capital expenditures 1,665 1,580 1,373 1,168 1,016
Disposal of assets 366 86 481 443 157
Dividends paid 354 342 316 307 295
--------------------------------------------------------------------------------------------------------------
EMPLOYEE DATA
Total employment costs(d)(e) $ 2,582 $ 2,372 $ 2,289 $ 2,179 $ 2,186
Average number of employees(d)(e) 52,596 44,860 41,620 41,553 42,133
Number of pensioners at year-end 100,504(f) 95,429 97,051 99,713 102,449
--------------------------------------------------------------------------------------------------------------
(a) 1999 and 1998 statistics, other than employee data,
include 100% of MAP, which should be considered when
making comparisons to prior periods.
(b) Reclassified to conform to 1999 classifications.
(c) Total debt represents the sum of notes payable,
total long-term debt and preferred stock of
subsidiary and trust preferred securities.
(d) Excludes the Delhi Companies sold in 1997.
(e) Data for 1998 includes Ashland employees from the
date of their payroll transfer to MAP, which
occurred at various times throughout 1998. These
employees were contracted to MAP in 1998, prior to
their payroll transfer.
(f) Includes approximately 8,000 surviving spouse
beneficiaries added to the U. S. Steel pension plan
in 1999.
U-38
MANAGEMENT'S DISCUSSION AND ANALYSIS
USX Corporation ("USX") is a diversified company engaged
primarily in the energy business through its Marathon Group,
and in the steel business through its U. S. Steel Group.
Effective October 31, 1997, USX sold Delhi Gas Pipeline
Corporation and other subsidiaries of USX that comprised all of
the USX - Delhi Group ("Delhi Companies"). On January 26, 1998,
USX used the $195 million net proceeds from the sale to redeem
all of the 9.45 million outstanding shares of USX - Delhi Group
Common Stock. For additional information, see Note 5 to the USX
Consolidated Financial Statements.
During 1997, Marathon Oil Company ("Marathon") and Ashland
Inc. ("Ashland") agreed to combine the major elements of their
refining, marketing and transportation ("RM&T") operations. On
January 1, 1998, Marathon transferred certain RM&T net assets to
Marathon Ashland Petroleum LLC ("MAP"), a new consolidated
subsidiary. Also on January 1, 1998, Marathon acquired certain
RM&T net assets from Ashland in exchange for a 38 percent
interest in MAP. Financial measures such as revenues, income
from operations and capital expenditures in 1999 and 1998
include 100 percent of MAP and are not comparable to prior
period amounts. Income from continuing operations, net income
and related per share amounts for 1999 and 1998 are net of the
minority interest. For further discussion of MAP and pro forma
information, see Note 3 to the USX Consolidated Financial
Statements.
On August 11, 1998, Marathon acquired Tarragon Oil and Gas
Limited ("Tarragon"), a Canadian oil and gas exploration and
production company. The purchase price included $686 million in
cash payments, the assumption of $345 million in debt and the
issuance of Exchangeable Shares of an indirect Canadian
subsidiary of Marathon valued at $29 million. The Exchangeable
Shares are exchangeable at any time on a one-for-one basis for
shares of USX - Marathon Group Common Stock ("Marathon Stock").
On November 4, 1998, USX sold 17 million shares of Marathon
Stock. The proceeds to USX of $528 million, were used to reduce
indebtedness incurred to fund the Tarragon acquisition.
Financial measures such as revenues, income from operations and
capital expenditures in 1999 and 1998 include operations of
Marathon Canada Limited, formerly known as Tarragon, commencing
August 12, 1998. For further discussion of Tarragon and pro
forma information, see Note 3 to the USX Consolidated Financial
Statements.
Management's Discussion and Analysis of USX Consolidated
Financial Statements provides certain information about the
Marathon and U. S. Steel Groups, particularly in Management's
Discussion and Analysis of Operations by Group. More expansive
Group information is provided in Management's Discussion and
Analysis of the Marathon Group and U. S. Steel Group, which are
included in the USX 1999 Form 10-K. Management's Discussion and
Analysis should be read in conjunction with the USX Consolidated
Financial Statements and Notes to the USX Consolidated Financial
Statements.
Certain sections of Management's Discussion and Analysis
include forward-looking statements concerning trends or events
potentially affecting USX. These statements typically contain
words such as "anticipates", "believes", "estimates", "expects"
or similar words indicating that future outcomes are uncertain.
In accordance with "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, these statements are
accompanied by cautionary language identifying important
factors, though not necessarily all such factors, that could
cause future outcomes to differ materially from those set forth
in the forward-looking statements. For additional risk factors
affecting the businesses of USX, see Supplementary Data -
Disclosures About Forward-Looking Statements in the USX 1999
Form 10-K.
U-39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INCOME
REVENUES for each of the last three years are summarized in
the following table:
(DOLLARS IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Revenues(a)(b)
Marathon Group $ 24,327 $ 21,977 $ 15,846
U. S. Steel Group 5,314 6,283 6,941
Eliminations (58) (23) (107)
-------- -------- --------
Total USX Corporation revenues 29,583 28,237 22,680
Less:
Matching crude oil and refined product buy/sell transactions(c) 3,539 3,948 2,436
Consumer excise taxes on petroleum products and merchandise(c) 3,973 3,824 2,828
-------- -------- --------
Revenues adjusted to exclude above items $ 22,071 $ 20,465 $ 17,416
-----------------------------------------------------------------------------------------------------------
(a) Consists of sales, dividend and affiliate income, gain on
ownership change in MAP, net gains on disposal of assets
and other income.
(b) Effective October 31, 1997, USX sold the Delhi Companies.
Excludes revenues of the Delhi Companies, which have been
classified as discontinued operations for 1997.
(c) Included in both revenues and costs and expenses for the
Marathon Group and USX Consolidated, resulting in no effect
on income.
Adjusted revenues increased by $1,606 million in 1999
compared with 1998, reflecting an 18 percent increase for the
Marathon Group, partially offset by a 15 percent decrease for
the U. S. Steel Group. Adjusted revenues increased by $3,049
million in 1998 compared with 1997, reflecting a 34 percent
increase for the Marathon Group, partially offset by a 9 percent
decrease for U. S. Steel Group. For further discussion, see
Management's Discussion and Analysis of Operations by Group,
herein.
INCOME FROM OPERATIONS for each of the last three years are
summarized in the following table:
(DOLLARS IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Reportable segments
Marathon Group
Exploration & production $ 618 $ 278 $ 773
Refining, marketing & transportation 611 896 563
Other energy related businesses 61 33 48
-------- -------- --------
Income for reportable segments - Marathon Group 1,290 1,207 1,384
U. S. Steel Group
U. S. Steel Operations (128) 330 618
-------- -------- --------
Income for reportable segments - USX Corporation 1,162 1,537 2,002
Items not allocated to reportable segments:
Marathon Group 423 (269) (452)
U. S. Steel Group 278 249 155
-------- -------- --------
Total income from operations - USX Corporation $ 1,863 $ 1,517 $ 1,705
-----------------------------------------------------------------------------------------------------------
Income from operations increased $346 million in 1999
compared with 1998 and decreased $188 million in 1998 compared
with 1997. The increase in 1999 was mainly attributable to
higher income for the Marathon Group mainly due to higher
worldwide liquid hydrocarbon prices. Income from operations for
the U. S. Steel Group declined in 1999 due primarily to a $49
per ton decrease in average realized prices related to the high
levels of imports and weak tubular markets that continued in
1999. For further discussion, see Management's Discussion and
Analysis of Operations by Group, herein.
U-40
NET INTEREST AND OTHER FINANCIAL COSTS for each of the last
three years are summarized in the following table:
(DOLLARS IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Interest and other financial income $ 3 $ 39 $ 5
Interest and other financial costs 365 318 352
-------- -------- --------
Net interest and other financial costs 362 279 347
Less:
Favorable adjustment to
carrying value of indexed debt(a) (13) (44) (10)
-------- -------- --------
Net interest and other financial costs
adjusted to exclude above item $ 375 $ 323 $ 357
-----------------------------------------------------------------------------------------------------------
(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. ("RTI") or
for the equivalent amount of cash, at USX's option. The
carrying value of indexed debt was adjusted quarterly to
settlement value based on changes in the value of RTI common
stock. Any resulting adjustment was charged or credited to
income and included in interest and other financial costs.
In 1999, USX irrevocably deposited with a trustee the RTI
common stock resulting in satisfaction of USX's obligation.
For further information see Note 8 to the USX Consolidated
Financial Statements.
Excluding the effect of the adjustment to the carrying
value of indexed debt, net interest and other financial costs
increased by $52 million in 1999 compared with 1998, and
decreased by $34 million in 1998 compared with 1997. The
increase in 1999 was primarily due to lower interest income and
increased financial costs as a result of higher average debt
levels. The decrease in 1998 was primarily due to increased
interest income levels and increased capitalized interest on
exploration and production projects, partially offset by
increased interest costs resulting from higher average debt
levels. For additional information, see Note 7 to the USX
Consolidated Financial Statements.
The PROVISION FOR ESTIMATED INCOME TAXES was $349 million
in 1999, compared with $315 million in 1998 and $450 million in
1997. The 1999 provision included a $23 million favorable
adjustment to deferred taxes for the Marathon Group related to
the outcome of a United States Tax Court case. The 1998 income
tax provision included $33 million of favorable income tax
accrual adjustments relating to foreign operations. For
reconciliation of the federal statutory rate to total provisions
on income from continuing operations, see Note 12 to the USX
Consolidated Financial Statements.
INCOME FROM DISCONTINUED OPERATIONS in 1997 reflects after
tax income of the Delhi Group. Income in 1997 included an $81
million gain on disposal of the Delhi Companies (net of income
taxes). For additional discussion, see Note 5 to the USX
Consolidated Financial Statements.
EXTRAORDINARY LOSS of $7 million, net of income tax benefit,
in 1999 included a $5 million loss resulting from the
satisfaction of the indexed debt and a $2 million loss that was
USX's share of Republic Technologies International, LLC's
extraordinary loss related to the early extinquishment of debt.
For additional information, see Note 8 to the USX Consolidated
Financial Statements.
NET INCOME was $698 million in 1999, $674 million in 1998
and $988 million in 1997. Excluding the gain on change of
ownership in MAP in 1999 and 1998, the effects of the $81
million gain on disposal related to discontinued operations in
1997, and adjustments to the inventory market valuation reserve
in each of 1999, 1998 and 1997, net income decreased by $152
million in 1999 compared with 1998, and decreased by $462
million in 1998 compared with 1997.
NONCASH CREDIT FROM EXCHANGE OF PREFERRED STOCK was $10
million, or 12 cents per share of Steel Stock, in 1997. In
May 1997, USX exchanged 3.9 million 6.75% Convertible Quarterly
Income Preferred Securities ("Trust Preferred Securities") of
USX Capital Trust I for an equivalent number of
U-41
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 and the fair value of the Trust Preferred
Securities at the date of the exchange. For additional
information, see Note 23 to the USX Consolidated Financial
Statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, CASH FLOWS AND
LIQUIDITY
CURRENT ASSETS increased by $1,771 million from year-end
1998, primarily reflecting increased receivables as the result
of higher commodity prices and the expiration of the U. S.
Steel Group's accounts receivable program. Inventories increased
by $619 million largely due to the reversal of the market
valuation reserve for oil inventories. For further discussion of
the inventory market valuation reserve, see Note 17 to the USX
Consolidated Financial Statements.
CURRENT LIABILITIES increased by $697 million from year-end
1998, primarily due to an increase in accounts payable reflecting
higher year-end commodity prices for the Marathon Group and the
impact of costs associated with higher production levels in the
latter part of 1999 compared with the same 1998 period for the
U. S. Steel Group, partially offset by a decrease in notes
payable.
NET PROPERTY, PLANT AND EQUIPMENT decreased by $120 million
from year-end 1998, primarily due to depreciation,
reclassifications to assets held for disposal and asset sales,
including Scurlock Permian LLC and Carnegie Natural Gas Company
and affiliated subsidiaries, partially offset by the acquisition
of certain Ultramar Diamond Shamrock ("UDS") assets and the
purchase of Kobe Steel, Ltd.'s 50% membership interest in Lorain
Tubular Company LLC.
TOTAL LONG-TERM DEBT AND NOTES PAYABLE increased by $147
million from year-end 1998, mainly reflecting borrowings for the
U. S. Steel Group accounts receivables facility, the addition of
the 6.65% Notes due 2006 and an increase in commercial paper
borrowings partially offset by a decrease in revolving credit
agreements and notes payable. For further discussion of the U. S.
Steel Group accounts receivable facility, see Note 16 to the USX
Consolidated Financial Statements.
STOCKHOLDERS' EQUITY increased by $451 million from year-end
1998 mainly reflecting net income of $698 million, partially
offset by dividends paid.
NET CASH PROVIDED FROM OPERATING ACTIVITIES was $1,936
million in 1999, $2,022 million in 1998 and $1,464 million in
1997. Cash provided from operating activities in 1999 included
a $320 million payment resulting from the expiration of the
U. S. Steel Group's accounts receivable program and a $20
million payment to fund the Voluntary Employee Benefit
Association Trust ("VEBA"). Cash provided from operating
activities in 1998 included proceeds of $38 million for the
insurance litigation settlement pertaining to the 1995 Gary
Works #8 blast furnace explosion. Cash provided from operating
activities in 1997 included a payment of $390 million resulting
from termination of a Marathon Group and Delhi Group accounts
receivable sales program, payments of $199 million to fund
employee benefit plans related to the U. S. Steel Group, and
insurance recoveries of $40 million related to a 1996 hearth
breakout at the Gary Works No. 13 blast furnace. Excluding the
effects of these adjustments, cash provided from operating
activities increased by $292 million in 1999 compared with 1998
primarily due to favorable working capital changes. Cash
provided from operating activities decreased by $29 million in
1998 compared with 1997, primarily due to lower net income and
unfavorable working capital changes.
U-42
CAPITAL EXPENDITURES for each of the last three years are
summarized in the following table:
(DOLLARS IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Marathon Group
Exploration & production
Domestic $ 356 $ 652 $ 647
International 388 187 163
Refining, marketing & transportation 612 410 205
Other 22 21 23
-------- -------- --------
Subtotal Marathon Group 1,378 1,270 1,038
U. S. Steel Group 287 310 261
Discontinued operations - - 74
-------- -------- --------
Total USX Corporation capital expenditures $ 1,665 $ 1,580 $ 1,373
-----------------------------------------------------------------------------------------------------------
Marathon Group's domestic exploration and production capital
expenditures in 1999 mainly included the completion of Green
Canyon Blocks 112 and 113 ("Angus") and additional development
at South Pass 89 in the Gulf of Mexico and natural gas
developments in East Texas and other gas basins throughout the
western United States. International exploration and production
projects included the completion of the Tchatamba South
development located offshore Gabon and oil and natural gas
developments in Canada. Refining, marketing and transportation
capital expenditures by MAP consisted of the acquisition of
certain UDS assets in Michigan, upgrades and expansions of
retail marketing outlets, refinery modifications and expansion
and enhancement of logistic systems.
U. S. Steel Group's capital expenditures in 1999 included
the completion of the new 64" pickle line at Mon Valley Works;
the replacement of three coilers at the Gary hot strip mill; an
upgrade to the Mon Valley cold rolling mill; replacement of coke
battery thruwalls at Gary Works; several projects at Gary Works
allowing for production of high strength steel, primarily for the
automotive market; and completion of the conversion of the
Fairfield pipemill to use rounds instead of square blooms.
CAPITAL EXPENDITURES IN 2000 are expected to be approximately
$1.6 billion. Expenditures for the Marathon Group are expected to
be approximately $1.4 billion. Domestic exploration and
development projects planned for 2000 include completion of the
Petronius development in the Gulf of Mexico, various producing
property acquisitions and continued natural gas developments in
East Texas and other gas basins throughout the western United
States. International exploration and development projects
include the Tchatamba West development, located offshore Gabon
and continued oil and natural gas developments in Canada.
Refining, marketing and transportation spending by MAP will
primarily consist of upgrades and expansions of retail marketing
outlets, refinery improvements, including the delayed coker unit
project at the Garyville refinery, and expansion and enhancement
of logistic systems.
Capital expenditures for the U. S. Steel Group in 2000 are
expected to be approximately $230 million. Planned projects
include continued coke battery thruwall repairs at Gary Works,
installation of the remaining two coilers at Gary's hot strip
mill, a blast furnace stove replacement at Gary Works and a Mon
Valley cold mill upgrade.
INVESTMENTS IN AFFILIATES of $74 million in 1999 mainly
reflected development spending for the Sakhalin II project in
Russia and the investment in Republic Technologies International,
Inc.
In 2000, net investments in affiliates are expected to be
approximately $100 million. Projected investments include
continued development of the Sakhalin II project.
Contract commitments to acquire property, plant and equipment
and long-term investments at December 31, 1999, totaled $568
million compared with $812 million at December 31, 1998.
U-43
The above statements with respect to capital expenditures
and investments are forward-looking statements reflecting
management's best estimates based on information currently
available. To the extent this information proves to be
inaccurate, the timing and levels of future expenditures and
investments could differ materially from those included in the
forward-looking statements. Factors that could cause future
capital expenditures and investments to differ materially
include changes in industry supply and demand, general economic
conditions, the availability of business opportunities and
levels of cash flow from operations for each of the Groups. The
timing of completion or cost of particular capital projects
could be affected by unforeseen hazards such as weather
conditions, explosions or fires, or by delays in obtaining
government or partner approval. In addition, levels of
investments may be affected by the ability of equity affiliates
to obtain third-party financing.
PROCEEDS FROM DISPOSAL OF ASSETS were $366 million in 1999,
compared with $86 million in 1998 and $481 million in 1997.
Proceeds in 1999 primarily reflected the Marathon Group's sales
of Scurlock Permian LLC, over 150 non-strategic domestic and
international production properties and Carnegie Natural Gas
Company and affiliated subsidiaries. Proceeds in 1997 included
$361 million resulting from USX's entry into a strategic
partnership with two limited partners to acquire an interest in
three coke batteries at its U. S. Steel Group's Clairton Works
and $15 million from the sale of the plate mill at the U. S.
Steel Group's former Texas Works.
The net change in RESTRICTED CASH was a net deposit of $1
million in 1999, compared with a net withdrawal of $174 million
in 1998 and a net deposit of $97 million in 1997. The $174
million net withdrawal in 1998 was primarily the result of
redeeming all of the outstanding shares of USX - Delhi Group
Common Stock with the $195 million of net proceeds from the sale
of the Delhi Companies that had been classified as restricted
cash in 1997. The net deposit of $97 million in 1997 mainly
represents the deposit of the $195 million of net proceeds from
the sale of the Delhi Companies, partially offset by cash
withdrawn from an interest-bearing escrow account established in
1996 in connection with the disposal of oil production
properties in Alaska.
REPAYMENTS OF LOANS AND ADVANCES TO AFFILIATES were $1
million in 1999 compared with $71 million in 1998 and $10 million
in 1997. In 1998, Sakhalin Energy Investment Company Ltd. repaid
advances made by Marathon in connection with the Sakhalin II
project.
FINANCIAL OBLIGATIONS (the net of commercial paper and
revolving credit arrangements, debt borrowings and repayments on
the Consolidated Statement of Cash Flows) increased $187 million
in 1999, compared with an increase of $315 million in 1998 and a
decrease of $734 million in 1997. The increase in 1999 reflects
the net effects of net cash provided from operating activities,
net cash used in investing activities, distributions to minority
shareholder of MAP and dividends paid. The increase in 1998 was
primarily the result of borrowings against revolving credit
agreements to fund the acquisition of Tarragon. The decrease in
financial obligations in 1997 primarily reflected cash flows
provided from operating activities and asset sales in excess of
cash used for capital expenditures and dividend payments (and
with respect to 1997, in excess of $219 million of cash used for
investments in affiliates).
U-44
Additions to long-term debt and the issuance of Trust
Preferred Securities for each of the last three years is
summarized in the following table:
(DOLLARS IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Aggregate principal amounts of:
6.65% Notes due 2006 $ 300 $ - $ -
6.85% Notes due 2008 - 400 -
U. S. Steel Receivables facility 350
Trust preferred securities(a) - - 182
Environmental bonds and capital leases(b) 37 280 -
--------- --------- ---------
Total $ 687 $ 680 $ 182
-----------------------------------------------------------------------------------------------------------
(a) In 1997, USX exchanged 3.9 million 6.75% Convertible
Quarterly Income Preferred Securities ("Trust Preferred
Securities") of USX Capital Trust I for an equivalent
number of shares of USX's 6.50% Cumulative Convertible
Preferred Stock. This was a noncash transaction. For
additional discussion, see Note 23 to the USX Consolidated
Financial Statements.
(b) Issued to refinance an equivalent amount of environmental
improvement refunding bonds.
In the event of a change in control of USX, debt and lease
obligations totaling $3,541 million at year-end 1999 may be
declared immediately due and payable or required to be
collateralized. See Notes 11 and 16 to the USX Consolidated
Financial Statements.
DIVIDENDS PAID increased $12 million in 1999 compared with
1998 and increased $26 million in 1998 compared with 1997. The
increase in 1998 was due primarily to a two-cents-per-share
increase in the quarterly Marathon Stock dividend rate effective
January 1998.
BENEFIT PLAN ACTIVITY
In 1999, USX contributed $20 million to the United
Steelworkers of America ("USWA") VEBA. USX contributed $49
million in 1997 to fund the U. S. Steel Group's principal
pension plan for the 1996 plan year. Also in 1997, USX
contributed $80 million for elective funding of retiree life
insurance of union and nonunion participants, and $70 million
to the VEBA. A total of $40 million of the $70 million VEBA
contribution represented prefunding for the years 1998 and 1999.
DEBT AND PREFERRED STOCK RATINGS
Standard & Poor's Corp. currently rates USX and Marathon
senior debt as investment grade at BBB-. USX's subordinated debt
and preferred stock are rated at BB+. Moody's Investors Services,
Inc., following upgrades in June 1998, currently rates USX's and
Marathon's senior debt as investment grade at Baa2, USX's
subordinated debt at Baa3 and USX's preferred stock as Ba1. Duff
& Phelps Credit Rating Co. currently rates USX's senior notes as
investment grade at BBB and USX's subordinated debt as BBB-.
DERIVATIVE INSTRUMENTS
See Quantitative and Qualitative Disclosures About Market
Risk for discussion of derivative instruments and associated
market risk.
LIQUIDITY
At December 31, 1999, USX had $300 million of borrowings
against its $2,350 million long-term revolving credit agreements
and commercial paper borrowings of $165 million. There were no
borrowings against MAP revolving credit agreements at December 31,
1999.
USX filed with the Securities and Exchange Commission a shelf
registration statement, which became effective October 20, 1999,
that allows USX to offer and issue unsecured debt securities,
common and preferred stock and warrants in an aggregate principal
amount of up to $1 billion in one
U-45
or more separate offerings on terms to be determined at the time
of sale. Including this shelf registration statement, USX had a
total of $1.678 billion available under existing shelf
registration statements at December 31, 1999.
USX management believes that its short-term and long-term
liquidity is adequate to satisfy its obligations as of
December 31, 1999, and to complete currently authorized capital
spending programs. Future requirements for USX's business needs,
including the funding of capital expenditures, debt maturities
for the years 2000, 2001 and 2002, and any amounts that may
ultimately be paid in connection with contingencies (which are
discussed in Note 27 to the USX Consolidated Financial
Statements), are expected to be financed by a combination of
internally generated funds, proceeds from the sale of stock,
borrowings or other external financing sources.
USX management's opinion concerning liquidity and USX's
ability to avail itself in the future of the financing options
mentioned in the above forward-looking statements are based on
currently available information. To the extent that this
information proves to be inaccurate, future availability of
financing may be adversely affected. Factors that affect the
availability of financing include the performance of each Group
(as indicated by levels of cash provided from operating
activities and other measures), the state of the debt and equity
markets, investor perceptions of past performance and
expectations regarding future actions and performance, the
overall U.S. financial climate, and, in particular, with respect
to borrowings, levels of USX's outstanding debt and credit
ratings by rating agencies. For a summary of long-term debt, see
Note 16 to the USX Consolidated Financial Statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF ENVIRONMENTAL MATTERS, LITIGATION AND
CONTINGENCIES
USX has incurred and will continue to incur substantial
capital, operating and maintenance, and remediation expenditures
as a result of environmental laws and regulations. To the extent
these expenditures, as with all costs, are not ultimately
reflected in the prices of USX's products and services, operating
results will be adversely affected. USX believes that domestic
competitors of the U. S. Steel Group and substantially all the
competitors of the Marathon Group are subject to similar
environmental laws and regulations. However, the specific impact
on each competitor may vary depending on a number of factors,
including the age and location of its operating facilities,
marketing areas, production processes and the specific products
and services it provides.
U-46
The following table summarizes USX's environmental
expenditures for each of the last three years(a):
(DOLLARS IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Capital
Marathon Group(b) $ 46 $ 83 $ 67
U. S. Steel Group 32 49 43
Discontinued operations - - 10
-------- -------- --------
Total capital $ 78 $ 132 $ 120
-----------------------------------------------------------------------------------------------------------
Compliance
Operating & maintenance
Marathon Group(b) $ 117 $ 126 $ 84
U. S. Steel Group 199 198 196
Discontinued operations - - 4
-------- -------- --------
Total operating & maintenance 316 324 284
Remediation(c)
Marathon Group(b) 25 10 19
U. S. Steel Group 22 19 29
-------- -------- --------
Total remediation 47 29 48
Total compliance $ 363 $ 353 $ 332
-----------------------------------------------------------------------------------------------------------
(a) Amounts for the Marathon Group are calculated based on
American Petroleum Institute survey guidelines. Amounts for
the U. S. Steel Group are based on previously established
U.S. Department of Commerce survey guidelines.
(b) Amounts in 1999 and 1998 include 100% of MAP.
(c) Amounts do not include noncash provisions recorded for
environmental remediation, but include spending charged
against such reserves, net of recoveries where permissible.
USX's environmental capital expenditures accounted for 5%,
8% and 9% of total consolidated capital expenditures in 1999,
1998 and 1997, respectively.
USX's environmental compliance expenditures averaged 1%, 1%
and 2% of total consolidated costs in 1999, 1998 and 1997,
respectively. Remediation spending primarily reflected ongoing
clean-up costs for soil and groundwater contamination associated
with underground storage tanks and piping at retail gasoline
stations, and remediation activities at former and present
operating locations.
The Resource Conservation and Recovery Act ("RCRA")
establishes standards for the management of solid and hazardous
wastes. Besides affecting current waste disposal practices, RCRA
also addresses the environmental effects of certain past waste
disposal operations, the recycling of wastes and the regulation
of storage tanks.
A significant portion of USX's currently identified
environmental remediation projects relate to the remediation of
former and present operating locations. These projects include
continuing remediation at an IN SITU uranium mining operation,
the remediation of former coke-making facilities, a closed and
dismantled refinery site and the closure of permitted hazardous
and non-hazardous waste landfills.
USX has been notified that it is a potentially responsible
party ("PRP") at 41 waste sites under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA")
as of December 31, 1999. In addition, there are 20 sites where
USX has received information requests or other indications that
USX may be a PRP under CERCLA but where sufficient information
is not presently available to confirm the existence of liability.
There are also 142 additional sites, excluding retail gasoline
stations, where remediation is being sought under other
environmental statutes, both federal and state, or where private
parties are seeking remediation through discussions or
litigation. Of these sites, 17 were associated with properties
conveyed to MAP by Ashland for which Ashland has retained
liability for all costs associated with remediation. At many of
these sites, USX is one of a
U-47
number of parties involved and the total cost of remediation, as
well as USX's share thereof, is frequently dependent upon the
outcome of investigations and remedial studies. USX accrues for
environmental remediation activities when the responsibility to
remediate is probable and the amount of associated costs is
reasonably determinable. As environmental remediation matters
proceed toward ultimate resolution or as additional remediation
obligations arise, charges in excess of those previously accrued
may be required. See Note 27 to the USX Consolidated Financial
Statements.
In October 1998, the National Enforcement Investigations
Center and Region V of the United States Environmental Protection
Agency ("EPA") conducted a multi-media inspection of MAP's
Detroit refinery. Subsequently, in November 1998, Region V
conducted a multi-media inspection of MAP's Robinson refinery.
These inspections covered compliance with the Clean Air Act
(New Source Performance Standards, Prevention of Significant
Deterioration, and the National Emission Standards for Hazardous
Air Pollutants for Benzene), the Clean Water Act (Permit
exceedances for the Waste Water Treatment Plant), reporting
obligations under the Emergency Planning and Community Right to
Know Act and the handling of process waste. Although MAP has been
advised as to certain compliance issues regarding MAP's Detroit
refinery, it is not known when complete findings on the results
of the inspections will be issued. Thus far, MAP has been served
with two Notices of Violation and three Findings of Violation in
connection with the multi-media inspections at its Detroit
refinery and one finding of violation at its Robinson refinery.
The Detroit notices allege violations of the Michigan State
Air Pollution Regulations, the EPA New Source Performance
Standards and National Emission Standards for Hazardous Air
Pollutants for benzene. The Robinson notice alleges noncompliance
with a general conduct provision as a result of acid-gas flaring
since 1994. The Robinson refinery is alleged to have routine acid
gas flaring arising from a failure to properly operate and
maintain the sulfur recovery plant and amine units. MAP can
contest the factual and legal basis for the allegations prior to
the EPA taking enforcement action. At this time, it is not known
when complete findings on the results of these multi-media
inspections will be issued.
In 1998, USX entered into a consent decree with the EPA
which resolved alleged violations of the Clean Water Act
National Pollution Discharge Elimination System ("NPDES") permit
at Gary Works and provides for a sediment remediation project
for a section of the Grand Calumet River that runs through Gary
Works. Contemporaneously, USX entered into a consent decree
with the public trustees which resolves potential liability for
natural resource damages on the same section of the Grand Calumet
River. In 1999, USX paid civil penalties of $2.9 million for the
alleged water act violations and $0.5 million in natural resource
damages assessment costs. In addition, USX will pay the public
trustees $1 million at the end of the remediation project for
future monitoring costs and USX is obligated to purchase and
restore several parcels of property that have been or will be
conveyed to the trustees. During the negotiations leading up
to the settlement with EPA, capital improvements were made to
upgrade plant systems to comply with the NPDES requirements. The
sediment remediation project is an approved final interim measure
under the corrective action program for Gary Works and is
expected to cost approximately $30 million over the next six
years. Estimated remediation and monitoring costs for this
project have been accrued.
New or expanded environmental requirements, which could
increase USX's environmental costs, may arise in the future.
USX intends to comply with all legal requirements regarding the
environment, but since many of them are not fixed or presently
determinable (even under existing legislation) and may be
affected by future legislation, it is not possible to predict
accurately the ultimate cost of compliance, including remediation
costs which may be incurred and penalties which may be imposed.
However, based on presently available information, and existing
laws and regulations as currently implemented, USX does not
anticipate that environmental compliance expenditures (including
operating and maintenance and remediation) will materially
increase in 2000. USX expects environmental capital expenditures
in 2000 to be approximately $107 million, or approximately 6% of
total estimated consolidated capital expenditures. Predictions
beyond 2000 can
U-48
only be broad-based estimates which have varied, and will
continue to vary, due to the ongoing evolution of specific
regulatory requirements, the possible imposition of more
stringent requirements and the availability of new technologies,
among other matters. Based upon currently identified projects,
USX anticipates that environmental capital expenditures in 2001
will total approximately $71 million; however, actual
expenditures may vary as the number and scope of environmental
projects are revised as a result of improved technology or
changes in regulatory requirements, and could increase if
additional projects are identified or additional requirements
are imposed.
USX is the subject of, or party to, a number of pending or
threatened legal actions, contingencies and commitments involving
a variety of matters. The ultimate resolution of these
contingencies could, individually or in the aggregate, be
material to the consolidated financial statements. However,
management believes that USX will remain a viable and competitive
enterprise even though it is possible that these contingencies
could be resolved unfavorably.
OUTLOOK AND YEAR 2000
For Outlook with respect to the Marathon Group and U. S.
Steel Group, see Management's Discussion and Analysis of
Operations by Group, herein.
For discussion of Year 2000 as it affects the Marathon Group
and the U. S. Steel Group, see Management's Discussion and
Analysis of Operations by Group, herein.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities"(SFAS No. 133).
This new Standard requires recognition of all derivatives as
either assets or liabilities at fair value. SFAS No. 133 may
result in additional volatility in both current period earnings
and other comprehensive income as a result of recording
recognized and unrecognized gains and losses resulting from
changes in the fair value of derivative instruments. The
transition adjustment resulting from adoption of SFAS No. 133
will be reported as a cumulative effect of a change in
accounting principle.
Under the new Standard, USX may elect not to designate
certain derivative instruments as hedges even if the strategy
qualifies for hedge accounting treatment. This approach would
eliminate the administrative effort needed to measure
effectiveness and monitor such instruments; however, this
approach also may result in additional volatility in current
period earnings.
USX cannot reasonably estimate the effect of adoption either
on financial position or results of operations. It is not
possible to estimate what effect this Statement will have on
future results of operations, although greater period-to-period
volatility is likely. USX plans to adopt the Standard effective
January 1, 2001.
MANAGEMENT'S DISCUSSION AND ANALYSIS BY GROUP
THE MARATHON GROUP
The Marathon Group includes Marathon Oil Company ("Marathon")
and certain other subsidiaries of USX Corporation ("USX"), which
are engaged in worldwide exploration and production of crude oil
and natural gas; domestic refining, marketing and transportation
of petroleum products primarily through Marathon Ashland
Petroleum LLC ("MAP"), owned 62 percent by Marathon; and other
energy related businesses. The Management's Discussion and
Analysis should be read in conjunction with the Marathon Group's
Financial Statements and Notes to Financial Statements.
U-49
The Marathon Group's 1999 financial performance was primarily
affected by the strong recovery in worldwide liquid hydrocarbon
prices. During 1999, Marathon focused on the acquisition of
assets with a strong strategic fit, the disposal of non-core
properties and workforce reductions through a voluntary early
retirement program. Marathon also achieved a significant
milestone when oil production commenced from the
Piltun-Astokhskoye field offshore Sakhalin Island in the Russian
Far East region on July 5, 1999.
Marathon Group REVENUES for each of the last three years are
summarized in the following table:
(DOLLARS IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Exploration & production ("E&P") $ 3,479 $ 2,270 $ 2,314
Refining, marketing & transportation ("RM&T")(a) 20,322 19,254 13,722
Other energy related businesses(b) 834 355 424
-------- -------- --------
Revenues of reportable segments 24,635 21,879 16,460
Revenues not allocated to segments:
Gain on ownership change in MAP 17 245 -
Other(c) (36) 24 -
Elimination of intersegment revenues (289) (171) (619)
Administrative revenues - - 5
-------- -------- --------
Total Group revenues $ 24,327 $ 21,977 $ 15,846
======== ======== ========
Items included in both revenues and costs and expenses,
resulting in no effect on income:
Consumer excise taxes on petroleum products and merchandise $ 3,973 $ 3,824 $ 2,828
Matching crude oil and refined product
buy/sell transactions settled in cash:
E&P $ 732 $ 340 $ 114
RM&T 2,807 3,608 2,322
-------- -------- --------
Total buy/sell transactions $ 3,539 $ 3,948 $ 2,436
-----------------------------------------------------------------------------------------------------------
(a) Amounts in 1999 and 1998 include 100 percent of MAP.
(b) Includes domestic natural gas and crude oil marketing and
transportation, and power generation.
(c) Represents in 1999 net losses on certain asset sales.
E&P segment revenues increased by $1,209 million in 1999
from 1998 following a decrease of $44 million in 1998 from 1997.
The increase in 1999 was primarily due to higher worldwide
liquid hydrocarbon prices, increased domestic liquid hydrocarbon
production and higher E&P crude oil buy/sell volumes. The
decrease in 1998 was primarily due to lower worldwide liquid
hydrocarbon prices and lower domestic natural gas prices,
partially offset by higher liquid hydrocarbon sales volumes.
RM&T segment revenues increased by $1,068 million in 1999
from 1998, mainly due to higher refined product prices,
increased volumes of refined product sales and higher merchandise
sales, partially offset by reduced crude oil sales revenues
following the sale of Scurlock Permian LLC. Beginning in 1998,
RM&T segment revenues include 100 percent of MAP revenues and
are not comparable to prior periods.
Other energy related businesses segment revenues increased
by $479 million in 1999 from 1998 following a decrease of $69
million in 1998 from 1997. The increase in 1999 was primarily
due to increased crude oil and natural gas purchase and resale
activity. The decrease in 1998 was primarily due to lower prices
associated with natural gas resale activity.
U-50
For additional discussion of revenues, see Note 10 to the
Marathon Group Financial Statements.
Marathon Group INCOME FROM OPERATIONS for each of the last
three years is summarized in the following table:
(DOLLARS IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
E&P
Domestic $ 494 $ 190 $ 500
International 124 88 273
-------- -------- --------
Income of E&P reportable segment 618 278 773
RM&T(a) 611 896 563
Other energy related businesses 61 33 48
-------- -------- --------
Income for reportable segments 1,290 1,207 1,384
Items not allocated to reportable segments
Administrative expenses(b) (108) (106) (168)
IMV reserve adjustment(c) 551 (267) (284)
Gain on ownership change & transition charges - MAP(d) 17 223 -
E&P domestic and international impairments
and gas contract settlement(e) (16) (119) -
Loss on disposal of assets(f) (36) - -
Pension settlement gain & benefit accruals(g) 15 - -
-------- -------- --------
Total income from operations $ 1,713 $ 938 $ 932
-----------------------------------------------------------------------------------------------------------
(a) Amounts in 1999 and 1998 include 100 percent of MAP.
(b) Includes the portion of the Marathon Group's administrative
costs not charged to the operating segments and the portion
of USX corporate general and administrative costs allocated
to the Marathon Group.
(c) The inventory market valuation ("IMV") reserve reflects the
extent to which the recorded LIFO cost basis of crude oil and
refined products inventories exceeds net realizable value.
For additional discussion of the IMV, see Note 20 to the
Marathon Group Financial Statements.
(d) The gain on ownership change and one-time transition charges
in 1998 relate to the formation of MAP. For additional
discussion of the gain on ownership change in MAP, see Note 5
to the Marathon Group Financial Statements.
(e) Represents in 1999 an impairment of certain domestic
properties. Represents in 1998 a write-off of certain
non-revenue producing international investments and several
exploratory wells which had encountered hydrocarbons, but had
been suspended pending further evaluation. It also includes
in 1998 a gain from the resolution of a contract dispute
with a purchaser of Marathon's natural gas production from
certain domestic properties.
(f) This represents a loss on the sale of Scurlock Permian LLC,
certain domestic production properties, Carnegie Natural Gas
Company and affiliated subsidiaries and certain Egyptian
properties.
(g) Represents a fourth quarter pension settlement gain and
various benefit accruals resulting from favorable net gains
on retirement plan settlements and the voluntary early
retirement program.
U-51
Income for reportable segments increased by $83 million in
1999 from 1998, mainly due to higher worldwide liquid hydrocarbon
prices, partially offset by lower refined product margins.
Beginning in 1998, income from operations includes 100 percent of
MAP, and Marathon Canada Limited (formerly known as Tarragon)
results of operations commencing August 12, 1998. On an unaudited
pro forma basis, assuming the acquisitions of Ashland's RM&T net
assets and Tarragon's operations had occurred on January 1, 1997,
income for reportable segments for 1997 would have been $1,728
million. Income for reportable segments decreased by $521 million
in 1998 from pro forma 1997, mainly due to lower worldwide liquid
hydrocarbon prices, lower domestic natural gas prices and lower
refining crack spreads, partially offset by higher liquid
hydrocarbon production.
AVERAGE VOLUMES AND SELLING PRICES
1999 1998 1997
-----------------------------------------------------------------------------------------------------------
(thousands of barrels per day)
Net liquids production(a) - U.S. 145 135 115
- International(b) 62 61 49
------- ------- -------
- Total Consolidated 207 196 164
- Equity affiliates(c) 1 - -
------- ------- -------
- Worldwide 208 196 164
(MILLIONS OF CUBIC FEET PER DAY)
Net natural gas production - U.S. 755 744 722
- International - equity 489 441 423
- International - other(d) 16 23 32
------- ------- -------
- Total Consolidated 1,260 1,208 1,177
- Equity affiliate(e) 36 33 42
------- ------- -------
- Worldwide 1,296 1,241 1,219
-----------------------------------------------------------------------------------------------------------
(DOLLARS PER BARREL)
Liquid hydrocarbons(a)(f) - U.S. $ 15.44 $ 10.42 $ 16.88
- International 16.90 12.24 18.77
(DOLLARS PER MCF)
Natural gas(f) - U.S. $ 1.90 $ 1.79 $ 2.20
- International - equity 1.90 1.94 2.00
-----------------------------------------------------------------------------------------------------------
(THOUSANDS OF BARRELS PER DAY)
Refined products sold(g) 1,251 1,198 775
Matching buy/sell volumes included in above 45 39 51
-----------------------------------------------------------------------------------------------------------
(a) Includes crude oil, condensate and natural gas liquids.
(b) Represents equity tanker liftings, truck deliveries and
direct deliveries.
(c) Represents Marathon's equity interest in Sakhalin
Energy Investment Company Ltd. ("Sakhalin Energy") and
CLAM Petroleum B.V. ("CLAM").
(d) Represents gas acquired for injection and subsequent resale.
(e) Represents Marathon's equity interest in CLAM.
(f) Prices exclude gains/losses from hedging activities, equity
affiliates and purchase/resale gas.
(g) In 1999 and 1998, refined products sold and matching buy/sell
volumes include 100 percent of MAP and are not comparable to
prior periods.
DOMESTIC E&P income increased by $304 million in 1999 from
1998 following a decrease of $310 million in 1998 from 1997. The
increase in 1999 was primarily due to higher liquid hydrocarbon
and natural gas prices, increased liquid hydrocarbon volumes
resulting from new production in the Gulf of Mexico and lower
exploration expense.
The decrease in 1998 was primarily due to lower liquid
hydrocarbon and natural gas prices, partially offset by increased
liquid hydrocarbon production and natural gas volumes. The 17
percent, or 20,000 barrels per day ("bpd"), increase in liquid
hydrocarbon production was mainly attributable to new production
in the Gulf of Mexico, while the increase in natural gas volumes
was mainly attributable to properties in east Texas.
U-52
INTERNATIONAL E&P income increased by $36 million in 1999
from 1998 following a decrease of $185 million in 1998 from
1997. The increase in 1999 was primarily due to higher liquid
hydrocarbon prices, partially offset by lower liquid
hydrocarbon and natural gas production in Europe and higher
exploration expense.
The decrease in 1998 was primarily due to lower liquid
hydrocarbon and natural gas prices and higher exploration and
operating expenses. These items were partially offset by
increased liquid hydrocarbon production and natural gas
volumes. The 24 percent, or 12,000 bpd, increase in liquid
hydrocarbon production was mainly attributable to the acquired
production in Canada and new production in Gabon. The increase
in natural gas volumes was mainly attributable to acquired
production in Canada.
RM&T segment income decreased by $285 million in 1999 from
1998, primarily due to lower refined product margins, partially
offset by recognized mark-to-market derivative gains, increased
refined product sales volumes, higher merchandise sales at
Speedway SuperAmerica LLC and the realization of additional
operating efficiencies as a result of forming MAP.
Beginning in 1998, RM&T segment income includes 100 percent
of MAP. On an unaudited pro forma basis, assuming the
acquisition of Ashland's RM&T net assets had occurred on
January 1, 1997, income for the reportable segments of the
combined downstream operations of Marathon and Ashland for 1997
would have been $869 million. On this basis, 1998 RM&T segment
income of $896 million was slightly higher than pro forma 1997
RM&T segment income. During 1998, the effects of lower refining
crack spreads were offset by strong performances from MAP's
asphalt and retail operations, realization of operating
efficiencies as a result of combining Marathon and Ashland's
downstream operations and lower energy costs.
OTHER ENERGY RELATED BUSINESSES segment income increased by
$28 million in 1999 from 1998 following a decrease of $15
million in 1998 from 1997. The increase in 1999 was primarily
due to higher equity earnings as a result of increased pipeline
throughput and a reversal of abandonment accruals of $10
million in 1999. The decrease in 1998 was primarily due to a
gain on the sale of an equity interest in a domestic pipeline
company included in 1997 segment income.
ITEM NOT ALLOCATED TO REPORTABLE SEGMENTS: IMV reserve
adjustment - When U. S. Steel Corporation acquired Marathon Oil
Company in March 1982, crude oil and refined product prices
were at historically high levels. In applying the purchase
method of accounting, the Marathon Group's crude oil and
refined product inventories were revalued by reference to
current prices at the time of acquisition, and this became the
new LIFO cost basis of the inventories. Generally accepted
accounting principles require that inventories be carried at
lower of cost or market. Accordingly, the Marathon Group has
established an IMV reserve to reduce the cost basis of its
inventories to net realizable value. Quarterly adjustments to
the IMV reserve result in noncash charges or credits to income
from operations.
When Marathon acquired the crude oil and refined product
inventories associated with Ashland's RM&T operations on
January 1, 1998, the Marathon Group established a new LIFO cost
basis for those inventories. The acquisition cost of these
inventories lowered the overall average cost of the Marathon
Group's combined RM&T inventories. As a result, the price
threshold at which an IMV reserve will be recorded was also
lowered.
These adjustments affect the comparability of financial
results from period to period as well as comparisons with other
energy companies, many of which do not have such adjustments.
Therefore, the Marathon Group reports separately the effects of
the IMV reserve adjustments on financial results. In
management's opinion, the effects of such adjustments should be
considered separately when evaluating operating performance.
In 1999, the IMV reserve adjustment resulted in a credit to
income from operations of $551 million compared to a charge of
$267 million in 1998, or a change of $818 million. The
favorable 1999 IMV reserve adjustment, which is almost entirely
recorded by MAP, was primarily due to the significant increase
in refined product prices experienced during 1999. For
additional discussion of the IMV reserve, see Note 20 to the
Marathon Group Financial Statements.
U-53
OUTLOOK - MARATHON GROUP
The outlook regarding the Marathon Group's upstream
revenues and income is largely dependent upon future prices and
volumes of liquid hydrocarbons and natural gas. Prices have
historically been volatile and have frequently been affected by
unpredictable changes in supply and demand resulting from
fluctuations in worldwide economic activity and political
developments in the world's major oil and gas producing and
consuming areas. Any significant decline in prices could have a
material adverse effect on the Marathon Group's results of
operations. A prolonged decline in such prices could also
adversely affect the quantity of crude oil and natural gas
reserves that can be economically produced and the amount of
capital available for exploration and development.
In 2000, worldwide liquid hydrocarbon production, including
Marathon's share of equity affiliates, is expected to increase
from 1999, to average approximately 210,000 bpd. Most of the
increase is anticipated in the second half of the year. This
primarily reflects projected new production from the start-up
of Petronius in the Gulf of Mexico in the third quarter of 2000
and one full ice-free season of production from the
Piltun-Astokhskoye ("P-A") field in Russia, partially offset by
natural production declines of mature fields. In 2001,
worldwide liquid hydrocarbon production is expected to increase
further to approximately 230,000 bpd. In 2000 and 2001,
worldwide natural gas volumes, including Marathon's share of
equity affiliates, are expected to average approximately 1.3
billion cubic feet per day ("bcfd") and 1.4 bcfd, respectively.
These projections are based on known discoveries and do not
assume any new discoveries, acquisitions or dispositions.
Progress continues on the Petronius development in the
deepwater Gulf of Mexico. In 1999, efforts focused on
rebuilding the lost platform deck module, which was dropped
during installation in 1998. Third party insurance has covered
substantially all rebuilding costs associated with this
incident. The platform module is scheduled to be completed in
the first quarter of 2000 and offshore installation should
occur in the second quarter of 2000 with first production
expected in the third quarter of 2000.
In September 1999, production commenced from the Angus
field, a three-well subsea development in the Gulf of Mexico.
In January 2000, Marathon sold its 33.34 percent interest in
the Angus development and will report a pre-tax gain of
approximately $85 million in the first quarter of 2000.
Marathon's worldwide liquid hydrocarbon production forecasts
discussed previously exclude estimated 2000 and 2001 production
from the Angus field.
On January 21, 2000, the Poseidon pipeline, a subsea
pipeline that transports Marathon's production from Ewing Bank
873, was damaged by a ship's anchor and had to be shut-in. The
pipeline was inoperable for approximately three weeks for
repairs and resulted in no production from Ewing Bank during
this period. Marathon does not expect this incident to have a
material impact on the current year's operations.
Marathon has increased its presence in the Gulf of Mexico
through extensive acquisition and analysis of 3-D seismic.
Plans are to drill eight deepwater exploratory wells in 2000.
To support this increased drilling activity, Marathon has
contracted two new deepwater rigs, capable of drilling in water
depths beyond 6,500 feet.
Marathon holds a 37.5 percent interest in Sakhalin Energy
Investment Company Ltd. ("Sakhalin Energy"), an incorporated
joint venture company responsible for the overall management of
the Sakhalin II project. This project includes development of
the P-A oil field and the Lunskoye gas-condensate field, which
are located 8-12 miles offshore Sakhalin Island in the Russian
Far East Region. The Russian State Reserves Committee has
approved estimated combined reserves for the P-A and Lunskoye
fields of 1 billion gross barrels of liquid hydrocarbons and 14
trillion cubic feet of natural gas.
U-54
In July 1999, oil production commenced from the P-A field
and the first lifting occurred on September 20, 1999. In late
September, production was shut-in following a failure of the
mooring system and resumed only for brief periods during
October and November before operations ceased for the winter in
early December. A re-designed mooring system is expected to be
installed in the second quarter of 2000 and production is
expected to resume in June 2000, the beginning of the ice-free
season. In 2000, gross production is expected to average 36,000
gross bpd (on an annualized basis). Marathon's equity share of
reserves from primary production in the Astokh Feature is 80
million barrels of oil.
Further development of the P-A field continues, including
plans to drill two appraisal and eight production wells in 2000
and to commence waterflood activity for the Astokh Feature.
With respect to the Lunskoye field, appraisal work and efforts
to secure long term gas sales markets continue. Commencement of
gas production from the Lunskoye field, which will be
contingent upon the conclusion of a gas sales contract, is
anticipated to occur in 2006 or later.
At December 31, 1999, Marathon's net investment in the
Sakhalin II project was approximately $400 million.
Other major upstream projects, which are currently underway
or under evaluation and are expected to improve future income
streams, include the Mississippi Canyon Block 348 in the Gulf
of Mexico, the Tchatamba West field, located offshore Gabon,
and various North American natural gas fields.
In 2000, Marathon launched an initiative that targets $150
million in annual, repeatable pre-tax operating efficiencies by
year-end 2001. This initiative focuses on gaining measurable,
hard-dollar improvements in revenues or expenses. Besides a
goal to constrain production costs, this initiative includes
strategic management of Marathon's portfolio of properties,
allocation of personnel and resources to assets and activities
with the greatest opportunity for return and growth, and the
adoption of enterprise-wide tools (computerization and other
new technology) to elevate workforce productivity.
The above discussion includes forward-looking statements
with respect to worldwide liquid hydrocarbon production
(including Russia for 2000) and natural gas volumes for 2000
and 2001, commencement of projects and dates of initial
production, Gulf of Mexico and Russia drilling programs, and
the amount and timing of operating efficiencies. 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, drilling rig availability, reserve
replacement rates, other geological, operating and economic
considerations, and the ability to identify sufficient
initiatives in order to generate efficiencies. In addition,
development of new production properties in countries outside
the United States may require protracted negotiations with host
governments and is frequently subject to political
considerations, such as tax regulations, which could adversely
affect the timing and economics of projects. To the extent
these assumptions prove inaccurate and/or negotiations and
other considerations are not satisfactorily resolved, actual
results could be materially different than present expectations.
Downstream income of the Marathon Group is largely
dependent upon refined product margins, which reflect the
difference between the selling prices of refined products and
the cost of raw materials refined and manufacturing costs.
Refined product margins have been historically volatile and
vary with the level of economic activity in the various
marketing areas, the regulatory climate, crude oil costs,
manufacturing costs and the available supply of crude oil and
refined products.
U-55
MAP's subsidiary, Ohio River Pipe Line LLC ("ORPL"), plans
to build a pipeline from Kenova, West Virginia to Columbus,
Ohio. ORPL is a common carrier pipeline company and the
pipeline will be an interstate common carrier pipeline. The
pipeline is expected to initially move about 50,000 bpd of
refined petroleum into the central Ohio region. Construction is
currently expected to begin in late 2000. However, the
construction schedule is largely dependent on obtaining the
necessary rights-of-way, of which over 86 percent have been
obtained to date, and final regulatory approvals.
MAP is constructing a delayed coker unit at its Garyville,
LA refinery. This unit will allow for the use of heavier, lower
cost crude and eliminate the production of heavy fuel oil. To
supply this new unit, MAP reached an agreement with P.M.I.
Comercio Internacional, S.A. de C.V., (PMI), an affiliate of
Petroleos Mexicanos, (PEMEX), to purchase approximately 90,000
bpd of heavy Maya crude oil. This is a multi-year contract,
which will begin upon completion of the delayed coker unit
which is scheduled in the fourth quarter of 2001. In addition,
a project to increase crude throughput and light product output
is being undertaken at MAP's Robinson, IL refinery and is also
expected to be completed in the fourth quarter of 2001.
The above statements with respect to pipeline and refinery
improvement projects are forward looking statements. Some
factors that could potentially cause actual results to differ
materially from present expectations include (among others) the
price of petroleum products, levels of cash flow from
operations, obtaining the necessary construction and
environmental permits, unforeseen hazards such as weather
conditions, obtaining the necessary rights-of-way and
regulatory approval constraints.
YEAR 2000
The Marathon Group encountered only minor problems during
the rollover to the Year 2000, none of which impacted
operations. Most problems were quickly corrected, while the
remaining problems were addressed by utilizing contingency
plans to prevent any business disruptions.
Essentially all business processes and systems have been
successfully operated since the rollover to the Year 2000.
However, the possibility for Year 2000 problems still exists.
Therefore, the Marathon Group plans to continue monitoring its
business processes and systems to ensure dates and date-related
information continue to be processed correctly.
Total costs associated with Year 2000 readiness were $36
million, including $18 million of incremental costs.
THE U. S. STEEL GROUP
The U. S. Steel Group includes U. S. Steel, which is
engaged in the production and sale of steel mill products,
coke, and taconite pellets; the management of mineral
resources; domestic coal mining; real estate development; and
engineering and consulting services. Certain business
activities are conducted through joint ventures and partially
owned companies, such as USS-POSCO Industries ("USS-POSCO"),
PRO-TEC Coating Company ("PRO-TEC"), Transtar, Inc.
("Transtar"), Clairton 1314B Partnership, Republic Technologies
International, LLC ("Republic") and VSZ U. S. Steel, s. r.o.
Management's Discussion and Analysis should be read in
conjunction with the U. S. Steel Group's Financial Statements
and Notes to Financial Statements.
In 1999, segment income for U. S. Steel
operations decreased primarily due to lower average steel
product prices, unfavorable product mix, and lower income from
affiliates.
U-56
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
U. S. Steel Group REVENUES for each of the last three years
are summarized in the following table.
(DOLLARS IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Sales by product:
Sheet and semi-finished steel products $ 3,345 $ 3,501 $ 3,820
Tubular, plate, and tin mill products 1,118 1,513 1,754
Raw materials (coal, coke and iron ore) 505 679 724
Other(a) 414 490 517
Income from affiliates (89) 46 69
Gain on disposal of assets 21 54 57
-------- -------- --------
Total revenues $ 5,314 $ 6,283 $ 6,941
-----------------------------------------------------------------------------------------------------------
(a) Includes revenue from the sale of steel production by-products,
engineering and consulting services, real estate development
and resource management.
Total revenues decreased by $969 million in 1999 from 1998
primarily due to lower average realized prices and lower income
from affiliates, which included a $47 million charge for the
impairment of U. S. Steel's investment in USS/Kobe Steel
Company. Net gain on disposal of assets in 1999 included a $22
million charge representing the difference between the carrying
value of the investment in RTI International Metals, Inc.
("RTI") and the carrying value of indexed debt (for additional
information, see Note 5 to the U. S. Steel Group Financial
Statements). Total revenues in 1998 decreased by $658 million
from 1997 primarily due to lower average realized prices, lower
steel shipment volumes, and lower income from affiliates.
U. S. Steel Group INCOME FROM OPERATIONS for the U. S.
Steel Group for the last three years was:
(DOLLARS IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Segment income (loss) for U. S. Steel operations(a) $ (128) $ 330 $ 618
Items not allocated to segment:
Pension credits 447 373 313
Administrative expenses (17) (24) (33)
Costs related to former business activities(b) (83) (100) (125)
Impairment of USX's investment in USS/Kobe and costs
related to formation of Republic(c) (47) - -
Loss on investment in RTI stock used to satisfy indexed
debt obligations(d) (22) - -
-------- -------- --------
Total income from operations $ 150 $ 579 $ 773
-----------------------------------------------------------------------------------------------------------
(a) Includes income from the production and sale of steel mill
products, coke and taconite pellets; the management of mineral
resources; domestic coal mining; real estate development; and
engineering and consulting services.
(b) Includes the portion of postretirement benefit costs and
certain other expenses principally attributable to former
business units of the U. S. Steel Group. Results in 1997
included charges of $9 million related to environmental
accruals and the adoption of SOP 96-1.
(c) For further details, see Note 7 to the U. S. Steel Group
Financial Statements.
(d) For further details, see Note 5 to the U. S. Steel Group
Financial Statements.
SEGMENT INCOME FOR U. S. STEEL OPERATIONS
U. S. Steel operations recorded a segment loss of
$128 million in 1999 versus segment income of $330 million in
1998, a decrease of $458 million. The 1999 segment loss
included a $10 million charge for certain environmental
accruals, a $7 million charge for certain legal accruals and $7
million in various non-recurring equity affiliate charges.
Results in 1998 included a net favorable $30 million for an
insurance litigation settlement and charges of $10 million
related to a voluntary workforce reduction plan. In addition to
the effects of these items, the decrease in segment income in
1999 for U. S. Steel operations was primarily due to lower
average steel prices, lower income from raw materials
operations, unfavorable product mix, higher pension costs and
lower income from affiliates.
U-57
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
High levels of imports and weak tubular markets continued
to negatively affect steel product prices and steel shipment
levels in 1999 as they did in 1998. U. S. Steel's average
realized price declined 10% in 1999 compared to 1998 from $469
per ton to $420 per ton. In 1999, raw steel capability
utilization averaged 94%, compared to 88% in 1998 and 97% in
1997.
Segment income for U. S. Steel operations in 1998 decreased
$288 million from 1997. Segment income in 1998 and 1997
included insurance recoveries of $30 million and $40 million,
respectively, due to blast furnace incidents in 1995 and 1996
at Gary Works. Results in 1997 included a $15 million gain on
the sale of the plate mill at U. S. Steel's former Texas Works.
In addition to the effects of these items, the decrease in
segment income in 1998 for U. S. Steel operations was primarily
due to lower average steel prices, lower shipments, less
efficient operating levels, the cost effects of a 10 day outage
at Gary Works No. 13 blast furnace following a tap hole
failure, and lower income from affiliates. These unfavorable
items were partially offset by lower 1998 accruals for profit
sharing.
Segment income for U. S. Steel operations included pension
costs (which are primarily noncash) allocated to the ongoing
operations of U. S. Steel of $219 million, $187 million, and
$169 million in 1999, 1998 and 1997, respectively. Pension
costs in 1998 included $10 million for termination benefits
associated to a voluntary early retirement program.
ITEM NOT ALLOCATED TO SEGMENT: Pension credits associated
with pension plan assets and liabilities allocated to pre-1987
retirees and former businesses are not included in segment
income for U. S. Steel operations. These pension credits, which
are primarily noncash, totaled $447 million in 1999, compared
to $373 million and $313 million in 1998 and 1997,
respectively. Pension credits in 1999 included $35 million for
a one-time favorable pension settlement primarily related to
the voluntary early retirement program for salaried employees.
Pension credits, combined with pension costs included in
segment income for U. S. Steel operations, resulted in net
pension credits of $228 million in 1999, $186 million in 1998
and $144 million in 1997. Net pension credits are expected to
be approximately $270 million in 2000. Also in 2000, U. S.
Steel's main pension plans' transition asset will be fully
amortized, decreasing the pension credit by $69 million
annually in future years for this component. Future net pension
credits can vary depending upon the market performance of plan
assets, changes in actuarial assumptions regarding such factors
as the selection of a discount rate and rate of return on plan
assets, changes in the amortization levels of transition
amounts or prior period service costs, plan amendments
affecting benefit payout levels and profile changes in the
beneficiary populations being valued. Changes in any of these
factors could cause net pension credits to change. To the
extent net pension credits decline in the future, income from
operations would be adversely affected. For additional
information on pensions, see Note 11 to the U. S. Steel Group
Financial Statements.
OUTLOOK FOR 2000 - U. S. STEEL GROUP
U. S. Steel expects that shipment volumes and average steel
product prices to be higher in 2000 compared to 1999. In recent
years, demand for steel in the United States has been at high
levels. Any weakness in the United States economy for capital
goods or consumer durables could further adversely impact U. S.
Steel Group's product prices and shipment level.
Income from equity affiliates will be negatively impacted
by losses associated with Republic. Republic has stated that it
expects to incur operating losses through 2000 and nonrecurring
charges associated with the consolidation of the combined
operations. U. S. Steel will recognize its share of any such
losses under the equity method of accounting.
In August 1999, members of the USWA ratified a new
five-year labor contract. The new labor contract, which
includes $2.00 in hourly wage increases phased in over the term
of the agreement beginning in 2000 as well as pension and other
benefit improvements for active and retired employees
U-58
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
and spouses, will result in higher labor and benefit costs for
the U. S. Steel Group each year throughout the term of the
contract. Management believes that this agreement is
competitive with labor agreements reached by U. S. Steel's
major domestic integrated competitors and thus does not believe
that U. S. Steel's competitive position with regard to such
competitors will be materially affected.
Steel imports to the United States accounted for an
estimated 26%, 30% and 24% of the domestic steel market for the
years 1999, 1998 and 1997, respectively. Steel imports of hot
rolled and cold rolled steel decreased 34% in 1999, compared to
1998. Steel imports of plates decreased 52% compared to 1998.
For most products, U. S. Steel's order books are strong and
prices are increasing. The trade cases have had a positive
impact, however, high import levels remain a problem and will
continue to affect the industry throughout the year.
The preceding statements concerning anticipated steel
demand, steel pricing, and shipment levels are forward-looking
and are based upon assumptions as to future product prices and
mix, and levels of steel production capability, production and
shipments. These forward-looking statements can be affected by
imports, domestic and international economies, domestic
production capacity, and customer demand. In the event these
assumptions prove to be inaccurate, actual results may differ
significantly from those presently anticipated.
YEAR 2000
U. S. Steel experienced only nominal problems during the
year-end rollover to the Year 2000, none of which impacted
production operations. After a planned short pause in
operations over the year-end rollover, facilities were
restarted on schedule and full production quickly resumed.
To-date, no Year 2000 related problems have been encountered
with third-parties.
Substantially all processes and systems have been run
successfully in production mode after the rollover; but until
this is complete, there is a potential for Year 2000 related
problems, especially for business systems. Accordingly, U. S.
Steel plans to continue to closely monitor the processes and
systems to ensure that dates and date-related information are
accurately represented and displayed on all output.
Total costs associated with Year 2000 project for U. S.
Steel were $28 million, including $17 million of incremental
costs.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") 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. SFAS
No. 133 may result in additional volatility in both current
period earnings and other comprehensive income as a result of
recording recognized and unrecognized gains and losses
resulting from changes in the fair value of derivative
instruments. The transition adjustment resulting from adoption
of SFAS No. 133 will be reported as a cumulative effect of a
change in accounting principle.
Under the new Standard, USX may elect not to designate
certain derivative instruments as hedges even if the strategy
qualifies for hedge accounting treatment. This approach would
eliminate the administrative effort needed to measure
effectiveness and monitor such instruments; however, this
approach also may result in additional volatility in current
period earnings.
USX cannot reasonably estimate the effect of adoption on
either the financial position or results of operations. It is
not possible to estimate what effect this Statement will have
on future results of operations, although greater
period-to-period volatility is likely. USX plans to adopt the
Standard effective January 1, 2001.
U-59
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MANAGEMENT OPINION CONCERNING DERIVATIVE INSTRUMENTS
USX uses commodity-based and foreign currency derivative
instruments to manage its price risk. Management has authorized
the use of futures, forwards, swaps and options to manage
exposure to price fluctuations related to the purchase,
production or sale of crude oil, natural gas, refined products,
nonferrous metals and electricity. For transactions that
qualify for hedge accounting, the resulting gains or losses are
deferred and subsequently recognized in income from operations,
in the same period as the underlying physical transaction.
Derivative instruments used for trading and other activities
are marked-to-market and the resulting gains or losses are
recognized in the current period in income from operations.
While USX's risk management activities generally reduce market
risk exposure due to unfavorable commodity price changes for
raw material purchases and products sold, such activities can
also encompass strategies that assume price risk.
Management believes that use of derivative instruments
along with risk assessment procedures and internal controls
does not expose USX to material risk. The use of derivative
instruments could materially affect USX's results of operations
in particular quarterly or annual periods. However, management
believes that use of these instruments will not have a material
adverse effect on financial position or liquidity. For a
summary of accounting policies related to derivative
instruments, see Note 1 to the USX Consolidated Financial
Statements.
COMMODITY PRICE RISK AND RELATED RISKS
In the normal course of its business, USX is exposed to
market risk or price fluctuations related to the purchase,
production or sale of crude oil, natural gas, refined products
and steel products. To a lesser extent, USX is exposed to the
risk of price fluctuations on coal, coke, natural gas liquids,
electricity, petroleum feedstocks and certain nonferrous metals
used as raw materials. USX is also exposed to effects of price
fluctuations on the value of its commodity inventories.
USX's market risk strategy has generally been to obtain
competitive prices for its products and services and allow
operating results to reflect market price movements dictated by
supply and demand. However, USX uses fixed-price contracts and
derivative commodity instruments to manage a relatively small
portion of its commodity price risk. USX uses fixed-price
contracts for portions of its natural gas production to manage
exposure to fluctuations in natural gas prices. In addition,
USX uses derivative commodity instruments such as
exchange-traded futures contracts and options, and
over-the-counter ("OTC") commodity swaps and options to manage
exposure to market risk related to the purchase, production or
sale of crude oil, natural gas, refined products, certain
nonferrous metals and electricity. For transactions that
qualify for hedge accounting, the resulting gains or losses are
deferred and subsequently recognized in income from operations,
in the same period as the underlying physical transaction.
Derivative instruments used for trading and other activities
are marked-to-market and the resulting gains or losses are
recognized in the current period in income from operations.
However, certain derivative commodity instruments have the
effect of restoring the equity portion of fixed-price sales of
natural gas to variable market-based pricing. These instruments
are used as part of USX's overall risk management programs.
U-60
Sensitivity analyses of the incremental effects on pretax
income of hypothetical 10% and 25% changes in commodity prices
for open derivative commodity instruments as of December 31,
1999 and December 31, 1998, are provided in the following
table:(a)
(DOLLARS IN MILLIONS)
-----------------------------------------------------------------------------------------------------------
INCREMENTAL DECREASE IN
PRETAX INCOME ASSUMING A
HYPOTHETICAL PRICE
CHANGE OF(a)
1999 1998
Derivative Commodity Instruments 10% 25% 10% 25%
-----------------------------------------------------------------------------------------------------------
Marathon Group(b)(c):
Crude oil (price increase)(d)
Trading $ 1.3 $ 7.7 $ - $ -
Other than trading 16.5 54.0 2.6 12.8
Natural gas (price decrease)(d)
Trading - - - -
Other than trading 4.7 16.8 9.4 24.0
Refined products (price increase)(d)
Trading - - - -
Other than trading 8.4 23.8 1.9 6.5
-----------------------------------------------------------------------------------------------------------
U. S. Steel Group:
Natural gas (price decrease)(d)
Other than trading $ 1.8 $ 4.6 $ 2.3 $ 5.6
Zinc (price decrease)(d)
Other than trading 2.0 5.0 1.6 3.9
Nickel (price decrease)(d)
Other than trading - - .1 .2
Tin (price decrease)(d)
Other than trading .2 .6 .1 .2
Heating oil (price decrease)(d)
Other than trading - - - .1
-----------------------------------------------------------------------------------------------------------
(a)Gains and losses on derivative commodity
instruments are generally offset by price changes in the
underlying commodity. Effects of these offsets are not
reflected in the sensitivity analyses. Amounts reflect the
estimated incremental effect on pretax income of hypothetical
10% and 25% changes in closing commodity prices for each open
contract position at December 31, 1999 and December 31, 1998.
Marathon Group and U. S. Steel Group management evaluates their
portfolios 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 December 31, 1999, would cause future
pretax income effects to differ from those presented in the
table.
(b)The number of net open contracts varied throughout 1999, from a
low of 107 contracts at July 14, to a high of 34,199 contracts
at April 16, and averaged 14,462 for the year. The derivative
commodity instruments used and hedging positions taken also
varied throughout 1999, and will continue to vary in the
future. Because of these variations in the composition of the
portfolio over time, the number of open contracts, by itself,
cannot be used to predict future income effects.
(c)The calculation of sensitivity amounts for basis swaps assumes
that the physical and paper indices are perfectly correlated.
Gains and losses on options are based on changes in intrinsic
value only.
(d)The direction of the price change used in calculating the
sensitivity amount for each commodity reflects that which would
result in the largest incremental decrease in pretax income
when applied to the derivative commodity instruments used to
hedge that commodity.
While derivative commodity instruments are generally used
to reduce risks from unfavorable commodity price movements,
they also may limit the opportunity to benefit from favorable
movements. In total, Marathon's exploration and production
operations recorded net pretax other than trading activity
gains of $3 million in 1999, losses of $3 million in 1998 and
losses of $3 million in 1997.
U-61
Marathon's refining, marketing and transportation
operations generally use derivative commodity instruments to
lock-in costs of certain raw material purchases, to protect
carrying values of inventories and to protect margins on
fixed-price sales of refined products. Marathon's refining,
marketing and transportation operations recorded net pretax
other than trading activity gains, net of the 38% minority
interest in MAP, of approximately $8 million in 1999, $28
million in 1998, and $29 million in 1997. Beginning in 1999,
Marathon's refining, marketing and transportation operations
used derivative instruments for trading activities and recorded
net pretax trading activity gains, net of the 38% minority
interest in MAP, of $5 million.
The U. S. Steel Group uses OTC commodity swaps to manage
exposure to market risk related to the purchase of natural gas,
heating oil and certain nonferrous metals. The U. S. Steel
Group recorded net pretax other than trading activity losses of
$4 million in 1999, losses of $6 million in 1998 and gains of
$5 million in 1997. These gains and losses were offset by
changes in the realized prices of the underlying hedged
commodities.
For additional quantitative information relating to
derivative commodity instruments, including aggregate contract
values and fair values, where appropriate, see Note 25 to the
USX Consolidated Financial Statements.
USX is subject to basis risk, caused by factors that affect
the relationship between commodity futures prices reflected in
derivative commodity instruments and the cash market price of
the underlying commodity. Natural gas transaction prices are
frequently based on industry reference prices that may vary
from prices experienced in local markets. For example, New York
Mercantile Exchange ("NYMEX") contracts for natural gas are
priced at Louisiana's Henry Hub, while the underlying
quantities of natural gas may be produced and sold in the
Western United States at prices that do not move in strict
correlation with NYMEX prices. To the extent that commodity
price changes in one region are not reflected in other regions,
derivative commodity instruments may no longer provide the
expected hedge, resulting in increased exposure to basis risk.
These regional price differences could yield favorable or
unfavorable results. OTC transactions are being used to manage
exposure to a portion of basis risk.
USX is subject to liquidity risk, caused by timing delays
in liquidating contract positions due to a potential inability
to identify a counterparty willing to accept an offsetting
position. Due to the large number of active participants,
liquidity risk exposure is relatively low for exchange-traded
transactions.
U-62
INTEREST RATE RISK
USX is subject to the effects of interest rate fluctuations
on certain of its non-derivative financial instruments. A
sensitivity analysis of the projected incremental effect of a
hypothetical 10% decrease in year-end 1999 and 1998 interest
rates on the fair value of USX's non-derivative financial
instruments, is provided in the following table:
(DOLLARS IN MILLIONS)
--------------------------------------------------------------------------------------------------------------------
As of December 31, 1999 1998
Incremental Incremental
Increase in Increase in
Non-Derivative Carrying Fair Fair Carrying Fair Fair
Financial Instruments(a) Value (b) Value (b) Value (c) Value (b) Value (b) Value (c)
--------------------------------------------------------------------------------------------------------------------
Financial assets:
Investments and
long-term receivables(d) $ 134 $ 190 $ - $ 124 $ 180 $ -
--------------------------------------------------------------------------------------------------------------------
Financial liabilities:
Long-term debt(e)(f) $ 4,176 $4,278 $ 164 $ 3,896 $ 4,203 $ 158
Preferred stock of subsidiary(g) 250 239 21 250 249 20
USX obligated mandatorily
redeemable convertible preferred
securities of a subsidiary trust(g) 183 169 15 182 165 13
------- ------- ----- ------- ------- -----
Total liabilities $ 4,609 $4,686 $ 200 $ 4,328 $ 4,617 $ 191
--------------------------------------------------------------------------------------------------------------------
(a)Fair values of cash and cash equivalents, receivables, notes
payable, accounts payable and accrued interest, approximate
carrying value and are relatively insensitive to changes in
interest rates due to the short-term maturity of the
instruments. Accordingly, these instruments are excluded
from the table.
(b)See Note 26 to the USX Consolidated Financial Statements.
(c)Reflects, by class of financial instrument, the estimated
incremental effect of a hypothetical 10% decrease in
interest rates at December 31, 1999 and December 31, 1998,
on the fair value of USX's non-derivative financial
instruments. For financial liabilities, this assumes a 10%
decrease in the weighted average yield to maturity of USX's
long-term debt at December 31, 1999 and December 31, 1998.
(d)For additional information, see Note 14 to the USX
Consolidated Financial Statements.
(e)Includes amounts due within one year.
(f)Fair value was based on market prices where available, or
current borrowing rates for financings with similar terms
and maturities. For additional information, see Note 16 to
the USX Consolidated Financial Statements.
(g) See Note 23 to the USX Consolidated Financial Statements.
At December 31, 1999, USX's portfolio of long-term debt was
comprised primarily of fixed-rate instruments. Therefore, the
fair value of the portfolio is relatively sensitive to effects
of interest rate fluctuations. This sensitivity is illustrated
by the $164 million increase in the fair value of long-term
debt assuming a hypothetical 10% decrease in interest rates.
However, USX's sensitivity to interest rate declines and
corresponding increases in the fair value of its debt portfolio
would unfavorably affect USX's results and cash flows only to
the extent that USX elected to repurchase or otherwise retire
all or a portion of its fixed-rate debt portfolio at prices
above carrying value.
FOREIGN CURRENCY EXCHANGE RATE RISK
USX is subject to the risk of price fluctuations related to
anticipated revenues and operating costs, firm commitments for
capital expenditures and existing assets or liabilities
denominated in currencies other than U.S. dollars. USX has not
generally used derivative instruments to manage this risk.
However, USX has made limited use of forward currency contracts
to manage exposure to certain currency price fluctuations. At
December 31, 1999, USX had open Canadian dollar forward
purchase contracts with a total carrying value of approximately
$52 million compared to $36 million at December 31, 1998. A 10%
increase in the December 31, 1999, Canadian dollar to U.S.
dollar forward rate, would result in a charge to income of
approximately $5 million. Last year, a 10% increase in the
December 31, 1998, Canadian dollar to U.S. dollar forward rate,
would have resulted in a charge to income of $3 million.
U-63
SAFE HARBOR
USX's quantitative and qualitative disclosures about market
risk include forward-looking statements with respect to
management's opinion about risks associated with USX's use of
derivative instruments. These statements are based on certain
assumptions with respect to market prices and industry supply
of and demand for crude oil, refined products, steel products
and certain raw materials. To the extent that these assumptions
prove to be inaccurate, future outcomes with respect to USX's
hedging programs may differ materially from those discussed in
the forward-looking statements.
U-64
Marathon Group
INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA,
MANAGEMENT'S DISCUSSION AND ANALYSIS, AND
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PAGE
----
Management's Report............................................................................ M-1
Audited Financial Statements:
Report of Independent Accountants............................................................ M-1
Statement of Operations...................................................................... M-2
Balance Sheet................................................................................ M-3
Statement of Cash Flows...................................................................... M-4
Notes to Financial Statements................................................................ M-5
Selected Quarterly Financial Data.............................................................. M-21
Principal Unconsolidated Affiliates............................................................ M-21
Supplementary Information...................................................................... M-21
Five-Year Operating Summary ................................................................... M-22
Five-Year Financial Summary.................................................................... M-24
Management's Discussion and Analysis........................................................... M-25
Quantitative and Qualitative Disclosures About Market Risk..................................... M-37
MANAGEMENT'S REPORT
The accompanying financial statements of the Marathon Group are
the responsibility of and have been prepared by USX Corporation
(USX) in conformity with accounting principles generally
accepted in the United States. They necessarily include some
amounts that are based on best judgments and estimates. The
Marathon Group financial information displayed in other
sections of this report is consistent with these financial
statements.
USX seeks to assure the objectivity and integrity of its
financial records by careful selection of its managers, by
organizational arrangements that provide an appropriate
division of responsibility and by communications programs aimed
at assuring that its policies and methods are understood
throughout the organization.
USX has a comprehensive formalized system of internal
accounting controls designed to provide reasonable assurance
that assets are safeguarded and that financial records are
reliable. Appropriate management monitors the system for
compliance, and the internal auditors independently measure its
effectiveness and recommend possible improvements thereto. In
addition, as part of their audit of the financial statements,
USX's independent accountants, who are elected by the
stockholders, review and test the internal accounting controls
selectively to establish a basis of reliance thereon in
determining the nature, extent and timing of audit tests to be
applied.
The Board of Directors pursues its oversight role in the
area of financial reporting and internal accounting control
through its Audit Committee. This Committee, composed solely of
nonmanagement directors, regularly meets (jointly and
separately) with the independent accountants, management and
internal auditors to monitor the proper discharge by each of
its responsibilities relative to internal accounting controls
and the consolidated and group financial statements.
Thomas J. Usher Robert M. Hernandez Kenneth L. Matheny
CHAIRMAN, BOARD OF DIRECTORS VICE CHAIRMAN VICE PRESIDENT
& CHIEF EXECUTIVE OFFICER & CHIEF FINANCIAL OFFICER & COMPTROLLER
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of USX Corporation:
In our opinion, the accompanying financial statements appearing
on pages M-2 through M-20 present fairly, in all material
respects, the financial position of the Marathon Group at
December 31, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These
financial statements are the responsibility of USX's
management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted
our audits of these statements in accordance with auditing
standards generally accepted in the United States, which
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed
above.
The Marathon Group is a business unit of USX Corporation
(as described in Note 1, page M-5); accordingly, the financial
statements of the Marathon Group should be read in connection
with the consolidated financial statements of USX Corporation.
PricewaterhouseCoopers LLP
600 GRANT STREET, PITTSBURGH, PENNSYLVANIA 15219-2794
FEBRUARY 8, 2000
M-1
STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS) 1999 1998 1997
----------------------------------------------------------------------------------------------------------
REVENUES:
Sales (NOTE 7) $ 24,212 $ 21,628 $ 15,760
Dividend and affiliate income 69 50 36
Net gains on disposal of assets - 28 37
Gain on ownership change in
Marathon Ashland Petroleum LLC (NOTE 5) 17 245 -
Other income 29 26 13
--------- --------- ---------
Total revenues 24,327 21,977 15,846
--------- --------- ---------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 17,273 14,984 10,392
Selling, general and administrative expenses 486 505 355
Depreciation, depletion and amortization 950 941 664
Taxes other than income taxes 4,218 4,029 3,030
Exploration expenses 238 313 189
Inventory market valuation charges (credits) (NOTE 20) (551) 267 284
--------- --------- ---------
Total costs and expenses 22,614 21,039 14,914
--------- --------- ---------
INCOME FROM OPERATIONS 1,713 938 932
Net interest and other financial costs (NOTE 8) 288 237 260
Minority interest in income of
Marathon Ashland Petroleum LLC (NOTE 5) 447 249 -
--------- --------- ---------
INCOME BEFORE INCOME TAXES 978 452 672
Provision for estimated income taxes (NOTE 18) 324 142 216
--------- --------- ---------
NET INCOME $ 654 $ 310 $ 456
----------------------------------------------------------------------------------------------------------
INCOME PER COMMON SHARE
1999 1998 1997
----------------------------------------------------------------------------------------------------------
BASIC $ 2.11 $ 1.06 $ 1.59
DILUTED 2.11 1.05 1.58
----------------------------------------------------------------------------------------------------------
See Note 22, for a description and computation of income per
common share.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL
STATEMENTS.
M-2
BALANCE SHEET
(DOLLARS IN MILLIONS) December 31 1999 1998
----------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents (NOTE 6) $ 111 $ 137
Receivables, less allowance for doubtful accounts
of $2 and $3 1,866 1,277
Inventories (NOTE 20) 1,884 1,310
Other current assets 241 252
--------- ---------
Total current assets 4,102 2,976
Investments and long-term receivables (NOTE 19) 772 603
Property, plant and equipment - net (NOTE 16) 10,293 10,429
Prepaid pensions (NOTE 14) 225 241
Other noncurrent assets 313 295
--------- ---------
Total assets $ 15,705 $ 14,544
----------------------------------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Notes payable $ - $ 132
Accounts payable 2,659 1,940
Income taxes payable (NOTE 23) 97 -
Distribution payable to minority shareholder of
Marathon Ashland Petroleum LLC (NOTE 6) - 103
Payroll and benefits payable 146 190
Accrued taxes 107 99
Accrued interest 92 87
Long-term debt due within one year (NOTE 12) 48 59
--------- ---------
Total current liabilities 3,149 2,610
Long-term debt (NOTE 12) 3,320 3,456
Deferred income taxes (NOTE 18) 1,495 1,450
Employee benefits (NOTE 14) 564 553
Deferred credits and other liabilities (NOTE 23) 440 389
Preferred stock of subsidiary (NOTE 9) 184 184
Minority interest in Marathon Ashland Petroleum LLC (NOTE 5) 1,753 1,590
COMMON STOCKHOLDERS' EQUITY (NOTE 17) 4,800 4,312
--------- ---------
Total liabilities and common stockholders' equity $ 15,705 $ 14,544
----------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
M-3
STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS) 1999 1998 1997
----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $ 654 $ 310 $ 456
Adjustments to reconcile to net cash provided
from operating activities:
Minority interest in income of
Marathon Ashland Petroleum LLC 447 249 -
Depreciation, depletion and amortization 950 941 664
Exploratory dry well costs 109 186 78
Inventory market valuation charges (credits) (551) 267 284
Pensions and other postretirement benefits 36 34 6
Deferred income taxes 105 26 30
Gain on ownership change in
Marathon Ashland Petroleum LLC (17) (245) -
Net gains on disposal of assets - (28) (37)
Changes in: Current receivables - sold - - (340)
- operating turnover (833) 240 97
Inventories (63) (13) 18
Current accounts payable and accrued expenses 1,095 (233) 11
All other - net 84 (92) (21)
-------- -------- --------
Net cash provided from operating activities 2,016 1,642 1,246
-------- -------- --------
INVESTING ACTIVITIES:
Capital expenditures (1,378) (1,270) (1,038)
Acquisition of Tarragon Oil and Gas Limited - (686) -
Disposal of assets 356 65 60
Restricted cash - withdrawals 45 11 108
- deposits (44) (32) (10)
Affiliates- investments (59) (42) (193)
- loans and advances (70) (103) (46)
- returns and repayments 1 71 8
All other - net (25) (18) (2)
-------- -------- --------
Net cash used in investing activities (1,174) (2,004) (1,113)
-------- -------- --------
FINANCING ACTIVITIES (NOTE 9):
Increase (decrease) in Marathon Group's portion of
USX consolidated debt (296) 329 97
Specifically attributed debt:
Borrowings 141 366 -
Repayments (144) (389) (39)
Marathon Stock issued 89 613 34
Dividends paid (257) (246) (219)
Distributions to minority shareholder of
Marathon Ashland Petroleum LLC (400) (211) -
-------- -------- --------
Net cash provided from (used in) financing activities (867) 462 (127)
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1) 1 (2)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (26) 101 4
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 137 36 32
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 111 $ 137 $ 36
----------------------------------------------------------------------------------------------------------
See Note 13, for supplemental cash flow information. THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL
STATEMENTS.
M-4
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
After the redemption of the USX - Delhi Group stock on
January 26, 1998, USX Corporation (USX) has two classes of
common stock: USX - Marathon Group Common Stock (Marathon
Stock) and USX - U. S. Steel Group Common Stock (Steel Stock),
which are intended to reflect the performance of the Marathon
Group and the U. S. Steel Group, respectively.
The financial statements of the Marathon Group include the
financial position, results of operations and cash flows for
the businesses of Marathon Oil Company (Marathon) and certain
other subsidiaries of USX, and a portion of the corporate
assets and liabilities and related transactions which are not
separately identified with ongoing operating units of USX. The
Marathon Group financial statements are prepared using the
amounts included in the USX consolidated financial statements.
For a description of the Marathon Group's operating segments,
see Note 10.
Although the financial statements of the Marathon Group and
the U. S. Steel Group separately report the assets, liabilities
(including contingent liabilities) and stockholders' equity of
USX attributed to each such Group, such attribution of assets,
liabilities (including contingent liabilities) and
stockholders' equity between the Marathon Group and the U. S.
Steel Group for the purpose of preparing their respective
financial statements does not affect legal title to such assets
or responsibility for such liabilities. Holders of Marathon
Stock and Steel Stock are holders of common stock of USX and
continue to be subject to all the risks associated with an
investment in USX and all of its businesses and liabilities.
Financial impacts arising from one Group that affect the
overall cost of USX's capital could affect the results of
operations and financial condition of the other Group. In
addition, net losses of either Group, as well as dividends and
distributions on any class of USX Common Stock or series of
preferred stock and repurchases of any class of USX Common
Stock or series of preferred stock at prices in excess of par
or stated value, will reduce the funds of USX legally available
for payment of dividends on both classes of Common Stock.
Accordingly, the USX consolidated financial information should
be read in connection with the Marathon Group financial
information.
- --------------------------------------------------------------------------------
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
PRINCIPLES APPLIED IN CONSOLIDATION - These financial
statements include the accounts of the businesses comprising
the Marathon Group. The Marathon Group and the U. S. Steel
Group financial statements, taken together, comprise all of the
accounts included in the USX consolidated financial statements.
Investments in unincorporated oil and gas joint ventures,
undivided interest pipelines and jointly owned gas processing
plants are consolidated on a pro rata basis.
Investments in entities over which the Marathon Group has
significant influence are accounted for using the equity method
of accounting and are carried at the Marathon Group's share of
net assets plus loans and advances.
Investments in companies whose stock is publicly traded are
carried at market value. The difference between the cost of
these investments and market value is recorded in other
comprehensive income (net of tax). Investments in companies
whose stock has no readily determinable fair value are carried
at cost.
USE OF ESTIMATES - Generally accepted accounting principles
require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at year-end and
the reported amounts of revenues and expenses during the year.
Significant items subject to such estimates and assumptions
include the carrying value of long-lived assets; valuation
allowances for receivables, inventories and deferred income tax
assets; environmental liabilities; liabilities for potential
tax deficiencies and potential litigation claims and
settlements; and assets and obligations related to employee
benefits. Additionally, certain estimated liabilities are
recorded when management commits to a plan to close an
operating facility or to exit a business activity. Actual
results could differ from the estimates and assumptions used.
M-5
REVENUE RECOGNITION - Revenues principally include sales,
dividend and affiliate income, gains or losses on the disposal
of assets and gains or losses from changes in ownership
interests.
SALES - Sales are recognized when products are shipped or
services are provided to customers. Consumer excise taxes
on petroleum products and merchandise and matching crude
oil and refined products buy/sell transactions settled in
cash are included in both revenues and costs and expenses,
with no effect on income.
DIVIDEND AND AFFILIATE INCOME - Dividend and affiliate
income includes the Marathon Group's proportionate share of
income from equity method investments and dividend income
from other investments. Dividend income is recognized when
dividend payments are received.
DISPOSAL OF ASSETS - When long-lived assets depreciated on
an individual basis are sold or otherwise disposed of, any
gains or losses are reflected in income. Gains on disposal
of long-lived assets are recognized when earned, which is
generally at the time of closing. If a loss on disposal is
expected, such losses are recognized when long-lived assets
are reclassified as assets held for sale. Proceeds from
disposal of long-lived assets depreciated on a group basis
are credited to accumulated depreciation, depletion and
amortization with no immediate effect on income.
GAS BALANCING - The Marathon Group follows the sales method
of accounting for gas production imbalances and would
recognize a liability if the existing proved reserves were
not adequate to cover the current imbalance situation.
CHANGE IN OWNERSHIP INTEREST - Gains or losses from a
change in ownership of a consolidated subsidiary or an
unconsolidated affiliate are recognized in revenues in the
period of change.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include
cash on hand and on deposit and investments in highly liquid
debt instruments with maturities generally of three months or
less.
INVENTORIES - Inventories are carried at lower of cost or
market. Cost of inventories is determined primarily under the
last-in, first-out (LIFO) method.
DERIVATIVE INSTRUMENTS - The Marathon Group uses
commodity-based and foreign currency derivative instruments to
manage its exposure to price risk. Management is authorized to
use futures, forwards, swaps and options related to the
purchase, production or sale of crude oil, natural gas, refined
products and electricity. While the Marathon Group's risk
management activities generally reduce market risk exposure due
to unfavorable commodity price changes for raw material
purchases and products sold, such activities can also encompass
strategies which assume price risk.
COMMODITY-BASED HEDGING TRANSACTIONS - For transactions that
qualify for hedge accounting, the resulting gains or losses
are deferred and subsequently recognized in income from
operations, as a component of sales or cost of sales, in
the same period as the underlying physical transaction. To
qualify for hedge accounting, derivative positions cannot
remain open if the underlying physical market risk has been
removed. If such derivative positions remain in place, they
would be marked-to-market and accounted for as trading or
other activities. Recorded deferred gains or losses are
reflected within other current and noncurrent assets or
accounts payable and deferred credits and other
liabilities, as appropriate.
COMMODITY-BASED TRADING AND OTHER ACTIVITIES -Derivative
instruments used for trading and other activities are
marked-to-market and the resulting gains or losses are
recognized in the current period within income from
operations. This category also includes the use of
derivative instruments that have no offsetting underlying
physical market risk.
FOREIGN CURRENCY TRANSACTIONS - The Marathon Group uses
forward exchange contracts to manage currency risks. Gains
or losses related to firm commitments are deferred and
recognized concurrent with the underlying transaction. All
other gains or losses are recognized in income in the
current period as sales, cost of sales, interest income or
expense, or other income, as appropriate. Forward exchange
contracts are recorded as receivables or payables, as
appropriate.
EXPLORATION AND DEVELOPMENT - The Marathon Group follows the
successful efforts method of accounting for oil and gas
exploration and development.
M-6
LONG-LIVED ASSETS - Depreciation and depletion of oil and gas
producing properties are computed using predetermined rates
based upon estimated proved oil and gas reserves applied on a
units-of-production method. Other items of property, plant and
equipment are depreciated principally by the straight-line
method.
The Marathon Group evaluates impairment of its oil and gas
producing assets primarily on a field-by-field basis using
undiscounted cash flows based on total proved reserves. Other
assets are evaluated on an individual asset basis or by logical
groupings of assets. Assets deemed to be impaired are written
down to their fair value, including any related goodwill, using
discounted future cash flows and, if available, comparable
market values.
ENVIRONMENTAL LIABILITIES - The Marathon Group provides for
remediation costs and penalties when the responsibility to
remediate is probable and the amount of associated costs is
reasonably determinable. Generally, the timing of remediation
accruals coincides with completion of a feasibility study or
the commitment to a formal plan of action. Remediation
liabilities are accrued based on estimates of known
environmental exposure and are discounted in certain instances.
If recoveries of remediation costs from third parties are
probable, a receivable is recorded. Estimated abandonment and
dismantlement costs of offshore production platforms are
accrued based upon estimated proved oil and gas reserves on a
units-of-production method.
INSURANCE - The Marathon Group is insured for catastrophic
casualty and certain property and business interruption
exposures, as well as those risks required to be insured by law
or contract. Costs resulting from noninsured losses are charged
against income upon occurrence.
RECLASSIFICATIONS - Certain reclassifications of prior years'
data have been made to conform to 1999 classifications.
- --------------------------------------------------------------------------------
3. NEW ACCOUNTING STANDARDS
Effective January 1, 1997, USX adopted American Institute of
Certified Public Accountants Statement of Position No. 96-1,
"Environmental Remediation Liabilities" (SOP 96-1), which
provides additional interpretation of existing accounting
standards related to recognition, measurement and disclosure of
environmental remediation liabilities. As a result of adopting
SOP 96-1, the Marathon Group identified additional
environmental remediation liabilities of $11 million. Estimated
receivables for recoverable costs related to adoption of SOP
96-1 were $4 million. The net unfavorable effect of adoption on
the Marathon Group's income from operations at January 1, 1997,
was $7 million.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
(SFAS No. 133). This new Standard requires recognition of all
derivatives as either assets or liabilities at fair value. SFAS
No. 133 may result in additional volatility in both current
period earnings and other comprehensive income as a result of
recording recognized and unrecognized gains and losses
resulting from changes in the fair value of derivative
instruments. The transition adjustment resulting from adoption
of SFAS No. 133 will be reported as a cumulative effect of a
change in accounting principle.
Under the new Standard, USX may elect not to designate
certain derivative instruments as hedges even if the strategy
qualifies for hedge accounting treatment. This approach would
eliminate the administrative effort needed to measure
effectiveness and monitor such instruments; however, this
approach also may result in additional volatility in current
period earnings.
USX cannot reasonably estimate the effect of adoption on
either the financial position or results of operations. It is
not possible to estimate what effect this Statement will have
on future results of operations, although greater
period-to-period volatility is likely. USX plans to adopt the
Standard effective January 1, 2001.
M-7
- --------------------------------------------------------------------------------
4. CORPORATE ACTIVITIES
FINANCIAL ACTIVITIES - As a matter of policy, USX manages most
financial activities on a centralized, consolidated basis. Such
financial activities include the investment of surplus cash;
the issuance, repayment and repurchase of short-term and
long-term debt; the issuance, repurchase and redemption of
preferred stock; and the issuance and repurchase of common
stock. Transactions related primarily to invested cash,
short-term and long-term debt (including convertible debt),
related net interest and other financial costs, and preferred
stock and related dividends are attributed to the Marathon
Group, the U. S. Steel Group and, prior to November 1, 1997,
the Delhi Group based upon the cash flows of each group for the
periods presented and the initial capital structure of each
group. Most financing transactions are attributed to and
reflected in the financial statements of all groups. See Note
9, for the Marathon Group's portion of USX's financial
activities attributed to all groups. However, transactions such
as leases, certain collaterized financings, certain indexed
debt instruments, financial activities of consolidated entities
which are less than wholly owned by USX and transactions
related to securities convertible solely into any one class of
common stock are or will be specifically attributed to and
reflected in their entirety in the financial statements of the
group to which they relate.
CORPORATE GENERAL AND ADMINISTRATIVE COSTS - Corporate general
and administrative costs are allocated to the Marathon Group,
the U. S. Steel Group and, prior to November 1, 1997, the Delhi
Group based upon utilization or other methods management
believes to be reasonable and which consider certain measures
of business activities, such as employment, investments and
sales. The costs allocated to the Marathon Group were $26
million in 1999, $28 million in 1998 and $37 million in 1997,
and primarily consist of employment costs including pension
effects, professional services, facilities and other related
costs associated with corporate activities.
INCOME TAXES - All members of the USX affiliated group are
included in the consolidated United States federal income tax
return filed by USX. Accordingly, the provision for federal
income taxes and the related payments or refunds of tax are
determined on a consolidated basis. The consolidated provision
and the related tax payments or refunds have been reflected in
the Marathon Group, the U. S. Steel Group and, prior to
November 1, 1997, the Delhi Group financial statements in
accordance with USX's tax allocation policy. In general, such
policy provides that the consolidated tax provision and related
tax payments or refunds are allocated among the Marathon Group,
the U. S. Steel Group and, prior to November 1, 1997, the Delhi
Group, for group financial statement purposes, based
principally upon the financial income, taxable income, credits,
preferences and other amounts directly related to the
respective groups.
For tax provision and settlement purposes, tax benefits
resulting from attributes (principally net operating losses and
various tax credits), which cannot be utilized by one of the
groups on a separate return basis but which can be utilized on
a consolidated basis in that year or in a carryback year, are
allocated to the group that generated the attributes. To the
extent that one of the groups is allocated a consolidated tax
attribute which, as a result of expiration or otherwise, is not
ultimately utilized on the consolidated tax return, the prior
years' allocation of such attribute is adjusted such that the
effect of the expiration is borne by the group that generated
the attribute. Also, if a tax attribute cannot be utilized on a
consolidated basis in the year generated or in a carryback
year, the prior years' allocation of such consolidated tax
effects is adjusted in a subsequent year to the extent
necessary to allocate the tax benefits to the group that would
have realized the tax benefits on a separate return basis. As a
result, the allocated group amounts of taxes payable or
refundable are not necessarily comparable to those that would
have resulted if the groups had filed separate tax returns.
- --------------------------------------------------------------------------------
5. BUSINESS COMBINATIONS
In August 1998, Marathon acquired Tarragon Oil and Gas Limited
(Tarragon), a Canadian oil and gas exploration and production
company. Securityholders of Tarragon received, at their
election, Cdn$14.25 for each Tarragon share, or the economic
equivalent in Exchangeable Shares of an indirect Canadian
subsidiary of Marathon, which are exchangeable solely on a
one-for-one basis into Marathon Stock. The purchase price
included cash payments of $686 million, issuance of 878,074
Exchangeable Shares valued at $29 million and the assumption of
$345 million in debt.
The Exchangeable Shares are exchangeable at the option of
the holder at any time and automatically redeemable on August
11, 2003 (and, in certain circumstances, as early as August 11,
2001). The holders of Exchangeable Shares are entitled to
receive declared dividends equivalent to dividends declared
from time to time by USX on Marathon Stock.
Marathon accounted for the acquisition using the purchase
method of accounting. The 1998 results of operations include
the operations of Marathon Canada Limited, formerly known as
Tarragon, commencing August 12, 1998.
M-8
During 1997, Marathon and Ashland Inc. (Ashland) agreed to
combine the major elements of their refining, marketing and
transportation (RM&T) operations. On January 1, 1998, Marathon
transferred certain RM&T net assets to Marathon Ashland
Petroleum LLC (MAP), a new consolidated subsidiary. Also on
January 1, 1998, Marathon acquired certain RM&T net assets from
Ashland in exchange for a 38% interest in MAP. The acquisition
was accounted for under the purchase method of accounting. The
purchase price was determined to be $1.9 billion, based upon an
external valuation. The change in Marathon's ownership interest
in MAP resulted in a gain of $245 million, which is included in
1998 revenues. In accordance with MAP closing agreements,
Marathon and Ashland made capital contributions to MAP for
environmental improvements. The closing agreements stipulate
that ownership interests in MAP will not be adjusted as a
result of such contributions. Accordingly, Marathon recognized
a gain on ownership change of $17 million in 1999.
In connection with the formation of MAP, Marathon and
Ashland entered into a Limited Liability Company Agreement
dated January 1, 1998 (the LLC Agreement). The LLC Agreement
provides for an initial term of MAP expiring on December 31,
2022 (25 years from its formation). The term will automatically
be extended for ten-year periods, unless a termination notice
is given by either party.
Also in connection with the formation of MAP, the parties
entered into a Put/Call, Registration Rights and Standstill
Agreement (the Put/Call Agreement). The Put/Call Agreement
provides that at any time after December 31, 2004, Ashland will
have the right to sell to Marathon all of Ashland's ownership
interest in MAP, for an amount in cash and/or Marathon or USX
debt or equity securities equal to the product of 85% (90% if
equity securities are used) of the fair market value of MAP at
that time, multiplied by Ashland's percentage interest in MAP.
Payment could be made at closing, or at Marathon's option, in
three equal annual installments, the first of which would be
payable at closing. At any time after December 31, 2004,
Marathon will have the right to purchase all of Ashland's
ownership interests in MAP, for an amount in cash equal to the
product of 115% of the fair market value of MAP at that time,
multiplied by Ashland's percentage interest in MAP.
The following unaudited pro forma data for the Marathon
Group includes the results of operations of Tarragon for 1998
and 1997, and the Ashland RM&T net assets for 1997, giving
effect to the acquisitions as if they had been consummated at
the beginning of the years presented. The pro forma data is
based on historical information and does not necessarily
reflect the actual results that would have occurred nor is it
necessarily indicative of future results of operations.
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1998 1997
----------------------------------------------------------------------------------------------------------
Revenues $ 22,071 $ 23,425
Net income 279(a) 457(a)
Net income per common share -
Basic and diluted .95 1.58
----------------------------------------------------------------------------------------------------------
(a) Excluding the pro forma inventory market valuation
adjustment, pro forma net income would have been $383
million in 1998 and $619 million in 1997. Reported net
income, excluding the reported inventory market valuation
adjustment, would have been $414 million in 1998 and $635
million in 1997.
- --------------------------------------------------------------------------------
6. TRANSACTIONS BETWEEN MAP AND ASHLAND
At December 31, 1999 and 1998, MAP had current receivables from
Ashland of $26 million and $22 million, respectively, and
current payables to Ashland of $2 million at December 31, 1999,
and at December 31, 1998, $106 million, including distributions
payable.
At December 31, 1998, MAP's cash and cash equivalents
included a $103 million demand note invested with Ashland,
which was repaid in January 1999.
MAP has a $190 million short-term revolving credit
agreement with Ashland. Interest on borrowings is based on the
Federal Funds Rate in effect each day during the period plus
0.30 of 1%. At December 31, 1999, there were no borrowings
against this facility.
During 1999 and 1998, MAP's sales to Ashland consisting
primarily of petroleum products, were $198 million and $185
million, respectively, and MAP's purchases of products and
services from Ashland were $25 million and $45 million,
respectively. These transactions were conducted under terms
comparable to those with unrelated parties.
- --------------------------------------------------------------------------------
7. REVENUES
The items below are included in revenues and costs and
expenses, with no effect on income.
(IN MILLIONS) 1999 1998 1997
----------------------------------------------------------------------------------------------------------
Consumer excise taxes on petroleum products
and merchandise $ 3,973 $ 3,824 $ 2,828
Matching crude oil and refined product
buy/sell transactions settled in cash 3,539 3,948 2,436
----------------------------------------------------------------------------------------------------------
M-9
- -------------------------------------------------------------------------------
8. OTHER ITEMS
(IN MILLIONS) 1999 1998 1997
----------------------------------------------------------------------------------------------------------
NET INTEREST AND OTHER FINANCIAL COSTS
INTEREST AND OTHER FINANCIAL INCOME(a):
Interest income $ 15 $ 30 $ 7
Other (13) 4 (6)
-------- -------- --------
Total 2 34 1
-------- -------- --------
INTEREST AND OTHER FINANCIAL COSTS(a):
Interest incurred 281 285 232
Less interest capitalized 20 40 24
-------- -------- --------
Net interest 261 245 208
Interest on tax issues 5 5 7
Financial costs on preferred stock of subsidiary 17 17 16
Amortization of discounts 2 4 4
Expenses on sales of accounts receivable - - 19
Other 5 - 7
-------- -------- --------
Total 290 271 261
-------- -------- --------
NET INTEREST AND OTHER FINANCIAL COSTS(a) $ 288 $ 237 $ 260
----------------------------------------------------------------------------------------------------------
(a) See Note 4, for discussion of USX net interest and other
financial costs attributable to the Marathon Group.
------------------------------------------------------------------
FOREIGN CURRENCY TRANSACTIONS
For 1999, 1998 and 1997, the aggregate foreign currency
transaction gains (losses) included in determining net income
were $(12) million, $13 million and $4 million, respectively.
- --------------------------------------------------------------------------------
9. FINANCIAL ACTIVITIES ATTRIBUTED TO GROUPS
The following is the portion of USX financial activities
attributed to the Marathon Group. These amounts exclude amounts
specifically attributed to the Marathon Group.
Marathon Group Consolidated USX(a)
------------------- -------------------
(IN MILLIONS) December 31 1999 1998 1999 1998
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 8 $ 4 $ 9 $ 4
Other noncurrent assets 7 7 8 8
-------- -------- -------- --------
Total assets $ 15 $ 11 $ 17 $ 12
----------------------------------------------------------------------------------------------------------
Notes payable $ - $ 132 $ - $ 145
Accrued interest 82 80 95 88
Long-term debt due within one year (NOTE 12) 47 59 54 66
Long-term debt (NOTE 12) 3,305 3,456 3,771 3,762
Preferred stock of subsidiary 184 184 250 250
-------- -------- -------- --------
Total liabilities $ 3,618 $ 3,911 $ 4,170 $ 4,311
----------------------------------------------------------------------------------------------------------
Marathon Group(b) Consolidated USX
--------------------- -------------------
(IN MILLIONS) 1999 1998 1997 1999 1998 1997
----------------------------------------------------------------------------------------------------------
Net interest and other financial costs (NOTE 8) $295 $295 $246 $334 $324 $309
----------------------------------------------------------------------------------------------------------
(a) For details of USX long-term debt and preferred stock of
subsidiary, see Notes 16 and 23, respectively, to the USX
consolidated financial statements.
(b) The Marathon Group's net interest and other financial costs
reflect weighted average effects of all financial
activities attributed to all groups.
- --------------------------------------------------------------------------------
10. SEGMENT INFORMATION
The Marathon Group's operations consist of three reportable
operating segments: 1) Exploration and Production - explores
for and produces crude oil and natural gas on a worldwide
basis; 2) Refining, Marketing and Transportation - refines,
markets and transports crude oil and petroleum products,
primarily in the Midwest and southeastern United States through
MAP; and 3) Other Energy Related Businesses. Other Energy
Related Businesses is an aggregation of two segments which fall
below the quantitative reporting thresholds: 1) Natural Gas and
Crude Oil Marketing and Transportation - markets and transports
its own and third-party natural gas and crude oil in the United
States; and 2) Power Generation - develops, constructs and
operates independent electric power projects worldwide.
M-10
Sales by product line are:
(IN MILLIONS) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Refined products $ 10,873 $ 8,750 $ 7,012
Merchandise 2,088 1,873 1,045
Liquid hydrocarbons 2,159 1,818 941
Natural gas 1,381 1,144 1,331
Transportation and other products 199 271 167
- ---------------------------------------------------------------------------------------------------------------------------------
Segment income represents income from operations allocable to operating
segments. USX corporate general and administrative costs are not allocated to
operating segments. These costs primarily consist of employment costs including
pension effects, professional services, facilities and other related costs
associated with corporate activities. Certain general and administrative costs
related to all Marathon Group operating segments in excess of amounts billed to
MAP under service contracts and amounts charged out to operating segments under
Marathon's shared services procedures also are not allocated to operating
segments. Additionally, the following items are not allocated to operating
segments: inventory market valuation adjustments, gain on ownership change in
MAP and certain other items not allocated to operating segments for business
performance reporting purposes (see (a) in reconcilement table on page M-12).
Refining, Other
Exploration Marketing Energy
and and Related
(IN MILLIONS) Production Transportation Businesses Total
- ---------------------------------------------------------------------------------------------------------------------------------
1999
Revenues:
Customer $ 3,230 $ 20,210 $ 731 $ 24,171
Intersegment(a) 202 47 40 289
Intergroup(a) 19 - 22 41
Equity in earnings (losses) of unconsolidated affiliates (2) 17 26 41
Other 30 48 15 93
--------- --------- --------- ---------
Total revenues $ 3,479 $ 20,322 $ 834 $ 24,635
========= ========= ========= =========
Segment income $ 618 $ 611 $ 61 $ 1,290
Significant noncash items included in segment income:
Depreciation, depletion and amortization(b) 638 280 5 923
Pension expenses(c) 3 32 2 37
Capital expenditures(d) 744 612 4 1,360
Affiliates - investments 56 - 3 59
- ---------------------------------------------------------------------------------------------------------------------------------
1998
Revenues:
Customer $ 2,085 $ 19,192 $ 306 $ 21,583
Intersegment(a) 144 10 17 171
Intergroup(a) 13 - 7 20
Equity in earnings of unconsolidated affiliates 2 12 14 28
Other 26 40 11 77
--------- --------- --------- ---------
Total revenues $ 2,270 $ 19,254 $ 355 $ 21,879
========= ========= ========= =========
Segment income $ 278 $ 896 $ 33 $ 1,207
Significant noncash items included in segment income:
Depreciation, depletion and amortization(b) 581 272 6 859
Pension expenses(c) 3 16 2 21
Capital expenditures(d) 839 410 8 1,257
Affiliates - investments(d) - 22 17 39
- ---------------------------------------------------------------------------------------------------------------------------------
1997
Revenues:
Customer $ 1,575 $ 13,698 $ 381 $ 15,654
Intersegment(a) 619 - - 619
Intergroup(a) 99 - 6 105
Equity in earnings of unconsolidated affiliates 14 4 7 25
Other 7 20 30 57
--------- --------- --------- ---------
Total revenues $ 2,314 $ 13,722 $ 424 $ 16,460
========= ========= ========= =========
Segment income $ 773 $ 563 $ 48 $ 1,384
Significant noncash items included in segment income:
Depreciation, depletion and amortization(b) 469 173 7 649
Pension expenses(c) 3 8 1 12
Capital expenditures(d) 810 205 6 1,021
Affiliates - investments(d) 114 - 73 187
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
(b) Differences between segment totals and group totals represent amounts
included in administrative expenses and, in 1999 and 1998, international and
domestic exploration and production property impairments.
(c) Differences between segment totals and group totals represent amounts
included in administrative expenses.
(d) Differences between segment totals and group totals represent amounts
related to corporate administrative activities.
M-11
The following reconciles segment revenues and income to amounts reported in
the Marathon Group financial statements:
(IN MILLIONS) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
REVENUES:
Revenues of reportable segments $ 24,635 $ 21,879 $ 16,460
Items not allocated to segments:
Gain on ownership change in MAP 17 245 -
Other (36) 24 -
Elimination of intersegment revenues (289) (171) (619)
Administrative revenues - - 5
---------- ---------- ----------
Total Group revenues $ 24,327 $ 21,977 $ 15,846
========== ========== ==========
INCOME:
Income for reportable segments $ 1,290 $ 1,207 $ 1,384
Items not allocated to segments:
Gain on ownership change in MAP 17 245 -
Administrative expenses (108) (106) (168)
Inventory market valuation adjustments 551 (267) (284)
Other(a) (37) (141) -
---------- ---------- ----------
Total Group income from operations $ 1,713 $ 938 $ 932
- --------------------------------------------------------------------------------------------------------------------------------
(a)Represents in 1999, primarily certain domestic exploration and production
impairments, net losses on certain asset sales and costs of a voluntary early
retirement program. Represents in 1998 certain international exploration and
production property impairments, certain suspended exploration well
write-offs, a gas contract settlement and MAP transition charges.
GEOGRAPHIC AREA:
The information below summarizes the operations in different geographic
areas. Transfers between geographic areas are at prices which approximate
market.
Revenues
--------------------------------------------------
Within Between
(IN MILLIONS) Year Geographic Areas Geographic Areas Total Assets(a)
- ---------------------------------------------------------------------------------------------------------------------------------
United States 1999 $ 23,337 $ - $ 23,337 $ 7,555
1998 21,191 - 21,191 7,659
1997 15,123 - 15,123 5,578
Canada 1999 425 521 946 1,112
1998 209 368 577 1,094
United Kingdom 1999 459 - 459 1,581
1998 462 - 462 1,739
1997 593 - 593 1,856
Other Foreign Countries 1999 106 88 194 735
1998 115 52 167 468
1997 130 39 169 530
Eliminations 1999 - (609) (609) -
1998 - (420) (420) -
1997 - (39) (39) -
Total 1999 $ 24,327 $ - $ 24,327 $ 10,983
1998 21,977 - 21,977 10,960
1997 15,846 - 15,846 7,964
- ---------------------------------------------------------------------------------------------------------------------------------
(a)Includes property, plant and equipment and investments in affiliates.
- --------------------------------------------------------------------------------
11. LEASES
Future minimum commitments for capital leases (including
sale-leasebacks accounted for as financings) and for
operating leases having remaining noncancelable lease
terms in excess of one year are as follows:
Capital Operating
(IN MILLIONS) Leases Leases
----------------------------------------------------------------------------------------------------------
2000 $ 2 $ 198
2001 2 77
2002 2 64
2003 2 40
2004 2 33
Later years 14 120
Sublease rentals - (35)
--------- ---------
Total minimum lease payments 24 $ 497
=========
Less imputed interest costs (9)
---------
Present value of net minimum lease payments
included in long-term debt $ 15
----------------------------------------------------------------------------------------------------------
Operating lease rental expense:
(IN MILLIONS) 1999 1998 1997
----------------------------------------------------------------------------------------------------------
Minimum rental $ 142 $ 157 $ 102
Contingent rental 11 10 10
Sublease rentals (6) (7) (7)
---------- ---------- ----------
Net rental expense $ 147 $ 160 $ 105
----------------------------------------------------------------------------------------------------------
M-12
The Marathon Group leases a wide variety of
facilities and equipment under operating leases,
including land and building space, office equipment,
production facilities and transportation equipment. Most
long-term leases include renewal options and, in certain
leases, purchase options. In the event of a change in
control of USX, as defined in the agreements, or certain
other circumstances, operating lease obligations
totaling $104 million may be declared immediately due
and payable.
- --------------------------------------------------------------------------------
12. LONG-TERM DEBT
The Marathon Group's portion of USX's consolidated
long-term debt is as follows:
Marathon Group Consolidated USX(a)
------------------ -------------------
(IN MILLIONS) December 31 1999 1998 1999 1998
----------------------------------------------------------------------------------------------------------
Specifically attributed debt(b):
Receivables facility $ - $ - $ 350 $ -
Sale-leaseback financing and capital leases 15 - 107 95
Indexed debt less unamortized discount - - - 68
Other 1 - 1 -
-------- -------- -------- --------
Total 16 - 458 163
Less amount due within one year 1 - 7 5
-------- -------- -------- --------
Total specifically attributed long-term debt $ 15 $ - $ 451 $ 158
----------------------------------------------------------------------------------------------------------
Debt attributed to groups(c) $ 3,375 $ 3,537 $ 3,852 $ 3,853
Less unamortized discount 23 22 27 25
Less amount due within one year 47 59 54 66
-------- -------- -------- --------
Total long-term debt attributed to groups $ 3,305 $ 3,456 $ 3,771 $ 3,762
----------------------------------------------------------------------------------------------------------
Total long-term debt due within one year $ 48 $ 59 $ 61 $ 71
Total long-term debt due after one year 3,320 3,456 4,222 3,920
----------------------------------------------------------------------------------------------------------
(a)See Note 16, to the USX consolidated financial
statements for details of interest rates, maturities
and other terms of long-term debt.
(b)As described in Note 4, certain financial activities
are specifically attributed only to the Marathon
Group and the U. S. Steel Group.
(c)Most long-term debt activities of USX Corporation
and its wholly owned subsidiaries are attributed to
all groups (in total, but not with respect to
specific debt issues) based on their respective cash
flows (Notes 4, 9 and 13).
- --------------------------------------------------------------------------------
13. SUPPLEMENTAL CASH FLOW INFORMATION
(IN MILLIONS) 1999 1998 1997
----------------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES INCLUDED:
Interest and other financial costs paid (net of amount capitalized) $ (289) $ (260) $ (257)
Income taxes paid, including settlements with other groups (101) (154) (178)
----------------------------------------------------------------------------------------------------------
USX DEBT ATTRIBUTED TO ALL GROUPS - NET:
Commercial paper - issued $ 6,282 $ - $ -
- repayments (6,117) - -
Credit agreements - borrowings 5,529 17,486 10,454
- repayments (5,980) (16,817) (10,449)
Other credit arrangements - net (95) 55 36
Other debt - borrowings 319 671 10
- repayments (87) (1,053) (741)
--------- --------- ---------
Total $ (149) $ 342 $ (690)
----------------------------------------------------------------------------------------------------------
Marathon Group activity $ (296) $ 329 $ 97
U. S. Steel Group activity 147 13 (561)
Delhi Group activity - - (226)
--------- --------- ---------
Total $ (149) $ 342 $ (690)
---------------------------------------------------------------------------------------------------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Marathon Stock issued for dividend reinvestment and
employee stock plans $ 4 $ 3 $ 5
Marathon Stock issued for Exchangeable Shares 7 11 -
Affiliate preferred stock received in conversion of affiliate loan 142 - -
Disposal of assets:
Notes received 19 - -
Liabilities assumed by buyers - - 5
Business combinations:
Acquisition of Tarragon:
Exchangeable Shares issued - 29 -
Liabilities assumed - 433 -
Acquisition of Ashland RM&T net assets:
38% interest in MAP - 1,900 -
Liabilities assumed - 1,038 -
Other acquisitions - liabilities assumed 16 - -
----------------------------------------------------------------------------------------------------------
M-13
- --------------------------------------------------------------------------------
14. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
The Marathon Group has noncontributory defined benefit
pension plans covering substantially all employees.
Benefits under these plans are based primarily upon
years of service and final average pensionable earnings.
Certain subsidiaries provide benefits for employees
covered by other plans based primarily upon employees'
service and career earnings.
The Marathon Group also has defined benefit retiree
health and life insurance plans (other benefits)
covering most employees upon their retirement. Health
benefits are provided through comprehensive hospital,
surgical and major medical benefit provisions or through
health maintenance organizations, both subject to
various cost sharing features. Life insurance benefits
are provided to certain nonunion and most union
represented retiree beneficiaries primarily based on
employees' annual base salary at retirement. Other
benefits have not been prefunded.
Pension Benefits Other Benefits
--------------------- ---------------------
(IN MILLIONS) 1999 1998 1999 1998
----------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at January 1 $ 1,080 $ 771 $ 597 $ 381
Service cost 65 48 17 12
Interest cost 67 57 36 31
Plan amendments 18 6 (44) (20)
Actuarial (gains) losses (197) 121 (108) 112
Plan merger and acquisition 14 145 4 98
Settlements, curtailments and termination benefits (122) - - -
Benefits paid (57) (68) (24) (17)
--------- --------- --------- ---------
Benefit obligations at December 31 $ 868 $ 1,080 $ 478 $ 597
----------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1 $ 1,331 $ 1,150
Actual return on plan assets 136 199
Plan merger and acquisition 12 55
Employer contributions 2 8
Trustee distributions(a) (16) (14)
Settlements paid (99) -
Benefits paid from plan assets (56) (67)
--------- ---------
Fair value of plan assets at December 31 $ 1,310 $ 1,331
----------------------------------------------------------------------------------------------------------
FUNDED STATUS OF PLANS AT DECEMBER 31 $ 442 (b) $251 (b) $ (478) $ (597)
Unrecognized net gain from transition (26) (35) - -
Unrecognized prior service costs (credits) 63 48 (72) (35)
Unrecognized actuarial (gains) losses (306) (88) 68 182
Additional minimum liability(c) (8) (18) - -
--------- --------- --------- ---------
Prepaid (accrued) benefit cost $ 165 $ 158 $ (482) $ (450)
----------------------------------------------------------------------------------------------------------
(a)Represents transfers of excess pension assets to
fund retiree health care benefits accounts under
Section 420 of the Internal Revenue Code.
(b)Includes several plans that have accumulated
benefit obligations in excess of plan assets:
Aggregate accumulated benefit obligations $ (24) $ (36)
Aggregate projected benefit obligations (37) (52)
Aggregate plan assets - -
(c) Additional minimum liability recorded was offset by
the following:
Intangible asset $ 3 $ 2
--------- --------
Accumulated other comprehensive income (losses):
Beginning of year $ (10) $ (7)
Change during year (net of tax) 7 (3)
--------- --------
Balance at end of year $ (3) $ (10)
----------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
----------------------------- ----------------------------
(IN MILLIONS) 1999 1998 1997 1999 1998 1997
----------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC
BENEFIT COST (CREDIT)
Service cost $ 65 $ 48 $ 31 $ 17 $ 12 $ 6
Interest cost 67 57 45 36 31 22
Expected return on plan assets (114) (107) (85) - - -
Amortization -net transition gain (5) (5) (5) - - -
-prior service costs (credits) 4 3 1 (8) (3) (3)
-actuarial losses 1 - 1 7 3 -
Other plans 5 5 4 - - -
Settlement and termination gain (7)(a) - - - - -
------- ------- ------- ------- ------- -------
Net periodic benefit cost (credit) $ 16 $ 1 $ (8) $ 52 $ 43 $ 25
----------------------------------------------------------------------------------------------------------
(a)Includes 1999 voluntary early retirement program.
M-14
Pension Benefits Other Benefits
--------------------- ---------------------
1999 1998 1999 1998
----------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE ACTUARIAL ASSUMPTIONS
AT DECEMBER 31:
Discount rate 8.0% 6.5% 8.0% 6.5%
Expected annual return on plan assets 9.5% 9.5% 9.5% 9.5%
Increase in compensation rate 5.0% 5.0% 5.0% 5.0%
----------------------------------------------------------------------------------------------------------
For measurement purposes, an 8% annual rate of
increase in the per capita cost of covered health care
benefits was assumed for 2000. The rate was assumed to
decrease gradually to 5% for 2006 and remain at that
level thereafter.
A one-percentage-point change in assumed health
care cost trend rates would have the following effects:
1-Percentage- 1-Percentage-
(IN MILLIONS) Point Increase Point Decrease
----------------------------------------------------------------------------------------------------------
Effect on total of service and interest cost components $ 8 $ (6)
Effect on other postretirement benefit obligations 58 (48)
----------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
15. DIVIDENDS
In accordance with the USX Restated Certificate of
Incorporation, dividends on the Marathon Stock and Steel
Stock are limited to the legally available funds of USX.
Net losses of either Group, as well as dividends and
distributions on any class of USX Common Stock or series
of preferred stock and repurchases of any class of USX
Common Stock or series of preferred stock at prices in
excess of par or stated value, will reduce the funds of
USX legally available for payment of dividends on both
classes of Common Stock. Subject to this limitation, the
Board of Directors intends to declare and pay dividends
on the Marathon Stock based on the financial condition
and results of operations of the Marathon Group,
although it has no obligation under Delaware law to do
so. In making its dividend decisions with respect to
Marathon Stock, the Board of Directors considers among
other things, the long-term earnings and cash flow
capabilities of the Marathon Group as well as the
dividend policies of similar publicly traded energy
companies.
- --------------------------------------------------------------------------------
16. PROPERTY, PLANT AND EQUIPMENT
(IN MILLIONS) December 31 1999 1998
----------------------------------------------------------------------------------------------------------
Production $ 14,568 $ 14,707
Refining 2,439 2,251
Marketing 2,197 2,103
Transportation 1,374 1,402
Other 282 265
--------- ---------
Total 20,860 20,728
Less accumulated depreciation, depletion and amortization 10,567 10,299
--------- ---------
Net $ 10,293 $ 10,429
----------------------------------------------------------------------------------------------------------
Property, plant and equipment at December 31, 1999,
includes gross assets acquired under capital leases of
$20 million with no related amounts in accumulated
depreciation, depletion and amortization.
- --------------------------------------------------------------------------------
17. COMMON STOCKHOLDERS' EQUITY
(IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998 1997
----------------------------------------------------------------------------------------------------------
BALANCE AT BEGINNING OF YEAR $ 4,312 $ 3,618 $ 3,340
Net income 654 310 456
Marathon Stock issued 96 617 39
Exchangeable Shares:
Issued - 29 -
Exchanged for Marathon Stock (7) (12) -
Dividends on Marathon Stock
(per share: $.84 in 1999 and 1998 and $.76 in 1997) (261) (248) (219)
Deferred compensation - 2 1
Accumulated other comprehensive income (loss)(a):
Foreign currency translation adjustments (1) 2 -
Minimum pension liability adjustments (NOTE 14) 7 (3) (2)
Unrealized holding gains (losses) on investments - (3) 3
--------- --------- ---------
BALANCE AT END OF YEAR $ 4,800 $ 4,312 $ 3,618
----------------------------------------------------------------------------------------------------------
(a) See page U-7 of the USX consolidated financial
statements relative to the annual activity of these
adjustments and gains (losses). Total comprehensive
income for the Marathon Group for the years 1999,
1998 and 1997 was $660 million, $306 million and $457
million, respectively.
M-15
- --------------------------------------------------------------------------------
18. INCOME TAXES
Income tax provisions and related assets and liabilities
attributed to the Marathon Group are determined in
accordance with the USX group tax allocation policy
(Note 4).
Provisions (credits) for estimated income taxes
were:
1999 1998 1997
---------------------------- ------------------------ ------------------------
(IN MILLIONS) CURRENT DEFERRED TOTAL Current Deferred Total Current Deferred Total
----------------------------------------------------------------------------------------------------------
Federal $ 191 $158 $ 349 $ 83 $ 19 $ 102 $ 171 $ (5) $ 166
State and local 3 (7) (4) 30 9 39 3 7 10
Foreign 25 (46) (21) 3 (2) 1 12 28 40
----- ----- ----- ----- ----- ----- ----- ----- -----
Total $ 219 $105 $ 324 $116 $ 26 $ 142 $ 186 $ 30 $ 216
----------------------------------------------------------------------------------------------------------
A reconciliation of federal statutory tax rate
(35%) to total provisions follows:
(IN MILLIONS) 1999 1998 1997
----------------------------------------------------------------------------------------------------------
Statutory rate applied to income before income taxes $ 342 $ 158 $ 235
Effects of foreign operations, including foreign tax credits (18) (26) (8)
State and local income taxes after federal income tax effects (3) 25 6
Credits other than foreign tax credits (7) (9) (9)
Effects of partially owned companies (5) (4) (6)
Dispositions of subsidiary investments 7 - -
Adjustment of prior years' federal income taxes 4 (5) (4)
Adjustment of valuation allowances - - (4)
Other 4 3 6
--------- --------- ---------
Total provisions $ 324 $ 142 $ 216
----------------------------------------------------------------------------------------------------------
Deferred tax assets and liabilities resulted from
the following:
(IN MILLIONS) December 31 1999 1998
----------------------------------------------------------------------------------------------------------
Deferred tax assets:
Minimum tax credit carryforwards $ - $ 15
State tax loss carryforwards (expiring in 2000 through 2018) 57 54
Foreign tax loss carryforwards (portion of which expire in 2000 through 2014) 382 414
Employee benefits 206 201
Receivables, payables, and debt 14 13
Expected federal benefit for:
Crediting certain foreign deferred income taxes 530 528
Deducting state and other foreign deferred income taxes 36 51
Contingency and other accruals 150 140
Investments in foreign subsidiaries 52 52
Investments in subsidiaries and affiliates 20 22
Other 34 38
Valuation allowances:
Federal (30) (30)
State (11) (8)
Foreign (282) (260)
--------- ---------
Total deferred tax assets(a) 1,158 1,230
--------- ---------
Deferred tax liabilities:
Property, plant and equipment 2,065 2,158
Inventory 324 170
Prepaid pensions 127 125
Other 111 150
--------- ---------
Total deferred tax liabilities 2,627 2,603
--------- ---------
Net deferred tax liabilities $ 1,469 $ 1,373
----------------------------------------------------------------------------------------------------------
(a)USX expects to generate sufficient future taxable
income to realize the benefit of the Marathon Group's
deferred tax assets. In addition, the ability to
realize the benefit of foreign tax credits is based
upon certain assumptions concerning future operating
conditions (particularly as related to prevailing oil
prices), income generated from foreign sources and
USX's tax profile in the years that such credits may
be claimed.
The consolidated tax returns of USX for the years
1990 through 1997 are under various stages of audit and
administrative review by the IRS. USX believes it has
made adequate provision for income taxes and interest
which may become payable for years not yet settled.
Pretax income (loss) included $66 million, $(75)
million and $250 million attributable to foreign sources
in 1999, 1998 and 1997, respectively.
Undistributed earnings of certain consolidated
foreign subsidiaries at December 31, 1999, amounted to
$150 million. No provision for deferred U.S. income
taxes has been made for these subsidiaries because the
Marathon Group intends to permanently reinvest such
earnings in those foreign operations. If such earnings
were not permanently reinvested, a deferred tax
liability of $53 million would have been required.
M-16
- --------------------------------------------------------------------------------
19. INVESTMENTS AND LONG-TERM RECEIVABLES
(IN MILLIONS) December 31 1999 1998
----------------------------------------------------------------------------------------------------------
Equity method investments $ 658 $ 498
Other investments 32 33
Receivables due after one year 56 46
Deposits of restricted cash 20 21
Other 6 5
--------- ---------
Total $ 772 $ 603
----------------------------------------------------------------------------------------------------------
Summarized financial information of affiliates
accounted for by the equity method of accounting
follows:
(IN MILLIONS) 1999 1998 1997
----------------------------------------------------------------------------------------------------------
Income data - year:
Revenues $ 422 $ 347 $ 562
Operating income 152 132 114
Net income 119 79 52
----------------------------------------------------------------------------------------------------------
Balance sheet data - December 31:
Current assets $ 387 $ 262
Noncurrent assets 2,606 2,233
Current liabilities 300 243
Noncurrent liabilities 1,066 1,254
----------------------------------------------------------------------------------------------------------
Dividends and partnership distributions received
from equity affiliates were $44 million in 1999, $23
million in 1998 and $21 million in 1997.
Marathon Group purchases from equity affiliates
totaled $50 million, $64 million and $37 million in
1999, 1998 and 1997, respectively. Marathon Group sales
to USX equity affiliates were $22 million in 1999 and
1998 and $36 million in 1997.
- --------------------------------------------------------------------------------
20. INVENTORIES
(IN MILLIONS) December 31 1999 1998
----------------------------------------------------------------------------------------------------------
Crude oil and natural gas liquids $ 729 $ 731
Refined products and merchandise 1,046 1,023
Supplies and sundry items 109 107
--------- ---------
Total (at cost) 1,884 1,861
Less inventory market valuation reserve - 551
--------- ---------
Net inventory carrying value $ 1,884 $ 1,310
----------------------------------------------------------------------------------------------------------
Inventories of crude oil and refined products are
valued by the LIFO method. The LIFO method accounted for
90% and 88% of total inventory value at December 31,
1999 and 1998, respectively. Current acquisition costs
were estimated to exceed the above inventory values at
December 31, 1999, by approximately $200 million.
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.
- --------------------------------------------------------------------------------
21. STOCK-BASED COMPENSATION PLANS AND STOCKHOLDER RIGHTS PLAN
USX Stock-Based Compensation Plans and Stockholder
Rights Plan are discussed in Note 19, and Note 21,
respectively, to the USX consolidated financial
statements.
The Marathon Group's actual stock-based
compensation expense (credit) was $(4) million in 1999,
$(3) million in 1998 and $20 million in 1997.
Incremental compensation expense, as determined under a
fair value model, was not material ($.02 or less per
share for all years presented). Therefore, pro forma net
income and earnings per share data have been omitted.
M-17
- --------------------------------------------------------------------------------
22. INCOME PER COMMON SHARE
The method of calculating net income per share for the
Marathon Stock, the Steel Stock and, prior to November
1, 1997, the Delhi Stock reflects the USX Board of
Directors' intent that the separately reported earnings
and surplus of the Marathon Group, the U. S. Steel Group
and the Delhi Group, as determined consistent with the
USX Restated Certificate of Incorporation, are available
for payment of dividends to the respective classes of
stock, although legally available funds and liquidation
preferences of these classes of stock do not necessarily
correspond with these amounts.
Basic net income per share is based on the weighted
average number of common shares outstanding. Diluted net
income per share assumes conversion of convertible
securities for the applicable periods outstanding and
assumes exercise of stock options, provided in each
case, the effect is not antidilutive.
1999 1998 1997
------------------- --------------------- --------------------
COMPUTATION OF INCOME PER SHARE BASIC DILUTED Basic Diluted Basic Diluted
------------------------------- ----- ------- ----- ------- ----- -------
Net income (millions):
Net income $ 654 $ 654 $ 310 $ 310 $ 456 $ 456
Dilutive effect of convertible debentures - - - - - 3
--------- --------- --------- --------- --------- ---------
Net income assuming conversions $ 654 $ 654 $ 310 $ 310 $ 456 $ 459
========= ========= ========= ========= ========= =========
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 309,696 309,696 292,876 292,876 288,038 288,038
Effect of dilutive securities:
Convertible debentures - - - - - 1,936
Stock options - 314 - 559 - 546
--------- --------- --------- --------- --------- ---------
Average common shares and dilutive effect 309,696 310,010 292,876 293,435 288,038 290,520
========= ========= ========= ========= ========= =========
Net income per share $ 2.11 $ 2.11 $ 1.06 $ 1.05 $ 1.59 $ 1.58
========= ========= ========= ========= ========= =========
- --------------------------------------------------------------------------------
23. INTERGROUP TRANSACTIONS
SALES AND PURCHASES - Marathon Group sales to other
groups totaled $41 million, $21 million and $105 million
in 1999, 1998 and 1997, respectively. Marathon Group
purchases from other groups totaled $17 million in 1999,
$2 million in 1998 and $18 million in 1997. At December
31, 1999 and 1998, Marathon Group receivables included
$5 million and $3 million, respectively, related to
transactions with the U. S. Steel Group. These
transactions were conducted under terms comparable to
those with unrelated parties. Since October 31, 1997,
transactions with the Delhi Companies are third-party
transactions.
INCOME TAXES RECEIVABLE FROM/PAYABLE TO THE U. S. STEEL
GROUP - At December 31, 1999 and 1998, amounts
receivable or payable for income taxes were included in
the balance sheet as follows:
(IN MILLIONS) December 31 1999 1998
----------------------------------------------------------------------------------------------------------
Current:
Receivables $ 1 $ 2
Income taxes payable 97 -
Noncurrent:
Deferred credits and other liabilities 97 97
----------------------------------------------------------------------------------------------------------
These amounts have been determined in accordance
with the tax allocation policy described in Note 4.
Amounts classified as current are settled in cash in the
year succeeding that in which such amounts are accrued.
Noncurrent amounts represent estimates of intergroup tax
effects of certain issues for years that are still under
various stages of audit and administrative review. Such
tax effects are not settled between the groups until the
audit of those respective tax years is closed. The
amounts ultimately settled for open tax years will be
different than recorded noncurrent amounts based on the
final resolution of all of the audit issues for those
years.
- --------------------------------------------------------------------------------
24. DERIVATIVE INSTRUMENTS
The Marathon Group remains at risk for possible changes
in the market value of the derivative instrument;
however, such risk should be mitigated by price changes
in the underlying hedged item. The Marathon Group is
also exposed to credit risk in the event of
nonperformance by counterparties. The credit worthiness
of counterparties is subject to continuing review,
including the use of master netting agreements to the
extent practical, and full performance is anticipated.
The following table sets forth quantitative
information by class of derivative instrument:
M-18
RECOGNIZED
FAIR CARRYING TRADING RECORDED
VALUE AMOUNT GAIN OR DEFERRED AGGREGATE
ASSETS ASSETS (LOSS) FOR GAIN OR CONTRACT
(IN MILLIONS) (LIABILITIES)(a)(b) (LIABILITIES) THE YEAR (LOSS) VALUES(c)
- ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999:
Exchange-traded commodity futures:
Trading $ - $ - $ 4 $ - $ 8
Other than trading - - - 28 344
Exchange-traded commodity options:
Trading - - 4 - 179
Other than trading (6) (d) (6) - (10) 1,262
OTC commodity swaps(e):
Trading - - - - -
Other than trading 3 (f) 3 - 2 156
OTC commodity options:
Trading - - - - -
Other than trading 4 (g) 4 - 5 238
----------- ----------- ----------- ----------- -----------
Total commodities $ 1 $ 1 $ 8 $ 25 $ 2,187
=========== =========== =========== =========== ===========
Forward exchange contracts(h):
- receivable $ 52 $ 52 $ - $ - $ 51
- ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998:
Exchange-traded commodity futures $ - $ - $ (2) $ 104
Exchange-traded commodity options 3 (d) 2 3 776
OTC commodity swaps (2) (f) (2) - 243
OTC commodity options 3 (g) 3 3 147
----------- ----------- ----------- -----------
Total commodities $ 4 $ 3 $ 4 $ 1,270
=========== =========== =========== ===========
Forward exchange contracts:
- receivable $ 36 $ 36 $ - $ 36
- ----------------------------------------------------------------------------------------------------------------------------------
(a) The fair value amounts for OTC positions are based on various indices or
dealer quotes. The fair value amounts for currency contracts are based on
dealer quotes of forward prices covering the remaining duration of the
forward exchange contract. The exchange-traded futures contracts and certain
option contracts do not have a corresponding fair value since changes in the
market prices are settled on a daily basis.
(b) The aggregate average fair value of all trading activities for the period
ending December 31, 1999, was $3 million. Detail by class of instrument was
not available.
(c) Contract or notional amounts do not quantify risk exposure, but are used in
the calculation of cash settlements under the contracts. The contract or
notional amounts do not reflect the extent to which positions may offset one
another.
(d) Includes fair values as of December 31, 1999 and 1998, for assets of $11
million and $23 million and for liabilities of $(17) million and $(20)
million, respectively.
(e) The OTC swap arrangements vary in duration with certain contracts extending
into 2008.
(f) Includes fair values as of December 31, 1999 and 1998, for assets of $8
million and $29 million and for liabilities of $(5) million and $(31)
million, respectively.
(g) Includes fair values as of December 31, 1999 and 1998, for assets of $5
million and for liabilities of $(1) million and $(2) million, respectively.
(h) The forward exchange contracts relating to USX's foreign operations have
various maturities ending in December 2000.
- --------------------------------------------------------------------------------
25. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value of the financial instruments disclosed herein
is not necessarily representative of the amount that
could be realized or settled, nor does the fair value
amount consider the tax consequences of realization or
settlement. The following table summarizes financial
instruments, excluding derivative financial instruments
disclosed in Note 24, by individual balance sheet
account. As described in Note 4, the Marathon Group's
specifically attributed financial instruments and the
Marathon Group's portion of USX's financial instruments
attributed to all groups are as follows:
1999 1998
---------------------- ----------------------
FAIR CARRYING Fair Carrying
(IN MILLIONS) December 31 VALUE AMOUNT Value Amount
----------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and cash equivalents $ 111 $ 111 $ 137 $ 137
Receivables 1,866 1,866 1,277 1,277
Investments and long-term receivables 166 109 157 101
-------- -------- -------- --------
Total financial assets $ 2,143 $ 2,086 $ 1,571 $ 1,515
----------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Notes payable $ - $ - $ 132 $ 132
Accounts payable (including intergroup payables) 2,756 2,756 1,940 1,940
Distribution payable to minority shareholder of MAP - - 103 103
Accrued interest 92 92 87 87
Long-term debt (including amounts due within one year) 3,443 3,353 3,797 3,515
Preferred stock of subsidiary 176 184 183 184
-------- -------- -------- --------
Total financial liabilities $ 6,467 $ 6,385 $ 6,242 $ 5,961
----------------------------------------------------------------------------------------------------------
M-19
Fair value of financial instruments classified as
current assets or liabilities approximates carrying
value due to the short-term maturity of the instruments.
Fair value of investments and long-term receivables was
based on discounted cash flows or other specific
instrument analysis. Fair value of preferred stock of
subsidiary was based on market prices. Fair value of
long-term debt instruments was based on market prices
where available or current borrowing rates available for
financings with similar terms and maturities.
The Marathon Group's unrecognized financial
instruments consist of financial guarantees. It is not
practicable to estimate the fair value of these forms of
financial instrument obligations because there are no
quoted market prices for transactions which are similar
in nature. For details relating to financial guarantees,
see Note 26.
- --------------------------------------------------------------------------------
26. CONTINGENCIES AND COMMITMENTS
USX is the subject of, or party to, a number of pending
or threatened legal actions, contingencies and
commitments relating to the Marathon Group involving a
variety of matters, including laws and regulations
relating to the environment. Certain of these matters
are discussed below. The ultimate resolution of these
contingencies could, individually or in the aggregate,
be material to the Marathon Group financial statements.
However, management believes that USX will remain a
viable and competitive enterprise even though it is
possible that these contingencies could be resolved
unfavorably to the Marathon Group.
ENVIRONMENTAL MATTERS -
The Marathon Group is subject to federal, state,
local and foreign laws and regulations relating to the
environment. These laws generally provide for control of
pollutants released into the environment and require
responsible parties to undertake remediation of
hazardous waste disposal sites. Penalties may be imposed
for noncompliance. At December 31, 1999 and 1998,
accrued liabilities for remediation totaled $69 million
and $48 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 $52 million at December 31, 1999, and $41 million
at December 31, 1998.
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 1999 and 1998, such capital
expenditures totaled $46 million and $83 million,
respectively. The Marathon Group anticipates making
additional such expenditures in the future; however, the
exact amounts and timing of such expenditures are
uncertain because of the continuing evolution of
specific regulatory requirements.
At December 31, 1999 and 1998, accrued liabilities
for platform abandonment and dismantlement totaled $152
million and $141 million, respectively.
GUARANTEES -
Guarantees by USX and its consolidated subsidiaries
of the liabilities of affiliated entities of the
Marathon Group totaled $131 million at December 31, 1999
and 1998. As of December 31, 1999, the largest guarantee
for a single affiliate was $131 million.
At December 31, 1999 and 1998, the Marathon Group's
pro rata share of obligations of LOOP LLC and various
pipeline affiliates secured by throughput and deficiency
agreements totaled $146 million and $164 million,
respectively. Under the agreements, the Marathon Group
is required to advance funds if the affiliates are
unable to service debt. Any such advances are
prepayments of future transportation charges.
COMMITMENTS -
At December 31, 1999 and 1998, the Marathon Group's
contract commitments to acquire property, plant and
equipment and long-term investments totaled $485 million
and $624 million, respectively.
The Marathon Group is a party to a 15-year
transportation services agreement with a natural gas
transmission company. The contract requires the Marathon
Group to pay a minimum annual demand charge of
approximately $5 million starting in the year 2000 and
concluding in the year 2014. The payments are required
even if the transportation facility is not utilized.
M-20
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1999 1998
-------------------------------------------------- ------------------------------------------------
(IN MILLIONS, EXCEPT PER 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
SHARE DATA)
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 7,505 $ 6,490 $ 5,481 $4,851 $5,339 (a) $ 5,597 (a) $ 5,530 (a) $ 5,511 (a)
Income (loss) from operations 350 561 399 403 (132) 215 453 402
Includes:
Inventory market valuation
charges (credits) - (136) (66) (349) 245 50 (3) (25)
Gain on ownership
change in MAP (6) (11) - - - 1 2 (248)
Net income (loss) 171 230 134 119 (86) 51 162 183
- ----------------------------------------------------------------------------------------------------------------------------------
MARATHON STOCK DATA:
Net income (loss) per share:
Basic $ .55 $ .74 $ .43 $ .38 $ (.29) $ .18 $ .56 $ .63
Diluted .55 .74 .43 .38 (.29) .17 .56 .63
Dividends paid per share .21 .21 .21 .21 .21 .21 .21 .21
Price range of Marathon Stock(b):
- Low 23-5/8 28-1/2 25-13/16 19-5/8 26-11/16 25 32- 3/16 31
- High 30-5/8 33-7/8 32-3/4 31-3/8 38-1/8 37-1/8 38-7/8 40-1/2
- ----------------------------------------------------------------------------------------------------------------------------------
(a) Reclassified to conform to 1999 classifications.
(b) Composite tape.
PRINCIPAL UNCONSOLIDATED AFFILIATES (UNAUDITED)
December 31, 1999
Company Country Ownership Activity
- ----------------------------------------------------------------------------------------------------------------------------------
CLAM Petroleum B.V. Netherlands 50% Oil & Gas Production
Kenai LNG Corporation United States 30% Natural Gas Liquification
LOCAP, Inc. United States 50% (a) Pipeline & Storage Facilities
LOOP LLC United States 47% (a) Offshore Oil Port
Manta Ray Offshore Gathering Company, LLC United States 24% Natural Gas Transmission
Minnesota Pipe Line Company United States 33% (a) Pipeline Facility
Nautilus Pipeline Company, LLC United States 24% Natural Gas Transmission
Odyssey Pipeline LLC United States 29% Pipeline Facility
Poseidon Oil Pipeline Company, LLC United States 28% Crude Oil Transportation
Sakhalin Energy Investment Company Ltd. Russia 38% Oil & Gas Development
- ----------------------------------------------------------------------------------------------------------------------------------
(a) Represents the ownership of MAP.
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
See the USX consolidated financial statements for Supplementary Information on
Oil and Gas Producing Activities relating to the Marathon Group, pages U-30
through U-34.
M-21
FIVE-YEAR OPERATING SUMMARY
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------------------
NET LIQUID HYDROCARBON PRODUCTION (thousands of
barrels per day)
United States (by region)
Alaska - - - 8 9
Gulf Coast 74 55 29 30 33
Southern 5 6 8 9 11
Central 4 4 5 4 8
Mid-Continent - Yates 18 23 25 25 24
Mid-Continent - Other 20 21 21 20 19
Rocky Mountain 24 26 27 26 28
-------------------------------------------------
Total United States 145 135 115 122 132
-------------------------------------------------
International
Canada 17 6 - - -
Egypt 5 8 8 8 5
Indonesia - - - - 10
Gabon 9 5 - - -
Norway - 1 2 3 2
Tunisia - - - - 2
United Kingdom 31 41 39 48 54
-------------------------------------------------
Total International 62 61 49 59 73
-------------------------------------------------
Consolidated 207 196 164 181 205
Equity affiliate(a) 1 - - - -
-------------------------------------------------
Total 208 196 164 181 205
Natural gas liquids included in above 19 17 17 17 17
----------------------------------------------------------------------------------------------------------
NET NATURAL GAS PRODUCTION (millions of cubic feet
per day)
United States (by region)
Alaska 148 144 151 145 133
Gulf Coast 107 84 78 88 94
Southern 178 208 189 161 142
Central 134 117 119 109 105
Mid-Continent 129 125 125 122 112
Rocky Mountain 59 66 60 51 48
-------------------------------------------------
Total United States 755 744 722 676 634
-------------------------------------------------
International
Canada 150 65 - - -
Egypt 13 16 11 13 15
Ireland 132 168 228 259 269
Norway 26 27 54 87 81
United Kingdom - equity 168 165 130 140 98
- other(b) 16 23 32 32 35
-------------------------------------------------
Total International 505 464 455 531 498
-------------------------------------------------
Consolidated 1,260 1,208 1,177 1,207 1,132
Equity affiliate(c) 36 33 42 45 44
-------------------------------------------------
Total 1,296 1,241 1,219 1,252 1,176
----------------------------------------------------------------------------------------------------------
AVERAGE SALES PRICES
Liquid Hydrocarbons (dollars per barrel)(d)(e)
United States $15.44 $10.42 $16.88 $18.58 $14.59
International 16.90 12.24 18.77 20.34 16.66
Natural Gas (dollars per thousand cubic feet)(d)(e)
United States $ 1.90 $ 1.79 $ 2.20 $ 2.09 $ 1.63
International 1.90 1.94 2.00 1.97 1.80
----------------------------------------------------------------------------------------------------------
NET PROVED RESERVES AT YEAR-END (developed and
undeveloped)
Liquid Hydrocarbons (millions of barrels)
United States 520 549 (f) 590 (f) 570 (f) 558
International 277 316 187 203 206
------------------------------------------------
Consolidated 797 865 777 773 764
Equity affiliate(a) 77 80 82 - -
------------------------------------------------
Total 874 945 859 773 764
Developed reserves as % of total net reserves 81% 71% (f) 77% (f) 80% (f) 88%
----------------------------------------------------------------------------------------------------------
Natural Gas (billions of cubic feet)
United States 2,057 2,163 (f) 2,232 (f) 2,251 (f) 2,210
International 1,607 1,796 1,071 1,199 1,379
-------------------------------------------------
Consolidated 3,664 3,959 3,303 3,450 3,589
Equity affiliate(c) 123 110 111 132 131
-------------------------------------------------
Total 3,787 4,069 3,414 3,582 3,720
Developed reserves as % of total net reserves 75% 79% 83% 83% 80%
----------------------------------------------------------------------------------------------------------
(a) Represents Marathon's equity interest in Sakhalin
Energy Investment Company Ltd. and CLAM Petroleum
B.V.
(b) Represents gas acquired for injection and subsequent
resale.
(c) Represents Marathon's equity interest in CLAM
Petroleum B.V.
(d) Prices exclude gains/losses from hedging activities.
(e) Prices exclude equity affiliates and purchase/resale
gas.
(f) Revised to exclude reserves attributable to a
pressure maintenance program for the Petronius field
scheduled to commence in third quarter 2000.
M-22
FIVE-YEAR OPERATING SUMMARY CONTINUED
1999(a) 1998(a) 1997 1996 1995
----------------------------------------------------------------------------------------------------------
U.S. REFINERY OPERATIONS (thousands of barrels per day)
In-use crude oil capacity at year-end 935 935 575 570 570
Refinery runs - crude oil refined 888 894 525 511 503
- other charge and blend stocks 139 127 99 96 94
In-use crude oil capacity utilization rate 95% 96% 92% 90% 88%
----------------------------------------------------------------------------------------------------------
SOURCE OF CRUDE PROCESSED (thousands of barrels per day)
United States 349 317 202 229 254
Europe 7 15 10 12 6
Middle East and Africa 363 394 241 193 183
Other International 169 168 72 79 58
-------------------------------------------------
Total 888 894 525 513 501
----------------------------------------------------------------------------------------------------------
REFINED PRODUCT YIELDS (thousands of barrels per day)
Gasoline 566 545 353 345 339
Distillates 261 270 154 155 146
Propane 22 21 13 13 12
Feedstocks and special products 66 64 36 35 38
Heavy fuel oil 43 49 35 30 31
Asphalt 69 68 39 36 36
-------------------------------------------------
Total 1,027 1,017 630 614 602
----------------------------------------------------------------------------------------------------------
REFINED PRODUCTS YIELDS (% breakdown)
Gasoline 55% 54% 56% 56% 57%
Distillates 25 27 24 25 24
Other products 20 19 20 19 19
-------------------------------------------------
Total 100% 100% 100% 100% 100%
----------------------------------------------------------------------------------------------------------
U.S. REFINED PRODUCT SALES (thousands of barrels per day)
Gasoline 714 671 452 468 445
Distillates 331 318 198 192 180
Propane 23 21 12 12 12
Feedstocks and special products 66 67 40 37 44
Heavy fuel oil 43 49 34 31 31
Asphalt 74 72 39 35 35
-------------------------------------------------
Total 1,251 1,198 775 775 747
Matching buy/sell volumes included in above 45 39 51 71 47
----------------------------------------------------------------------------------------------------------
REFINED PRODUCTS SALES BY CLASS OF TRADE (as a % of
total sales) Wholesale - independent private-brand
marketers and consumers 66% 65% 61% 62% 61%
Marathon and Ashland brand jobbers and dealers 11 11 13 13 13
Speedway SuperAmerica retail outlets 23 24 26 25 26
-------------------------------------------------
Total 100% 100% 100% 100% 100%
----------------------------------------------------------------------------------------------------------
REFINED PRODUCTS (dollars per barrel)
Average sales price $24.59 $20.65 (b) $26.38 $27.43 $23.80
Average cost of crude oil throughput 18.66 13.02 19.00 21.94 18.09
----------------------------------------------------------------------------------------------------------
PETROLEUM INVENTORIES AT YEAR-END (thousands of barrels)
Crude oil, raw materials and natural gas liquids 34,255 35,630 19,351 20,047 22,224
Refined products 32,853 32,334 20,598 21,283 22,102
----------------------------------------------------------------------------------------------------------
U.S. REFINED PRODUCT MARKETING OUTLETS AT YEAR-END
MAP operated terminals 93 88 51 51 51
Retail - Marathon and Ashland brand outlets 3,482 3,117 2,465 2,392 2,380
- Speedway SuperAmerica outlets 2,433 2,257 1,544 1,592 1,627
----------------------------------------------------------------------------------------------------------
PIPELINES (miles of common carrier pipelines)(c)
Crude Oil - gathering lines 557 2,827 1,003 1,052 1,115
- trunklines 4,720 4,859 2,665 2,665 2,666
Products - trunklines 2,856 2,861 2,310 2,310 2,311
-------------------------------------------------
Total 8,133 10,547 5,978 6,027 6,092
----------------------------------------------------------------------------------------------------------
PIPELINE BARRELS HANDLED (millions)(d)
Crude Oil - gathering lines 30.4 47.8 43.9 43.2 43.8
- trunklines 545.7 571.9 369.6 378.7 371.3
Products - trunklines 331.9 329.7 262.4 274.8 252.3
-------------------------------------------------
Total 908.0 949.4 675.9 696.7 667.4
----------------------------------------------------------------------------------------------------------
RIVER OPERATIONS
Barges - owned/leased 169 169 - - -
Boats - owned/leased 8 8 - - -
----------------------------------------------------------------------------------------------------------
(a) 1999 and 1998 statistics include 100% of MAP and
should be considered when compared to prior periods.
(b) Reclassified to conform to 1999 classifications.
(c) Pipelines for downstream operations also include
non-common carrier, leased and equity affiliates.
(d) Pipeline barrels handled on owned common carrier
pipelines, excluding equity affiliates.
M-23
FIVE-YEAR FINANCIAL SUMMARY
(DOLLARS IN MILLIONS, EXCEPT AS NOTED) 1999(a) 1998(a) 1997 1996 1995
----------------------------------------------------------------------------------------------------------
REVENUES
Sales by product:
Refined products $ 10,873 $ 8,750 $ 7,012 $ 7,132 $ 6,127
Merchandise 2,088 1,873 1,045 1,000 941
Liquid hydrocarbons 2,159 1,818 941 1,111 881
Natural gas 1,381 1,144 1,331 1,194 950
Transportation and other products 199 271 167 180 197
Gain on ownership change in MAP 17 245 - - -
Other(b) 98 104 86 97 42
----------------------------------------------------------------
Subtotal 16,815 14,205 10,582 10,714 9,138
Matching buy/sell transactions(c) 3,539 3,948 2,436 2,912 2,067
Excise taxes(c) 3,973 3,824 2,828 2,663 2,588
----------------------------------------------------------------
Total revenues $ 24,327 $21,977 (d) $15,846 (d) $ 16,289 (d) $ 13,793 (d)
----------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS
Exploration and production (E&P)
Domestic $ 494 $ 190 $ 500 $ 547 $ 306
International 124 88 273 353 178
----------------------------------------------------------------
Income for E&P reportable segment 618 278 773 900 484
Refining, marketing and transportation 611 896 563 249 259
Other energy related businesses 61 33 48 57 60
----------------------------------------------------------------
Income for reportable segments 1,290 1,207 1,384 1,206 803
Items not allocated to reportable segments:
Administrative expenses (108) (106) (168) (133) (85)
Inventory market valuation adjustments 551 (267) (284) 209 70
Gain on ownership change & transition
charges - MAP 17 223 - - -
E&P domestic & int'l. impairments &
gas contract settlement (16) (119) - - -
Impairment of long-lived assets - - - - (659)
Other items (21) - - 14 18
----------------------------------------------------------------
Income from operations 1,713 938 932 1,296 147
Minority interest in income of MAP 447 249 - - -
Net interest and other financial costs 288 237 260 305 337
Provision (credit) for income taxes 324 142 216 320 (107)
----------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS $ 654 $ 310 $ 456 $ 671 $ (83)
Per common share - basic (in dollars) 2.11 1.06 1.59 2.33 (.31)
- diluted (in dollars) 2.11 1.05 1.58 2.31 (.31)
----------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 654 $ 310 $ 456 $ 664 $ (88)
Per common share - basic (in dollars) 2.11 1.06 1.59 2.31 (.33)
- diluted (in dollars) 2.11 1.05 1.58 2.29 (.33)
----------------------------------------------------------------------------------------------------------
BALANCE SHEET POSITION AT YEAR-END
Current assets $ 4,102 $ 2,976 $ 2,018 $ 2,046 $ 1,888
Net property, plant and equipment 10,293 10,429 7,566 7,298 7,521
Total assets 15,705 14,544 10,565 10,151 10,109
Short-term debt 48 191 525 323 384
Other current liabilities 3,101 2,419 1,737 1,819 1,641
Long-term debt 3,320 3,456 2,476 2,642 3,367
Minority interest in MAP 1,753 1,590 - - -
Common stockholders' equity 4,800 4,312 3,618 3,340 2,872
Per share (in dollars) 15.38 13.95 12.53 11.62 9.99
----------------------------------------------------------------------------------------------------------
CASH FLOW DATA
Net cash from operating activities $ 2,016 $ 1,642 (d) $ 1,246 $ 1,503 $ 1,044
Capital expenditures 1,378 1,270 1,038 751 642
Disposal of assets 356 65 60 282 77
Dividends paid 257 246 219 201 199
----------------------------------------------------------------------------------------------------------
EMPLOYEE DATA(e)
Marathon Group:
Total employment costs $ 1,421 $ 1,054 $ 854 $ 790 $ 781
Average number of employees 33,086 24,344 20,695 20,461 21,015
Number of pensioners at year-end 3,402 3,378 3,099 3,203 3,378
Speedway SuperAmerica LLC (SSA):
(Included in Marathon Group totals)
Total employment costs $ 452 $ 283 $ 263 $ 241 $ 229
Average number of employees 22,801 12,831 12,816 12,474 12,087
Number of pensioners at year-end 209 212 215 207 206
----------------------------------------------------------------------------------------------------------
STOCKHOLDER DATA AT YEAR-END
Number of common shares
outstanding (in millions) 311.8 308.5 288.8 287.5 287.4
Registered shareholders (in thousands) 71.4 77.3 84.0 92.1 101.2
Market price of common stock $ 24.688 $ 30.125 $33.750 $ 23.875 $ 19.500
----------------------------------------------------------------------------------------------------------
(a) 1999 and 1998 statistics, other than employee data,
include 100% of MAP, which should be considered when
making comparisons to prior periods.
(b) Includes dividend and affiliate income, net gains on
disposal of assets and other income.
(c) These items are included in both revenues and costs
and expenses, resulting in no effect on income.
(d) Reclassified to conform to 1999 classifications.
(e) Employee Data for 1998 includes Ashland employees
from the date of their payroll transfer to MAP,
which occurred at various times throughout 1998.
These employees were contracted to MAP in 1998,
prior to their payroll transfer. As of December 31,
1999, active employees for the Marathon Group were
32,103, which included 28,217 MAP employees. Of the
MAP total, 21,939 were employees of SSA.
M-24
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Marathon Group includes Marathon Oil Company
("Marathon") and certain other subsidiaries of USX
Corporation ("USX"), which are engaged in worldwide
exploration and production of crude oil and natural gas;
domestic refining, marketing and transportation of
petroleum products primarily through Marathon Ashland
Petroleum LLC ("MAP"), owned 62 percent by Marathon; and
other energy related businesses. The Management's
Discussion and Analysis should be read in conjunction
with the Marathon Group's Financial Statements and Notes
to Financial Statements.
The Marathon Group's 1999 financial performance was
primarily affected by the strong recovery in worldwide
liquid hydrocarbon prices. During 1999, Marathon focused
on the acquisition of assets with a strong strategic
fit, the disposal of non-core properties and workforce
reductions through a voluntary early retirement program.
Marathon also achieved a significant milestone when oil
production commenced from the Piltun-Astokhskoye field
offshore Sakhalin Island in the Russian Far East region
on July 5, 1999.
Certain sections of Management's Discussion and
Analysis include forward-looking statements concerning
trends or events potentially affecting the businesses of
the Marathon Group. These statements typically contain
words such as "anticipates", "believes", "estimates",
"expects", "targets" or similar words indicating that
future outcomes are uncertain. In accordance with "safe
harbor" provisions of the Private Securities Litigation
Reform Act of 1995, these statements are accompanied by
cautionary language identifying important factors,
though not necessarily all such factors, that could
cause future outcomes to differ materially from those
set forth in forward-looking statements. For additional
risk factors affecting the businesses of the Marathon
Group, see Supplementary Data - Disclosures About
Forward-Looking Statements in USX's 1999 Form 10-K.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INCOME AND OPERATIONS
REVENUES for each of the last three years are summarized
in the following table:
(DOLLARS IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Exploration & production ("E&P") $ 3,479 $ 2,270 $ 2,314
Refining, marketing & transportation ("RM&T")(a) 20,322 19,254 13,722
Other energy related businesses(b) 834 355 424
--------- --------- ---------
Revenues of reportable segments 24,635 21,879 16,460
Revenues not allocated to segments:
Gain on ownership change in MAP 17 245 -
Other(c) (36) 24 -
Elimination of intersegment revenues (289) (171) (619)
Administrative revenues - - 5
--------- --------- ---------
Total Group revenues $ 24,327 $ 21,977 $ 15,846
========= ========= =========
Items included in both revenues and costs and expenses,
resulting in no effect on income:
Consumer excise taxes on petroleum products and merchandise $ 3,973 $ 3,824 $ 2,828
Matching crude oil and refined product
buy/sell transactions settled in cash:
E&P $ 732 $ 340 $ 114
RM&T 2,807 3,608 2,322
--------- --------- ---------
Total buy/sell transactions $ 3,539 $ 3,948 $ 2,436
-----------------------------------------------------------------------------------------------------------
(a) Amounts in 1999 and 1998 include 100 percent of MAP.
(b) Includes domestic natural gas and crude oil
marketing and transportation, and power generation.
(c) Represents in 1999 net losses on certain asset
sales.
M-25
E&P segment revenues increased by $1,209 million in
1999 from 1998 following a decrease of $44 million in
1998 from 1997. The increase in 1999 was primarily due
to higher worldwide liquid hydrocarbon prices, increased
domestic liquid hydrocarbon production and higher E&P
crude oil buy/sell volumes. The decrease in 1998 was
primarily due to lower worldwide liquid hydrocarbon
prices and lower domestic natural gas prices, partially
offset by higher liquid hydrocarbon sales volumes.
RM&T segment revenues increased by $1,068 million in
1999 from 1998, mainly due to higher refined product
prices, increased volumes of refined product sales and
higher merchandise sales, partially offset by reduced
crude oil sales revenues following the sale of Scurlock
Permian LLC. Beginning in 1998, RM&T segment revenues
include 100 percent of MAP revenues and are not
comparable to prior periods.
Other energy related businesses segment revenues
increased by $479 million in 1999 from 1998 following a
decrease of $69 million in 1998 from 1997. The increase
in 1999 was primarily due to increased crude oil and
natural gas purchase and resale activity. The decrease
in 1998 was primarily due to lower prices associated
with natural gas resale activity.
For additional discussion of revenues, see Note 10
to the Marathon Group Financial Statements.
INCOME FROM OPERATIONS for each of the last three
years is summarized in the following table:
(DOLLARS IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
E&P
Domestic $ 494 $ 190 $ 500
International 124 88 273
--------- --------- ---------
Income of E&P reportable segment 618 278 773
RM&T(a) 611 896 563
Other energy related businesses 61 33 48
--------- --------- ---------
Income for reportable segments 1,290 1,207 1,384
Items not allocated to reportable segments
Administrative expenses(b) (108) (106) (168)
IMV reserve adjustment(c) 551 (267) (284)
Gain on ownership change & transition charges - MAP(d) 17 223 _
E&P domestic and international impairments
and gas contract settlement(e) (16) (119) _
Loss on disposal of assets(f) (36) _ _
Pension settlement gain & benefit accruals(g) 15 _ _
--------- --------- ---------
Total income from operations $ 1,713 $ 938 $ 932
-----------------------------------------------------------------------------------------------------------
(a) Amounts in 1999 and 1998 include 100 percent of MAP.
(b) Includes the portion of the Marathon Group's
administrative costs not charged to the operating
segments and the portion of USX corporate general and
administrative costs allocated to the Marathon Group.
(c) The inventory market valuation ("IMV") reserve
reflects the extent to which the recorded LIFO cost
basis of crude oil and refined products inventories
exceeds net realizable value. For additional
discussion of the IMV, see Note 20 to the Marathon
Group Financial Statements.
(d) The gain on ownership change and one-time transition
charges in 1998 relate to the formation of MAP. For
additional discussion of the gain on ownership change
in MAP, see Note 5 to the Marathon Group Financial
Statements.
(e) Represents in 1999 an impairment of certain domestic
properties. Represents in 1998 a write-off of certain
non-revenue producing international investments and
several exploratory wells which had encountered
hydrocarbons, but had been suspended pending further
evaluation. It also includes in 1998 a gain from the
resolution of a contract dispute with a purchaser of
Marathon's natural gas production from
certain domestic properties.
(f) This represents a loss on the sale of Scurlock
Permian LLC, certain domestic production properties,
Carnegie Natural Gas Company and affiliated
subsidiaries and certain Egyptian properties.
(g) Represents a fourth quarter pension settlement gain
and various benefit accruals resulting from favorable
net gains on retirement plan settlements and the
voluntary early retirement program.
M-26
Income for reportable segments increased by $83
million in 1999 from 1998, mainly due to higher
worldwide liquid hydrocarbon prices, partially offset by
lower refined product margins. Beginning in 1998, income
from operations includes 100 percent of MAP, and
Marathon Canada Limited (formerly known as Tarragon)
results of operations commencing August 12, 1998. On an
unaudited pro forma basis, assuming the acquisitions of
Ashland's RM&T net assets and Tarragon's operations had
occurred on January 1, 1997, income for reportable
segments for 1997 would have been $1,728 million. Income
for reportable segments decreased by $521 million in
1998 from pro forma 1997, mainly due to lower worldwide
liquid hydrocarbon prices, lower domestic natural gas
prices and lower refining crack spreads, partially
offset by higher liquid hydrocarbon production.
AVERAGE VOLUMES AND SELLING PRICES
1999 1998 1997
-----------------------------------------------------------------------------------------------------------
(THOUSANDS OF BARRELS PER DAY)
Net liquids production(a) - U.S. 145 135 115
- International(b) 62 61 49
--------- --------- ---------
- Total Consolidated 207 196 164
- Equity affiliates(c) 1 _ _
--------- --------- ---------
- Worldwide 208 196 164
(MILLIONS OF CUBIC FEET PER DAY)
Net natural gas production - U.S. 755 744 722
- International - equity 489 441 423
- International - other(d) 16 23 32
--------- --------- ---------
- Total Consolidated 1,260 1,208 1,177
- Equity affiliate(e) 36 33 42
--------- --------- ---------
- Worldwide 1,296 1,241 1,219
-----------------------------------------------------------------------------------------------------------
(DOLLARS PER BARREL)
Liquid hydrocarbons(a)(f) - U.S. $ 15.44 $ 10.42 $ 16.88
- International 16.90 12.24 18.77
(DOLLARS PER MCF)
Natural gas(f) - U.S. $ 1.90 $ 1.79 $ 2.20
- International - equity 1.90 1.94 2.00
-----------------------------------------------------------------------------------------------------------
(THOUSANDS OF BARRELS PER DAY)
Refined products sold(g) 1,251 1,198 775
Matching buy/sell volumes included in above 45 39 51
-----------------------------------------------------------------------------------------------------------
(a) Includes crude oil, condensate and natural gas
liquids.
(b) Represents equity tanker liftings, truck deliveries
and direct deliveries.
(c) Represents Marathon's equity interest in
Sakhalin Energy Investment Company Ltd.
("Sakhalin Energy") and CLAM Petroleum B.V.
("CLAM").
(d) Represents gas acquired for injection and
subsequent resale.
(e) Represents Marathon's equity interest in CLAM.
(f) Prices exclude gains/losses from hedging
activities, equity affiliates and purchase/resale
gas.
(g) In 1999 and 1998, refined products sold and
matching buy/sell volumes include 100 percent of
MAP and are not comparable to prior periods.
DOMESTIC E&P income increased by $304 million in
1999 from 1998 following a decrease of $310 million in
1998 from 1997. The increase in 1999 was primarily due
to higher liquid hydrocarbon and natural gas prices,
increased liquid hydrocarbon volumes resulting from new
production in the Gulf of Mexico and lower exploration
expense.
The decrease in 1998 was primarily due to lower
liquid hydrocarbon and natural gas prices, partially
offset by increased liquid hydrocarbon production and
natural gas volumes. The 17 percent, or 20,000 barrels
per day ("bpd"), increase in liquid hydrocarbon
production was mainly attributable to new production in
the Gulf of Mexico, while the increase in natural gas
volumes was mainly attributable to properties in east
Texas.
INTERNATIONAL E&P income increased by $36 million in
1999 from 1998 following a decrease of $185 million in
1998 from 1997. The increase in 1999 was primarily due
to higher liquid hydrocarbon prices, partially offset by
lower liquid hydrocarbon and natural gas production in
Europe and higher exploration expense.
M-27
The decrease in 1998 was primarily due to lower
liquid hydrocarbon and natural gas prices and higher
exploration and operating expenses. These items were
partially offset by increased liquid hydrocarbon
production and natural gas volumes. The 24 percent, or
12,000 bpd, increase in liquid hydrocarbon production
was mainly attributable to the acquired production in
Canada and new production in Gabon. The increase in
natural gas volumes was mainly attributable to acquired
production in Canada.
RM&T segment income decreased by $285 million in
1999 from 1998, primarily due to lower refined product
margins, partially offset by recognized mark-to-market
derivative gains, increased refined product sales
volumes, higher merchandise sales at Speedway
SuperAmerica LLC and the realization of additional
operating efficiencies as a result of forming MAP.
Beginning in 1998, RM&T segment income includes 100
percent of MAP. On an unaudited pro forma basis,
assuming the acquisition of Ashland's RM&T net assets
had occurred on January 1, 1997, income for the
reportable segments of the combined downstream
operations of Marathon and Ashland for 1997 would have
been $869 million. On this basis, 1998 RM&T segment
income of $896 million was slightly higher than pro
forma 1997 RM&T segment income. During 1998, the effects
of lower refining crack spreads were offset by strong
performances from MAP's asphalt and retail operations,
realization of operating efficiencies as a result of
combining Marathon and Ashland's downstream operations
and lower energy costs.
OTHER ENERGY RELATED BUSINESSES segment income
increased by $28 million in 1999 from 1998 following a
decrease of $15 million in 1998 from 1997. The increase
in 1999 was primarily due to higher equity earnings as a
result of increased pipeline throughput and a reversal
of abandonment accruals of $10 million in 1999. The
decrease in 1998 was primarily due to a gain on the sale
of an equity interest in a domestic pipeline company
included in 1997 segment income.
ITEM NOT ALLOCATED TO REPORTABLE SEGMENTS: IMV
RESERVE ADJUSTMENT - When U. S. Steel Corporation
acquired Marathon Oil Company in March 1982, crude oil
and refined product prices were at historically high
levels. In applying the purchase method of accounting,
the Marathon Group's crude oil and refined product
inventories were revalued by reference to current prices
at the time of acquisition, and this became the new LIFO
cost basis of the inventories. Generally accepted
accounting principles require that inventories be
carried at lower of cost or market. Accordingly, the
Marathon Group has established an IMV reserve to reduce
the cost basis of its inventories to net realizable
value. Quarterly adjustments to the IMV reserve result
in noncash charges or credits to income from operations.
When Marathon acquired the crude oil and refined
product inventories associated with Ashland's RM&T
operations on January 1, 1998, the Marathon Group
established a new LIFO cost basis for those inventories.
The acquisition cost of these inventories lowered the
overall average cost of the Marathon Group's combined
RM&T inventories. As a result, the price threshold at
which an IMV reserve will be recorded was also lowered.
These adjustments affect the comparability of
financial results from period to period as well as
comparisons with other energy companies, many of which
do not have such adjustments. Therefore, the Marathon
Group reports separately the effects of the IMV reserve
adjustments on financial results. In management's
opinion, the effects of such adjustments should be
considered separately when evaluating operating
performance.
In 1999, the IMV reserve adjustment resulted in a
credit to income from operations of $551 million
compared to a charge of $267 million in 1998, or a
change of $818 million. The favorable 1999 IMV reserve
adjustment, which is almost entirely recorded by MAP,
was primarily due to the significant increase in refined
product prices experienced during 1999. For additional
discussion of the IMV reserve, see Note 20 to the
Marathon Group Financial Statements.
NET INTEREST AND OTHER FINANCIAL COSTS increased by
$51 million in 1999 from 1998, following a decrease of
$23 million in 1998 from 1997. The increase in 1999 was
primarily due to lower interest income and lower
capitalized interest on upstream projects. The decrease
in 1998 was primarily due to increased interest income
and higher capitalized interest on upstream projects,
partially offset by higher interest and other financial
costs resulting from the debt incurred for the Tarragon
acquisition. For additional details, see Note 8 to the
Marathon Group Financial Statements.
M-28
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
The MINORITY INTEREST IN INCOME OF MAP, which
represents Ashland's 38 percent ownership interest,
increased by $198 million in 1999 from 1998, primarily
due to the favorable effects of the IMV reserve
adjustment as discussed above, partially offset by lower
RM&T segment income, also discussed above.
The PROVISION FOR ESTIMATED INCOME TAXES of $324
million in 1999 included a $23 million favorable
adjustment to deferred federal income taxes related to
the outcome of a United States Tax Court case. The 1998
income tax provision included $24 million of favorable
income tax accrual adjustments relating to foreign
operations. For additional discussion of income taxes,
see Note 18 to the Marathon Group Financial Statements.
NET INCOME increased by $344 million in 1999 from
1998, following a decrease of $146 million in 1998 from
1997, primarily reflecting the factors discussed above.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, CASH FLOWS AND
LIQUIDITY
CURRENT ASSETS increased $1,126 million from
year-end 1998, primarily due to an increase in
receivables and inventories. The accounts receivable and
inventory increases were mainly due to higher year-end
commodity prices.
CURRENT LIABILITIES increased $539 million from
year-end 1998, primarily due to an increase in accounts
payable due to higher year-end commodity prices and the
recording of an inter-group income tax payable,
partially offset by a decrease in notes payable and
distribution payable to the minority shareholder of MAP.
NET PROPERTY, PLANT AND EQUIPMENT decreased $136
million from year-end 1998, primarily due to the sale of
certain domestic and international production
properties, the sale of Scurlock Permian LLC,
reclassifications to assets held for disposal, and the
sale of Carnegie Natural Gas Company and affiliated
subsidiaries. This was partially offset by 1999 capital
expenditures including the acquisition of certain
Ultramar Diamond Shamrock ("UDS") assets in Michigan.
Net property, plant and equipment for each of the last
three years is summarized in the following table:
(DOLLARS IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
E&P
Domestic $ 3,435 $ 3,688 $ 3,469
International 2,987 3,027 2,156
--------- --------- ---------
Total E&P 6,422 6,715 5,625
RM&T(a) 3,712 3,517 1,755
Other(b) 159 197 186
--------- --------- ---------
Total $ 10,293 $ 10,429 $ 7,566
-----------------------------------------------------------------------------------------------------------
(a) Amounts for 1999 and 1998 include 100 percent of
MAP.
(b) Includes other energy related businesses and other
miscellaneous corporate net property, plant and
equipment.
TOTAL LONG-TERM DEBT AND NOTES PAYABLE at December
31, 1999 were $3,368 million, a decrease of $279 million
from year-end 1998. This decrease is mainly due to a
decrease in the debt attributed to the Marathon Group
because of higher cash flow provided from operating
activities, and a decrease in notes payable. Virtually
all of the debt is a direct obligation of, or is
guaranteed by, USX.
NET CASH PROVIDED FROM OPERATING ACTIVITIES totaled
$2,016 million in 1999, compared with $1,642 million in
1998 and $1,246 million in 1997. Operating cash flow in
1997 included the impact of terminating Marathon's
participation in an accounts receivable sales program,
resulting in a cash outflow of $340 million. Excluding
the effect of this item, net cash from operating
activities increased by $374 million in 1999 from 1998
and increased by $56 million in 1998 from 1997. The
increase in 1999 mainly reflected favorable working
capital changes. The increase in 1998 mainly reflected
improved net income (excluding the IMV reserve
adjustment and other noncash items), partially offset by
unfavorable working capital changes.
M-29
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
CAPITAL EXPENDITURES for each of the last three
years are summarized in the following table:
(DOLLARS IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
E&P
Domestic $ 356 $ 652 $ 647
International(a) 388 187 163
--------- --------- ---------
Total E&P 744 839 810
RM&T(b) 612 410 205
Other(c) 22 21 23
--------- --------- ---------
Total $ 1,378 $ 1,270 $ 1,038
-----------------------------------------------------------------------------------------------------------
(a) Amount for 1998 excludes the Tarragon acquisition.
(b) Amounts for 1999 and 1998 include 100 percent of
MAP.
(c) Includes other energy related businesses and other
miscellaneous corporate capital expenditures.
During 1999, domestic E&P capital spending mainly
included the completion of Green Canyon Blocks 112 and
113 ("Angus") and additional development at South Pass
89 in the Gulf of Mexico and natural gas developments in
East Texas and other gas basins throughout the western
United States. International E&P projects included the
completion of the Tchatamba South development, located
offshore Gabon, and oil and natural gas developments in
Canada. RM&T spending by MAP primarily consisted of the
acquisition of certain UDS assets in Michigan, upgrades
and expansions of retail marketing outlets, refinery
modifications and expansion and enhancement of logistic
systems.
Capital expenditures in 2000 are expected to be
approximately $1.4 billion, which is consistent with
1999 levels. Domestic E&P projects planned for 2000
include completion of the Petronius development in the
Gulf of Mexico, various producing property acquisitions
and continued natural gas developments in East Texas and
other gas basins throughout the western United States.
International E&P projects include the Tchatamba West
development, located offshore Gabon, and continued oil
and natural gas developments in Canada. RM&T spending by
MAP will primarily consist of upgrades and expansions of
retail marketing outlets, refinery improvements,
including the delayed coker unit project at the
Garyville refinery and expansion and enhancement of
logistic systems.
INVESTMENTS IN AFFILIATES were $59 million in 1999,
compared with $42 million in 1998. The 1999 amount
mainly reflected development spending for the Sakhalin
II project in Russia. The 1998 amount mainly reflected
MAP's acquisition of an interest in Southcap Pipe Line
Company for $22 million and continued investment in
pipeline and power projects.
LOANS AND ADVANCES TO AFFILIATES were $70 million in
1999, compared with $103 million in 1998. Cash outflows
in both periods primarily reflected funding provided to
equity affiliates for capital projects, primarily the
Sakhalin II project.
REPAYMENTS OF LOANS AND ADVANCES TO AFFILIATES were
$1 million in 1999, compared with $71 million in 1998.
The 1998 amount primarily was a result of repayments by
Sakhalin Energy of advances made by Marathon in
conjunction with the Sakhalin II project.
In 2000, net investments in affiliates are expected
to be approximately $52 million, primarily reflecting
continued development spending for the Sakhalin II
project.
Contract commitments for property, plant and
equipment acquisitions and long-term investments at
year-end 1999 were $485 million, compared with $624
million at year-end 1998.
The above statements with respect to future capital
expenditures and investments are forward-looking
statements, reflecting management's best estimates,
based on information currently available. To the extent
this information proves to be inaccurate, the timing and
levels of future spending could differ materially from
those included in the forward-looking statements.
Factors that could cause future capital expenditures and
investments to differ materially from present
expectations include price volatility, worldwide supply
and demand for petroleum products, general worldwide
economic conditions, levels of cash flow from
operations, available business opportunities, unforeseen
hazards such as weather conditions, and/or by delays in
obtaining government or partner approvals.
M-30
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
The ACQUISITION OF TARRAGON OIL AND GAS LIMITED in
1998 included cash payments of $686 million. For further
discussion of Tarragon, see Note 5 to the Marathon Group
Financial Statements.
CASH FROM DISPOSAL OF ASSETS was $356 million in
1999, compared with $65 million in 1998 and $60 million
in 1997. Proceeds in 1999 were mainly from the sales of
Scurlock Permian LLC, over 150 non-strategic domestic
and international production properties and Carnegie
Natural Gas Company and affiliated subsidiaries.
Proceeds in 1998 were mainly from the sales of domestic
production properties and equipment. Proceeds in 1997
were mainly from the sales of interests in various
domestic upstream properties, certain investments and an
interest in a domestic pipeline company.
The net change in RESTRICTED CASH was a net
withdrawal of $1 million in 1999 compared to a net
deposit of $21 million in 1998. The 1998 amount
represents cash deposited from the sales of domestic
production properties and equipment, partially offset by
cash withdrawn for the purchase of offshore production
leases.
FINANCIAL OBLIGATIONS, which consist of the Marathon
Group's portion of USX debt and preferred stock of a
subsidiary attributed to both groups, as well as debt
specifically attributed to the Marathon Group, decreased
by $299 million in 1999. Financial obligations decreased
primarily because cash from operating activities and
asset sales exceeded capital expenditures, distributions
to the minority shareholder of MAP and dividend
payments. For further details, see Management's
Discussion and Analysis of USX Consolidated Financial
Condition, Cash Flows and Liquidity.
DISTRIBUTIONS TO MINORITY SHAREHOLDER OF MAP were
$400 million in 1999, compared with $211 million in
1998. The increase was primarily due to a distribution
of $103 million in the first quarter 1999, which related
to fourth quarter 1998 MAP activity.
DERIVATIVE INSTRUMENTS
See Quantitative and Qualitative Disclosures
About Market Risk for a discussion of derivative
instruments and associated market risk.
LIQUIDITY
For discussion of USX's liquidity and capital
resources, see Management's Discussion and Analysis of
USX Consolidated Financial Condition, Cash Flows and
Liquidity.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF ENVIRONMENTAL MATTERS, LITIGATION AND
CONTINGENCIES
The Marathon Group has incurred and will continue to
incur substantial capital, operating and maintenance,
and remediation expenditures as a result of
environmental laws and regulations. To the extent these
expenditures, as with all costs, are not ultimately
reflected in the prices of the Marathon Group's products
and services, operating results will be adversely
affected. The Marathon Group believes that substantially
all of its competitors are subject to similar
environmental laws and regulations. However, the
specific impact on each competitor may vary depending on
a number of factors, including the age and location of
its operating facilities, marketing areas, production
processes and whether or not it is engaged in the
petrochemical business, power business or the marine
transportation of crude oil and refined products.
Marathon Group environmental expenditures for each
of the last three years were(a):
(DOLLARS IN MILLIONS) 1999(b) 1998(b) 1997
-----------------------------------------------------------------------------------------------------------
Capital $ 46 $ 83(c) $ 67(c)
Compliance
Operating & maintenance 117 126 84
Remediation(d) 25 10 19
------- ------- -------
Total $ 188 $ 219 $ 170
-----------------------------------------------------------------------------------------------------------
(a) Amounts are determined based on American Petroleum
Institute survey guidelines.
(b) Amounts for 1999 and 1998 include 100% of MAP.
(c) Reclassified to conform to 1999 classifications.
(d) These amounts include spending charged against such
reserves, net of recoveries, where permissible, but
do not include noncash provisions recorded for
environmental remediation.
M-31
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
The Marathon Group's environmental capital
expenditures accounted for three percent of total
capital expenditures in 1999, seven percent in 1998
(excluding the acquisition of Tarragon) and six percent
in 1997.
During 1997 through 1999, compliance expenditures
represented one percent of the Marathon Group's total
operating costs. Remediation spending during this period
was primarily related to retail marketing outlets which
incur ongoing clean-up costs for soil and groundwater
contamination associated with underground storage tanks
and piping.
USX has been notified that it is a potentially
responsible party ("PRP") at 15 waste sites related to
the Marathon Group under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") as
of December 31, 1999. In addition, there are 8 sites
related to the Marathon Group where USX has received
information requests or other indications that USX may
be a PRP under CERCLA but where sufficient information
is not presently available to confirm the existence of
liability.
There are also 110 additional sites, excluding
retail marketing outlets, related to the Marathon Group
where remediation is being sought under other
environmental statutes, both federal and state, or where
private parties are seeking remediation through
discussions or litigation. Of these sites, 17 were
associated with properties conveyed to MAP by Ashland
for which Ashland has retained liability for all costs
associated with remediation.
At many of these sites, USX is one of a number of
parties involved and the total cost of remediation, as
well as USX's share thereof, is frequently dependent
upon the outcome of investigations and remedial studies.
The Marathon Group accrues for environmental remediation
activities when the responsibility to remediate is
probable and the amount of associated costs is
reasonably determinable. As environmental remediation
matters proceed toward ultimate resolution or as
additional remediation obligations arise, charges in
excess of those previously accrued may be required. See
Note 26 to the Marathon Group Financial Statements.
New or expanded environmental requirements, which
could increase the Marathon Group's environmental costs,
may arise in the future. USX intends to comply with all
legal requirements regarding the environment, but since
many of them are not fixed or presently determinable
(even under existing legislation) and may be affected by
future legislation, it is not possible to predict
accurately the ultimate cost of compliance, including
remediation costs which may be incurred and penalties
which may be imposed. However, based on presently
available information, and existing laws and regulations
as currently implemented, the Marathon Group does not
anticipate that environmental compliance expenditures
(including operating and maintenance and remediation)
will materially increase in 2000. The Marathon Group's
environmental capital expenditures are expected to be
approximately $80 million in 2000. Predictions beyond
2000 can only be broad-based estimates which have
varied, and will continue to vary, due to the ongoing
evolution of specific regulatory requirements, the
possible imposition of more stringent requirements and
the availability of new technologies, among other
matters. Based upon currently identified projects, the
Marathon Group anticipates that environmental capital
expenditures will be approximately $55 million in 2001;
however, actual expenditures may vary as the number and
scope of environmental projects are revised as a result
of improved technology or changes in regulatory
requirements and could increase if additional projects
are identified or additional requirements are imposed.
In October 1998, the National Enforcement
Investigations Center and Region V of the United States
Environmental Protection Agency ("EPA") conducted a
multi-media inspection of MAP's Detroit refinery.
Subsequently, in November 1998, Region V conducted a
multi-media inspection of MAP's Robinson refinery. These
inspections covered compliance with the Clean Air Act
(New Source Performance Standards, Prevention of
Significant Deterioration, and the National Emission
Standards for Hazardous Air Pollutants for Benzene), the
Clean Water Act (Permit exceedances for the Waste Water
Treatment Plant), reporting obligations under the
Emergency Planning and Community Right to Know Act and
the handling of process waste. Although MAP has been
advised as to certain compliance issues regarding MAP's
Detroit refinery, it is not known when complete findings
on the
M-32
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
results of the inspections will be issued. Thus far, MAP
has been served with two Notices of Violation and three
Findings of Violation in connection with the multi-media
inspections at its Detroit refinery. The Detroit notices
allege violations of the Michigan State Air Pollution
Regulations, the EPA New Source Performance Standards
and National Emission Standards for Hazardous Air
Pollutants for benzene. The Robinson notice alleges
noncompliance with a general conduct provision as a
result of acid-gas flaring since 1994. The Robinson
refinery is alleged to have routine acid gas flaring
arising from a failure to properly operate and maintain
the sulfur recovery plant and amine units. MAP can
contest the factual and legal basis for the allegations
prior to the EPA taking enforcement action. At this
time, it is not known when complete findings on the
results of these multi-media inspections will be issued.
During 1999 an EPA advisory panel on oxygenate use
in gasoline issued recommendations to the EPA, calling
for the improved protection of drinking water from
methyl tertiary butyl ether ("MTBE") impacts, a
substantial reduction in the use of MTBE, and action by
Congress to remove the oxygenate requirements for
reformulated gasoline under the Clean Air Act. The panel
reviewed public health and environmental issues that
have been raised by the use of MTBE in gasoline, and
specifically by the discovery of MTBE in water supplies.
State and federal environmental regulatory agencies
could implement the majority of the recommendations,
while some would require Congressional legislative
action. California has acted to ban MTBE use by December
31, 2002 and has requested a waiver from the EPA of
California state oxygenate requirements. Other states
are also assessing whether to continue the use of MTBE
in gasoline.
Marathon has a non-material investment in MTBE units
at its Robinson, Catlettsburg and Detroit refineries.
Approximately eight percent of Marathon's refinery
gasoline production includes MTBE. Potential phase-outs
or restrictions on the use of MTBE would not be expected
to have a material impact on Marathon and its
operations, although it is not possible to reach any
conclusions until federal or further state actions, if
any, are taken.
USX is the subject of, or party to, a number of
pending or threatened legal actions, contingencies and
commitments relating to the Marathon Group involving a
variety of matters, including laws and regulations
relating to the environment, certain of which are
discussed in Note 26 to the Marathon Group Financial
Statements. The ultimate resolution of these
contingencies could, individually or in the aggregate,
be material to the Marathon Group financial statements.
However, management believes that USX will remain a
viable and competitive enterprise even though it is
possible that these contingencies could be resolved
unfavorably to the Marathon Group. See Management's
Discussion and Analysis of USX Consolidated Financial
Condition, Cash Flows and Liquidity.
OUTLOOK
The outlook regarding the Marathon Group's upstream
revenues and income is largely dependent upon future
prices and volumes of liquid hydrocarbons and natural
gas. Prices have historically been volatile and have
frequently been affected by unpredictable changes in
supply and demand resulting from fluctuations in
worldwide economic activity and political developments
in the world's major oil and gas producing and consuming
areas. Any significant decline in prices could have a
material adverse effect on the Marathon Group's results
of operations. A prolonged decline in such prices could
also adversely affect the quantity of crude oil and
natural gas reserves that can be economically produced
and the amount of capital available for exploration and
development.
In 2000, worldwide liquid hydrocarbon production,
including Marathon's share of equity affiliates, is
expected to increase from 1999, to average approximately
210,000 bpd. Most of the increase is anticipated in the
second half of the year. This primarily reflects
projected new production from the start-up of Petronius
in the Gulf of Mexico in the third quarter of 2000 and
one full ice-free season of production from the
Piltun-Astokhskoye ("P-A") field in Russia, partially
offset by natural production declines of mature fields.
In 2001, worldwide liquid hydrocarbon production is
expected to increase further to approximately 230,000
bpd. In 2000 and 2001, worldwide natural gas volumes,
including Marathon's share of equity affiliates, are
expected to average approximately 1.3 billion cubic feet
per day ("bcfd") and 1.4 bcfd, respectively. These
projections are based on known discoveries and do not
assume any new discoveries, acquisitions or
dispositions.
M-33
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Progress continues on the Petronius development in
the deepwater Gulf of Mexico. In 1999, efforts focused
on rebuilding the lost platform deck module, which was
dropped during installation in 1998. Third party
insurance has covered substantially all rebuilding costs
associated with this incident. The platform module is
scheduled to be completed in the first quarter of 2000
and offshore installation should occur in the second
quarter of 2000 with first production expected in the
third quarter of 2000.
In September 1999, production commenced from the
Angus field, a three-well subsea development in the Gulf
of Mexico. In January 2000, Marathon sold its 33.34
percent interest in the Angus development and will
report a pre-tax gain of approximately $85 million in
the first quarter of 2000. Marathon's worldwide liquid
hydrocarbon production forecasts discussed previously
exclude estimated 2000 and 2001 production from the
Angus field.
On January 21, 2000, the Poseidon pipeline, a subsea
pipeline that transports Marathon's production from
Ewing Bank 873, was damaged by a ship's anchor and had
to be shut-in. The pipeline was inoperable for
approximately three weeks for repairs and resulted in no
production from Ewing Bank during this period. Marathon
does not expect this incident to have a material impact
on the current year's operations.
Marathon has increased its presence in the Gulf of
Mexico through extensive acquisition and analysis of 3-D
seismic. Plans are to drill eight deepwater exploratory
wells in 2000. To support this increased drilling
activity, Marathon has contracted two new deepwater
rigs, capable of drilling in water depths beyond 6,500
feet.
Marathon holds a 37.5 percent interest in Sakhalin
Energy Investment Company Ltd. ("Sakhalin Energy"), an
incorporated joint venture company responsible for the
overall management of the Sakhalin II project. This
project includes development of the P-A oil field and
the Lunskoye gas-condensate field, which are located
8-12 miles offshore Sakhalin Island in the Russian Far
East Region. The Russian State Reserves Committee has
approved estimated combined reserves for the P-A and
Lunskoye fields of 1 billion gross barrels of liquid
hydrocarbons and 14 trillion cubic feet of natural gas.
In July 1999, oil production commenced from the P-A
field and the first lifting occurred on September 20,
1999. In late September, production was shut-in
following a failure of the mooring system and resumed
only for brief periods during October and November
before operations ceased for the winter in early
December. A re-designed mooring system is expected to be
installed in the second quarter of 2000 and production
is expected to resume in June 2000, the beginning of the
ice-free season. In 2000, gross production is expected
to average 36,000 gross bpd (on an annualized basis).
Marathon's equity share of reserves from primary
production in the Astokh Feature is 80 million barrels
of oil.
Further development of the P-A field continues,
including plans to drill two appraisal and eight
development wells in 2000 and to commence waterflood
activity for the Astokh Feature. With respect to the
Lunskoye field, appraisal work and efforts to secure
long term gas sales markets continue. Commencement of
gas production from the Lunskoye field, which will be
contingent upon the conclusion of a gas sales contract,
is anticipated to occur in 2006 or later.
At December 31, 1999, Marathon's net investment in
the Sakhalin II project was approximately $400 million.
Other major upstream projects, which are currently
underway or under evaluation and are expected to improve
future income streams, include the Mississippi Canyon
Block 348 in the Gulf of Mexico, the Tchatamba West
field, located offshore Gabon, and various North
American natural gas fields.
In 2000, Marathon launched an initiative that
targets $150 million in annual, repeatable pre-tax
operating efficiencies by year-end 2001. This initiative
focuses on gaining measurable, hard-dollar improvements
in revenues or expenses. Besides a goal to constrain
production costs, this initiative includes strategic
management of Marathon's portfolio of properties,
allocation of personnel and resources to assets and
activities with the greatest opportunity for return and
growth, and the adoption of enterprise-wide tools
(computerization and other new technology) to elevate
workforce productivity.
M-34
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
The above discussion includes forward-looking
statements with respect to worldwide liquid hydrocarbon
production (including Russia for 2000) and natural gas
volumes for 2000 and 2001, commencement of projects and
dates of initial production, Gulf of Mexico and Russia
drilling programs, and the amount and timing of
operating efficiencies. 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, drilling rig
availability, reserve replacement rates, other
geological, operating and economic considerations, and
the ability to identify sufficient initiatives in order
to generate efficiencies. In addition, development of
new production properties in countries outside the
United States may require protracted negotiations with
host governments and is frequently subject to political
considerations, such as tax regulations, which could
adversely affect the timing and economics of projects.
To the extent these assumptions prove inaccurate and/or
negotiations and other considerations are not
satisfactorily resolved, actual results could be
materially different than present expectations.
Downstream income of the Marathon Group is largely
dependent upon refined product margins, which reflect
the difference between the selling prices of refined
products and the cost of raw materials refined and
manufacturing costs. Refined product margins have been
historically volatile and vary with the level of
economic activity in the various marketing areas, the
regulatory climate, crude oil costs, manufacturing costs
and the available supply of crude oil and refined
products.
MAP's subsidiary, Ohio River Pipe Line LLC ("ORPL"),
plans to build a pipeline from Kenova, West Virginia to
Columbus, Ohio. ORPL is a common carrier pipeline
company and the pipeline will be an interstate common
carrier pipeline. The pipeline is expected to initially
move about 50,000 bpd of refined petroleum into the
central Ohio region. Construction is currently expected
to begin in late 2000. However, the construction
schedule is largely dependent on obtaining the necessary
rights-of-way, of which over 86 percent have been
obtained to date, and final regulatory approvals.
MAP is constructing a delayed coker unit at its
Garyville, LA refinery. This unit will allow for the use
of heavier, lower cost crude and eliminate the
production of heavy fuel oil. To supply this new unit,
MAP reached an agreement with P.M.I. Comercio
Internacional, S.A. de C.V., (PMI), an affiliate of
Petroleos Mexicanos, (PEMEX), to purchase approximately
90,000 bpd of heavy Maya crude oil. This is a multi-year
contract, which will begin upon completion of the
delayed coker unit which is scheduled in the fourth
quarter of 2001. In addition, a project to increase
crude throughput and light product output is being
undertaken at MAP's Robinson, IL refinery and is also
expected to be completed in the fourth quarter of 2001.
The above statements with respect to pipeline and
refinery improvement projects are forward looking
statements. Some factors that could potentially cause
actual results to differ materially from present
expectations include (among others) the price of
petroleum products, levels of cash flow from operations,
obtaining the necessary construction and environmental
permits, unforeseen hazards such as weather conditions,
obtaining the necessary rights-of-way and regulatory
approval constraints.
YEAR 2000
The Marathon Group encountered only minor problems
during the rollover to the Year 2000, none of which
impacted operations. Most problems were quickly
corrected, while the remaining problems were addressed
by utilizing contingency plans to prevent any business
disruptions.
Essentially all business processes and systems have
been successfully operated since the rollover to the
Year 2000. However, the possibility for Year 2000
problems still exists. Therefore, the Marathon Group
plans to continue monitoring its business processes and
systems to ensure dates and date-related information
continue to be processed correctly.
Total costs associated with Year 2000 readiness
were $36 million, including $18 million of incremental
costs.
M-35
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133"). This new standard
requires recognition of all derivatives as either assets
or liabilities at fair value. SFAS No. 133 may result in
additional volatility in both current period earnings
and other comprehensive income as a result of recording
recognized and unrecognized gains and losses resulting
from changes in the fair value of derivative
instruments. The transition adjustment resulting from
adoption of SFAS No. 133 will be reported as a
cumulative effect of a change in accounting principle.
Under the new Standard, USX may elect not to
designate certain derivative instruments as hedges even
if the strategy qualifies for hedge accounting
treatment. This approach would eliminate the
administrative effort needed to measure effectiveness
and monitor such instruments; however, this approach
also may result in additional volatility in current
period earnings.
USX cannot reasonably estimate the effect of
adoption on either the financial position or results of
operations. It is not possible to estimate what effect
this Statement will have on future results of
operations, although greater period-to-period volatility
is likely. USX plans to adopt the Standard effective
January 1, 2001.
M-36
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MANAGEMENT OPINION CONCERNING DERIVATIVE INSTRUMENTS
USX uses commodity-based and foreign currency derivative
instruments to manage its price risk. Management has authorized
the use of futures, forwards, swaps and options to manage
exposure to price fluctuations related to the purchase,
production or sale of crude oil, natural gas, refined products,
nonferrous metals and electricity. For transactions that
qualify for hedge accounting, the resulting gains or losses are
deferred and subsequently recognized in income from operations,
in the same period as the underlying physical transaction.
Derivative instruments used for trading and other activities
are marked-to-market and the resulting gains or losses are
recognized in the current period in income from operations.
While USX's risk management activities generally reduce market
risk exposure due to unfavorable commodity price changes for
raw material purchases and products sold, such activities can
also encompass strategies that assume price risk.
Management believes that use of derivative instruments
along with risk assessment procedures and internal controls
does not expose the Marathon Group to material risk. The use of
derivative instruments could materially affect the Marathon
Group's results of operations in particular quarterly or annual
periods. However, management believes that use of these
instruments will not have a material adverse effect on
financial position or liquidity. For a summary of accounting
policies related to derivative instruments, see Note 2 to the
Marathon Group Financial Statements.
COMMODITY PRICE RISK AND RELATED RISKS
In the normal course of its business, the Marathon Group is
exposed to market risk or price fluctuations related to the
purchase, production or sale of crude oil, natural gas and
refined products. To a lesser extent, the Marathon Group is
exposed to the risk of price fluctuations on natural gas
liquids, electricity and petroleum feedstocks used as raw
materials. The Marathon Group is also exposed to effects of
price fluctuations on the value of its commodity inventories.
The Marathon Group's market risk strategy has generally
been to obtain competitive prices for its products and services
and allow operating results to reflect market price movements
dictated by supply and demand. However, the Marathon Group uses
fixed-price contracts and derivative commodity instruments to
manage a relatively small portion of its commodity price risk.
The Marathon Group uses fixed-price contracts for portions of
its natural gas production to manage exposure to fluctuations
in natural gas prices. In addition, the Marathon Group uses
derivative commodity instruments such as exchange-traded
futures contracts and options, and over-the-counter ("OTC")
commodity swaps and options to manage exposure to market risk
related to the purchase, production or sale of crude oil,
natural gas, refined products and electricity. For transactions
that qualify for hedge accounting, the resulting gains or
losses are deferred and subsequently recognized in income from
operations, in the same period as the underlying physical
transaction. Derivative instruments used for trading and other
activities are marked-to-market and the resulting gains or
losses are recognized in the current period in income from
operations. However, certain derivative commodity instruments
have the effect of restoring the equity portion of fixed-price
sales of natural gas to variable market-based pricing. These
instruments are used as part of the Marathon Group's overall
risk management programs.
M-37
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(CONTINUED)
Sensitivity analyses of the incremental effects on pretax
income of hypothetical 10% and 25% changes in commodity prices
for open derivative commodity instruments for the Marathon
Group as of December 31, 1999 and December 31, 1998, are
provided in the following table(a):
(DOLLARS IN MILLIONS)
-----------------------------------------------------------------------------------------------------------
INCREMENTAL DECREASE IN
PRETAX INCOME ASSUMING A
HYPOTHETICAL PRICE
CHANGE OF(a)
1999 1998
Derivative Commodity Instruments 10% 25% 10% 25%
-----------------------------------------------------------------------------------------------------------
Marathon Group(b)(c):
Crude oil (price increase)(d)
Trading $ 1.3 $ 7.7 $ - $ -
Other than trading 16.5 54.0 2.6 12.8
Natural gas (price decrease)(d)
Trading - - - -
Other than trading 4.7 16.8 9.4 24.0
Refined products (price increase)(d)
Trading - - - -
Other than trading 8.4 23.8 1.9 6.5
-----------------------------------------------------------------------------------------------------------
(a) Gains and losses on derivative commodity instruments are
generally offset by price changes in the underlying
commodity. Effects of these offsets are not reflected in the
sensitivity analyses. Amounts reflect the estimated
incremental effect on pretax income of hypothetical 10% and
25% changes in closing commodity prices for each open
contract position at December 31, 1999 and December 31,
1998. Marathon Group management evaluates their portfolio of
derivative commodity instruments on an ongoing basis and
adds or revises strategies to reflect anticipated market
conditions and changes in risk profiles. Changes to the
portfolio subsequent to December 31, 1999, would cause
future pretax income effects to differ from those presented
in the table.
(b) The number of net open contracts varied throughout 1999,
from a low of 107 contracts at July 14, to a high of 34,199
contracts at April 16, and averaged 14,462 for the year. The
derivative commodity instruments used and hedging positions
taken also varied throughout 1999, and will continue to vary
in the future. Because of these variations in the
composition of the portfolio over time, the number of open
contracts, by itself, cannot be used to predict future
income effects.
(c) The calculation of sensitivity amounts for basis swaps
assumes that the physical and paper indices are perfectly
correlated. Gains and losses on options are based on changes
in intrinsic value only.
(d) The direction of the price change used in calculating the
sensitivity amount for each commodity reflects that which
would result in the largest incremental decrease in pretax
income when applied to the derivative commodity instruments
used to hedge that commodity.
While derivative commodity instruments are generally used
to reduce risks from unfavorable commodity price movements,
they also may limit the opportunity to benefit from favorable
movements. In total, Marathon's exploration and production
operations recorded net pretax other than trading activity
gains of $3 million in 1999, losses of $3 million in 1998 and
losses of $3 million in 1997.
Marathon's refining, marketing and transportation
operations generally use derivative commodity instruments to
lock-in costs of certain raw material purchases, to protect
carrying values of inventories and to protect margins on
fixed-price sales of refined products. Marathon's refining,
marketing and transportation recorded net pretax other than
trading activity gains, net of the 38% minority interest in
MAP, of approximately $8 million in 1999, $28 million in 1998,
and $29 million in 1997. Beginning in 1999, Marathon's
refining, marketing and transportation operations used
derivative instruments for trading activities and recorded net
pretax trading activity gains, net of the 38% minority interest
in MAP, of $5 million. For additional quantitative information
relating to derivative commodity instruments, including
aggregate contract values and fair values, where appropriate,
see Note 24 to the Marathon Group Financial Statements.
M-38
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(CONTINUED)
The Marathon Group is subject to basis risk, caused by
factors that affect the relationship between commodity futures
prices reflected in derivative commodity instruments and the
cash market price of the underlying commodity. Natural gas
transaction prices are frequently based on industry reference
prices that may vary from prices experienced in local markets.
For example, New York Mercantile Exchange ("NYMEX") contracts
for natural gas are priced at Louisiana's Henry Hub, while the
underlying quantities of natural gas may be produced and sold
in the Western United States at prices that do not move in
strict correlation with NYMEX prices. To the extent that
commodity price changes in one region are not reflected in
other regions, derivative commodity instruments may no longer
provide the expected hedge, resulting in increased exposure to
basis risk. These regional price differences could yield
favorable or unfavorable results. OTC transactions are being
used to manage exposure to a portion of basis risk.
The Marathon Group is subject to liquidity risk, caused by
timing delays in liquidating contract positions due to a
potential inability to identify a counterparty willing to
accept an offsetting position. Due to the large number of
active participants, liquidity risk exposure is relatively low
for exchange-traded transactions.
INTEREST RATE RISK
USX is subject to the effects of interest rate fluctuations
on certain of its non-derivative financial instruments. A
sensitivity analysis of the projected incremental effect of a
hypothetical 10% decrease in year-end 1999 and 1998 interest
rates on the fair value of the Marathon Group's specifically
attributed non-derivative financial instruments and the
Marathon Group's portion of USX's non-derivative financial
instruments attributed to both groups, is provided in the
following table:
(DOLLARS IN MILLIONS)
-----------------------------------------------------------------------------------------------------------
As of December 31, 1999 1998
Incremental Incremental
Increase in Increase in
Non-Derivative Carrying Fair Fair Carrying Fair Fair
Financial Instruments(a) Value(b) Value(b) Value(c) Value(b) Value(b) Value(c)
-----------------------------------------------------------------------------------------------------------
Financial assets:
Investments and
long-term receivables(d) $ 109 $ 166 $ - $ 101 $ 157 $ -
-----------------------------------------------------------------------------------------------------------
Financial liabilities:
Long-term debt(e)(f) $ 3,353 $ 3,443 $ 144 $ 3,515 $ 3,797 $ 142
Preferred stock of subsidiary(g) 184 176 16 184 183 15
--------- --------- --------- --------- --------- ---------
Total liabilities $ 3,537 $ 3,619 $ 160 $ 3,699 $ 3,980 $ 157
-----------------------------------------------------------------------------------------------------------
(a) Fair values of cash and cash equivalents, receivables, notes
payable, accounts payable and accrued interest, approximate
carrying value and are relatively insensitive to changes in
interest rates due to the short-term maturity of the
instruments. Accordingly, these instruments are excluded
from the table.
(b) See Note 25 to the Marathon Group Financial Statements.
(c) Reflects, by class of financial instrument, the estimated
incremental effect of a hypothetical 10% decrease in
interest rates at December 31, 1999 and December 31, 1998 on
the fair value of non-derivative financial instruments. For
financial liabilities, this assumes a 10% decrease in the
weighted average yield to maturity of USX's long-term debt
at December 31, 1999 and December 31, 1998.
(d) For additional information, see Note 19 to the Marathon
Group Financial Statements.
(e) Includes amounts due within one year.
(f) Fair value was based on market prices where available, or
current borrowing rates for financings with similar terms
and maturities. For additional information, see Note 12 to
the Marathon Group Financial Statements.
(g) See Note 23 to the USX Consolidated Financial Statements.
At December 31, 1999, USX's portfolio of long-term debt was
comprised primarily of fixed-rate instruments. Therefore, the
fair value of the portfolio is relatively sensitive to effects
of interest rate fluctuations. This sensitivity is illustrated
by the $144 million increase in the fair value of long-term
debt assuming a hypothetical 10% decrease in interest rates.
However, USX's sensitivity to interest rate declines and
corresponding increases in the fair value of its debt portfolio
would unfavorably affect USX's results and cash flows only to
the extent that USX elected to repurchase or otherwise retire
all or a portion of its fixed-rate debt portfolio at prices
above carrying value.
M-39
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(CONTINUED)
FOREIGN CURRENCY EXCHANGE RATE RISK
USX is subject to the risk of price fluctuations related to
anticipated revenues and operating costs, firm commitments for
capital expenditures and existing assets or liabilities
denominated in currencies other than U.S. dollars. USX has not
generally used derivative instruments to manage this risk.
However, USX has made limited use of forward currency contracts
to manage exposure to certain currency price fluctuations. At
December 31, 1999, USX had open Canadian dollar forward
purchase contracts with a total carrying value of approximately
$52 million compared to $36 million at December 31, 1998. A 10%
increase in the December 31, 1999, Canadian dollar to U.S.
dollar forward rate would result in a charge to income of
approximately $5 million. Last year, a 10% increase in the
December 31, 1998 Canadian dollar to U. S. dollar forward rate
would have resulted in a charge to income of $3 million. The
entire amount of these contracts is attributed to the Marathon
Group.
EQUITY PRICE RISK
At December 31, 1999, the Marathon Group had no material
exposure to equity price risk.
SAFE HARBOR
The Marathon Group's quantitative and qualitative
disclosures about market risk include forward-looking
statements with respect to management's opinion about risks
associated with the Marathon Group's use of derivative
instruments. These statements are based on certain assumptions
with respect to market prices and industry supply of and demand
for crude oil, natural gas and refined products. To the extent
that these assumptions prove to be inaccurate, future outcomes
with respect to the Marathon Group's hedging programs may
differ materially from those discussed in the forward-looking
statements.
M-40
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MANAGEMENT OPINION CONCERNING DERIVATIVE INSTRUMENTS
USX uses commodity-based and foreign currency derivative
instruments to manage its price risk. Management has authorized
the use of futures, forwards, swaps and options to manage
exposure to price fluctuations related to the purchase,
production or sale of crude oil, natural gas, refined products,
nonferrous metals and electricity. For transactions that
qualify for hedge accounting, the resulting gains or losses are
deferred and subsequently recognized in income from operations,
in the same period as the underlying physical transaction.
Derivative instruments used for trading and other activities
are marked-to-market and the resulting gains or losses are
recognized in the current period in income from operations.
While USX's risk management activities generally reduce market
risk exposure due to unfavorable commodity price changes for
raw material purchases and products sold, such activities can
also encompass strategies that assume price risk.
Management believes that use of derivative instruments
along with risk assessment procedures and internal controls
does not expose the Marathon Group to material risk. The use of
derivative instruments could materially affect the Marathon
Group's results of operations in particular quarterly or annual
periods. However, management believes that use of these
instruments will not have a material adverse effect on
financial position or liquidity. For a summary of accounting
policies related to derivative instruments, see Note 2 to the
Marathon Group Financial Statements.
COMMODITY PRICE RISK AND RELATED RISKS
In the normal course of its business, the Marathon Group is
exposed to market risk or price fluctuations related to the
purchase, production or sale of crude oil, natural gas and
refined products. To a lesser extent, the Marathon Group is
exposed to the risk of price fluctuations on natural gas
liquids, electricity and petroleum feedstocks used as raw
materials. The Marathon Group is also exposed to effects of
price fluctuations on the value of its commodity inventories.
The Marathon Group's market risk strategy has generally
been to obtain competitive prices for its products and services
and allow operating results to reflect market price movements
dictated by supply and demand. However, the Marathon Group uses
fixed-price contracts and derivative commodity instruments to
manage a relatively small portion of its commodity price risk.
The Marathon Group uses fixed-price contracts for portions of
its natural gas production to manage exposure to fluctuations
in natural gas prices. In addition, the Marathon Group uses
derivative commodity instruments such as exchange-traded
futures contracts and options, and over-the-counter ("OTC")
commodity swaps and options to manage exposure to market risk
related to the purchase, production or sale of crude oil,
natural gas, refined products and electricity. For transactions
that qualify for hedge accounting, the resulting gains or
losses are deferred and subsequently recognized in income from
operations, in the same period as the underlying physical
transaction. Derivative instruments used for trading and other
activities are marked-to-market and the resulting gains or
losses are recognized in the current period in income from
operations. However, certain derivative commodity instruments
have the effect of restoring the equity portion of fixed-price
sales of natural gas to variable market-based pricing. These
instruments are used as part of the Marathon Group's overall
risk management programs.
M-37
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(CONTINUED)
Sensitivity analyses of the incremental effects on pretax
income of hypothetical 10% and 25% changes in commodity prices
for open derivative commodity instruments for the Marathon
Group as of December 31, 1999 and December 31, 1998, are
provided in the following table(a):
(DOLLARS IN MILLIONS)
-----------------------------------------------------------------------------------------------------------
INCREMENTAL DECREASE IN
PRETAX INCOME ASSUMING A
HYPOTHETICAL PRICE
CHANGE OF(a)
1999 1998
Derivative Commodity Instruments 10% 25% 10% 25%
-----------------------------------------------------------------------------------------------------------
Marathon Group(b)(c):
Crude oil (price increase)(d)
Trading $ 1.3 $ 7.7 $ - $ -
Other than trading 16.5 54.0 2.6 12.8
Natural gas (price decrease)(d)
Trading - - - -
Other than trading 4.7 16.8 9.4 24.0
Refined products (price increase)(d)
Trading - - - -
Other than trading 8.4 23.8 1.9 6.5
-----------------------------------------------------------------------------------------------------------
(a) Gains and losses on derivative commodity instruments are
generally offset by price changes in the underlying
commodity. Effects of these offsets are not reflected in the
sensitivity analyses. Amounts reflect the estimated
incremental effect on pretax income of hypothetical 10% and
25% changes in closing commodity prices for each open
contract position at December 31, 1999 and December 31,
1998. Marathon Group management evaluates their portfolio of
derivative commodity instruments on an ongoing basis and
adds or revises strategies to reflect anticipated market
conditions and changes in risk profiles. Changes to the
portfolio subsequent to December 31, 1999, would cause
future pretax income effects to differ from those presented
in the table.
(b) The number of net open contracts varied throughout 1999,
from a low of 107 contracts at July 14, to a high of 34,199
contracts at April 16, and averaged 14,462 for the year. The
derivative commodity instruments used and hedging positions
taken also varied throughout 1999, and will continue to vary
in the future. Because of these variations in the
composition of the portfolio over time, the number of open
contracts, by itself, cannot be used to predict future
income effects.
(c) The calculation of sensitivity amounts for basis swaps
assumes that the physical and paper indices are perfectly
correlated. Gains and losses on options are based on changes
in intrinsic value only.
(d) The direction of the price change used in calculating the
sensitivity amount for each commodity reflects that which
would result in the largest incremental decrease in pretax
income when applied to the derivative commodity instruments
used to hedge that commodity.
While derivative commodity instruments are generally used
to reduce risks from unfavorable commodity price movements,
they also may limit the opportunity to benefit from favorable
movements. In total, Marathon's exploration and production
operations recorded net pretax other than trading activity
gains of $3 million in 1999, losses of $3 million in 1998 and
losses of $3 million in 1997.
Marathon's refining, marketing and transportation
operations generally use derivative commodity instruments to
lock-in costs of certain raw material purchases, to protect
carrying values of inventories and to protect margins on
fixed-price sales of refined products. Marathon's refining,
marketing and transportation recorded net pretax other than
trading activity gains, net of the 38% minority interest in
MAP, of approximately $8 million in 1999, $28 million in 1998,
and $29 million in 1997. Beginning in 1999, Marathon's
refining, marketing and transportation operations used
derivative instruments for trading activities and recorded net
pretax trading activity gains, net of the 38% minority interest
in MAP, of $5 million. For additional quantitative information
relating to derivative commodity instruments, including
aggregate contract values and fair values, where appropriate,
see Note 24 to the Marathon Group Financial Statements.
M-38
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(CONTINUED)
The Marathon Group is subject to basis risk, caused by
factors that affect the relationship between commodity futures
prices reflected in derivative commodity instruments and the
cash market price of the underlying commodity. Natural gas
transaction prices are frequently based on industry reference
prices that may vary from prices experienced in local markets.
For example, New York Mercantile Exchange ("NYMEX") contracts
for natural gas are priced at Louisiana's Henry Hub, while the
underlying quantities of natural gas may be produced and sold
in the Western United States at prices that do not move in
strict correlation with NYMEX prices. To the extent that
commodity price changes in one region are not reflected in
other regions, derivative commodity instruments may no longer
provide the expected hedge, resulting in increased exposure to
basis risk. These regional price differences could yield
favorable or unfavorable results. OTC transactions are being
used to manage exposure to a portion of basis risk.
The Marathon Group is subject to liquidity risk, caused by
timing delays in liquidating contract positions due to a
potential inability to identify a counterparty willing to
accept an offsetting position. Due to the large number of
active participants, liquidity risk exposure is relatively low
for exchange-traded transactions.
INTEREST RATE RISK
USX is subject to the effects of interest rate fluctuations
on certain of its non-derivative financial instruments. A
sensitivity analysis of the projected incremental effect of a
hypothetical 10% decrease in year-end 1999 and 1998 interest
rates on the fair value of the Marathon Group's specifically
attributed non-derivative financial instruments and the
Marathon Group's portion of USX's non-derivative financial
instruments attributed to both groups, is provided in the
following table:
(DOLLARS IN MILLIONS)
-----------------------------------------------------------------------------------------------------------
As of December 31, 1999 1998
Incremental Incremental
Increase in Increase in
Non-Derivative Carrying Fair Fair Carrying Fair Fair
Financial Instruments(a) Value(b) Value(b) Value(c) Value(b) Value(b) Value(c)
-----------------------------------------------------------------------------------------------------------
Financial assets:
Investments and
long-term receivables(d) $ 109 $ 166 $ - $ 101 $ 157 $ -
-----------------------------------------------------------------------------------------------------------
Financial liabilities:
Long-term debt(e)(f) $ 3,353 $ 3,443 $ 144 $ 3,515 $ 3,797 $ 142
Preferred stock of subsidiary(g) 184 176 16 184 183 15
--------- --------- --------- --------- --------- ---------
Total liabilities $ 3,537 $ 3,619 $ 160 $ 3,699 $ 3,980 $ 157
-----------------------------------------------------------------------------------------------------------
(a) Fair values of cash and cash equivalents, receivables, notes
payable, accounts payable and accrued interest, approximate
carrying value and are relatively insensitive to changes in
interest rates due to the short-term maturity of the
instruments. Accordingly, these instruments are excluded
from the table.
(b) See Note 25 to the Marathon Group Financial Statements.
(c) Reflects, by class of financial instrument, the estimated
incremental effect of a hypothetical 10% decrease in
interest rates at December 31, 1999 and December 31, 1998 on
the fair value of non-derivative financial instruments. For
financial liabilities, this assumes a 10% decrease in the
weighted average yield to maturity of USX's long-term debt
at December 31, 1999 and December 31, 1998.
(d) For additional information, see Note 19 to the Marathon
Group Financial Statements.
(e) Includes amounts due within one year.
(f) Fair value was based on market prices where available, or
current borrowing rates for financings with similar terms
and maturities. For additional information, see Note 12 to
the Marathon Group Financial Statements.
(g) See Note 23 to the USX Consolidated Financial Statements.
At December 31, 1999, USX's portfolio of long-term debt was
comprised primarily of fixed-rate instruments. Therefore, the
fair value of the portfolio is relatively sensitive to effects
of interest rate fluctuations. This sensitivity is illustrated
by the $144 million increase in the fair value of long-term
debt assuming a hypothetical 10% decrease in interest rates.
However, USX's sensitivity to interest rate declines and
corresponding increases in the fair value of its debt portfolio
would unfavorably affect USX's results and cash flows only to
the extent that USX elected to repurchase or otherwise retire
all or a portion of its fixed-rate debt portfolio at prices
above carrying value.
M-39
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(CONTINUED)
FOREIGN CURRENCY EXCHANGE RATE RISK
USX is subject to the risk of price fluctuations related to
anticipated revenues and operating costs, firm commitments for
capital expenditures and existing assets or liabilities
denominated in currencies other than U.S. dollars. USX has not
generally used derivative instruments to manage this risk.
However, USX has made limited use of forward currency contracts
to manage exposure to certain currency price fluctuations. At
December 31, 1999, USX had open Canadian dollar forward
purchase contracts with a total carrying value of approximately
$52 million compared to $36 million at December 31, 1998. A 10%
increase in the December 31, 1999, Canadian dollar to U.S.
dollar forward rate would result in a charge to income of
approximately $5 million. Last year, a 10% increase in the
December 31, 1998 Canadian dollar to U. S. dollar forward rate
would have resulted in a charge to income of $3 million. The
entire amount of these contracts is attributed to the Marathon
Group.
EQUITY PRICE RISK
At December 31, 1999, the Marathon Group had no material
exposure to equity price risk.
SAFE HARBOR
The Marathon Group's quantitative and qualitative
disclosures about market risk include forward-looking
statements with respect to management's opinion about risks
associated with the Marathon Group's use of derivative
instruments. These statements are based on certain assumptions
with respect to market prices and industry supply of and demand
for crude oil, natural gas and refined products. To the extent
that these assumptions prove to be inaccurate, future outcomes
with respect to the Marathon Group's hedging programs may
differ materially from those discussed in the forward-looking
statements.
M-40
U.S. Steel Group
INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA,
MANAGEMENT'S DISCUSSION AND ANALYSIS, AND QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PAGE
-----
Management's Report............................................................................ S-1
Audited Financial Statements:
Report of Independent Accountants............................................................. S-1
Statement of Operations....................................................................... S-2
Balance Sheet................................................................................. S-3
Statement of Cash Flows....................................................................... S-4
Notes to Financial Statements................................................................. S-5
Selected Quarterly Financial Data.............................................................. S-21
Principal Unconsolidated Affiliates............................................................ S-22
Supplementary Information...................................................................... S-22
Five-Year Operating Summary ................................................................... S-23
Five-Year Financial Summary.................................................................... S-24
Management's Discussion and Analysis........................................................... S-25
Quantitative and Qualitative Disclosures About Market Risk..................................... S-38
MANAGEMENT'S REPORT
The accompanying financial statements of the U. S. Steel Group are the
responsibility of and have been prepared by USX Corporation (USX) in
conformity with accounting principles generally accepted in the United
States. They necessarily include some amounts that are based on best
judgments and estimates. The U. S. Steel Group financial information
displayed in other sections of this report is consistent with these financial
statements.
USX seeks to assure the objectivity and integrity of its financial
records by careful selection of its managers, by organizational arrangements
that provide an appropriate division of responsibility and by communications
programs aimed at assuring that its policies and methods are understood
throughout the organization.
USX has a comprehensive formalized system of internal accounting
controls designed to provide reasonable assurance that assets are safeguarded
and that financial records are reliable. Appropriate management monitors the
system for compliance, and the internal auditors independently measure its
effectiveness and recommend possible improvements thereto. In addition, as
part of their audit of the financial statements, USX's independent
accountants, who are elected by the stockholders, review and test the
internal accounting controls selectively to establish a basis of reliance
thereon in determining the nature, extent and timing of audit tests to be
applied.
The Board of Directors pursues its oversight role in the area of
financial reporting and internal accounting control through its Audit
Committee. This Committee, composed solely of nonmanagement directors,
regularly meets (jointly and separately) with the independent accountants,
management and internal auditors to monitor the proper discharge by each of
its responsibilities relative to internal accounting controls and the
consolidated and group financial statements.
Thomas J. Usher Robert M. Hernandez Kenneth L. Matheny
CHAIRMAN, BOARD OF DIRECTORS VICE CHAIRMAN VICE PRESIDENT
& CHIEF EXECUTIVE OFFICER & CHIEF FINANCIAL OFFICER & COMPTROLLER
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of USX Corporation:
In our opinion, the accompanying financial statements appearing on pages S-2
through S-20 present fairly, in all material respects, the financial position
of the U. S. Steel Group at December 31, 1999 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. These financial statements are the
responsibility of USX's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
The U. S. Steel Group is a business unit of USX Corporation (as
described in Note 1, page S-5); accordingly, the financial statements of the
U. S. Steel Group should be read in connection with the consolidated
financial statements of USX Corporation.
PricewaterhouseCoopers LLP
600 GRANT STREET, PITTSBURGH, PENNSYLVANIA 15219-2794
FEBRUARY 8, 2000
S-1
STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
REVENUES:
Sales $ 5,380 $ 6,184 $ 6,814
Income (loss) from affiliates (89) 46 69
Net gains on disposal of assets 21 54 57
Other income (loss) 2 (1) 1
--------- --------- ---------
Total revenues 5,314 6,283 6,941
--------- --------- ---------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 4,928 5,410 5,762
Selling, general and administrative expenses (credits) (NOTE 11) (283) (201) (137)
Depreciation, depletion and amortization 304 283 303
Taxes other than income taxes 215 212 240
--------- --------- ---------
Total costs and expenses 5,164 5,704 6,168
--------- --------- ---------
INCOME FROM OPERATIONS 150 579 773
Net interest and other financial costs (NOTE 6) 74 42 87
--------- --------- ---------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSSES 76 537 686
Provision for estimated income taxes (NOTE 14) 25 173 234
--------- --------- ---------
INCOME BEFORE EXTRAORDINARY LOSSES 51 364 452
Extraordinary losses (NOTE 5) 7 - -
--------- --------- ---------
NET INCOME 44 364 452
Noncash credit from exchange of preferred stock (NOTE 18) - - 10
Dividends on preferred stock (9) (9) (13)
--------- --------- ---------
NET INCOME APPLICABLE TO STEEL STOCK $ 35 $ 355 $ 449
- ----------------------------------------------------------------------------------------------------------
INCOME PER COMMON SHARE APPLICABLE TO STEEL STOCK
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
BASIC:
Income before extraordinary losses $ .48 $ 4.05 $ 5.24
Extraordinary losses .08 - -
--------- --------- ---------
Net income $ .40 $ 4.05 $ 5.24
DILUTED:
Income before extraordinary losses $ .48 $ 3.92 $ 4.88
Extraordinary losses .08 - -
--------- --------- ---------
Net income $ .40 $ 3.92 $ 4.88
- ----------------------------------------------------------------------------------------------------------
See Note 21, for a description and computation of income per common share.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
S-2
BALANCE SHEET
(DOLLARS IN MILLIONS) December 31 1999 1998
- ----------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 22 $ 9
Receivables, less allowance for doubtful accounts
of $10 and $9 838 392
Income taxes receivable (NOTE 12) 97 -
Inventories (NOTE 13) 743 698
Deferred income tax benefits (NOTE 14) 281 176
--------- ---------
Total current assets 1,981 1,275
Investments and long-term receivables,
less reserves of $3 and $10 (NOTES 12 AND 15) 572 743
Property, plant and equipment - net (NOTE 17) 2,516 2,500
Prepaid pensions (NOTE 11) 2,404 2,172
Other noncurrent assets 52 59
--------- ---------
Total assets $ 7,525 $ 6,749
- ----------------------------------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Notes payable $ - $ 13
Accounts payable 739 501
Payroll and benefits payable 322 330
Accrued taxes 177 150
Accrued interest 15 10
Long-term debt due within one year (NOTE 10) 13 12
--------- ---------
Total current liabilities 1,266 1,016
Long-term debt (NOTE 10) 902 464
Deferred income taxes (NOTE 14) 348 129
Employee benefits (NOTE 11) 2,245 2,315
Deferred credits and other liabilities 459 484
Preferred stock of subsidiary (NOTE 9) 66 66
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely junior subordinated
convertible debentures of USX (NOTE 18) 183 182
STOCKHOLDERS' EQUITY (NOTE 19)
Preferred stock 3 3
Common stockholders' equity 2,053 2,090
--------- ---------
Total stockholders' equity 2,056 2,093
--------- ---------
Total liabilities and stockholders' equity $ 7,525 $ 6,749
- ----------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
S-3
STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $ 44 $ 364 $ 452
Adjustments to reconcile to net cash provided
from (used in) operating activities:
Extraordinary losses 7 - -
Depreciation, depletion and amortization 304 283 303
Pensions and other postretirement benefits (256) (215) (349)
Deferred income taxes 107 158 193
Net gains on disposal of assets (21) (54) (57)
Changes in: Current receivables - sold (320) (30) -
- operating turnover (242) 232 (24)
Inventories (14) 7 (57)
Current accounts payable and accrued expenses 239 (285) 61
All other - net 72 (80) (46)
--------- --------- ---------
Net cash provided from (used in) operating activities (80) 380 476
--------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures (287) (310) (261)
Disposal of assets 10 21 420
Restricted cash - withdrawals 15 35 -
- deposits (17) (35) -
Affiliates- investments (15) (73) (26)
- loans and advances - (1) -
- repayments of loans and advances - - 2
All other - net - 14 (1)
--------- --------- ---------
Net cash provided from (used in) investing activities (294) (349) 134
--------- --------- ---------
FINANCING ACTIVITIES (NOTE 9):
Increase (decrease) in U. S. Steel Group's portion of
USX consolidated debt 147 13 (561)
Specifically attributed debt:
Borrowings 350 - -
Repayments (11) (4) (6)
Steel Stock issued - 55 48
Preferred stock repurchased (2) (8) -
Dividends paid (97) (96) (96)
--------- --------- ---------
Net cash provided from (used in) financing activities 387 (40) (615)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 13 (9) (5)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9 18 23
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 22 $ 9 $ 18
- ----------------------------------------------------------------------------------------------------------
See Note 8, for supplemental cash flow information.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
S-4
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
After the redemption of the USX - Delhi Group stock on
January 26, 1998, USX Corporation (USX) has two classes
of common stock: USX - U. S. Steel Group Common Stock
(Steel Stock) and USX - Marathon Group Common Stock
(Marathon Stock), which are intended to reflect the
performance of the U. S. Steel Group and the Marathon
Group, respectively.
The financial statements of the U. S. Steel Group
include the financial position, results of operations
and cash flows for all businesses of USX other than the
businesses, assets and liabilities included in the
Marathon Group, and a portion of the corporate assets
and liabilities and related transactions which are not
separately identified with ongoing operating units of
USX. The U. S. Steel Group financial statements are
prepared using the amounts included in the USX
consolidated financial statements. For a description of
the U. S. Steel Group's operating segment, see Note 7.
Although the financial statements of the U. S.
Steel Group and the Marathon Group separately report the
assets, liabilities (including contingent liabilities)
and stockholders' equity of USX attributed to each such
Group, such attribution of assets, liabilities
(including contingent liabilities) and stockholders'
equity between the U. S. Steel Group and the Marathon
Group for the purpose of preparing their respective
financial statements does not affect legal title to such
assets or responsibility for such liabilities. Holders
of Steel Stock and Marathon Stock are holders of common
stock of USX, and continue to be subject to all the
risks associated with an investment in USX and all of
its businesses and liabilities. Financial impacts
arising from one Group that affect the overall cost of
USX's capital could affect the results of operations and
financial condition of the other Group. In addition, net
losses of either Group, as well as dividends and
distributions on any class of USX Common Stock or series
of preferred stock and repurchases of any class of USX
Common Stock or series of preferred stock at prices in
excess of par or stated value, will reduce the funds of
USX legally available for payment of dividends on both
classes of Common Stock. Accordingly, the USX
consolidated financial information should be read in
connection with the U. S. Steel Group financial
information.
- --------------------------------------------------------------------------------
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
PRINCIPLES APPLIED IN CONSOLIDATION - These financial
statements include the accounts of the U. S. Steel
Group. The U. S. Steel Group and the Marathon Group
financial statements, taken together, comprise all of
the accounts included in the USX consolidated financial
statements.
Investments in entities over which the U. S. Steel
Group has significant influence are accounted for using
the equity method of accounting and are carried at the
U. S. Steel Group's share of net assets plus loans and
advances.
Investments in companies whose stock is publicly
traded are carried at market value. The difference
between the cost of these investments and market value
is recorded in other comprehensive income (net of tax).
Investments in companies whose stock has no readily
determinable fair value are carried at cost.
USE OF ESTIMATES - Generally accepted accounting
principles require management to make estimates and
assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and
liabilities at year-end and the reported amounts of
revenues and expenses during the year. Significant items
subject to such estimates and assumptions include the
carrying value of long-lived assets; valuation
allowances for receivables, inventories and deferred
income tax assets; environmental liabilities;
liabilities for potential tax deficiencies and potential
litigation claims and settlements; and assets and
obligations related to employee benefits. Additionally,
certain estimated liabilities are recorded when
management commits to a plan to close an operating
facility or to exit a business activity. Actual results
could differ from the estimates and assumptions used.
REVENUE RECOGNITION - Revenues principally include
sales, dividend and affiliate income, gains or losses on
the disposal of assets and gains or losses from changes
in ownership interests.
Sales are recognized when products are shipped or
services are provided to customers. Income from
affiliates includes the U. S. Steel Group's
proportionate share of income from equity method
investments.
When long-lived assets depreciated on an individual
basis are sold or otherwise disposed of, any gains or
losses are reflected in income. Gains on disposal of
long-lived assets are recognized when earned, which is
generally at the time of closing. If a loss on disposal
is expected, such losses are recognized when long-lived
assets are reclassified as assets held for sale.
Proceeds from disposal of long-lived assets depreciated
on a group basis are credited to accumulated
depreciation, depletion and amortization with no
immediate effect on income.
Gains or losses from a change in ownership of an
unconsolidated affiliate are recognized in revenues in
the period of change.
S-5
CASH AND CASH EQUIVALENTS - Cash and cash equivalents
include cash on hand and on deposit and highly liquid
debt instruments with maturities generally of three
months or less.
INVENTORIES - Inventories are carried at lower of cost
or market. Cost of inventories is determined primarily
under the last-in, first-out (LIFO) method.
DERIVATIVE INSTRUMENTS - The U. S. Steel Group uses
commodity-based derivative instruments to manage its
exposure to price risk. Management is authorized to use
futures, forwards, swaps and options related to the
purchase of natural gas, refined products and nonferrous
metals used in steel operations. For transactions that
qualify for hedge accounting, the resulting gains or
losses are deferred and subsequently recognized in
income from operations, as a component of sales or cost
of sales, in the same period as the underlying physical
transaction. To qualify for hedge accounting, derivative
positions cannot remain open if the underlying physical
market risk has been removed. Recorded deferred gains or
losses are reflected within other current and noncurrent
assets or accounts payable and deferred credits and
other liabilities, as appropriate.
LONG-LIVED ASSETS - Depreciation is generally computed
using a modified straight-line method based upon
estimated lives of assets and production levels. The
modification factors range from a minimum of 85% at a
production level below 81% of capability, to a maximum
of 105% for a 100% production level. No modification is
made at the 95% production level, considered the normal
long-range level.
Depletion of mineral properties is based on rates
which are expected to amortize cost over the estimated
tonnage of minerals to be removed.
The U. S. Steel Group evaluates impairment of its
long-lived assets on an individual asset basis or by
logical groupings of assets. Assets deemed to be
impaired are written down to their fair value, including
any related goodwill, using discounted future cash flows
and, if available, comparable market values.
ENVIRONMENTAL REMEDIATION - The U. S. Steel Group
provides for remediation costs and penalties when the
responsibility to remediate is probable and the amount
of associated costs is reasonably determinable.
Generally, the timing of remediation accruals coincides
with completion of a feasibility study or the commitment
to a formal plan of action. Remediation liabilities are
accrued based on estimates of known environmental
exposure and are discounted in certain instances.
POSTEMPLOYMENT BENEFITS - The U. S. Steel Group
recognizes an obligation to provide postemployment
benefits, primarily for disability-related claims
covering indemnity and medical payments. The obligation
for these claims and the related periodic costs are
measured using actuarial techniques and assumptions,
including an appropriate discount rate, analogous to the
required methodology for measuring pension and other
postretirement benefit obligations. Actuarial gains and
losses are deferred and amortized over future periods.
INSURANCE - The U. S. Steel Group is insured for
catastrophic casualty and certain property and business
interruption exposures, as well as those risks required
to be insured by law or contract. Costs resulting from
noninsured losses are charged against income upon
occurrence.
RECLASSIFICATIONS - Certain reclassifications of prior
years' data have been made to conform to 1999
classifications.
S-6
- --------------------------------------------------------------------------------
3. NEW ACCOUNTING STANDARDS
Effective January 1, 1997, USX adopted American
Institute of Certified Public Accountants Statement of
Position No. 96-1, "Environmental Remediation
Liabilities" (SOP 96-1), which provides additional
interpretation of existing accounting standards related
to recognition, measurement and disclosure of
environmental remediation liabilities. As a result of
adopting SOP 96-1, the U. S. Steel Group identified
additional environmental remediation liabilities of $35
million, of which $28 million was discounted to a
present value of $13 million and $7 million was not
discounted. Assumptions used in the calculation of the
present value amount included an inflation factor of 2%
and an interest rate of 7% over a range of 22 to 30
years. The net unfavorable effect of adoption on the
U. S. Steel Group's income from operations at January 1,
1997, was $20 million.
In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS No. 133). This new Standard
requires recognition of all derivatives as either assets
or liabilities at fair value. SFAS No. 133 may result in
additional volatility in both current period earnings
and other comprehensive income as a result of recording
recognized and unrecognized gains and losses resulting
from changes in the fair value of derivative
instruments. The transition adjustment resulting from
adoption of SFAS No. 133 will be reported as a
cumulative effect of a change in accounting principle.
Under the new Standard, USX may elect not to
designate certain derivative instruments as hedges even
if the strategy qualifies for hedge accounting
treatment. This approach would eliminate the
administrative effort needed to measure effectiveness
and monitor such instruments; however, this approach
also may result in additional volatility in current
period earnings.
USX cannot reasonably estimate the effect of
adoption on either the financial position or results of
operations. It is not possible to estimate what effect
this Statement will have on future results of
operations, although greater period-to-period volatility
is likely. USX plans to adopt the Standard effective
January 1, 2001.
- --------------------------------------------------------------------------------
4. CORPORATE ACTIVITIES
FINANCIAL ACTIVITIES - As a matter of policy, USX
manages most financial activities on a centralized,
consolidated basis. Such financial activities include
the investment of surplus cash; the issuance, repayment
and repurchase of short-term and long-term debt; the
issuance, repurchase and redemption of preferred stock;
and the issuance and repurchase of common stock.
Transactions related primarily to invested cash,
short-term and long-term debt (including convertible
debt), related net interest and other financial costs,
and preferred stock and related dividends are attributed
to the U. S. Steel Group, the Marathon Group and, prior
to November 1, 1997, the Delhi Group based upon the cash
flows of each group for the periods presented and the
initial capital structure of each group. Most financing
transactions are attributed to and reflected in the
financial statements of the groups. See Note 9, for the
U. S. Steel Group's portion of USX's financial
activities attributed to the groups. However,
transactions such as leases, certain collateralized
financings, certain indexed debt instruments, financial
activities of consolidated entities which are less than
wholly owned by USX and transactions related to
securities convertible solely into any one class of
common stock are or will be specifically attributed to
and reflected in their entirety in the financial
statements of the group to which they relate.
CORPORATE GENERAL AND ADMINISTRATIVE COSTS - Corporate
general and administrative costs are allocated to the
U. S. Steel Group, the Marathon Group and, prior to
November 1, 1997, the Delhi Group based upon utilization
or other methods management believes to be reasonable
and which consider certain measures of business
activities, such as employment, investments and sales.
The costs allocated to the U. S. Steel Group were $17
million in 1999, $24 million in 1998 and $33 million in
1997, and primarily consist of employment costs
including pension effects, professional services,
facilities and other related costs associated with
corporate activities.
INCOME TAXES - All members of the USX affiliated group
are included in the consolidated United States federal
income tax return filed by USX. Accordingly, the
provision for federal income taxes and the related
payments or refunds of tax are determined on a
consolidated basis. The consolidated provision and the
related tax payments or refunds have been reflected in
the U. S. Steel Group, the Marathon Group and, prior to
November 1, 1997, the Delhi Group financial statements
in accordance
S-7
with USX's tax allocation policy. In general, such
policy provides that the consolidated tax provision and
related tax payments or refunds are allocated among the
U. S. Steel Group, Marathon Group and, prior to November
1, 1997, the Delhi Group, for group financial statement
purposes, based principally upon the financial income,
taxable income, credits, preferences and other amounts
directly related to the respective groups.
For tax provision and settlement purposes, tax
benefits resulting from attributes (principally net
operating losses and various tax credits), which cannot
be utilized by one of the groups on a separate return
basis but which can be utilized on a consolidated basis
in that year or in a carryback year, are allocated to
the group that generated the attributes. To the extent
that one of the groups is allocated a consolidated tax
attribute which, as a result of expiration or otherwise,
is not ultimately utilized on the consolidated tax
return, the prior years' allocation of such attribute is
adjusted such that the effect of the expiration is borne
by the group that generated the attribute. Also, if a
tax attribute cannot be utilized on a consolidated basis
in the year generated or in a carryback year, the prior
years' allocation of such consolidated tax effects is
adjusted in a subsequent year to the extent necessary to
allocate the tax benefits to the group that would have
realized the tax benefits on a separate return basis. As
a result, the allocated group amounts of taxes payable
or refundable are not necessarily comparable to those
that would have resulted if the groups had filed
separate tax returns.
- --------------------------------------------------------------------------------
5. EXTRAORDINARY LOSSES
In 1999, USX irrevocably deposited with a trustee the
entire 5.5 million common shares it owned in RTI
International Metals, Inc. (RTI). The deposit of the
shares resulted in the satisfaction of USX's obligation
under its 6 3/4% Exchangeable Notes (indexed debt) due
February 1, 2000. Under the terms of the indenture, the
trustee exchanged one RTI share for each note at
maturity. All shares were required for satisfaction of
the indexed debt; therefore, none reverted back to USX.
As a result of the above transaction, USX recorded
in 1999 an extraordinary loss of $5 million, net of a $3
million income tax benefit, representing prepaid
interest expense and the write-off of unamortized debt
issue costs, and a pretax charge of $22 million,
representing the difference between the carrying value
of the investment in RTI and the carrying value of the
indexed debt, which is included in net gains on disposal
of assets.
In December 1996, USX had issued $117 million of
notes indexed to the common share price of RTI. At
maturity, USX would have been required to exchange the
notes for shares of RTI common stock, or redeem the
notes for the equivalent amount of cash. Since USX's
investment in RTI was attributed to the U. S. Steel
Group, the indexed debt was also attributed to the U. S.
Steel Group. USX had a 26% investment in RTI and
accounted for its investment using the equity method of
accounting.
Republic Technologies International, LLC, an equity
method affiliate of USX, recorded in 1999 an
extraordinary loss related to the early extinguishment
of debt. As a result, the U. S. Steel Group recorded an
extraordinary loss of $2 million, net of a $1 million
income tax benefit, representing its share of the
extraordinary loss.
- --------------------------------------------------------------------------------
6. NET INTEREST AND OTHER FINANCIAL COSTS
(IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
INTEREST AND OTHER FINANCIAL INCOME(a) -
Interest income $ 1 $ 5 $ 4
-------- -------- --------
INTEREST AND OTHER FINANCIAL COSTS(a):
Interest incurred 45 40 57
Less interest capitalized 6 6 7
-------- -------- --------
Net interest 39 34 50
Interest on tax issues 15 16 13
Financial costs on trust preferred securities 13 13 10
Financial costs on preferred stock of subsidiary 5 5 5
Amortization of discounts 1 2 2
Expenses on sales of accounts receivable 15 21 21
Adjustment to settlement value of indexed debt (13) (44) (10)
-------- -------- --------
Total 75 47 91
-------- -------- --------
NET INTEREST AND OTHER FINANCIAL COSTS(a) $ 74 $ 42 $ 87
-----------------------------------------------------------------------------------------------------------
(a) See Note 4, for discussion of USX net interest and
other financial costs attributable to the U. S. Steel
Group.
S-8
- --------------------------------------------------------------------------------
7. SEGMENT INFORMATION
The U. S. Steel Group consists of one operating segment,
U. S. Steel. U. S. Steel is engaged in the production
and sale of steel mill products, coke and taconite
pellets. U. S. Steel also engages in the following
related business activities: the management of mineral
resources, domestic coal mining, engineering and
consulting services, and real estate development and
management.
Segment income represents income from operations
allocable to U. S. Steel and does not include net
interest and other financial costs and provisions for
estimated income taxes. Additionally, the following
items are not allocated to the operating segment:
- Pension credits associated with pension plan
assets and liabilities allocated to pre-1987
retirees and former businesses
- Certain costs related to former U. S. Steel
Group business activities
- USX corporate general and administrative
costs. These costs primarily consist of
employment costs including pension effects,
professional services, facilities and other
related costs associated with corporate
activities.
- Certain other items not allocated to
operating segments for business performance
reporting purposes (see reconcilement
schedule below)
The following table represents the operations of
U. S. Steel:
(IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Revenues:
Customer $ 5,363 $ 6,180 $ 6,812
Intergroup(a) 17 2 2
Equity in earnings (losses) of unconsolidated affiliates (43) 46 69
Other 46 55 58
--------- --------- ---------
Total revenues $ 5,383 $ 6,283 $ 6,941
========= ========= =========
Segment income (loss) $ (128) $ 330 $ 618
Significant noncash items included in segment income:
Depreciation, depletion and amortization 304 283 303
Pension expenses(b) 219 187 169
Capital expenditures(c) 286 305 256
Affiliates - investments(c) 15 71 26
-----------------------------------------------------------------------------------------------------------
(a) Intergroup sales and transfers were conducted under
terms comparable to those with unrelated parties.
(b) Differences between segment total and group total
represent unallocated pension credits and amounts
included in administrative expenses.
(c) Differences between segment total and group total
represent amounts related to corporate administrative
activities.
The following schedule reconciles segment revenues
and income to amounts reported in the U. S. Steel
Group's financial statements:
(IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
REVENUES:
Revenues of reportable segment $ 5,383 $ 6,283 $ 6,941
Items not allocated to segment:
Impairment and other costs related to an
investment in an equity affiliate (47) - -
Loss on investment in RTI stock used
to satisfy indexed debt obligations (22) - -
--------- --------- ---------
Total Group revenues $ 5,314 $ 6,283 $ 6,941
========= ========= =========
INCOME:
Income (loss) for reportable segment $ (128) $ 330 $ 618
Items not allocated to segment:
Impairment and other costs related to an
investment in an equity affiliate (47) - -
Loss on investment in RTI stock used
to satisfy indexed debt obligations (22) - -
Administrative expenses (17) (24) (33)
Pension credits 447 373 313
Costs related to former businesses activities (83) (100) (125)
--------- --------- ---------
Total Group income from operations $ 150 $ 579 $ 773
-----------------------------------------------------------------------------------------------------------
S-9
GEOGRAPHIC AREA:
The information below summarizes the operations in different geographic
areas.
Revenues
--------------------------------------------------
Within Between
Geographic Geographic
(IN MILLIONS) Year Areas Areas Total Assets(a)
- ---------------------------------------------------------------------------------------------------------------------------------
United States 1999 $ 5,296 $ - $ 5,296 $ 2,889
1998 6,266 - 6,266 3,043
1997 6,926 - 6,926 3,023
Foreign Countries 1999 18 - 18 63
1998 17 - 17 69
1997 15 - 15 1
Total 1999 $ 5,314 $ - $ 5,314 $ 2,952
1998 6,283 - 6,283 3,112
1997 6,941 - 6,941 3,024
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Includes property, plant and equipment and investments in affiliates.
SALES BY PRODUCT:
(IN MILLIONS) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Sheet and semi-finished steel products $ 3,345 $ 3,501 $ 3,820
Tubular, plate and tin mill products 1,118 1,513 1,754
Raw materials (coal, coke and iron ore) 505 679 724
Other(a) 414 490 517
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Includes revenue from the sale of steel production by-products, engineering
and consulting services, real estate development and resource management.
- --------------------------------------------------------------------------------
8. SUPPLEMENTAL CASH FLOW INFORMATION
(IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES INCLUDED:
Interest and other financial costs paid
(net of amount capitalized) $ (77) $ (76) $ (99)
Income taxes (paid) refunded, including
settlements with other groups 3 (29) (48)
-----------------------------------------------------------------------------------------------------------
USX DEBT ATTRIBUTED TO ALL GROUPS - NET:
Commercial paper:
Issued $ 6,282 $ - $ -
Repayments (6,117) - -
Credit agreements:
Borrowings 5,529 17,486 10,454
Repayments (5,980) (16,817) (10,449)
Other credit arrangements - net (95) 55 36
Other debt:
Borrowings 319 671 10
Repayments (87) (1,053) (741)
--------- --------- ---------
Total $ (149) $ 342 $ (690)
-----------------------------------------------------------------------------------------------------------
U. S. Steel Group activity $ 147 $ 13 $ (561)
Marathon Group activity (296) 329 97
Delhi Group activity - - (226)
--------- --------- ---------
Total $ (149) $ 342 $ (690)
-----------------------------------------------------------------------------------------------------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Steel Stock issued for dividend reinvestment and
employee stock plans $ 2 $ 2 $ 5
Trust preferred securities exchanged for preferred stock - - 182
Disposal of assets:
Deposit of RTI common shares in satisfaction of indexed debt 56 - -
Interest in USS/Kobe contributed to Republic 40 - -
Other disposals of assets - notes or common stock received 1 2 -
Business combinations:
Liabilities assumed 26 - -
Affiliate liabilities consolidated in step acquisition 26 - -
-----------------------------------------------------------------------------------------------------------
S-10
- -------------------------------------------------------------------------------
9. FINANCIAL ACTIVITIES ATTRIBUTED TO GROUPS
The following is the portion of USX financial activities
attributed to the U. S. Steel Group. These amounts
exclude amounts specifically attributed to the U. S.
Steel Group.
U. S. Steel Group Consolidated USX(a)
------------------- ------------------
(IN MILLIONS) December 31 1999 1998 1999 1998
-----------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 1 $ - $ 9 $ 4
Other noncurrent assets 1 1 8 8
-------- -------- -------- --------
Total assets $ 2 $ 1 $ 17 $ 12
-----------------------------------------------------------------------------------------------------------
Notes payable $ - $ 13 $ - $ 145
Accrued interest 13 8 95 88
Long-term debt due within one year (NOTE 10) 7 7 54 66
Long-term debt (NOTE 10) 466 306 3,771 3,762
Preferred stock of subsidiary 66 66 250 250
-------- -------- -------- --------
Total liabilities $ 552 $ 400 $ 4,170 $ 4,311
-----------------------------------------------------------------------------------------------------------
U. S. Steel Group(b) Consolidated USX
-------------------- --------------------
(IN MILLIONS) 1999 1998 1997 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Net interest and other financial costs (NOTE 6) $39 $29 $46 $334 $324 $309
-----------------------------------------------------------------------------------------------------------
(a) For details of USX long-term debt and preferred
stock of subsidiary, see Notes 16 and 23,
respectively, to the USX consolidated financial
statements.
(b) The U. S. Steel Group's net interest and other
financial costs reflect weighted average effects of
all financial activities attributed to all groups.
- --------------------------------------------------------------------------------
10. LONG-TERM DEBT
The U. S. Steel Group's portion of USX's consolidated
long-term debt is as follows:
U. S. Steel Group Consolidated USX(a)
------------------- -------------------
(IN MILLIONS) December 31 1999 1998 1999 1998
-----------------------------------------------------------------------------------------------------------
Specifically attributed debt(b):
Receivables facility $ 350 $ - $ 350 $ -
Sale-leaseback financing and capital leases 92 95 107 95
Indexed debt less unamortized discount - 68 - 68
Other - - 1 -
-------- -------- -------- --------
Total 442 163 458 163
Less amount due within one year 6 5 7 5
-------- -------- -------- --------
Total specifically attributed long-term debt $ 436 $ 158 $ 451 $ 158
-----------------------------------------------------------------------------------------------------------
Debt attributed to groups(c) $ 477 $ 316 $ 3,852 $ 3,853
Less unamortized discount 4 3 27 25
Less amount due within one year 7 7 54 66
-------- -------- -------- --------
Total long-term debt attributed to groups $ 466 $ 306 $ 3,771 $ 3,762
-----------------------------------------------------------------------------------------------------------
Total long-term debt due within one year $ 13 $ 12 $ 61 $ 71
Total long-term debt due after one year 902 464 4,222 3,920
-----------------------------------------------------------------------------------------------------------
(a) See Note 16, to the USX consolidated financial
statements for details of interest rates, maturities
and other terms of long-term debt.
(b) As described in Note 4, certain financial activities
are specifically attributed only to the U. S. Steel
Group and the Marathon Group.
(c) Most long-term debt activities of USX Corporation
and its wholly owned subsidiaries are attributed
to all groups (in total, but not with respect to
specific debt issues) based on their respective cash
flows (Notes 4, 8 and 9).
S-11
- -------------------------------------------------------------------------------
11. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
The U. S. Steel Group has noncontributory defined
benefit pension plans covering substantially all
employees. Benefits under these plans are based upon
years of service and final average pensionable earnings,
or a minimum benefit based upon years of service,
whichever is greater. In addition, pension benefits are
also provided to most salaried employees based upon a
percent of total career pensionable earnings. Certain of
these plans provide benefits to USX corporate employees,
and the related costs or credits for such employees are
allocated to all groups (Note 4). The U. S. Steel Group
also participates in multiemployer plans, most of which
are defined benefit plans associated with coal
operations.
The U. S. Steel Group also has defined benefit
retiree health and life insurance plans (other benefits)
covering most employees upon their retirement. Health
benefits are provided through comprehensive hospital,
surgical and major medical benefit provisions or through
health maintenance organizations, both subject to
various cost sharing features. Life insurance benefits
are provided to nonunion retiree beneficiaries primarily
based on employees' annual base salary at retirement.
These plans provide benefits to USX corporate employees,
and the related costs for such employees are allocated
to all groups (Note 4). For union retirees, benefits are
provided for the most part based on fixed amounts
negotiated in labor contracts with the appropriate
unions. Except for certain life insurance benefits paid
from reserves held by insurance carriers and benefits
required to be funded by union contracts, most other
benefits have not been prefunded.
Pension Benefits Other Benefits
--------------------- ---------------------
(IN MILLIONS) 1999 1998 1999 1998
-----------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at January 1 $ 7,549 $ 7,314 $ 2,113 $ 2,070
Service cost 87 71 15 15
Interest cost 473 487 133 141
Plan amendments 381(a) 8 14 -
Actuarial (gains) losses (822) 516 (225) 23
Plan merger and acquisition 42 - 7 -
Settlements, curtailments and termination benefits (207) 10 - 7
Benefits paid (787) (857) (161) (143)
--------- --------- --------- ---------
Benefit obligations at December 31 $ 6,716 $ 7,549 $ 1,896 $ 2,113
-----------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1 $ 10,243 $ 9,775 $ 265 $ 258
Actual return on plan assets 729 1,308 20 31
Acquisition 26 - 1 -
Employer contributions - - 34 -
Trustee distributions(b) (14) - - -
Settlements paid (207) - - -
Benefits paid from plan assets (782) (840) (39) (24)
--------- --------- --------- ---------
Fair value of plan assets at December 31 $ 9,995 $10,243 $ 281 $ 265
-----------------------------------------------------------------------------------------------------------
FUNDED STATUS OF PLANS AT DECEMBER 31 $ 3,279(c) $ 2,694(c) $ (1,615) $ (1,848)
Unrecognized net gain from transition (69) (140) - -
Unrecognized prior service cost 817 518 19 7
Unrecognized actuarial gains (1,639) (905) (526) (292)
Additional minimum liability(d) (16) (57) - -
--------- --------- --------- ---------
Prepaid (accrued) benefit cost $ 2,372 $ 2,110 $ (2,122) $ (2,133)
-----------------------------------------------------------------------------------------------------------
(a) Results primarily from a new five-year labor
contract with the United Steelworkers of America
ratified in August 1999.
(b) Represents transfers of excess pension assets to
fund retiree health care benefits accounts under
Section 420 of the Internal Revenue Code.
(c) Includes several plans that have accumulated
benefit obligations in excess of plan assets:
Aggregate accumulated benefit obligations $ (29) $ (62)
Aggregate projected benefit obligations (39) (68)
Aggregate plan assets - -
(d) Additional minimum liability recorded was offset by
the following:
Intangible asset $ 6 $ 16
--------- ---------
Accumulated other comprehensive income (losses):
Beginning of year $ (27) $ (25)
Change during year (net of tax) 20 (2)
--------- ---------
Balance at end of year $ (7) $ (27)
-----------------------------------------------------------------------------------------------------------
S-12
Pension Benefits Other Benefits
----------------------------- --------------------------------
(IN MILLIONS) 1999 1998 1997 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC
BENEFIT COST (CREDIT)
Service cost $ 87 $ 71 $ 65 $ 15 $ 15 $ 15
Interest cost 473 487 517 133 141 153
Expected return on plan assets (781) (769) (743) (21) (21) (11)
Amortization - net transition gain (67) (69) (69) - - -
- prior service costs 83 72 72 4 4 4
- actuarial (gains) losses 6 6 3 (12) (16) (13)
Multiemployer and other plans - 1 2 7(a) 13(a) 15(a)
Settlement and termination (gains) losses (35)(b) 10(b) 4 - - -
------- ------- ------- ------- ------- -------
Net periodic benefit cost (credit) $ (234) $ (191) $ (149) $ 126 $ 136 $ 163
-----------------------------------------------------------------------------------------------------------
(a) Represents payments to a multiemployer health care
benefit plan created by the Coal Industry Retiree
Health Benefit Act of 1992 based on assigned
beneficiaries receiving benefits. The present value
of this unrecognized obligation is broadly estimated
to be $90 million, including the effects of future
medical inflation, and this amount could increase if
additional beneficiaries are assigned.
(b) Relates primarily to the 1998 voluntary early
retirement program.
Pension Benefits Other Benefits
--------------------- ---------------------
1999 1998 1999 1998
-----------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE ACTUARIAL ASSUMPTIONS
AT DECEMBER 31:
Discount rate 8.0% 6.5% 8.0% 6.5%
Expected annual return on plan assets 8.5% 9.0% 8.5% 9.0%
Increase in compensation rate 4.0% 4.0% 4.0% 4.0%
-----------------------------------------------------------------------------------------------------------
For measurement purposes, a 7.5% annual rate of
increase in the per capita cost of covered health care
benefits was assumed for 2000. The rate was assumed to
decrease gradually to 5% for 2005 and remain at that
level thereafter.
A one-percentage-point change in assumed health
care cost trend rates would have the following effects:
1-Percentage- 1-Percentage-
(IN MILLIONS) Point Increase Point Decrease
-----------------------------------------------------------------------------------------------------------
Effect on total of service and interest cost components $ 14 $ (12)
Effect on other postretirement benefit obligations 149 (127)
-----------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
12. INTERGROUP TRANSACTIONS
SALES AND PURCHASES - U. S. Steel Group sales to the
Marathon Group totaled $17 million in 1999 and $2
million in 1998. U. S. Steel Group purchases from the
Marathon Group totaled $41 million, $21 million and $29
million in 1999, 1998 and 1997, respectively. At
December 31, 1999 and 1998, U. S. Steel Group accounts
payable included $5 million and $3 million,
respectively, related to transactions with the Marathon
Group. These transactions were conducted under terms
comparable to those with unrelated parties.
INCOME TAXES RECEIVABLE FROM/PAYABLE TO THE MARATHON
GROUP - At December 31, 1999 and 1998, amounts
receivable or payable for income taxes were included in
the balance sheet as follows:
(IN MILLIONS) December 31 1999 1998
-----------------------------------------------------------------------------------------------------------
Current:
Income tax receivable $ 97 $ -
Accounts payable 1 2
Noncurrent:
Investments and long-term receivables 97 97
-----------------------------------------------------------------------------------------------------------
These amounts have been determined in accordance
with the tax allocation policy described in Note 4.
Amounts classified as current are settled in cash in the
year succeeding that in which such amounts are accrued.
Noncurrent amounts represent estimates of intergroup tax
effects of certain issues for years that are still under
various stages of audit and administrative review. Such
tax effects are not settled between the groups until the
audit of those respective tax years is closed. The
amounts ultimately settled for open tax years will be
different than recorded noncurrent amounts based on the
final resolution of all of the audit issues for those
years.
S-13
- --------------------------------------------------------------------------------
13. INVENTORIES
(IN MILLIONS) December 31 1999 1998
-----------------------------------------------------------------------------------------------------------
Raw materials $ 101 $ 185
Semi-finished products 392 282
Finished products 193 182
Supplies and sundry items 57 49
--------- ---------
Total $ 743 $ 698
-----------------------------------------------------------------------------------------------------------
At December 31, 1999 and 1998, respectively, the
LIFO method accounted for 93% and 94% of total inventory
value. Current acquisition costs were estimated to
exceed the above inventory values at December 31 by
approximately $370 million and $310 million in 1999 and
1998, respectively.
- --------------------------------------------------------------------------------
14. INCOME TAXES
Income tax provisions and related assets and liabilities
attributed to the U. S. Steel Group are determined in
accordance with the USX group tax allocation policy
(Note 4).
Provisions (credits) for estimated income taxes
were:
1999 1998 1997
---------------------------- ------------------------- -------------------------
(IN MILLIONS) CURRENT DEFERRED TOTAL Current Deferred Total Current Deferred Total
-----------------------------------------------------------------------------------------------------------
Federal $ (84) $ 99 $ 15 $ 19 $ 149 $ 168 $ 37 $ 168 $ 205
State and local 1 8 9 3 9 12 4 25 29
Foreign 1 - 1 (7) - (7) - - -
------ ------ ------ ------ ------ ------ ------ ------ -----
Total $ (82) $ 107 $ 25 $ 15 $ 158 $ 173 $ 41 $ 193 $ 234
-----------------------------------------------------------------------------------------------------------
A reconciliation of federal statutory tax rate
(35%) to total provisions follows:
(IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Statutory rate applied to income before income taxes $ 27 $ 188 $ 240
Excess percentage depletion (7) (11) (10)
Effects of foreign operations, including foreign tax credits (2) (11) (3)
State and local income taxes after federal income tax effects 6 8 19
Credits other than foreign tax credits (3) (3) (15)
Effects of partially owned companies - - (3)
Adjustment of prior years' federal income taxes - - 6
Adjustment of valuation allowances - - (1)
Other 4 2 1
--------- --------- ---------
Total provisions $ 25 $ 173 $ 234
-----------------------------------------------------------------------------------------------------------
Deferred tax assets and liabilities resulted from
the following:
(IN MILLIONS) December 31 1999 1998
-----------------------------------------------------------------------------------------------------------
Deferred tax assets:
Minimum tax credit carryforwards $ 131 $ 185
State tax loss carryforwards (expiring in 2000 through 2019) 65 64
Employee benefits 998 969
Receivables, payables and debt 68 52
Contingency and other accruals 52 48
Other 11 12
Valuation allowances - state (41) (44)
--------- ---------
Total deferred tax assets(a) 1,284 1,286
--------- ---------
Deferred tax liabilities:
Property, plant and equipment 274 272
Prepaid pensions 921 792
Inventory 16 16
Investments in subsidiaries and affiliates 96 116
Federal effect of state deferred tax assets - 3
Other 44 40
--------- ---------
Total deferred tax liabilities 1,351 1,239
--------- ---------
Net deferred tax assets (liabilities) $ (67) $ 47
-----------------------------------------------------------------------------------------------------------
(a) USX expects to generate sufficient future taxable
income to realize the benefit of the U. S. Steel
Group's deferred tax assets.
The consolidated tax returns of USX for the years
1990 through 1997 are under various stages of audit and
administrative review by the IRS. USX believes it has
made adequate provision for income taxes and interest
which may become payable for years not yet settled.
S-14
- --------------------------------------------------------------------------------
15. INVESTMENTS AND LONG-TERM RECEIVABLES
(IN MILLIONS) December 31 1999 1998
-----------------------------------------------------------------------------------------------------------
Equity method investments $ 397 $ 564
Other investments 39 48
Receivables due after one year 11 10
Income taxes receivable 97 97
Deposits of restricted cash 2 -
Other 26 24
--------- ---------
Total $ 572 $ 743
-----------------------------------------------------------------------------------------------------------
Summarized financial information of affiliates
accounted for by the equity method of accounting
follows:
(IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Income data - year:
Revenues $ 3,027 $ 3,163 $ 3,143
Operating income (loss) (57) 193 228
Net income (loss) (193) 97 139
-----------------------------------------------------------------------------------------------------------
Balance sheet data - December 31:
Current assets $ 995 $ 1,028
Noncurrent assets 2,402 2,149
Current liabilities 1,181 631
Noncurrent liabilities 1,251 883
-----------------------------------------------------------------------------------------------------------
In 1999, USX and Kobe Steel, Ltd. (Kobe Steel)
completed a transaction that combined the steelmaking
and bar producing assets of USS/Kobe Steel Company
(USS/Kobe) with companies controlled by Blackstone
Capital Partners II. The combined entity was named
Republic Technologies International, LLC (Republic). In
addition, USX made a $15 million equity investment in
Republic. USX owned 50% of USS/Kobe and now owns 16% of
Republic. USX accounts for its investment in Republic
under the equity method of accounting. Income (loss)
from affiliates in 1999 includes $47 million in charges
related to the impairment of the carrying value of USX's
investment in USS/Kobe and costs related to the
formation of Republic. The seamless pipe business of
USS/Kobe was excluded from this transaction. That
business, now known as Lorain Tubular Company, LLC,
became a wholly owned subsidiary of USX at the close of
business on December 31, 1999.
Dividends and partnership distributions received
from equity affiliates were $2 million in 1999, $19
million in 1998 and $13 million in 1997.
U. S. Steel Group purchases of transportation
services and semi-finished steel from equity affiliates
totaled $361 million, $331 million and $424 million in
1999, 1998 and 1997, respectively. At December 31, 1999
and 1998, U. S. Steel Group payables to these affiliates
totaled $22 million and $15 million, respectively. U. S.
Steel Group sales of steel and raw materials to equity
affiliates totaled $831 million, $725 million and $802
million in 1999, 1998 and 1997, respectively. At
December 31, 1999 and 1998, U. S. Steel Group
receivables from these affiliates were $177 million.
Generally, these transactions were conducted under
long-term, market-based contractual arrangements.
- --------------------------------------------------------------------------------
16. LEASES
Future minimum commitments for capital leases (including
sale-leasebacks accounted for as financings) and for
operating leases having remaining noncancelable lease
terms in excess of one year are as follows:
Capital Operating
(IN MILLIONS) Leases Leases
-----------------------------------------------------------------------------------------------------------
2000 $ 11 $ 104
2001 11 122
2002 11 51
2003 11 36
2004 11 32
Later years 105 80
Sublease rentals - (69)
--------- ---------
Total minimum lease payments 160 $ 356
Less imputed interest costs (68) =========
---------
Present value of net minimum lease payments
included in long-term debt $ 92
-----------------------------------------------------------------------------------------------------------
S-15
Operating lease rental expense:
(IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Minimum rental $ 124 $ 131 $ 130
Contingent rental 18 19 15
Sublease rentals (6) (7) (7)
--------- --------- ---------
Net rental expense $ 136 $ 143 $ 138
-----------------------------------------------------------------------------------------------------------
The U. S. Steel Group leases a wide variety of
facilities and equipment under operating leases,
including land and building space, office equipment,
production facilities and transportation equipment. Most
long-term leases include renewal options and, in certain
leases, purchase options. In the event of a change in
control of USX, as defined in the agreements, or certain
other circumstances, lease obligations totaling
$1 million may be declared immediately due and payable.
- --------------------------------------------------------------------------------
17. PROPERTY, PLANT AND EQUIPMENT
(IN MILLIONS) December 31 1999 1998
-----------------------------------------------------------------------------------------------------------
Land and depletable property $ 152 $ 151
Buildings 484 469
Machinery and equipment 8,007 7,711
Leased assets 105 108
--------- ---------
Total 8,748 8,439
Less accumulated depreciation, depletion and amortization 6,232 5,939
--------- ---------
Net $ 2,516 $ 2,500
-----------------------------------------------------------------------------------------------------------
Amounts in accumulated depreciation, depletion and
amortization for assets acquired under capital leases
(including sale-leasebacks accounted for as financings)
were $81 million and $77 million at December 31, 1999
and 1998, respectively.
- --------------------------------------------------------------------------------
18. TRUST PREFERRED SECURITIES
In 1997, USX exchanged approximately 3.9 million 6.75%
Convertible Quarterly Income Preferred Securities (Trust
Preferred Securities) of USX Capital Trust I, a Delaware
statutory business trust (Trust), for an equivalent
number of shares of its 6.50% Cumulative Convertible
Preferred Stock (6.50% Preferred Stock) (Exchange). The
Exchange resulted in the recording of Trust Preferred
Securities at a fair value of $182 million and a noncash
credit to Retained Earnings of $10 million.
USX owns all of the common securities of the Trust,
which was formed for the purpose of the Exchange. (The
Trust Common Securities and the Trust Preferred
Securities are together referred to as the Trust
Securities.) The Trust Securities represent undivided
beneficial ownership interests in the assets of the
Trust, which consist solely of USX 6.75% Convertible
Junior Subordinated Debentures maturing March 31, 2037
(Debentures), having an aggregate principal amount equal
to the aggregate initial liquidation amount ($50.00 per
security and $203 million in total) of the Trust
Securities issued by the Trust. Interest and principal
payments on the Debentures will be used to make
quarterly distributions and to pay redemption and
liquidation amounts on the Trust Preferred Securities.
The quarterly distributions, which accumulate at the
rate of 6.75% per annum on the Trust Preferred
Securities and the accretion from fair value to the
initial liquidation amount, are charged to income and
included in net interest and other financial costs.
Under the terms of the Debentures, USX has the
right to defer payment of interest for up to 20
consecutive quarters and, as a consequence, monthly
distributions on the Trust Preferred Securities will be
deferred during such period. If USX exercises this
right, then, subject to limited exceptions, it may not
pay any dividend or make any distribution with respect
to any shares of its capital stock.
S-16
The Trust Preferred Securities are convertible at
any time prior to the close of business on March 31,
2037 (unless such right is terminated earlier under
certain circumstances) at the option of the holder, into
shares of Steel Stock at a conversion price of $46.25
per share of Steel Stock (equivalent to a conversion
ratio of 1.081 shares of Steel Stock for each Trust
Preferred Security), subject to adjustment in certain
circumstances.
The Trust Preferred Securities may be redeemed at
any time at the option of USX, at a premium of 102.60%
of the initial liquidation amount through March 31,
2000, and thereafter, declining annually to the initial
liquidation amount on April 1, 2003, and thereafter.
They are mandatorily redeemable at March 31, 2037, or
earlier under certain circumstances.
Payments related to quarterly distributions and to
the payment of redemption and liquidation amounts on the
Trust Preferred Securities by the Trust are guaranteed
by USX on a subordinated basis. In addition, USX
unconditionally guarantees the Trust's Debentures. The
obligations of USX under the Debentures, and the related
indenture, trust agreement and guarantee constitute a
full and unconditional guarantee by USX of the Trust's
obligations under the Trust Preferred Securities.
- --------------------------------------------------------------------------------
19. STOCKHOLDERS' EQUITY
(IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
PREFERRED STOCK:
Balance at beginning of year $ 3 $ 3 $ 7
Exchanged for trust preferred securities - - (4)
--------- --------- ---------
Balance at end of year $ 3 $ 3 $ 3
-----------------------------------------------------------------------------------------------------------
COMMON STOCKHOLDERS' EQUITY:
Balance at beginning of year $ 2,090 $ 1,779 $ 1,559
Net income 44 364 452
6.50% preferred stock:
Repurchased (2) (8) -
Exchanged for trust preferred securities (NOTE 18) - - (188)
Steel Stock issued 2 59 53
Dividends on preferred stock (9) (9) (13)
Dividends on Steel Stock (per share $1.00) (88) (88) (86)
Deferred compensation 1 - -
Accumulated other comprehensive income (loss)(a):
Foreign currency translation adjustments (5) (5) -
Minimum pension liability adjustments (NOTE 11) 20 (2) (8)
Other - - 10
--------- --------- ---------
Balance at end of year $ 2,053 $ 2,090 $ 1,779
-----------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 2,056 $ 2,093 $ 1,782
-----------------------------------------------------------------------------------------------------------
(a) See page U-7 of the USX consolidated financial
statements relative to the annual activity of these
adjustments. Total comprehensive income for the U. S.
Steel Group for the years 1999, 1998 and 1997 was $59
million, $357 million and $444 million, respectively.
- --------------------------------------------------------------------------------
20. DIVIDENDS
In accordance with the USX Restated Certificate of
Incorporation, dividends on the Steel Stock and Marathon
Stock are limited to the legally available funds of USX.
Net losses of either Group, as well as dividends and
distributions on any class of USX Common Stock or series
of preferred stock and repurchases of any class of USX
Common Stock or series of preferred stock at prices in
excess of par or stated value, will reduce the funds of
USX legally available for payment of dividends on both
classes of Common Stock. Subject to this limitation, the
Board of Directors intends to declare and pay dividends
on the Steel Stock based on the financial condition and
results of operations of the U. S. Steel Group, although
it has no obligation under Delaware law to do so. In
making its dividend decisions with respect to Steel
Stock, the Board of Directors considers, among other
things, the long-term earnings and cash flow
capabilities of the U. S. Steel Group as well as the
dividend policies of similar publicly traded steel
companies.
Dividends on the Steel Stock are further limited to
the Available Steel Dividend Amount. At December 31,
1999, the Available Steel Dividend Amount was at least
$3,300 million. The Available Steel Dividend Amount will
be increased or decreased, as appropriate, to reflect
U. S. Steel Group net income, dividends, repurchases or
issuances with respect to the Steel Stock and preferred
stock attributed to the U. S. Steel Group and certain
other items.
S-17
- --------------------------------------------------------------------------------
21. INCOME PER COMMON SHARE
The method of calculating net income per share for the
Steel Stock, the Marathon Stock and, prior to November
1, 1997, the Delhi Stock reflects the USX Board of
Directors' intent that the separately reported earnings
and surplus of the U. S. Steel Group, the Marathon Group
and the Delhi Group, as determined consistent with the
USX Restated Certificate of Incorporation, are available
for payment of dividends to the respective classes of
stock, although legally available funds and liquidation
preferences of these classes of stock do not necessarily
correspond with these amounts.
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.
1999 1998 1997
------------------ ------------------ ------------------
Basic Diluted Basic Diluted Basic Diluted
----- ------- ----- ------- ----- -------
COMPUTATION OF INCOME PER SHARE
Net income (millions):
Income before extraordinary losses $ 51 $ 51 $ 364 $ 364 $ 452 $ 452
Dividends on preferred stock (9) (9) (9) - (13) -
Noncash credit from exchange of preferred stock - - - - 10 -
Extraordinary losses (7) (7) - - - -
--------- --------- --------- --------- --------- ---------
Net income applicable to Steel Stock 35 35 355 364 449 452
Effect of dilutive securities:
Trust preferred securities - - - 8 - 6
Convertible debentures - - - - - 2
--------- --------- --------- --------- --------- ---------
Net income assuming conversions $ 35 $ 35 $ 355 $ 372 $ 449 $ 460
========= ========= ========= ========= ========= =========
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 88,392 88,392 87,508 87,508 85,672 85,672
Effect of dilutive securities:
Trust preferred securities - - - 4,256 - 2,660
Preferred stock - - - 3,143 - 4,811
Convertible debentures - - - - - 1,025
Stock options - 4 - 36 - 35
--------- --------- --------- --------- --------- ---------
Average common shares and dilutive effect 88,392 88,396 87,508 94,943 85,672 94,203
========= ========= ========= ========= ========= =========
Per share:
Income before extraordinary losses $ .48 $ .48 $ 4.05 $ 3.92 $ 5.24 $ 4.88
Extraordinary losses .08 .08 - - - -
--------- --------- --------- --------- --------- ---------
Net income $ .40 $ .40 $ 4.05 $ 3.92 $ 5.24 $ 4.88
========= ========= ========= ========= ========= =========
- --------------------------------------------------------------------------------
22. STOCK-BASED COMPENSATION PLANS AND STOCKHOLDER RIGHTS PLAN
USX Stock-Based Compensation Plans and Stockholder
Rights Plan are discussed in Note 19, and Note 21,
respectively, to the USX consolidated financial
statements.
The U. S. Steel Group's actual stock-based
compensation expense was $1 million in 1999, none in
1998 and $8 million in 1997. Incremental compensation
expense, as determined under a fair value model, was not
material ($.02 or less per share for all years
presented). Therefore, pro forma net income and earnings
per share data have been omitted.
S-18
- --------------------------------------------------------------------------------
23. DERIVATIVE INSTRUMENTS
The U. S. Steel Group remains at risk for possible
changes in the market value of the derivative
instrument; however, such risk should be mitigated by
price changes in the underlying hedged item. The U. S.
Steel Group is also exposed to credit risk in the event
of nonperformance by counterparties. The credit
worthiness of counterparties is subject to continuing
review, including the use of master netting agreements
to the extent practical, and full performance is
anticipated.
The following table sets forth quantitative
information by class of derivative instrument:
FAIR CARRYING RECORDED
VALUE AMOUNT DEFERRED AGGREGATE
ASSETS ASSETS GAIN OR CONTRACT
(IN MILLIONS) (LIABILITIES)(a) (LIABILITIES) (LOSS) VALUES(b)
-----------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999:
OTC commodity swaps - other than trading(c) $ 3 $ 3 $ 3 $ 37
-----------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998:
OTC commodity swaps - other than trading $ (7) $ (7) $ (7) $ 54
-----------------------------------------------------------------------------------------------------------
(a) The fair value amounts are based on exchange-traded
index prices and dealer quotes.
(b) Contract or notional amounts do not quantify risk
exposure, but are used in the calculation of cash
settlements under the contracts.
(c) The OTC swap arrangements vary in duration with
certain contracts extending into 2000.
- --------------------------------------------------------------------------------
24. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value of the financial instruments disclosed herein
is not necessarily representative of the amount that
could be realized or settled, nor does the fair value
amount consider the tax consequences of realization or
settlement. The following table summarizes financial
instruments, excluding derivative financial instruments
disclosed in Note 23, by individual balance sheet
account. As described in Note 4, the U. S. Steel Group's
specifically attributed financial instruments and the U.
S. Steel Group's portion of USX's financial instruments
attributed to all groups are as follows:
1999 1998
---------------------- ----------------------
FAIR CARRYING FAIR CARRYING
(IN MILLIONS) December 31 VALUE AMOUNT VALUE AMOUNT
-----------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and cash equivalents $ 22 $ 22 $ 9 $ 9
Receivables (including intergroup receivables) 935 935 392 392
Investments and long-term receivables 122 122 120 120
-------- -------- -------- --------
Total financial assets $ 1,079 $ 1,079 $ 521 $ 521
-----------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Notes payable $ - $ - $ 13 $ 13
Accounts payable 739 739 501 501
Accrued interest 15 15 10 10
Long-term debt (including amounts due within one year) 835 823 406 381
Preferred stock of subsidiary and trust
preferred securities 232 249 231 248
-------- -------- -------- --------
Total financial liabilities $ 1,821 $ 1,826 $ 1,161 $ 1,153
-----------------------------------------------------------------------------------------------------------
Fair value of financial instruments classified as
current assets or liabilities approximates carrying
value due to the short-term maturity of the instruments.
Fair value of investments and long-term receivables was
based on discounted cash flows or other specific
instrument analysis. Fair value of preferred stock of
subsidiary and trust preferred securities was based on
market prices. Fair value of long-term debt instruments
was based on market prices where available or current
borrowing rates available for financings with similar
terms and maturities.
The U. S. Steel Group's unrecognized financial
instruments consist of receivables sold in 1998 and
financial guarantees. It is not practicable to estimate
the fair value of these forms of financial instrument
obligations because there are no quoted market prices
for transactions which are similar in nature. For
details relating to financial guarantees, see Note 25.
S-19
- --------------------------------------------------------------------------------
25. CONTINGENCIES AND COMMITMENTS
USX is the subject of, or party to, a number of pending
or threatened legal actions, contingencies and
commitments relating to the U. S. Steel Group involving
a variety of matters, including laws and regulations
relating to the environment. Certain of these matters
are discussed below. The ultimate resolution of these
contingencies could, individually or in the aggregate,
be material to the U. S. Steel Group financial
statements. However, management believes that USX will
remain a viable and competitive enterprise even though
it is possible that these contingencies could be
resolved unfavorably to the U. S. Steel Group.
ENVIRONMENTAL MATTERS -
The U. S. Steel Group is subject to federal, state,
and local laws and regulations relating to the
environment. These laws generally provide for control of
pollutants released into the environment and require
responsible parties to undertake remediation of
hazardous waste disposal sites. Penalties may be imposed
for noncompliance. Accrued liabilities for remediation
totaled $101 million and $97 million at December 31,
1999 and 1998, 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 1999 and 1998, such capital
expenditures totaled $32 million and $49 million,
respectively. The U. S. Steel Group anticipates making
additional such expenditures in the future; however, the
exact amounts and timing of such expenditures are
uncertain because of the continuing evolution of
specific regulatory requirements.
GUARANTEES -
Guarantees by USX of the liabilities of affiliated
entities of the U. S. Steel Group totaled $88 million at
December 31, 1999, and $81 million at December 31, 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 potential U. S. Steel Group
losses resulting from these guarantees. As of December
31, 1999, the largest guarantee for a single affiliate
was $61 million.
COMMITMENTS -
At December 31, 1999 and 1998, the U. S. Steel
Group's contract commitments to acquire property, plant
and equipment totaled $83 million and $188 million,
respectively.
USX entered into a 15-year take-or-pay arrangement
in 1993, which requires the U. S. Steel Group to accept
pulverized coal each month or pay a minimum monthly
charge of approximately $1 million. Charges for
deliveries of pulverized coal totaled $23 million in
both 1999 and 1998. If USX elects to terminate the
contract early, a maximum termination payment of $102
million, which declines over the duration of the
agreement, may be required.
S-20
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1999 1998
------------------------------------------------- --------------------------------------------------
(IN MILLIONS, EXCEPT
PER SHARE DATA) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR.
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 1,462 $ 1,337 (a) $1,304 $ 1,211 $1,357 $1,497 $ 1,733 $1,696
Income (loss)
from operations 75 (26)(a) 103 (2) 95 105 217 162
Income (loss) before
extraordinary losses 34 (29)(a) 55 (9) 76 65 136 87
Net income (loss) 34 (31) 55 (14) 76 65 136 87
- ----------------------------------------------------------------------------------------------------------------------------------
STEEL STOCK DATA:
Income (loss) before
extraordinary losses
applicable to Steel Stock $ 32 $ (31)(a) $ 52 $ (11) $ 74 $ 63 $ 133 $ 85
- Per share: basic .35 (.35)(a) .60 (.13) .83 .72 1.53 .98
diluted .35 (.35)(a) .59 (.13) .81 .71 1.46 .95
Dividends paid per share .25 .25 .25 .25 .25 .25 .25 .25
Price range of Steel
Stock(b):
- Low 21-3/4 24-9/16 23-1/2 22-1/4 21-5/8 20-7/16 31 28-7/16
- High 33 30-1/16 34-1/4 29-1/8 27-3/4 33-1/2 43-1/16 42-1/8
- ----------------------------------------------------------------------------------------------------------------------------------
(a) Restated to reflect current classifications.
(b) Composite tape.
S-21
PRINCIPAL UNCONSOLIDATED AFFILIATES (UNAUDITED)
December 31, 1999
Company Country Ownership Activity
- ---------------------------------------------------------------------------------------------------------------------------------
Clairton 1314B Partnership, L.P. United States 10% Coke & Coke By-Products
Double Eagle Steel Coating Company United States 50% Steel Processing
PRO-TEC Coating Company United States 50% Steel Processing
Republic Technologies International, LLC United States 16% Steel Products
Transtar, Inc. United States 46% Transportation
USS-POSCO Industries United States 50% Steel Processing
VSZ U. S. Steel, s. r.o. Slovak Republic 50% Tin Mill Products
Worthington Specialty Processing United States 50% Steel Processing
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY INFORMATION ON MINERAL RESERVES (UNAUDITED)
See the USX consolidated financial statements for Supplementary Information on
Mineral Reserves relating to the U. S. Steel Group, page U-30.
S-22
FIVE-YEAR OPERATING SUMMARY
(THOUSANDS OF NET TONS, UNLESS OTHERWISE NOTED) 1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
RAW STEEL PRODUCTION
Gary, IN 7,102 6,468 7,428 6,840 7,163
Mon Valley, PA 2,821 2,594 2,561 2,746 2,740
Fairfield, AL 2,109 2,152 2,361 1,862 2,260
------------------------------------------------------
Total 12,032 11,214 12,350 11,448 12,163
-----------------------------------------------------------------------------------------------------------
RAW STEEL CAPABILITY
Continuous cast 12,800 12,800 12,800 12,800 12,500
Total production as % of total capability 94.0 87.6 96.5 89.4 97.3
-----------------------------------------------------------------------------------------------------------
HOT METAL PRODUCTION 10,344 9,743 10,591 9,716 10,521
-----------------------------------------------------------------------------------------------------------
COKE PRODUCTION(a) 4,619 4,835 5,757 6,777 6,770
-----------------------------------------------------------------------------------------------------------
IRON ORE PELLETS - MINNTAC, MN
Shipments 15,025 15,446 16,403 14,962 15,218
-----------------------------------------------------------------------------------------------------------
COAL PRODUCTION 6,632 8,150 7,528 7,283 7,509
-----------------------------------------------------------------------------------------------------------
COAL SHIPMENTS 6,924 7,670 7,811 7,117 7,502
-----------------------------------------------------------------------------------------------------------
STEEL SHIPMENTS BY PRODUCT
Sheet and semi-finished steel products 8,114 7,608 8,170 8,677 8,721
Tubular, plate and tin mill products 2,515 3,078 3,473 2,695 2,657
------------------------------------------------------
Total 10,629 10,686 11,643 11,372 11,378
Total as % of domestic steel industry 10.1 10.5 10.9 11.3 11.7
-----------------------------------------------------------------------------------------------------------
STEEL SHIPMENTS BY MARKET
Steel service centers 2,456 2,563 2,746 2,831 2,564
Transportation 1,505 1,785 1,758 1,721 1,636
Further conversion:
Joint ventures 1,818 1,473 1,568 1,542 1,332
Trade customers 1,633 1,140 1,378 1,227 1,084
Containers 738 794 856 874 857
Construction 844 987 994 865 671
Oil, gas and petrochemicals 363 509 810 746 748
Export 321 382 453 493 1,515
All other 951 1,053 1,080 1,073 971
------------------------------------------------------
Total 10,629 10,686 11,643 11,372 11,378
-----------------------------------------------------------------------------------------------------------
AVERAGE STEEL PRICE PER TON $420 $469 $479 $467 $466
-----------------------------------------------------------------------------------------------------------
(a) The reduction in coke production after 1996
reflected U. S. Steel's entry into a strategic
partnership with two limited partners on June 1,
1997, to acquire an interest in three coke batteries
at its Clairton (Pa.) Works.
S-23
FIVE-YEAR FINANCIAL SUMMARY
(DOLLARS IN MILLIONS, EXCEPT AS NOTED) 1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
REVENUES
Sales by product:
Sheet and semi-finished
steel products $ 3,345 $ 3,501 $ 3,820 $ 3,677 $ 3,623
Tubular, plate and tin mill products 1,118 1,513 1,754 1,635 1,677
Raw materials (coal, coke and
iron ore) 505 679 724 757 731
Other(a) 414 490 517 466 425
Income (loss) from affiliates (89) 46 69 66 80
Net gains on disposal of assets 21 54 57 16 21
Gain on affiliate stock offering - - - 53 -
----------------------------------------------------------------
Total revenues $ 5,314 $ 6,283 $ 6,941 $ 6,670 $ 6,557
-----------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS
Segment income (loss) for
U. S. Steel operations $ (128) $ 330 $ 618 $ 248 $ 472
Items not allocated to segment:
Pension credits 447 373 313 330 294
Costs of former businesses (83) (100) (125) (120) (141)
Administrative expenses (17) (24) (33) (28) (43)
Gain on affiliate stock offering - - - 53 -
Other(b) (69) - - - -
----------------------------------------------------------------
Total income from operations 150 579 773 483 582
Net interest and other financial costs 74 42 87 116 129
Provision for income taxes 25 173 234 92 150
-----------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY LOSSES $ 51 $ 364 $ 452 $ 275 $ 303
Per common share - basic (in dollars) .48 4.05 5.24 3.00 3.53
- diluted (in dollars) .48 3.92 4.88 2.97 3.43
NET INCOME $ 44 $ 364 $ 452 $ 273 $ 301
Per common share - basic (in dollars) .40 4.05 5.24 2.98 3.51
- diluted (in dollars) .40 3.92 4.88 2.95 3.41
-----------------------------------------------------------------------------------------------------------
PENSION COSTS INCLUDED IN
U. S. STEEL OPERATIONS $ 219 $ 187 $ 169 $ 172 $ 164
-----------------------------------------------------------------------------------------------------------
BALANCE SHEET POSITION AT YEAR-END
Current assets $ 1,981 $ 1,275 $ 1,531 $ 1,428 $ 1,444
Net property, plant and equipment 2,516 2,500 2,496 2,551 2,512
Total assets 7,525 6,749 6,694 6,580 6,521
Short-term debt 13 25 67 91 101
Other current liabilities 1,253 991 1,267 1,208 1,418
Long-term debt 902 464 456 1,014 923
Employee benefits 2,245 2,315 2,338 2,430 2,424
Trust preferred securities and
preferred stock of subsidiary 249 248 248 64 64
Common stockholders' equity 2,053 2,090 1,779 1,559 1,337
Per share (in dollars) 23.23 23.66 20.56 18.37 16.10
-----------------------------------------------------------------------------------------------------------
CASH FLOW DATA
Net cash from operating activities $ (80) $ 380(c) $ 476(c) $ 92(c) $ 586(c)
Capital expenditures 287 310 261 337 324
Disposal of assets 10 21 420 161 67
Dividends paid 97 96 96 104 93
-----------------------------------------------------------------------------------------------------------
EMPLOYEE DATA
Total employment costs $ 1,148 $ 1,305 $ 1,417 $ 1,372 $ 1,381
Average employment cost
(dollars per hour) 28.35 30.42 31.56 30.35 31.24
Average number of employees 19,266 20,267 20,683 20,831 20,845
Number of pensioners at year-end 97,102(d) 92,051 93,952 96,510 99,062
-----------------------------------------------------------------------------------------------------------
STOCKHOLDER DATA AT YEAR-END
Number of common shares
outstanding (in millions) 88.4 88.3 86.6 84.9 83.0
Registered shareholders (in thousands) 55.6 60.2 65.1 71.0 76.7
Market price of common stock $ 33.000 $23.000 $31.250 $ 31.375 $ 30.750
-----------------------------------------------------------------------------------------------------------
(a) Includes revenue from the sale of steel production
by-products, engineering and consulting services,
real estate development and resource management.
(b) Includes losses related to investments in equity
affiliates.
(c) Reclassified to conform to 1999 classifications.
(d) Includes approximately 8,000 surviving spouse
beneficiaries added to the U. S. Steel pension plan
in 1999.
S-24
MANAGEMENT'S DISCUSSION AND ANALYSIS
The U. S. Steel Group includes U. S. Steel, which is
engaged in the production and sale of steel mill
products, coke, and taconite pellets; the management of
mineral resources; domestic coal mining; real estate
development; and engineering and consulting services.
Certain business activities are conducted through joint
ventures and partially owned companies, such as
USS-POSCO Industries ("USS-POSCO"), PRO-TEC Coating
Company ("PRO-TEC"), Transtar, Inc. ("Transtar"),
Clairton 1314B Partnership, Republic Technologies
International, LLC ("Republic") and VSZ U. S. Steel,
s.r.o. Management's Discussion and Analysis should be
read in conjunction with the U. S. Steel Group's
Financial Statements and Notes to Financial Statements.
In 1999, segment income for U. S. Steel operations
decreased primarily due to lower average steel product
prices, unfavorable product mix, and lower income from
affiliates.
Certain sections of Management's Discussion and
Analysis include forward-looking statements concerning
trends or events potentially affecting the businesses of
the U. S. Steel Group. These statements typically
contain words such as "anticipates," "believes,"
"estimates," "expects" or similar words indicating that
future outcomes are not known with certainty and subject
to risk factors that could cause these outcomes to
differ significantly from those projected. In accordance
with "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, these statements are
accompanied by cautionary language identifying important
factors, though not necessarily all such factors, that
could cause future outcomes to differ materially from
those set forth in forward-looking statements. For
additional risk factors affecting the businesses of the
U. S. Steel Group, see Supplementary Data - Disclosures
About Forward-Looking Information in USX Form 10-K.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INCOME
REVENUES for each of the last three years are
summarized in the following table.
(DOLLARS IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Sales by product:
Sheet and semi-finished steel products $ 3,345 $ 3,501 $ 3,820
Tubular, plate, and tin mill products 1,118 1,513 1,754
Raw materials (coal, coke and iron ore) 505 679 724
Other(a) 414 490 517
Income from affiliates (89) 46 69
Gain on disposal of assets 21 54 57
-------- -------- --------
Total revenues $ 5,314 $ 6,283 $ 6,941
-----------------------------------------------------------------------------------------------------------
(a) Includes revenue from the sale of steel production
by-products, engineering and consulting services,
real estate development and resource management.
Total revenues decreased by $969 million in 1999
from 1998 primarily due to lower average realized prices
and lower income from affiliates, which included a $47
million charge for the impairment of U. S. Steel's
investment in USS/Kobe Steel Company. Net gain on
disposal of assets in 1999 included a $22 million charge
representing the difference between the carrying value
of the investment in RTI International Metals, Inc.
("RTI") and the carrying value of indexed debt (for
additional information, see Note 5 to the U. S. Steel
Group Financial Statements). Total revenues in 1998
decreased by $658 million from 1997 primarily due to
lower average realized prices, lower steel shipment
volumes, and lower income from affiliates.
S-25
INCOME FROM OPERATIONS for the U. S. Steel Group for
the last three years was:
(DOLLARS IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Segment income (loss) for U. S. Steel operations(a) $ (128) $ 330 $ 618
Items not allocated to segment:
Pension credits 447 373 313
Administrative expenses (17) (24) (33)
Costs related to former business activities(b) (83) (100) (125)
Impairment of USX's investment in USS/Kobe and costs
related to formation of Republic(c) (47) - -
Loss on investment in RTI stock used to satisfy indexed
debt obligations(d) (22) - -
-------- -------- --------
Total income from operations $ 150 $ 579 $ 773
-----------------------------------------------------------------------------------------------------------
(a) Includes income from the production and sale of
steel mill products, coke and taconite pellets; the
management of mineral resources; domestic coal
mining; real estate development; and engineering and
consulting services.
(b) Includes the portion of postretirement benefit costs
and certain other expenses principally attributable
to former business units of the U. S. Steel Group.
Results in 1997 included charges of $9 million
related to environmental accruals and the adoption
of SOP 96-1.
(c) For further details, see Note 7 to the U. S. Steel
Group Financial Statements.
(d) For further details, see Note 5 to the U. S. Steel
Group Financial Statements.
SEGMENT INCOME FOR U. S. STEEL OPERATIONS
U. S. Steel operations recorded a segment loss of
$128 million in 1999 versus segment income of $330
million in 1998, a decrease of $458 million. The 1999
segment loss included a $10 million charge for certain
environmental accruals, a $7 million charge for certain
legal accruals and $7 million in various non-recurring
equity affiliate charges. Results in 1998 included a net
favorable $30 million for an insurance litigation
settlement and charges of $10 million related to a
voluntary workforce reduction plan. In addition to the
effects of these items, the decrease in segment income
in 1999 for U. S. Steel operations was primarily due to
lower average steel prices, lower income from raw
materials operations, unfavorable product mix, higher
pension costs and lower income from affiliates.
High levels of imports and weak tubular markets
continued to negatively affect steel product prices and
steel shipment levels in 1999 as they did in 1998. U. S.
Steel's average realized price declined 10% in 1999
compared to 1998 from $469 per ton to $420 per ton. In
1999, raw steel capability utilization averaged 94%,
compared to 88% in 1998 and 97% in 1997.
Segment income for U. S. Steel operations in 1998
decreased $288 million from 1997. Segment income in 1998
and 1997 included insurance recoveries of $30 million
and $40 million, respectively, due to blast furnace
incidents in 1995 and 1996 at Gary Works. Results in
1997 included a $15 million gain on the sale of the
plate mill at U. S. Steel's former Texas Works. In
addition to the effects of these items, the decrease in
segment income in 1998 for U. S. Steel operations was
primarily due to lower average steel prices, lower
shipments, less efficient operating levels, the cost
effects of a 10 day outage at Gary Works No. 13 blast
furnace following a tap hole failure, and lower income
from affiliates. These unfavorable items were partially
offset by lower 1998 accruals for profit sharing.
Segment income for U. S. Steel operations included
pension costs (which are primarily noncash) allocated to
the ongoing operations of U. S. Steel of $219 million,
$187 million, and $169 million in 1999, 1998 and 1997,
respectively. Pension costs in 1998 included $10 million
for termination benefits associated to a voluntary early
retirement program.
S-26
ITEM NOT ALLOCATED TO SEGMENT: Pension credits
associated with pension plan assets and liabilities
allocated to pre-1987 retirees and former businesses are
not included in segment income for U. S. Steel
operations. These pension credits, which are primarily
noncash, totaled $447 million in 1999, compared to $373
million and $313 million in 1998 and 1997, respectively.
Pension credits in 1999 included $35 million for a
one-time favorable pension settlement primarily related
to the voluntary early retirement program for salaried
employees.
Pension credits, combined with pension costs
included in segment income for U. S. Steel operations,
resulted in net pension credits of $228 million in 1999,
$186 million in 1998 and $144 million in 1997. Net
pension credits are expected to be approximately $270
million in 2000. Also in 2000, U. S. Steel's main
pension plans' transition asset will be fully amortized,
decreasing the pension credit by $69 million annually in
future years for this component. Future net pension
credits can vary depending upon the market performance
of plan assets, changes in actuarial assumptions
regarding such factors as the selection of a discount
rate and rate of return on plan assets, changes in the
amortization levels of transition amounts or prior
period service costs, plan amendments affecting benefit
payout levels and profile changes in the beneficiary
populations being valued. Changes in any of these
factors could cause net pension credits to change. To
the extent net pension credits decline in the future,
income from operations would be adversely affected. For
additional information on pensions, see Note 11 to the
U. S. Steel Group Financial Statements.
NET INTEREST AND OTHER FINANCIAL COSTS for each of
the last three years are summarized in the following
table:
(DOLLARS IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Net interest and other financial costs $ 74 $ 42 $ 87
Less:
Favorable adjustment to
carrying value of Indexed Debt(a) 13 44 10
-------- -------- --------
Net interest and other financial costs
adjusted to exclude above item $ 87 $ 86 $ 97
-----------------------------------------------------------------------------------------------------------
(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. The
carrying value of Indexed Debt was adjusted quarterly
to settlement value, based on changes in the value of
RTI common stock. Any resulting adjustment was
credited to income and included in interest and other
financial costs. For further discussion of Indexed
Debt, see Note 5 to the U. S. Steel Group Financial
Statements.
Adjusted net interest and other financial costs were
$87 million in 1999 as compared with $86 million in
1998. Adjusted net interest and other financial costs
decreased by $11 million in 1998 as compared with 1997,
due primarily to a lower average debt level.
The PROVISION FOR ESTIMATED INCOME TAXES in 1999
decreased compared to 1998 due to a decline in income
from operations. The provision for estimated income
taxes in 1998 decreased compared to 1997 due to a
decline in income from operations and a $9 million
favorable foreign tax adjustment in 1998 as a result of
a favorable resolution of foreign tax litigation. For
further discussion on income taxes, see Note 14 to the
U. S. Steel Group Financial Statements.
The EXTRAORDINARY LOSS on extinguishment of debt of
$7 million, net of income tax benefit, in 1999 includes
a $5 million loss resulting from the satisfaction of the
indexed debt and a $2 million loss that was U. S.
Steel's share of Republic's extraordinary loss related
to the early extinguishment of debt. For additional
information, see Note 5 to the U. S. Steel Group
Financial Statements.
S-27
NET INCOME in 1999 was $44 million, compared with
$364 million in 1998 and $452 million in 1997. Net
income decreased $320 million in 1999 from 1998, and
decreased $88 million in 1998 from 1997. The decreases
in net income primarily reflect the factors discussed
above.
NONCASH CREDIT FROM EXCHANGE OF PREFERRED STOCK
totaled $10 million in 1997. On May 16, 1997, USX
exchanged approximately 3.9 million 6.75% Convertible
Quarterly Income Preferred Securities ("Trust Preferred
Securities") of USX Capital Trust I, for an equivalent
number of shares of its outstanding 6.50% Cumulative
Convertible Preferred Stock ("6.50% Preferred Stock").
The noncash credit from exchange of preferred stock
represents the difference between the carrying value of
the 6.50% Preferred Stock ($192 million) and the fair
value of the Trust Preferred Securities of USX Capital
Trust I ($182 million), at the date of the exchange. For
additional discussion on the exchange, see Note 18 to
the U. S. Steel Group Financial Statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, CASH FLOWS AND
LIQUIDITY
CURRENT ASSETS at year-end 1999 increased $706
million from year-end 1998 primarily due to higher trade
receivables (including the effects of the expiration in
1999 of a program to sell accounts receivables), higher
deferred income taxes, the recording of an inter-group
income tax receivable and the purchase of Kobe Steel,
Ltd.'s 50% membership interest and consolidation of
Lorain Tubular Company, LLC.
CURRENT LIABILITIES in 1999 increased $250 million
from 1998 primarily due to increased accounts payable
impacted by costs associated with higher production
levels in the latter part of 1999 compared with the same
1998 period, and the purchase of Kobe Steel, Ltd.'s 50%
membership interest and consolidation in 1999 of Lorain
Tubular Company, LLC.
TOTAL LONG-TERM DEBT AND NOTES PAYABLE at December
31, 1999 of $915 million was $426 million higher than
year-end 1998. This increase was largely due to the
replacement of a $350 million accounts receivable
program, which was accounted for as a sale of accounts
receivable, with a facility of the same size now
accounted for as a secured borrowing. For additional
discussion on the facility, see Note 16 to the USX
Corporation Consolidated Financial Statements. Excluding
the impact of the replacement of the receivables
program, the increase in debt was primarily due to lower
cash flow provided from operating activities partially
offset by reduced net cash used in investing activities
and the satisfaction of indexed debt. For further
discussion of indexed debt, see Note 5 to the U. S.
Steel Group Financial Statements. Virtually all of the
debt is a direct obligation of, or is guaranteed by,
USX.
NET CASH USED IN OPERATING ACTIVITIES in 1999 was
$80 million including a net payment of $320 million upon
the expiration of the accounts receivable program
discussed above and a payment of $20 million to the
United Steelworkers of America ("USWA") Voluntary
Employee Benefit Association Trust ("VEBA"). Net cash
provided from operating activities was $380 million in
1998 and included proceeds of $38 million for the
insurance litigation settlement pertaining to the 1995
Gary Works No. 8 blast furnace explosion and the payment
of $30 million for the repurchase of sold accounts
receivable. Excluding these non-recurring items in both
years, net cash provided from operating activities
decreased $112 million in 1999 due mainly to decreased
profitability.
S-28
The U. S. Steel Group's net cash provided from
operating activities in 1997 included payments of $80
million in elective funding of retiree life insurance of
union and nonunion participants, $70 million to the USWA
VEBA, $49 million to fund the U. S. Steel Group's
principal pension plan for the 1996 plan year and
receipts of $40 million in insurance recoveries related
to the 1996 Gary Works No. 13 hearth breakout. Excluding
these items, net cash provided from operating activities
decreased $263 million in 1998 due mainly to decreased
profitability and unfavorable working capital changes.
CAPITAL EXPENDITURES in 1999 included the completion
of the new 64" pickle line at Mon Valley Works; the
replacement of three coilers at the Gary hot strip mill,
one of which was installed in 1999; an upgrade to the
Mon Valley cold rolling mill; replacement of coke
battery thruwalls at Gary Works; several projects at
Gary Works allowing for production of specialized high
strength steels, primarily for the automotive market;
and completion of the conversion of the Fairfield
pipemill to use rounds instead of square blooms. Capital
expenditures in 1998 included a reline of the Gary Works
No. 6 blast furnace, an upgrade to the galvanizing line
at Fairless Works, replacement of coke battery thruwalls
at Gary Works, conversion of the Fairfield pipemill to
use rounds and additional environmental expenditures
primarily at Fairfield Works and Gary Works. Capital
expenditures in 1997 included a blast furnace reline at
Mon Valley Works, a new heat treat line for plates at
Gary Works and additional environmental expenditures
primarily at Gary Works. Contract commitments for
capital expenditures at year-end 1999 were $83 million,
compared with $188 million at year-end 1998.
Capital expenditures for 2000 are expected to be
approximately $230 million including continued coke
battery thruwall repairs at Gary Works, installation of
the remaining two coilers at Gary's hot strip mill, a
blast furnace stove replacement at Gary Works and a Mon
Valley cold mill upgrade.
The preceding statement concerning expected 2000
capital expenditures is a forward-looking statement.
This forward-looking statement is based on assumptions,
which can be affected by (among other things) levels of
cash flow from operations, whether or not assets are
purchased or financed by operating leases, unforeseen
hazards such as weather conditions, explosions or fires,
and delays in obtaining government or partner approval,
which could delay the timing of completion of particular
capital projects. Accordingly, actual results may differ
materially from current expectations in the
forward-looking statement.
INVESTMENTS IN AFFILIATES in 1999 of $15 million was
an investment in Republic. Investments in affiliates in
1998 of $73 million mainly reflects funding for entry
into a joint venture in the Slovak Republic with VSZ
a.s. ("VSZ"). Investments in affiliates in 1997 of $26
million included funding of equity affiliate capital
projects (mainly the construction of a second
galvanizing line at PRO-TEC).
CASH FROM DISPOSAL OF ASSETS totaled $10 million in
1999, compared with $21 million in 1998 and $420 million
in 1997. The 1997 proceeds included $361 million from
U. S. Steel's entry into a strategic partnership with
two limited partners to acquire an interest in three
coke batteries at its Clairton Works and $15 million
from the sale of the plate mill at the U. S. Steel
Group's former Texas Works.
S-29
FINANCIAL OBLIGATIONS increased by $486 million and
$9 million in 1999 and 1998, respectively, and decreased
$567 million in 1997. Financial obligations consist of
the U. S. Steel Group's portion of USX debt and
preferred stock of a subsidiary attributed to both
groups as well as debt and financing agreements
specifically attributed to the U. S. Steel Group. The
increase in 1999 primarily reflected the net effects of
cash used in operating and investing activities and
dividend payments. The decrease in 1997 primarily
reflected the net effects of cash from operating
activities, asset sales and capital expenditures. For a
discussion of USX financing activities attributed to
both groups, see Management's Discussion and Analysis of
USX Consolidated Financial Condition, Cash Flows and
Liquidity.
PENSION ACTIVITY
USX contributed $49 million in 1997 to fund the
U.S. Steel Group's principal pension plan for the 1996
plan year.
DERIVATIVE INSTRUMENTS
See Quantitative and Qualitative Disclosures About
Market Risk for discussion of derivative instruments and
associated market risk for U. S. Steel Group.
LIQUIDITY
For discussion of USX's liquidity and capital
resources, see Management's Discussion and Analysis of
USX Consolidated Financial Condition, Cash Flows and
Liquidity.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF ENVIRONMENTAL MATTERS, LITIGATION AND
CONTINGENCIES
The U. S. Steel Group has incurred and will continue
to incur substantial capital, operating and maintenance,
and remediation expenditures as a result of
environmental laws and regulations. In recent years,
these expenditures have been mainly for process changes
in order to meet Clean Air Act obligations, although
ongoing compliance costs have also been significant. To
the extent these expenditures, as with all costs, are
not ultimately reflected in the prices of the U. S.
Steel Group's products and services, operating results
will be adversely affected. The U. S. Steel Group
believes that all of its domestic competitors are
subject to similar environmental laws and regulations.
However, the specific impact on each competitor may vary
depending on a number of factors, including the age and
location of its operating facilities, marketing areas,
production processes and the specific products and
services it provides. To the extent that competitors are
not required to undertake equivalent costs in their
operations, the competitive position of the U. S. Steel
Group could be adversely affected.
S-30
MANAGEMENT'S DISCUSSION AND ANALYSIS
The U. S. Steel Group's environmental expenditures
for the last three years were(a):
(DOLLARS IN MILLIONS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Capital $ 32 $ 49 $ 43
Compliance
Operating & maintenance 199 198 196
Remediation(b) 22 19 29
-------- -------- --------
Total U. S. Steel Group $ 253 $ 266 $ 268
-----------------------------------------------------------------------------------------------------------
(a) Based on previously established U. S. Department of
Commerce survey guidelines.
(b) These amounts include spending charged against such
reserves, net of recoveries where permissible, but
do not include noncash provisions recorded for
environmental remediation.
The U. S. Steel Group's environmental capital
expenditures accounted for 11%, 16% and 16% of total
capital expenditures in 1999, 1998 and 1997,
respectively.
Compliance expenditures represented 4% of the U. S.
Steel Group's total costs and expenses in 1999, 1998 and
1997. Remediation spending during 1997 to 1999 was
mainly related to remediation activities at former and
present operating locations. These projects include
continuing remediation at an IN SITU uranium mining
operation and former coke-making facilities and the
closure of permitted hazardous and non-hazardous waste
landfills.
The Resource Conservation and Recovery Act ("RCRA")
establishes standards for the management of solid and
hazardous wastes. Besides affecting current waste
disposal practices, RCRA also addresses the
environmental effects of certain past waste disposal
operations, the recycling of wastes and the regulation
of storage tanks.
The U. S. Steel Group is in the study phase of RCRA
corrective action programs at its Fairless Works and its
former Geneva Works. A RCRA corrective action program
has been initiated at its Gary Works and its Fairfield
Works. Until the studies are completed at these
facilities, USX is unable to estimate the total cost of
remediation activities that will be required.
USX has been notified that it is a potential
responsible party ("PRP") at 26 waste sites related to
the U. S. Steel Group under the Comprehensive
Environmental Response, Compensation and Liability Act
("CERCLA") as of December 31, 1999. In addition, there
are 12 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 32 additional sites
related to the U. S. Steel Group where remediation is
being sought under other environmental statutes, both
federal and state, or where private parties are seeking
remediation through discussions or litigation. At many
of these sites, USX is one of a number of parties
involved and the total cost of remediation, as well as
USX's share thereof, is frequently dependent upon the
outcome of investigations and remedial studies. The
U.S. Steel Group accrues for environmental remediation
activities when the responsibility to remediate is
probable and the amount of associated costs is
reasonably determinable. As environmental remediation
matters proceed toward ultimate resolution or as
additional remediation obligations arise, charges in
excess of those previously accrued may be required. See
Note 25 to the U. S. Steel Group Financial Statements.
S-31
MANAGEMENT'S DISCUSSION AND ANALYSIS
In 1998, USX entered into a consent decree with the
Environmental Protection Agency ("EPA") which resolved
alleged violations of the Clean Water Act National
Pollution Discharge Elimination System ("NPDES") permit
at Gary Works and provides for a sediment remediation
project for a section of the Grand Calumet River that
runs through Gary Works. Contemporaneously, USX entered
into a consent decree with the public trustees which
resolves potential liability for natural resource
damages on the same section of the Grand Calumet River.
In 1999, USX paid civil penalties of $2.9 million for
the alleged water act violations and $0.5 million in
natural resource damages assessment costs. In addition,
USX will pay the public trustees $1 million at the end
of the remediation project for future monitoring costs
and USX is obligated to purchase and restore several
parcels of property that have been or will be conveyed
to the trustees. During the negotiations leading up to
the settlement with EPA, capital improvements were made
to upgrade plant systems to comply with the NPDES
requirements. The sediment remediation project is an
approved final interim measure under the corrective
action program for Gary Works and is expected to cost
approximately $30 million over the next six years.
Estimated remediation and monitoring costs for this
project have been accrued.
In addition, remediation of contaminated sediments
in the Gary Vessel Slip has been implemented as an
interim measure under the corrective action program. The
work is completed and is expected to cost $2.5 million.
New or expanded environmental requirements, which
could increase the U. S. Steel Group's environmental
costs, may arise in the future. USX intends to comply
with all legal requirements regarding the environment,
but since many of them are not fixed or presently
determinable (even under existing legislation) and may
be affected by future legislation, it is not possible to
predict accurately the ultimate cost of compliance,
including remediation costs which may be incurred and
penalties which may be imposed. However, based on
presently available information, and existing laws and
regulations as currently implemented, the U. S. Steel
Group does not anticipate that environmental compliance
expenditures (including operating and maintenance and
remediation) will materially increase in 2000. The U. S.
Steel Group's capital expenditures for environmental are
expected to be approximately $27 million in 2000 and are
expected to be spent on projects primarily at Gary Works
and Fairfield Works. Predictions beyond 2000 can only be
broad-based estimates which have varied, and will
continue to vary, due to the ongoing evolution of
specific regulatory requirements, the possible
imposition of more stringent requirements and the
availability of new technologies to remediate sites,
among other matters. Based upon currently identified
projects, the U. S. Steel Group anticipates that
environmental capital expenditures will be approximately
$16 million in 2001; however, actual expenditures may
vary as the number and scope of environmental projects
are revised as a result of improved technology or
changes in regulatory requirements and could increase if
additional projects are identified or additional
requirements are imposed.
S-32
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 25 to the U. S. Steel Group Financial
Statements. The ultimate resolution of these
contingencies could, individually or in the aggregate,
be material to the U. S. Steel Group Financial
Statements. However, management believes that USX will
remain a viable and competitive enterprise even though
it is possible that these contingencies could be
resolved unfavorably to the U. S. Steel Group.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
In 1999, average realized steel prices and steel
shipments continued to be negatively impacted by the
ongoing effects of steel imports and weak plate and
tubular markets.
Average realized steel prices were 10.4% lower in
1999 versus 1998 due primarily to U. S. Steel realizing
lower prices on most products. In 1999, average realized
steel prices on sheet products were 7.8% lower versus
1998.
Steel shipments were 10.6 million tons in 1999, 10.7
million tons in 1998, and 11.6 million tons in 1997.
U.S. Steel Group shipments comprised approximately
10.1% of the domestic steel market in 1999. In 1999 and
1998, U. S. Steel shipments were negatively affected by
an increase in imports and weak tubular markets.
Exports accounted for approximately 3% of U. S. Steel
Group shipments in 1999 and 4% in both 1998 and 1997.
Raw steel production was 12.0 million tons in 1999,
compared with 11.2 million tons in 1998 and 12.3 million
tons in 1997. Raw steel production averaged 94% of
capability in 1999, compared with 88% of capability in
1998 and 97% of capability in 1997. In 1998, raw steel
production was negatively affected by a planned reline
at Gary Works No. 6 blast furnace, an unplanned blast
furnace outage at the Gary Works No. 13 blast furnace,
and the idling of certain facilities as a result of the
increase in imports. Because of market conditions, U. S.
Steel Group curtailed its production by keeping the Gary
Works No. 6 blast furnace out of service until February
1999, after a scheduled reline was completed in
mid-August 1998. In addition, raw steel production was
cut back at Mon Valley Works and Fairfield Works during
1998. U. S. Steel's stated annual raw steel production
capability was 12.8 million tons in 1999, 1998 and 1997.
On September 30, 1998, U. S. Steel joined with 11
other producers, the USWA and the Independent
Steelworkers Union ("ISU") to file trade cases against
hot-rolled carbon steel products from Japan, Russia, and
Brazil. A final antidumping ("AD") order against Japan
was issued on June 23, 1999. In the cases against
Brazil, on July 7, 1999, the U. S. Department of
Commerce ("Commerce") announced final countervailing
("CVD") and AD duty determinations and,
contemporaneously, announced that it had entered into
agreements with Brazil to suspend the investigations. In
the case against Russia, on July 13, 1999, Commerce
announced final AD duty determinations and,
contemporaneously, announced that it had entered into an
agreement with Russia to suspend the investigation. In
addition, Commerce announced that it had also entered
into a comprehensive agreement concerning all steel
product imports from Russia except for plate products
S-33
MANAGEMENT'S DISCUSSION AND ANALYSIS
and hot-rolled products. Plate products from Russia are
subject to a suspension agreement signed in 1997. On
August 16, 1999, U. S. Steel, along with four other
integrated domestic producers, filed appeals with the
U.S. Court of International Trade challenging the
hot-rolled carbon steel suspension agreements with
Brazil and Russia.
On February 16, 1999, U. S. Steel joined with four
other producers and the USWA to file trade cases against
eight countries (Japan, South Korea, India, Indonesia,
Macedonia, the Czech Republic, France, and Italy)
concerning imports of cut-to-length plate products. AD
cases were filed against all the countries and CVD duty
cases were filed against all of the countries except
Japan and the Czech Republic. On April 2, 1999, the
U.S. International Trade Commission ("ITC") determined
that the volume of imports from Macedonia and the Czech
Republic were negligible thereby terminating the
investigations as to those countries. On February 11,
2000, final AD orders were issued against all the
remaining countries, and final CVD orders were issued in
all of the remaining CVD cases.
On June 2, 1999, U. S. Steel joined with eight other
producers, the USWA and the ISU to file trade cases
against twelve countries (Argentina, Brazil, China,
Indonesia, Japan, Russia, South Africa, Slovakia,
Taiwan, Thailand, Turkey, and Venezuela) concerning
imports of cold-rolled sheet products. AD cases were
filed against all the countries and CVD duty cases were
filed against Brazil, Indonesia, Thailand, and
Venezuela. On July 19, 1999, the ITC issued its
preliminary determination that the domestic industry was
being injured or threatened with injury as the result of
imports from all of the countries. It decided, however,
to discontinue the investigations of subsidies on
imports from Indonesia, Thailand, and Venezuela. After
having found preliminary margins against each of the
countries in each of the remaining cases, Commerce has
announced final AD margins against Argentina, Brazil,
Japan, Russia, South Africa, and Thailand, and final CVD
margins against Brazil. Final decisions from Commerce as
to the remaining countries are expected in the first
half of 2000. Commerce has announced that it has entered
into an agreement with Russia to suspend the
investigation. After a final injury hearing, on March
3, 2000, the ITC determined that the imports from
Argentina, Brazil, Japan, Russia, South Africa, and
Thailand were not causing material injury to the
domestic industry, terminating the cases against
these countries. The ITC's final injury determination
for the remaining six countries is still pending.
On June 30, 1999, U. S. Steel joined with four other
producers and the USWA to file trade cases against five
countries (the Czech Republic, Japan, Mexico, Romania,
and South Africa) concerning imports of large and small
diameter carbon and alloy standard, line, and pressure
pipe. On August 13, 1999, the ITC issued its preliminary
determination that the domestic industry was being
injured or threatened with injury as the result of
imports from all of the countries and Commerce has
announced preliminary duty determinations in each of the
cases. These cases are subject to further investigation
by both the ITC and Commerce.
U. S. Steel intends to file additional anti-dumping
and countervailing duty petitions if unfairly traded
imports adversely impact, or threaten to adversely
impact, the results of the U. S. Steel Group. For
additional information regarding levels of imported
steel, see discussion of "Outlook for 2000" below.
On September 1, 1999, Commerce and the ITC published
public notices announcing the initiation of the
mandatory five-year "sunset reviews" of antidumping and
countervailing duty orders issued as a result of the
cold-rolled, corrosion-resistant, and cut-to-length
plate cases filed by the domestic industry in 1992.
Under the "sunset review" procedure, an order must be
revoked after five years
S-34
MANAGEMENT'S DISCUSSION AND ANALYSIS
unless Commerce and the ITC determine that dumping or a
countervailable subsidy is likely to continue or recur
and that material injury to the domestic industry is
likely to continue or recur. Of the 34 orders issued
concerning the various products imported from various
countries, 28 will be the subject of expedited review at
Commerce because there was no response, inadequate
response, or waiver of participation by the respondent
parties. Therefore, at Commerce, only six of the orders
(corrosion-resistant, cold-rolled, and cut-to-length
plate from Germany; corrosion-resistant from Japan;
cold-rolled from the Netherlands; and cut-to-length
plate from Romania) will be the subject of a full
review. The ITC has indicated that it will conduct full
reviews in all 34 of the cases, despite the fact that
responses by some of the respondent countries were
inadequate.
On October 28, 1999, Weirton Steel, along with the
USWA and the ISU, filed a trade case against tin- and
chromium-coated steel sheet imports from Japan. In
December 1999, the ITC issued its preliminary
determination that the domestic industry is being
injured as a result of the imports from Japan. Commerce
is expected to make an announcement concerning
preliminary duty margins by the end of March 2000. This
case is subject to further investigation by both the ITC
and Commerce.
In August 1999, members of United Steelworkers of
America ("USWA") ratified a new five-year labor
contract, effective August 1, 1999, covering
approximately 14,500 employees. Management believes that
this agreement is competitive with labor agreements
reached by U. S. Steel's major domestic integrated
competitors and thus does not believe that U. S. Steel's
competitive position with regard to such competitors
will be materially affected.
U. S. Steel Mining Company, LLC ("U. S. Steel
Mining") entered into a five-year contract with the
United Mine Workers of America ("UMWA"), effective
January 1, 1998, covering approximately 1,000 employees.
This agreement followed that of other major mining
companies.
The U. S. Steel Group depreciates steel assets by
modifying straight-line depreciation based on the level
of production. Depreciation charges for 1999, 1998, and
1997 were 99%, 93%, and 102%, respectively, of
straight-line depreciation based on production levels
for each of the years. See Note 2 to the U. S. Steel
Group Financial Statements.
OUTLOOK FOR 2000
U. S. Steel expects shipment volumes and average
steel product prices to be higher in 2000 compared to
1999. In recent years, demand for steel in the United
States has been at high levels. Any weakness in the
United States economy for capital goods or consumer
durables could further adversely impact U. S.
Steel Group's product prices and shipment level.
Income from equity affiliates will be negatively
impacted by losses associated with Republic. Republic
has stated that it expects to incur operating losses
through 2000 and nonrecurring charges associated with
the consolidation of the combined operations. U. S.
Steel will recognize its share of any such losses under
the equity method of accounting.
In August 1999, members of the USWA ratified a new
five-year labor contract. The new labor contract, which
includes $2.00 in hourly wage increases phased in over
the term of the agreement beginning in 2000 as well as
pension and other benefit improvements for active and
retired employees and spouses, will result in higher
labor and benefit costs for the U. S. Steel Group each
year
S-35
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
throughout the term of the contract. Management believes
that this agreement is competitive with labor agreements
reached by U. S. Steel's major domestic integrated
competitors and thus does not believe that U. S. Steel's
competitive position with regard to such competitors
will be materially affected.
Steel imports to the United States accounted for an
estimated 26%, 30% and 24% of the domestic steel market
for the years 1999, 1998 and 1997, respectively. Steel
imports of hot rolled and cold rolled steel decreased
34% in 1999, compared to 1998. Steel imports of plates
decreased 52% compared to 1998. For most products, U. S.
Steel's order books are strong and prices are
increasing. The trade cases have had a positive impact,
however, high import levels remain a problem and will
continue to affect the industry throughout the year.
The preceding statements concerning anticipated
steel demand, steel pricing, and shipment levels are
forward-looking and are based upon assumptions as to
future product prices and mix, and levels of steel
production capability, production and shipments. These
forward-looking statements can be affected by imports,
domestic and international economies, domestic
production capacity, and customer demand. In the event
these assumptions prove to be inaccurate, actual results
may differ significantly from those presently
anticipated.
YEAR 2000
U. S. Steel experienced only nominal problems during
the year-end rollover to the Year 2000, none of which
impacted production operations. After a planned short
pause in operations over the year-end rollover,
facilities were restarted on schedule and full
production quickly resumed. To-date, no Year 2000
related problems have been encountered with
third-parties.
Substantially all processes and systems have been
run successfully in production mode after the rollover;
but until this is complete, there is a potential for
Year 2000 related problems, especially for business
systems. Accordingly, U. S. Steel plans to continue to
closely monitor the processes and systems to ensure that
dates and date-related information are accurately
represented and displayed on all output.
Total costs associated with Year 2000 project for
U.S. Steel were $28 million, including $17 million of
incremental costs.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
("SFAS") 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. SFAS No. 133 may result in
additional volatility in both current period earnings
and other comprehensive income as a result of recording
recognized and unrecognized gains and losses resulting
from changes in the fair value of derivative
instruments. The transition adjustment resulting from
adoption of SFAS No. 133 will be reported as a
cumulative effect of a change in accounting principle.
S-36
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Under the new Standard, USX may elect not to
designate certain derivative instruments as hedges even
if the strategy qualifies for hedge accounting
treatment. This approach would eliminate the
administrative effort needed to measure effectiveness
and monitor such instruments; however, this approach
also may result in additional volatility in current
period earnings.
USX cannot reasonably estimate the effect of
adoption on either the financial position or results of
operations. It is not possible to estimate what effect
this Statement will have on future results of
operations, although greater period-to-period volatility
is likely. USX plans to adopt the Standard effective
January 1, 2001.
S-37
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
MANAGEMENT OPINION CONCERNING DERIVATIVE INSTRUMENTS
USX uses commodity-based and foreign currency
derivative instruments to manage its price risk.
Management has authorized the use of futures, forwards,
swaps and options to manage exposure to price
fluctuations related to the purchase, production or sale
of crude oil, natural gas, refined products, nonferrous
metals and electricity. For transactions that qualify
for hedge accounting, the resulting gains or losses are
deferred and subsequently recognized in income from
operations, in the same period as the underlying
physical transaction. Derivative instruments used for
trading and other activities are marked-to-market and
the resulting gains or losses are recognized in the
current period in income from operations. While USX's
risk management activities generally reduce market risk
exposure due to unfavorable commodity price changes for
raw material purchases and products sold, such
activities can also encompass strategies that assume
price risk.
Management believes that use of derivative
instruments along with risk assessment procedures and
internal controls does not expose the U. S. Steel Group
to material risk. The use of derivative instruments
could materially affect the U. S. Steel Group's results
of operations in particular quarterly or annual periods.
However, management believes that use of these
instruments will not have a material adverse effect on
financial position or liquidity. For a summary of
accounting policies related to derivative instruments,
see Note 2 to U. S. Steel Group Financial Statements.
COMMODITY PRICE RISK AND RELATED RISKS
In the normal course of its business, the U. S.
Steel Group is exposed to market risk or price
fluctuations related to the production and sale of steel
products. To a lesser extent, the U. S. Steel Group is
exposed to price risk related to the purchase,
production or sale of coal and coke and the purchase of
natural gas, steel scrap and certain nonferrous metals
used as raw materials. The U. S. Steel Group is also
exposed to effects of price fluctuations on the value of
its raw material and steel product inventories.
The U. S. Steel Group's market risk strategy has
generally been to obtain competitive prices for its
products and services and allow operating results to
reflect market price movements dictated by supply and
demand. However, the U. S. Steel Group uses derivative
commodity instruments (primarily over-the-counter
commodity swaps) to manage exposure to fluctuations in
the purchase price of natural gas, heating oil and
certain nonferrous metals. The use of these instruments
has not been significant in relation to the U. S. Steel
Group's overall business activity.
S-38
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK CONTINUED
Sensitivity analyses of the incremental effects on
pretax income of hypothetical 10% and 25% decreases in
commodity prices for open derivative commodity
instruments as of December 31, 1999 and December 31,
1998, are provided in the following table(a):
(DOLLARS IN MILLIONS)
-----------------------------------------------------------------------------------------------------------
INCREMENTAL DECREASE IN
PRETAX INCOME ASSUMING A
HYPOTHETICAL PRICE
CHANGE OF(a)
1999 1998
Derivative Commodity Instruments 10% 25% 10% 25%
-----------------------------------------------------------------------------------------------------------
U. S. Steel Group:
Natural gas (price decrease)(d)
Other than trading $ 1.8 $ 4.6 $ 2.3 $ 5.6
Zinc (price decrease)(d)
Other than trading 2.0 5.0 1.6 3.9
Nickel (price decrease)(d)
Other than trading - - .1 .2
Tin (price decrease)(d)
Other than trading .2 .6 .1 .2
Heating oil (price decrease)(d)
Other than trading - - - .1
-----------------------------------------------------------------------------------------------------------
(a) Gains and losses on derivative commodity instruments
are generally offset by price changes in the
underlying commodity. Effects of these offsets are
not reflected in the sensitivity analyses. Amounts
reflect the estimated incremental effect on pretax
income of hypothetical 10% and 25% decreases in
closing commodity prices for each open contract
position at December 31, 1999 and December 31, 1998.
U. S. Steel Group management evaluates its portfolio
of derivative commodity instruments on an ongoing
basis and adds or revises strategies to reflect
anticipated market conditions and changes in risk
profiles. Changes to the portfolio subsequent to
December 31, 1999, would cause future pretax income
effects to differ from those presented in the table.
While these derivative commodity instruments are
generally used to reduce risks from unfavorable
commodity price movements, they also may limit the
opportunity to benefit from favorable movements. The
U. S. Steel Group recorded net pretax other than trading
activity losses of $4 million in 1999, losses of $6
million in 1998, and gains of $5 million in 1997. These
gains and losses were offset by changes in the realized
prices of the underlying hedged commodities. For
additional quantitative information relating to
derivative commodity instruments, including aggregate
contract values and fair values, where appropriate, see
Note 23 to the U. S. Steel Group Financial Statements.
INTEREST RATE RISK
USX is subject to the effects of interest rate
fluctuations on certain of its non-derivative financial
instruments. A sensitivity analysis of the projected
incremental effect of a hypothetical 10% decrease in
year-end 1999 and 1998 interest rates on the fair value
of the U. S. Steel Group's specifically attributed
non-derivative financial instruments and the U. S. Steel
Group's portion of USX's non-derivative financial
instruments attributed to both groups, is provided in
the following table:
S-39
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK CONTINUED
(DOLLARS IN MILLIONS)
-----------------------------------------------------------------------------------------------------------
As of December 31, 1999 1998
Incremental Incremental
Increase in Increase in
Non-Derivative Carrying Fair Fair Carrying Fair Fair
Financial Instruments(a) Value(b) Value(b) Value(c) Value(b) Value(b) Value(c)
-----------------------------------------------------------------------------------------------------------
Financial assets:
Investments and
long-term receivables(d) $ 122 $ 122 $ - $ 120 $ 120 $ -
-----------------------------------------------------------------------------------------------------------
Financial liabilities:
Long-term debt(e)(f) $ 823 $ 835 $ 20 $ 381 $ 406 $ 16
Preferred stock of subsidiary(g) 66 63 5 66 66 5
USX obligated mandatorily
redeemable convertible preferred
securities of a subsidiary trust(g) 183 169 15 182 165 13
--------- --------- --------- --------- --------- ---------
Total liabilities $ 1,072 $ 1,067 $ 40 $ 629 $ 637 $ 34
-----------------------------------------------------------------------------------------------------------
(a) Fair values of cash and cash equivalents,
receivables, notes payable, accounts payable and
accrued interest, approximate carrying value and are
relatively insensitive to changes in interest rates
due to the short-term maturity of the instruments.
Accordingly, these instruments are excluded from the
table.
(b) See Note 24 to the U. S. Steel Group Financial
Statements.
(c) Reflects, by class of financial instrument, the
estimated incremental effect of a hypothetical 10%
decrease in interest rates at December 31, 1999 and
December 31, 1998, on the fair value of
non-derivative financial instruments. For financial
liabilities, this assumes a 10% decrease in the
weighted average yield to maturity of USX's long-term
debt at December 31, 1999 and December 31, 1998.
(d) For additional information, see Note 15 to the U. S.
Steel Group Financial Statements.
(e) Includes amounts due within one year.
(f) Fair value was based on market prices where
available, or current borrowing rates for financings
with similar terms and maturities. For additional
information, see Note 10 to the U. S. Steel Group
Financial Statements.
(g) See Note 23 to the USX Consolidated Financial
Statements.
At December 31, 1999, USX's portfolio of long-term
debt was comprised primarily of fixed-rate instruments.
Therefore, the fair value of the portfolio is relatively
sensitive to effects of interest rate fluctuations. This
sensitivity is illustrated by the $20 million increase
in the fair value of long-term debt assuming a
hypothetical 10% decrease in interest rates. However,
USX's sensitivity to interest rate declines and
corresponding increases in the fair value of its debt
portfolio would unfavorably affect USX's results and
cash flows only to the extent that USX elected to
repurchase or otherwise retire all or a portion of its
fixed-rate debt portfolio at prices above carrying
value.
FOREIGN CURRENCY EXCHANGE RATE RISK
At December 31, 1999, the U. S. Steel Group had no
material exposure to foreign currency exchange rate
risk.
EQUITY PRICE RISK
USX was subject to equity price risk resulting from
its issuance in December 1996 of $117 million of 6-3/4%
Exchangeable Notes due February 1, 2000 ("indexed
debt"). On March 31, 1999, USX irrevocably deposited
with a trustee the entire 5.5 million shares it owned in
RTI. The deposit of shares resulted in the satisfaction
of USX's obligation under the indexed debt. Under the
terms of the indenture, the trustee exchanged one RTI
share for each note at maturity. All shares were
required for satisfaction of the indexed debt;
therefore, none reverted back to USX.
SAFE HARBOR
The U. S. Steel Group's quantitative and qualitative
disclosures about market risk include forward-looking
statements with respect to management's opinion about
risks associated with the U. S. Steel Group's use of
derivative instruments. These statements are based on
certain assumptions with respect to market prices and
industry supply of and demand for steel products and
certain raw materials. To the extent that these
assumptions prove to be inaccurate, future outcomes with
respect to U. S. Steel Group's hedging programs may
differ materially from those discussed in the
forward-looking statements.
S-40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors and executive officers of USX
required by this item is incorporated by reference to the material appearing
under the headings "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in USX's Proxy Statement dated March 13, 2000,
for the 2000 Annual Meeting of Stockholders.
The executive officers of USX or its subsidiaries and their ages as of
February 1, 2000, are as follows:
USX -- CORPORATE
Albert E. Ferrara, Jr...... 51 Vice President--Strategic Planning
Edward F. Guna............. 51 Vice President & Treasurer
Robert M. Hernandez........ 55 Vice Chairman & Chief Financial Officer
Kenneth L. Matheny......... 52 Vice President & Comptroller
Dan D. Sandman............. 51 General Counsel, Secretary and Senior Vice President--Human Resources
& Public Affairs
Terrence D. Straub......... 54 Vice President--Governmental Affairs
Thomas J. Usher............ 57 Chairman of the Board of Directors & Chief Executive Officer
Charles D. Williams........ 64 Vice President--Investor Relations
USX -- MARATHON GROUP
Clarence P. Cazalot, Jr.... 49 Vice Chairman--USX Corporation and President--Marathon Oil Company
Ron S. Keisler............. 53 Senior Vice President--Worldwide Exploration--Marathon Oil Company
William F. Madison......... 57 Senior Vice President--Worldwide Production--Marathon Oil Company
John T. Mills.............. 52 Senior Vice President--Finance & Administration--Marathon Oil Company
John V. Parziale........... 59 Senior Vice President--Planning & Technical Resources--Marathon Oil Company
William F. Schwind, Jr..... 55 General Counsel & Secretary--Marathon Oil Company
On March 2, 2000, USX Corporation announced that the board of
directors elected Clarence P. Cazalot, Jr. president of Marathon Oil
Company. Mr. Cazalot was also named a vice--chairman of USX Corporation
and elected to the USX board. Mr. Cazalot had been employed by Texaco Inc.
since 1972 where held a number of senior posts. Mr. Cazalot's latest
position was vice president of Texaco Inc. and president -- production
operations.
USX -- U. S. STEEL GROUP
Charles G. Carson, III..... 57 Vice President--Environmental Affairs
John J. Connelly........... 53 Vice President--Long Range Planning & International Business
Roy G. Dorrance............ 54 Executive Vice President--Sheet Products
Charles C. Gedeon.......... 59 Executive Vice President--Raw Materials & Diversified Businesses
Gretchen R. Haggerty....... 44 Vice President--Accounting & Finance
Bruce A. Haines............ 55 Vice President--Technology & Management Services
J. Paul Kadlic............. 58 Vice President--Sales
David H. Lohr.............. 46 Vice President--Operations
Thomas W. Sterling, III.... 52 Vice President--Employee Relations
Stephan K. Todd............ 54 General Counsel
Paul J. Wilhelm............ 57 Vice Chairman--USX Corporation and President--U. S. Steel Group
With the exception of Mr. Cazalot as mentioned above, all of the
executive officers have held responsible management or professional positions
with USX or its subsidiaries for more than the past five years.
53
ITEM 11. MANAGEMENT REMUNERATION
Information required by this item is incorporated by reference to the
material appearing under the heading "Executive Compensation and Other
Information" in USX's Proxy Statement dated March 13, 2000, for the 2000 Annual
Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the
material appearing under the headings, "Security Ownership of Certain Beneficial
Owners" and "Security Ownership of Directors and Executive Officers" in USX's
Proxy Statement dated March 13, 2000, for the 2000 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the
material appearing under the heading "Transactions" in USX's Proxy Statement
dated March 13, 2000, for the 2000 Annual Meeting of Stockholders.
54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. DOCUMENTS FILED AS PART OF THE REPORT
1. Financial Statements
Financial Statements filed as part of this report are listed on the
Index to Financial Statements, Supplementary Data, Management's
Discussion and Analysis, and Quantitative and Qualitative Disclosures
About Market Risk of USX Consolidated, the Marathon Group and the
U.S. Steel Group, immediately preceding pages U-1, M-1 and S-1,
respectively.
2. Financial Statement Schedules and Supplementary Data
Financial Statement Schedules are omitted because they are not
applicable or the required information is contained in the
applicable financial statements or notes thereto.
Supplementary Data --
Summarized Financial Information of Marathon Oil Company is
provided on page 61. Disclosures About Forward-Looking
Statements are provided beginning on page 62.
B. REPORTS ON FORM 8-K
Form 8-K dated October 13, 1999, reporting under Item 5. Other Events,
the retirement of Victor G. Beghini, president of Marathon Oil
Company, on October 31, 1999.
Form 8-K dated February 17, 2000, reporting under Item 5. Other
Events, the filing of the audited Financial Statements and
Supplementary Data for the fiscal year ended December 31, 1999,
reports of independent accountants and Financial Data Schedule.
Form 8-K dated March 3, 2000, reporting under Item 5. Other Events,
the election of Clarence P. Cazalot, Jr. as vice-chairman of USX
Corporation and president of Marathon Oil
Company.
C. EXHIBITS
Exhibit No.
3. Articles of Incorporation and By-Laws
(a) USX Restated Certificate of
Incorporation dated May 1, 1999................... Incorporated by reference to Exhibit 3.1 to
the USX Report on Form 10-Q for the quarter
ended June 30, 1999.
(b) USX By-Laws, effective
as of May 1, 1999................................. Incorporated by reference to Exhibit 3.2 to
the USX Report on Form 10-Q for the quarter
ended June 30, 1999.
55
4. Instruments Defining the Rights of Security Holders,
Including Indentures
(a) Credit Agreement dated as of
August 18, 1994, as amended by an Amended
and Restated Credit Agreement dated
August 7, 1996.................................... Incorporated by reference to Exhibit 4(a) to
USX Reports on Form 10-Q for the quarters
ended September 30, 1994, and June 30, 1996.
(b) Rights Agreement, dated as of..................... Incorporated by reference to Exhibit 4 to
September 28, 1999, between USX's Form 8-K filed on September 28,
USX Corporation and ChaseMellon Shareholder 1999.
Services, L.L.C., as Rights Agent
(c) Pursuant to 17 CFR 229.601(b)(4)(iii), instruments with respect
to long-term debt issues have been omitted where the amount of
securities authorized under such instruments does not exceed 10%
of the total consolidated assets of USX. USX hereby agrees to
furnish a copy of any such instrument to the Commission upon its
request.
10. Material Contracts
(a) USX 1990 Stock Plan, As
Amended April 28, 1998............................ Incorporated by reference to Annex II to the USX
Proxy Statement dated March 9, 1998.
(b) USX Annual Incentive Compensation
Plan, As Amended March 26, 1991...................
(c) USX Senior Executive Officer Annual
Incentive Compensation Plan, As Amended
April 28, 1998.................................... Incorporated by reference to Annex I to the
USX Proxy Statement dated March 9, 1998.
(d) Marathon Oil Company Annual Incentive
Compensation Plan, As Amended
November 23, 1999.................................
(e) USX Executive Management
Supplemental Pension Program, As Amended
January 1, 1999...................................
(f) USX Supplemental Thrift Program, As Amended
January 1, 1999...................................
(g) Amended and Restated Limited Liability
Company Agreement of Marathon Ashland
Petroleum LLC, dated as of December 31, 1998...... Incorporated by reference to Exhibit 10(h) of
USX Form 10-Q for the quarter ended June 30,
1999.
56
(h) Amendment No. 1 dated as of December 31, 1998
to the Put/Call, Registration Rights and Standstill
Agreement of Marathon Ashland Petroleum LLC
dated as of January 1, 1998....................... Incorporated by reference to Exhibit 10.2 of USX
Form 8-K dated January 1, 1998, and Exhibit 10(i)
of USX Form 10-Q for the quarter ended June 30, 1999.
(i) Form of Severance Agreements between the
Corporation and Various Officers.................. Incorporated by reference to Exhibit 10 of USX
form 10-Q for the quarter ended September 30,
1999.
(j) USX Deferred Compensation Plan
For Non-Employee Directors
effective January 1, 1997......................... Incorporated by reference to Exhibit 10(k) to
the USX Form 10-K for the year ended December
31, 1996.
(k) Agreement between Marathon Oil Company and Clarence
P. Cazalot, Jr., executed February 28, 2000.
12.1 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
12.2 Computation of Ratio of Earnings to Fixed Charges
21. List of Significant Subsidiaries
23. Consent of Independent Accountants
27. Financial Data Schedule
57
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacity indicated on March 13, 2000.
USX CORPORATION
By /s/ Kenneth L. Matheny
-------------------------------------
KENNETH L. MATHENY
VICE PRESIDENT & COMPTROLLER
SIGNATURE TITLE
--------- -----
Chairman of the Board of Directors,
/s/ Thomas J. Usher Chief Executive Officer and Director
- --------------------------------------------------------
THOMAS J. USHER
Vice Chairman & Chief Financial Officer
/s/ Robert M. Hernandez and Director
- --------------------------------------------------------
ROBERT M. HERNANDEZ
/s/ Kenneth L. Matheny Vice President & Comptroller
- --------------------------------------------------------
KENNETH L. MATHENY
/s/ Neil A. Armstrong Director
- --------------------------------------------------------
NEIL A. ARMSTRONG
/s/ Jeanette G. Brown Director
- --------------------------------------------------------
JEANETTE G. BROWN
Director
- --------------------------------------------------------
CLARENCE P. CAZALOT, JR.
/s/ J. Gary Cooper Director
- --------------------------------------------------------
J. GARY COOPER
/s/ Charles A. Corry Director
- --------------------------------------------------------
CHARLES A. CORRY
/s/ Charles R. Lee Director
- --------------------------------------------------------
CHARLES R. LEE
/s/ Paul E. Lego Director
- --------------------------------------------------------
PAUL E. LEGO
/s/ Ray Marshall Director
- --------------------------------------------------------
RAY MARSHALL
/s/ John F. McGillicuddy Director
- --------------------------------------------------------
JOHN F. MCGILLICUDDY
/s/ Seth E. Schofield Director
- --------------------------------------------------------
SETH E. SCHOFIELD
/s/ John W. Snow Director
- --------------------------------------------------------
JOHN W. SNOW
/s/ Paul J. Wilhelm Director
- --------------------------------------------------------
PAUL J. WILHELM
/s/ Douglas C. Yearley Director
- --------------------------------------------------------
DOUGLAS C. YEARLEY
58
GLOSSARY OF CERTAIN DEFINED TERMS
The following definitions apply to terms used in this document:
Arnold--------------------------- Ewing Bank Block 963
bcfd----------------------------- billion cubic feet per day
BOE------------------------------ barrels of oil equivalent
bpd------------------------------ barrels per day
CAA------------------------------ Clean Air Act
CERCLA--------------------------- Comprehensive Environmental Response, Compensation, and
Liability Act
CIPCO---------------------------- Carnegie Interstate Pipeline Company
Clairton Partnership------------- Clairton 1314B Partnership, L.P.
CLAM----------------------------- CLAM Petroleum B.V.
CWA------------------------------ Clean Water Act
DD&A----------------------------- depreciation, depletion and amortization
Delhi Companies------------------ Delhi Gas Pipeline Company and other subsidiaries of
USX that comprised all of the Delhi Group
Delhi Stock---------------------- USX-Delhi Group Common Stock
DESCO---------------------------- Double Eagle Steel Coating Company
DOE------------------------------ Department of Energy
DOJ------------------------------ U. S. Department of Justice
downstream ---------------------- refining, marketing and transportation operations
E&P------------------------------ exploration and production
exploratory---------------------- wildcat and delineation, i.e., exploratory wells
Gulf----------------------------- Gulf of Mexico
IMV------------------------------ Inventory Market Valuation
Indexed Debt--------------------- 6-3/4% Exchangeable Notes Due February 1, 2000
Kobe----------------------------- Kobe Steel Ltd.
LNG------------------------------ liquefied natural gas
MACT----------------------------- Maximum Achievable Control Technology
MAP------------------------------ Marathon Ashland Petroleum LLC
MTBE----------------------------- Methyl tertiary butyly ether
Marathon------------------------- Marathon Oil Company
Marathon Power------------------- Marathon Power Company, Ltd.
Marathon Stock------------------- USX-Marathon Group Common Stock
mcf------------------------------ thousand cubic feet
MCL------------------------------ Marathon Canada Limited
Minntac-------------------------- U. S. Steel's iron ore operations at Mt. Iron, Minn.
MIPS----------------------------- 8-3/4% Cumulative Monthly Income Preferred Stock
mmcfd---------------------------- million cubic feet per day
NOV------------------------------ Notice of Violation
OPA-90--------------------------- Oil Pollution Act of 1990
Oyster--------------------------- Ewing Bank Block 917
P-A------------------------------ Piltun-Astokhskoye
PaDER---------------------------- Pennsylvania Department of Environmental Resources
Petronius------------------------ Viosca Knoll Block 786
POSCO---------------------------- Pohang Iron & Steel Co., Ltd.
PRO-TEC-------------------------- PRO-TEC Coating Company, a USX and Kobe joint venture.
PRP------------------------------ potentially responsible party
RCRA----------------------------- Resource Conservation and Recovery Act
RFI------------------------------ RCRA Facility Investigation
RI/FS---------------------------- Remedial Investigation and Feasibility Study
RM&T----------------------------- refining, marketing and transportation
RTI------------------------------ RTI International Metals, Inc. (formerly RMI Titanium Company)
Republic------------------------- Republic Technologies International, LLC
SAGE----------------------------- Scottish Area Gas Evacuation
Sakhalin Energy------------------ Sakhalin Energy Investment Company Ltd.
SG&A----------------------------- selling, general and administrative
SSA------------------------------ Speedway SuperAmerica LLC
Steel Stock---------------------- USX-U. S. Steel Group Common Stock
Tarragon------------------------- Tarragon Oil and Gas Limited
Trust Preferred Securities------- 6.75% Convertible Quarterly Income Preferred Securities of USX
Capital Trust I
59
GLOSSARY OF CERTAIN DEFINED TERMS
The following definitions apply to terms used in this document:
upstream------------------------- exploration and production operations
USS-POSCO ----------------------- USS-POSCO Industries, USX and Pohang Iron & Steel Co., Ltd., joint venture.
USS/Kobe ------------------------ USX and Kobe Steel Ltd. joint venture.
USTs----------------------------- underground storage tanks
VSZ U. S. Steel s. r.o.---------- U. S. Steel and VSZ a.s. joint venture in Kosice, Slovakia
60
SUPPLEMENTARY DATA
SUMMARIZED FINANCIAL INFORMATION OF MARATHON OIL COMPANY
Included below is the summarized financial information of Marathon Oil
Company, a wholly owned subsidiary of USX Corporation.
(IN MILLIONS)
YEAR ENDED DECEMBER 31
1999(b) 1998(b) 1997
------- ------- ----
INCOME DATA:
Revenues(a)..................................... $ 24,309 $ 21,950 $ 15,807
Income from operations.......................... 1,749 964 961
Net income...................................... 640 281 430
DECEMBER 31
1999(b) 1998(b)
BALANCE SHEET DATA:
Assets:
Current assets................................ $ 6,067 $ 4,742
Noncurrent assets............................. 11,499 11,420
------ ---------
Total assets............................... $ 17,566 $ 16,162
========= =========
Liabilities and stockholder's equity:
Current liabilities........................... $ 3,294 $ 2,543
Noncurrent liabilities........................ 9,276 9,428
Preferred stock of subsidiary................. 10 17
Minority interest in Marathon Ashland.........
Petroleum LLC.............................. 1,753 1,590
Stockholder's equity.......................... 3,233 2,584
----- ---------
Total liabilities and stockholder's equity. $ 17,566 $ 16,162
========= =========
(a) Consists of sales, dividend and affiliate income, gain on ownership
change in MAP, net gains on disposal of assets and other income.
(b) Amounts in 1999 and 1998 include 100% of MAP and are not comparable
to prior periods.
61
SUPPLEMENTARY DATA
DISCLOSURES ABOUT FORWARD-LOOKING STATEMENTS
USX includes forward-looking statements concerning trends, market
forces, commitments, material events or other contingencies potentially
affecting USX or the businesses of its Marathon Group or U. S. Steel Group in
reports filed with the Securities and Exchange Commission, external documents or
oral presentations. In order to take advantage of "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995, USX is filing the
following cautionary language identifying important factors (though not
necessarily all such factors) that could cause actual outcomes to differ
materially from information set forth in forward-looking statements made by, or
on behalf of, USX, its representatives and its individual Groups.
CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
USX
Forward-looking statements with respect to USX may include, but are not
limited to, comments about general business strategies, financing decisions or
corporate structure. The following discussion is intended to identify important
factors (though not necessarily all such factors) that could cause future
outcomes to differ materially from those set forth in forward-looking
statements.
LIQUIDITY FACTORS
USX's ability to finance its future business requirements through
internally generated funds, proceeds from the sale of stock, borrowings and
other external financing sources is affected by the performance of each of its
Groups (as measured by various factors, including cash provided from operating
activities), the state of worldwide debt and equity markets, investor
perceptions and expectations of past and future performance and actions, the
overall U.S. financial climate, and, in particular, with respect to borrowings,
by USX's outstanding debt and credit ratings by investor services. To the extent
that USX Management's assumptions concerning these factors prove to be
inaccurate, USX's liquidity position could be materially adversely affected.
OTHER FACTORS
Holders of USX-Marathon Group Common Stock or USX-U. S. Steel Group
Common Stock are holders of common stock of USX and are subject to all the risks
associated with an investment in USX and all of its businesses and liabilities.
Financial impacts, arising from either of the groups, which affect the overall
cost of USX's capital could affect the results of operations and financial
condition of all groups.
For further discussion of certain of the factors described herein, see
Item 1. Business, Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters, Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations and Item 7A. Quantitative and Qualitative
Information About Market Risk.
USX-MARATHON GROUP
Forward-looking statements with respect to the Marathon Group may
include, but are not limited to, levels of revenues, gross margins, income from
operations, net income or earnings per share; levels of capital, exploration,
environmental or maintenance expenditures; the success or timing of completion
of ongoing or anticipated capital, exploration or maintenance projects; volumes
of production, sales, throughput or shipments of liquid hydrocarbons, natural
gas and refined products; levels of worldwide prices of liquid hydrocarbons,
natural gas and refined products; levels of reserves, proved or otherwise, of
liquid hydrocarbons or natural gas; the acquisition or divestiture of assets;
the effect of restructuring or reorganization of business components; the
potential effect of judicial proceedings on the business and financial
condition; and the anticipated effects of actions of third parties such as
competitors, or federal, state or local regulatory authorities.
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Forward-looking statements typically contain words such as
"anticipates", "believes", "estimates", "expects", "forecasts", "predicts" or
"projects" or variations of these words, suggesting that future outcomes are
uncertain. The following discussion is intended to identify important factors
(though not necessarily all such factors) that could cause future outcomes to
differ materially from those set forth in forward-looking statements with
respect to the Marathon Group.
The oil and gas industry is characterized by a large number of
companies, none of which is dominant within the industry, but a number of which
have greater resources than Marathon. Marathon must compete with these companies
for the rights to explore for oil and gas. Marathon's expectations as to
revenues, margins and income are based upon assumptions as to future prices and
volumes of liquid hydrocarbons, natural gas and refined products. Prices have
historically been volatile and have frequently been driven by unpredictable
changes in supply and demand resulting from fluctuations in economic activity
and political developments in the world's major oil and gas producing areas,
including OPEC member countries. Any substantial decline in such prices could
have a material adverse effect on Marathon's results of operations. A decline in
such prices could also adversely affect the quantity of liquid hydrocarbons and
natural gas that can be economically produced and the amount of capital
available for exploration and development.
The Marathon Group uses commodity-based and foreign currency derivative
instruments such as futures, forwards, swaps, and options to manage exposure to
price fluctuations. For transactions that qualify for hedge accounting, the
resulting gains and losses are deferred and subsequently recognized in income
from operations, as a component of sales or cost of sales, in the same period as
the underlying physical transaction. Derivative instruments used for trading and
other activities are marked-to-market and the resulting gains or losses are
recognized in the current period within income from operations. While
commodity-based derivative instruments are generally used to reduce risks from
unfavorable commodity price movements, they also may limit the opportunity to
benefit from favorable movements. Levels of hedging activity vary among oil
industry competitors and could affect the Marathon Group's competitive position
with respect to those competitors.
FACTORS AFFECTING EXPLORATION AND PRODUCTION OPERATIONS
Projected production levels for liquid hydrocarbons and natural gas are
based on a number of assumptions, including (among others) prices, supply and
demand, regulatory constraints, reserve estimates, production decline rates for
mature fields, reserve replacement rates, drilling rig availability and
geological and operating considerations. These assumptions may prove to be
inaccurate. Exploration and production operations are subject to various
hazards, including explosions, fires and uncontrollable flows of oil and gas.
Offshore production and marine operations in areas such as the Gulf of Mexico,
the North Sea, Gabon and the Russian Far East Region are also subject to severe
weather conditions such as hurricanes or violent storms or other hazards.
Development of new production properties in countries outside the United States
may require protracted negotiations with host governments and are frequently
subject to political considerations, such as tax regulations, which could
adversely affect the economics of projects.
FACTORS AFFECTING REFINING, MARKETING AND TRANSPORTATION OPERATIONS
Marathon conducts domestic refining, marketing and transportation
operations primarily through its consolidated subsidiary, Marathon Ashland
Petroleum LLC ("MAP"). MAP's operations are conducted mainly in the Midwest,
Southeast, Ohio River Valley and the upper Great Plains. The profitability of
these operations depends largely on the margin between the cost of crude oil
and other feedstocks refined and the selling prices of refined products. MAP
is a purchaser of crude oil in order to satisfy its refinery throughput
requirements. As a result, its overall profitability could be adversely
affected by rising crude oil and other feedstock prices which are not
recovered in the marketplace. Refined product margins have been historically
volatile and vary with the level of economic activity in the various
marketing areas, the regulatory climate and the available supply of refined
products. Gross margins on merchandise sold at retail outlets tend to
moderate the volatility experienced in the retail sale of gasoline and diesel
fuel. Environmental regulations, particularly the 1990 Amendments to the
Clean Air Act, have imposed (and are expected to continue to impose)
increasingly stringent and costly requirements on refining and marketing
operations which may have an adverse effect on margins. Refining, marketing
and transportation operations are subject to business interruptions due to
unforeseen events such as explosions, fires, crude oil or refined product
spills, inclement weather, or labor disputes. They are also subject to the
additional hazards of marine operations, such as capsizing, collision and
damage or loss from severe weather conditions.
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TECHNOLOGY FACTORS
Longer-term projections of corporate strategy, including the viability,
timing or expenditures required for capital projects, can be affected by changes
in technology, especially innovations in processes used in the exploration,
production or refining of hydrocarbons. While specific future changes are
difficult to project, recent innovations affecting the oil industry include the
development of three-dimensional seismic imaging and deep-water and horizontal
drilling capabilities.
OTHER FACTORS
Holders of USX-Marathon Group Common Stock are holders of common stock
of USX and are subject to all the risks associated with an investment in USX and
all of its businesses and liabilities. Financial impacts, arising from either of
the groups, which affect the overall cost of USX's capital could affect the
results of operations and financial condition of both groups.
For further discussion of certain of the factors described herein, and
their potential effects on the businesses of the Marathon Group, see Item 1.
Business, Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.
USX-U. S. STEEL GROUP
Forward-looking statements with respect to the U. S. Steel Group may
include, but are not limited to, projections of levels of revenues, income from
operations or income from operations per ton, net income or earnings per share;
levels of capital, environmental or maintenance expenditures; the success or
timing of completion of ongoing or anticipated capital or maintenance projects;
levels of raw steel production capability, prices, production, shipments, or
labor and raw material costs; the acquisition, idling, shutdown or divestiture
of assets or businesses; the effect of restructuring or reorganization of
business components; the effect of potential judicial proceedings on the
business and financial condition; and the effects of actions of third parties
such as competitors, or federal, state or local regulatory authorities.
Forward-looking statements typically contain words such as
"anticipates", "believes", "estimates", "expects", "forecasts", "predicts" or
"projects", or variations of these words, suggesting that future outcomes are
uncertain. The following discussion is intended to identify important factors
(though not necessarily all such factors) that could cause future outcomes to
differ materially from those set forth in forward-looking statements with
respect to the U. S. Steel Group.
MARKET FACTORS
The U. S. Steel Group's expectations as to levels of production and
revenues, gross margins, income from operations and income from operations per
ton are based upon assumptions as to future product prices and mix, and levels
of raw steel production capability, production and shipments. These assumptions
may prove to be inaccurate.
The steel industry is characterized by excess world supply which has
restricted the ability of U. S. Steel and the industry to raise prices during
periods of economic growth and resist price decreases during economic
contraction.
Domestic flat-rolled steel supply has increased in recent years with
the completion and start-up of minimills that are less expensive to build than
integrated facilities, and are typically staffed by non-unionized work forces
with lower base labor costs and more flexible work rules. Through the use of
thin slab casting technology, minimill competitors are increasingly able to
compete directly with integrated producers of higher value-added products. Such
competition could adversely affect the U. S. Steel Group's future product prices
and shipment levels.
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The domestic steel industry has, in the past, been adversely affected
by unfairly traded imports. Steel imports to the United States accounted for an
estimated 26%, 30% and 24% of the domestic steel market in 1999, 1998 and 1997,
respectively. Foreign competitors typically have lower labor costs, and are
often owned, controlled or subsidized by their governments, allowing their
production and pricing decisions to be influenced by political and economic
policy considerations as well as prevailing market conditions. Increases in
levels of imported steel could adversely affect future market prices and demand
levels for domestic steel.
The U. S. Steel Group also competes in many markets with producers of
substitutes for steel products, including aluminum, cement, composites, glass,
plastics and wood. The emergence of additional substitutes for steel products
could adversely affect future prices and demand for steel products.
The businesses of the U. S. Steel Group are aligned with cyclical
industries such as the automotive, appliance, containers, construction and
energy industries. As a result, future downturns in the U.S. economy or any of
these industries could adversely affect the profitability of the U. S. Steel
Group.
OPERATING AND COST FACTORS
The operations of the U. S. Steel Group are subject to planned and
unplanned outages due to maintenance, equipment malfunctions or work stoppages;
and various hazards, including explosions, fires and severe weather conditions,
which could disrupt operations or the availability of raw materials, resulting
in reduced production volumes and increased production costs.
Labor costs for the U. S. Steel Group are affected by collective
bargaining agreements. U. S. Steel entered into a five year contract with the
United Steel Workers of America, effective August 1, 1999, covering
approximately 14,500 employees. The contract provided for increases in hourly
wages phased over the term of the agreement beginning in 2000 as well as pension
and benefit improvements for active and retired employees and spouses that will
result in higher labor and benefit costs for the U.S. Steel Group each year
throughout the term of the contract. To the extent that increased costs are not
recoverable through the sales prices of products, future income from operations
would be adversely affected.
Income from operations for the U. S. Steel Group includes periodic
pension credits (which are primarily noncash). The resulting net pension credits
totaled $228 million, $186 million and $144 million in 1999, 1998 and 1997,
respectively. Future net pension credits can be volatile dependent upon the
future marketplace performance of plan assets, changes in actuarial assumptions
regarding such factors as a selection of a discount rate and rate of return on
assets, changes in the amortization levels of transition amounts or prior period
service costs, plan amendments affecting benefit payout levels and profile
changes in the beneficiary populations being valued. Changes in any of these
factors could cause net pension credits to change. To the extent that these
credits decline in the future, income from operations would be adversely
affected.
The U. S. Steel Group provides health care and life insurance benefits
to most employees upon retirement. Most of these benefits have not been
prefunded. The accrued liability for such benefits as of December 31, 1999, was
$2,122 million. To the extent that competitors do not provide similar benefits,
or have been relieved of obligations to provide such benefits following
bankruptcy reorganization, the competitive position of the U. S. Steel Group may
be adversely affected, depending on future costs of health care.
LEGAL AND ENVIRONMENTAL FACTORS
The profitability of the U. S. Steel Group's operations could be
affected by a number of contingencies, including legal actions. The ultimate
resolution of these contingencies could, individually or in the aggregate, be
material to the U. S. Steel Group financial statements.
The businesses of the U. S. Steel Group are subject to numerous
environmental laws. Certain current and former U. S. Steel Group operating
facilities have been in operation for many years and could require significant
future accruals and expenditures to meet existing and future requirements under
these laws. To the extent that competitors are not required to undertake
equivalent costs in their operations, the competitive position of the U. S.
Steel Group could be adversely affected.
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OTHER FACTORS
Holders of USX-U. S. Steel Group Common Stock are holders of common
stock of USX and are subject to all the risks associated with an investment in
USX and all of its businesses and liabilities. Financial impacts, arising from
either of the groups, which affect the overall cost of USX's capital, could
affect the results of operations and financial condition of both groups.
For further discussion of certain of the factors described herein, and
their potential effects on the businesses of the U.S. Steel Group, see Item 1.
Business, Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.
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