-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VZ+ivqpQB4+Q198Th4wLNpnYdF3IZgNNdtiLhXarNbg9Lmfc5VfTSK7QXK6llujs mJOLSOG4Rlwwz1myqsoBMw== 0000950132-99-000185.txt : 19990309 0000950132-99-000185.hdr.sgml : 19990309 ACCESSION NUMBER: 0000950132-99-000185 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990308 FILER: COMPANY DATA: COMPANY CONFORMED NAME: USX CORP CENTRAL INDEX KEY: 0000101778 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 250996816 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-05153 FILM NUMBER: 99559440 BUSINESS ADDRESS: STREET 1: 600 GRANT ST CITY: PITTSBURGH STATE: PA ZIP: 15219-4776 BUSINESS PHONE: 4124331121 FORMER COMPANY: FORMER CONFORMED NAME: UNITED STATES STEEL CORP/DE DATE OF NAME CHANGE: 19860714 10-K 1 FORM 10-K FORM 10-K 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------ ------------------ Commission file number 1-5153 USX CORPORATION (Exact name of registrant as specified in its charter) Delaware 25-0996816 (State of Incorporation) (I.R.S. Employer Identification No.) 600 Grant Street, Pittsburgh, PA 15219-4776 (Address of principal executive offices) Tel. No. (412) 433-1121 Securities registered pursuant to Section 12 (b) of the Act:* Title of Each Class USX -- Marathon Group 6-3/4% Exchangeable Notes Due 2000 Common Stock, par value $1.00 8-3/4% Cumulative Monthly Income Preferred Shares, USX -- U. S. Steel Group Series A (Liquidation Preference $25 per share)** Common Stock, par value $1.00 6.75% Convertible Quarterly Income Preferred 6.50% Cumulative Convertible Preferred Securities (Initial Liquidation Amount $50 per (Liquidation Preference $50.00 per share) Security)*** 7% Guaranteed Notes Due 2002 of Marathon Oil Company****
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for at least the past 90 days. Yes X No -------- ---------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of Common Stock held by non-affiliates as of January 31, 1999: $9.2 billion. The amount shown is based on the closing prices of the registrant's Common Stocks on the New York Stock Exchange composite tape on that date. Shares of Common Stock held by executive officers and directors of the registrant are not included in the computation. However, the registrant has made no determination that such individuals are "affiliates" within the meaning of Rule 405 under the Securities Act of 1933. There were 308,467,709 shares of USX-Marathon Group Common Stock and 88,336,439 shares of USX-U. S. Steel Group Common Stock outstanding as of January 31, 1999. Documents Incorporated By Reference: Proxy Statement dated March 8, 1999 is incorporated in Part III. Proxy Statement dated March 9, 1998 is incorporated in Part IV. - -------------------- * These securities are listed on the New York Stock Exchange. In addition, the Common Stocks are traded on The Chicago Stock Exchange and the Pacific Exchange. ** Issued by USX Capital LLC. *** Issued by USX Capital Trust I **** Obligations of Marathon Oil Company, USX Capital LLC and USX Capital Trust I, all wholly owned subsidiaries of the registrant, have been guaranteed by the registrant.
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............ 44 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................................... 45 Item 6. SELECTED FINANCIAL DATA USX CONSOLIDATED.......................................... 47 MARATHON GROUP............................................ 49 U. S. STEEL GROUP......................................... 50 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS USX CONSOLIDATED.......................................... U-39 MARATHON GROUP............................................ M-25 U. S. STEEL GROUP......................................... S-25 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK USX CONSOLIDATED.......................................... U-61 MARATHON GROUP............................................ M-37 U. S. STEEL GROUP......................................... S-38 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA USX CONSOLIDATED.......................................... U-1 MARATHON GROUP............................................ M-1 U. S. STEEL GROUP......................................... S-1 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....................... 51 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 52 Item 11. MANAGEMENT REMUNERATION........................................ 53 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................. 53 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 53 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................................................. 54 SIGNATURES...................................................................... 57 GLOSSARY OF CERTAIN DEFINED TERMS............................................... 58 SUPPLEMENTARY DATA SUMMARIZED FINANCIAL INFORMATION OF MARATHON OIL COMPANY...................... 59 DISCLOSURES ABOUT FORWARD-LOOKING STATEMENTS.................................. 60
1 NOTE ON PRESENTATION USX Corporation ("USX" or the "Corporation") is a diversified company which is principally engaged in the energy business through its Marathon Group and in the steel business through its U. S. Steel Group. USX has two classes of common stock, USX-Marathon Group Common Stock ("Marathon Stock") and USX-U. S. Steel Group Common Stock ("Steel Stock"). Each class of Common Stock is intended to provide stockholders of that class with a separate security reflecting the performance of the related group. Effective October 31, 1997, USX sold Delhi Gas Pipeline Corporation and other subsidiaries of USX that comprised all of the USX-Delhi Group ("Delhi Companies"). On January 26, 1998, USX used the $195 million net proceeds from the sale to redeem all of the 9.45 million outstanding shares of USX-Delhi Group Common Stock. USX continues to include consolidated financial information in its periodic reports required by the Securities Exchange Act of 1934, in its annual shareholder reports and in other financial communications. The consolidated financial statements are supplemented with separate financial statements of the Marathon Group and the U. S. Steel Group, together with the related Management's Discussion and Analyses, descriptions of business and other financial and business information to the extent such information is required to be presented in the report being filed. The financial information of the Marathon Group and U. S. Steel Group and certain financial information relating to the Delhi Companies, taken together, includes all accounts which comprise the corresponding consolidated financial information of USX. For consolidated financial reporting purposes, USX consists of the Marathon Group and the U. S. Steel Group. The attribution of assets, liabilities (including contingent liabilities) and stockholders' equity between the Marathon Group and the U. S. Steel Group for the purpose of preparing their respective financial statements does not affect legal title to such assets and responsibility for such liabilities. Holders of Marathon Stock and Steel Stock are holders of common stock of USX and continue to be subject to all of the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts arising from either of the Groups that affect the overall cost of USX's capital could affect the results of operations and financial condition of both groups. In addition, net losses of any Group, as well as dividends and distributions on any class of USX common stock or series of preferred stock and repurchases of any class of USX common stock or series of preferred stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on both classes of USX common stock. Accordingly, the USX consolidated financial information should be read in connection with the Marathon Group and the U. S. Steel Group financial information. For information regarding accounting matters and policies affecting the Marathon Group and the U. S. Steel Group financial statements, see "Financial Statements and Supplementary Data - Notes to Financial Statements - 1. Basis of Presentation and - 4. Corporate Activities" for each respective group. For information regarding dividend limitations and dividend policies affecting holders of Marathon Stock and Steel Stock, see "Market for Registrant's Common Equity and Related Stockholder Matters." For a Glossary of Certain Defined Terms used in this document, see page 58. Forward-Looking Statements Certain sections of USX's Form 10-K, particularly Item 1. Business, Item 3. Legal Proceedings, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures About Market Risk, include forward-looking statements concerning trends or events potentially affecting USX. These statements typically contain words such as "anticipates", "believes", "estimates", "expects" or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in forward-looking statements. For additional factors affecting the businesses of USX, see Supplementary Data - Disclosures About Forward-Looking Statements. 2 PART I Item 1. BUSINESS USX CORPORATION USX Corporation was incorporated in 1901 and is a Delaware corporation. Executive offices are located at 600 Grant Street, Pittsburgh, PA 15219-4776. The terms "USX" and "Corporation" when used herein refer to USX Corporation or USX Corporation and its subsidiaries, as required by the context. Groups For consolidated reporting purposes, USX consists of the Marathon Group and the U. S. Steel Group. Effective October 31, 1997, USX sold Delhi Gas Pipeline Corporation and other subsidiaries of USX that comprised all of the Delhi Group. See "Financial Statements and Supplementary Data - Notes to USX Consolidated Financial Statements - 5. Discontinued Operations" on page U-11. The businesses of the Marathon Group and the U. S. Steel Group, are as follows: . The Marathon Group includes Marathon Oil Company ("Marathon") and certain other subsidiaries of USX, which are engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of petroleum products primarily through Marathon Ashland Petroleum LLC ("MAP"), owned 62 percent by Marathon; and other energy related businesses. Marathon Group revenues as a percentage of total USX consolidated revenues were 78% in 1998, 69% in 1997 and 71% in 1996. . The U. S. Steel Group includes U. S. Steel, which is engaged in the production and sale of steel mill products, coke and taconite pellets; the management of mineral resources; domestic coal mining; real estate development; and engineering and consulting services. Certain business activities are conducted through joint ventures and partially-owned companies, such as USS/Kobe Steel Company, USS-POSCO Industries, PRO-TEC Coating Company, Transtar, Inc., Clairton 1314B Partnership, VSZ U. S. Steel, s. r.o. and RTI International Metals, Inc. U. S. Steel Group revenues as a percentage of total USX consolidated revenues were 22% in 1998, 31% in 1997 and 29% in 1996. 3 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 1998 $22,075 $ 938 $310 $14,544 $1,270 1997 15,754 932 456 10,565 1,038 1996 16,394 1,296 664 10,151 751 U. S. Steel Group 1998 6,283 579 364 6,693 310 1997 6,941 773 452 6,694 261 1996 6,670 483 273 6,580 337 Adjustments for Discontinued Operations and Eliminations (d) 1998 (23) - - (104) - 1997 (107) - 80 25 74 1996 (87) - 6 249 80 Total USX Corporation 1998 $28,335 $1,517 $674 $21,133 $1,580 1997 22,588 1,705 988 17,284 1,373 1996 22,977 1,779 943 16,980 1,168
- ----------- (a) Consists of sales, dividend and affiliate income, gain on ownership change in MAP, net gains on disposal of assets, gain on affiliate stock offering and other income. (b) Excludes amounts for the companies comprising the Delhi Group of USX (sold in 1997; see footnote (d) below), which have been reclassified as discontinued operations. (c) Includes the following favorable (unfavorable) amounts: adjustments to the inventory market valuation reserve for the Marathon Group of $(267) million, $(284) million and $209 million in 1998, 1997 and 1996, respectively; and gain on ownership change in MAP of $245 million in 1998. (d) Effective October 31, 1997, USX sold Delhi Gas Pipeline Corporation and other subsidiaries of USX that comprised all of the Delhi Group. For additional financial information about the Groups, see "Financial Statements and Supplementary Data - Notes to USX Consolidated Financial Statements - 10. Group and Segment Information" on page U-13. The total number of active USX Headquarters employees not assigned to a specific group at year-end 1998 was 248. A narrative description of the primary businesses of the Marathon Group and the U. S. Steel Group is provided below. 4 MARATHON GROUP The Marathon Group is comprised of Marathon Oil Company and certain other subsidiaries of USX which are engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of petroleum products primarily through Marathon Ashland Petroleum LLC ("MAP"), owned 62% by Marathon Oil Company; and other energy related businesses. Marathon Group revenues as a percentage of total USX consolidated revenues were 78% in 1998, 69% in 1997 and 71% in 1996. The following table summarizes Marathon Group revenues for each of the last three years:
Revenues (a) (Millions) 1998 1997 1996 ------- ------- ------- Sales by product: Refined products....................... $ 9,091 $ 7,012 $ 7,132 Merchandise............................ 1,873 1,045 1,000 Liquid hydrocarbons.................... 1,818 941 1,111 Natural gas............................ 1,144 1,331 1,194 Transportation and other products...... 271 167 180 Gain on ownership change in MAP (b)..... 245 - - Other (c)............................... 104 86 97 ------- ------- ------- Subtotal................................ 14,546 10,582 10,714 Matching buy/sell transactions (d) (f).. 3,948 2,436 2,912 Excise taxes (e) (f).................... 3,581 2,736 2,768 ------- ------- ------- Total revenues........................ $22,075 $15,754 $16,394 ======= ======= =======
- ----------- (a) Amounts in 1998 include 100% of Marathon Ashland Petroleum LLC ("MAP") and are not comparable to prior periods. (b) See Note 5 to the Marathon Group Financial Statements for a discussion of the gain on ownership change in MAP. (c) Includes dividend and affiliate income, net gains on disposal of assets and other income. (d) Matching crude oil and refined products buy/sell transactions settled in cash. (e) Consumer excise taxes on petroleum products and merchandise. (f) Included in both revenues and costs and expenses, resulting in no effect on income. For additional financial information about USX's operating segments, see "Financial Statements and Supplementary Data - Notes to USX Consolidated Financial Statements - 10, Group and Segment Information" on page U-13. RECENT DEVELOPMENT MAP announced on March 1, 1999, that it signed a memorandum of understanding to sell Scurlock Permian LLC, its crude oil gathering business, to Plains All American Pipeline, L.P. Scurlock Permian LLC is actively engaged in purchasing, selling and trading crude oil, principally at Midland, Texas; Cushing, Oklahoma; and St. James, Louisiana, three of the major distribution points for U.S. crude oil, and at major trading and distribution hubs in western Canada. Exploration and Production Oil and Natural Gas Exploration and Development Marathon is currently conducting exploration and development activities in 13 countries. Principal exploration activities are in the United States, the United Kingdom, Canada, Denmark, Egypt, Gabon, Ireland, the 5 Netherlands and Tunisia. Principal development activities are in the United States, the United Kingdom, Canada, Egypt, Gabon and Russia. Marathon is also pursuing opportunities in Angola and other West Africa countries, South America, the Middle East and around the Black Sea. During 1998, exploration activities resulted in discoveries in the United States, the United Kingdom, Canada, Egypt, Gabon and the Netherlands. The following table sets forth, by geographic area, the number of net productive and dry development and exploratory wells completed in each of the last three years (references to "net" wells or production indicate Marathon's ownership interest or share as the context requires):
Net Productive and Dry Wells Completed (a) 1998 1997 1996 ---- ---- ---- United States Development (b)- Oil 28 44 43 - Gas 58 76 73 - Dry 2 3 9 ---- ---- ---- Total 88 123 125 Exploratory - Oil 7 4 1 - Gas 5 13 18 - Dry 8 10 13 ---- ---- ---- Total 20 27 32 ---- ---- ---- Total United States 108 150 157 International (c) Development (b)- Oil 7 5 3 - Gas 7 1 1 - Dry 2 - - ---- ---- ---- Total 16 6 4 Exploratory - Oil 5 4 3 - Gas 4 - - - Dry 15 5 6 ---- ---- ---- Total 24 9 9 ---- ---- ---- Total International 40 15 13 ---- ---- ---- Total Worldwide 148 165 170 ==== ==== ====
- ----------- (a) Includes the number of wells completed during the year regardless of the year in which drilling was initiated. A dry well is a well found to be incapable of producing hydrocarbons in sufficient quantities to justify completion. A productive well is a well that is not a dry well. (b) Indicates wells drilled in the proved area of an oil or gas reservoir. (c) Includes Marathon's equity interest in CLAM. United States In the United States during 1998, Marathon drilled 45 gross (32 net) wildcat and delineation ("exploratory") wells of which 26 gross (19 net) wells encountered hydrocarbons. Of these 26 wells, 5 gross (3 net) wells were temporarily suspended, and will be reported in the Net Productive and Dry Wells Completed table when 6 completed. Principal domestic exploratory and development activities were in the U.S. Gulf of Mexico and the states of Texas, Oklahoma and New Mexico. Exploration expenditures during the three-year period ended December 31, 1998, totaled $521 million in the United States, of which $217 million was incurred in 1998. Development expenditures during the three-year period ended December 31, 1998, totaled $1,176 million in the United States, of which $431 million was incurred in 1998. The following is a summary of recent, significant exploration and development activity in the United States including discussion, as deemed appropriate, of completed wells, drilling wells and wells under evaluation. Gulf of Mexico - Marathon continues to consider the deepwater Gulf of Mexico ("Gulf") as a core area for domestic growth in oil and gas production and has committed significant resources to exploit its opportunities. Four of the five wells of the Troika subsea development project in the Green Canyon Block 244 field, located in the central Gulf were completed and tied back to a co-venturer's platform at year-end 1998. The fifth well is scheduled for completion and tie-back in late first quarter 1999. The Troika project, consisting of four blocks (Green Canyon Blocks 200, 201, 244 and 245), has recoverable reserves estimated at over 200 million gross barrels of oil equivalent ("BOE"). Marathon holds a 33.3% working interest in this development. Ewing Bank Block 963 ("Arnold") and 917 ("Oyster") developments were tied back subsea to the Marathon-operated Ewing Bank 873 platform during the second quarter of 1998. Recoverable reserves are estimated at 25 million gross BOE for Arnold and 10 million gross BOE for Oyster. Marathon owns a working interest of 62.5% in Arnold and 66.7% in Oyster. Progress continues on development of the Green Canyon Block 112/113 ("Stellaria/Angus") project in the central Gulf. After drilling the initial discovery well on Green Canyon Block 112 in mid-1997, Marathon confirmed the discovery with a successful delineation well on Green Canyon Block 113 later that year. A three-well development completed subsea and tied back to a co- venturer's platform is underway, with initial production targeted for mid-1999. Marathon has a 33.3% working interest in the Stellaria/Angus project. The Viosca Knoll Block 786 ("Petronius") development in the deepwater Gulf, was originally scheduled to begin production in the second quarter of 1999, but the project was delayed when the last platform topsides module being lifted during installation fell into the sea. The lost module will have to be replaced. Third party insurance is expected to cover costs associated with the module replacement and its installation on the platform. First production is now expected in the fourth quarter of 2000. The Petronius project is estimated to have recoverable reserves of 95 million gross BOE. Marathon holds a 50% working interest in this project. During 1998, Marathon participated in the Central and Western Gulf of Mexico lease sales. This effort added 26 blocks and 13 prospects to Marathon's growing deepwater leasehold inventory. To support an expanding inventory of deepwater prospects, Marathon, in 1998, acquired one-third interest in a five-year contract for the Noble Amos Runner, a drilling rig capable of drilling in water depths up to 6,000 feet. Marathon also signed a five-year contract, convertible to a three-year commitment, for the new build Sedco Cajun Express, capable of drilling in water up to 8,500 feet. These rigs become available in mid-1999 and mid-2000, respectively, and sustain an on-going deepwater exploration program. Texas - In east Texas, Marathon is actively involved in a development drilling program for gas reserves in the Austin Chalk area. Marathon has approximately 73,000 net acres under lease in this play. A 12-well development program, in which Marathon will have an average 87% working interest, is planned for 1999. Oklahoma - In 1998, Marathon had a discovery in the Granite Wash formation in western Oklahoma. Delineation wells and development are planned for 1999. Marathon has a 100% working interest in this discovery well. 7 With respect to the 1997 Arbuckle discovery in the Carter Knox field, a confirmation well was completed in 1998. A sour gas facility was built to treat the Arbuckle gas and is currently processing about 20 million cubic feet per day ("mmcfd") from the discovery and confirmation wells. The plant is capable of treating 40 mmcfd and was designed for expansion as needed. Marathon has a 100% working interest in both wells and the gas treating facility. A third well was drilled to the Arbuckle formation but was not successful. However, this well was completed in alternate formations in early 1999. Marathon has a 75.3% working interest in this well. New Mexico - In 1998, Marathon drilled 31 successful wells in the Travis Canyon and Indian Basin fields of southeast New Mexico. Marathon has 3,000 net acres under lease in the Travis Canyon field and in 1999, plans to drill 3 development wells and 3 delineation wells in Travis Canyon and 13 development wells in Indian Basin. Marathon's working interest averages 75% and 85% in Travis Canyon and Indian Basin, respectively. International Outside the United States during 1998, Marathon drilled 17 gross (9 net) exploratory wells in 6 countries. Of these 17 wells, 11 gross (5 net) wells encountered hydrocarbons, of which 6 gross (3 net) wells were temporarily suspended and will be reported in the Net Productive and Dry Wells Completed table when completed. Marathon's expenditures for international oil and natural gas exploration activities, including Marathon's 50% equity interest in CLAM Petroleum B.V. ("CLAM") and Marathon's 37.5% equity interest in Sakhalin Energy Investment Company Ltd. ("Sakhalin Energy"), during the three-year period ended December 31, 1998, totaled $285 million, of which $125 million was incurred in 1998. Marathon's international development expenditures, including CLAM and Sakhalin Energy, during the three-year period ended December 31, 1998, totaled $541 million, of which $256 million was incurred in 1998. The following is a summary of recent, significant exploration and development activity outside the United States, including discussion, as deemed appropriate, of completed wells, drilling wells and wells under evaluation. United Kingdom - Marathon is continuing its development of the Brae area in the U.K. North Sea where it is the operator and owns a 41.6% revenue interest in the South, Central and North Brae fields, a 38.5% revenue interest in the East Brae field and a 28.1% revenue interest in the West Brae/Sedgwick joint development project. Marathon has interests in 39 blocks in the U.K. North Sea and other offshore areas. With respect to the West Brae/Sedgwick joint development, the initial phase of development was completed in 1998 and is comprised of four production wells and a single water injection well. Another production well is planned for 1999 which will produce additional reserves proved in 1998 through delineation drilling in the northern portion of the field. Gross reserves for the joint project are estimated at approximately 55 million BOE. The successful development drilling program, combined with the delineation program, has extended the potential from this development. In June 1997, Marathon announced the Dalmore oil discovery in the U.K. North Sea on Block 16/6b. The well was drilled to a depth of 7,150 feet and encountered 107 feet of net oil pay. Marathon is the operator and holds a 62.5% working interest in the well. This discovery is located 12 miles west of the Brae A platform. A delineation well was drilled in October 1997, approximately one-half mile southwest of the discovery, but was unsuccessful. During 1998, additional acreage was obtained in this trend when two blocks were awarded to the west and northwest of Dalmore. In 1999, a second well is expected to be drilled to further delineate the discovery. Canada - On August 11, 1998, Marathon acquired Tarragon Oil and Gas Limited ("Tarragon"), a Canadian oil and gas exploration and production company, which was subsequently renamed Marathon Canada Limited ("MCL"). This acquisition added approximately 290 million net BOE, or in excess of a 20% increase, to Marathon's year-end proved reserves. In addition, approximately two million net acres of acquired undeveloped leasehold provides Marathon significant growth opportunities in one of North America's most attractive gas basins. MCL's 1999 capital spending plans on exploration and development activities reflect an aggressive full-year program with significant drilling to exploit these new assets. 8 Egypt - In June 1998, Marathon announced a gas discovery on the onshore El Manzala concession. The Abu Monkar No. 1 well flowed at a maximum rate of 21.6 mmcfd. The well has been suspended pending further appraisal work. In October and November 1998, a seismic program was completed to define additional locations for possible future drilling. In 1999, technical and economic evaluations are expected to be completed. Marathon is the operator and holds a 60% working interest in this concession. Gabon - In January 1998, oil production commenced from the Tchatamba Marin field in the Kowe Permit, located 18 miles offshore Gabon. Field reserves are estimated to be approximately 30 million gross BOE. Marathon is the operator of this field. Its working interest was proportionately reduced from 75% to 56.25% in early 1998 after the Gabonese government exercised its right to obtain a 25% interest in the field. The Tchatamba West discovery was drilled in early 1998, 4.5 miles northwest of the Tchatamba Marin production facilities. This field has possible reserves of seven million gross BOE, and is being evaluated as a one-well development tied back to the Tchatamba Marin facility. The 1997 Tchatamba South discovery, which tested at 8,165 barrels of oil per day, is being developed with a minimum concept platform and will be tied back to the Tchatamba Marin facility. The Tchatamba South field was delineated during 1998, with the Tchatamba South Nos. 3 and 4 wells. The No. 3 well was successful and will be utilized along with the No. 1 well in the field development. The No. 4 well was unsuccessful and was abandoned. The Tchatamba South field has estimated reserves of approximately 30 million gross BOE and is expected to be producing in the third quarter of 1999. In June 1998, Marathon and its partner announced an oil discovery on the East Orovinyare prospect, four miles offshore Gabon. The East Orovinyare No. 1 wildcat well was drilled in the Kowe Permit in 65 feet of water and encountered an oil column in excess of 400 feet. The first appraisal well, East Orovinyare No. 2, was drilled and tested a combined daily flow rate of 2,460 barrels of 35- degree API gravity of oil. In 1999, Marathon plans to evaluate the reservoir to formulate a field-wide development plan. Marathon is the operator of the Tchatamba West, Tchatamba South and East Orovinyare fields with a 75% working interest in these fields. Under the terms of the Kowe Permit, the Gabonese government has the right to obtain a maximum 25% working interest in any development, which would proportionately reduce Marathon's interest. The Akoumba Marin Permit lies in 2,000 to 6,000 feet of water. Marathon holds a 100% working interest in this concession. The initial exploratory well was drilled in early 1999 and did not encounter hydrocarbons. Further evaluation of remaining prospects is underway to determine if additional drilling opportunities are warranted. Under the terms of the Akoumba Marin Permit, the Gabonese government has the right to obtain a maximum 10% working interest in any development, which would reduce Marathon's interest. In 1998, Marathon expanded its opportunities in Gabon by acquiring an interest in the Inguessi Permit, which is adjacent to the Kowe Permit. Marathon acquired over 300 square kilometers of three-dimensional ("3-D") seismic data as part of an expenditure commitment to earn a 50% working interest in this concession. Under the terms of the Inguessi Permit, the Gabonese government has the right to obtain a maximum 10% working interest in any development, which would proportionately reduce Marathon's interest. Ireland - During 1997, Marathon drilled an exploratory well in the Porcupine Basin off the west coast of Ireland. Although hydrocarbons were encountered, the well was plugged and abandoned. In 1998, Marathon's working interest in the Porcupine Basin increased from 33.3% to 50% due to a co- venturer's relinquishment of its interest. Marathon continues to evaluate future prospects, however, no drilling activities are presently planned for 1999. Marathon is the operator of this license. Marathon continues to evaluate development options for the Southwest Kinsale reservoir. This reservoir is located on the west side of the Kinsale Head field in the Celtic Sea and is estimated to contain approximately 36 billion cubic feet ("bcf") of recoverable gas. A subsea development is planned, with first production expected in fourth quarter 1999. Marathon holds a 100% working interest in this area. 9 Tunisia - Marathon's 60% working interest in the 470,000-acre South Jenein Permit in southern Tunisia was formally ratified by the government in 1996. In 1998, Marathon acquired 523 kilometers of two-dimensional seismic data and drilled an exploratory well (Jenein-1). This well encountered hydrocarbons and was suspended pending further evaluation. Jenein-1 was the first of a two-well exploration commitment for the permit. Netherlands - In 1998, Marathon, through its 50% equity interest in CLAM, drilled three gross exploratory wells and six gross development wells in the Netherlands North Sea. A new CLAM discovery was made in 1998, the first outside the joint development area. This discovery is expected to be evaluated with a delineation well planned in 1999. A total of five development wells and two exploratory wells are presently planned for 1999. Also, in 1998, CLAM was awarded two blocks in the Danish sector of the North Sea. A 3-D seismic program is presently planned for 1999. Independent from its interest in CLAM, in January 1999, Marathon was awarded the A-15 block in the Netherlands North Sea. Marathon holds a 40% working interest in this block, which is operated by a co-venturer. Denmark - In June 1998, Marathon acquired one block in Denmark, a new operating country for Marathon. The geologic and field development knowledge obtained from the Brae/Sedgwick area of the United Kingdom led to the identification of the areas awarded to Marathon and its partners. Further evaluations, including a 3-D seismic program are scheduled in 1999. Russia - Marathon holds a 37.5% interest in Sakhalin Energy, an incorporated joint venture company responsible for the overall management of the Sakhalin II project. This project includes development of the Piltun- Astokhskoye ("P-A") oil field and the Lunskoye gas-condensate field, which are located 8-12 miles offshore Sakhalin Island in the Russian Far East Region. The Russian State Reserves Committee has approved estimated combined reserves for the P-A and Lunskoye fields of one billion gross barrels of liquid hydrocarbons and 14 trillion cubic feet of natural gas. In 1997, a Development Plan for the P-A license area, Phase I: Astokh Feature was approved. Offshore drilling and production facilities for the Astokh Feature were set in place on September 1, 1998. Drilling of development wells commenced in December of 1998. First production from the Astokh Feature is scheduled for mid-1999, with sales forecast to average 45,000 gross barrels per day ("bpd") of oil annually as early as 2000. This rate is based on six months of offshore loading operations during the ice-free weather window at an estimated daily rate of 90,000 gross barrels. Marathon's equity share of reserves from primary production in the Astokh Feature is 80 million barrels of oil. The approved Development Plan also provides for further appraisal work for the remainder of the P-A field. An appraisal well was drilled during the summer weather window in 1998 and the results are being evaluated. Conceptual design work for further development of the P-A field, including pressure maintenance for the Astokh Feature, continues. With respect to the Lunskoye field, appraisal work and efforts to secure long term gas sales markets continue. Commencement of gas production from the Lunskoye field, which will be contingent upon the conclusion of a gas sales contract, is anticipated to occur in 2005 or later. Late in 1997, the Sakhalin Energy consortium arranged a limited recourse project financing facility of $348 million. Sakhalin Energy borrowed the full amount of this facility in 1998 to fund Phase I expenditures and to repay amounts previously advanced to Sakhalin Energy by its shareholders. In the area of significant Russian legislation, the Russian Parliament passed a Production Sharing Agreement ("PSA") Amendments Law and a PSA Enabling Law, which brings other Russian legislation into conformance with the PSA Law. These laws were signed by President Yeltsin and enacted in 1999. At December 31, 1998, Marathon's investment in the Sakhalin II project was $275 million. The above discussions include forward-looking statements concerning various projects, drilling plans, expected production and sales levels, reserves and dates of initial production, which are based on a number of 10 assumptions, including (among others) prices, amount of capital available for exploration and development, worldwide supply and demand for petroleum products, regulatory constraints, reserve estimates, production decline rates of mature fields, reserve replacement rates, drilling rig availability and other geological, operating and economic considerations. In addition, development of new production properties in countries outside the United States may require protracted negotiations with host governments and is frequently subject to political considerations and tax regulations, which could adversely affect the economics of projects. To the extent these assumptions prove inaccurate and/or negotiations and other considerations are not satisfactorily resolved, actual results could be materially different than present expectations. Reserves At December 31, 1998, the Marathon Group's net proved liquid hydrocarbon and natural gas reserves, including equity affiliate interests, totaled approximately 1.6 billion barrels on a BOE basis, of which 57% were located in the United States. (Natural gas reserves are converted to barrels of oil equivalent using a conversion factor of six thousand cubic feet ("mcf") of natural gas to one barrel of oil.) On a BOE basis, Marathon replaced 242% of its 1998 worldwide oil and gas production. Including dispositions, Marathon replaced 235% of worldwide oil and gas production. Additions during 1998 were primarily attributable to acquired reserves in Canada. 11 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 ---------------------- ----------------------- 1998 1997 1996 1998 1997 1996 ------ ------ ------ ------- ------ ------ (Millions of Barrels) Liquid Hydrocarbons United States............. 489 486 443 568 609 589 Europe.................... 119 161 163 122 161 177 Other International (c)... 67 12 11 194 26 26 ----- ----- ----- ----- ----- ----- Total Consolidated..... 675 659 617 884 796 792 Equity affiliates (a)..... - - - 80 82 - ----- ----- ----- ----- ----- ----- WORLDWIDE................... 675 659 617 964 878 792 ===== ===== ===== ===== ===== ===== Developed reserves as % of total net reserves........ 70.0% 75.1% 77.9% (Billions of Cubic Feet) Natural Gas United States............. 1,678 1,702 1,720 2,151 2,220 2,239 Europe.................... 909 1,024 1,133 966 1,048 1,178 Other International (c)... 534 19 16 830 23 21 ----- ----- ----- ----- ----- ----- Total Consolidated..... 3,121 2,745 2,869 3,947 3,291 3,438 Equity affiliate (b)...... 76 78 100 110 111 132 ----- ----- ----- ----- ----- ----- WORLDWIDE................... 3,197 2,823 2,969 4,057 3,402 3,570 ===== ===== ===== ===== ===== ===== Developed reserves as % of total net reserves........ 78.8% 83.0% 83.2% (Millions of Barrels) Total BOEs United States............. 769 770 729 927 979 962 Europe.................... 270 332 352 282 336 373 Other International (c)... 156 15 14 332 30 30 ----- ----- ----- ----- ----- ----- Total Consolidated..... 1,195 1,117 1,095 1,541 1,345 1,365 Equity affiliates (a)..... 13 13 17 98 100 22 ----- ----- ----- ----- ----- ----- WORLDWIDE................... 1,208 1,130 1,112 1,638 1,445 1,387 ===== ===== ===== ===== ===== ===== Developed reserves as % of total net reserves........ 73.7% 78.2% 80.2%
- ----------- (a) Represents Marathon's equity interests in CLAM and Sakhalin Energy. (b) Represents Marathon's equity interests in CLAM. (c) Includes Canada for 1998. The above estimates, which are forward-looking statements, are based upon a number of assumptions, including (among others) prices, presently known physical data concerning size and character of the reservoirs, economic recoverability, production experience and other operating considerations. To the extent these assumptions prove inaccurate, actual recoveries could be materially different than current estimates. For additional details of estimated quantities of net proved oil and gas reserves at the end of each of the last three years, see "Consolidated Financial Statements and Supplementary Data - Supplementary Information on Oil and Gas Producing Activities - Estimated Quantities of Proved Oil and Gas Reserves" on page U-32. Reports have been filed with the U.S. Department of Energy ("DOE") for the years 1997 and 1996 disclosing the year-end 12 estimated oil and gas reserves. A similar report will be filed for 1998. The year-end estimates reported to the DOE are the same as the estimates reported in the USX Consolidated Supplementary Data. Oil and Gas Acreage The following table sets forth, by geographic area, the developed and undeveloped oil and gas acreage held as of December 31, 1998:
Gross and Net Acreage Developed & Developed Undeveloped Undeveloped ------------ ------------- ------------- Gross Net Gross Net Gross Net ----- ----- ------ ----- ------ ----- (Thousands of Acres) United States............ 2,279 950 3,199 1,838 5,478 2,788 Europe................... 340 283 2,145 1,048 2,485 1,331 Other International (b).. 1,408 842 8,708 4,745 10,116 5,587 ----- ----- ------ ----- ------ ----- Total Consolidated...... 4,027 2,075 14,052 7,631 18,079 9,706 Equity affiliates (a).... 350 36 705 178 1,055 214 ----- ----- ------ ----- ------ ----- WORLDWIDE............... 4,377 2,111 14,757 7,809 19,134 9,920 ===== ===== ====== ===== ====== =====
- ----------- (a) Represents Marathon's equity interests in CLAM and Sakhalin Energy. (b) Includes Canada. Oil and Natural Gas Production The following tables set forth daily average net production of liquid hydrocarbons and natural gas for each of the last three years:
Net Liquid Hydrocarbons Production (a) (Thousands of Barrels per Day) 1998 1997 1996 ----- ----- ----- United States (b)....................... 135 115 122 Europe (c).............................. 42 41 51 Other International (c) (g)............. 19 8 8 ----- ----- ----- WORLDWIDE............................... 196 164 181 ===== ===== ===== Net Natural Gas Production (d) (Millions of Cubic Feet per Day) United States (b)....................... 744 722 676 Europe (e).............................. 360 412 486 Other International (g)................. 81 11 13 ----- ----- ----- Total Consolidated.................... 1,185 1,145 1,175 Equity affiliate (f).................... 33 42 45 ----- ----- ----- WORLDWIDE............................... 1,218 1,187 1,220 ===== ===== =====
- ----------- (a) Includes crude oil, condensate and natural gas liquids. (b) Amounts reflect production from leasehold and plant ownership, after royalties and interests of others. (c) Except for Canada and Gabon, amounts reflect equity tanker liftings, truck deliveries and direct deliveries of liquid hydrocarbons before royalties, if any. The amounts correspond with the basis for fiscal settlements with governments. Crude oil purchases, if any, from host governments are not included. (d) Amounts reflect sales of equity production, only. It excludes volumes purchased from third parties for resale of 23 mmcfd in 1998 and 32 mmcfd in 1997 and 1996. (e) Amounts reflect production before royalties. (f) Represents Marathon's equity interest in CLAM. (g) Includes Canada for 1998. 13 At year-end 1998, Marathon was producing crude oil and/or natural gas in eight countries, including the United States. Marathon's worldwide liquid hydrocarbon production increased 32,000 bpd, or approximately 20%, from 1997, mainly reflecting new production in the Gulf of Mexico, acquired production in Canada and new operations in Gabon. Marathon's 1999 worldwide liquid hydrocarbon production is expected to increase 17% from 1998, to average approximately 230,000 bpd. Most of the increase is anticipated in the second half of the year. This primarily reflects projected new production from the Phase I development of the P-A field in Russia, start-up of the Tchatamba South field in the third quarter of 1999 and a full year of production by Marathon Canada Limited, partially offset by natural production declines of mature fields. In 2000, worldwide liquid hydrocarbon production is expected to remain consistent with 1999 levels and is expected to increase by approximately 10 to 15% over 2000 productions levels in 2001. Marathon's 1998 worldwide sales of equity natural gas production, including Marathon's share of CLAM's production, increased about 3% from 1997, reflecting acquired production in Canada and increased production from properties in East Texas, partially offset by natural declines in international fields (primarily in Ireland and Norway). In addition to sales of 474 net mmcfd of international equity natural gas production, Marathon sold 23 net mmcfd of natural gas acquired for injection and resale during 1998. In 1999, Marathon's worldwide natural gas volumes are expected to increase 11% over 1998 levels, to average approximately 1.38 bcfd. This primarily reflects increases in North American gas production, offset by natural declines in mature international fields, primarily in Ireland and Norway. In 2000, worldwide natural gas volumes are expected to remain consistent with 1999 levels and are expected to increase by approximately 4% over 2000 levels in 2001. The above projections of 1999, 2000 and 2001 liquid hydrocarbon production and natural gas volumes are forward-looking statements. They are based on known discoveries and do not include any additions from potential or future acquisitions or future wildcat drilling. They are also based on certain assumptions, including (among others) prices, amount of capital available for exploration and development, worldwide supply and demand for petroleum products, regulatory constraints, reserve estimates, production decline rates of mature fields, timing of commencing production from new wells, reserve replacement rates and other geological, operating and economical considerations. If these assumptions prove to be incorrect, actual results could be materially different than present expectations. United States Approximately 69% of Marathon's 1998 worldwide liquid hydrocarbon production and equity liftings and 61% of worldwide natural gas production (including CLAM volumes) were from domestic operations. The principal domestic producing areas are located in Texas, the U.S. Gulf of Mexico, Wyoming, New Mexico and Oklahoma. Marathon's ongoing domestic growth strategy is to apply its technical expertise in fields with undeveloped potential, to dispose of interests in non-core properties with limited upside potential and high production costs, and to acquire significant working interests in properties with high development potential. Marathon continues to apply enhanced recovery and reservoir management programs and cost containment efforts to maximize liquid hydrocarbon recovery and profitability in mature fields such as the Yates field in Texas and the Oregon Basin field in Wyoming. Enhanced recovery efforts for the Yates field include an ongoing evaluation of thermal recovery techniques. Texas - Onshore production for 1998 averaged 33,900 net bpd of liquid hydrocarbons and 186 net mmcfd of natural gas, representing 25% of Marathon's total U.S. liquid hydrocarbon and natural gas production, respectively. Liquids production volumes decreased by 3,600 net bpd from 1997 levels, while gas volumes increased by 25 net mmcfd from 1997 levels. The liquid volume decrease was mainly due to natural production declines and the gas volume increase was a result of successful development programs in east Texas. Within Texas, Marathon owns a 49.8% working interest in, and is the operator of, the Yates Field Unit, one of the largest fields in the United States on the basis of reserves. Marathon's 23,200 net bpd of 1998 liquid hydrocarbon production from the Yates field and gas plant accounted for 17% of Marathon's total U.S. liquids 14 production. Activation of a thermal pilot project began in December 1998 with the completion of a steam generation facility. Gulf of Mexico - During 1998, Marathon's Gulf production averaged 54,700 net bpd of liquid hydrocarbons and 84 net mmcfd of natural gas, representing 41% and 11% of Marathon's total U.S. liquid hydrocarbon and natural gas production, respectively. Liquid hydrocarbon production increased by 26,200 net bpd and natural gas production increased by 7 net mmcfd from the prior year, mainly due to new production from Troika, Arnold and Oyster, offset by declines from mature fields. At year-end 1998, Marathon held working interests in 14 fields and 31 platforms, 20 of which Marathon operates. Ewing Bank 873 is an important part of Marathon's deepwater infrastructure, where Marathon is the operator and holds a 66.7% working interest. Production averaged 32,100 net bpd and 24 net mmcfd in 1998, compared with 19,000 net bpd and 12 net mmcfd in 1997, primarily due to new production from Arnold and Oyster. Wyoming - Liquid hydrocarbon production for 1998 averaged 23,700 net bpd, representing 18% of Marathon's total U.S. liquid hydrocarbon production, down from 24,700 net bpd in 1997. The decrease in 1998 from 1997 was primarily due to capital restraints and natural production declines. Gas production averaged 61 net mmcfd in 1998, compared to 54 net mmcfd in 1997, with the increase due mainly to developments in southwest Wyoming. New Mexico - Production in New Mexico, primarily from the Indian Basin and Travis Canyon fields, averaged 12,500 net bpd and 109 net mmcfd in 1998, compared with 12,400 net bpd and 109 net mmcfd in 1997. Oklahoma - Gas production for 1998 averaged 107 net mmcfd, representing 14% of Marathon's total U.S. gas production, compared with 109 net mmcfd in 1997. Alaska - Marathon's production from Alaska averaged 144 net mmcfd of natural gas in 1998, compared with 149 net mmcfd in 1997. Marathon's primary focus in Alaska is the expansion of its natural gas business through exploration, exploitation, development and marketing. International Interests in liquid hydrocarbon and/or natural gas production are held in the U.K. North Sea, Irish Celtic Sea, the Norwegian North Sea, Canada, Egypt and Gabon. In addition, Marathon has an interest through an equity affiliate (CLAM) in the Netherlands North Sea. U.K. North Sea - The following table sets forth Marathon's average net liquid hydrocarbon liftings in the Brae area, for each of the last three years:
Brae-Area Average Net Liquid Hydrocarbon Liftings (Net Barrels per Day) 1998 1997 1996 ------ ------ ------ East Brae.............. 14,500 22,000 29,800 North Brae............. 9,300 8,900 10,000 South Brae............. 3,800 3,600 4,700 Central Brae........... 4,700 3,300 4,200 West Brae.............. 8,600 1,400 - ------ ------ ------ TOTAL.................. 40,900 39,200 48,700 ====== ====== ======
East Brae is a gas condensate field, which uses gas cycling. The decrease in East Brae production in 1998 primarily reflects the expected depletion of the reservoir. Gas for pressure maintenance at East Brae is provided by injecting gas streams from the Brae B platform. 15 North Brae is a gas condensate field, produced via the Brae B platform using the gas cycling technique. Although partial cycling continues, the majority of North Brae gas is being transferred to the East Brae reservoir for pressure maintenance and sales. North Brae liftings shown in the table above include production from the Beinn field, which underlies the North Brae field. The Brae A facilities act as the host platform for the underlying South Brae field, adjacent Central Brae field and West Brae/Sedgwick fields. The strategic location of the Brae A, Brae B and East Brae platforms and pipeline infrastructure has generated significant third-party business since 1986. Arrangements were finalized in 1998 for the processing and transportation of reservoir fluids from the outside-operated Larch field. This agreement brings to 15, the number of third-party fields contracted to the Brae system. In addition to generating processing and pipeline tariff revenue, third-party business also has a favorable impact on Brae area operations by optimizing infrastructure usage and extending the economic life of the facilities. Participation in the Scottish Area Gas Evacuation ("SAGE") system provides pipeline transportation and onshore processing for Brae-area gas. The Brae group owns 50% of SAGE, which has a total wet gas capacity of approximately 1.0 bcfd. The other 50% is owned by the Beryl group, which operates the system. A 30-inch pipeline connects the Brae, Beryl and Scott fields to the SAGE gas processing terminal at St. Fergus in northeast Scotland. The St. Fergus facilities were expanded in 1998, and a new pipeline connecting the Britannia field to the St. Fergus terminal began transporting gas for processing through SAGE in August 1998. Marathon's total United Kingdom gas sales from all sources averaged 188 net mmcfd in 1998, compared with 162 net mmcfd in 1997. Sales of Brae-area gas through the SAGE pipeline system averaged 185 net mmcfd for the year 1998 and 159 net mmcfd for the year 1997. Of these totals, 162 mmcfd and 127 mmcfd was Brae-area equity gas in 1998 and 1997, respectively, and 23 and 32 mmcfd was gas acquired for injection and subsequent resale in 1998 and 1997, respectively. Ireland - Marathon holds a 100% working interest in the Kinsale Head and Ballycotton fields in the Irish Celtic Sea. Natural gas sales from these maturing fields were 168 net mmcfd in 1998, compared with 228 net mmcfd in 1997. This production decline is expected to be partially offset by compressor modifications being implemented in 1999 and 2000, which is expected to improve recovery from Kinsale Head, and by the planned development of the Southwest Kinsale reservoir. Norway - In the Norwegian North Sea, Marathon holds a 23.8% working interest in the Heimdal field, which had 1998 sales of 27 net mmcfd of natural gas and 900 net bpd of condensate, compared with 1997 sales of 54 net mmcfd of natural gas and 1,700 net bpd of condensate. In mid-1994, Marathon issued a notice of termination on the gas sales agreements for this field based upon low gas prices and high pipeline tariffs associated with the operations. The effective date of the termination was June 11, 1996. In June 1996, an agreement was reached with one of the buyers, which provided for an improved economic position for 30% of the gas sales. The remaining 70% share of sales, sold under a separate agreement, remains unresolved, although gas sales have continued under protest. Heimdal production is scheduled to cease in late 1999 with future revenue from third party business commencing in 2002. During 1998, an agreement was reached with the Heimdal Group and the operator to redevelop the field as a processing and transportation center. Canada - MCL net production averaged 16,000 bpd and 166 mmcfd from August 12, 1998 through year-end 1998. Egypt - Marathon holds interests in four concessions in Egypt under production sharing agreements. Liquid hydrocarbon and natural gas production totaled 8,500 net bpd and 16 net mmcfd in 1998, compared with 8,300 net bpd and 11 net mmcfd in 1997. Gabon - In 1998, the first year of production, the Tchatamba Marin field produced 4,700 net bpd of liquid hydrocarbons. 16 Netherlands - Marathon's 50% equity interest in CLAM, the eighth largest producer and reserves holder in the Netherlands North Sea, provides a 5% entitlement in the production of 19 gas fields, which provided sales of 33 net mmcfd of natural gas in 1998, compared with 42 net mmcfd in 1997. The decrease in natural gas sales was mainly attributable to natural production declines and an equity redetermination. The following tables set forth productive wells and service wells for each of the last three years and drilling wells as of December 31, 1998:
Gross and Net Wells 1998 Productive Wells (a) - ---- ----------------------------- Oil Gas Service Wells (b) Drilling Wells (c) -------------- ------------- ----------------- ----------------- Gross Net Gross Net Gross Net Gross Net ------ ------ ------ ----- ----- ----- ----- ----- United States............ 9,396 3,616 3,214 1,414 4,062 1,127 16 12 ------ ------ ----- ----- ----- ----- ----- ----- Europe................... 33 13 64 32 22 9 2 1 Other International (f).. 1,248 795 1,459 1,068 162 111 1 0 ------ ------ ----- ----- ----- ----- ----- ----- Total Consolidated... 10,677 4,424 4,737 2,514 4,246 1,247 19 13 Equity affiliates (d).... - - 83 4 - - 2 1 ------ ------ ----- ----- ----- ----- ----- ----- WORLDWIDE................ 10,677 4,424 4,820 2,518 4,246 1,247 21 14 ====== ====== ===== ===== ===== ===== ===== =====
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 ====== ===== ===== ===== ===== =====
1996 Productive Wells (a) - ---- -------------------------- Oil Gas Service Wells (b) ------------- ----------- --------------- Gross Net Gross Net Gross Net ------ ----- ----- ----- ----- ----- United States............ 10,939 3,860 3,248 1,401 4,891 1,181 Europe................... 28 12 55 30 19 8 Other International...... 11 7 10 2 - - ------ ----- ----- ----- ----- ----- Total Consolidated...... 10,978 3,879 3,313 1,433 4,910 1,189 Equity affiliate (e)..... - - 76 5 - - ------ ----- ----- ----- ----- ----- WORLDWIDE................ 10,978 3,879 3,389 1,438 4,910 1,189 ====== ===== ===== ===== ===== =====
- ----------- (a) Includes active wells and wells temporarily shut-in. Of the gross productive wells, gross wells with multiple completions operated by Marathon totaled 518, 335 and 329 in 1998, 1997 and 1996, respectively. Information on wells with multiple completions operated by other companies is not available to Marathon. (b) Consists of injection, water supply and disposal wells. (c) Consists of exploratory and development wells. (d) Represents CLAM and Sakhalin Energy. (e) Represents CLAM. (f) Includes Canada. 17 The following tables set forth average production costs and sales prices per unit of production for each of the last three years:
Average Production Costs (a) 1998 1997 1996 ------ ------ ------ (Dollars per BOE) United States............................. $ 3.12 $ 3.93 $3.97 International - Europe.................... 4.29 4.27 4.38 - Other International (d)... 4.73 3.40 3.29 Total Consolidated........................ $ 3.55 $ 4.01 $4.09 - Equity affiliate (b)...... 3.99 5.86 5.22 WORLDWIDE................................. $ 3.56 $ 4.05 $4.11
1998 1997 1996 1998 1997 1996 ------ ------ ------ ------ ------ ------ Average Sales Prices (c) Crude Oil and Condensate Natural Gas Liquids ------------------------------------------------------- (Dollars per Barrel) United States.............................. $10.60 $17.32 $19.12 $ 8.64 $13.28 $13.59 International - Europe..................... 12.87 19.37 20.77 11.49 17.85 17.33 - Other International (d).... 11.31 16.62 19.74 8.38 18.12 17.65 WORLDWIDE.................................. $11.17 $17.79 $19.63 $ 9.12 $14.52 $14.71
Natural Gas ---------------------- (Dollars per Thousand Cubic Feet) United States.............................. $ 1.79 $ 2.20 $ 2.09 International - Europe..................... 2.07 2.00 1.96 - Other International (d).... 1.34 2.10 2.34 Total Consolidated......................... $ 1.85 $ 2.13 $ 2.04 - Equity affiliate (b)....... 2.37 2.73 2.74 WORLDWIDE.................................. $ 1.86 $ 2.15 $ 2.06
- ----------- (a) Production costs are as defined by the Securities and Exchange Commission and include property taxes, severance taxes and other costs, but exclude depreciation, depletion and amortization of capitalized acquisition, exploration and development costs and certain administrative costs. Natural gas volumes were converted to barrels of oil equivalent using a conversion factor of six mcf of natural gas to one barrel of oil. (b) Represents CLAM. (c) Prices exclude gains/losses from hedging activities. (d) Includes Canada for 1998. Refining, Marketing and Transportation Effective January 1, 1998, Marathon and Ashland Inc. ("Ashland") formed a new domestic refining, marketing and transportation ("RM&T") company, Marathon Ashland Petroleum LLC ("MAP"). On January 1, 1998, Marathon transferred certain RM&T net assets to MAP. Also, on January 1, 1998, Marathon acquired certain RM&T net assets from Ashland in exchange for a 38% interest in MAP. For further discussion of MAP, see Note 3 to the USX Consolidated Financial Statements on page U-10. Since MAP is a consolidated subsidiary of Marathon, operating statistics and financial data applicable to the Marathon Group's RM&T activities include 100% of MAP's operations, commencing January 1, 1998. The following discussion of RM&T operations includes historical data for the three-year period ended December 31, 1998. Operating measures such as refined product yields and refined product sales in 1998 include 100% of MAP and are not comparable to prior period amounts. 18 Refining MAP owns and operates seven refineries with an aggregate refining capacity of 935,000 barrels of crude oil per calendar day. The table below sets forth the location and daily throughput capacity of each of MAP's refineries as of December 31, 1998:
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. Marathon's 50,000 bpd Indianapolis refinery, which was not contributed to MAP, has remained idled since October 1993. The status of the refinery is periodically reviewed, considering economic as well as regulatory matters. In 1998, several refining components were dismantled and sold. As of February 28, 1999, the refinery remained idled. During 1998, MAP's refineries processed 894,000 bpd of crude oil and 127,000 bpd of other charge and blend stocks. The following table sets forth MAP's refinery production by product group for 1998 and Marathon's refinery production by product group for 1997 and 1996:
Refined Product Yields (Thousands of Barrels per Day) 1998 1997 1996 ----- ---- ---- Gasoline........................ 545 353 345 Distillates..................... 270 154 155 Propane......................... 21 13 13 Feedstocks & Special Products... 64 36 35 Heavy Fuel Oil.................. 49 35 30 Asphalt......................... 68 39 36 ----- ---- ---- TOTAL........................... 1,017 630 614 ===== ==== ====
Maintenance activities requiring temporary shutdown of certain refinery operating units ("turnarounds") are periodically performed at each of the operating refineries. MAP completed major turnarounds at the Garyville and Canton refineries in 1998. In addition, a maintenance and safety improvement program was implemented and substantially completed at the Catlettsburg, Canton and St. Paul Park refineries in 1998. MAP and a third party are constructing facilities to produce 800 million pounds per year of polymer grade propylene and polypropylene at the Garyville refinery. MAP is building, and will own and operate facilities to 19 produce polymer grade propylene. The third party is constructing, and will own and operate the polypropylene facilities and market its output. Production of the polymer grade propylene is scheduled to begin in the second quarter of 1999. Marketing In 1998, MAP's refined product sales volumes (excluding matching buy/sell transactions) totaled 17.8 billion gallons (1,159,000 bpd). Excluding sales related to matching buy/sell transactions, the wholesale distribution of petroleum products to private brand marketers and to large commercial and industrial consumers, primarily located in the Midwest, the upper Great Plains and the Southeast, accounted for about 64% of MAP's refined product sales volumes in 1998. Approximately 46% of MAP's gasoline volumes and 77% of its distillate volumes were sold on a wholesale basis to independent unbranded customers in 1998. The following table sets forth the volume of MAP's consolidated refined product sales by product group for 1998 and Marathon's consolidated refined product sales by product group for 1997 and 1996:
Refined Product Sales (Thousands of Barrels per Day) 1998 1997 1996 ----- ---- ---- Gasoline..................................... 671 452 468 Distillates.................................. 318 198 192 Propane...................................... 21 12 12 Feedstocks & Special Products................ 67 40 37 Heavy Fuel Oil............................... 49 34 31 Asphalt...................................... 72 39 35 ----- ---- ---- TOTAL........................................ 1,198 775 775 ===== ==== ==== Matching Buy/Sell Volumes included in above.. 39 51 71
As of December 31, 1998, MAP supplied petroleum products to 3,117 Marathon and Ashland branded retail outlets located primarily in Ohio, Michigan, Indiana, Kentucky and Illinois. Branded retail outlets are also located in the states of West Virginia, Wisconsin, Virginia, Tennessee, Minnesota, Pennsylvania and North Carolina. MAP currently has both the Marathon and Ashland brands for jobbers. In 1998, MAP decided to endorse a single brand concept for maximum market effectiveness. The brand chosen was Marathon because of its significant longtime presence in the market and its substantially larger number of retail outlets and credit card holders. If an Ashland jobber chooses to become a Marathon branded jobber, MAP assists in re-imaging the applicable locations to Marathon brand specifications. In 1998, retail sales of gasoline and diesel fuel were also made through limited service and self-service stations and truck stops operated in 20 states by a wholly owned MAP subsidiary, Speedway SuperAmerica, LLC ("SSA"). As of December 31, 1998, this subsidiary had 2,257 retail outlets which sold petroleum products and convenience-store merchandise, primarily under the brand names "Speedway," "SuperAmerica", "Starvin' Marvin" and "Rich". SSA's revenues from the sale of convenience-store merchandise totaled $1,827 million in 1998, compared with $1,037 million for Emro Marketing Company in 1997. Profits generated from these sales tend to moderate the margin volatility experienced in the retail sale of gasoline and diesel fuel. The selection of merchandise varies among outlets -- 1,978 of SSA's 2,257 outlets at December 31, 1998, had convenience stores which sold a variety of food and merchandise, and the remaining outlets sold selected convenience-store items such as cigarettes, candy and beverages. In July 1998, MAP announced plans to locate the SSA corporate headquarters in Enon, Ohio, where Emro Marketing Company was formerly located. The move to Enon was completed in December 1998. 20 Supply and Transportation The crude oil processed in MAP's refineries is obtained from negotiated lease, contract and spot purchases or exchanges. In 1998, MAP's negotiated lease, contract and spot purchases of U.S. crude oil for refinery input averaged 317,000 bpd including 24,000 bpd acquired from Marathon. In 1998, 64% or 577,000 bpd of the crude oil processed by MAP's refineries was from foreign sources and acquired primarily from various foreign national oil companies, producing companies and traders, of which approximately 330,000 bpd was acquired from the Middle East. In addition, MAP, through its subsidiary, Scurlock Permian LLC, is actively engaged in purchasing, selling and trading crude oil, principally at Midland, Texas; Cushing, Oklahoma; and St. James, Louisiana, three of the major distribution points for U.S. crude oil, and at major trading and distribution hubs in western Canada. MAP announced on March 1, 1999, that it signed a memorandum of understanding to sell Scurlock Permian LLC to Plains All American Pipeline, L.P. The transaction, subject to customary closing conditions, including execution of definitive agreements, consent of third parties, and receipt of governmental approvals, is expected to be completed in the second quarter of 1999. MAP operates a system of pipelines and terminals to provide crude oil to its refineries and refined products to its marketing areas. Eighty-eight light product and asphalt terminals are strategically located throughout the Midwest, upper Great Plains and Southeast. These facilities are supplied by a combination of pipelines, barges, rail cars and trucks. At December 31, 1998, MAP owned, leased or had an ownership interest in approximately 2,653 miles of crude oil gathering lines; 4,553 miles of crude oil trunk lines; and 2,861 miles of products trunk lines. In addition, MAP owned a 46.7% interest in LOOP LLC ("LOOP"), which is the owner and operator of the only U.S. deepwater oil port, located 18 miles off the coast of Louisiana; a 49.9% interest in LOCAP Inc. ("LOCAP"), which is the owner and operator of a crude oil pipeline connecting LOOP and the Capline system; and a 37.2% interest in the Capline system, a large diameter crude oil pipeline extending from St. James, Louisiana to Patoka, Illinois. MAP also has a 33.3% ownership interest in Minnesota Pipe Line Company, which operates a crude oil pipeline in Minnesota. Minnesota Pipe Line Company provides MAP with access to 270,000 bpd nominal capacity of crude oil common carrier transportation from Clearbrook, Minnesota to Cottage Grove, Minnesota, which is in the vicinity of MAP's St. Paul Park, Minnesota, refinery. MAP plans to build a pipeline from its Catlettsburg refinery to Columbus, Ohio. The wholly owned pipeline is expected to initially move about 50,000 bpd of refined products into central Ohio. Construction is expected to commence in the summer of 1999 after final regulatory approvals. The pipeline is expected to be operational in the first half of 2000. MAP's marine transportation operations include towboats and barges that transport refined products on the Ohio, Mississippi and Illinois rivers, their tributaries, and the Intercoastal Waterway. MAP leases on a long-term basis two single-hulled 80,000-ton-deadweight tankers, which are primarily used for third- party delivery of foreign crude oil to the United States. The initial term of these charters expires in 2001 and 2002, subject to certain renewal options. These tankers are not essential for MAP to satisfy its own crude oil requirements. In 1999, MAP "bare boat sub-chartered" these tankers to a third party operator, who will operate the vessels. MAP leases rail cars in various sizes and capacities for movement of petroleum products. MAP also owns a large number of tractors, tank trailers, and general service trucks. The above discussion related to Scurlock Permian LLC contains forward- looking statements regarding the schedule for closing the sale transaction. The closing of this transaction and the timing thereof involve uncertainties including, but not limited to, the execution of definitive agreements, receipt of government approvals, consent of third parties, and satisfaction of customary closing conditions. A delay in completing any of these could 21 result in a delay in closing the sale transaction. In addition, failure to complete any of these events could result in the sale transaction not closing as currently contemplated. Other Energy Related Businesses Natural Gas and Crude Oil Marketing and Transportation Marathon owns and operates, as a common carrier, approximately 174 miles of crude oil gathering lines and 187 miles of crude oil trunk lines that were not contributed to MAP. In addition, Marathon owns interests in various pipeline systems that were not contributed to MAP, including a 29% interest of Odyssey Pipeline L.L.C., which owns and operates a 300,000 bpd crude oil pipeline serving Main Pass Blocks 69, 72 and 289 and Viosca Knoll Blocks 780 and 786; a 28% interest of Poseidon Oil Pipeline Company, L.L.C., which owns and operates a 400,000 bpd crude oil pipeline system connected to the Marathon-operated Ewing Bank 873 platform in the Gulf of Mexico; a 24.33% interest of Nautilus Pipeline Company, L.L.C., which owns and operates a 600 mmcfd natural gas pipeline system, also located in the Gulf of Mexico; a 17.4% interest of Explorer Pipeline Company, which operates a light products pipeline system extending from the Gulf Coast to the Midwest; and a 2.5% interest of Colonial Pipeline Company, which operates a light products pipeline system extending from the Gulf Coast to the East Coast. Marathon has a 30% ownership in a Kenai, Alaska, natural gas liquefication plant and two 87,500 cubic meter tankers used to transport liquefied natural gas ("LNG") to customers in Japan. Feedstock for the plant is supplied from a portion of Marathon's equity natural gas production in the Cook Inlet. LNG is sold under a long-term contract with two of Japan's largest utility companies which calls for the sale of more than 900 gross bcf over the term of the contract. Marathon has a 30% participation in this contract which is effective through March 31, 2004, and provides an option for a five-year extension. During 1998, LNG deliveries totaled 66.0 gross bcf (20.0 net bcf), up from 62.2 gross bcf (18.6 net bcf) in 1997. In addition to the sale of domestic equity production of natural gas, Marathon purchases gas from third-party producers and marketers for resale. This activity helps to maximize the value of Marathon's equity gas production, while meeting customers' needs for secure and source-flexible supplies. The Marathon Group includes five USX subsidiaries that are engaged solely in the natural gas business. Carnegie Interstate Pipeline Company ("CIPCO") is an interstate pipeline company engaged in the transportation of natural gas via interstate commerce. Carnegie Production Company produces and sells natural gas, while Carnegie Natural Gas Sales, Inc. is an unregulated marketer of natural gas. Carnegie Natural Gas Company ("Carnegie") functions as a local distribution company serving residential, commercial and industrial customers in West Virginia and western Pennsylvania. Finally, Carnegie Natural Gas Storage LLC was established to invest in gas storage projects. As of December 31, 1998, Carnegie owned and operated approximately 1,800 miles of natural gas gathering lines. Owned proved developed reserves dedicated to gathering operations were 44.7 bcf in 1998 as compared to 39.8 bcf and 42.8 bcf in 1997 and 1996, respectively. Carnegie is regulated as a public utility by state commissions within its service areas, while CIPCO is regulated by the Federal Energy Regulatory Commission as an interstate pipeline. Total natural gas throughput was 23 bcf in 1998 compared to 32 bcf and 34 bcf in 1997 and 1996, respectively. Power Generation Marathon, through its wholly owned subsidiary, Marathon Power Company, Ltd. ("Marathon Power"), pursues development, construction, ownership and operation of independent electric power projects in the global electrical power market. In 1997, Marathon Power acquired a 50% interest in an Ecuadorian power generation company, which owns and operates two generating plants in Ecuador capable of delivering 130 megawatts of power. Marathon Power is actively pursuing a variety of projects in Latin America, Europe, Africa and the Asia/Pacific Region. 22 Competition and Market Conditions The oil and gas industry is characterized by a large number of companies, none of which is dominant within the industry, but a number of which have greater resources than Marathon. Marathon must compete with these companies for the rights to explore for oil and gas. Acquiring the more attractive exploration opportunities frequently requires competitive bids involving substantial front-end bonus payments or commitments to work programs. Based on industry sources, Marathon believes it currently ranks 11th among U.S. based petroleum corporations on the basis of 1997 worldwide liquid hydrocarbon and natural gas production. Marathon through MAP must also compete with a large number of other companies to acquire crude oil for refinery processing and in the distribution and marketing of a full array of petroleum products. MAP believes it ranks fourth among U.S. petroleum companies on the basis of crude oil refining capacity as of January 1, 1999. MAP competes in three distinct markets -- wholesale, branded and retail distribution -- for the sale of refined products, and believes it competes with more than 50 companies in the wholesale distribution of petroleum products to private brand marketers and large commercial and industrial consumers; nine refiner/marketers in the supply of branded petroleum products to dealers and jobbers; and over 1,800 petroleum product retailers in the retail sale of petroleum products. Marathon also competes in the convenience store industry through MAP's retail outlets. The Marathon Group's operating results are affected by price changes in crude oil, natural gas and petroleum products as well as changes in competitive conditions in the markets it serves. Generally, operating results from production operations benefit from higher crude oil and natural gas prices while refining and marketing margins may be adversely affected by crude oil price increases. Market conditions in the oil industry are cyclical and subject to global economic and political events. Employees The Marathon Group had 32,862 active employees as of December 31, 1998, which included 28,449 MAP employees. Of the MAP total, 21,586 were employees of Speedway SuperAmerica, LLC, primarily representing employees at retail marketing outlets. Certain hourly employees at the Catlettsburg and Canton refineries are represented by the Paper, Allied Industrial, Chemical and Energy Workers International Union under labor agreements which expire on January 31, 2002, while certain hourly employees at the Texas City refinery are represented by the same union under a labor agreement which expires on March 31, 2002. Certain hourly employees at the St. Paul Park and Detroit refineries are represented by the International Brotherhood of Teamsters under labor agreements which expire on May 31, 1999 and January 31, 2000, respectively. Property, Plant and Equipment Additions For property, plant and equipment additions, see "Management's Discussion and Analysis of Financial Condition, Cash Flows and Liquidity - Capital Expenditures" for the Marathon Group on page M-29. Environmental Matters The Marathon Group maintains a comprehensive environmental policy overseen by the Public Policy Committee of the USX Board of Directors. The Health, Environment and Safety organization has the responsibility to ensure that the Marathon Group's operating organizations maintain environmental compliance systems that are in accordance with applicable laws and regulations. The Health, Environment and Safety Management Committee, which is comprised of officers of the group, is charged with reviewing its overall performance with various environmental compliance programs. Also, the Marathon Group has formed an Emergency Management Team, composed of senior management, which will oversee the response to any major emergency environmental incident throughout the group. 23 The businesses of the Marathon Group are subject to numerous federal, state and local laws and regulations relating to the protection of the environment. These environmental laws and regulations include the Clean Air Act ("CAA") with respect to air emissions, the Clean Water Act ("CWA") with respect to water discharges, the Resource Conservation and Recovery Act ("RCRA") with respect to solid and hazardous waste treatment, storage and disposal, the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with respect to releases and remediation of hazardous substances, and the Oil Pollution Act of 1990 ("OPA-90") with respect to oil pollution and response. In addition, many states where the Marathon Group operates have similar laws dealing with the same matters. These laws and their associated regulations are constantly evolving and becoming increasingly stringent. The ultimate impact of complying with existing laws and regulations is not always clearly known or determinable due in part to the fact that certain implementing regulations for laws such as RCRA and the CAA have not yet been finalized or in certain instances are undergoing revision. These environmental laws and regulations, particularly the 1990 Amendments to the CAA and new water quality standards, could result in increased capital, operating and compliance costs. For a discussion of environmental capital expenditures and costs of compliance for air, water, solid waste and remediation, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Management's Discussion and Analysis of Environmental Matters, Litigation and Contingencies" on page M-31 and "Legal Proceedings" for the Marathon Group on page 37. The Marathon Group has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the Marathon Group's products and services, operating results will be adversely affected. The Marathon Group believes that substantially all of its competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and whether or not it is engaged in the petrochemical business or the marine transportation of crude oil or refined products. Air The CAA imposes stringent limits on air emissions, establishes a federally mandated operating permit program and allows for civil and criminal enforcement sanctions. The principal impact of the CAA on the Marathon Group is on its RM&T operations. The CAA also establishes attainment deadlines and control requirements based on the severity of air pollution in a geographical area. It is estimated that, from 1999 to 2002, the Marathon Group, which includes all seven MAP refineries, may spend approximately $90 million in order to comply with the proposed Maximum Achievable Control Technology ("MACT") Phase II standards under the CAA. These standards require new control equipment on Fluid Catalytic Cracking Units and other units. In addition, the standards for RFG become even more stringent in the year 2000, when Phase II Complex Model RFG will be required. It is expected that new Tier II Fuels regulations will be issued during 1999, requiring reduced sulfur levels in both gasoline and diesel fuels, which would not take effect until sometime after 2002. It is anticipated that if final regulations are adopted, consistent with earlier drafts of the regulations, the compliance cost for these regulations could amount to a total of several hundred million dollars spread over a period of several years. In July 1997, the Environmental Protection Agency (" U.S. EPA") promulgated the revisions to the National Ambient Air Quality Standards ("NAAQS") for ozone and particulate matter. Additionally, in 1998, the U.S. EPA published a nitrogen oxide ("NOx") State Implementation Plan ("SIP") call, which would require some 22 states, including many states where the Marathon Group has operations, to revise their SIPs to reduce NOx emissions. The effective date for any additional NOx control mechanisms to be installed will not be until May 2003. The impact of the revised NAAQS and NOx standards could be significant to Marathon, but the potential financial effects cannot be reasonably estimated until the states develop and implement their revised SIPs covering their NAAQS and NOx (particularly if it covers fuels) standards. 24 Water The Marathon Group maintains numerous discharge permits as required under the National Pollutant Discharge Elimination System program of the CWA, and has implemented systems to oversee its compliance efforts. In addition, the Marathon Group is regulated under OPA-90 which amended the CWA. Among other requirements, OPA-90 requires the owner or operator of a tank vessel or a facility to maintain an emergency plan to respond to discharges of oil or hazardous substances. Also, in case of such spills, OPA-90 requires responsible companies to pay removal costs and damages caused by them, provides for substantial civil penalties, and imposes criminal sanctions for violations of this law. Additionally, OPA-90 requires that new tank vessels entering or operating in domestic waters be double-hulled, and that existing tank vessels that are not double-hulled be retrofitted or removed from domestic service, according to a phase-out schedule. MAP leases on a long-term basis two single-hulled, 80,000- ton-deadweight tankers, which are primarily used for third-party delivery of foreign crude oil to the United States. The initial term of these charters expires in 2001 and 2002, subject to certain renewal options. In 1999, MAP "bare boat sub-chartered" these tankers to a third party operator, who will operate the vessels. The Coast Guard National Pollution Funds Center has granted permission to Marathon and Ashland to self-insure the financial responsibility amount for liability purposes for MAP's tankers, as provided in OPA-90. In addition, most of the barges, which are used in MAP's river transportation operations, meet the double-hulled requirements of OPA-90. Single-hulled barges owned and operated by MAP are in the process of being phased out. Displaced single-hulled barges will be divested or recycled into docks or floats within MAP's system. The Marathon Group operates facilities at which spills of oil and hazardous substances could occur. Several coastal states in which Marathon operates have passed state laws similar to OPA-90, but with expanded liability provisions, including provisions for cargo owners as well as ship owners. Marathon has implemented emergency oil response plans for all of its components and facilities covered by OPA-90. Solid Waste The Marathon Group continues to seek methods to minimize the generation of hazardous wastes in its operations. RCRA establishes standards for the management of solid and hazardous wastes. Besides affecting current waste disposal practices, RCRA also addresses the environmental effects of certain past waste disposal operations, the recycling of wastes and the regulation of underground storage tanks ("USTs") containing regulated substances. Since the U.S. EPA has not yet promulgated implementing regulations for all provisions of RCRA and has not yet made clear the practical application of all the implementing regulations it has promulgated, the ultimate cost of compliance cannot be accurately estimated. In addition, new laws are being enacted and regulations are being adopted by various regulatory agencies on a continuing basis, and the costs of compliance with these new rules can only be broadly appraised until their implementation becomes more accurately defined. Remediation The Marathon Group operates certain retail outlets where, during the normal course of operations, releases of petroleum products from USTs have occurred. Federal and state laws require that contamination caused by such releases at these sites be assessed and remediated to meet applicable standards. The enforcement of the UST regulations under RCRA has been delegated to the states which administer their own UST programs. The Marathon Group's obligation to remediate such contamination varies, depending upon the extent of the releases and the stringency of the laws and regulations of the states in which it operates. A portion of these remediation costs may be recoverable from state UST reimbursement funds once the applicable deductibles have been satisfied. Accruals for remediation expenses and associated reimbursements are established for sites where contamination has been determined to exist and the amount of associated costs is reasonably determinable. As a general rule, Marathon and Ashland retained responsibility for certain costs of remediation arising out of the prior ownership and operation of those businesses transferred to MAP. Such continuing responsibility, 25 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/Kobe Steel Company ("USS/Kobe"), USS- POSCO Industries ("USS-POSCO"), PRO-TEC Coating Company ("PRO-TEC"), Transtar, Inc. ("Transtar"), Clairton 1314B Partnership, VSZ U. S. Steel, s. r.o. and RTI International Metals, Inc. ("RTI"). U. S. Steel Group revenues as a percentage of total USX consolidated revenues were approximately 22% in 1998, 31% in 1997 and 29% in 1996. The following table sets forth the total revenues of the U. S. Steel Group for each of the last three years.
Revenues (Millions) 1998 1997 1996 ------ ------ ------ Sales by product: Sheet and Semi-finished Steel Products... $3,501 $3,820 $3,677 Tubular, Plate, and Tin Mill Products.... 1,513 1,754 1,635 Raw Materials (Coal, Coke and Iron Ore).. 591 671 757 Other (a)................................ 578 570 466 Income from affiliates..................... 46 69 66 Gain on disposal of assets................. 54 57 16 Gain on affiliate stock offering (b)....... - - 53 ------ ------ ------ TOTAL U. S. STEEL GROUP REVENUES........... $6,283 $6,941 $6,670 ====== ====== ======
- ----------- (a) Includes revenue from the sale of steel production by-products, engineering and consulting services, real estate development and resource management. (b) For further details, see Note 5 to the U. S. Steel Group Financial Statements. For additional financial information about USX's industry segments, see "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - 10. Group and Segment Information" on page U -13. The total number of active U. S. Steel Group employees at year-end 1998 was 19,169. Most hourly and certain salaried employees are represented by the United Steelworkers of America ("USWA"). U. S. Steel's contract with the USWA, covering approximately 15,000 employees, expires on August 1, 1999. U. S. Steel's ability to negotiate an acceptable labor contract is essential to ongoing operations. Any labor interruptions could have an adverse effect on operations, financial results and cash flow. U. S. Steel Mining Company, LLC ("U. S. Steel Mining") entered into a five year contract with the United Mine Workers of America ("UMWA"), effective January 1, 1998, covering approximately 1,000 employees. This agreement follows that of other major mining companies. Steel Industry Background and Competition The domestic steel industry is cyclical and highly competitive and is affected by excess world capacity which has restricted price increases during periods of economic growth and led to price decreases during economic contraction. In addition, the domestic steel industry, including U. S. Steel, faces competition from producers of materials such as aluminum, cement, composites, glass, plastics and wood in many markets. U. S. Steel is the largest steel producer in the United States and competes with many domestic and foreign steel producers. Domestic competitors include integrated producers which, like U. S. Steel, use iron ore and coke as 27 primary raw materials for steel production, and mini-mills which primarily use steel scrap and, increasingly, iron bearing feedstocks as raw materials. Mini- mills generally produce a narrower range of steel products than integrated producers, but typically enjoy certain competitive advantages such as lower capital expenditures for construction of facilities and non-unionized work forces with lower employment costs and more flexible work rules. An increasing number of mini-mills utilize thin slab casting technology to produce flat-rolled products, and additional domestic flat-rolled mini-mill capacity was added in 1998. Through the use of thin slab casting, mini-mill competitors are increasingly able to compete directly with integrated producers of flat-rolled products. Depending on market conditions, the additional production generated by flat-rolled mini-mills could have an adverse effect on U. S. Steel's selling prices and shipment levels. Steel imports to the United States accounted for an estimated 30%, 24% and 23% of the domestic steel market for the years 1998, 1997 and 1996, respectively. In November 1998, steel imports accounted for an estimated 37% of the domestic steel market. Steel imports of hot rolled and cold rolled steel increased 42% in 1998, compared to 1997. Steel imports of plates increased 75% in 1998, compared to 1997. Foreign competitors typically have lower labor costs, and are often owned, controlled or subsidized by their governments, allowing their production and pricing decisions to be influenced by political and economic policy considerations as well as prevailing market conditions. Continued high levels of imported steel will have an adverse affect on future market prices and demand levels for domestic steel. On September 30, 1998, U. S. Steel joined with 11 other producers and the USWA to file trade cases against Japan, Russia, and Brazil. Those filings contend that millions of tons of unfairly traded hot-rolled carbon sheet products have caused serious injury to the domestic steel industry through rapidly falling prices and lost business. The U. S. International Trade Commission ("ITC"), in its preliminary November 1998, determination, found the domestic steel industry was being threatened with material injury as a result of imports of hot-rolled carbon sheet products from these three countries. This preliminary determination of injury is subject to further investigation by the ITC and U.S. Department of Commerce ("Commerce"). On February 12, 1999, Commerce announced preliminary anti-dumping duty margins on hot rolled imports from Japan (ranging from approximately 25% to 67%) and Brazil (ranging from approximately 50% to 71%) and preliminary countervailing duty margins on imports from Brazil (ranging from more than 6% to more than 9%). On February 22, 1999, Commerce announced preliminary anti-dumping duty margins on hot rolled imports from Russia (ranging from approximately 71% to 217%). However, Commerce announced at the same time that it had initialed an agreement with Russia to suspend the anti-dumping investigation on hot rolled imports from Russia. This agreement, if approved, allows the annual import of 750,000 metric tons of hot rolled steel product from Russia at a minimum price ranging from $255 to $280 FOB per metric ton. U. S. Steel is opposed to this agreement and is reviewing all available remedies to challenge this agreement. U. S. Steel will pursue the hot rolled import case against Russia to obtain the issuance of final determinations by Commerce and the ITC. The preliminary injury determination and the preliminary anti-dumping and countervailing duty margin determinations are subject to further investigation by the ITC and Commerce. It is presently expected that Commerce will issue its final anti-dumping and countervailing duty margin determinations on April 28, 1999, and the ITC will issue its final injury determination on June 2, 1999. In addition to announcing the preliminary anti-dumping duty margins on hot rolled imports from Russia and the proposed suspension agreement on those imports, Commerce also announced on February 22, 1999 that it had initialed an agreement with Russia to restrict imports of major steel products, other than hot rolled and cut-to-length plate, from Russia. U. S. Steel is opposed to this agreement. Plate products accounted for 10%, 8% and 9% of U. S. Steel Group shipments in 1998, 1997 and 1996, respectively. On November 5, 1996, two other domestic steel plate producers filed antidumping cases with Commerce and the ITC asserting that People's Republic of China, the Russian Federation, Ukraine, and South Africa engaged in unfair trade practices with respect to the export of carbon cut-to-length plate to the United States. U. S. Steel Group has supported these cases. Commerce issued final affirmative determination of dumping for each country in October 1997, finding substantial dumping margins on cut-to-length steel plate imports from these countries. In December 1997, the ITC voted unanimously that the United States industry producing cut-to-length carbon steel plate was injured due to imports of dumped cut-to-length plate from the four countries. The 28 United States has negotiated suspension agreements that limit imports of cut-to- length carbon steel plate from the four countries to a total of approximately 440,000 tons per year for the next five years, a reduction of about two-thirds from 1996 import levels, and provide for an average 10-15% increase in import prices to remove the injurious impact of the imports. Any violation or abrogation of the suspension agreements will result in imposition of the dumping duties found by Commerce. On February 16, 1999, U. S. Steel, along with Bethlehem Steel Corporation, IPSCO, Inc., Gulf States Steel Inc., Tuscaloosa Steel Company, and the USWA, filed trade cases against South Korea, France, Italy, Macedonia, India, the Czech Republic, Japan, and Indonesia, contending that dumped and subsidized cut- to-length plate are being imported into the United States from these countries. The U. S. Steel Group's businesses are subject to numerous federal, state and local laws and regulations relating to the storage, handling, emission and discharge of environmentally sensitive materials. U. S. Steel believes that its major domestic integrated steel competitors are confronted by substantially similar conditions and thus does not believe that its relative position with regard to such other competitors is materially affected by the impact of environmental laws and regulations. However, the costs and operating restrictions necessary for compliance with environmental laws and regulations may have an adverse effect on U. S. Steel's competitive position with regard to domestic mini-mills and some foreign steel producers and producers of materials which compete with steel, which may not be required to undertake equivalent costs in their operations. For further information, see Environmental Proceedings on page 40, Legal Proceedings on page 40, and Management's Discussion and Analysis of Environmental Matters, Litigation and Contingencies on page S-30. Business Strategy U. S. Steel produces raw steel at Gary Works in Indiana, Mon Valley Works in Pennsylvania and Fairfield Works in Alabama. U. S. Steel has responded to competition resulting from excess steel industry capability by eliminating less efficient facilities, modernizing those that remain and entering into joint ventures, all with the objective of focusing production on higher value-added products, where superior quality and special characteristics are of critical importance. These products include bake hardenable steels and coated sheets for the automobile and appliance industries, laminated sheets for the manufacture of motors and electrical equipment, improved tin mill products for the container industry and oil country tubular goods. Modernization projects over the past two years support U. S. Steel's objectives of providing value-added products. These projects included the dualine coating lines at Fairfield Works and Mon Valley Works for the construction market; the cold mill upgrades at Gary Works and Mon Valley Works; the second hot-dip galvanized sheet line at PRO-TEC and the Fairless Works galvanizing line upgrade for the automotive market. In 1998, U. S. Steel began the conversion of the Fairfield Works bloom caster and pipemill to use round semifinished steel for tubular production. This project is planned to come on line in 1999 and will enhance U. S. Steel's ability to serve the tubular goods markets. Additional modernization projects in 1999 include the new 64" pickle line and upgrades to the cold mill at Mon Valley Works, the upgrade of the hot strip mill coilers and replacement of coke battery thruwalls at Gary Works, the basic oxygen furnace emissions project at Fairfield Works, and the new customer service center in Detroit to support our automotive business. These projects support U. S. Steel's objective of providing quality value-added products and services to customers. In addition to the modernization of its production facilities, USX has entered into a number of joint ventures with domestic and foreign partners to take advantage of market or manufacturing opportunities in the sheet, tin mill, tubular, bar and plate consuming industries. In November 1998, operations commenced on the newly constructed hot-dip galvanized sheet line at PRO-TEC. This second line expanded PRO-TEC's capacity by nearly 400,000 tons a year to 1.0 million tons annually. The increase in capacity will enable U. S. Steel to offer additional value-added products to the automotive industry. Also in 1998, Olympic Laser Processing L.L.C. (a 50-50 joint venture between U. S. Steel Group and Olympic Steel, Inc.) completed construction of the world's first fully automated laser blank welding facility. Laser welded blanks are used in the automotive industry for an increasing number of body fabrication applications. Commercial operations will begin in 1999 once the facility 29 becomes certified for specific parts with the automotive manufacturers. U. S. Steel continues to pursue lower manufacturing cost objectives through continuing cost improvement programs. These initiatives include, but are not limited to, reduced production cycle time, improved yields, increased customer orientation and improved process control. U. S. Steel Segment Operations U. S. Steel operates plants which produce steel products in a variety of forms and grades. Raw steel production was 11.2 million tons in 1998, compared with 12.3 million tons in 1997 and 11.4 million tons in 1996. Raw steel produced was nearly 100% continuous cast in 1998, 1997 and 1996. Raw steel production averaged 88% of capability in 1998, compared with 97% of capability in 1997 and 89% of capability in 1996. U.S. Steel's stated annual raw steel production capability was 12.8 millions tons for 1998 (7.7 million at Gary Works, 2.8 million at Mon Valley Works and 2.3 million at Fairfield Works). Steel shipments were 10.7 million tons in 1998, 11.6 million tons in 1997 and 11.4 million tons in 1996. U. S. Steel Group shipments comprised approximately 10.3% of domestic steel shipments in 1998. Exports accounted for approximately 4% of U. S. Steel Group shipments in 1998, 1997 and 1996. 30 The following tables set forth significant U. S. Steel shipment data by major markets and products for each of the last three years. Such data do not include shipments by joint ventures and other affiliates of USX accounted for by the equity method.
Steel Shipments By Market and Product Sheets Tubular, & Semi-finished Plate & Tin Major Market - 1998 Steel Mill Products Total - -------------------- --------------- ------------- ------ (Thousands of Net Tons) Steel Service Centers................... 1,867 696 2,563 Further Conversion: Trade Customers........................ 706 434 1,140 Joint Ventures......................... 1,473 - 1,473 Transportation (Including Automotive)... 1,438 347 1,785 Containers.............................. 222 572 794 Construction and Construction Products.. 809 178 987 Oil, Gas and Petrochemicals............. - 509 509 Export.................................. 226 156 382 All Other............................... 867 186 1,053 ----- ----- ------ TOTAL.................................. 7,608 3,078 10,686 ===== ===== ====== Major Market - 1997 - -------------------- (Thousands of Net Tons) Steel Service Centers................... 2,020 726 2,746 Further Conversion: Trade Customers........................ 859 519 1,378 Joint Ventures......................... 1,568 - 1,568 Transportation (Including Automotive)... 1,503 255 1,758 Containers.............................. 216 640 856 Construction and Construction Products.. 889 105 994 Oil, Gas and Petrochemicals............. - 810 810 Export.................................. 236 217 453 All Other............................... 879 201 1,080 ----- ----- ------ TOTAL.................................. 8,170 3,473 11,643 ===== ===== ====== Major Market - 1996 - ------------------- (Thousands of Net Tons) Steel Service Centers................... 2,155 676 2,831 Further Conversion: Trade Customers........................ 848 379 1,227 Joint Ventures......................... 1,542 - 1,542 Transportation (Including Automotive)... 1,391 330 1,721 Containers.............................. 238 636 874 Construction and Construction Products.. 733 132 865 Oil, Gas and Petrochemicals............. - 746 746 Export.................................. 303 190 493 All Other............................... 886 187 1,073 ----- ----- ------ TOTAL.................................. 8,096 3,276 11,372 ===== ===== ======
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 USS/Kobe(a)...................... Bar; Tubular PRO-TEC(a)....................... Galvanized Sheet VSZ U. S. Steel s. r.o.(a)....... Tin Mill Clairton......................... Coke Clairton 1314B Partnership(a).... Coke Transtar(a)...................... Transportation RTI(a)........................... Titanium Metal Minntac.......................... Taconite Pellets U.S. Steel Mining................ Coal Resource Management.............. Administration of Mineral, Coal and Timber Properties USX Realty Development........... Real estate sales, leasing and management USX Engineers and Consultants.... Engineering and Consulting Services - ----------- (a) Equity affiliate USX and its wholly owned entity, U. S. Steel Mining, have domestic coal properties with demonstrated bituminous coal reserves of approximately 790 million net tons at year-end 1998 compared with approximately 799 million net tons at year-end 1997. The decrease in 1998 was due to production, leasing activity and engineering revisions. The reserves are of metallurgical and steam quality in approximately equal proportions. They are located in Alabama, Illinois, Indiana, Pennsylvania, Tennessee and West Virginia. Approximately 96% of the reserves are owned, and the rest are leased. The leased properties are covered by a lease which expires in 2005. U. S. Steel Mining's coal production was 7.3 million tons in 1998, compared with 7.5 million tons in 1997 and 7.3 million tons in 1996. Coal shipments were 7.7 million tons in 1998, compared with 7.8 million tons in 1997 and 7.1 million tons in 1996. USX controls domestic iron ore properties having demonstrated iron ore reserves in grades subject to beneficiation processes in commercial use by U. S. Steel of approximately 739 million tons at year-end 1998, substantially all of which are iron ore concentrate equivalents available from low-grade iron-bearing materials. All demonstrated reserves are located in Minnesota. Approximately 32% of these reserves are owned and the remaining 68% are leased. Most of the leased reserves are covered by a lease expiring in 2058 and the remaining leases have expiration dates ranging from 2021 to 2026. U. S. Steel's iron ore operations at Mt. Iron, Minnesota ("Minntac") produced 15.8 million net tons of taconite pellets in 1998, 16.3 million net tons in 1997 and 15.1 million net tons in 1996. Taconite pellet shipments were 15.4 million tons in 1998, compared with 16.5 million tons in 1997 and 15.0 million tons in 1996. USX's Resource Management administers the remaining mineral lands and timber lands of U. S. Steel and is responsible for the lease or sale of these lands and their associated resources, which encompass approximately 300,000 acres of surface rights and 1,500,000 acres of mineral rights in 13 states. USX Engineers and Consultants, Inc. sells technical services worldwide to the steel, mining, chemical and related industries. Together with its subsidiary companies, it provides engineering and consulting services for facility expansions and modernizations, operating improvement projects, integrated computer systems, coal and lubrication testing and environmental projects. USX Realty Development develops real estate for sale or lease and manages retail and office space, business and industrial parks and residential and recreational properties. 32 For significant operating data for U. S. Steel Operations for each of the last five years, see "USX Consolidation Financial Statements and Supplementary Data - Five-Year Operating Summary - U. S. Steel Group" on page U-37. USX participates directly and through subsidiaries in a number of joint ventures included in the U. S. Steel segment operations. All of the joint ventures are accounted for under the equity method. Certain of the joint ventures and other investments are described below, all of which are at least 50% owned except Transtar, RTI, Acero Prime and the Clairton 1314B Partnership. For financial information regarding joint ventures and other investments, see "Financial Statements and Supplementary Data - Notes to Financial Statements - 16. Investments and Long-term Receivables" for the U. S. Steel Group on page S- 15. USX and Pohang Iron & Steel Co., Ltd. ("POSCO") of South Korea participate in a joint venture, USS-POSCO, which owns and operates the former U. S. Steel Pittsburg, California Plant. The joint venture markets high quality sheet and tin products, principally in the western United States market area. USS-POSCO produces cold-rolled sheets, galvanized sheets, tin plate and tin-free steel. USS-POSCO's annual rated shipment capacity is 1.4 million tons with hot bands principally provided by U. S. Steel and POSCO. Total shipments by USS-POSCO were approximately 1.5 million tons in 1998. USX and Kobe Steel, Ltd. ("Kobe") of Japan participate in a joint venture, USS/Kobe, which owns and operates the former U. S. Steel Lorain, Ohio Works. The joint venture produces raw steel for the manufacture of bar and tubular products. Bar products are sold by USS/Kobe while U. S. Steel has sales and marketing responsibilities for tubular products. Total shipments by USS/Kobe in 1998 were approximately 1.4 million tons. USS/Kobe's contract with the USWA, covering approximately 2,300 employees, expires on August 1, 1999. USS/Kobe's annual raw steel capability is 2.6 million tons with iron ore and coke provided primarily by U. S. Steel. Raw steel production was approximately 1.7 million tons in 1998. USX and Kobe also participate in another joint venture, PRO-TEC, which owns and operates two hot-dip galvanizing lines in Leipsic, Ohio. The first galvanizing line commenced operations in early 1993. In November 1998, operations commenced on a second hot-dip galvanized sheet line which expanded PRO-TEC's capacity nearly 400,000 tons a year to 1.0 million tons annually. PRO- TEC produced approximately 633,000 prime tons of galvanized steel in 1998 on the original facility. USX and Worthington Industries Inc. participate in a joint venture known as Worthington Specialty Processing which operates a steel processing facility in Jackson, Michigan. The plant is operated by Worthington Industries, Inc. and is dedicated to serving U. S. Steel customers. The facility contains state-of-the- art technology capable of processing master steel coils into both slit coils and sheared first operation blanks including rectangles, trapezoids, parallelograms and chevrons. It is designed to meet specifications for the automotive, appliance, furniture and metal door industries. The joint venture processes material sourced by U. S. Steel, with a processing capacity of 600,000 tons annually. In 1998, Worthington Specialty Processing processed approximately 411,000 tons. USX and Rouge Steel Company participate in Double Eagle Steel Coating Company ("DESCO"), a joint venture which operates an electrogalvanizing facility located in Dearborn, Michigan. This facility enables U. S. Steel to further supply the automotive demand for steel with corrosion resistant properties. The facility can coat both sides of sheet steel with zinc or alloy coatings and has the capability to coat one side with zinc and the other side with alloy. Capacity is 870,000 tons of electrogalvanized steel annually, with availability of the facility shared equally by the partners. In 1998, DESCO produced approximately 861,000 tons of electrogalvanized steel. USX and Olympic Steel, Inc. formed a 50-50 joint venture in 1997 to process laser welded sheet steel blanks at a facility in Van Buren, Michigan. The joint venture conducts business as Olympic Laser Processing L.L.C. Startup began in 1998. Effective capacity is approximately 2.4 million parts annually. Laser welded blanks are used in the automotive industry for an increasing number of body fabrication applications. U. S. Steel will be the venture's primary customer and will be responsible for marketing the laser welded blanks. 33 USX owns a 46% interest in Transtar, which in 1988 purchased the former domestic transportation businesses of USX including railroads, a dock company, USS Great Lakes Fleet, Inc. and Warrior & Gulf Navigation Company. Blackstone Transportation Partners, L.P. and Blackstone Capital Partners L.P., both affiliated with The Blackstone Group, together own 53% of Transtar, and the senior management of Transtar owns the remaining 1%. USX and VSZ a.s., formed a 50-50 joint venture in Kosice, Slovakia, for the production and marketing of tin mill products to serve an emerging Central European market. In February 1998, the joint venture, doing business as VSZ U. S. Steel, s. r.o., took over ownership and commenced operation of an existing tin mill facility (VSZ's Ocel plant in Kosice) with an annual production capacity of 140,000 metric tons. In 1997, USX entered into the Clairton 1314B Partnership, a strategic partnership with two limited partners to acquire an interest in three coke batteries at Clairton Works. The partnership has an annual coke production capability of 1.5 million tons. In 1998, production of coke totaled 1.5 million tons. U. S. Steel, the general partner, owns a 9.78% interest in the Clairton 1314B Partnership. In 1997, USX, through its subsidiary, United States Steel Export Company de Mexico, along with Feralloy Mexico, S.R.L. de C.V., and Intacero de Mexico, S.A. de C.V., formed a joint venture for a slitting and warehousing facility in San Luis Potosi, Mexico. The joint venture will conduct business as Acero Prime and will service primarily the appliance industry. Construction was completed in 1998 with operations commencing in early 1999. USX owns a 26% interest in RTI (formerly RMI Titanium Company), a leading producer of titanium metal products. RTI is accounted for under the equity method (for additional information, see Note 5 to the U. S. Steel Group Financial Statements). RTI is a publicly traded company listed on the New York Stock Exchange. In December 1996, USX issued $117 million of 6 3/4% Exchangeable Notes Due February 1, 2000 ("Indexed Debt") indexed to the price of RTI common stock. At maturity, USX must exchange these notes for shares of RTI common stock, or redeem the notes for the equivalent amount of cash. For additional information on Indexed Debt, see Note 17, footnote (d), to the USX Consolidated Financial Statements on page U-20. Property, Plant and Equipment Additions For property, plant and equipment additions, including capital leases, see "Management's Discussion and Analysis of Financial Condition, Cash Flows and Liquidity - Capital Expenditures" for the U. S. Steel Group on page S-28. Environmental Matters The U. S. Steel Group maintains a comprehensive environmental policy overseen by the Public Policy Committee of the USX Board of Directors. The Environmental Affairs organization has the responsibility to ensure that the U. S. Steel Group's operating organizations maintain environmental compliance systems that are in accordance with applicable laws and regulations. The Executive Environmental Committee, which is comprised of officers of the U. S. Steel Group, is charged with reviewing its overall performance with various environmental compliance programs. Also, the U. S. Steel Group, largely through the American Iron and Steel Institute, continues its involvement in the negotiation of various air, water, and waste regulations with federal, state and local governments to assure the implementation of cost effective pollution reduction strategies. The businesses of the U. S. Steel Group are subject to numerous federal, state and local laws and regulations relating to the protection of the environment. These environmental laws and regulations include the Clean Air Act ("CAA") with respect to air emissions; the Clean Water Act ("CWA") with respect to water discharges; the Resource Conservation and Recovery Act ("RCRA") with respect to solid and hazardous waste treatment, storage and disposal; and the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with respect to releases and remediation of hazardous substances. In addition, all states where the 34 U. S. Steel Group operates have similar laws dealing with the same matters. These laws are constantly evolving and becoming increasingly stringent. The ultimate impact of complying with existing laws and regulations is not always clearly known or determinable due in part to the fact that certain implementing regulations for laws such as RCRA and the CAA have not yet been promulgated or in certain instances are undergoing revision. These environmental laws and regulations, particularly the CAA, could result in substantially increased capital, operating and compliance costs. For a discussion of environmental capital expenditures and the cost of compliance for air, water, solid waste and remediation, see "Management's Discussion and Analysis of Environmental Matters, Litigation and Contingencies" on page S-30 and "Legal Proceedings" for the U. S. Steel Group on page 40. The U. S. Steel Group has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. In recent years, these expenditures have been mainly for process changes in order to meet CAA obligations, although ongoing compliance costs have also been significant. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the U. S. Steel Group's products and services, operating results will be adversely affected. U. S. Steel believes that its major domestic integrated steel competitors are confronted by substantially similar conditions and thus does not believe that its relative position with regard to such other competitors is materially affected by the impact of environmental laws and regulations. However, the costs and operating restrictions necessary for compliance with environmental laws and regulations may have an adverse effect on U. S. Steel's competitive position with regard to domestic mini-mills and some foreign steel producers and producers of materials which compete with steel, which may not be required to undertake equivalent costs in their operations. In addition, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities and its production methods. For further information, see "Legal Proceedings" on page 40, and "Management's Discussion and Analysis of Environmental Matters, Litigation and Contingencies" on page S-30. Air The CAA imposed more stringent limits on air emissions, established a federally mandated operating permit program and allowed for enhanced civil and criminal enforcement sanctions. The principal impact of the CAA on the U. S. Steel Group is on the coke-making and primary steel-making operations of U. S. Steel, as described in this section. The coal mining operations and sales of U. S. Steel Mining may also be affected. The CAA requires the regulation of hazardous air pollutants and development and promulgation of Maximum Achievable Control Technology ("MACT") Standards. The amendment to the Chrome Electroplating MACT to include the chrome processes at Gary and Fairless and the Pickling MACT are expected in 1999. The EPA is required to promulgate MACT standards for integrated iron and steel plants and taconite iron ore processing by November 15, 2000. The impact of these new standards could be significant to U. S. Steel, but the cost cannot be reasonably estimated until the rules are finalized. The CAA specifically addressed the regulation and control of coke oven batteries. The National Emission Standard for Hazardous Air Pollutants for coke oven batteries was finalized in October 1993, setting forth the MACT standard and, as an alternative, a Lowest Achievable Emission Rate ("LAER") standard. Effective January 1998, U. S. Steel elected to comply with the LAER standards. U. S. Steel believes it will be able to meet the current LAER standards. The LAER standards will be further revised in 2010 and additional health risk-based standards are expected to be adopted in 2020. EPA is in the process of developing the Phase II Coke MACT for pushing, quenching and battery stacks which is scheduled to be finalized in 2000. This MACT will impact U. S. Steel, but the cost cannot be reasonably estimated at this time. The CAA also mandates the nationwide reduction of emissions of acid rain precursors (sulfur dioxide and nitrogen oxides) from fossil fuel-fired electrical utility plants. Specified emission reductions are to be achieved by 2000. Phase I began on January 1, 1995, and applies to 110 utility plants specifically listed in the law. Phase II, which begins on January 1, 2000, will apply to other utility plants which may be regulated under the law. 35 U. S. Steel, like all other electricity consumers, will be impacted by increased electrical energy costs that are expected as electric utilities seek rate increases to comply with the acid rain requirements. In September 1997, the EPA adopted revisions to the National Ambient Air Quality Standards for ozone and particulate matter which are significantly more stringent than prior standards. EPA has issued a Nitrogen Oxide ("NOx") State Implementation Plan ("SIP") Call to require certain states to develop plans to reduce NOx emissions focusing on large utility and industrial boilers. The impact of these revised standards could be significant to U. S. Steel, but the cost cannot be reasonably estimated until the final revised standards and the NOx SIP Call are issued and, more importantly, the states implement their State Implementation Plans covering their standards. In 1998, all of the coal production of U. S. Steel Mining was metallurgical coal, which is primarily used in coke production. While USX believes that the new environmental requirements for coke ovens will not have an immediate effect on U. S. Steel Mining, the requirements may encourage development of steelmaking processes that reduce the usage of coke. The new ozone and particulate matter standards could be significant to U. S. Steel Mining, but the cost is not capable of being reasonably estimated until rules are proposed or finalized. Water The U. S. Steel Group maintains the necessary discharge permits as required under the National Pollutant Discharge Elimination System program of the CWA, and it is in compliance with such permits. In 1998, USX entered into a consent decree with the Environmental Protection Agency ("EPA") which resolved alleged violations of the Clean Water Act National Pollution Discharge Elimination System ("NPDES") permit at Gary Works and provides for a sediment remediation project for a section of the Grand Calumet River that runs through Gary Works. Contemporaneously, USX entered into a consent decree with the public trustees which resolves potential liability for natural resource damages on the same section of the Grand Calumet River. USX has agreed to pay civil penalties of $2.9 million for the alleged water act violations and $0.5 million in natural resource damages assessment costs, which will be paid in 1999. In addition, USX will pay the EPA $1 million at the end of the remediation project for future monitoring costs. During the negotiations leading up to the settlement with EPA, capital improvements were made to upgrade plant systems to comply with the NPDES requirements. The sediment remediation project is an approved final interim measure under the corrective action program for Gary Works and is expected to cost approximately $30 million over the next six years. Estimated remediation and monitoring costs for this project have been accrued. Solid Waste The U. S. Steel Group continues to seek methods to minimize the generation of hazardous wastes in its operations. RCRA establishes standards for the management of solid and hazardous wastes. Besides affecting current waste disposal practices, RCRA also addresses the environmental effects of certain past waste disposal operations, the recycling of wastes and the regulation of storage tanks. Corrective action under RCRA related to past waste disposal activities is discussed below under "Remediation." Remediation A significant portion of the U. S. Steel Group's currently identified environmental remediation projects relate to the remediation of former and present operating locations. These projects include the remediation of the Grand Calumet River (discussed above), and the closure and remediation of permitted hazardous and non-hazardous waste landfills. The U. S. Steel Group is also involved in a number of remedial actions under CERCLA, RCRA and other federal and state statutes, and it is possible that additional matters may come to its attention which may require remediation. For a discussion of remedial actions related to the U. S. Steel Group, see "Legal Proceedings - U. S. Steel Group Environmental Proceedings." 36 Item 2. PROPERTIES The location and general character of the principal oil and gas properties, plants, mines, pipeline systems and other important physical properties of USX are described in the Item 1. Business section of this document. Except for oil and gas producing properties, which generally are leased, or as otherwise stated, such properties are held in fee. The plants and facilities have been constructed or acquired over a period of years and vary in age and operating efficiency. At the date of acquisition of important properties, titles were examined and opinions of counsel obtained, but no title examination has been made specifically for the purpose of this document. The properties classified as owned in fee generally have been held for many years without any material unfavorably adjudicated claim. Several steel production facilities and interests in two liquefied natural gas tankers are leased. See "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - 12. Leases" on page U-17. The basis for estimating oil and gas reserves is set forth in "Consolidated Financial Statements and Supplementary Data - Supplementary Information on Oil and Gas Producing Activities - Estimated Quantities of Proved Oil and Gas Reserves" on pages U-32 and U-33. USX believes that its surface and mineral rights covering reserves are adequate to assure the basic legal right to extract the minerals, but may not yet have obtained all governmental permits necessary to do so. Unless otherwise indicated, all reserves shown are as of December 31, 1998. Item 3. LEGAL PROCEEDINGS USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments related to the Marathon Group and the U. S. Steel Group involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are included below in this discussion. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the consolidated financial statements and/or to the financial statements of the applicable group. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably. Marathon Group Environmental Proceedings The following is a summary of proceedings attributable to the Marathon Group that were pending or contemplated as of December 31, 1998, under federal and state environmental laws. Except as described herein, it is not possible to predict accurately the ultimate outcome of these matters; however, management's belief set forth in the first paragraph under Item 3. "Legal Proceedings" above takes such matters into account. Claims under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") and related state acts have been raised with respect to the cleanup of various waste disposal and other sites. CERCLA is intended to expedite the cleanup of hazardous substances without regard to fault. Potentially responsible parties ("PRPs") for each site include present and former owners and operators of, transporters to and generators of the substances at the site. Liability is strict and can be joint and several. Because of various factors including the ambiguity of the regulations, the difficulty of identifying the responsible parties for any particular site, the complexity of determining the relative liability among them, the uncertainty as to the most desirable remediation techniques and the amount of damages and cleanup costs and the time period during which such costs may be incurred, USX is unable to reasonably estimate its ultimate cost of compliance with CERCLA. 37 Projections, provided in the following paragraphs, of spending for and/or timing of completion of specific projects are forward-looking statements. These forward-looking statements are based on certain assumptions including, but not limited to, the factors provided in the preceding paragraph. To the extent that these assumptions prove to be inaccurate, future spending for, or timing of completion of environmental projects may differ materially from those stated in forward-looking statements. At December 31, 1998, USX had been identified as a PRP at a total of 17 CERCLA waste sites related to the Marathon Group. Based on currently available information, which is in many cases preliminary and incomplete, USX believes that its liability for cleanup and remediation costs in connection with each of these sites will be under $1 million per site, and most will be under $100,000. In addition, there are 8 waste sites related to the Marathon Group where USX has received information requests or other indications that USX may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability. There are also 92 additional sites, excluding retail marketing outlets, related to the Marathon Group where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. Of these sites, 16 were associated with properties conveyed to MAP by Ashland which has retained liability for all costs associated with remediation. Based on currently available information, which is in many cases preliminary and incomplete, the Marathon Group believes that its liability for cleanup and remediation costs in connection with 14 of these sites will be under $100,000 per site, another 32 sites have potential costs between $100,000 and $1 million per site, 9 sites may involve remediation costs between $1 million and $5 million per site. In addition, cleanup and remediation at one site, described in the following paragraph is expected to cost more than $5 million. There are 20 sites with insufficient information to estimate any remediation costs. There is one site that involves a remediation program in cooperation with the Michigan Department of Environmental Quality at a closed and dismantled refinery site located near Muskegon, Mich. During the next 10 to 20 years, the Marathon Group anticipates spending between $8 million and $12 million at this site. Expenditures for 1999 are expected to be approximately $570,000. Additionally, negotiations are taking place with Michigan Department of Environmental Quality to eventually perform a risk-based closure on this site. As discussed in Management's Discussion and Analysis of Environmental Matters, Litigation and Contingencies, on page U-47, in October 1998, the National Enforcement Investigations Center and Region V of the United States Environmental Protection Agency ("U.S. EPA") conducted a multi-media inspection of MAP's Detroit refinery. Subsequently, in November 1998, Region V and Illinois Environmental Protection Agency conducted a multi-media inspection of MAP's Robinson refinery. These inspections covered compliance with the Clean Air Act (the Act, as amended by the 1990 Amendments, the "CAA") including New Source Performance Standards, Prevention of Significant Deterioration, and the National Emission Standards for Hazardous Air Pollutants for Benzene, the Clean Water Act (Permit exceedances for the Waste Water Treatment Plant), reporting obligations under the Emergency Planning and Community Right to Know Act and the handling of process waste. Although MAP has been advised as to certain compliance issues, including one contested Notice of Violation regarding MAP's Detroit refinery discussed below, it is not known when complete findings on the results of the inspections will be issued. In connection with the multi-media inspection at MAP's Detroit refinery, in December 1998, U.S. EPA, Region V issued a Notice of Violation against the refinery alleging that, as a result of "stack tests" conducted in 1992, 1995, 1997 and 1998, at the fluid catalytic cracking unit and the fluid catalytic cracking unit carbon monoxide boiler, the refinery exceeded the emission limits for particulate matter and sulfur dioxide thereby violating the CAA. In January 1997, a Notice of Violation ("NOV") was served by the Illinois Environmental Protection Agency on the Marathon Group, including Marathon Oil Company (Robinson Refinery and Brand Marketing, now operating organizations within MAP), Marathon Pipe Line Company (now Marathon Ashland Pipe Line LLC) and 38 Emro Marketing Company (now Speedway SuperAmerica LLC), consolidating various alleged violations of federal and state environmental laws and regulations relating to air, water and soil contamination. Based on the ongoing negotiations with Illinois Environmental Protection Agency, a penalty in excess of $100,000 may be assessed against each of these companies. Negotiations continue with the State Attorney General's office and the Illinois Environmental Protection Agency to resolve these alleged violations. In two of the matters, the State Attorney General's office has instituted civil actions against Speedway SuperAmerica LLC with regards to a UST site in Chicago, Illinois and violations of the CAA dealing with the installation, testing and reporting of Stage II Vapor Recovery Systems in certain station sites in Illinois. In October 1996, U.S. EPA Region 5 issued a Finding of Violation against the Robinson refinery alleging that it does not qualify for an exemption under the National Emission Standards for Benzene Waste Operations pursuant to the CAA, because the refinery's Total Annual Benzene releases exceed the limitation of 10 megagrams per year, and as a result, the refinery is in violation of the emission control, record keeping, and reports requirements. The Marathon Group contends that it does qualify for the exemption. However, in February 1999, the U.S. Department of Justice ("DOJ") in Chicago, Illinois, filed a civil complaint in the U.S. District Court for the Southern District of Illinois alleging six counts of violations of the CAA with respect to the benzene releases. In connection with the formation of MAP all three of the refineries owned by Ashland Inc. ("Ashland") were conveyed effective January 1, 1998, to MAP or its subsidiaries. Ashland reported in its 1997 Form 10-K, that during 1997, the U.S. EPA completed comprehensive inspections of these three refineries, prior to formation of MAP. These inspections evaluated Ashland's compliance with federal environmental laws and regulations at those facilities. Ashland reported in its 1998 Form 10-K, that during 1998, the U.S. EPA and Ashland reached an agreement with respect to the alleged violations discovered during those inspections. Ashland reported that it agreed to pay $5.864 million in civil penalties. Ashland also reported that it would under take specific remedial projects and improvements at the refinery sites, as well as, a number of supplemental environmental projects involving improvements to the facilities' operations. Ashland reported that the total cost of these projects is expected to be $26 million. Under the terms of its agreements with MAP, Ashland has retained responsibility for matters arising out of these inspections, including commencement of work as soon as practical on certain enumerated projects. Posted Price Litigation The Marathon Group, alone or with other energy companies, has been named in a number of lawsuits in State and Federal courts alleging various causes of action related to crude oil royalty payments based on posted prices, including underpayment of royalty interests, underpayment of severance taxes, antitrust violations, and violation of the Texas common purchaser statute. Plaintiffs in these actions include governmental entities and private entities or individuals, and some seek class action status. All of these cases are in various stages of preliminary activities. No class certification has been determined as to Marathon in any case to date. During November 1997, Marathon and over twenty other defendants entered into a proposed class settlement agreement covering antitrust and contract claims from January 1, 1986, through September 30, 1997, excluding federal and Indian royalty claims, common purchaser claims and severance tax claims. A new settlement agreement was filed with the U.S. District Court in Texas on June 26, 1998, which replaces the November 1997 Settlement Agreement. The new settlement agreement omits from the settlement class all State entities which receive royalty payments and only covers private claimants. At a hearing on December 1, 1998, the Court preliminarily approved the new settlement agreement for the group of defendants of which Marathon is a part. The new settlement agreement settles all private claims, subject to opt-outs and a fairness hearing scheduled on April 5, 1999, for a period from January 1, 1986 to September 30, 1998. If the Court approves the settlement, Marathon's payment is not expected to be material. Marathon has been named by private plaintiffs as a defendant, along with other energy companies, in a lawsuit under the False Claims Act in the U.S. District Court of Texas (Eastern District). On February 19, 1998, the U.S. DOJ announced that it had intervened against four of the other energy-company defendants named in such 39 action. (U.S. ex rel., J. Benjamin Johnson et al. v. Exxon Company USA et al.). Marathon's Motion seeking dismissal from this case has been denied. The Marathon Group intends to vigorously defend such remaining cases. U. S. Steel Group Legal Proceedings B&LE Litigation In 1994, judgments against the Bessemer & Lake Erie Railroad ("B&LE") in the amount of approximately $498 million, plus interest, in the Lower Lake Erie Iron Ore Antitrust Litigation were upheld and have been paid. A trial in a related lawsuit (Pacific Great Lakes Corporation v. B&LE) filed under the Ohio Valentine Act in the Cuyahoga County (Ohio) Court of Common Pleas in September 1995, was concluded in February 1996, with a jury verdict finding no injury to the plaintiff. The plaintiff appealed the verdict to the Cuyahoga County Court of Appeals which, in 1998, affirmed the judgment of the lower court. A request by the plaintiff to the Supreme Court of Ohio to accept an appeal in the case is pending. The B&LE was a wholly owned subsidiary of USX throughout the period the conduct occurred. It is now a subsidiary of Transtar, in which USX has a 46% equity interest. USX is obligated to reimburse Transtar for judgments against the B&LE in these matters. Inland Steel Patent Litigation In July 1991, Inland Steel Company ("Inland") filed an action against USX and another domestic steel producer in the U. S. District Court for the Northern District of Illinois, Eastern Division, alleging defendants had infringed two of Inland's steel-related patents. Inland seeks monetary damages of up to approximately $50 million and an injunction against future infringement. USX in its answer and counterclaim alleges the patents are invalid and not infringed and seeks a declaratory judgment to such effect. In May 1993, a jury found USX to have infringed the patents. The District Court has yet to rule on the validity of the patents. In July 1993, the U. S. Patent Office rejected the claims of the two Inland patents upon a reexamination at the request of USX and the other steel producer. A further request was submitted by USX to the Patent Office in October 1993, presenting additional questions as to patentability which was granted and consolidated for consideration with the original request. In 1994, the Patent Office issued a decision rejecting all claims of the Inland patents. Inland has appealed this decision to the Patent Office Board of Appeals. An oral hearing was held in March 1997. No decision has been reached. Asbestos Litigation USX has been and is a defendant in a large number of cases in which plaintiffs allege injury resulting from exposure to asbestos. Many of these cases involve multiple plaintiffs and most have multiple defendants. These claims fall into three major groups: (1) claims made under the Jones Act and general maritime law by employees of the Great Lakes or Intercoastal Fleets, former operations of USX; (2) claims made by persons who did work at U. S. Steel Group facilities; and (3) claims made by industrial workers allegedly exposed to an electrical cable product formerly manufactured by USX. To date all actions resolved have been either dismissed or settled for immaterial amounts. It is not possible to predict with certainty the outcome of these matters; however, based upon present knowledge, USX believes that the remaining actions will be similarly resolved. This statement of belief is a forward-looking statement. Predictions as to the outcome of pending litigation are subject to substantial uncertainties with respect to (among other things) factual and judicial determinations, and actual results could differ materially from those expressed in the forward-looking statements. 40 Environmental Proceedings The following is a summary of the proceedings attributable to the U. S. Steel Group that were pending or contemplated as of December 31, 1998, under federal and state environmental laws. Except as described herein, it is not possible to accurately predict the ultimate outcome of these matters; however, management's belief set forth in the first paragraph under "Item 3. Legal Proceedings" above takes such matters into account. Claims under CERCLA and related state acts have been raised with respect to the cleanup of various waste disposal and other sites. CERCLA is intended to expedite the cleanup of hazardous substances without regard to fault. PRPs for each site include present and former owners and operators of, transporters to and generators of the substances at the site. Liability is strict and can be joint and several. Because of various factors including the ambiguity of the regulations, the difficulty of identifying the responsible parties for any particular site, the complexity of determining the relative liability among them, the uncertainty as to the most desirable remediation techniques and the amount of damages and cleanup costs and the time period during which such costs may be incurred, USX is unable to reasonably estimate its ultimate cost of compliance with CERCLA. Projections, provided in the following paragraphs, of spending for and/or timing of completion of specific projects are forward-looking statements. These forward-looking statements are based on certain assumptions including, but not limited to, the factors provided in the preceding paragraph. To the extent that these assumptions prove to be inaccurate, future spending for, or timing of completion of environmental projects may differ materially from those stated in forward-looking statements. At December 31, 1998, USX had been identified as a PRP at a total of 29 CERCLA sites related to the U. S. Steel Group. Based on currently available information, which is in many cases preliminary and incomplete, USX believes that its liability for cleanup and remediation costs in connection with twelve of these sites will be between $100,000 and $1 million per site and ten will be under $100,000. At the remaining seven sites, USX has no reason to believe that its share in the remaining cleanup costs at any single site will exceed $5 million, although it is not possible to accurately predict the amount of USX's share in any final allocation of such costs. Following is a summary of the status of these sites: 1. At USX's former Duluth, Minn. Works, USX spent a total of approximately $11 million through 1998. The Duluth Works was listed by the Minnesota Pollution Control Agency under the Minnesota Environmental Response and Liability Act on its Permanent List of Priorities. The U.S. EPA has consolidated and included the Duluth Works site with the St. Louis River and Interlake sites on the U.S. EPA's National Priorities List. The Duluth Works cleanup has proceeded since 1989. USX is conducting an engineering study of the estuary sediments and the construction of a breakwater in the estuary. Depending upon the method and extent of remediation at this site, future costs are presently unknown and indeterminable. 2. The Buckeye Reclamation Landfill, near St. Clairsville, Ohio, has been used at various times as a disposal site for coal mine refuse and municipal and industrial waste. USX is one of 15 PRPs that have indicated a willingness to enter into an agreed order with the U.S. EPA to perform a remediation of the site. Implementation of the remedial design plan, resulting in a long-term cleanup of the site, is estimated to cost approximately $28.5 million. One of the PRPs filed suit against the U.S. EPA, the Ohio Environmental Protection Agency, and 13 PRPs including USX. The U.S. EPA, in turn, filed suit against the PRPs to recover $1.5 million in oversight costs. In May 1996, USX entered into a final settlement agreement to resolve this litigation and the overall allocation. USX agreed to pay 4.8% of the estimated costs which would result in USX paying an additional amount of approximately $1.1 million over a two- to three-year period. To date USX has spent $350,000 at the site. Remediation will commence in 1999. 41 3. The D'Imperio/Ewan sites in New Jersey are waste disposal sites where a former USX subsidiary allegedly disposed of used paint and solvent wastes. USX has entered into a settlement agreement with the major PRPs at the sites which fixes USX's share of liability at approximately $1.2 million, $578,000 of which USX has already paid. The balance, which is expected to be paid over the next several years, has been accrued. 4. The Berks Associates/Douglassville Site ("Berks Site") is situated on a 50-acre parcel located on the Schuylkill River in Berks County, Pa. Used oil and solvent reprocessing operations were conducted on the Berks Site between 1941 and 1986. The U.S. EPA undertook the dismantling of the Berks Site's former processing area and instituted a cost recovery suit in July 1991 against 30 former Berks Site customers, as PRPs to recover $8 million it expended in the process area dismantling. The 30 PRPs targeted by the U.S. EPA joined over 400 additional PRPs in the U.S. EPA's cost recovery litigation. On June 30, 1993, the U.S. EPA issued a unilateral administrative order to the original 30 PRPs ordering remediation which the U.S. EPA estimates will cost over $70 million. In June 1996, the PRPs proposed an alternative remedy estimated to cost approximately $20 million. USX expects its share of these costs to be approximately 7%. In September 1997, USX signed a consent decree to conduct a feasibility study at the site relating to the alternative remedy. This remedy has been submitted to the U.S. EPA and the DOJ for their approval. In February 1996, USX and other Berks Site PRPs were sued by the Pennsylvania Department of Environmental Resources ("PaDER") for $6 million in past costs. 5. In 1987 the California Department of Health Services ("DHS") issued a remedial action order for the GBF/Pittsburg landfill near Pittsburg, Calif. Records indicate that from 1972 through 1974, Pittsburg Works arranged for the disposal of approximately 2.6 million gallons of waste oil, sludge, caustic mud and acid which were eventually taken to this landfill for disposal. The DHS recently requested that an interim remediation of one of the plumes of site contamination be carried out as soon as possible. The Generators' Cooperative Group has agreed to fund the interim remediation which is expected to cost approximately $400,000, of which U. S. Steel paid $43,175. Total remediation costs are estimated to be between $18 million and $32 million. In June, 1997, the DHS issued a Remedial Action Plan. Work on the Remedial Action Plan has been deferred while a Group application for an alternative remedy is being reviewed. The GBF Respondents Group has initiated an action against parties implicated at the site who have failed to become involved in cleanup related activities. In 1998, USX entered into an agreement that establishes USX's liability among the site transporter and the other participating waste generators at 10.2%. Liability of the site owner has yet to be established. 6. In 1988, USX and three other PRPs agreed to the issuance of an administrative order by the U.S. EPA to undertake emergency removal work at the Municipal & Industrial Disposal Co. site in Elizabeth, Pa. The cost of such removal, which has been completed, was approximately $4.2 million, of which USX paid $3.4 million. The U.S. EPA has indicated that further remediation of this site may be required in the future, but it has not conducted any assessment or investigation to support what remediation would be required. In October 1991, the PaDER placed the site on the Pennsylvania State Superfund list and began a Remedial Investigation and Feasibility Study ("RI/FS") which was issued in 1997. It is not possible to estimate accurately the cost of any remediation or USX's share in any final allocation formula; however, based on presently available information, USX may have been responsible for as much as 70% of the waste material deposited at the site. On October 10, 1995, the U.S. DOJ filed a complaint in the U.S. District Court for Western Pennsylvania against USX and other Municipal & Industrial Disposal Co. defendants to recover alleged costs incurred at the site. In June 1996, USX agreed to pay $245,000 to settle the government's claims for costs against USX, American Recovery, and Carnegie Natural Gas. In 1996, USX filed a cost recovery action against parties who did not contribute to the cost of the removal activity at the site. USX has reached a settlement in principle with all of the parties except the site owner. In 1998, PaDER gave conditional approval of a conceptual plan to remediate the entire site. 42 7. USX participated with 35 other PRPs in performing removal work at the Ekotek/Petrochem site in Salt Lake City, Utah under the terms of a 1991 administrative order negotiated with the U.S. EPA. The removal work was completed in 1992 at a cost of over $9 million. In July 1992, the PRP Remediation Committee negotiated an administrative order on consent to perform a RI/FS of the site. The RI/FS was completed in 1995. A remediation plan estimated to cost $16.6 million was proposed by the U.S. EPA in 1995. In 1997, the U.S. EPA issued a revised Record of Decision with a remedial action estimated to cost $12.2 million. USX has contributed $875,000 through 1998 towards completing the removal work and performing the RI/FS. USX's proportionate share of costs presently being used by the PRP Remediation Committee is approximately 5% of the participating PRPs. The PRP Remediation Committee commenced cost recovery litigation against approximately 1,100 non-participating PRPs. Almost all of these defendants have settled their liability or joined the PRP Remediation Committee. In February 1997, the U.S. EPA issued an administrative order to USX and other PRPs to undertake the proposed remedial action and to reimburse approximately $5 million to de minimus PRPs who had earlier settled with the U.S. EPA on the basis of a substantially greater remedial cost estimate. On December 15, 1997, USX, along with forty other parties, signed a consent decree to clean up the site. Site cleanup will commence in 1999. In addition, there are 17 sites related to the U. S. Steel Group where USX has received information requests or other indications that USX may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability. There are also 34 additional sites related to the U. S. Steel Group where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. Based on currently available information, which is in many cases preliminary and incomplete, the U. S. Steel Group believes that its liability for cleanup and remediation costs in connection with six of these sites will be under $100,000 per site, another five sites have potential costs between $100,000 and $1 million per site, and eleven sites may involve remediation costs between $1 million and $5 million. Another of the 34 sites, the Grand Calumet River remediation at Gary Works, is expected to have remediation costs in excess of $5 million. Potential costs associated with remediation at the remaining 11 sites are not presently determinable. The following is a discussion of remediation activities at the U. S. Steel Group's major facilities: Gary Works In 1990 a consent decree was signed by USX which, among other things, required USX to study and implement a program to remediate the sediment in a portion of the Grand Calumet River. USX has developed a sediment remediation plan for the section of the Grand Calumet River that runs through Gary Works. As proposed, this project would require five to six years to complete after approval and would be followed by an environmental recovery validation. The estimated program cost, which has been accrued, is approximately $30 million. USX has entered into a consent decree with the U.S. EPA which provides for the expanded sediment remediation program and resolves alleged violations of the prior consent decree and National Pollutant Discharge Elimination System permit since 1990. USX has to pay civil penalties of $2.9 million for alleged violations of the Clean Water Act at Gary Works. In addition, USX has entered into a consent decree with the public trustees to settle natural resource damage claims for the portion of the Grand Calumet River that runs through Gary Works. This settlement obligates USX to purchase and restore several parcels of property and pay $1.5 million in past and future assessment and monitoring costs. In October 1996, USX was notified by the Indiana Department of Environmental Management ("IDEM") acting as lead trustee, that IDEM and the U.S. Department of the Interior had concluded a preliminary investigation of potential injuries to natural resources related to releases of hazardous substances from various municipal and industrial sources along the east branch of the Grand Calumet River and Indiana Harbor Canal. The Public Trustees completed a preassessment screen pursuant to federal regulations and have determined to perform a NRD Assessment. USX was identified as a PRP along with 15 other companies owning property along the river and harbor canal. USX and eight other PRPs have formed a joint defense group. The Trustees notified the public of 43 their plan for assessment and later adopted the plan. The PRP group and the trustees are working to coordinate trustee and PRP assessment activities. On October 23, 1998, a final Administrative Order on Consent was issued by U.S. EPA addressing Corrective Action for Solid Waste Management Units throughout Gary Works. This order requires USX to perform a RCRA Facility Investigation ("RFI") and a Corrective Measure Study ("CMS") at Gary Works. The Current Conditions Report, USX's first deliverable, was submitted to U.S. EPA on January 31, 1999. IDEM issued NOVs to USS Gary Works in 1994 alleging various violations of air pollution requirements. In early 1996, USX paid a $6 million penalty and agreed to install additional pollution control equipment and programs costing approximately $100 million to be installed and implemented over a period of several years. In January 1998, USS Gary Works entered into negotiations of a second Agreed Order with IDEM. The current draft requires increased monitoring at the No. 8 Blast Furnace and the replacement of the large bell and one hot blast stove at the No. 8 Blast Furnace by December 31, 1999. The proposed penalty is $1,037,000 which resolves outstanding NOV's from 1994 to present and includes Stipulated Penalties from the Agreed Order signed in 1996. The second Agreed Order is presently expected to be finalized by the end of the first quarter 1999. Clairton In 1987, USX and the PaDER entered into a consent Order to resolve an incident in January 1985 involving the alleged unauthorized discharge of benzene and other organic pollutants from Clairton Works in Clairton, Pa. That consent Order required USX to pay a penalty of $50,000 and a monthly payment of $2,500 for five years. In 1990, USX and the PaDER reached agreement to amend the consent Order. Under the amended Order, USX agreed to remediate the Peters Creek Lagoon (a former coke plant waste disposal site); to pay a penalty of $300,000; and to pay a monthly penalty of up to $1,500 each month until the former disposal site is closed. Remediation costs have amounted to $2.2 million with another $3.9 million presently projected to complete the project. Fairless Works In January 1992, USX commenced negotiations with the U.S. EPA regarding the terms of an Administrative Order on consent, pursuant to the RCRA, under which USX would perform a RFI and a CMS at Fairless Works. A Phase I RFI report was submitted during the third quarter of 1997. A Phase II/III RFI will be submitted following U.S. EPA approval. The RFI/CMS will determine whether there is a need for, and the scope of, any remedial activities at Fairless Works. Fairfield Works In December 1995, USX reached an agreement in principle with the U.S. EPA and the DOJ with respect to alleged RCRA violations at Fairfield Works. A consent decree was signed by USX and the United States and filed with the court on December 11, 1997, under which USX will pay a civil penalty of $1 million, implement two SEPs costing a total of $1.75 million and implement a RCRA corrective action at the facility. One SEP was completed during 1998 at a cost of $250,000. Mon Valley Works/Edgar Thomson Plant In September 1997, USX received a draft consent decree addressing issues raised in a NOV issued by the U.S. EPA in January 1997. The NOV alleged air quality violations at U. S. Steel's Edgar Thomson Plant, which is part of Mon Valley Works. The draft consent decree addressed these issues, including various operational requirements, which U.S. EPA believes are necessary to bring the plant into compliance. USX has begun implementing some of the compliance requirements identified by U.S. EPA. USX is meeting with U.S. EPA and other involved agencies to negotiate a consent decree and an appropriate penalty. USX and the U.S. EPA have tentatively agreed to a civil penalty of $1 million and the U.S. EPA is currently evaluating certain SEPs proposed by the company as a means of further reducing the final negotiated civil penalty. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 44 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The principal market on which Marathon Stock and Steel Stock are traded is the New York Stock Exchange. Information concerning the high and low sales prices for the common stocks as reported in the consolidated transaction reporting system and the frequency and amount of dividends paid during the last two years is set forth in "Consolidated Financial Statements and Supplementary Data - Selected Quarterly Financial Data (Unaudited)" on page U-29. As of January 31, 1999, there were 76,871 registered holders of Marathon Stock and 59,874 registered holders of Steel Stock. The Board of Directors intends to declare and pay dividends on Marathon Stock and Steel Stock based on the financial condition and results of operations of the Marathon Group and the U. S. Steel Group respectively, although it has no obligation under Delaware law to do so. In determining its dividend policy with respect to Marathon Stock and Steel Stock, the Board will rely on the separate financial statements of the Marathon Group and the U. S. Steel Group, respectively. The method of calculating earnings per share for Marathon Stock and Steel Stock reflects the Board's intent that separately reported earnings and the surplus of the Marathon Group and the U. S. Steel Group, as determined consistent with the USX Restated Certificate of Incorporation, are available for payment of dividends to the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. Dividends on all classes of preferred stock and USX common stock are limited to legally available funds of USX, which are determined on the basis of the entire Corporation. Distributions on Marathon Stock and Steel Stock would be precluded by a failure to pay dividends on any series of preferred stock of USX. In addition, net losses of any group, as well as dividends or distributions on any class of USX common stock or series of preferred stock and repurchases of any class of USX common stock or preferred stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on the two classes of USX common stock as well as any preferred stock. Dividends on Steel Stock are further limited to the Available Steel Dividend Amount. Net losses of the Marathon Group and distributions on Marathon Stock, and on any preferred stock attributed to the Marathon Group will not reduce the funds available for declaration and payment of dividends on Steel Stock unless the legally available funds of USX are less than the Available Steel Dividend Amount. See "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - 22. Dividends" on page U-23. The Board has adopted certain policies with respect to the Marathon Group and the U. S. Steel Group, including, without limitation, the intention to: (i) limit capital expenditures of the U. S. Steel Group over the long term to an amount equal to the internally generated cash flow of the U. S. Steel Group, including funds generated by sales of assets of the U. S. Steel Group, (ii) sell assets and provide services between the Marathon Group and the U. S. Steel Group only on an arm's-length basis and (iii) treat funds generated by sales of Marathon Stock or Steel Stock and securities convertible into such stock as assets of the Marathon Group or the U. S. Steel Group, as the case may be, and apply such funds to acquire assets or reduce liabilities of the Marathon Group or the U. S. Steel Group, respectively. These policies may be modified or rescinded by action of the Board, or the Board may adopt additional policies, without the approval of holders of the two classes of USX common stock, although the Board has no present intention to do so. 45 Fiduciary Duties of the Board; Resolution of Conflicts Under Delaware law, the Board must act with due care and in the best interest of all the stockholders, including the holders of the shares of each class of USX common stock. The interests of the holders of any class of USX common stock may, under some circumstances, diverge or appear to diverge. Examples include the optional exchange of Steel Stock for Marathon Stock at the 10% premium, the determination of the record date of any such exchange or for the redemption of any Steel Stock; the establishing of the date for public announcement of the liquidation of USX and the commitment of capital among the Marathon Group and the U. S. Steel Group. Because the Board owes an equal duty to all common stockholders regardless of class, the Board is the appropriate body to deal with these matters. In order to assist the Board in this regard, USX has formulated policies to serve as guidelines for the resolution of matters involving a conflict or a potential conflict, including policies dealing with the payment of dividends, limiting capital investment in the U. S. Steel Group over the long term to its internally generated cash flow and allocation of corporate expenses and other matters. The Board has been advised concerning the applicable law relating to the discharge of its fiduciary duties to the common stockholders in the context of the separate classes of USX common stock and has delegated to the Audit Committee of the Board the responsibility to review matters which relate to this subject and report to the Board. While the classes of USX common stock may give rise to an increased potential for conflicts of interest, established rules of Delaware law would apply to the resolution of any such conflicts. In general, under Delaware law, a good faith determination by a disinterested and adequately informed Board with respect to any such matter would be a defense to any claim of liability made on behalf of the holders of any class of USX common stock. USX is aware of no precedent concerning the manner in which such rules of Delaware law would be applied in the context of its capital structure. 46 Item 6. SELECTED FINANCIAL DATA USX - Consolidated
Dollars in millions (except per share data) ---------------------------------------------- 1998 1997 1996 1995 1994 ------ ------- ------- ------- -------- Statement of Operations Data: Revenues(a) (b).................... $28,335 $22,588 $22,977 $20,413 $19,055 Income from operations(b).......... 1,517 1,705 1,779 726 1,174 Includes: Inventory market valuation charges (credits)................ 267 284 (209) (70) (160) Impairment of long-lived assets.. - - - 675 - Income from continuing operations.. 674 908 946 217 532 Income (loss) from discontinued operations.......... - 80 6 4 (31) Extraordinary loss................. - - (9) (7) - Net income......................... $ 674 $ 988 $ 943 $ 214 $ 501 Noncash credit from exchange of preferred stock (c).............. - 10 - - - Dividends on preferred stock....... (9) (13) (22) (28) (31) ------- ------- ------- ------- ------- Net income applicable to common stocks.................... $ 665 $ 985 $ 921 $ 186 $ 470
- ----------- (a) Consists of sales, dividend and affiliate income, gain on ownership change in MAP, net gains on disposal of assets, gain on affiliate stock offering and other income. (b) Excludes amounts for the Delhi Companies (sold in 1997), which have been reclassified as discontinued operations. See Note 5 to the USX Consolidated Financial Statements, on page U-11. (c) See Note 25 to the USX Consolidated Financial Statements, on page U-25.
Common Share Data Marathon Stock: Income (loss) before extraordinary loss applicable to Marathon Stock........... $ 310 $ 456 $ 671 $ (87) $ 315 Per share-basic (in dollars)............. 1.06 1.59 2.33 (.31) 1.10 -Diluted (in dollars).................. 1.05 1.58 2.31 (.31) 1.10 Net income (loss) applicable to Marathon Stock......................... 310 456 664 (92) 315 Per share-basic (in dollars)............. 1.06 1.59 2.31 (.33) 1.10 -Diluted (in dollars).................. 1.05 1.58 2.29 (.33) 1.10 Dividends paid (in dollars).............. .84 .76 .70 .68 .68 Common Stockholders' Equity per share (in dollars)................. 13.95 12.53 11.62 9.99 11.01
47 SELECTED FINANCIAL DATA (contd.) USX - Consolidated (contd.)
Dollars in millions (except per share data) -------------------------------------------- 1998 1997 1996 1995 1994 -------- ------- ------- ------- ------- Steel Stock: Income before extraordinary loss applicable to Steel Stock............ $ 355 $ 449 $ 253 $ 279 $ 176 Per share-basic (in dollars)........... 4.05 5.24 3.00 3.53 2.35 -Diluted (in dollars)................ 3.92 4.88 2.97 3.43 2.33 Net income applicable to Steel Stock.......................... 355 449 251 277 176 Per share-basic (in dollars)........... 4.05 5.24 2.98 3.51 2.35 -Diluted (in dollars)................ 3.92 4.88 2.95 3.41 2.33 Dividends paid (in dollars)............ 1.00 1.00 1.00 1.00 1.00 Common Stockholders' Equity per share (in dollars)............... 23.66 20.56 18.37 16.10 12.01 Balance Sheet Data-December 31: Capital expenditures-for year.......... $ 1,580 $ 1,373 $ 1,168 $ 1,016 $ 1,033 Total assets........................... 21,133 17,284 16,980 16,743 17,517 Capitalization: Notes payable........................ $ 145 $ 121 $ 81 $ 40 $ 1 Total long-term debt................. 3,991 3,403 4,212 4,937 5,599 Preferred stock of subsidiary(a)..... 250 250 250 250 250 Trust preferred securities(a)........ 182 182 - - - Minority interest in MAP............. 1,590 - - - - Redeemable Delhi Stock(b)............ - 195 - - - Preferred stock...................... 3 3 7 7 112 Common stockholders' equity.......... 6,402 5,397 5,015 4,321 4,190 ------- ------- ------- ------- ------- Total capitalization.............. $12,563 $ 9,551 $ 9,565 $ 9,555 $10,152 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges(c).. 3.47 4.11 3.90 1.62 2.18 Ratio of earnings to combined fixed charges and preferred stock dividends(c)......................... 3.36 3.92 3.62 1.49 2.01
- ----------- (a) See Note 25 to the USX Consolidated Financial Statements, on page U-25. (b) On January 26, 1998, USX redeemed all of the outstanding shares of Delhi Stock. For additional information regarding Delhi Stock, see Income Per Common Share on page U-3, and Note 5 to the USX Consolidated Financial Statements, on page U-11. (c) Amounts represent combined fixed charges and earnings from continuing operations. 48 SELECTED FINANCIAL DATA (contd.) USX - Marathon Group
Dollars in millions (except per share data) ------------------------------------------- 1998 1997 1996 1995 1994 ------ ------ ------ ----- ----- Statement of Operations Data: Revenues(a)................................. $22,075 $15,754 $16,394 $13,913 $12,949 Income from operations...................... 938 932 1,296 147 776 Includes: Inventory market valuation charges (credits)......................... 267 284 (209) (70) (160) Impairment of long-lived assets............ - - - 659 - Income (loss) before extraordinary loss....................................... 310 456 671 (83) 321 Net income (loss)........................... $ 310 $ 456 $ 664 $ (88) $ 321 Dividends on preferred stock................ - - - (4) (6) ------- ------- ------- ------- ------- Net income (loss) applicable to Marathon Stock............................. $ 310 $ 456 $ 664 $ (92) $ 315 Per Common Share Data Income (loss) before extraordinary loss - basic.................................... $ 1.06 $ 1.59 $ 2.33 $ (.31) $ 1.10 - diluted.................................. 1.05 1.58 2.31 (.31) 1.10 Net income (loss)-basic..................... 1.06 1.59 2.31 (.33) 1.10 - diluted.................................. 1.05 1.58 2.29 (.33) 1.10 Dividends paid.............................. .84 .76 .70 .68 .68 Common stockholders' equity................. 13.95 12.53 11.62 9.99 11.01 Balance Sheet Data-December 31: Capital expenditures-for year............... $ 1,270 $ 1,038 $ 751 $ 642 $ 753 Total assets................................ 14,544 10,565 10,151 10,109 10,951 Capitalization: Notes payable.............................. $ 132 $ 108 $ 59 $ 31 $ 1 Total long-term debt....................... 3,515 2,893 2,906 3,720 4,038 Preferred stock of subsidiary.............. 184 184 182 182 182 Minority interest in MAP................... 1,590 - - - - Preferred stock............................ - - - - 78 Common stockholders' equity................ 4,312 3,618 3,340 2,872 3,163 ------- ------- ------- ------- ------- Total capitalization..................... $ 9,733 $ 6,803 $ 6,487 $ 6,805 $ 7,462 ======= ======= ======= ======= =======
- ------------- (a) Consists of sales, dividend and affiliate income, gain on ownership change in MAP, net gains on disposal of assets and other income. 49 SELECTED FINANCIAL DATA (contd.) USX - U. S. Steel Group
Dollars in millions (except per share data) ------------------------------------------- 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ Statement of Operations Data: Revenues(a)................................. $6,283 $6,941 $6,670 $6,557 $6,141 Income from operations...................... 579 773 483 582 388 Includes: Impairment of long-lived assets............ - - - 16 - Income before extraordinary loss....................................... 364 452 275 303 201 Net income.................................. $ 364 $ 452 $ 273 $ 301 $ 201 Noncash credit from exchange of preferred stock(b)....................... - 10 - - - Dividends on preferred stock................ (9) (13) (22) (24) (25) ------ ------ ------ ------ ------ Net income applicable to Steel Stock................................ $ 355 $ 449 $ 251 $ 277 $ 176 Per Common Share Data Income before extraordinary loss -basic..................................... $ 4.05 $ 5.24 $ 3.00 $ 3.53 $ 2.35 -diluted................................... 3.92 4.88 2.97 3.43 2.33 Net income -basic........................... 4.05 5.24 2.98 3.51 2.35 -diluted................................... 3.92 4.88 2.95 3.41 2.33 Dividends paid.............................. 1.00 1.00 1.00 1.00 1.00 Common stockholders' equity................. 23.66 20.56 18.37 16.10 12.01 Balance Sheet Data-December 31: Capital expenditures-for year............... $ 310 $ 261 $ 337 $ 324 $ 248 Total assets................................ 6,693 6,694 6,580 6,521 6,480 Capitalization: Notes payable.............................. $ 13 $ 13 $ 18 $ 8 $ - Total long-term debt....................... 476 510 1,087 1,016 1,453 Preferred stock of subsidiary.............. 66 66 64 64 64 Trust Preferred Securities................. 182 182 - - - Preferred stock............................ 3 3 7 7 32 Common stockholders' equity................ 2,090 1,779 1,559 1,337 913 ------ ------ ------ ------ ------ Total capitalization...................... $2,830 $2,553 $2,735 $2,432 $2,462 ====== ====== ====== ====== ======
- ----------- (a) Consists of sales, dividend and affiliate income, net gains on disposal of assets, gain on affiliate stock offering and other income. (b) See Note 25 to the USX Consolidated Financial Statements, on page U-25. 50 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Indexes to Financial Statements, Supplementary Data, Management's Discussion and Analysis, and Quantitative and Qualitative Disclosures About Market Risk of USX Consolidated, the Marathon Group and the U. S. Steel Group are presented immediately preceding pages U-1, M-1 and S-1, respectively. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Indexes to Financial Statements, Supplementary Data, Management's Discussion and Analysis, and Quantitative and Qualitative Disclosures About Market Risk for USX Consolidated, the Marathon Group and the U. S. Steel Group are presented immediately preceding pages U-1, M-1 and S-1, respectively. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable 51 USX Index to Consolidated Financial Statements, Supplementary Data, Management's Discussion and Analysis, and Quantitative and Qualitative Disclosures About Market Risk Page ---- Management's Report.......................................... U-1 Audited Consolidated Financial Statements: Report of Independent Accountants............................ U-1 Consolidated Statement of Operations......................... U-2 Consolidated Balance Sheet................................... U-4 Consolidated Statement of Cash Flows......................... U-5 Consolidated Statement of Stockholders' Equity............... U-6 Notes to Consolidated Financial Statements................... U-8 Selected Quarterly Financial Data............................. U-29 Principal Unconsolidated Affiliates........................... U-30 Supplementary Information..................................... U-30 Five-Year Operating Summary -- Marathon Group................. U-35 Five-Year Operating Summary -- U. S. Steel Group.............. U-37 Five-Year Financial Summary................................... U-38 Management's Discussion and Analysis.......................... U-39 Quantitative and Qualitative Disclosures About Market Risk.... U-61 Management's Report The accompanying consolidated financial statements of USX Corporation and Subsidiary Companies (USX) are the responsibility of and have been prepared by USX in conformity with generally accepted accounting principles. They necessarily include some amounts that are based on best judgments and estimates. The consolidated financial information displayed in other sections of this report is consistent with these consolidated financial statements. USX seeks to assure the objectivity and integrity of its financial records by careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communications programs aimed at assuring that its policies and methods are understood throughout the organization. USX has a comprehensive formalized system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that financial records are reliable. Appropriate management monitors the system for compliance, and the internal auditors independently measure its effectiveness and recommend possible improvements thereto. In addition, as part of their audit of the consolidated financial statements, USX's independent accountants, who are elected by the stockholders, review and test the internal accounting controls selectively to establish a basis of reliance thereon in determining the nature, extent and timing of audit tests to be applied. The Board of Directors pursues its oversight role in the area of financial reporting and internal accounting control through its Audit Committee. This Committee, composed solely of nonmanagement directors, regularly meets (jointly and separately) with the independent accountants, management and internal auditors to monitor the proper discharge by each of its responsibilities relative to internal accounting controls and the consolidated financial statements.
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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of USX's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP 600 Grant Street, Pittsburgh, Pennsylvania 15219-2794 February 9, 1999 U-1 Consolidated Statement of Operations
(Dollars in millions) 1998 1997 1996 Revenues: Sales (Note 6) $27,887 $22,375 $22,743 Dividend and affiliate income 96 105 99 Gain on disposal of assets 82 94 71 Gain on ownership change in Marathon Ashland Petroleum LLC (Note 3) 245 -- -- Gain on affiliate stock offering (Note 9) -- -- 53 Other income 25 14 11 ------- ------- ------- Total revenues 28,335 22,588 22,977 ------- ------- ------- Costs and expenses: Cost of sales (excludes items shown below) 20,712 16,047 16,930 Selling, general and administrative expenses 304 218 144 Depreciation, depletion and amortization 1,224 967 985 Taxes other than income taxes 3,998 3,178 3,202 Exploration expenses 313 189 146 Inventory market valuation charges (credits) (Note 19) 267 284 (209) ------- ------- ------- Total costs and expenses 26,818 20,883 21,198 ------- ------- ------- Income from operations 1,517 1,705 1,779 Net interest and other financial costs (Note 7) 279 347 421 Minority interest in income of Marathon Ashland Petroleum LLC (Note 3) 249 -- -- ------- ------- ------- Income from continuing operations before income taxes 989 1,358 1,358 Provision for estimated income taxes (Note 13) 315 450 412 ------- ------- ------- Income from continuing operations 674 908 946 ------- ------- ------- Discontinued operations (Note 5): Income (loss) from operations (net of income tax) -- (1) 6 Gain on disposal (net of income tax) -- 81 -- ------- ------- ------- Income from discontinued operations -- 80 6 ------- ------- ------- Extraordinary loss (Note 8) -- -- 9 ------- ------- ------- Net income 674 988 943 Noncash credit from exchange of preferred stock (Note 25) -- 10 -- Dividends on preferred stock (9) (13) (22) ------- ------- ------- Net income applicable to common stocks $ 665 $ 985 $ 921
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) 1998 1997 1996 CONTINUING OPERATIONS Applicable to Marathon Stock: Income before extraordinary loss $ 310 $ 456 $ 671 Extraordinary loss -- -- 7 ----- ----- ----- Net income $ 310 $ 456 $ 664 Per Share Data Basic: Income before extraordinary loss $1.06 $1.59 $2.33 Extraordinary loss -- -- .02 ----- ----- ----- Net income $1.06 $1.59 $2.31 Diluted: Income before extraordinary loss $1.05 $1.58 $2.31 Extraordinary loss -- -- .02 ----- ----- ----- Net income $1.05 $1.58 $2.29 Applicable to Steel Stock: Income before extraordinary loss $ 355 $ 449 $ 253 Extraordinary loss -- -- 2 ----- ----- ----- Net income $ 355 $ 449 $ 251 Per Share Data Basic: Income before extraordinary loss $4.05 $5.24 $3.00 Extraordinary loss -- -- .02 ----- ----- ----- Net income $4.05 $5.24 $2.98 Diluted: Income before extraordinary loss $3.92 $4.88 $2.97 Extraordinary loss -- -- .02 ----- ----- ----- Net income $3.92 $4.88 $2.95 DISCONTINUED OPERATIONS Applicable to Delhi Stock: Income before extraordinary loss $79.7 $ 6.4 Extraordinary loss -- .5 ----- ----- Net income $79.7 $ 5.9 Per Share Data Basic: Income before extraordinary loss $8.43 $ .67 Extraordinary loss -- .06 ----- ----- Net income $8.43 $ .61 Diluted: Income before extraordinary loss $8.41 $ .67 Extraordinary loss -- .06 ----- ----- Net income $8.41 $ .61
See Note 24, for a description and computation of income per common share. The accompanying notes are an integral part of these consolidated financial statements. U-3
Consolidated Balance Sheet (Dollars in millions) December 31 1998 1997 Assets Current assets: Cash and cash equivalents (Note 4) $ 146 $ 54 Receivables, less allowance for doubtful accounts of $12 and $15 (Note 14) 1,663 1,417 Inventories (Note 19) 2,008 1,685 Deferred income tax benefits (Note 13) 217 229 Other current assets 172 87 ------- ------- Total current assets 4,206 3,472 Investments and long-term receivables, less reserves of $10 and $15 (Note 15) 1,249 1,028 Property, plant and equipment -- net (Note 18) 12,929 10,062 Prepaid pensions (Note 11) 2,413 2,247 Other noncurrent assets 336 280 Cash restricted for redemption of Delhi Stock (Note 5) -- 195 ------- ------- Total assets $21,133 $17,284 Liabilities Current liabilities: Notes payable $ 145 $ 121 Accounts payable 2,478 2,011 Distribution payable to minority shareholder of Marathon Ashland Petroleum LLC (Note 4) 103 -- Payroll and benefits payable 480 521 Accrued taxes 245 304 Accrued interest 97 95 Long-term debt due within one year (Note 17) 71 471 ------- ------- Total current liabilities 3,619 3,523 Long-term debt (Note 17) 3,920 2,932 Long-term deferred income taxes (Note 13) 1,579 1,353 Employee benefits (Note 11) 2,868 2,713 Deferred credits and other liabilities 720 736 Preferred stock of subsidiary (Note 25) 250 250 USX obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely junior subordinated convertible debentures of USX (Note 25) 182 182 Minority interest in Marathon Ashland Petroleum LLC (Note 3) 1,590 -- Redeemable Delhi Stock (Note 5) -- 195 Stockholders' Equity (Details on pages U-6 and U-7) Preferred stock (Note 26) -- 6.50% Cumulative Convertible issued -- 2,767,787 shares and 2,962,037 shares ($138 and $148 liquidation preference, respectively) 3 3 Common stocks: Marathon Stock issued -- 308,458,835 shares and 288,786,343 shares (par value $1 per share, authorized 550,000,000 shares) 308 289 Steel Stock issued -- 88,336,439 shares and 86,577,799 shares (par value $1 per share, authorized 200,000,000 shares) 88 86 Securities exchangeable solely into Marathon Stock -- issued -- 507,324 shares (Note 3) 1 -- Additional paid-in capital 4,587 3,924 Deferred compensation (1) (3) Retained earnings 1,467 1,138 Accumulated other comprehensive income (loss) (48) (37) ------- ------- Total stockholders' equity 6,405 5,400 ------- ------- Total liabilities and stockholders' equity $21,133 $17,284 ------- -------
The accompanying notes are an integral part of these consolidated financial statements. U-4 Consolidated Statement of Cash Flows
(Dollars in millions) 1998 1997 1996 Increase (decrease) in cash and cash equivalents Operating activities: Net income $ 674 $ 988 $ 943 Adjustments to reconcile to net cash provided from operating activities: Minority interest in income of Marathon Ashland Petroleum LLC -- net of distributions 38 -- -- Depreciation, depletion and amortization 1,224 987 1,012 Exploratory dry well costs 186 78 54 Inventory market valuation charges (credits) 267 284 (209) Pensions and other postretirement benefits (181) (342) (151) Deferred income taxes 184 228 257 Gain on disposal of the Delhi Companies -- (287) -- Gain on ownership change in Marathon Ashland Petroleum LLC (245) -- -- Gain on disposal of assets (82) (94) (71) Gain on affiliate stock offering -- -- (53) Changes in: Current receivables -- sold (30) (390) -- -- operating turnover 451 16 (170) Inventories (6) (39) 27 Current accounts payable and accrued expenses (497) 91 83 All other -- net (180) (62) (73) ------- ------- ------- Net cash provided from operating activities 1,803 1,458 1,649 ------- ------- ------- Investing activities: Capital expenditures (1,580) (1,373) (1,168) Acquisition of Tarragon Oil and Gas Limited (686) -- -- Proceeds from sale of the Delhi Companies -- 752 -- Disposal of assets 86 481 443 Restricted cash -- withdrawals 241 108 -- -- deposits (67) (205) (98) Affiliates -- investments (115) (219) (32) -- loans and advances (104) (46) (6) -- repayments of loans and advances 63 7 19 All other -- net 12 6 43 ------- ------- ------- Net cash used in investing activities (2,150) (489) (799) ------- ------- ------- Financing activities: Commercial paper and revolving credit arrangements -- net 724 41 (153) Other debt -- borrowings 1,036 11 191 -- repayments (1,445) (786) (711) Common stock -- issued 668 82 53 -- repurchased (195) -- -- Preferred stock repurchased (8) -- -- Dividends paid (342) (316) (307) ------- ------- ------- Net cash provided from (used in) financing activities 438 (968) (927) ------- ------- ------- Effect of exchange rate changes on cash 1 (2) 1 ------- ------- ------- Net increase (decrease) in cash and cash equivalents 92 (1) (76) Cash and cash equivalents at beginning of year 54 55 131 ------- ------- ------- Cash and cash equivalents at end of year $ 146 $ 54 $ 55
See Note 20, 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 10, for a description of the two Groups.) During 1998, USX issued 878,074 Exchangeable Shares (exchangeable solely into Marathon Stock) related to the purchase of a Canadian company. (See Note 3.) On all matters where the holders of Marathon Stock and Steel Stock vote together as a single class, Marathon Stock has one vote per share and Steel Stock has a fluctuating vote per share based on the relative market value of a share of Steel Stock to the market value of a share of Marathon Stock. In the event of a disposition of all or substantially all the properties and assets of the U. S. Steel Group, USX must either distribute the net proceeds to the holders of the Steel Stock as a special dividend or in redemption of the stock, or exchange the Steel Stock for the Marathon Stock. In the event of liquidation of USX, the holders of the Marathon Stock and Steel Stock will share in the funds remaining for common stockholders based on the relative market capitalization of the respective Marathon Stock and Steel Stock to the aggregate market capitalization of both classes of common stock.
Dollars in millions Shares in thousands ----------------------------------- ------------------------------------ 1998 1997 1996 1998 1997 1996 ---------- ----------- ---------- ----------- ----------- ---------- Preferred stock (Note 26) -- 6.50% Cumulative Convertible: Outstanding at beginning of year $ 3 $ 7 $ 7 2,962 6,900 6,900 Repurchased -- -- -- (194) -- -- Exchanged for trust preferred securities -- (4) -- -- (3,938) -- ----- ----- ----- ------- ------- ---------- Outstanding at end of year $ 3 $ 3 $ 7 2,768 2,962 6,900 ----- ----- ----- ------- ------- ---------- Common stocks: Marathon Stock: Outstanding at beginning of year $ 289 $ 288 $ 287 288,786 287,525 287,398 Issued in public offering 17 -- -- 17,000 -- -- Issued for: Employee stock plans 2 1 1 2,236 1,209 127 Dividend Reinvestment Plan -- -- -- 66 52 -- Exchangeable Shares -- -- -- 371 -- -- ----- ----- ----- ------- ------- ---------- Outstanding at end of year $ 308 $ 289 $ 288 308,459 288,786 287,525 ----- ----- ----- ------- ------- ---------- Steel Stock: Outstanding at beginning of year $ 86 $ 85 $ 83 86,578 84,885 83,042 Issued for: Employee stock plans 2 1 2 1,733 1,416 1,649 Dividend Reinvestment Plan -- -- -- 25 277 194 ----- ----- ----- ------- ------- ---------- Outstanding at end of year $ 88 $ 86 $ 85 88,336 86,578 84,885 ----- ----- ----- ------- ------- ---------- Delhi Stock: Outstanding at beginning of year $ -- $ 9 $ 9 -- 9,448 9,447 Issued (canceled) for employee stock plans -- -- -- -- (3) 1 Reclassified to redeemable Delhi Stock -- (9) -- -- (9,445) -- ----- ----- ----- ------- ------- ---------- Outstanding at end of year $ -- $ -- $ 9 -- -- 9,448 ----- ----- ----- ------- ------- ---------- Securities exchangeable solely into Marathon Stock: Issued to acquire Tarragon stock $ 1 $ -- $ -- 878 -- -- Exchanged for Marathon Stock -- -- -- (371) -- -- ----- ----- ----- ------- ------- ---------- Outstanding at end of year $ 1 $ -- $ -- 507 -- -- ----- ----- ----- ------- ------- ----------
(Table continued on next page) U-6
Stockholders' Equity Comprehensive Income (Dollars in millions) 1998 1997 1996 1998 1997 1996 Additional paid-in capital: Balance at beginning of year $3,924 $4,150 $4,094 Marathon Stock issued 598 38 3 Steel Stock issued 57 52 53 Exchangeable Shares: Issued 28 -- -- Exchanged for Marathon Stock (12) -- -- 6.50% preferred stock: Repurchased (8) -- -- Exchanged for trust preferred securities -- (188) -- Reclassified to redeemable Delhi Stock -- (128) -- ------ ------ ------ Balance at end of year $4,587 $3,924 $4,150 ------ ------ ------ Deferred compensation (Note 21) $ (1) $ (3) $ (4) ------ ------ ------ Retained earnings: Balance at beginning of year $1,138 $ 517 $ (116) Net income 674 988 943 $ 674 $ 988 $ 943 Dividends on preferred stock (9) (13) (22) Dividends on Marathon Stock (per share: $.84 in 1998, $.76 in 1997 and $.70 in 1996) (248) (219) (201) Dividends on Steel Stock (per share $1.00) (88) (86) (85) Dividends on Delhi Stock (per share: $.15 in 1997 and $.20 in 1996) -- (1) (2) Reclassified to redeemable Delhi Stock -- (58) -- Noncash credit from exchange of preferred stock -- 10 -- ------ ------ ------ Balance at end of year $1,467 $1,138 $ 517 ------ ------ ------ Accumulated other comprehensive income (loss): Minimum pension liability adjustments: Balance at beginning of year $ (32) $ (22) $ (23) Changes during year, net of taxes/(a)/ (5) (10) 1 (5) (10) 1 ------ ------ ------ ------ ------ ------ Balance at end of year (37) (32) (22) ------ ------ ------ Foreign currency translation adjustments: Balance at beginning of year $ (8) $ (8) $ (8) Changes during year, net of taxes/(a)/ (3) -- -- (3) -- -- ------ ------ ------ ------ ------ ------ Balance at end of year (11) (8) (8) ------ ------ ------ Unrealized holding gains on investments: Balance at beginning of year $ 3 $ -- $ -- Changes during year, net of taxes/(a)/ 2 3 -- 2 3 -- ------ ------ ------ ------ ------ ------ Reclassification adjustment for gains included in net income (5) -- -- (5) -- -- ------ ------ ------ ------ ------ ------ Balance at end of year -- 3 -- ------ ------ ------ Total balances at end of year $ (48) $ (37) $ (30) ------ ------ ------ Total comprehensive income/(b)/ $ 663 $ 981 $ 944 Total stockholders' equity $6,405 $5,400 $5,022 ------ ------ ------
(a) Related income tax provision (credit): 1998 1997 1996 ------ ------ ------ Minimum pension liability adjustments $ 3 $ 5 $ -- Foreign currency translation adjustments 4 -- -- Unrealized holding gains on investments 2 (1) -- (b) Total comprehensive income by Group: Marathon Group $ 306 $ 457 $ 665 U. S. Steel Group 357 444 273 Delhi Group -- 80 6 ------ ------ ------ Total $ 663 $ 981 $ 944 ====== ====== ======
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 other entities over which USX has significant influence are accounted for using the equity method of accounting and are carried at USX's share of net assets plus loans and advances. Investments in other companies whose stock is publicly traded are carried at market value. The difference between the cost of these investments and market value is recorded in other comprehensive income (net of tax). Investments in companies whose stock has no readily determinable fair value are carried at cost. Use of estimates -- Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at year-end and the reported amounts of revenues and expenses during the year. Significant items subject to such estimates and assumptions include the carrying value of long-lived assets; valuation allowances for receivables, inventories and deferred income tax assets; environmental liabilities; liabilities for potential tax deficiencies and potential litigation claims and settlements; and assets and obligations related to employee benefits. Additionally, certain estimated liabilities are recorded when management commits to a plan to close an operating facility or to exit a business activity. Actual results could differ from the estimates and assumptions used. Revenue recognition -- Revenues principally include sales, dividend and affiliate income, gains or losses on the disposal of assets and gains or losses from changes in ownership interests. Sales are recognized when products are shipped or services are provided to customers. Consumer excise taxes on petroleum products and merchandise and matching crude oil and refined products buy/sell transactions settled in cash are included in both revenues and costs and expenses, with no effect on income. Dividend and affiliate income includes USX's proportionate share of income from equity method investments and dividend income from other investments. Dividend income is recognized when dividend payments are received. When long-lived assets depreciated on an individual basis are sold or otherwise disposed of, any gains or losses are reflected in income. Such gains or losses on the disposal of long- lived assets are recognized when title passes to the buyer and, if applicable, all significant regulatory approvals are received. Proceeds from disposal of long-lived assets depreciated on a group basis are credited to accumulated depreciation, depletion and amortization with no immediate effect on income. Gains or losses from a change in ownership of a consolidated subsidiary or an unconsolidated affiliate are recognized in revenues in the period of change. Cash and cash equivalents -- Cash and cash equivalents include cash on hand and on deposit and investments in highly liquid debt instruments with maturities generally of three months or less. Inventories -- Inventories are carried at lower of cost or market. Cost of inventories is determined primarily under the last- in, first-out (LIFO) method. Derivative instruments -- USX engages in commodity and currency risk management activities within the normal course of its businesses as an end-user of derivative instruments (Note 27). Management is authorized to manage exposure to price fluctuations related to the purchase, production or sale of crude oil, natural gas, refined products, nonferrous metals and electricity through the use of a variety of derivative financial and nonfinancial instruments. Derivative financial instruments require settlement in cash and include such instruments as over-the-counter (OTC) commodity swap agreements and OTC commodity options. Derivative nonfinancial instruments require or permit settlement by delivery of commodities and include exchange-traded commodity futures contracts and options. At times, derivative positions are closed, prior to maturity, simultaneous with the underlying physical transaction and the effects are recognized in income accordingly. USX's practice does not permit derivative positions to remain open if the underlying physical market risk has been removed. Derivative instruments relating to fixed price sales of equity production are marked-to-market in the current period and the related income effects are included U-8 within income from operations. All other changes in the market value of derivative instruments are deferred, including both closed and open positions, and are subsequently recognized in income, as sales or cost of sales, in the same period as the underlying transaction. Premiums on all commodity-based option contracts are initially recorded based on the amount paid or received; the options' market value is subsequently recorded as a receivable or payable, as appropriate. The margin receivable accounts required for open commodity contracts reflect changes in the market prices of the underlying commodity and are settled on a daily basis. Forward exchange contracts are used to manage currency risks related to commitments for capital expenditures and existing assets or liabilities denominated in a foreign currency. Gains or losses related to firm commitments are deferred and included with the underlying transaction; all other gains or losses are recognized in income in the current period as sales, cost of sales, interest income or expense, or other income, as appropriate. Forward exchange contract values are included in receivables or payables, as appropriate. Recorded deferred gains or losses are reflected within other current and noncurrent assets or accounts payable and deferred credits and other liabilities. Cash flows from the use of derivative instruments are reported in the same category as the hedged item in the statement of cash flows. Exploration and development -- USX follows the successful efforts method of accounting for oil and gas exploration and development. Gas balancing -- USX follows the sales method of accounting for gas production imbalances. Long-lived assets -- Except for oil and gas producing properties, depreciation is generally computed on the straight-line method based upon estimated lives of assets. USX's method of computing depreciation for steel producing assets modifies straight-line depreciation based on the level of production. The modification factors range from a minimum of 85% at a production level below 81% of capability, to a maximum of 105% for a 100% production level. No modification is made at the 95% production level, considered the normal long-range level. Depreciation and depletion of oil and gas producing properties are computed using predetermined rates based upon estimated proved oil and gas reserves applied on a units-of- production method. Depletion of mineral properties, other than oil and gas, is based on rates which are expected to amortize cost over the estimated tonnage of minerals to be removed. USX evaluates impairment of its oil and gas producing assets primarily on a field-by-field basis. Other assets are evaluated on an individual asset basis or by logical groupings of assets. Assets deemed to be impaired are written down to their fair value, including any related goodwill, using discounted future cash flows and, if available, comparable market values. Environmental liabilities -- USX provides for remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. Generally, the timing of remediation accruals coincides with completion of a feasibility study or the commitment to a formal plan of action. Remediation liabilities are accrued based on estimates of known environmental exposure and are discounted in certain instances. If recoveries of remediation costs from third parties are probable, a receivable is recorded. Estimated abandonment and dismantlement costs of offshore production platforms are accrued based on production of estimated proved oil and gas reserves. Postemployment benefits -- USX recognizes an obligation to provide postemployment benefits, primarily for disability-related claims covering indemnity and medical payments. The obligation for these claims and the related periodic costs are measured using actuarial techniques and assumptions, including an appropriate discount rate, analogous to the required methodology for measuring pension and other postretirement benefit obligations. Actuarial gains and losses are deferred and amortized over future periods. Insurance -- USX is insured for catastrophic casualty and certain property and business interruption exposures, as well as those risks required to be insured by law or contract. Costs resulting from noninsured losses are charged against income upon occurrence. Reclassifications -- Certain reclassifications of prior years' data have been made to conform to 1998 classifications. 2. New Accounting Standards The following accounting standards were adopted by USX: Reporting comprehensive income -- Effective January 1, 1998, USX adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". This Standard establishes requirements for reporting and display of comprehensive income and its components in the financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events from nonowner sources. It includes U-9 all changes in equity during a period except those resulting from investments by and distributions to owners. See required disclosures on page U-7. Disclosures of operating segments -- USX adopted in 1998, Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131), which establishes new standards for reporting information about operating segments and related disclosures about products and services, geographic areas and major customers. The most significant new requirement of this Standard is that reportable operating segments be based on an enterprise's internally reported business segments. USX has complied with SFAS No. 131 by disclosing Group operating segments and other required data at Note 10. Disclosures of postretirement benefits -- USX adopted in 1998, Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (SFAS No. 132), which revises and standardizes the reporting requirements for postretirement benefits. However, the Standard does not change the measurement and recognition of those benefits. USX has complied with SFAS No. 132 by disclosing pension and other postretirement benefits at Note 11. Environmental remediation liabilities -- Effective January 1, 1997, USX adopted American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" (SOP 96-1), which provides additional interpretation of existing accounting standards related to recognition, measurement and disclosure of environmental remediation liabilities. As a result of adopting SOP 96-1, USX identified additional environmental remediation liabilities of $46 million, of which $28 million was discounted to a present value of $13 million and $18 million was not discounted. Assumptions used in the calculation of the present value amount included an inflation factor of 2% and an interest rate of 7% over a range of 22 to 30 years. Estimated receivables for recoverable costs related to adoption of SOP 96-1 were $4 million. The net unfavorable effect of adoption on income from operations at January 1, 1997, was $27 million. Stock-based compensation -- Effective January 1, 1996, USX adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), which establishes a fair value based method of accounting for employee stock-based compensation plans. The Standard permits companies to continue to apply the accounting provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), provided certain disclosures are made. USX has complied with SFAS No. 123 by following the accounting provisions of APB No. 25 and including the required disclosures at Note 21. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). This new Standard requires recognition of all derivatives as either assets or liabilities at fair value. SFAS No. 133 may result in additional volatility in both current period earnings and other comprehensive income as a result of recording recognized and unrecognized gains and losses resulting from changes in the fair value of derivative instruments. SFAS No. 133 requires a comprehensive review of all outstanding derivative instruments to determine whether or not their use meets the hedge accounting criteria. It is possible that there will be derivative instruments employed in our businesses that do not meet all of the designated hedge criteria and they will be reflected in income on a mark-to- market basis. Based upon the strategies currently employed by USX and the level of activity related to forward exchange contracts and commodity-based derivative instruments in recent periods, USX does not anticipate the effect of adoption to have a material impact on either financial position or results of operations. USX plans to adopt SFAS No. 133 effective January 1, 2000, as required. 3. Business Combinations In August 1998, Marathon Oil Company (Marathon) acquired Tarragon Oil and Gas Limited (Tarragon), a Canadian oil and gas exploration and production company. Securityholders of Tarragon received, at their election, Cdn$14.25 for each Tarragon share, or the economic equivalent in Exchangeable Shares of an indirect Canadian subsidiary of Marathon, which are exchangeable solely on a one-for-one basis into Marathon Stock. The purchase price included cash payments of $686 million, issuance of 878,074 Exchangeable Shares valued at $29 million and the assumption of $345 million in debt. The Exchangeable Shares are exchangeable at the option of the holder at any time and automatically redeemable on August 11, 2003 (and, in certain circumstances, as early as August 11, 2001). The holders of Exchangeable Shares are entitled to receive declared dividends equivalent to dividends declared from time to time by USX on Marathon Stock. USX accounted for the acquisition using the purchase method of accounting. The 1998 results of operations include the operations of Marathon Canada Limited, formerly known as Tarragon, commencing August 12, 1998. U-10 During 1997, Marathon and Ashland Inc. (Ashland) agreed to combine the major elements of their refining, marketing and transportation (RM&T) operations. On January 1, 1998, Marathon transferred certain RM&T net assets to Marathon Ashland Petroleum LLC (MAP), a new consolidated subsidiary. Also on January 1, 1998, Marathon acquired certain RM&T net assets from Ashland in exchange for a 38% interest in MAP. The acquisition was accounted for under the purchase method of accounting. The purchase price was determined to be $1.9 billion, based upon an external valuation. The change in Marathon's ownership interest in MAP resulted in a gain of $245 million, which is included in 1998 revenues. In connection with the formation of MAP, Marathon and Ashland entered into a Limited Liability Company Agreement dated January 1, 1998 (the LLC Agreement). The LLC Agreement provides for an initial term of MAP expiring on December 31, 2022 (25 years from its formation). The term will automatically be extended for ten- year periods, unless a termination notice is given by either party. Also in connection with the formation of MAP, the parties entered into a Put/Call, Registration Rights and Standstill Agreement (the Put/Call Agreement). The Put/Call Agreement provides that at any time after December 31, 2004, Ashland will have the right to sell to Marathon all of Ashland's ownership interest in MAP, for an amount in cash and/or Marathon or USX debt or equity securities equal to the product of 85% (90% if equity securities are used) of the fair market value of MAP at that time, multiplied by Ashland's percentage interest in MAP. Payment could be made at closing, or at Marathon's option, in three equal annual installments, the first of which would be payable at closing. At any time after December 31, 2004, Marathon will have the right to purchase all of Ashland's ownership interests in MAP, for an amount in cash equal to the product of 115% of the fair market value of MAP at that time, multiplied by Ashland's percentage interest in MAP. The following unaudited pro forma data for USX includes the results of operations of Tarragon for 1998 and 1997, and the Ashland RM&T net assets for 1997, giving effect to the acquisitions as if they had been consummated at the beginning of the years presented. The pro forma data is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations.
(In millions, except per share amounts) 1998 1997 Revenues $ 28,429 $30,167 Net income 643/(a)/ 989/(a)/ Net income per common share of Marathon Stock -- Basic and diluted .95 1.58
/(a)/Excluding the pro forma inventory market valuation adjustment, pro forma net income would have been $747 million in 1998 and $1,151 million in 1997. Reported net income, excluding the reported inventory market valuation adjustment, would have been $778 million in 1998 and $1,167 million in 1997. 4. Transactions Between MAP and Ashland At December 31, 1998, MAP included in their cash and cash equivalents, a $103 million demand note invested with Ashland, which is payable March 15, 1999. During 1998, MAP's petroleum products' sales to Ashland were $185 million and MAP's purchases of products and services from Ashland were $45 million. These transactions were conducted on an arm's-length basis. At December 31, 1998, MAP had current receivables from Ashland of $22 million and current payables, including distributions payable, to Ashland of $106 million. 5. Discontinued Operations Effective October 31, 1997, USX sold its stock in Delhi Gas Pipeline Corporation and other subsidiaries of USX that comprised all of the Delhi Group (Delhi Companies). The transaction involved a gross purchase price of $762 million. Under the USX Restated Certificate of Incorporation (USX Certificate), USX was required to elect one of three options to return the value of the net proceeds received in the transaction to the holders of shares in Delhi Stock (Delhi shareholders). Of the three options, USX elected to use the net proceeds of $195 million, or $20.60 per share, to redeem all shares of Delhi Stock. The net proceeds were distributed to the Delhi shareholders on January 26, 1998. After the redemption, 50,000,000 shares of Delhi Stock remain authorized but unissued. The sale of the Delhi Companies resulted in a gain on disposal of $81 million, net of $206 million income taxes. As of December 31, 1997, the balance sheet of the Delhi Group consisted of cash restricted for the redemption of Delhi Stock of $195 million and redeemable Delhi Stock in an equal and offsetting amount. U-11 The financial results of the Delhi Group have been reclassified as discontinued operations for the 1997 and 1996 periods presented in the Consolidated Statement of Operations and are summarized as follows:
Year Ended December 31 ---------------------- (In millions) 1997/(a)/ 1996 Revenues $1,205 $1,062 Costs and expenses 1,190 1,031 ------ ------ Income from operations 15 31 Net interest and other financial costs 23 21 ------ ------ Income (loss) before income taxes (8) 10 Provision (credit) for estimated income taxes (7) 4 ------ ------ Net income (loss) $ (1) $ 6
/(a)/Represents ten months of operations. 6. Revenues The items below are included in revenues and costs and expenses, with no effect on income.
(In millions) 1998 1997 1996 Matching crude oil and refined product buy/sell transactions settled in cash $3,948 $2,436 $2,912 Consumer excise taxes on petroleum products and merchandise 3,581 2,736 2,768
7. Other Items
(In millions) 1998 1997 1996 Net interest and other financial costs from continuing operations Interest and other financial income: Interest income $ 35 $ 11 $ 8 Other 4 (6) (1) ------ ------ ------ Total 39 5 7 ------ ------ ------ Interest and other financial costs: Interest incurred 325 289 345 Less interest capitalized 46 31 11 ------ ------ ------ Net interest 279 258 334 Interest on tax issues 21 20 14 Financial costs on trust preferred securities 13 10 -- Financial costs on preferred stock of subsidiary 22 21 21 Amortization of discounts 6 6 9 Expenses on sales of accounts receivable 21 40 40 Adjustment to settlement value of indexed debt (44) (10) 6 Other -- 7 4 ------ ------ ------ Total 318 352 428 ------ ------ ------ Net interest and other financial costs $ 279 $ 347 $ 421
Foreign currency transactions For 1998, 1997 and 1996, the aggregate foreign currency transaction gains (losses) included in determining income from continuing operations were $13 million, $4 million and $(24) million, respectively. 8. Extraordinary Loss On December 30, 1996, USX irrevocably called for redemption on January 30, 1997, $120 million of 8-1/2% Sinking Fund Debentures, resulting in a 1996 extraordinary loss of $9 million, net of a $5 million income tax benefit. 9. Gain on Affiliate Stock Offering In 1996, an aggregate of 6.9 million shares of RTI International Metals, Inc. (RTI) (formerly RMI Titanium Company) common stock was sold in a public offering at a price of $18.50 per share and total net proceeds of $121 million. Included in the offering were 2.3 million shares sold by USX for net proceeds of $40 million. USX recognized a total pretax gain of $53 million, of which $34 million was attributable to the shares sold by USX and $19 million was attributable to the increase in value of USX's investment as a result of the shares sold by RTI. The income tax effect related to the total gain was $19 million. As a result of this transaction, USX's ownership in RTI decreased from approximately 50% to 27%. USX continues to account for its investment in RTI under the equity method of accounting. U-12 10. Group and Segment Information After the redemption of the Delhi Stock on January 26, 1998, USX has two classes of common stock: Marathon Stock and Steel Stock, which are intended to reflect the performance of the Marathon Group and the U. S. Steel Group, respectively. A description of each group and its products and services is as follows: Marathon Group -- The Marathon Group includes Marathon Oil Company and certain other subsidiaries of USX. Marathon Group revenues as a percentage of total consolidated USX revenues were 78% in 1998, 69% in 1997 and 71% in 1996. For information on sales by product line, see table of revenues on page U-49 of Management's Discussion and Analysis. U. S. Steel Group -- The U. S. Steel Group consists of U. S. Steel, the largest domestic integrated steel producer. U. S. Steel Group revenues as a percentage of total consolidated USX revenues were 22% in 1998, 31% in 1997 and 29% in 1996. For information on sales by product line, see table of revenues on page U-56 of Management's Discussion and Analysis. Group Operations:
Income From Net Capital (In millions) Year Revenues Operations Income Expenditures Assets - ----------------------------------------------------------------------------------------------------------------------------------- Marathon Group 1998 $22,075 $ 938 $310 $1,270 $14,544 1997 15,754 932 456 1,038 10,565 1996 16,394 1,296 664 751 10,151 - ----------------------------------------------------------------------------------------------------------------------------------- U. S. Steel Group 1998 6,283 579 364 310 6,693 1997 6,941 773 452 261 6,694 1996 6,670 483 273 337 6,580 - ----------------------------------------------------------------------------------------------------------------------------------- Adjustments for 1998 (23) -- -- -- (104) Discontinued 1997 (107) -- 80 74 25 Operations and 1996 (87) -- 6 80 249 Eliminations - ----------------------------------------------------------------------------------------------------------------------------------- Total USX 1998 $28,335 $1,517 $674 $1,580 $21,133 Corporation 1997 22,588 1,705 988 1,373 17,284 1996 22,977 1,779 943 1,168 16,980 - -----------------------------------------------------------------------------------------------------------------------------------
Operating Segments: USX's reportable operating segments are business units within the Marathon and U. S. Steel Groups, each providing their own unique products and services. Each operating segment is independently managed and requires different technology and marketing strategies. Segment income represents income from operations allocable to operating segments. The following items included in income from operations are not allocated to operating segments: . Gain on ownership change in MAP . Gain on affiliate stock offering . Pension credits associated with pension plan assets and liabilities allocated to pre-1987 retirees and former businesses . Certain costs related to former U. S. Steel Group business activities . Certain general and administrative costs related to all Marathon Group operating segments in excess of amounts billed to MAP under service contracts and amounts charged out to operating segments under Marathon's shared services procedures . USX corporate general and administrative costs. These costs primarily consist of employment costs including pension effects, professional services, facilities and other related costs associated with corporate activities. . Inventory market valuation adjustments . Certain other items not allocated to operating segments for business performance reporting purposes U-13 The Marathon Group's operations consists of three reportable operating segments: 1) Exploration and Production -- explores for and produces crude oil and natural gas on a worldwide basis; 2) Refining, Marketing and Transportation -- refines, markets and transports crude oil and petroleum products, primarily in the Midwest and southeastern United States through MAP; and 3) Other Energy Related Businesses. Other Energy Related Businesses is an aggregation of two segments which fall below the quantitative reporting thresholds: 1) Natural Gas and Crude Oil Marketing and Transportation -- markets and transports its own and third- party natural gas and crude oil in the United States; and 2) Power Generation -- develops, constructs and operates independent electric power projects worldwide. The U. S. Steel Group consists of a single operating segment, U. S. Steel. U. S. Steel is engaged in the production and sale of steel mill products, coke and taconite pellets; the management of mineral resources; domestic coal mining; engineering and consulting services; and real estate development and management.
Refining, Other Exploration Marketing Energy Total and and Related Marathon (In millions) Production Transportation Businesses Segments U. S. Steel Total - ------------------------------------------------------------------------------------------------------------------------------------ 1998 Revenues: Customer $2,085 $19,290 $306 $21,681 $6,180 $27,861 Intersegment/(a)/ 144 10 17 171 -- 171 Intergroup/(a)/ 13 -- 7 20 2 22 Equity in earnings of unconsolidated affiliates 2 12 14 28 46 74 Other 26 40 11 77 55 132 ------ ------- ---- ------- ------ ------- Total revenues $2,270 $19,352 $355 $21,977 $6,283 $28,260 ------ ------- ---- ------- ------ ------- Segment income $ 278 $ 896 $ 33 $ 1,207 $ 330 $ 1,537 Significant noncash items included in segment income: Depreciation, depletion and amortization/(b)/ 581 272 6 859 283 1,142 Pension expenses/(c)/ 3 16 2 21 187 208 Capital expenditures/(d)/ 839 410 8 1,257 305 1,562 Affiliates -- investments/(e)/ -- 22 17 39 71 110 - ------------------------------------------------------------------------------------------------------------------------------------ 1997 Revenues: Customer $1,575 $13,606 $381 $15,562 $6,812 $22,374 Intersegment/(a)/ 619 -- -- 619 -- 619 Intergroup/(a)/ 99 -- 6 105 2 107 Equity in earnings of unconsolidated affiliates 14 4 7 25 69 94 Other 7 20 30 57 58 115 ------ ------- ---- ------- ------ ------- Total revenues $2,314 $13,630 $424 $16,368 $6,941 $23,309 ------ ------- ---- ------- ------ ------- Segment income $ 773 $ 563 $ 48 $ 1,384 $ 618 $ 2,002 Significant noncash items included in segment income: Depreciation, depletion and amortization/(b)/ 469 173 7 649 303 952 Pension expenses/(c)/ 3 8 1 12 169 181 Capital expenditures/(d)/ 810 205 6 1,021 256 1,277 Affiliates -- investments/(e)/ 114 -- 73 187 26 213 - ------------------------------------------------------------------------------------------------------------------------------------ 1996 Revenues: Customer $1,765 $14,130 $299 $16,194 $6,535 $22,729 Intersegment/(a)/ 776 -- -- 776 -- 776 Intergroup/(a)/ 83 -- 4 87 -- 87 Equity in earnings of unconsolidated affiliates 6 8 11 25 66 91 Other 10 13 13 36 16 52 ------ ------- ---- ------- ------ ------- Total revenues $2,640 $14,151 $327 $17,118 $6,617 $23,735 ------ ------- ---- ------- ------ ------- Segment income $ 900 $ 249 $ 57 $ 1,206 $ 248 $ 1,454 Significant noncash items included in segment income: Depreciation, depletion and amortization/(b)/ 499 173 6 678 292 970 Pension expenses/(c)/ 2 8 1 11 172 183 Capital expenditures/(d)/ 504 234 3 741 336 1,077 Affiliates -- investments/(e)/ 20 -- 11 31 -- 31 - ------------------------------------------------------------------------------------------------------------------------------------
/(a)/Intersegment and intergroup sales and transfers were conducted on an arm's-length basis. /(b)/Differences between segment totals and consolidated totals represent amounts included in administrative expenses and, in 1998, international exploration and production property impairments. /(c)/Differences between segment totals and consolidated totals represent unallocated pension credits and amounts included in administrative expenses. /(d)/Differences between segment totals and consolidated totals represent amounts related to corporate administrative activities and, in 1997 and 1996, discontinued operations. /(e)/Differences between segment totals and consolidated totals represent amounts related to corporate administrative activities. U-14 The following schedule reconciles segment revenues and income to amounts reported in the Marathon and U. S. Steel Groups' financial statements:
Marathon Group U. S. Steel Group (In millions) 1998 1997 1996 1998 1997 1996 Revenues: Revenues of reportable segments $21,977 $16,368 $17,118 $6,283 $6,941 $6,617 Items not allocated to segments: Gain on ownership change in MAP 245 -- -- -- -- -- Gain on affiliate stock offering -- -- -- -- -- 53 Other 24 -- 35 -- -- -- Elimination of intersegment revenues (171) (619) (776) -- -- -- Administrative revenues -- 5 17 -- -- -- ------ ------- ------- ------ ------ ------ Total Group revenues $22,075 $15,754 $16,394 $6,283 $6,941 $6,670 ------- ------- ------- ------ ------ ------ Income: Income for reportable segments $ 1,207 $ 1,384 $ 1,206 $ 330 $ 618 $ 248 Items not allocated to segments: Gain on ownership change in MAP 245 -- -- -- -- -- Gain on affiliate stock offering -- -- -- -- -- 53 Administrative expenses (106) (168) (133) (24) (33) (28) Pension credits -- -- -- 373 313 330 Costs related to former business activities -- -- -- (100) (125) (120) Inventory market valuation adjustments (267) (284) 209 -- -- -- Other/(a)/ (141) -- 14 -- -- -- ------- ------- ------- ------ ------ ------ Total Group income from operations $ 938 $ 932 $ 1,296 $ 579 $ 773 $ 483 - -----------------------------------------------------------------------------------------------------------------------------------
/(a)/Represents international exploration and production property impairments, suspended exploration well write-offs, gas contract settlement and MAP transition charges in 1998. Represents net gains on certain asset sales, charges for withdrawal from a nonprofit oil spill response group and certain state tax adjustments in 1996. Geographic Area: The information below summarizes the operations in different geographic areas. Transfers between geographic areas are at prices which approximate market.
Revenues ---------- Within Between Geographic Geographic (In millions) Year Areas Areas Total Assets/(a)/ - ------------------------------------------------------------------------------------------------------------------------------------ Marathon Group: United States 1998 $21,296 $ -- $21,296 $ 7,675 1997 15,034 -- 15,034 5,588 1996 15,509 -- 15,509 5,192 United Kingdom 1998 532 -- 532 1,788 1997 698 -- 698 1,932 1996 859 -- 859 2,002 Other Foreign Countries 1998 247 420 667 1,497 1997 22 39 61 444 1996 26 43 69 270 Eliminations 1998 -- (420) (420) -- 1997 -- (39) (39) -- 1996 -- (43) (43) -- Total Marathon Group 1998 $22,075 $ -- $22,075 $10,960 1997 15,754 -- 15,754 7,964 1996 16,394 -- 16,394 7,464 - ------------------------------------------------------------------------------------------------------------------------------------ U. S. Steel Group: United States 1998 $ 6,266 $ -- $ 6,266 $ 3,043 1997 6,926 -- 6,926 3,023 1996 6,642 -- 6,642 3,024 Foreign Countries 1998 17 -- 17 69 1997 15 -- 15 1 1996 28 -- 28 2 Total U. S. Steel Group 1998 $ 6,283 $ -- $ 6,283 $ 3,112 1997 6,941 -- 6,941 3,024 1996 6,670 -- 6,670 3,026 - ------------------------------------------------------------------------------------------------------------------------------------ Adjustments for Discontinued 1998 $ (23) $ -- $ (23) $ -- Operations and Eliminations 1997 (107) -- (107) -- 1996 (87) -- (87) 557 - ------------------------------------------------------------------------------------------------------------------------------------ Total USX Corporation 1998 $28,335 $ -- $28,335 $14,072 1997 22,588 -- 22,588 10,988 1996 22,977 -- 22,977 11,047 - ------------------------------------------------------------------------------------------------------------------------------------
/(a)/Includes property, plant and equipment and investments in affiliates. U-15 11. Pensions and Other Postretirement Benefits USX has noncontributory defined benefit pension plans covering substantially all employees. Benefits under these plans are primarily based upon years of service and final average pensionable earnings, or a minimum benefit based upon years of service, whichever is greater. In addition, pension benefits based upon a percent of total career pensionable earnings cover certain participating salaried employees. USX also has defined benefit retiree health and life insurance plans (other benefits) covering most employees upon their retirement. Health benefits are provided, for the most part, through comprehensive hospital, surgical and major medical benefit provisions subject to various cost sharing features. Life insurance benefits are provided to certain nonunion and union represented retiree beneficiaries primarily based on employees' annual base salary at retirement. For most union retirees, benefits are provided for the most part based on fixed amounts negotiated in labor contracts with the appropriate unions. Except for certain life insurance benefits paid from reserves held by insurance carriers and benefits required to be funded by union contracts, most other benefits have not been prefunded.
Pension Benefits Other Benefits ------------------------ ------------------ (In millions) 1998 1997 1998 1997 Change in benefit obligations Benefit obligations at January 1 $ 8,085 $ 7,885 $ 2,451 $ 2,417 Service cost 119 96 27 21 Interest cost 544 562 172 175 Plan amendments 14 37 (30) -- Actuarial (gains) losses 637 462 164 (11) Acquisition 145 -- 98 -- Settlement, curtailment and termination benefits 10 4 7 -- Benefits paid (925) (961) (160) (151) --------- ------- ------- ------- Benefit obligations at December 31 $ 8,629 $ 8,085 $ 2,729 $ 2,451 Change in plan assets Fair value of plan assets at January 1 $ 10,925 $ 9,849 $ 258 $ 111 Actual return on plan assets 1,507 1,972 31 19 Acquisition 55 -- -- -- Employer contributions (6) 44 -- 150 Benefits paid (907) (940) (24) (22) --------- ------- ------- ------- Fair value of plan assets at December 31 $ 11,574 $10,925 $ 265 $ 258 Funded status of plans at December 31 $ 2,945/(a)/ $ 2,840/(a)/ $(2,464) $(2,193) Unrecognized net gain from transition (175) (249) -- -- Unrecognized prior service costs (credits) 566 628 (38) (7) Unrecognized net actuarial gains (993) (993) (81) (254) Additional minimum liability/(b)/ (75) (79) -- -- --------- ------- ------- ------- Prepaid (accrued) benefit cost $ 2,268 $ 2,147 $(2,583) $(2,454) --------- ------- ------- -------
/(a)/Includes several small plans that have accumulated benefit obligations in excess of plan assets: Projected benefit obligation (PBO) $ (120) $ (151) Plan assets -- 24 --------- ------- PBO in excess of plan assets $ (120) $ (127) /(b)/Additional minimum liability recorded was offset by the following: Intangible asset $ 18 $ 30 --------- ------- Accumulated other comprehensive income (losses): Beginning of year $ (32) $ (22) Change during year (net of tax) (5) (10) --------- ------- Balance at end of year $ (37) $ (32)
U-16
Pension Benefits Other Benefits (In millions) 1998 1997 1996 1998 1997 1996 Components of net periodic benefit cost (credit) Service cost $ 119 $ 96 $ 104 $ 27 $ 21 $ 26 Interest cost 544 562 568 172 175 183 Return on plan assets -- actual (1,507) (1,972) (1,275) (31) (19) (12) -- deferred gain 631 1,144 422 10 8 1 Amortization of unrecognized (gains) losses 7 3 7 (12) (12) 2 Multiemployer and other USX plans 6 6 6 13/(a)/ 15/(a)/ 15/(a) Settlement and termination costs 10/(b)/ 4 6 -- -- -- ----- ------- ------- ----- ----- ----- Net periodic benefit cost (credit) $(190) $ (157) $ (162) $ 179 $ 188 $ 215
/(a)/Represents payments to a multiemployer health care benefit plan created by the Coal Industry Retiree Health Benefit Act of 1992 based on assigned beneficiaries receiving benefits. The present value of this unrecognized obligation is broadly estimated to be $103 million, including the effects of future medical inflation, and this amount could increase if additional beneficiaries are assigned. /(b)/Represents costs of the U. S. Steel Group 1998 voluntary early retirement program.
Pension Benefits Other Benefits 1998 1997 1998 1997 Actuarial assumptions at December 31: Discount rate 6.5% 7.0% 6.5% 7.0% Expected annual return on plan assets 9.0% 9.5% 9.0% 9.5% Increase in compensation rate 4.0% 4.0% 4.0% 4.0%
For measurement purposes, an 8% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 5% for 2005 and remain at that level thereafter. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage- (In millions) Point Increase Point Decrease Effect on total of service and interest cost components $ 23 $ (17) Effect on other postretirement benefit obligations 288 (237)
12. Leases Future minimum commitments for capital leases (including sale- leasebacks accounted for as financings) and for operating leases having remaining noncancelable lease terms in excess of one year are as follows:
Capital Operating (In millions) Leases Leases 1999 $ 10 $ 229 2000 11 293 2001 11 200 2002 11 116 2003 11 82 Later years 117 208 Sublease rentals -- (16) ----- ------ Total minimum lease payments 171 $1,112 ====== Less imputed interest costs (76) ----- Present value of net minimum lease payments included in long-term debt $ 95
Operating lease rental expense from continuing operations:
(In millions) 1998 1997 1996 Minimum rental $ 293 $ 237 $ 227 Contingent rental 29 25 15 Sublease rentals (8) (8) (8) ----- ----- ------ Net rental expense $ 314 $ 254 $ 234
USX leases a wide variety of facilities and equipment under operating leases, including land and building space, office equipment, production facilities and transportation equipment. Most long-term leases include renewal options and, in certain leases, purchase options. In the event of a change in control of USX, as defined in the agreements, or certain other circumstances, operating lease obligations totaling $115 million may be declared immediately due and payable. U-17 13. Income Taxes Provisions (credits) for estimated income taxes on income from continuing operations were:
1998 1997 1996 (In millions) Current Deferred Total Current Deferred Total Current Deferred Total Federal $102 $ 168 $270 $208 $ 163 $ 371 $142 $ 151 $ 293 State and local 33 18 51 7 32 39 12 21 33 Foreign (4) (2) (6) 12 28 40 4 82 86 ---- ----- ---- ---------- -------- -------- -------- ---------- ---------- Total $131 $ 184 $315 $227 $ 223 $ 450 $158 $ 254 $ 412
A reconciliation of federal statutory tax rate (35%) to total provisions from continuing operations follows:
(In millions) 1998 1997 1996 Statutory rate applied to income from continuing operations before income taxes $ 346 $ 475 $ 476 Effects of foreign operations, including foreign tax credits (37) (11) (16) State and local income taxes after federal income tax effects 33 25 22 Credits other than foreign tax credits (12) (24) (48) Excess percentage depletion (11) (10) (7) Effects of partially owned companies (4) (9) (16) Nondeductible business and amortization expenses 4 5 5 Dispositions of subsidiary investments -- -- (8) Adjustment of prior years' income taxes (5) 2 3 Adjustment of valuation allowances -- (5) -- Other 1 2 1 ------- ------ ------ Total provisions on income from continuing operations $ 315 $ 450 $ 412
Deferred tax assets and liabilities resulted from the following:
(In millions) December 31 1998 1997 Deferred tax assets: Minimum tax credit carryforwards $ 200 $ 222 State tax loss carryforwards (expiring in 1999 through 2018) 118 127 Foreign tax loss carryforwards (portion of which expire in 1999 through 2013) 414 483 Employee benefits 1,170 1,079 Expected federal benefit for: Crediting certain foreign deferred income taxes 528 249 Deducting state and other foreign deferred income taxes 48 47 Receivables, payables and debt 80 63 Contingency and other accruals 188 198 Other 50 10 Valuation allowances: Federal (30) -- State (73) (91) Foreign (260) (272) ------- ------- Total deferred tax assets/(a)/ 2,433 2,115 ------- ------- Deferred tax liabilities: Property, plant and equipment 2,409 2,062 Prepaid pensions 917 790 Inventory 186 212 Investments in subsidiaries and affiliates 57 74 Other 190 94 ------- ------- Total deferred tax liabilities 3,759 3,232 ------- ------- Net deferred tax liabilities $1,326 $1,117
/(a)/USX expects to generate sufficient future taxable income to realize the benefit of its deferred tax assets. In addition, the ability to realize the benefit of foreign tax credits is based upon certain assumptions concerning future operating conditions (particularly as related to prevailing oil prices), income generated from foreign sources and USX's tax profile in the years that such credits may be claimed. The consolidated tax returns of USX for the years 1990 through 1994 are under various stages of audit and administrative review by the IRS. USX believes it has made adequate provision for income taxes and interest which may become payable for years not yet settled. Pretax income (loss) from continuing operations included $(75) million, $250 million and $339 million attributable to foreign sources in 1998, 1997 and 1996, respectively. Undistributed earnings of certain consolidated foreign subsidiaries at December 31, 1998, amounted to $132 million. No provision for deferred U.S. income taxes has been made for these subsidiaries because USX intends to permanently reinvest such earnings in those foreign operations. If such earnings were not permanently reinvested, a deferred tax liability of $46 million would have been required. U-18 14. Sales of Receivables USX has an agreement (the program) at December 31, 1998, to sell an undivided interest in certain accounts receivable of the U. S. Steel Group. Payments are collected from the sold accounts receivable; the collections are reinvested in new accounts receivable for the buyers; and a yield, based on defined short-term market rates, is transferred to the buyers. At December 31, 1998, the amount sold under the program that had not been collected was $320 million, which will be forwarded to the buyers at the end of the agreement in 1999, or in the event of earlier contract termination. If USX does not have a sufficient quantity of eligible accounts receivable to reinvest in for the buyers, the size of the program will be reduced accordingly. The amounts sold under the current and previous programs averaged $347 million, $705 million and $740 million for years 1998, 1997 and 1996, respectively. (For most of 1997 and for the year 1996, the Marathon and Delhi Groups had a separate accounts receivable program that was terminated in late 1997.) The buyers have rights to a pool of receivables that must be maintained at a level of at least 115% of the program's size. USX does not generally require collateral for accounts receivable, but significantly reduces credit risk through credit extension and collection policies, which include analyzing the financial condition of potential customers, establishing credit limits, monitoring payments and aggressively pursuing delinquent accounts. In the event of a change in control of USX, USX may be required to forward to the buyers, payments collected on the sold accounts receivable. 15. Investments and Long-Term Receivables
(In millions) December 31 1998 1997 Equity method investments $1,062 $ 838 Other investments 81 88 Receivables due after one year 56 71 Deposits of restricted cash 21 -- Other 29 31 ------ ------ Total $1,249 $1,028
Summarized financial information of affiliates accounted for by the equity method of accounting follows:
(In millions) 1998 1997 1996 Income data -- year: Revenues $3,510 $3,705 $3,274 Operating income 324 342 318 Net income 176 191 193 Balance sheet data -- December 31: Current assets $1,290 $1,094 Noncurrent assets 4,382 3,476 Current liabilities 874 863 Noncurrent liabilities 2,137 1,521
Dividends and partnership distributions received from equity affiliates were $42 million in 1998, $34 million in 1997 and $49 million in 1996. USX purchases from equity affiliates totaled $395 million, $461 million and $509 million in 1998, 1997 and 1996, respectively. USX sales to equity affiliates totaled $725 million, $812 million and $830 million in 1998, 1997 and 1996, respectively. 16. Short-Term Credit Agreement USX has a short-term credit agreement totaling $125 million at December 31, 1998. Interest is based on the bank's prime rate or London Interbank Offered Rate (LIBOR), and carries a facility fee of .15%. Certain other banks provide short-term lines of credit totaling $150 million which require a .125% fee or maintenance of compensating balances of 3%. At December 31, 1998, there were $40 million in borrowings against these facilities. USX had other outstanding short-term borrowings of $105 million. U-19 17. Long-Term Debt
Interest December 31 (In millions) Rates -- % Maturity 1998 1997 USX Corporation: Revolving credit facility/(a)/ 2001 $ 700 $ -- Notes payable 6-17/20 -- 9-4/5 1999 -- 2023 2,267 2,239 Foreign currency obligations/(b)/ 5-3/4 -- -- 68 Obligations relating to Industrial Development and Environmental Improvement Bonds and Notes/(c)/ 3-3/20 -- 6-7/8 2007 -- 2033 494 470 Indexed debt/(d)/ 6-3/4 2000 69 113 All other obligations, including sale-leaseback financing and capital leases 1999 -- 2012 94 98 Consolidated subsidiaries: Revolving credit facilities/(e)/ Guaranteed Notes 7 2002 135 135 Guaranteed Loan/(f)/ 9-1/20 1999 -- 2006 245 265 Notes payable 8-1/2 1999 -- 2001 2 3 All other obligations, including capital leases 1999 -- 2008 11 38 ------ ------ Total /(g)(h)/ 4,017 3,429 Less unamortized discount 26 26 Less amount due within one year 71 471 ------ ------ Long-term debt due after one year $3,920 $2,932
/(a)/An amended agreement which terminates in August 2001, provides for borrowing under a $2,350 million revolving credit facility. Interest is based on defined short-term market rates. During the term of this agreement, USX is obligated to pay a variable facility fee on total commitments, which was .15 % at December 31, 1998. /(b)/These obligations were redeemed during 1998. /(c)/At December 31, 1998, USX had outstanding obligations relating to Environmental Improvement Bonds in the amount of $159 million, which were supported by letter of credit arrangements that could become short-term obligations under certain circumstances. /(d)/The indexed debt represents 6-3/4% exchangeable notes due February 1, 2000, in the principal amount of $117 million or $21.375 per note, which was the market price per share of RTI common stock on November 26, 1996. At maturity, the principal amount of each note will be mandatorily exchanged by USX into shares of RTI common stock (or, at USX's option, the cash equivalent and/or such other consideration as permitted or required by the terms of the notes) at a defined exchange rate, which is based on the average market price of RTI common stock valued in January 2000. The carrying value of the notes is adjusted quarterly to settlement value and any resulting adjustment is charged or credited to income and included in net interest and other financial costs. /(e)/In 1998, MAP entered into a revolving credit facility for $100 million that terminates in July 1999 and a $400 million revolving credit facility that terminates in July 2003. Interest is based on defined short-term market rates for both facilities. During the terms of the agreements, MAP is obligated to pay a variable facility fee on total commitments. At December 31, 1998, the facility fee was .10% for the $100 million facility and .125% for the $400 million facility. At December 31, 1998, the unused and available credit was $500 million. In the event that MAP defaults on indebtedness (as defined in the agreement) in excess of $100 million, USX has guaranteed the payment of any outstanding obligations. /(f)/The guaranteed loan was used to fund a portion of the costs in connection with the development of the East Brae Field and the SAGE pipeline in the North Sea. A portion of proceeds from a long-term gas sales contract is dedicated to loan service under certain circumstances. Prepayment of the loan may be required under certain situations, including events impairing the security interest. /(g)/Required payments of long-term debt for the years 2000-2003 are $127 million, $981 million, $209 million and $186 million, respectively. /(h)/In the event of a change in control of USX, as defined in the related agreements, debt obligations totaling $3,610 million may be declared immediately due and payable. The principal obligations subject to such a provision are Notes payable $2,267 million; and Guaranteed Loan $245 million. In such event, USX may also be required to either repurchase the leased Fairfield slab caster for $108 million or provide a letter of credit to secure the remaining obligation.
18. Property, Plant and Equipment (In millions) December 31 1998 1997 Marathon Group $20,728 $17,233 U. S. Steel Group 8,439 8,295 ------- --------- Total 29,167 25,528 Less accumulated depreciation, depletion and amortization 16,238 15,466 ------- --------- Net $12,929 $10,062
Property, plant and equipment includes gross assets acquired under capital leases (including sale-leasebacks accounted for as financings) of $108 million at December 31, 1998, and $134 million at December 31, 1997; related amounts in accumulated depreciation, depletion and amortization were $77 million and $94 million, respectively. U-20 19. Inventories
(In millions) December 31 1998 1997 Raw materials $ 916 $ 582 Semi-finished products 282 331 Finished products 1,205 922 Supplies and sundry items 156 134 ------ ------ Total (at cost) 2,559 1,969 Less inventory market valuation reserve 551 284 ------ ------ Net inventory carrying value $2,008 $1,685
At December 31, 1998 and 1997, the LIFO method accounted for 90% and 92%, respectively, of total inventory value. Current acquisition costs were estimated to exceed the above inventory values at December 31 by approximately $310 million and $300 million in 1998 and 1997, respectively. The inventory market valuation reserve reflects the extent that the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. The reserve is decreased to reflect increases in market prices and inventory turnover and increased to reflect decreases in market prices. Changes in the inventory market valuation reserve result in noncash charges or credits to costs and expenses. 20. Supplemental Cash Flow Information
(In millions) 1998 1997 1996 Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $ (336) $ (382) $ (488) Income taxes paid (183) (400) (127) Commercial paper and revolving credit arrangements net: Commercial paper -- issued $ 1,650 $ -- $ 1,422 -- repayments (950) -- (1,555) Credit agreements -- borrowings 15,836 10,454 10,356 repayments (15,867) (10,449) (10,340) Other credit arrangements -- net 55 36 (36) -------- -------- -------- Total $ 724 $ 41 $ (153) Noncash investing and financing activities: Common stock issued for dividend reinvestment and employee stock plans $ 5 $ 10 $ 6 Acquisition of Tarragon -- Exchangeable Shares issued 29 -- -- -- liabilities assumed 433 -- -- Acquisition of Ashland RM&T net assets -- 38% interest in MAP 1,900 -- -- -- liabilities assumed 1,038 -- -- Acquisition of assets -- debt issued -- -- 2 Disposal of assets -- notes and common stock received 2 -- 12 -- liabilities assumed by buyers -- 240 25 Trust preferred securities exchanged for preferred stock -- 182 -- Marathon Stock issued for Exchangeable Shares 11 -- --
21. Stock-Based Compensation Plans The 1990 Stock Plan, as amended and restated, authorizes the Compensation Committee of the Board of Directors to grant restricted stock, stock options and stock appreciation rights to key management employees. Such employees are generally granted awards of the class of common stock intended to reflect the performance of the group(s) to which their work relates. Up to .5 percent of the outstanding Marathon Stock and .8 percent of the outstanding Steel Stock, as determined on December 31 of the preceding year, are available for grants during each calendar year the 1990 Plan is in effect. In addition, awarded shares that do not result in shares being issued are available for subsequent grant, and any ungranted shares from prior years' annual allocations are available for subsequent grant during the years the 1990 Plan is in effect. As of December 31, 1998, 8,141,990 Marathon Stock shares and 2,524,613 Steel Stock shares were available for grants in 1999. The Stock-Based Compensation Plans' activity below includes the Delhi Stock prior to its January 1998 redemption (Note 5). Restricted stock represents stock granted for such consideration, if any, as determined by the Compensation Committee, subject to provisions for forfeiture and restricting transfer. Those restrictions may be removed as conditions such as performance, continuous service and other criteria are met. Restricted stock is issued at the market price per share at the date of grant and vests over service periods that range from one to five years. U-21 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 1998 1997 1996 1998 1997 1996 Number of shares granted 25,378 20,430 11,495 17,742 11,942 5,605 Weighted-average grant-date fair value per share $ 34.00 $ 29.38 $ 22.38 $ 37.28 $ 32.00 $31.94
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, 1995 5,056,550 $23.63 1,056,650 $35.68 259,900 $ 16.24 Granted 633,825 22.38 411,705 31.94 77,550 13.63 Exercised (321,985) 17.50 (100,260) 31.98 (1,500) 12.69 Canceled (137,820) 26.82 (22,500) 33.43 (9,000) 17.49 ---------- ------ --------- ------ ------- ---------- Balance December 31, 1996 5,230,570 23.78 1,345,595 34.85 326,950 15.60 Granted 756,260 29.38 457,590 32.00 94,250 13.31 Exercised (2,215,665) 23.86 (158,265) 31.85 (6,300) 12.21 Canceled (76,300) 26.91 (11,820) 34.36 (6,650) 15.73 ---------- ------ --------- ------ ------- ---------- Balance December 31, 1997 3,694,865 24.81 1,633,100 34.35 408,250 15.13 Granted 987,535 34.00 611,515 37.28 Exercised (594,260) 27.61 (230,805) 32.00 Canceled (13,200) 27.22 (21,240) 35.89 Redeemed -- -- (408,250) 20.60/(b)/ ---------- ------ --------- ------- Balance December 31, 1998 4,074,940 26.62 1,992,570 35.50 --
/(a)/Weighted-average exercise price /(b)/Redemption price The following table represents stock options at December 31, 1998, excluding the Delhi Stock, which was redeemed on January 26, 1998:
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 1,728,295 5.7 years $20.63 1,728,295 $20.63 25.38 -- 26.88 174,050 2.4 25.46 174,050 25.46 29.08 -- 34.00 2,172,595 7.3 31.48 1,189,060 29.39 --------- --------- Total 4,074,940 3,091,405 --------- --------- Steel Stock $22.46 -- 25.44 32,815 2.5 years $24.83 32,815 $24.83 31.69 -- 34.44 1,076,165 7.2 32.57 1,076,165 32.57 37.28 -- 44.19 883,590 7.8 39.46 279,375 44.19 --------- --------- Total 1,992,570 1,388,355
During 1996, USX adopted SFAS No. 123, Accounting for Stock-Based Compensation, as discussed in Note 2, and elected to continue to follow the accounting provisions of APB No. 25. Actual stock-based compensation expense (credit) was $(3) million in 1998, $30 million in 1997 and $8 million in 1996. Incremental compensation expense, as determined under SFAS No. 123, was not material ($.02 or less per share for all years presented). Therefore, pro forma net income and earnings per share data have been omitted. Effective January 1, 1997, USX created a deferred compensation plan for non-employee directors of its Board of Directors. The plan permits participants to defer some or all of their annual retainers in the form of common stock units or cash. Common stock units are book entry units equal in value to a share of Marathon Stock or Steel Stock. Deferred stock benefits are distributed in shares of common stock within five business days after a participant leaves the Board of Directors. During 1998 and 1997, no shares of common stock were distributed. U-22 22. Dividends In accordance with the USX Certificate, dividends on the Marathon Stock and Steel Stock are limited to the legally available funds of USX. Net losses of any Group, as well as dividends and distributions on any class of USX Common Stock or series of preferred stock and repurchases of any class of USX Common Stock or series of preferred stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on all classes of Common Stock. Subject to this limitation, the Board of Directors intends to declare and pay dividends on the Marathon Stock and Steel Stock based on the financial condition and results of operations of the related group, although it has no obligation under Delaware law to do so. In making its dividend decisions with respect to each of the Marathon Stock and Steel Stock, the Board of Directors considers, among other things, the long-term earnings and cash flow capabilities of the related group as well as the dividend policies of similar publicly traded companies. Dividends on the Steel Stock are further limited to the Available Steel Dividend Amount. At December 31, 1998, the Available Steel Dividend Amount was at least $3,336 million. The Available Steel Dividend Amount will be increased or decreased, as appropriate, to reflect U. S. Steel Group net income, dividends, repurchases or issuances with respect to the Steel Stock and preferred stock attributed to the U. S. Steel Group and certain other items. 23. Stockholder Rights Plan USX's Board of Directors has adopted a Stockholder Rights Plan and declared a dividend distribution of one right for each outstanding share of Marathon Stock and Steel Stock referred to together as "Voting Stock." Each right becomes exercisable, at a price of $120, when any person or group has acquired, obtained the right to acquire or made a tender or exchange offer for 15% or more of the total voting power of the Voting Stock, except pursuant to a qualifying all-cash tender offer for all outstanding shares of Voting Stock, which is accepted with respect to shares of Voting Stock representing a majority of the voting power other than Voting Stock beneficially owned by the offeror. Each right entitles the holder, other than the acquiring person or group, to purchase one one-hundredth of a share of Series A Junior Preferred Stock or, upon the acquisition by any person of 15% or more of the total voting power of the Voting Stock, Marathon Stock or Steel Stock (as the case may be) or other property having a market value of twice the exercise price. After the rights become exercisable, if USX is acquired in a merger or other business combination where it is not the survivor, or if 50% or more of USX's assets, earnings power or cash flow are sold or transferred, each right entitles the holder to purchase common stock of the acquiring entity having a market value of twice the exercise price. The rights and exercise price are subject to adjustment, and the rights expire on October 9, 1999, or may be redeemed by USX for one cent per right at any time prior to the point they become exercisable. Under certain circumstances, the Board of Directors has the option to exchange one share of the respective class of Voting Stock for each exercisable right. 24. Income Per Common Share The method of calculating net income per share for the Marathon Stock, the Steel Stock and, prior to November 1, 1997, the Delhi Stock reflects the USX Board of Directors' intent that the separately reported earnings and surplus of the Marathon Group, the U. S. Steel Group and the Delhi Group, as determined consistent with the USX Certificate, are available for payment of dividends on the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. The financial statements of the Marathon Group, the U. S. Steel Group and the Delhi Group, taken together, include all accounts which comprise the corresponding consolidated financial statements of USX. Basic net income per share is calculated by adjusting net income for dividend requirements of preferred stock and, in 1997, the noncash credit on exchange of preferred stock and is based on the weighted average number of common shares outstanding. Diluted net income per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options, provided in each case, the effect is not antidilutive. U-23
COMPUTATION OF INCOME PER SHARE 1998 1997 1996 Basic Diluted Basic Diluted Basic Diluted CONTINUING OPERATIONS Marathon Group Net income (millions): Income before extraordinary loss $ 310 $ 310 $ 456 $ 456 $ 671 $ 671 Extraordinary loss -- -- -- -- 7 7 -------- -------- -------- -------- -------- ------- Net income 310 310 456 456 664 664 Effect of dilutive securities -- Convertible debentures -- -- -- 3 -- 14 -------- -------- -------- -------- -------- ------- Net income assuming conversions $ 310 $ 310 $ 456 $ 459 $ 664 $ 678 ======== ======== ======== ======== ======== ======== Shares of common stock outstanding (thousands): Average number of common shares outstanding 292,876 292,876 288,038 288,038 287,460 287,460 Effect of dilutive securities: Convertible debentures -- -- -- 1,936 -- 8,975 Stock options -- 559 -- 546 -- 133 -------- -------- -------- -------- -------- ------- Average common shares and dilutive effect 292,876 293,435 288,038 290,520 287,460 296,568 ======== ======== ======== ======== ======== ======== Per share: Income before extraordinary loss $ 1.06 $ 1.05 $ 1.59 $ 1.58 $ 2.33 $ 2.31 Extraordinary loss -- -- -- -- .02 .02 -------- -------- -------- -------- -------- ------- Net income $ 1.06 $ 1.05 $ 1.59 $ 1.58 $ 2.31 $ 2.29 U. S. Steel Group Net income (millions): Income before extraordinary loss $ 364 $ 364 $ 452 $ 452 $ 275 $ 275 Noncash credit from exchange of preferred stock -- -- 10 -- -- -- Dividends on preferred stock (9) -- (13) -- (22) (22) Extraordinary loss -- -- -- -- (2) (2) -------- -------- -------- -------- -------- ------- Net income applicable to Steel Stock 355 364 449 452 251 251 Effect of dilutive securities: Trust preferred securities -- 8 -- 6 -- -- Convertible debentures -- -- -- 2 -- 3 -------- -------- -------- -------- -------- ------- Net income assuming conversions $ 355 $ 372 $ 449 $ 460 $ 251 $ 254 ======== ======== ======== ======== ======== ======== Shares of common stock outstanding (thousands): Average number of common shares outstanding 87,508 87,508 85,672 85,672 84,025 84,025 Effect of dilutive securities: Trust preferred securities -- 4,256 -- 2,660 -- -- Preferred stock -- 3,143 -- 4,811 -- -- Convertible debentures -- -- -- 1,025 -- 1,925 Stock options -- 36 -- 35 -- 12 -------- -------- -------- -------- -------- ------- Average common shares and dilutive effect 87,508 94,943 85,672 94,203 84,025 85,962 ======== ======== ======== ======== ======== ======== Per share: Income before extraordinary loss $ 4.05 $ 3.92 $ 5.24 $ 4.88 $ 3.00 $ 2.97 Extraordinary loss -- -- -- -- .02 .02 -------- -------- -------- -------- -------- ------- Net income $ 4.05 $ 3.92 $ 5.24 $ 4.88 $ 2.98 $ 2.95 DISCONTINUED OPERATIONS Delhi Group Net income (millions): Income before extraordinary loss $ 79.7 $ 79.7 $ 6.4 $ 6.4 Extraordinary loss -- -- .5 .5 -------- -------- -------- ------- Net income $ 79.7 $ 79.7 $ 5.9 $ 5.9 ======== ======== ======== ======== Shares of common stock outstanding (thousands): Average number of common shares outstanding 9,449 9,449 9,448 9,448 Stock options -- 21 -- 3 -------- -------- -------- ------- Average common shares and dilutive effect 9,449 9,470 9,448 9,451 ======== ======== ======== ======== Per share: Income before extraordinary loss $ 8.43 $ 8.41 $ .67 $ .67 Extraordinary loss -- -- .06 .06 -------- -------- -------- ------- Net income $ 8.43 $ 8.41 $ .61 $ .61
U-24 25. Preferred Stock of Subsidiary and Trust Preferred Securities USX Capital LLC, a wholly owned subsidiary of USX, sold 10,000,000 shares (carrying value of $250 million) of 8-3/4% Cumulative Monthly Income Preferred Shares (MIPS) (liquidation preference of $25 per share) in 1994. Proceeds of the issue were loaned to USX. USX has the right under the loan agreement to extend interest payment periods for up to 18 months, and as a consequence, monthly dividend payments on the MIPS can be deferred by USX Capital LLC during any such interest payment period. In the event that USX exercises this right, USX may not declare dividends on any share of its preferred or common stocks. The MIPS are redeemable at the option of USX Capital LLC and subject to the prior consent of USX, in whole or in part from time to time, for $25 per share on or after March 31, 1999, and will be redeemed from the proceeds of any repayment of the loan by USX. In addition, upon final maturity of the loan, USX Capital LLC is required to redeem the MIPS. The financial costs are included in net interest and other financial costs. In 1997, USX exchanged approximately 3.9 million 6.75% Convertible Quarterly Income Preferred Securities (Trust Preferred Securities) of USX Capital Trust I, a Delaware statutory business trust (Trust), for an equivalent number of shares of its 6.50% Cumulative Convertible Preferred Stock (6.50% Preferred Stock) (Exchange). The Exchange resulted in the recording of Trust Preferred Securities at a fair value of $182 million and a noncash credit to Retained Earnings of $10 million. USX owns all of the common securities of the Trust, which was formed for the purpose of the Exchange. (The Trust Common Securities and the Trust Preferred Securities are together referred to as the Trust Securities.) The Trust Securities represent undivided beneficial ownership interests in the assets of the Trust, which consist solely of USX 6.75% Convertible Junior Subordinated Debentures maturing March 31, 2037 (Debentures), having an aggregate principal amount equal to the aggregate initial liquidation amount ($50.00 per security and $203 million in total) of the Trust Securities issued by the Trust. Interest and principal payments on the Debentures will be used to make quarterly distributions and to pay redemption and liquidation amounts on the Trust Preferred Securities. The quarterly distributions, which accumulate at the rate of 6.75% per annum on the Trust Preferred Securities and the accretion from fair value to the initial liquidation amount, are charged to income and included in net interest and other financial costs. Under the terms of the Debentures, USX has the right to defer payment of interest for up to 20 consecutive quarters and, as a consequence, monthly distributions on the Trust Preferred Securities will be deferred during such period. If USX exercises this right, then, subject to limited exceptions, it may not pay any dividend or make any distribution with respect to any shares of its capital stock. The Trust Preferred Securities are convertible at any time prior to the close of business on March 31, 2037 (unless such right is terminated earlier under certain circumstances) at the option of the holder, into shares of Steel Stock at a conversion price of $46.25 per share of Steel Stock (equivalent to a conversion ratio of 1.081 shares of Steel Stock for each Trust Preferred Security), subject to adjustment in certain circumstances. The Trust Preferred Securities may be redeemed at any time at the option of USX, at a premium of 103.25% of the initial liquidation amount through March 31, 1999, and thereafter, declining annually to the initial liquidation amount on April 1, 2003, and thereafter. They are mandatorily redeemable at March 31, 2037, or earlier under certain circumstances. Payments related to quarterly distributions and to the payment of redemption and liquidation amounts on the Trust Preferred Securities by the Trust are guaranteed by USX on a subordinated basis. In addition, USX unconditionally guarantees the Trust's Debentures. The obligations of USX under the Debentures, and the related indenture, trust agreement and guarantee constitute a full and unconditional guarantee by USX of the Trust's obligations under the Trust Preferred Securities. 26. Preferred Stock USX is authorized to issue 40,000,000 shares of preferred stock, without par value -- 6.50% Cumulative Convertible Preferred Stock (6.50% Preferred Stock) -- As of December 31, 1998, 2,767,787 shares (stated value of $1.00 per share; liquidation preference of $50.00 per share) were outstanding. The 6.50% Preferred Stock is convertible at any time, at the option of the holder, into shares of Steel Stock at a conversion price of $46.125 per share of Steel Stock, subject to adjustment in certain circumstances. This stock is redeemable at USX's sole option, at a price of $51.625 per share beginning April 1, 1998, and thereafter at prices declining annually on each April 1 to an amount equal to $50.00 per share on and after April 1, 2003. U-25 27. Derivative Instruments USX uses commodity-based derivative instruments to manage exposure to price fluctuations related to the anticipated purchase or production and sale of crude oil, natural gas, refined products, nonferrous metals and electricity. The derivative instruments used, as a part of an overall risk management program, include exchange- traded futures contracts and options, and instruments which require settlement in cash such as OTC commodity swaps and OTC options. While risk management activities generally reduce market risk exposure due to unfavorable commodity price changes for raw material purchases and products sold, such activities can also encompass strategies which assume certain price risk in isolated transactions. USX uses forward exchange contracts to minimize its exposure to foreign currency price fluctuations. USX remains at risk for possible changes in the market value of the derivative instrument; however, such risk should be mitigated by price changes in the underlying hedged item. USX is also exposed to credit risk in the event of nonperformance by counterparties. The credit worthiness of counterparties is subject to continuing review, including the use of master netting agreements to the extent practical, and full performance is anticipated. The following table sets forth quantitative information by class of derivative instrument:
Fair Carrying Recorded Value Amount Deferred Aggregate Assets Assets Gain or Contract (In millions) (Liabilities)/(a)/ (Liabilities) (Loss) Values/(b)/ December 31, 1998: Exchange-traded commodity futures $ -- $ -- $ (2) $ 104 Exchange-traded commodity options 3/(c)/ 2 3 776 OTC commodity swaps/(d)/ (9)/(e)/ (9) (7) 297 OTC commodity options 3 3 3 147 ----- ------ ----- ------ Total commodities $ (3) $ (4) $ (3) $1,324 ===== ====== ===== ====== Forward exchange contracts/(f)/: receivable $ 36 $ 36 $ -- $ 36 December 31, 1997: Exchange-traded commodity futures $ -- $ -- $ -- $ 30 Exchange-traded commodity options 1/(c)/ 1 2 129 OTC commodity swaps (3)/(e)/ (3) (4) 50 OTC commodity options -- -- -- 6 ----- ------ ----- ------ Total commodities $ (2) $ (2) $ (2) $ 215 ===== ====== ===== ====== Forward exchange contracts/(g)/: --receivable $ 11 $ 10 $ -- $ 59 payable (1) (1) (1) 5 ----- ------ ----- ------ Total currencies $10 $ 9 $ (1) $ 64
/(a)/The fair value amounts for OTC positions are based on various indices or dealer quotes. The fair value amounts for currency contracts are based on dealer quotes of forward prices covering the remaining duration of the forward exchange contract. The exchange-traded futures contracts and certain option contracts do not have a corresponding fair value since changes in the market prices are settled on a daily basis. /(b)/Contract or notional amounts do not quantify risk exposure, but are used in the calculation of cash settlements under the contracts. The contract or notional amounts do not reflect the extent to which positions may offset one another. /(c)/Includes fair values as of December 31, 1998 and 1997, for assets of $23 million and $3 million and for liabilities of $(20) million and $(2) million, respectively. /(d)/The OTC swap arrangements vary in duration with certain contracts extending into 2008. /(e)/Includes fair values as of December 31, 1998 and 1997, for assets of $29 million and $1 million and for liabilities of $(38) million and $(4) million, respectively. /(f)/The forward exchange contracts relating to USX's foreign operations have various maturities ending in December 1999. /(g)/The forward exchange contracts relating to foreign denominated debt matured in 1998. U-26 28. Fair Value of Financial Instruments Fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. The following table summarizes financial instruments, excluding derivative financial instruments disclosed in Note 27, by individual balance sheet account:
1998 1997 Fair Carrying Fair Carrying (In millions) December 31 Value Amount Value Amount Financial assets: Cash and cash equivalents $ 146 $ 146 $ 54 $ 54 Receivables 1,663 1,663 1,417 1,417 Investments and long-term receivables 180 124 177 120 ------ ------ ------ -------- Total financial assets $1,989 $1,933 $1,648 $1,591 Financial liabilities: Notes payable $ 145 $ 145 $ 121 $ 121 Accounts payable 2,478 2,478 2,011 2,011 Distribution payable to minority shareholder of MAP 103 103 -- -- Accrued interest 97 97 95 95 Long-term debt (including amounts due within one year) 4,203 3,896 3,646 3,281 Preferred stock of subsidiary and trust preferred securities 414 432 435 432 ------ ------ ------ -------- Total financial liabilities $7,440 $7,151 $6,308 $5,940
Fair value of financial instruments classified as current assets or liabilities approximates carrying value due to the short- term maturity of the instruments. Fair value of investments and long-term receivables was based on discounted cash flows or other specific instrument analysis. Fair value of preferred stock of subsidiary and trust preferred securities was based on market prices. Fair value of long-term debt instruments was based on market prices where available or current borrowing rates available for financings with similar terms and maturities. USX's unrecognized financial instruments consist of receivables sold and financial guarantees. It is not practicable to estimate the fair value of these forms of financial instrument obligations because there are no quoted market prices for transactions which are similar in nature. For details relating to sales of receivables see Note 14, and for details relating to financial guarantees see Note 29. 29. Contingencies and Commitments USX is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the consolidated financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably. Environmental matters -- USX is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At December 31, 1998 and 1997, accrued liabilities for remediation totaled $145 million and $158 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in cleanup efforts related to underground storage tanks at retail marketing outlets, were $41 million at December 31, 1998, and $42 million at December 31, 1997. For a number of years, USX has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In 1998 and 1997, such capital expenditures totaled $173 million and $134 million, respectively. USX anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. At December 31, 1998 and 1997, accrued liabilities for platform abandonment and dismantlement totaled $141 million and $128 million, respectively. U-27 Guarantees -- Guarantees of the liabilities of affiliated entities by USX and its consolidated subsidiaries totaled $212 million at December 31, 1998, and $73 million at December 31, 1997. In the event that any defaults of guaranteed liabilities occur, USX has access to its interest in the assets of most of the affiliates to reduce potential losses resulting from these guarantees. As of December 31, 1998, the largest guarantee for a single affiliate was $131 million. At December 31, 1998 and 1997, USX's pro rata share of obligations of LOOP LLC and various pipeline affiliates secured by throughput and deficiency agreements totaled $164 million and $165 million, respectively. Under the agreements, USX is required to advance funds if the affiliates are unable to service debt. Any such advances are prepayments of future transportation charges. Commitments -- At December 31, 1998 and 1997, contract commitments to acquire property, plant and equipment and long-term investments totaled $812 million and $533 million, respectively. USX entered into a 15-year take-or-pay arrangement in 1993, which requires USX to accept pulverized coal each month or pay a minimum monthly charge of approximately $1.3 million. Charges for deliveries of pulverized coal totaled $23 million in 1998 and $24 million in 1997. If USX elects to terminate the contract early, a maximum termination payment of $108 million, which declines over the duration of the agreement, may be required. USX is a party to a 15-year transportation services agreement with a natural gas transmission company. The contract requires USX to pay a minimum annual demand charge of approximately $5 million starting in the year 2000 and concluding in the year 2014. The payments are required even if the transportation facility is not utilized. Other -- On August 1, 1999, U. S. Steel, along with several major steel competitors, faces the expiration of the labor agreement with the United Steelworkers of America. U. S. Steel's ability to negotiate an acceptable labor contract is essential to its ongoing operations. Any labor interruptions could have an adverse effect on operations, financial results and cash flow. U-28 Selected Quarterly Financial Data (Unaudited)
1998 1997 (In millions, except per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. CONTINUING OPERATIONS Revenues $6,700 $ 7,156 $ 7,292 $ 7,187 $ 5,734 $ 5,657 $ 5,502 $ 5,695 Income (loss) from operations (37) 320 670 564 346 557 436 366 Includes: Inventory market valuation charges (credits) 245 50 (3) (25) 147 (41) 64 114 Gain on ownership change in MAP -- (1) (2) 248 -- -- -- -- Net income (loss): Income (loss) from continuing operations $ (10) $ 116 $ 298 $ 270 $ 190 $ 308 $ 215 $ 195 Income (loss) from discontinued operations -- -- -- -- 81 (1) (1) 1 ------ ------- ------- ------ ------- ------ ------ ------ Net income (loss) $ (10) $ 116 $ 298 $ 270 $ 271 $ 307 $ 214 $ 196 Marathon Stock data: Net income (loss) $ (86) $ 51 $ 162 $ 183 $ 38 $ 192 $ 118 $ 108 -- Per share: basic (.29) .18 .56 .63 .14 .67 .41 .37 diluted (.29) .17 .56 .63 .13 .66 .41 .37 Dividends paid per share .21 .21 .21 .21 .19 .19 .19 .19 Price range of Marathon Stock/(a)/: -- Low 26-11/16 25 32-3/16 31 29 28-15/16 25-5/8 23-3/4 -- High 38-1/8 37-1/8 38-7/8 40-1/2 38-7/8 38-3/16 31-1/8 28-1/2 Steel Stock data: Net income applicable to Steel Stock $ 74 $ 63 $ 133 $ 85 $ 149 $ 114 $ 105 $ 81 -- Per share: basic .83 .72 1.53 .98 1.74 1.32 1.23 .96 diluted .81 .71 1.46 .95 1.64 1.25 1.06 .93 Dividends paid per share .25 .25 .25 .25 .25 .25 .25 .25 Price range of Steel Stock/(a)/: -- Low 21-5/8 20-7/16 31 28-7/16 26-7/8 34-3/16 25-3/8 26-3/8 -- High 27-3/4 33-1/2 43-1/16 42-1/8 36-15/16 40-3/4 35-5/8 33-3/8 DISCONTINUED OPERATIONS Delhi Stock data: Net income (loss) $ 81/(b)/ $ (1) $ (1) $ 1 -- Per share: basic 8.51/(b)/ (.06) (.16) .15 diluted 8.46/(b)/ (.06) (.16) .15 Dividends paid per share -- .05 .05 .05 Price range of Delhi Stock/(a)/: -- Low 14-7/8 12-1/8 12-1/4 13 -- High 20-5/8 15-1/2 14-3/8 17
/(a)/Composite tape. /(b)/Represents one month of operations and gain on disposal of the Delhi Companies. U-29 Principal Unconsolidated Affiliates (Unaudited)
December 31, 1998 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 Minnesota Pipe Line Company United States 33%/(a)/ Pipeline Facility Nautilus Pipeline Company, LLC United States 24% Natural Gas Transmission Odyssey Pipeline LLC United States 29% Pipeline Facility Poseidon Oil Pipeline Company LLC United States 28% Crude Oil Transportation PRO-TEC Coating Company United States 50% Steel Processing RTI International Metals, Inc./(b)/ United States 26% Titanium & Specialty Metals Sakhalin Energy Investment Company Ltd. Russia 38% Oil & Gas Development Transtar, Inc. United States 46% Transportation USS/Kobe Steel Company United States 50% Steel Products USS-POSCO Industries United States 50% Steel Processing VSZ U. S. Steel, s. r.o. Slovakia 50% Tin Mill Products Worthington Specialty Processing United States 50% Steel Processing
/(a)/Represents the ownership of MAP. /(b)/Formerly RMI Titanium Company. Supplementary Information on Mineral Reserves (Unaudited) Mineral Reserves (other than oil and gas)
Reserves at December 31/(a)/ Production (Million tons) 1998 1997 1996 1998 1997 1996 Iron/(b)/ 738.6 754.8 716.3 15.8 16.8 15.1 Coal/(c)/ 789.7 798.8 859.5 7.3 7.5 7.1
/(a)/Commercially recoverable reserves include demonstrated (measured and indicated) quantities which are expressed in recoverable net product tons. /(b)/In 1998, iron ore reserves decreased due to production and engineering revisions. In 1997, iron ore reserves increased 55.3 million tons due to lease exchanges. /(c)/In 1998, coal reserves decreased due to production, lease activity and engineering revisions. In 1997, coal reserves decreased 53.2 million tons due to a lease termination. Supplementary Information on Oil and Gas Producing Activities (Unaudited) Capitalized Costs and Accumulated Depreciation, Depletion and Amortization/(a)/
United Other Equity (In millions) December 31 States Europe Intl. Consolidated Affiliates Total 1998 Capitalized costs: Proved properties $8,366 $4,432 $1,273 $14,071 $621 $14,692 Unproved properties 400 43 105 548 7 555 ------ ------ ------ ------- ---- ------- Total 8,766 4,475 1,378 14,619 628 15,247 ------ ------ ------ ------- ---- ------- Accumulated depreciation, depletion and amortization: Proved properties 5,020 2,685 135 7,840 156 7,996 Unproved properties 91 -- 5 96 -- 96 ------ ------ ------ ------- ---- ------- Total 5,111 2,685 140 7,936 156 8,092 ------ ------ ------ ------- ---- ------- Net capitalized costs $3,655 $1,790 $1,238 $ 6,683 $472 $ 7,155 1997 Capitalized costs: Proved properties $8,117 $4,384 $ 163 $12,664 $405 $13,069 Unproved properties 335 68 75 478 4 482 ------ ------ ------ ------- ---- ------- Total 8,452 4,452 238 13,142 409 13,551 ------ ------ ------ ------- ---- ------- Accumulated depreciation, depletion and amortization: Proved properties 4,915 2,517 76 7,508 127 7,635 Unproved properties 86 -- 4 90 -- 90 ------ ------ ------ ------- ---- ------- Total 5,001 2,517 80 7,598 127 7,725 ------ ------ ------ ------- ---- ------- Net capitalized costs $3,451 $1,935 $ 158 $ 5,544 $282 $ 5,826
/(a)/Excludes assets specifically related to Other production-related earnings. 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 1998: Revenues: Sales/(b)/ $ 518 $ 454 $ 71 $ 1,043 $ 28 $ 1,071 Transfers 536 -- 51 587 -- 587 ------ ----- ----- ------- ------ ------- Total revenues 1,054 454 122 1,630 28 1,658 Expenses: Production costs (295) (153) (57) (505) (8) (513) Exploration expenses/(c)/ (179) (45) (86) (310) (5) (315) Depreciation, depletion and amortization/(d)/ (339) (150) (68) (557) (8) (565) Other expenses (37) (3) (11) (51) -- (51) ------ ----- ----- ------- ------ ------- Total expenses (850) (351) (222) (1,423) (21) (1,444) Other production-related earnings/(e)/ 1 15 3 19 1 20 ------ ----- ----- ------- ------ ------- Results before income taxes 205 118 (97) 226 8 234 Income taxes (credits) 61 22 (28) 55 3 58 ------ ----- ----- ------- ------ ------- Results of operations $ 144 $ 96 $ (69) $ 171 $ 5 $ 176 1997: Revenues: Sales/(b)/ $ 581 $ 572 $ 21 $ 1,174 $ 42 $ 1,216 Transfers 724 -- 38 762 -- 762 ------ ----- ----- ------- ------ ------- Total revenues 1,305 572 59 1,936 42 1,978 Expenses: Production costs (337) (162) (12) (511) (15) (526) Exploration expenses (127) (34) (25) (186) (1) (187) Depreciation, depletion and amortization (300) (130) (16) (446) (8) (454) Other expenses (32) (3) (13) (48) -- (48) ------ ----- ----- ------- ------ ------- Total expenses (796) (329) (66) (1,191) (24) (1,215) Other production-related earnings/(e)/ -- 28 1 29 1 30 ------ ----- ----- ------- ------ ------- Results before income taxes 509 271 (6) 774 19 793 Income taxes (credits) 170 79 4 253 4 257 ------ ----- ----- ------- ------ ------- Results of operations $ 339 $ 192 $ (10) $ 521 $ 15 $ 536 1996: Revenues: Sales/(b)/ $ 451 $ 736 $ 24 $ 1,211 $ 45 $ 1,256 Transfers 858 -- 43 901 -- 901 ------ ----- ----- ------- ------ ------- Total revenues 1,309 736 67 2,112 45 2,157 Expenses: Production costs/(f)/ (340) (202) (12) (554) (14) (568) Exploration expenses (97) (24) (24) (145) (3) (148) Depreciation, depletion and amortization (302) (160) (14) (476) (12) (488) Other expenses (31) (5) (15) (51) -- (51) ------ ----- ----- ------- ------ ------- Total expenses (770) (391) (65) (1,226) (29) (1,255) Other production-related earnings/(e)/ 1 28 -- 29 1 30 ------ ----- ----- ------- ------ ------- Results before income taxes 540 373 2 915 17 932 Income taxes (credits) 192 115 (1) 306 7 313 ------ ----- ----- ------- ------ ------- Results of operations $ 348 $ 258 $ 3 $ 609 $ 10 $ 619
/(a)/Includes the results of using derivative instruments to manage commodity and foreign currency risks. /(b)/Includes net gains on asset dispositions and natural gas contract settlements, as of December 31, 1998, 1997 and 1996, of $43 million, $7 million and $25 million, respectively. /(c)/Includes international property impairments and suspended exploration well write-offs of $73 million. /(d)/Includes international property impairments of $10 million. /(e)/Includes revenues, net of associated costs, from third-party activities that are an integral part of USX's production operations. Third-party activities may include the processing and/or transportation of third-party production, and the purchase and subsequent resale of gas utilized in reservoir management. /(f)/Includes domestic production tax charges of $11 million related to prior periods. U-31 Supplementary Information on Oil and Gas Producing Activities (Unaudited) CONTINUED Costs Incurred for Property Acquisition, Exploration and Development -- Including Capital Expenditures
United Other Equity (In millions) States Europe Intl. Consolidated Affiliates Total 1998: Property acquisition: Proved $ 3 $ 3 $ 1,051 $ 1,057 $ -- $ 1,057 Unproved 82 -- 57 139 -- 139 Exploration 217 39 75 331 11 342 Development 431 40 46 517 170 687 1997: Property acquisition: Proved $ 16 $ -- $ -- $ 16 $ -- $ 16 Unproved 50 -- -- 50 -- 50 Exploration 170 53 43 266 3 269 Development 477 67 27 571 142 713 1996: Property acquisition: Proved $ 36 $ -- $ -- $ 36 $ -- $ 36 Unproved 44 -- 2 46 19 65 Exploration 134 26 34 194 1 195 Development 268 31 15 314 3 317
Estimated Quantities of Proved Oil and Gas Reserves The following estimates of net reserves have been determined by deducting royalties of various kinds from USX's gross reserves. The reserve estimates are believed to be reasonable and consistent with presently known physical data concerning size and character of the reservoirs and are subject to change as additional knowledge concerning the reservoirs becomes available. The estimates include only such reserves as can reasonably be classified as proved; they do not include reserves which may be found by extension of proved areas or reserves recoverable by secondary or tertiary recovery methods unless these methods are in operation and are showing successful results. Undeveloped reserves consist of reserves to be recovered from future wells on undrilled acreage or from existing wells where relatively major expenditures will be required to realize production. Liquid hydrocarbon production amounts for international operations principally reflect tanker liftings of equity production. USX did not have any quantities of oil and gas reserves subject to long-term supply agreements with foreign governments or authorities in which USX acts as producer.
United Other Equity (Millions of barrels) States Europe Intl. Consolidated Affiliates Total Liquid Hydrocarbons Proved developed and undeveloped reserves: Beginning of year -- 1996 558 183 23 764 -- 764 Purchase of reserves in place 26 -- -- 26 -- 26 Revisions of previous estimates 3 (1) 3 5 -- 5 Improved recovery 19 -- -- 19 -- 19 Extensions, discoveries and other additions 54 13 15 82 -- 82 Production (45) (18) (3) (66) -- (66) Sales of reserves in place (26) -- (12) (38) -- (38) --- --- --- --- --- ----- End of year -- 1996 589 177 26 792 -- 792 Purchase of reserves in place 2 -- -- 2 -- 2 Revisions of previous estimates 9 (1) 3 11 -- 11 Improved recovery 22 -- -- 22 -- 22 Extensions, discoveries and other additions 31 -- -- 31 82 113 Production (42) (15) (3) (60) -- (60) Sales of reserves in place (2) -- -- (2) -- (2) --- --- --- --- --- ----- End of year -- 1997 609 161 26 796 82 878 Purchase of reserves in place 1 -- 156/(a)/ 157 -- 157 Revisions of previous estimates (1) (28) 1 (28) (2) (30) Improved recovery 3 -- -- 3 -- 3 Extensions, discoveries and other additions 10 4 18 32 -- 32 Production (49) (15) (7) (71) -- (71) Sales of reserves in place (5) -- -- (5) -- (5) --- --- --- --- --- ----- End of year -- 1998 568 122 194 884 80 964 Proved developed reserves: Beginning of year -- 1996 470 182 21 673 -- 673 End of year -- 1996 443 163 11 617 -- 617 End of year -- 1997 486 161 12 659 -- 659 End of year -- 1998 489 119 67 675 -- 675
/(a)/ 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 -- 1996 2,210 1,344 35 3,589 131 3,720 Purchase of reserves in place 10 -- -- 10 -- 10 Revisions of previous estimates (27) 26 (14) (15) 9 (6) Improved recovery 10 -- -- 10 -- 10 Extensions, discoveries and other additions 308 2 5 315 8 323 Production (247) (166) (5) (418) (16) (434) Sales of reserves in place (25) (28) -- (53) -- (53) ----- ----- --- ----- --- ----- End of year -- 1996 2,239 1,178 21 3,438 132 3,570 Purchase of reserves in place 31 -- -- 31 -- 31 Revisions of previous estimates (39) 9 6 (24) (6) (30) Improved recovery -- -- -- -- -- -- Extensions, discoveries and other additions 262 -- -- 262 -- 262 Production (264) (139) (4) (407) (15) (422) Sales of reserves in place (9) -- -- (9) -- (9) ----- ----- --- ----- --- ----- End of year -- 1997 2,220 1,048 23 3,291 111 3,402 Purchase of reserves in place 10 -- 782/(a)/ -- 792 792 Revisions of previous estimates (16) 10 (1) (7) 5 (2) Improved recovery -- -- -- -- -- -- Extensions, discoveries and other additions 238 32 55 325 5 330 Production (272) (124) (29) (425) (11) (436) Sales of reserves in place (29) -- -- (29) -- (29) ----- ----- --- ----- --- ----- End of year -- 1998 2,151 966 830 3,947 110 4,057 Proved developed reserves: Beginning of year -- 1996 1,517 1,300 35 2,852 105 2,957 End of year -- 1996 1,720 1,133 16 2,869 100 2,969 End of year -- 1997 1,702 1,024 19 2,745 78 2,823 End of year -- 1998 1,678 909 534 3,121 76 3,197
/(a)/ Represents reserves related to the acquisition of Tarragon Oil and Gas Limited in August 1998. Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Gas Reserves Estimated discounted future net cash flows and changes therein were determined in accordance with Statement of Financial Accounting Standards No. 69. Certain information concerning the assumptions used in computing the valuation of proved reserves and their inherent limitations are discussed below. USX believes such information is essential for a proper understanding and assessment of the data presented. Future cash inflows are computed by applying year-end prices of oil and gas relating to USX's proved reserves to the year-end quantities of those reserves. Future price changes are considered only to the extent provided by contractual arrangements in existence at year-end. The assumptions used to compute the proved reserve valuation do not necessarily reflect USX's expectations of actual revenues to be derived from those reserves nor their present worth. Assigning monetary values to the estimated quantities of reserves, described on the preceding page, does not reduce the subjective and ever- changing nature of such reserve estimates. Additional subjectivity occurs when determining present values because the rate of producing the reserves must be estimated. In addition to uncertainties inherent in predicting the future, variations from the expected production rate also could result directly or indirectly from factors outside of USX's control, such as unintentional delays in development, environmental concerns, changes in prices or regulatory controls. The reserve valuation assumes that all reserves will be disposed of by production. However, if reserves are sold in place or subjected to participation by foreign governments, additional economic considerations also could affect the amount of cash eventually realized. Future development and production costs, including abandonment and dismantlement costs, are computed by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves at the end of the year, based on year-end costs and assuming continuation of existing economic conditions. Future income tax expenses are computed by applying the appropriate year-end statutory tax rates, with consideration of future tax rates already legislated, to the future pretax net cash flows relating to USX's proved oil and gas reserves. Permanent differences in oil and gas related tax credits and allowances are recognized. Discount was derived by using a discount rate of 10 percent a year to reflect the timing of the future net cash flows relating to proved oil and gas reserves. U-33
Supplementary Information on Oil and Gas Producing Activities (Unaudited) CONTINUED Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves (continued) United Other Equity (In millions) States Europe Intl. Consolidated Affiliates Total December 31, 1998: Future cash inflows $ 8,615 $ 3,850 $2,686 $15,151 $ 1,036 $ 16,187 Future production costs (3,781) (2,240) (950) (6,971) (586) (7,557) Future development costs (585) (130) (323) (1,038) (124) (1,162) Future income tax expenses (850) (630) (542) (2,022) (45) (2,067) ------- ------- ------ ------- ------- -------- Future net cash flows 3,399 850 871 5,120 281 5,401 10% annual discount for estimated timing of cash flows (1,498) (256) (392) (2,146) (136) (2,282) ------- ------- ------ ------- ------- -------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves $ 1,901 $ 594 $ 479 $ 2,974 $ 145 $ 3,119 December 31, 1997: Future cash inflows $13,902 $ 6,189 $ 484 $20,575 $ 1,714 $ 22,289 Future production costs (4,739) (2,310) (172) (7,221) (643) (7,864) Future development costs (702) (162) (18) (882) (200) (1,082) Future income tax expenses (2,413) (1,371) (62) (3,846) (232) (4,078) ------- ------- ------ ------- ------- -------- Future net cash flows 6,048 2,346 232 8,626 639 9,265 10% annual discount for estimated timing of cash flows (2,696) (1,011) (52) (3,759) (367) (4,126) ------- ------- ------ ------- ------- -------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves $ 3,352 $ 1,335 $ 180 $ 4,867 $ 272 $ 5,139 December 31, 1996: Future cash inflows $19,640 $ 8,177 $ 631 $28,448 $ 390 $ 28,838 Future production costs (5,442) (2,454) (177) (8,073) (153) (8,226) Future development costs (762) (179) (45) (986) (35) (1,021) Future income tax expenses (4,151) (2,256) (115) (6,522) (78) (6,600) ------- ------- ------ ------- ------- -------- Future net cash flows 9,285 3,288 294 12,867 124 12,991 10% annual discount for estimated timing of cash flows (4,232) (1,033) (69) (5,334) (40) (5,374) ------- ------- ------ ------- ------- -------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves $ 5,053 $ 2,255 $ 225 $ 7,533 $ 84 $ 7,617
Summary of Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves Consolidated Equity Affiliates Total --------------------------- -------------------------- ----------------------------- (In millions) 1998 1997 1996 1998 1997 1996 1998 1997 1996 Sales and transfers of oil and gas produced, net of production costs $(1,125) $(1,424) $(1,558) $ (20) $ (28) $ (31) $(1,145) $(1,452) $(1,589) Net changes in prices and production costs related to future production (3,662) (3,677) 3,651 (372) (36) 37 (4,034) (3,713) 3,688 Extensions, discoveries and improved recovery, less related costs 284 458 1,572 4 263 9 288 721 1,581 Development costs incurred during the period 517 571 314 170 142 3 687 713 317 Changes in estimated future development costs (306) (302) (316) (105) (128) (10) (411) (430) (326) Revisions of previous quantity estimates (110) 43 15 (2) (5) 9 (112) 38 24 Net changes in purchases and sales of minerals in place 636 14 (58) -- -- -- 636 14 (58) Accretion of discount 639 1,065 658 39 13 11 678 1,078 669 Net change in income taxes 869 1,350 (1,342) 57 (29) (11) 926 1,321 (1,353) Other 365 (764) (365) 102 (4) (8) 467 (768) (373) Net change for the year (1,893) (2,666) 2,571 (127) 188 9 (2,020) (2,478) 2,580 Beginning of year 4,867 7,533 4,962 272 84 75 5,139 7,617 5,037 End of year $ 2,974 $ 4,867 $ 7,533 $ 145 $ 272 $ 84 $ 3,119 $ 5,139 $ 7,617
U-34 Five-Year Operating Summary -- Marathon Group
1998 1997 1996 1995 1994 Net Liquid Hydrocarbon Production (thousands of barrels per day) United States (by region) Alaska -- -- 8 9 9 Gulf Coast 55 29 30 33 12 Southern 6 8 9 11 12 Central 4 5 4 8 9 Mid-Continent Yates 23 25 25 24 23 Mid-Continent Other 21 21 20 19 18 Rocky Mountain 26 27 26 28 27 ------ ------ ------ ------ ------ Total United States 135 115 122 132 110 ------ ------ ------ ------ ------ International Abu Dhabi -- -- -- -- 1 Canada 6 -- -- -- -- Egypt 8 8 8 5 7 Indonesia -- -- -- 10 3 Gabon 5 -- -- -- -- Norway 1 2 3 2 2 Tunisia -- -- -- 2 3 United Kingdom 41 39 48 54 46 ------ ------ ------ ------ ------- Total International 61 49 59 73 62 ------ ------ ------ ------ ------- Total 196 164 181 205 172 Natural gas liquids included in above 17 17 17 17 15 Net Natural Gas Production (millions of cubic feet per day) United States (by region) Alaska 144 151 145 133 123 Gulf Coast 84 78 88 94 79 Southern 208 189 161 142 134 Central 117 119 109 105 110 Mid-Continent 125 125 122 112 89 Rocky Mountain 66 60 51 48 39 ------ ------ ------ ------ ------- Total United States 744 722 676 634 574 ------ ------ ------ ------ ------- International Canada 65 -- -- -- -- Egypt 16 11 13 15 17 Ireland 168 228 259 269 263 Norway 27 54 87 81 81 United Kingdom -- equity 165 130 140 98 39 -- other/(a)/ 23 32 32 35 -- ------ ------ ------ ------ ------- Total International 464 455 531 498 400 ------ ------ ------ ------ ------- Consolidated 1,208 1,177 1,207 1,132 974 Equity affiliate/(b)/ 33 42 45 44 40 ------ ------ ------ ------ ------- Total 1,241 1,219 1,252 1,176 1,014 Average Sales Prices Liquid Hydrocarbons (dollars per barrel)/(c)/ United States $10.42 $16.88 $18.58 $14.59 $13.53 International 12.24 18.77 20.34 16.66 15.61 Natural Gas (dollars per thousand cubic feet)/(c)/ United States $1.79 $2.20 $2.09 $1.63 $1.94 International 1.94 2.00 1.97 1.80 1.58 Net Proved Reserves at year-end (developed and undeveloped) Liquid Hydrocarbons (millions of barrels) United States 568 609 589 558 553 International 316 187 203 206 242 ------ ------ ------ ------ ------- Consolidated 884 796 792 764 795 Equity affiliate/(d)/ 80 82 -- -- -- ------ ------ ------ ------ ------- Total 964 878 792 764 795 Developed reserves as % of total net reserves 70% 75% 78% 88% 90% Natural Gas (billions of cubic feet) United States 2,151 2,220 2,239 2,210 2,127 International 1,796 1,071 1,199 1,379 1,527 ------ ------ ------ ------ ------- Consolidated 3,947 3,291 3,438 3,589 3,654 Equity affiliate/(b)/ 110 111 132 131 153 ------ ------ ------ ------ ------- Total 4,057 3,402 3,570 3,720 3,807 Developed reserves as % of total net reserves 79% 83% 83% 80% 79%
/(a)/ Represents gas acquired for injection and subsequent resale. /(b)/ Represents Marathon's equity interest in CLAM Petroleum B.V. /(c)/ Prices exclude gains/losses from hedging activities. /(d)/ Represents Marathon's equity interest in Sakhalin Energy Investment Company Ltd. U-35 Five-Year Operating Summary -- Marathon Group CONTINUED
1998/(a)/ 1997 1996 1995 1994 U.S. Refinery Operations (thousands of barrels per day) In-use crude oil capacity at year-end 935 575 570 570 570 Refinery runs -- crude oil refined 894 525 511 503 491 -- other charge and blend stocks 127 99 96 94 107 In-use crude oil capacity utilization rate 96% 92% 90% 88% 86% Source of Crude Processed (thousands of barrels per day) United States 317 202 229 254 218 Europe 15 10 12 6 31 Middle East and Africa 394 241 193 183 171 Other International 168 72 79 58 70 ------- ------- ------- ------- ------- Total 894 525 513 501 490 Refined Product Yields (thousands of barrels per day) Gasoline 545 353 345 339 340 Distillates 270 154 155 146 146 Propane 21 13 13 12 13 Feedstocks and special products 64 36 35 38 33 Heavy fuel oil 49 35 30 31 38 Asphalt 68 39 36 36 30 ------- ------- ------- ------- ------- Total 1,017 630 614 602 600 Refined Products Yields (% breakdown) Gasoline 54% 56% 56% 57% 57% Distillates 27 24 25 24 24 Other products 19 20 19 19 19 ------- ------- ------- ------- ------- Total 100% 100% 100% 100% 100% U.S. Refined Product Sales (thousands of barrels per day) Gasoline 671 452 468 445 443 Distillates 318 198 192 180 183 Propane 21 12 12 12 16 Feedstocks and special products 67 40 37 44 32 Heavy fuel oil 49 34 31 31 38 Asphalt 72 39 35 35 31 ------- ------- ------- ------- ------- Total 1,198 775 775 747 743 Matching buy/sell volumes included in above 39 51 71 47 73 Refined Products Sales by Class of Trade (as a % of total sales) Wholesale -- independent private-brand marketers and consumers 65% 61% 62% 61% 62% Marathon and Ashland brand jobbers and dealers 11 13 13 13 13 Speedway SuperAmerica retail outlets 24 26 25 26 25 ------- ------- ------- ------- ------- Total 100% 100% 100% 100% 100% Refined Products (dollars per barrel) Average sales price $21.43 $26.38 $27.43 $23.80 $ 22.75 Average cost of crude oil throughput 13.02 19.00 21.94 18.09 16.59 Petroleum Inventories at year-end (thousands of barrels) Crude oil, raw materials and natural gas liquids 35,630 19,351 20,047 22,224 22,987 Refined products 32,334 20,598 21,283 22,102 23,657 U.S. Refined Product Marketing Outlets at year-end MAP operated terminals 88 51 51 51 51 Retail -- Marathon and Ashland brand outlets 3,117 2,465 2,392 2,380 2,356 -- Speedway SuperAmerica outlets 2,257 1,544 1,592 1,627 1,659 Pipelines (miles of common carrier pipelines)/(b)/ Crude Oil -- gathering lines 2,827 1,003 1,052 1,115 1,115 -- trunklines 4,859 2,665 2,665 2,666 2,672 Products -- trunklines 2,861 2,310 2,310 2,311 2,311 ------- ------- ------- ------- ------- Total 10,547 5,978 6,027 6,092 6,098 Pipeline Barrels Handled (millions)/(c)/ Crude Oil -- gathering lines 47.8 43.9 43.2 43.8 43.4 -- trunklines 571.9 369.6 378.7 371.3 353.0 Products -- trunklines 329.7 262.4 274.8 252.3 282.2 ------- ------- ------- ------- ------- Total 949.4 675.9 696.7 667.4 678.6 River Operations Barges -- owned/leased 169 -- -- -- -- Boats -- owned/leased 8 -- -- -- --
/(a)/ 1998 statistics include 100% of MAP and should be considered when compared to prior periods. /(b)/ Pipelines for downstream operations also include non-common carrier, leased and equity affiliates. /(c)/ Pipeline barrels handled on owned common carrier pipelines, excluding equity affiliates. U-36 Five-Year Operating Summary -- U. S. Steel Group
(Thousands of net tons, unless otherwise noted) 1998 1997 1996 1995 1994 Raw Steel Production Gary, IN 6,468 7,428 6,840 7,163 6,768 Mon Valley, PA 2,594 2,561 2,746 2,740 2,669 Fairfield, AL 2,152 2,361 1,862 2,260 2,240 ------ ------ ------ ------ ------ Total 11,214 12,350 11,448 12,163 11,677 Raw Steel Capability Continuous cast 12,800 12,800 12,800 12,500 11,990 Total production as % of total capability 87.6 96.5 89.4 97.3 97.4 Hot Metal Production 9,743 10,591 9,716 10,521 10,328 Coke Production/(a)/ 4,835 5,757 6,777 6,770 6,777 Iron Ore Pellets -- Minntac, MN Shipments 15,446 16,319 14,962 15,218 16,174 Coal Production 8,150 7,528 7,283 7,509 7,424 Coal Shipments 7,670 7,811 7,117 7,502 7,698 Steel Shipments by Product Sheet and semi-finished steel products 7,608 8,170 8,677 8,721 7,988 Tubular, plate and tin mill products 3,078 3,473 2,695 2,657 2,580 ------ ------ ------ ------ ------ Total 10,686 11,643 11,372 11,378 10,568 Total as % of domestic steel industry 10.3 10.9 11.3 11.7 11.1 Steel Shipments by Market Steel service centers 2,563 2,746 2,831 2,564 2,780 Transportation 1,785 1,758 1,721 1,636 1,952 Further conversion: Joint ventures 1,473 1,568 1,542 1,332 1,308 Trade customers 1,140 1,378 1,227 1,084 1,058 Containers 794 856 874 857 962 Construction 987 994 865 671 722 Oil, gas and petrochemicals 509 810 746 748 367 Export 382 453 493 1,515 355 All other 1,053 1,080 1,073 971 1,064 ------ ------ ------ ------ ------ Total 10,686 11,643 11,372 11,378 10,568
/(a)/ The reduction in coke production in 1997 and 1998 reflected U. S. Steel's entry into a strategic partnership with two limited partners on June 1, 1997, to acquire an interest in three coke batteries at its Clairton (Pa.) Works. U-37
Five-Year Financial Summary (Dollars in millions, except as noted) 1998/(a)/ 1997 1996 1995 1994 Statement of Operations Revenues $ 28,335 $ 22,588 $ 22,977 $ 20,413 $ 19,055 Income from operations 1,517 1,705 1,779 726 1,174 Includes: Inventory market valuation charges (credits) 267 284 (209) (70) (160) Gain on ownership change in MAP 245 -- -- -- -- Impairment of long-lived assets -- -- -- 675 -- Income from continuing operations $ 674 $ 908 $ 946 $ 217 $ 532 Income (loss) from discontinued operations -- 80 6 4 (31) Extraordinary loss -- -- (9) (7) -- -------- -------- -------- -------- -------- Net Income $ 674 $ 988 $ 943 $ 214 $ 501 Applicable to Marathon Stock Income (loss) before extraordinary loss $ 310 $ 456 $ 671 $ (87) $ 315 Income (loss) before extraordinary loss per share -- basic (in dollars) 1.06 1.59 2.33 (.31) 1.10 -- diluted (in dollars) 1.05 1.58 2.31 (.31) 1.10 Net income (loss) 310 456 664 (92) 315 Net income (loss) per share -- basic (in dollars) 1.06 1.59 2.31 (.33) 1.10 -- diluted (in dollars) 1.05 1.58 2.29 (.33) 1.10 Dividends paid per share (in dollars) .84 .76 .70 .68 .68 Applicable to Steel Stock Income before extraordinary loss $ 355 $ 449 $ 253 $ 279 $ 176 Income before extraordinary loss per share -- basic (in dollars) 4.05 5.24 3.00 3.53 2.35 -- diluted (in dollars) 3.92 4.88 2.97 3.43 2.33 Net income 355 449 251 277 176 Net income per share -- basic (in dollars) 4.05 5.24 2.98 3.51 2.35 -- diluted (in dollars) 3.92 4.88 2.95 3.41 2.33 Dividends paid per share (in dollars) 1.00 1.00 1.00 1.00 1.00 Balance Sheet Position at year-end Cash and cash equivalents $ 146 $ 54 $ 55 $ 131 $ 48 Total assets 21,133 17,284 16,980 16,743 17,517 Capitalization: Notes payable $ 145 $ 121 $ 81 $ 40 $ 1 Total long-term debt 3,991 3,403 4,212 4,937 5,599 Minority interest in MAP 1,590 -- -- -- -- Preferred stock of subsidiary and trust preferred securities 432 432 250 250 250 Redeemable Delhi Stock -- 195 -- -- -- Preferred stock 3 3 7 7 112 Common stockholders' equity 6,402 5,397 5,015 4,321 4,190 -------- -------- -------- -------- -------- Total capitalization $ 12,563 $ 9,551 $ 9,565 $ 9,555 $ 10,152 % of total debt to capitalization/(b)/ 36.4 41.4 47.5 54.7 57.6 Cash Flow Data Net cash from operating activities $ 1,803 $ 1,458 $ 1,649 $ 1,632 $ 817 Capital expenditures 1,580 1,373 1,168 1,016 1,033 Disposal of assets 86 481 443 157 293 Dividends paid 342 316 307 295 301 Employee Data Total employment costs/(c)(d)/ $ 2,372 $ 2,289 $ 2,179 $ 2,186 $ 2,281 Average number of employees/(c)(d)/ 44,860 41,620 41,553 42,133 42,596 Number of pensioners at year-end 95,429 97,051 99,713 102,449 105,227
/(a)/ 1998 statistics, other than employee data, include 100% of MAP, which should be considered when making comparisons to prior periods. /(b)/ Total debt represents the sum of notes payable, total long-term debt and preferred stock of subsidiary and trust preferred securities. /(c)/ Excludes the Delhi Companies sold in 1997. /(d)/ Data for 1998 includes Ashland employees from the date of their payroll transfer to MAP, which occurred at various times throughout 1998. These employees were contracted to MAP in 1998, prior to their payroll transfer. U-38 Management's Discussion and Analysis USX Corporation ("USX") is a diversified company engaged primarily in the energy business through its Marathon Group, and in the steel business through its U. S. Steel Group. Effective October 31, 1997, USX sold Delhi Gas Pipeline Corporation and other subsidiaries of USX that comprised all of the USX -- Delhi Group ("Delhi Companies"). On January 26, 1998, USX used the $195 million net proceeds from the sale to redeem all of the 9.45 million outstanding shares of USX-Delhi Group Common Stock. For additional information, see Note 5 to the USX Consolidated Financial Statements. During 1997, Marathon Oil Company ("Marathon") and Ashland Inc. ("Ashland") agreed to combine the major elements of their refining, marketing and transportation ("RM&T") operations. On January 1, 1998, Marathon transferred certain RM&T net assets to Marathon Ashland Petroleum LLC ("MAP"), a new consolidated subsidiary. Also on January 1, 1998, Marathon acquired certain RM&T net assets from Ashland in exchange for a 38 percent interest in MAP. Financial measures such as revenues, income from operations and capital expenditures in 1998 include 100 percent of MAP and are not comparable to prior period amounts. Income from continuing operations, net income and related per share amounts for 1998 are net of the minority interest. For further discussion of MAP and pro forma information, see Note 3 to the USX Consolidated Financial Statements. On August 11, 1998, Marathon acquired Tarragon Oil and Gas Limited ("Tarragon"), a Canadian oil and gas exploration and production company. The purchase price included $686 million in cash payments, the assumption of $345 million in debt and the issuance of Exchangeable Shares of an indirect Canadian subsidiary of Marathon valued at $29 million. The Exchangeable Shares are exchangeable at any time on a one-for-one basis for shares of USX -- Marathon Group Common Stock ("Marathon Stock"). On November 4, 1998, USX sold 17 million shares of Marathon Stock. The proceeds to USX of $528 million, were used to reduce indebtedness incurred to fund the Tarragon acquisition. Financial measures such as revenues, income from operations and capital expenditures in 1998 include operations of Marathon Canada Limited, formerly known as Tarragon, commencing August 12, 1998. For further discussion of Tarragon and pro forma information, see Note 3 to the USX Consolidated Financial Statements. Management's Discussion and Analysis of USX Consolidated Financial Statements provides certain information about the Marathon and U. S. Steel Groups, particularly in Management's Discussion and Analysis of Operations by Group. More expansive Group information is provided in Management's Discussion and Analysis of the Marathon Group and U. S. Steel Group, which are included in the USX 1998 Form 10-K. Management's Discussion and Analysis should be read in conjunction with the USX Consolidated Financial Statements and Notes to USX Consolidated Financial Statements. Certain sections of Management's Discussion and Analysis include forward-looking statements concerning trends or events potentially affecting USX. These statements typically contain words such as "anticipates", "believes", "estimates", "expects" or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in the forward-looking statements. For additional risk factors affecting the businesses of USX, see Supplementary Data -- Disclosures About Forward-Looking Statements in the USX 1998 Form 10-K. U-39 Management's Discussion and Analysis CONTINUED Management's Discussion and Analysis of Income Revenues for each of the last three years are summarized in the following table:
(Dollars in millions) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------- Revenues/(a)(b)/ Marathon Group $22,075 $15,754 $16,394 U. S. Steel Group 6,283 6,941 6,670 Eliminations (23) (107) (87) ------- ------- ------- Total USX Corporation revenues 28,335 22,588 22,977 Less: Matching crude oil and refined product buy/sell transactions/(c)/ 3,948 2,436 2,912 Consumer excise taxes on petroleum products and merchandise/(c)/ 3,581 2,736 2,768 ------- ------- ------- Revenues adjusted to exclude above items $20,806 $17,416 $17,297 - ---------------------------------------------------------------------------------------------------------------
/(a)/Consists of sales, dividend and affiliate income, gain on ownership change in MAP, net gains on disposal of assets, gain on affiliate stock offering and other income. /(b)/Effective October 31, 1997, USX sold the Delhi Companies. Excludes revenues of the Delhi Companies, which have been reclassified as discontinued operations for 1997 and 1996. /(c)/Included in both revenues and costs and expenses for the Marathon Group and USX Consolidated, resulting in no effect on income. Adjusted revenues increased by $3,390 million in 1998 as compared with 1997, reflecting a 37 percent increase for the Marathon Group, partially offset by a 9 percent decrease for the U. S. Steel Group. Adjusted revenues increased by $119 million in 1997 as compared with 1996, reflecting a 4 percent increase for the U. S. Steel Group, partially offset by a 1 percent decrease for the Marathon Group. For further discussion, see Management's Discussion and Analysis of Operations by Group, herein. Income from operations for each of the last three years are summarized in the following table:
(Dollars in millions) 1998 1997 1996 - --------------------------------------------------------------------------------------------- Reportable segments Marathon Group Exploration & production $ 278 $ 773 $ 900 Refining, marketing & transportation 896 563 249 Other energy related businesses 33 48 57 ------ ------ ------ Income for reportable segments--Marathon Group 1,207 1,384 1,206 U. S. Steel Group U. S. Steel Operations 330 618 248 ------ ------ ------ Income for reportable segments--USX Corporation 1,537 2,002 1,454 Items not allocated to reportable segments: Marathon Group (269) (452) 90 U. S. Steel Group 249 155 235 ------ ------ ------ Total income from operations--USX Corporation $1,517 $1,705 $1,779
For further discussion, see Management's Discussion and Analysis of Operations by Group, herein. U-40 Management's Discussion and Analysis CONTINUED Net interest and other financial costs for each of the last three years are summarized in the following table:
(Dollars in millions) 1998 1997 1996 Interest and other financial income $ 39 $ 5 $ 7 Interest and other financial costs 318 352 428 ----- ----- ----- Net interest and other financial costs 279 347 421 Less: Favorable (unfavorable) adjustment to carrying value of Indexed Debt/(a)/ 44 10 (6) ----- ----- ----- Net interest and other financial costs adjusted to exclude above item $ 323 $ 357 $ 415
/(a)/ In December 1996, USX issued $117 million in aggregate principal amount of 6-3/4% Notes Due February 1, 2000 ("Indexed Debt"), mandatorily exchangeable at maturity for common stock of RTI International Metals, Inc. (formerly RMI Titanium Company) ("RTI") or for the equivalent amount of cash, at USX's option. The carrying value of indexed debt is adjusted quarterly to settlement value based on changes in the value of RTI common stock. Any resulting adjustment is charged or credited to income and included in interest and other financial costs. At December 31, 1998, the adjusted carrying value of Indexed Debt was $69 million. USX's 26 percent interest in RTI continues to be accounted for under the equity method. Excluding the effect of the adjustment to the carrying value of Indexed Debt, net interest and other financial costs decreased by $34 million in 1998 as compared with 1997, and by $58 million in 1997 as compared with 1996. The decrease in 1998 was primarily due to increased interest income levels and increased capitalized interest on Exploration & Production projects, partially offset by increased interest costs resulting from higher average debt levels. The decrease in 1997 was primarily due to decreased interest costs resulting from lower average debt levels and increased capitalized interest on Exploration & Production projects. For additional information, see Note 7 to the USX Consolidated Financial Statements. The provision for estimated income taxes was $315 million in 1998, compared with $450 million in 1997 and $412 million in 1996. The decrease in 1998 was primarily due to a decline in income from continuing operations. The 1998 provision included $33 million of favorable adjustments related to foreign operations. Provisions included credits other than foreign tax credits of $24 million and $48 million in 1997 and 1996, respectively (primarily nonconventional source fuel credits). A significant portion of the reduction in these credits in 1997 as compared with 1996 resulted from USX's entry into a strategic partnership with two limited partners to acquire an interest in three coke batteries at its U. S. Steel Group's Clairton (Pa.) Works. For reconciliation of the federal statutory rate to total provisions on income from continuing operations, see Note 13 to the USX Consolidated Financial Statements. Extraordinary loss in 1996 reflected unfavorable aftertax effects of early extinguishment of debt. In December 1996, USX irrevocably called for redemption on January 30, 1997, 8-1/2% Sinking Fund Debentures Due 2006, with a carrying value of $120 million, resulting in an extraordinary loss of $9 million, net of an income tax benefit of $5 million. Income from discontinued operations reflects aftertax income of the Delhi Group. Income in 1997 included an $81 million gain on disposal of the Delhi Companies (net of income taxes). For additional discussion, see Note 5 to the USX Consolidated Financial Statements. Net income was $674 million in 1998, $988 million in 1997 and $943 million in 1996. Excluding the gain on change of ownership in MAP in 1998, the effects of the $81 million gain on disposal related to discontinued operations in 1997, and adjustments to the inventory market valuation reserve in each of 1998, 1997 and 1996, net income decreased by $462 million in 1998 as compared with 1997, and increased by $275 million in 1997 as compared with 1996. Noncash credit from exchange of preferred stock was $10 million, or 12 cents per share of Steel Stock, in 1997. In May 1997, USX exchanged 3.9 million 6.75% Convertible Quarterly Income Preferred Securities ("Trust Preferred Securities") of USX Capital Trust I for an equivalent number of shares of its outstanding 6.50% Cumulative Convertible Preferred Stock ("6.50% Preferred Stock"). The U-41 Management's Discussion and Analysis CONTINUED $10 million noncash credit reflects the difference between the carrying value of the 6.50% Preferred Stock and the fair value of the Trust Preferred Securities at the date of the exchange. See Note 25 to the USX Consolidated Financial Statements for additional discussion. Management's Discussion and Analysis of Financial Condition, Cash Flows and Liquidity Current assets increased by $734 million from year-end 1997, primarily reflecting increased receivables and inventories resulting from the addition of Ashland RM&T receivables and inventories. These additions were partially offset by general declines in receivables and inventories resulting primarily from lower commodity prices, and lower operating levels for the U. S. Steel Group. Inventories were reduced by a $267 million increase to the inventory market valuation reserve reflecting lower year-end commodity prices. Current liabilities increased by $96 million from year-end 1997, primarily reflecting increased payables resulting from the addition of Ashland RM&T payables, partially offset by a decrease in long- term debt due within one year. Net property, plant and equipment increased by $2,867 million from year-end 1997, primarily reflecting the addition of Ashland's RM&T assets and the acquisition of Tarragon. Total long-term debt and notes payable increased by $612 million from year-end 1997, mainly reflecting borrowings against a revolving credit agreement to fund the acquisition of Tarragon in August 1998. At December 31, 1998, USX had $700 million of borrowings against its long-term revolving credit agreement of $2,350 million. Minority interest in Marathon Ashland Petroleum LLC represents Ashland's 38% interest in MAP. Stockholders' equity increased by $1,005 million from year-end 1997 mainly reflecting 1998 net income of $674 million and $528 million in proceeds from the public issuance of 17 million shares of Marathon Stock in November 1998, partially offset by dividends paid. Net cash provided from operating activities was $1,803 million in 1998, $1,458 million in 1997 and $1,649 million in 1996. Cash provided from operating activities in 1998 included proceeds of $38 million for the insurance litigation settlement pertaining to the 1995 Gary Works #8 blast furnace explosion. Cash provided from operating activities in 1997 included a payment of $390 million resulting from termination of a Marathon Group and Delhi Group accounts receivable sales program, payments of $199 million to fund employee benefit plans related to the U. S. Steel Group, and insurance recoveries of $40 million related to a 1996 hearth breakout at the Gary Works No. 13 blast furnace. Cash provided from operating activities in 1996 included a payment of $59 million to the Internal Revenue Service for certain agreed and unagreed adjustments relating to the tax year 1990, payments of $39 million related to certain state tax issues, and a payment of $28 million related to settlement of the Pickering litigation. Excluding the effects of these adjustments, cash provided from operating activities decreased by $242 million in 1998 as compared with 1997, primarily due to lower net income and unfavorable working capital changes, and increased by $232 million in 1997 as compared with 1996, due primarily to favorable working capital changes, improved profitability and reduced interest payments, partially offset by increased income taxes paid. For additional discussion of 1997 funding of U. S. Steel benefit plans, see Benefit Plan Activity, herein. U-42 Management's Discussion and Analysis CONTINUED Capital expenditures for each of the last three years are summarized in the following table:
(Dollars in millions) 1998 1997 1996 Marathon Group Exploration & production ("upstream") Domestic $ 652 $ 647 $ 424 International 187 163 80 Refining, marketing & transportation ("downstream") 410 205 234 Other 21 23 13 ------ ------ ------ Subtotal Marathon Group 1,270 1,038 751 U. S. Steel Group 310 261 337 Discontinued operations -- 74 80 ------ ------ ------ Total USX Corporation capital expenditures $1,580 $1,373 $1,168
Marathon Group's domestic upstream capital expenditures in 1998 mainly included continuing development of Viosca Knoll 786 ("Petronius"), Green Canyon 244 ("Troika") and Green Canyon 112/113 ("Stellaria") in the Gulf of Mexico. International upstream capital expenditures included development of the Tchatamba South field, offshore Gabon. Downstream capital expenditures in 1998 were primarily for upgrading and expanding retail marketing outlets and refinery modification projects. U. S. Steel Group capital expenditures in 1998 included a blast furnace reline at Gary Works, an upgrade to the galvanizing line at Fairless Works, replacement of coke battery thruwalls at Gary Works, conversion of the Fairfield Works pipe mill to use round instead of square blooms, and environmental expenditures primarily at Fairfield Works and Gary Works. Capital expenditures in 1999 are expected to be approximately $1.6 billion. Expenditures for the Marathon Group are expected to be approximately $1.3 billion. Domestic upstream projects planned for 1999 include continuing development of projects in the Gulf of Mexico and natural gas development in East Texas and throughout the western United States. International upstream projects include development of properties offshore Gabon and in Canada. Downstream spending is expected to be primarily for upgrades and expansions of retail marketing outlets and refinery improvements. Capital expenditures for the U. S. Steel Group in 1999 are expected to be approximately $290 million. Planned projects include improvements at Gary Works, Mon Valley Works and Fairfield Works and environmental expenditures. Investments in affiliates of $115 million in 1998, mainly reflected funding of MAP's acquisition of an interest in Southcap Pipe Line Company and U. S. Steel's entry into a joint venture in Slovakia with VSZ a.s. Investments in affiliates in 1999 are expected to be approximately $80 million. Projected investments include continued development of the Sakhalin II project. Contract commitments to acquire property, plant and equipment and long-term investments at December 31, 1998, totaled $812 million compared with $533 million at December 31, 1997. The above statements with respect to 1999 capital expenditures and investments are forward-looking statements reflecting management's best estimates based on information currently available. To the extent this information proves to be inaccurate, the timing and levels of future expenditures and investments could differ materially from those included in the forward-looking statements. Factors that could cause future capital expenditures and investments to differ materially include changes in industry supply and demand, general economic conditions, the availability of business opportunities and levels of cash flow from operations for each of the Groups. The timing of completion or cost of particular capital projects could be affected by unforeseen hazards such as weather conditions, explosions or fires, or by delays in obtaining government or partner approval. In addition, levels of investments may be affected by the ability of equity affiliates to obtain third-party financing. Proceeds from disposal of assets were $86 million in 1998, compared with $481 million in 1997 and $443 million in 1996. Proceeds in 1997 included $361 million resulting from USX's entry into a strategic partnership with two limited partners to acquire an interest in three coke batteries at its U-43 Management's Discussion and Analysis CONTINUED U. S. Steel Group's Clairton Works and $15 million from the sale of the plate mill at the U. S. Steel Group's former Texas Works. Proceeds in 1996 primarily reflected the sale of the U. S. Steel Group's investment in National-Oilwell (an oil field service joint venture); the sale of a portion of its investment in RTI common stock; disposal of the Marathon Group's interests in Alaskan oil properties and certain domestic and international oil and gas production properties; and the sale of the Marathon Group's equity interest in a domestic pipeline company. The net change in restricted cash was a net withdrawal of $174 million in 1998, which was primarily the result of redeeming all of the outstanding shares of USX-Delhi Group Common Stock with the $195 million of net proceeds from the sale of the Delhi Companies that had been classified as restricted cash in 1997. The net deposit of $97 million in 1997 mainly represents the deposit of the $195 million of net proceeds from the sale of the Delhi Companies, partially offset by cash withdrawn from an interest-bearing escrow account that was established in 1996 in connection with the disposal of oil production properties in Alaska. Financial obligations (the net of debt repayments, borrowings, commercial paper and revolving credit arrangements on the Consolidated Statement of Cash Flows) increased by $315 million in 1998, compared with decreases of $734 million in 1997 and $673 million in 1996. The increase in 1998 is primarily the result of borrowings against a revolving credit agreement to fund the acquisition of Tarragon in August 1998. The decrease in financial obligations in 1997 and 1996 primarily reflected cash flows provided from operating activities and asset sales in excess of cash used for capital expenditures and dividend payments (and with respect to 1997, in excess of $249 million of cash used for investments in equity affiliates). Issuance of long-term debt and Trust Preferred Securities for each of the last three years is summarized in the following table:
(Dollars in millions) 1998 1997 1996 Aggregate principal amounts of: 6.85% Notes due 2008 $ 400 $ -- $ -- Trust preferred securities/(a)/ -- 182 Indexed debt/(b)/ -- -- 117 Environmental bonds and capital leases/(c)/ 280 -- 78 ----- ----- ----- Total $ 680 $ 182 $ 195
/(a)/In 1997, USX exchanged 3.9 million 6.75% Convertible Quarterly Income Preferred Securities ("Trust Preferred Securities") of USX Capital Trust I for an equivalent number of shares of USX's 6.50% Cumulative Convertible Preferred Stock. This was a noncash transaction. For additional discussion, see Note 26 to the USX Consolidated Financial Statements. /(b)/See Note 17 to the USX Consolidated Financial Statements for a description of Indexed Debt. /(c)/Issued to refinance an equivalent amount of environmental improvement refunding bonds and capital leases. USX filed with the Securities and Exchange Commission a shelf registration statement, which became effective July 31, 1998, that allows USX to offer and issue unsecured debt securities, common and preferred stock and warrants in an aggregate principal amount of up to $1 billion in one or more separate offerings on terms to be determined at the time of sale. Including this shelf registration statement, USX had a total of $986 million available under existing shelf registration statements at December 31, 1998. In January 1999, USX issued $300 million in aggregate principal amount of 6.65% Notes due 2006, reducing the availability under existing shelf registration statements to $686 million. In the event of a change in control of USX, debt and guaranteed obligations totaling $4.0 billion at year-end 1998 may be declared immediately due and payable or required to be collateralized. See Notes 12, 14 and 17 to the USX Consolidated Financial Statements. Dividends paid increased by $26 million in 1998 as compared with 1997, due primarily to a two-cents-per-share increase in the quarterly Marathon Stock dividend rate effective January 1998. Dividends paid increased by $9 million in 1997 as compared with 1996, due primarily to the full-year effect of a two-cents-per- share increase in the quarterly Marathon Stock dividend rate effective October 1996. The increase was partially offset by decreased dividends on preferred stock, reflecting 6.50% Preferred Stock exchanged for Trust Preferred Securities during 1997. U-44 Management's Discussion and Analysis CONTINUED Benefit Plan Activity USX contributed $49 million in 1997 to fund the U. S. Steel Group's principal pension plan for the 1996 plan year. Also in 1997, USX contributed $80 million for elective funding of retiree life insurance of union and nonunion participants, and $70 million to the United Steelworkers of America ("USWA") Voluntary Employee Benefit Association Trust ("VEBA"). A total of $40 million of the $70 million VEBA contribution represented prefunding for the years 1998 and 1999. Debt and Preferred Stock Ratings Standard & Poor's Corp. currently rates USX and Marathon Oil Company ("Marathon") senior debt as investment grade, following an upgrade in November 1996 to BBB- from BB+. USX's subordinated debt and preferred stock were also upgraded to BB+ from BB-. Moody's Investors Services, Inc., following upgrades in June 1998, currently rates USX's and Marathon's senior debt as investment grade at Baa2, USX's subordinated debt at Baa3 and USX's preferred stock as Ba1. Duff & Phelps Credit Rating Co. currently rates USX's senior notes as investment grade at BBB and USX's subordinated debt as BBB-. Derivative Instruments See Quantitative and Qualitative Disclosures About Market Risk for discussion of derivative instruments and associated market risk. Liquidity USX management believes that its short-term and long-term liquidity is adequate to satisfy its obligations as of December 31, 1998, and to complete currently authorized capital spending programs. Future requirements for USX's business needs, including the funding of capital expenditures, debt maturities for the years 1999, 2000 and 2001, and any amounts that may ultimately be paid in connection with contingencies (which are discussed in Note 29 to the USX Consolidated Financial Statements), are expected to be financed by a combination of internally generated funds, proceeds from the sale of stock, borrowings or other external financing sources. USX management's opinion concerning liquidity and USX's ability to avail itself in the future of the financing options mentioned in the above forward-looking statements are based on currently available information. To the extent that this information proves to be inaccurate, future availability of financing may be adversely affected. Factors that affect the availability of financing include the performance of each Group (as indicated by levels of cash provided from operating activities and other measures), the state of the debt and equity markets, investor perceptions and expectations of past and future performance, the overall U.S. financial climate, and, in particular, with respect to borrowings, levels of USX's outstanding debt and credit ratings by rating agencies. For a summary of long-term debt, see Note 17 to the USX Consolidated Financial Statements. Management's Discussion and Analysis of Environmental Matters, Litigation and Contingencies USX has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of USX's products and services, operating results will be adversely affected. USX believes that domestic competitors of the U. S. Steel Group and substantially all the competitors of the Marathon Group are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and the specific products and services it provides. U-45 Management's Discussion and Analysis CONTINUED The following table summarizes USX's environmental expenditures for each of the last three years/(a)/:
(Dollars in millions) 1998 1997 1996 Capital Marathon Group/(b)/ $ 124 $ 81 $ 66 U. S. Steel Group 49 43 90 Discontinued operations -- 10 9 ----- ----- ----- Total capital $ 173 $ 134 $ 165 Compliance Operating & maintenance Marathon Group/(b)/ $ 126 $ 84 $ 75 U. S. Steel Group 198 196 199 Discontinued operations -- 4 4 ----- ----- ----- Total operating & maintenance 324 284 278 Remediation/(c)/ Marathon Group/(b)/ 10 19 26 U. S. Steel Group 19 29 33 ----- ----- ----- Total remediation 29 48 59 Total compliance $ 353 $ 332 $ 337
/(a)/Amounts for the Marathon Group are calculated based on American Petroleum Institute survey guidelines. Amounts for the U. S. Steel Group are based on previously established U.S. Department of Commerce survey guidelines. /(b)/Amounts in 1998 include 100% of MAP /(c)/Amounts do not include noncash provisions recorded for environmental remediation, but include spending charged against such reserves, net of recoveries where permissible. USX's environmental capital expenditures accounted for 11%, 10% and 14% of total consolidated capital expenditures in 1998, 1997 and 1996, respectively. USX's environmental compliance expenditures averaged 1% of total consolidated costs and expenses in 1998, and 2% in both 1997 and 1996. Remediation spending primarily reflected ongoing clean-up costs for soil and groundwater contamination associated with underground storage tanks and piping at retail gasoline stations, and remediation activities at former and present operating locations. The Resource Conservation and Recovery Act ("RCRA") establishes standards for the management of solid and hazardous wastes. Besides affecting current waste disposal practices, RCRA also addresses the environmental effects of certain past waste disposal operations, the recycling of wastes and the regulation of storage tanks. A significant portion of USX's currently identified environmental remediation projects relate to the remediation of former and present operating locations. These projects include continuing remediation at an in situ uranium mining operation, the remediation of former coke-making facilities, a closed and dismantled refinery site and the closure of permitted hazardous and non-hazardous waste landfills. USX has been notified that it is a potentially responsible party ("PRP") at 46 waste sites under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of December 31, 1998. In addition, there are 25 sites where USX has received information requests or other indications that USX may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability. There are also 126 additional sites, excluding retail gasoline stations, where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. Of these sites, 16 were associated with properties conveyed to MAP by Ashland for which Ashland has retained liability for all costs associated with remediation. At many of these sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. USX accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. See Note 29 to the USX Consolidated Financial Statements. U-46 Management's Discussion and Analysis CONTINUED In October 1998, the National Enforcement Investigations Center and Region V of the United States Environmental Protection Agency conducted a multi-media inspection of MAP's Detroit refinery. Subsequently, in November 1998, Region V conducted a multi-media inspection of MAP's Robinson refinery. These inspections covered compliance with the Clean Air Act (New Source Performance Standards, Prevention of Significant Deterioration, and the National Emission Standards for Hazardous Air Pollutants for Benzene), the Clean Water Act (Permit exceedances for the Waste Water Treatment Plant), reporting obligations under the Emergency Planning and Community Right to Know Act and the handling of process waste. Although MAP has been advised as to certain compliance issues, including one contested Notice of Violation regarding MAP's Detroit refinery, it is not known when complete findings on the results of the inspections will be issued. In an action separate from the multi-media inspection, the Department of Justice filed a civil complaint in February 1999, alleging violation of the Clean Air Act with respect to benzene releases at the Robinson refinery. In 1998, USX entered into a consent decree with the Environmental Protection Agency ("EPA") which resolved alleged violations of the Clean Water Act National Pollution Discharge Elimination System ("NPDES") permit at Gary Works and provides for a sediment remediation project for a section of the Grand Calumet River that runs through Gary Works. Contemporaneously, USX entered into a consent decree with the public trustees which resolves potential liability for natural resource damages on the same section of the Grand Calumet River. USX has agreed to pay civil penalties of $2.9 million for the alleged water act violations and $0.5 million in natural resource damages assessment costs, which will be paid in 1999. In addition, USX will pay the EPA $1 million at the end of the remediation project for future monitoring costs. During the negotiations leading up to the settlement with EPA, capital improvements were made to upgrade plant systems to comply with the NPDES requirements. The sediment remediation project is an approved final interim measure under the corrective action program for Gary Works and is expected to cost approximately $30 million over the next six years. Estimated remediation and monitoring costs for this project have been accrued. New or expanded environmental requirements, which could increase USX's environmental costs, may arise in the future. USX intends to comply with all legal requirements regarding the environment, but since many of them are not fixed or presently determinable (even under existing legislation) and may be affected by future legislation, it is not possible to predict accurately the ultimate cost of compliance, including remediation costs which may be incurred and penalties which may be imposed. However, based on presently available information, and existing laws and regulations as currently implemented, USX does not anticipate that environmental compliance expenditures (including operating and maintenance and remediation) will materially increase in 1999. USX expects environmental capital expenditures in 1999 to be approximately $96 million, or approximately 5% of total estimated consolidated capital expenditures. Predictions beyond 1999 can only be broad-based estimates which have varied, and will continue to vary, due to the ongoing evolution of specific regulatory requirements, the possible imposition of more stringent requirements and the availability of new technologies, among other matters. Based upon currently identified projects, USX anticipates that environmental capital expenditures in 2000 will total approximately $110 million; however, actual expenditures may vary as the number and scope of environmental projects are revised as a result of improved technology or changes in regulatory requirements, and could increase if additional projects are identified or additional requirements are imposed. Effective January 1, 1997, USX adopted American Institute of Certified Public Accountants Statement of Position No. 96-1 -- "Environmental Remediation Liabilities", which requires that companies include certain direct costs and post-closure monitoring costs in accruals for remediation liabilities. USX income from operations in the first quarter of 1997 included charges of $27 million (net of expected recoveries) related to adoption, primarily for accruals of post-closure monitoring costs, study costs and administrative costs. See Note 2 to the USX Consolidated Financial Statements for additional discussion. Income from operations in 1997 also included net favorable effects of $13 million related to other environmental accrual adjustments. U-47 Management's Discussion and Analysis CONTINUED USX is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the consolidated financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably. Outlook and Year 2000 For Outlook with respect to the Marathon Group and U. S. Steel Group, see Management's Discussion and Analysis of Operations by Group, herein. For discussion of the Year 2000 issue as it affects the Marathon Group and the U. S. Steel Group, see Management's Discussion and Analysis of Operations by Group, herein. Accounting Standards In March 1998, the American Institute of Certified Public Accountants issued Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidelines for companies to capitalize or expense costs incurred to develop or obtain internal- use software. USX adopted SOP 98-1 effective January 1, 1999. The incremental impact on results of operations of adoption of SOP 98-1 is likely to be initially favorable since certain qualifying costs will be capitalized and amortized over future periods. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". This new standard requires recognition of all derivatives as either assets or liabilities at fair value. This new standard may result in additional volatility in both current period earnings and other comprehensive income as a result of recording recognized and unrecognized gains and losses resulting from changes in the fair value of derivative instruments. At adoption this new standard requires a comprehensive review of all outstanding derivative instruments to determine whether or not their use meets the hedge accounting criteria. It is possible that there will be derivative instruments employed in our businesses that do not meet all of the designated hedge criteria and they will be reflected in income on a mark-to-market basis. Based upon the strategies currently used by USX and the level of activity related to forward exchange contracts and commodity-based derivative instruments in recent periods, USX does not anticipate the effect of adoption to have a material impact on either financial position or results of operations. USX plans to adopt the standard effective January 1, 2000, as required. Management's Discussion and Analysis of Operations by Group The Marathon Group The Marathon Group includes Marathon Oil Company ("Marathon") and certain other subsidiaries of USX Corporation ("USX"), which are engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of petroleum products primarily through Marathon Ashland Petroleum LLC ("MAP"), owned 62% by Marathon; and other energy related businesses. The Marathon Group's 1998 financial performance was significantly impacted by the lowest oil prices in 24 years, lower natural gas prices and decreased refining crack spreads (the difference between light products prices and crude costs). Nevertheless, in 1998, Marathon upstream operations achieved nearly a 20% growth in worldwide liquids production and MAP had a highly successful first year of operations, achieving annual repeatable operating efficiencies of approximately $150 million. U-48 Management's Discussion and Analysis CONTINUED Marathon Group revenues for each of the last three years are summarized in the following table, which is covered by the report of independent accountants.
(Dollars in millions) 1998 1997 1996 Sales by product: Refined products $ 9,091 $ 7,012 $ 7,132 Merchandise 1,873 1,045 1,000 Liquid hydrocarbons 1,818 941 1,111 Natural gas 1,144 1,331 1,194 Transportation and other products 271 167 180 Gain on ownership change in MAP/(a)/ 245 -- -- Other/(b)/ 104 86 97 ------- ------- ------- Subtotal 14,546 10,582 10,714 ------- ------- ------- Matching buy/sell transactions/(c)(e)/ 3,948 2,436 2,912 Excise taxes/(d)(e)/ 3,581 2,736 2,768 ------- ------- ------- Total revenues $22,075 $15,754 $16,394
/(a)/See Note 3 to the USX Consolidated Financial Statements for a discussion of the gain on ownership change in MAP. /(b)/Includes dividend and affiliate income, net gains on disposal of assets and other income. /(c)/Matching crude oil and refined products buy/sell transactions settled in cash. /(d)/Consumer excise taxes on petroleum products and merchandise. /(e)/Included in both revenues and costs and expenses, resulting in no effect on income. In 1998, Marathon Group revenues included 100% of MAP revenues, and MCL's revenues commencing August 12, 1998. On a pro forma basis, assuming the acquisitions of Tarragon's operations and Ashland's RM&T net assets had occurred on January 1, 1997, revenues (excluding matching buy/sell transactions and excise taxes) for 1997 would have been $16,278 million. Revenues (excluding matching buy/sell transactions and excise taxes) decreased by $1,732 million in 1998 from pro forma 1997. The decrease in 1998 mainly reflected lower prices for refined products, lower worldwide liquid hydrocarbon prices and lower domestic natural gas prices, partially offset by higher liquid hydrocarbon sales volumes. The increase in liquid hydrocarbon sales volumes was due to a higher volume of upstream production being sold to third parties. Revenues (excluding matching buy/sell transactions and excise taxes) decreased $132 million in 1997 (as reported) from 1996, mainly due to lower average refined product prices and lower worldwide liquid hydrocarbon prices and volumes, partially offset by increased volumes of refined products and higher domestic natural gas volumes and prices. U-49 Management's Discussion and Analysis CONTINUED Marathon Group income from operations for each of the last three years is summarized in the following table:
(Dollars in millions) 1998 1997 1996 Exploration & production ("E&P") Domestic $ 190 $ 500 $ 547 International 88 273 353 ------ ------ ------ Income for E&P reportable segment 278 773 900 Refining, marketing & transportation/(a)/ 896 563 249 Other energy related businesses/(b)/ 33 48 57 ------ ------ ------ Income for reportable segments 1,207 1,384 1,206 Items not allocated to reportable segments: Administrative expenses/(c)/ (106) (168) (133) IMV reserve adjustment/(d)/ (267) (284) 209 Gain on ownership change & transition charges--MAP/(e)/ 223 -- -- Int'l investment write-offs, suspended exploration well write-offs & gas contract settlement/(f)/ (119) -- -- Other items (net) -- -- 14 ------ ------ ------ Total income from operations $ 938 $ 932 $1,296
/(a)/In 1998, segment income includes 100% of MAP and is not comparable to prior periods. /(b)/Includes marketing and transportation of domestic natural gas and crude oil, and power generation. /(c)/Includes the portion of the Marathon Group's administrative costs not charged to the operating components and the portion of USX corporate general and administrative costs allocated to the Marathon Group. /(d)/The inventory market valuation ("IMV") reserve reflects the extent to which the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. /(e)/The gain on ownership change and one-time transition charges relate to the formation of MAP. For additional discussion of the gain on ownership change in MAP, see Note 3 to the USX Consolidated Financial Statements. /(f)/Includes a write-off of certain non-revenue producing international investments and several exploratory wells which had encountered hydrocarbons, but had been suspended pending further evaluation. It also includes a gain from the resolution of a contract dispute with a purchaser of Marathon's natural gas production from certain domestic properties. In 1998, Marathon Group income from operations included 100% of MAP, and MCL's results of operations commencing August 12, 1998. On a pro forma basis, assuming the acquisitions of Ashland's RM&T net assets and Tarragon's operations had occurred on January 1, 1997, income for reportable segments for 1997 would have been $1,728 million. Income for reportable segments decreased by $521 million in 1998 from pro forma 1997 and increased by $178 million in 1997 (as reported) from 1996. The decrease in 1998 was primarily due to lower worldwide liquid hydrocarbon prices, lower domestic natural gas prices and lower refining crack spreads, partially offset by higher liquid hydrocarbon production. The increase in 1997 was primarily due to higher average refined product margins and higher worldwide natural gas prices, partially offset by lower worldwide liquid hydrocarbon production and prices and higher worldwide exploration expense. U-50 Management's Discussion and Analysis CONTINUED
Average Volumes and Selling Prices 1998 1997 1996 (thousands of barrels per day) Net liquids production/(a)/ --U.S. 135 115 122 --International/(b)/ 61 49 59 --Worldwide ----- ------ ------ 196 164 181 (millions of cubic feet per day) Net natural gas production --U.S. 744 722 676 --International--equity 441 423 499 --International--other/(c)/ 23 32 32 ----- ------ ------ --Total Consolidated 1,208 1,177 1,207 --Equity affiliate 33 42 45 ----- ------ ------ --Worldwide 1,241 1,219 1,252 (dollars per barrel) Liquid hydrocarbons/(a)(d)/ --U.S. $10.42 $16.88 $18.58 --International 12.24 18.77 20.34 (dollars per mcf) Natural gas/(d)/ --U.S. $ 1.79 $ 2.20 $ 2.09 --International equity 1.94 2.00 1.97 (thousands of barrels per day) Refined products sold/(e)/ 1,198 775 775 Matching buy/sell volumes included in above 39 51 71
/(a)/Includes crude oil, condensate and natural gas liquids. /(b)/Represents equity tanker liftings, truck deliveries and direct deliveries. /(c)/Represents gas acquired for injection and subsequent resale. /(d)/Prices exclude gains/losses from hedging activities. /(e)/In 1998, refined products sold and matching buy/sell volumes include 100% of MAP and are not comparable to prior periods. Domestic E&P income decreased by $310 million in 1998 from 1997 following a decrease of $47 million in 1997 from 1996. The decrease in 1998 was primarily due to lower liquid hydrocarbon and natural gas prices, partially offset by increased liquid hydrocarbon production and natural gas volumes. The 17%, or 20,000 barrels per day ("bpd"), increase in liquid hydrocarbon production was mainly attributable to new production in the Gulf of Mexico, while the increase in natural gas volumes was mainly attributable to properties in east Texas. The decrease in 1997 was primarily due to lower liquid hydrocarbon prices and production and higher exploration expense, partially offset by increased natural gas production and prices. The lower liquid hydrocarbon production was mostly due to the 1996 disposal of oil producing properties in Alaska. The increase in natural gas volumes was mainly attributable to properties in east Texas, Oklahoma and Wyoming. International E&P income decreased by $185 million in 1998 following a decrease of $80 million in 1997. The decrease in 1998 was primarily due to lower liquid hydrocarbon and natural gas prices and higher exploration and operating expenses. These items were partially offset by increased liquid hydrocarbon production and natural gas volumes. The 24%, or 12,000 bpd, increase in liquid hydrocarbon production was mainly attributable to the acquired production in Canada and new operations in Gabon. The increase in natural gas volumes was mainly attributable to acquired production in Canada. The decrease in 1997 was primarily due to lower liquid hydrocarbon volumes, lower natural gas volumes and lower liquid hydrocarbon prices. These items were partially offset by reduced pipeline and terminal expenses and reduced DD&A expenses, due largely to the lower volumes. The lower liquid hydrocarbon volumes primarily reflected lower production in the U.K. North Sea, while the lower natural gas volumes were mainly due to natural field declines in Ireland and Norway. U-51 Management's Discussion and Analysis CONTINUED Refining, marketing and transportation ("downstream") reportable segment income in 1998 included 100 percent of MAP. On a pro forma basis, assuming the acquisition of Ashland's R&M net assets had occurred on January 1, 1997, income for the reportable segments of the combined downstream operations of Marathon and Ashland for 1997 would have been $869 million. On this basis, 1998 downstream reportable segment income of $896 million was slightly higher than pro forma 1997 downstream reportable segment income. During 1998, the effects of lower refining crack spreads were offset by strong performances from MAP's asphalt and retail operations, realization of operating efficiencies as a result of combining Marathon and Ashland's downstream operations and lower energy costs. Downstream reportable segment income in 1997 increased $314 million over 1996 due mainly to improved refined product margins as favorable effects of reduced crude oil and other feedstock costs more than offset a decrease in refined product sales prices. Other energy related businesses reportable segment income decreased by $15 million in 1998 following a decrease of $9 million in 1997. The decrease in 1998 was mainly due to a gain on the sale of an equity interest in a domestic pipeline company included in 1997 reportable segment income. Items not allocated to reportable segments Administrative expenses decreased by $62 million in 1998 following an increase of $35 million in 1997 from 1996. The decrease in 1998 mainly reflected an increase in administrative costs charged to the RM&T reportable segment, lower accruals for employee benefit and compensation plans and lower litigation accruals. The increase in 1997 mainly reflected higher accruals for employee benefit and compensation plans, including Marathon's performance-based variable pay plan. IMV reserve adjustment--When U. S. Steel Corporation acquired Marathon Oil Company in March 1982, crude oil and refined product prices were at historically high levels. In applying the purchase method of accounting, the Marathon Group's crude oil and refined product inventories were revalued by reference to current prices at the time of acquisition, and this became the new LIFO cost basis of the inventories. Generally accepted accounting principles require that inventories be carried at lower of cost or market. Accordingly, the Marathon Group has established an IMV reserve to reduce the cost basis of its inventories to net realizable value. Quarterly adjustments to the IMV reserve result in noncash charges or credits to income from operations. When Marathon acquired the crude oil and refined product inventories associated with Ashland's RM&T operations on January 1, 1998, the Marathon Group established a new LIFO cost basis for those inventories. The acquisition cost of these inventories lowered the overall average cost of the Marathon Group's combined RM&T inventories. As a result, the price threshold at which an IMV reserve will be recorded was also lowered. These adjustments affect the comparability of financial results from period to period as well as comparisons with other energy companies, many of which do not have such adjustments. Therefore, the Marathon Group reports separately the effects of the IMV reserve adjustments on financial results. In management's opinion, the effects of such adjustments should be considered separately when evaluating operating performance. Outlook--Marathon Group The outlook regarding the Marathon Group's upstream revenues and income is largely dependent upon future prices and volumes of liquid hydrocarbons and natural gas. Prices have historically been volatile and have frequently been affected by unpredictable changes in supply and demand resulting from fluctuations in worldwide economic activity and political developments in the world's major oil and gas producing and consuming areas. During 1998, worldwide liquid hydrocarbon and natural gas prices realized by Marathon were significantly lower than 1997. In 1998, West Texas Intermediate crude oil postings reached their lowest levels in 24 years. The continuation of this depressed pricing environment in 1999 will adversely impact upstream results. Expected increases in liquid hydrocarbon and natural gas production should partially offset the effects of these lower prices. Continued lower prices could adversely affect the quantity of crude oil and natural gas reserves that can be economically produced and the amount of capital available for exploration and development. U-52 Management's Discussion and Analysis CONTINUED In 1999, worldwide liquid hydrocarbon production, including Marathon's share of equity affiliates, is expected to increase by 17 percent, to average approximately 230,000 bpd. Most of the increase is anticipated in the second half of the year. This primarily reflects projected new production from the Phase I development of the Piltun-Astokhskoye ("P-A") field in mid-1999 (discussed below), start-up of the Tchatamba South field in the third quarter of 1999 and a full year of production by MCL, partially offset by natural production declines of mature fields. In 1999, worldwide natural gas volumes, including Marathon's share of equity affiliates, are expected to increase by 11 percent, to approximately 1.38 billion cubic feet per day. This primarily reflects increases in North American gas production, offset by natural declines in mature international fields, primarily in Ireland and Norway. In 2000, worldwide liquid hydrocarbon production and natural gas volumes are expected to remain consistent with 1999 levels. In 2001, liquid hydrocarbon production is expected to increase by 10 to 15 percent over 2000 production levels and natural gas volumes are expected to increase by approximately 4 percent over 2000 levels. These projections are based on known discoveries and do not include any additions from potential or future acquisitions or future wildcat drilling. Petronius, in the Gulf of Mexico, was originally scheduled to begin production in the second quarter of 1999, but the project was delayed when the last platform topsides module fell into the sea during installation work. The lost module will have to be replaced. Third party insurance is expected to cover costs associated with the replacement and installation on the platform. First production is now expected to begin in the fourth quarter of 2000. Marathon holds a 37.5% interest in Sakhalin Energy Investment Company Ltd. ("Sakhalin Energy"), an incorporated joint venture company responsible for the overall management of the Sakhalin II project. This project includes development of the P-A oil field and the Lunskoye gas-condensate field, which are located 8-12 miles offshore Sakhalin Island in the Russian Far East Region. The Russian State Reserves Committee has approved estimated combined reserves for the P-A and Lunskoye fields of one billion gross barrels of liquid hydrocarbons and 14 trillion cubic feet of natural gas. In 1997, a Development Plan for the P-A license area, Phase I: Astokh Feature was approved. Offshore drilling and production facilities for the Astokh Feature were set in place on September 1, 1998. Drilling of development wells commenced in December of 1998. First production from the Astokh Feature is scheduled for mid-1999, with sales forecast to average 45,000 gross bpd of oil annually as early as 2000. This rate is based on six months of offshore loading operations during the ice-free weather window at an estimated daily rate of 90,000 gross barrels. Marathon's equity share of reserves from primary production in the Astokh Feature is 80 million barrels of oil. The approved Development Plan also provides for further appraisal work for the remainder of the P-A field. An appraisal well was drilled during the summer weather window in 1998 and the results are being evaluated. Conceptual design work for further development of the P-A field, including pressure maintenance for the Astokh Feature, continues. With respect to the Lunskoye field, appraisal work and efforts to secure long-term gas sales markets continue. Commencement of gas production from the Lunskoye field, which will be contingent upon the conclusion of a gas sales contract, is anticipated to occur in 2005 or later. Late in 1997, the Sakhalin Energy consortium arranged a limited recourse project financing facility of $348 million. Sakhalin Energy borrowed the full amount of this facility in 1998 to fund Phase I expenditures and to repay amounts previously advanced to Sakhalin Energy by its shareholders. In the area of significant Russian legislation, the Russian Parliament passed a Production Sharing Agreement ("PSA") Amendments Law and a PSA Enabling Law, which brings other Russian legislation into conformance with the PSA Law. These laws were signed by President Yeltsin and enacted in 1999. At December 31, 1998, Marathon's investment in the Sakhalin II project was $275 million. The above discussion includes forward-looking statements with respect to worldwide liquid hydrocarbon production and natural gas volumes for 1999, 2000 and 2001, commencement of projects and dates of initial production. These statements are based on a number of assumptions, including (among others) prices, amount of capital available for exploration and development, worldwide supply U-53 Management's Discussion and Analysis CONTINUED and demand for petroleum products, regulatory constraints, reserve estimates, production decline rates of mature fields, timing of commencing production from new wells, timing and results of future development drilling, reserve replacement rates and other geological, operating and economic considerations. In addition, development of new production properties in countries outside the United States may require protracted negotiations with host governments and is frequently subject to political considerations, such as tax regulations, which could adversely affect the timing and economics of projects. To the extent these assumptions prove inaccurate and/or negotiations and other considerations are not satisfactorily resolved, actual results could be materially different than present expectations. Downstream income of the Marathon Group is largely dependent upon refining crack spreads (the difference between light product prices and crude costs). Refined product margins have been historically volatile and vary with the level of economic activity in the various marketing areas, the regulatory climate and the available supply of crude oil and refined products. Key external factors look promising for the refining and marketing industry. Demand for petroleum products is expected to grow modestly, due to a leveling of fuel efficiency in the passenger car fleet, increasing sales of light-truck and sport-utility vehicles which average fewer miles per gallon than passenger cars, and an increasing number of vehicle miles traveled. Refinery utilization rates are strong, reflecting the increased demand, which should be beneficial for MAP's refining margins. Also, increased highway construction funding should benefit MAP, the largest U.S. supplier of asphalt. As a result of Marathon and Ashland combining major elements of their downstream operations, MAP achieved approximately $150 million in annual repeatable pre-tax operating efficiencies in 1998 and has targeted an additional $100 million in 1999. MAP presently expects to derive efficiencies of $350 million annually on a pre- tax basis in 2001. This exceeds its original goal of achieving efficiencies of $200 million annually on a pre-tax basis. Efficiencies will continue to be identified in the logistical, retail marketing, wholesale marketing and refining operations, as well as administrative functions, that Marathon and Ashland transferred to MAP. MAP and a third party are constructing facilities to produce 800 million pounds per year of polymer grade propylene and polypropylene at the Garyville refinery. MAP is building and will own and operate facilities to produce polymer grade propylene. The third party is constructing and will own and operate the polypropylene facilities and market its output. Production of the polymer grade propylene is scheduled to begin in the second quarter of 1999. MAP plans to build a pipeline from its Catlettsburg refinery to Columbus, Ohio. The wholly owned pipeline is expected to initially move about 50,000 bpd of refined products into central Ohio. Construction is expected to commence in the summer of 1999 after final regulatory approvals. The pipeline is expected to be operational in the first half of 2000. A project to increase crude throughput and light product output is being undertaken at MAP's Robinson, IL refinery. This project is expected to be completed in 2001. The above statements with respect to demand for petroleum products, the amount and timing of efficiencies to be realized by MAP, and the statements with respect to the propylene, pipeline and refinery improvement projects are forward looking statements. Some factors that could potentially cause actual results to differ materially from present expectations include (among others) the price of petroleum products, unanticipated costs or delays associated with implementing shared technology, completing logistical infrastructure projects, leveraging procurement strategies, levels of cash flow from operations, obtaining the necessary construction and environmental permits, unforeseen hazards such as weather conditions and regulatory constraints. Year 2000 Readiness Disclosure The Marathon Group is executing action plans which include: . prioritizing and focusing on those computerized and automated systems and processes critical to the operations in terms of material operational, safety, environmental and financial risk to the company. . allocating and committing appropriate resources to fix the problem. U-54 Management's Discussion and Analysis CONTINUED . developing detailed contingency plans for those computerized and automated systems and processes critical to the operations in terms of material operational, safety, environmental and financial risk to the company. . communicating with, and aggressively pursuing, critical third parties to help ensure the Year 2000 readiness of their products and services through use of mailings, telephone contacts, and the inclusion of Year 2000 readiness language in purchase orders and contracts. . performing rigorous Year 2000 tests of critical systems. . participating in, and exchanging Year 2000 information with industry trade associations, such as the American Petroleum Institute (API). . engaging qualified outside engineering and information technology consulting firms to assist in the Year 2000 inventory, assessment and readiness. State of Readiness Readiness efforts and critical systems testing is 92% complete for Information Technology (IT) systems. The remaining systems are to be completed by end of the third quarter of 1999. Responses have been received from over 80% of the Marathon Group's third party software vendors, with 99% indicating that they are or will be Year 2000 ready and will provide updated software on a timely basis. The Marathon Group has completed the inventory on 93% of the Non-Information Technology (Non-IT) systems. Assessment of these inventories is being completed to identify those systems that will require remediation. All Non-IT systems are scheduled to be ready by the end of the third quarter of 1999 with minor exceptions. Plant maintenance shutdowns scheduled for the fourth quarter of 1999 will allow us to complete any final readiness efforts. The following chart provides the percent of completion for the inventory of systems and processes that may be affected by the Year 2000 ("Y2K Inventory"), analysis performed to determine the Year 2000 date impact of inventoried systems and processes ("Y2K Impact Assessment") and the Year 2000 readiness of the Marathon Group's Year 2000 inventory ("Y2K Readiness of Overall Inventory"). The percent of completion for Y2K Readiness of Overall Inventory includes all inventory items not date impacted, those items already Year 2000 ready and those corrected and made Year 2000 ready through the renovation/replacement, testing and implementation activities; however, the implementation of certain Year 2000 ready IT and Non-IT systems has been deferred until 1999, to avoid unnecessary disruption of operations.
Percent Completed Y2K Y2K Readiness Impact of Y2K Assess- Overall As of January 31, 1999 Inventory ment Inventory Information technology 100% 100% 92% Non-information technology 93% 60% 52%
Third Parties Third parties are suppliers, customers and vendors, excluding third party software vendors discussed previously. Contacts have been made with all critical third parties to determine if they will be able to provide services to the Marathon Group after the Year 2000. Follow-up continues with those third parties not responding or returning an unacceptable response. If it is determined that there is a significant risk, an effort will be made to work with such parties. If this is not successful, a new provider of the same services will be sought. The Costs to Address Year 2000 Issues The estimated costs associated with Year 2000 readiness, are approximately $36 million, including $19 million of incremental costs. This reflects an increase of $8 million from the previously reported estimate of total incremental costs. The estimated cost increase results primarily from increased use of external consultants and increased internal staffing of Y2K operational teams. Total costs incurred as of January 31, 1999, were $17 million, including $8 million of incremental costs. As U-55 Management's Discussion and Analysis CONTINUED Y2K impact assessment nears completion and the renovation planning, readiness implementation and testing evolve, the estimated costs may change. The Risks of the Company's Year 2000 Issues The most reasonably likely worst case Year 2000 scenario would be the inability of critical third party suppliers, such as utility providers, telecommunication companies, and other critical suppliers, such as drilling equipment suppliers, platform suppliers, crude oil suppliers and pipeline carriers, to continue providing their products and services. This could pose the greatest material operational, safety, environmental and/or financial risk to the company. In addition, the lack of accurate and timely Year 2000 date impact information from suppliers of automation and process control systems and processes is a concern. Without quality information from suppliers, specifically on embedded chip technology, some Year 2000 problems could go undetected until after January 1, 2000. Contingency Planning Representatives of the Marathon Group have participated with a work group of the API Year 2000 Task force to develop a contingency plan format. This format includes guidelines to develop a plan that will cover the Year 2000 areas of concern. Many business unit contingency planning teams have been formed and are actively working on contingency plans for the systems and processes critical to the operations in terms of material operational, safety, environmental and financial risk to the company. These plans are to be completed and tested, when practical, by the end of the third quarter of 1999. The foregoing Year 2000 discussion includes forward-looking statements of the Marathon Group's efforts and management's expectations relating to Year 2000 readiness. These statements are based on certain assumptions including, but not limited to, the availability of programming and testing resources, vendors' ability to install or modify proprietary hardware and software, unanticipated problems identified in the ongoing Year 2000 readiness review, the effectiveness and execution of contingency plans and the level of incremental costs associated with Year 2000 readiness efforts. If these assumptions prove to be incorrect, actual results could differ materially from present expectations. The U. S. Steel Group The U. S. Steel Group includes U. S. Steel, which is engaged in the production and sale of steel mill products, coke, and taconite pellets; the management of mineral resources; domestic coal mining; real estate development; and engineering and consulting services. Certain business activities are conducted through joint ventures and partially-owned companies, such as USS/Kobe Steel Company ("USS/Kobe"), USS-POSCO Industries ("USS-POSCO"), PRO-TEC Coating Company ("PRO-TEC"), Transtar, Inc. ("Transtar"), Clairton 1314B Partnership, VSZ U. S. Steel, s. r.o. and RTI International Metals, Inc. ("RTI"). In 1998, segment income for U. S. Steel operations decreased primarily due to lower average steel product prices, lower shipment volumes, and less efficient operating levels, resulting from an increase in imports and weak tubular markets. U. S. Steel Group revenues for each of the last three years are summarized in the following table, which is covered by the report of independent accountants.
(Dollars in millions) 1998 1997 1996 Sales by product: Sheet and semi-finished steel products $3,501 $3,820 $3,677 Tubular, plate, and tin mill products 1,513 1,754 1,635 Raw materials (coal, coke and iron ore) 591 671 757 Other/(a)/ 578 570 466 Income from affiliates 46 69 66 Gain on disposal of assets 54 57 16 Gain on affiliate stock offering/(b)/ -- -- 53 ------ ------ ------ Total revenues $6,283 $6,941 $6,670
/(a)/Includes revenue from the sale of steel production byproducts, engineering and consulting services, real estate development and resource management. /(b)/For further details, see Note 9 to the USX Consolidated Financial Statements. U-56 Management's Discussion and Analysis CONTINUED Total revenues decreased by $658 million in 1998 from 1997 primarily due to lower average realized prices, lower steel shipment volumes, and lower income from affiliates. Total revenues increased by $271 million in 1997 from 1996 primarily due to higher average steel product prices and higher shipment volumes. U. S. Steel Group income from operations for the last three years was:
(Dollars in millions) 1998 1997 1996 Segment income for U. S. Steel operations/(a)/ $ 330 $ 618 $ 248 Items not allocated to segment: Pension credits 373 313 330 Administrative expenses (24) (33) (28) Costs related to former business activities/(b)/ (100) (125) (120) Gain on affiliate stock offering/(c)/ -- -- 53 ----- ----- ----- Total income from operations $ 579 $ 773 $ 483
/(a)/Includes income from the production and sale of steel mill products, coke and taconite pellets; the management of mineral resources; domestic coal mining; real estate development; and engineering and consulting services. /(b)/Includes the portion of postretirement benefit costs and certain other expenses principally attributable to former business units of the U. S. Steel Group. Results in 1997 included charges of $9 million related to environmental accruals and the adoption of SOP 96-1. /(c)/For further details, see Note 9 to the USX Consolidated Financial Statements. Segment income for U. S. Steel operations Segment income for U. S. Steel operations, which decreased $288 million in 1998 from 1997, included a net favorable $30 million for an insurance litigation settlement pertaining to the 1995 Gary (Ind.) Works No. 8 blast furnace explosion and charges of $10 million related to a voluntary workforce reduction plan. Results in 1997 included a benefit of $40 million in insurance settlement payments related to the 1996 hearth breakout at Gary Works No. 13 blast furnace and a $15 million gain on the sale of the plate mill at U. S. Steel's former Texas Works. In addition to the effects of these items, the decrease in segment income in 1998 for U. S. Steel operations was primarily due to lower average steel prices, lower shipments, less efficient operating levels, the cost effects of the 10 day outage at Gary Works No. 13 blast furnace following a tap hole failure, and lower income from affiliates. These unfavorable items were partially offset by lower 1998 accruals for profit sharing. The increase in imports and weak tubular markets negatively affected steel shipment levels, steel product prices and operating levels in 1998. U. S. Steel shipments declined 8% in 1998 compared to 1997. In 1998, raw steel production was negatively affected by a planned reline at Gary Works No. 6 blast furnace, an unplanned blast furnace outage at the Gary Works No. 13 blast furnace, and the idling of certain facilities to control inventory as a result of the increase in imports. In 1998, raw steel capability utilization averaged 87.6%, compared to 96.5% in 1997. Segment income for U. S. Steel operations increased $370 million in 1997 compared to 1996. Results in 1996 included $39 million of charges related to repair of the Gary Works No. 13 blast furnace and $13 million of charges related to a voluntary workforce reduction at the Fairless (Pa.) Works. In addition to the effects of these items, the increase in 1997 was primarily due to higher steel shipments, higher average realized steel prices, and improved operating efficiencies, including the full year availability of the Gary Works No. 13 blast furnace. These improvements were partially offset by higher 1997 accruals for profit sharing. The Gary Works No. 13 blast furnace, which represents about half of Gary Works iron producing capacity and roughly one-fourth of U. S. Steel's iron capacity, was idled on April 2, 1996 due to a hearth breakout. In addition to direct repair costs, 1996 operating results were adversely affected by production inefficiencies at Gary, as well as at other U. S. Steel plants, reduced shipments and higher costs for purchased iron and semifinished steel. The total effect of this unplanned outage on 1996 segment income is estimated to have been more than $100 million. USX maintained property damage and business interruption insurance coverages for the No. 13 blast furnace hearth breakout and the 1995 Gary Works No. 8 blast furnace explosion, subject to a $50 million deductible per occurrence for U-57 Management's Discussion and Analysis CONTINUED recoverable items. In 1998, USX and its insurance companies settled the Gary Works No. 8 blast furnace loss for approximately $30 million (net of charges and reserves) in excess of the deductible. In 1997, USX and its insurance companies settled the Gary Works No. 13 blast furnace loss for $40 million in excess of the deductible. Segment income for U. S. Steel operations included pension costs (which are primarily noncash) allocated to the ongoing operations of U. S. Steel of $187 million, $169 million, and $172 million in 1998, 1997 and 1996, respectively. Pension costs in 1998 included $10 million for termination benefits associated to a voluntary early retirement program, the settlements for which will principally occur in the first half of 1999. Items not allocated to segment Pension credits associated with pension plan assets and liabilities allocated to pre-1987 retirees and former businesses are not included in segment income for U. S. Steel operations. These pension credits, which are primarily noncash, totaled $373 million in 1998, compared to $313 million and $330 million in 1997 and 1996 respectively. Pension credits, combined with pension costs included in segment income for U. S. Steel operations, resulted in net pension credits of $186 million in 1998, $144 million in 1997 and $158 million in 1996. Net pension credits are expected to be approximately $205 million in 1999. Future net pension credits can be volatile dependent upon the future marketplace performance of plan assets, changes in actuarial assumptions regarding such factors as a selection of a discount rate and rate of return on assets, changes in the amortization levels of transition amounts or prior period service costs, plan amendments affecting benefit payout levels and profile changes in the beneficiary populations being valued. Changes in any of these factors could cause net pension credits to change. To the extent net pension credits decline in the future, income from operations would be adversely affected. For additional information on pensions, see Note 11 to the USX Consolidated Financial Statements. Outlook for 1999 U. S. Steel Group U. S. Steel expects that shipment volumes and average steel product prices will continue to be impacted by the effects of high levels of low priced steel imports and growing domestic minimill production capability for flat rolled products. Scrap prices are currently at low levels and provide minimills a cost advantage. In recent years, demand for steel in the United States has been at high levels. Any weakness in the U.S. economy for capital goods or consumer durables could adversely impact U. S. Steel Group's product prices and shipment levels. On August 1, 1999, U. S. Steel, along with several major steel competitors, faces the expiration of the labor agreement with the USWA. U. S. Steel's ability to negotiate an acceptable labor contract is essential to ongoing operations. Any labor interruptions could have an adverse effect on operations, financial results and cash flow. Steel imports to the United States accounted for an estimated 30%, 24% and 23% of the domestic steel market for the years 1998, 1997 and 1996, respectively. In November 1998, steel imports accounted for an estimated 37% of the domestic steel market. Steel imports of hot rolled and cold rolled steel increased 42% in 1998, compared to 1997. Steel imports of plates increased 75% in 1998, compared to 1997. The preceding statements concerning anticipated steel demand, steel pricing, and shipment levels are forward-looking and are based upon assumptions as to future product prices and mix, and levels of steel production capability, production and shipments. These forward-looking statements can be affected by imports, domestic and international economies, domestic production capacity, and customer demand. In the event these assumptions prove to be inaccurate, actual results may differ significantly from those presently anticipated. U-58 Management's Discussion and Analysis CONTINUED Year 2000 Readiness Disclosure A multi-functional Year 2000 task force continues to execute a preparedness plan which addresses readiness requirements for business computer systems, technical infrastructure, end-user computing, third parties, manufacturing, environmental operations, systems products produced and sold, and dedicated R&D test facilities. The U. S. Steel Group is executing a Year 2000 readiness plan which includes: . prioritizing and focusing on those computerized and automated systems and processes critical to the operations in terms of material safety, operational, environmental, quality and financial risk to the company. . allocating and committing appropriate resources to fix the problem. . communicating with, and aggressively pursuing, critical third parties to help ensure the Year 2000 readiness of their products and services through use of mailings, telephone contacts, on-site assessments and the inclusion of Year 2000 readiness language in purchase orders and contracts. . performing rigorous Year 2000 tests of critical systems. . participating in, and exchanging Year 2000 information with industry trade associations, such as the American Iron & Steel Institute, Association of Iron & Steel Engineers and the Steel Industry Systems Association. . engaging qualified outside engineering and information technology consulting firms to assist in the Year 2000 impact assessment and readiness effort. State of Readiness The U. S. Steel Group's progress on achieving Year 2000 readiness is currently on pace with our objectives. Certain systems/processes are to be replaced and/or upgraded with third- party Year 2000 ready products and services. All systems and processes are targeted to be Year 2000 ready, including integration testing, by the end of the third quarter, 1999. This schedule may be impacted by the availability of information and services from third-party suppliers/vendors on the Year 2000 readiness of their products and services. Generally, efforts in 1999 will be primarily devoted to both Year 2000 systems and integration testing, tracking of the readiness of third parties, developing contingency plans and verifying the state of Year 2000 readiness. The following chart provides the percent of completion for the inventory of systems and processes that may be affected by the year 2000 ("Y2K Inventory"), the analysis performed to determine the Year 2000 date impact on inventoried systems and processes ("Y2K Impact Assessment") and the year 2000 readiness of the U. S. Steel Group's year 2000 inventory ("Y2K Readiness of Overall Inventory"). The percent of completion for Y2K Readiness of Overall Inventory includes all inventory items not date impacted, those items already Year 2000 ready and those corrected and made Year 2000 ready through the renovation/replacement, testing and implementation activities.
Percent Completed Y2K Y2K Readiness Impact of Y2K Assess- Overall As of January 31, 1999 Inventory ment Inventory Information technology 100% 98% 95% Non-information technology 100% 84% 81%
Third Parties The U. S. Steel Group continues to review its third party (including, but not limited to outside processors, process control systems and hardware suppliers, telecommunication providers, and transportation carriers) relationships to determine those critical to its operations. The majority of contacts have been made with critical third parties to determine if they will be able to provide their product and service to the U. S. Steel Group after the Year 2000. An aggressive follow-up process with those third parties not responding or returning an unacceptable response is underway. Communications with U. S. Steel Group's third parties is an on- going process which includes mailings, telephone contacts and on- site visits. If it is determined that there is a significant risk with the third U-59 Management's Discussion and Analysis CONTINUED parties, an effort will be made to work with the third parties to resolve the issue, or a new provider of the same products or services will be investigated and secured. As of December 31, 1998, the U. S. Steel Group has sent out approximately 700 inquiries and received over 600 responses. The Costs to Address Year 2000 Issues The current estimated cost associated with Year 2000 readiness, is approximately $29 million, which includes $16 million in incremental cost. Total costs incurred as of January 31, 1999, were $14 million, including $6 million of incremental costs. As Y2K Impact Assessment nears completion and the renovation planning, readiness implementation and testing evolve, the estimated costs may change. Year 2000 Risks to the Company The most reasonably likely worst case Year 2000 scenario would be the inability of third party suppliers, such as utility providers, telecommunication companies, outside processors, and other critical suppliers, to continue providing their products and services. This could pose the greatest material safety, operational, environmental, quality and/or financial risk to the company. In addition, the lack of accurate and timely Year 2000 date impact information from suppliers of automation and process control systems and processes is a concern to the U. S. Steel Group. Without timely and quality information from suppliers, specifically on embedded chip technology, schedules for attaining readiness can be impacted and some Year 2000 problems could go undetected during the transition to the year 2000. Contingency Planning General guidelines have been issued to all business units for creating contingency plans to address those critical facets of operations that can cause a material safety, operational, environmental, or financial risk to the company. Representatives of the U. S. Steel Group are working with the Association of Iron & Steel Engineers and the American Iron & Steel Institute to develop contingency planning guidelines to address issues specific to the steel industry. These guidelines are intended to help entities develop specific contingency plans that will cover their associated Year 2000 risks and areas of concern. The U. S. Steel Group currently expects to have contingency plans completed and tested, when practical, by the middle of 1999. This discussion includes forward-looking statements of the U. S. Steel Group's efforts and management's expectations relating to Year 2000 readiness. The Steel Group's ability to achieve Year 2000 readiness and the level of incremental costs associated therewith, could be adversely impacted by, among other things, the availability and cost of programming and testing resources, vendors' ability to install or modify proprietary hardware and software and unanticipated problems identified in the ongoing Year 2000 readiness review. Also, the U. S. Steel Group's ability to mitigate Year 2000 risks could be adversely impacted by the ability to complete, and the effectiveness of, contingency plans. The Delhi Group Effective October 31, 1997, USX sold Delhi Gas Pipeline Corporation and other subsidiaries of USX that comprise all of the Delhi Group. U-60 Quantitative and Qualitative Disclosures About Market Risk Management Opinion Concerning Derivative Instruments USX employs a strategic approach of limiting its use of derivative instruments principally to hedging activities, whereby gains and losses are generally offset by price changes in the underlying commodity. Based on this approach, combined with risk assessment procedures and internal controls, management believes that its use of derivative instruments does not expose USX to material risk; however, the use of derivative instruments for hedging activities could materially affect USX's results of operations in particular quarterly or annual periods. This is primarily because use of such instruments may limit the company's ability to benefit from favorable price movements. However, management believes that use of these instruments will not have a material adverse effect on financial position or liquidity. For a summary of accounting policies related to derivative instruments, see Note 1 to the USX Consolidated Financial Statements. Commodity Price Risk and Related Risks In the normal course of its business, USX is exposed to market risk or price fluctuations related to the purchase, production or sale of crude oil, natural gas, refined products and steel products. To a lesser extent, USX is exposed to the risk of price fluctuations on coal, coke, natural gas liquids, electricity, petroleum feedstocks and certain nonferrous metals used as raw materials. USX is also exposed to effects of price fluctuations on the value of its commodity inventories. USX's market risk strategy has generally been to obtain competitive prices for its products and services and allow operating results to reflect market price movements dictated by supply and demand. However, USX uses fixed-price contracts and derivative commodity instruments to manage a relatively small portion of its commodity price risk. USX uses fixed-price contracts for portions of its natural gas production to manage exposure to fluctuations in natural gas prices. In addition, USX uses derivative commodity instruments such as exchange-traded futures contracts and options, and over-the-counter ("OTC") commodity swaps and options to manage exposure to market risk related to the purchase, production or sale of crude oil, natural gas, refined products, certain nonferrous metals and electricity. USX's strategic approach is to limit the use of these instruments principally to hedging activities. Accordingly, gains and losses on derivative commodity instruments are generally offset by the effects of price changes in the underlying commodity. However, certain derivative commodity instruments have the effect of restoring the equity portion of fixed-price sales of natural gas to variable market-based pricing. These instruments are used as part of USX's overall risk management programs. U-61 Quantitative and Qualitative Disclosures About Market Risk continued Sensitivity analyses of the incremental effects on pretax income of hypothetical 10% and 25% changes in commodity prices for open derivative commodity instruments as of December 31, 1998, are provided in the following table:/(a)/
(Dollars in millions) Incremental Decrease in Pretax Income Assuming a Hypothetical Price Change of/(a)/ Derivative Commodity Instruments 10% 25% Marathon Group/(b)(c):/ Crude oil (price increase)/(d)/ $2.6 $12.8 Natural gas (price decrease)/(d)/ 9.4 24.0 Refined products (price increase)/(d)/ 1.9 6.5 U. S. Steel Group: Natural gas (price decrease)/(d)/ $2.3 $ 5.6 Zinc (price decrease)/(d)/ 1.6 3.9 Nickel (price decrease)/(d)/ .1 .2 Tin (price decrease)/(d)/ .1 .2 Heating oil (price decrease)/(d)/ -- .1
/(a)/ Gains and losses on derivative commodity instruments are generally offset by price changes in the underlying commodity. Effects of these offsets are not reflected in the sensitivity analyses. Amounts reflect the estimated incremental effect on pretax income of hypothetical 10% and 25% changes in closing commodity prices for each open contract position at December 31, 1998. Marathon Group and U. S. Steel Group management evaluate their portfolios of derivative commodity instruments on an ongoing basis and add or revise strategies to reflect anticipated market conditions and changes in risk profiles. Changes to the portfolios subsequent to December 31, 1998, would cause future pretax income effects to differ from those presented in the table. /(b)/ The number of net open contracts varied throughout 1998, from a low of 1,268 contracts at January 1, to a high of 17,359 contracts at September 24, and averaged 8,171 for the year. The derivative commodity instruments used and hedging positions taken also varied throughout 1998, and will continue to vary in the future. Because of these variations in the composition of the portfolio over time, the number of open contracts, by itself, cannot be used to predict future income effects. /(c)/ The calculation of sensitivity amounts for basis swaps assumes that the physical and paper indices are perfectly correlated. Gains and losses on options are based on changes in intrinsic value only. /(d)/ The direction of the price change used in calculating the sensitivity amount for each commodity reflects that which would result in the largest incremental decrease in pretax income when applied to the derivative commodity instruments used to hedge that commodity. While derivative commodity instruments are generally used to reduce risks from unfavorable commodity price movements, they also may limit the opportunity to benefit from favorable movements. During the fourth quarter of 1996, certain hedging strategies matured which limited the Marathon Group's ability to benefit from favorable market price increases on the sales of equity crude oil and natural gas production, resulting in pretax hedging losses of $33 million. In total, Marathon's upstream operations recorded net pretax hedging losses of $3 million in 1998, compared with net losses of $3 million in 1997, and net losses of $38 million in 1996. Marathon's downstream operations generally use derivative commodity instruments to lock-in costs of certain raw material purchases, to protect carrying values of inventories and to protect margins on fixed-price sales of refined products. In total, Marathon's downstream operations recorded net pretax hedging gains, net of the 38% minority interest in MAP, of $28 million in 1998, compared with net gains of $29 million in 1997, and net losses of $22 million in 1996. Essentially, all of these upstream and downstream gains and losses were offset by changes in the prices of the underlying hedged commodities, with the net effect approximating the targeted results of the hedging strategies. The U. S. Steel Group uses OTC commodity swaps to manage exposure to market risk related to the purchase of natural gas, heating oil and certain nonferrous metals. The U. S. Steel Group recorded net pretax hedging losses of $6 million in 1998, compared with net gains of $5 million in 1997 and net gains of $21 million in 1996. These gains and losses were offset by changes in the realized prices of the underlying hedged commodities. U-62 Quantitative and Qualitative Disclosures About Market Risk continued For additional quantitative information relating to derivative commodity instruments, including aggregate contract values and fair values, where appropriate, see Note 27 to the USX Consolidated Financial Statements. USX is subject to basis risk, caused by factors that affect the relationship between commodity futures prices reflected in derivative commodity instruments and the cash market price of the underlying commodity. Natural gas transaction prices are frequently based on industry reference prices that may vary from prices experienced in local markets. For example, New York Mercantile Exchange ("NYMEX") contracts for natural gas are priced at Louisiana's Henry Hub, while the underlying quantities of natural gas may be produced and sold in the Western United States at prices that do not move in strict correlation with NYMEX prices. To the extent that commodity price changes in one region are not reflected in other regions, derivative commodity instruments may no longer provide the expected hedge, resulting in increased exposure to basis risk. These regional price differences could yield favorable or unfavorable results. OTC transactions are being used to manage exposure to a portion of basis risk. USX is subject to liquidity risk, caused by timing delays in liquidating contract positions due to a potential inability to identify a counterparty willing to accept an offsetting position. Due to the large number of active participants, liquidity risk exposure is relatively low for exchange-traded transactions. Interest Rate Risk USX is subject to the effects of interest rate fluctuations on certain of its non-derivative financial instruments. A sensitivity analysis of the projected incremental effect of a hypothetical 10% decrease in year-end 1998 interest rates on the fair value of USX's non-derivative financial instruments, is provided in the following table:
(Dollars in millions) As of December 31, 1998 Incremental Increase in Carrying Fair Fair Non-Derivative Financial Instruments/(a)/ Value/(b)/ Value/(b)/ Value/(c)/ Financial assets: Investments and long-term receivables/(d)/ $ 124 $ 180 $ -- Financial liabilities: Long-term debt (including amounts due within one year)/(e)/ $3,896 $ 4,203 $ 158 Preferred stock of subsidiary/(f)/ 250 249 20 USX obligated mandatorily redeemable convertible preferred securities of a subsidiary trust/(f)/ 182 165 13 ------ ------- ------- Total $4,328 $ 4,617 $ 191
/(a)/ Fair values of cash and cash equivalents, receivables, notes payable, accounts payable and accrued interest, approximate carrying value and are relatively insensitive to changes in interest rates due to the short-term maturity of the instruments. Accordingly, these instruments are excluded from the table. /(b)/ See Note 28 to the USX Consolidated Financial Statements. /(c)/ Reflects, by class of financial instrument, the estimated incremental effect of a hypothetical 10% decrease in interest rates at December 31, 1998, on the fair value of USX's non- derivative financial instruments. For financial liabilities, this assumes a 10% decrease in the weighted average yield to maturity of USX's long-term debt at December 31, 1998. /(d)/ For additional information, see Note 15 to the USX Consolidated Financial Statements. /(e)/ Fair value was based on market prices where available, or current borrowing rates for financings with similar terms and maturities. For additional information, see Note 17 to the USX Consolidated Financial Statements. /(f)/ See Note 25 to the USX Consolidated Financial Statements. At December 31, 1998, USX's portfolio of long-term debt was comprised primarily of fixed-rate instruments. Therefore, the fair value of the portfolio is relatively sensitive to effects of interest rate fluctuations. This sensitivity is illustrated by the $120 million increase in the fair value of long-term debt assuming a hypothetical 10% decrease in interest rates. However, USX's sensitivity to interest rate declines and corresponding increases in the fair value of its debt portfolio would unfavorably affect USX's results and cash flows only to the extent that USX elected to repurchase or otherwise retire all or a portion of its fixed-rate debt portfolio at prices above carrying value. U-63 Quantitative and Qualitative Disclosures About Market Risk continued Foreign Currency Exchange Rate Risk USX is subject to the risk of price fluctuations related to anticipated revenues and operating costs, firm commitments for capital expenditures and existing assets or liabilities denominated in currencies other than U.S. dollars. USX has not generally used derivative instruments to manage this risk. However, USX has made limited use of forward currency contracts to manage exposure to certain currency price fluctuations. At December 31, 1998, USX had open Canadian dollar forward purchase contracts with a total carrying value of $36 million. A 10% increase in the December 31, 1998, Canadian dollar to U.S. dollar forward rate, would result in a charge to income of $3 million. Equity Price Risk USX is subject to equity price risk resulting from its issuance in December 1996 of $117 million of 6-3/4% Exchangeable Notes Due February 1, 2000 ("Indexed Debt"). At maturity, USX must exchange the notes for shares of RTI International Metals, Inc. (formerly RMI Titanium Company) ("RTI") common stock, or redeem the notes for the equivalent amount of cash. Each quarter, USX adjusts the carrying value of Indexed Debt to settlement value, based on changes in the value of RTI common stock. Any resulting adjustment is charged or credited to income and included in interest and other financial costs. During 1998, USX recorded a favorable adjustment of $44 million. At year-end 1998, a hypothetical 10% increase in the value of RTI common stock would have resulted in a $7 million unfavorable effect on pretax income. USX holds a 26% interest in RTI which is accounted for under the equity method. At December 31, 1998, USX's investment in RTI common stock had a fair market value of $77 million and USX's carrying value of the Indexed Debt was $69 million. The unfavorable effects on income described above would generally be offset by changes in the market value of USX's investment in RTI. However, under the equity method of accounting, USX cannot recognize in income these changes in the market value until the investment is liquidated. Safe Harbor USX's quantitative and qualitative disclosures about market risk include forward-looking statements with respect to management's opinion about risks associated with USX's use of derivative instruments. These statements are based on certain assumptions with respect to market prices and industry supply of and demand for crude oil, refined products, steel products and certain raw materials. To the extent that these assumptions prove to be inaccurate, future outcomes with respect to USX's hedging programs may differ materially from those discussed in the forward-looking statements. U-64 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 generally accepted accounting principles. They necessarily include some amounts that are based on best judgments and estimates. The Marathon Group financial information displayed in other sections of this report is consistent with these financial statements. USX seeks to assure the objectivity and integrity of its financial records by careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communications programs aimed at assuring that its policies and methods are understood throughout the organization. USX has a comprehensive formalized system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that financial records are reliable. Appropriate management monitors the system for compliance, and the internal auditors independently measure its effectiveness and recommend possible improvements thereto. In addition, as part of their audit of the financial statements, USX's independent accountants, who are elected by the stockholders, review and test the internal accounting controls selectively to establish a basis of reliance thereon in determining the nature, extent and timing of audit tests to be applied. The Board of Directors pursues its oversight role in the area of financial reporting and internal accounting control through its Audit Committee. This Committee, composed solely of nonmanagement directors, regularly meets (jointly and separately) with the independent accountants, management and internal auditors to monitor the proper discharge by each of its responsibilities relative to internal accounting controls and the consolidated and group financial statements. Thomas J. Usher Robert M. Hernandez Kenneth L. Matheny Chairman, Board of Directors Vice Chairman Vice President & Chief Executive Officer & Chief Financial Officer & Comptroller Report of Independent Accountants To the Stockholders of USX Corporation: In our opinion, the accompanying financial statements appearing on pages M-2 through M-20 present fairly, in all material respects, the financial position of the Marathon Group at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of USX' s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The Marathon Group is a business unit of USX Corporation (as described in Note 1, page M-5); accordingly, the financial statements of the Marathon Group should be read in connection with the consolidated financial statements of USX Corporation. PricewaterhouseCoopers LLP 600 Grant Street, Pittsburgh, Pennsylvania 15219-2794 February 9, 1999 M-1
Statement of Operations (Dollars in millions) 1998 1997 1996 Revenues: Sales (Note 7) $21,726 $15,668 $16,297 Dividend and affiliate income 50 36 33 Gain on disposal of assets 28 37 55 Gain on ownership change in Marathon Ashland Petroleum LLC (Note 5) 245 -- -- Other income 26 13 9 ------- ------- ------- Total revenues 22,075 15,754 16,394 ------- ------- ------- Costs and expenses: Cost of sales (excludes items shown below) 15,325 10,392 11,188 Selling, general and administrative expenses 505 355 309 Depreciation, depletion and amortization 941 664 693 Taxes other than income taxes 3,786 2,938 2,971 Exploration expenses 313 189 146 Inventory market valuation charges (credits) (Note 21) 267 284 (209) ------- ------- ------- Total costs and expenses 21,137 14,822 15,098 ------- ------- ------- Income from operations 938 932 1,296 Net interest and other financial costs (Note 8) 237 260 305 Minority interest in income of Marathon Ashland Petroleum LLC (Note 5) 249 -- -- ------- ------- ------- Income before income taxes and extraordinary loss 452 672 991 Provision for estimated income taxes (Note 19) 142 216 320 ------- ------- ------- Income before extraordinary loss 310 456 671 Extraordinary loss (Note 9) -- -- 7 ------- ------- ------- Net income $ 310 $ 456 $ 664 Income Per Common Share 1998 1997 1996 Basic: Income before extraordinary loss $ 1.06 $ 1.59 $ 2.33 Extraordinary loss -- -- .02 ------- ------- ------- Net income $ 1.06 $ 1.59 $ 2.31 Diluted: Income before extraordinary loss $ 1.05 $ 1.58 $ 2.31 Extraordinary loss -- -- .02 ------- ------- ------- Net income $ 1.05 $ 1.58 $ 2.29
See Note 23, for a description and computation of income per common share. The accompanying notes are an integral part of these financial statements. M-2
Balance Sheet (Dollars in millions) December 31 1998 1997 Assets Current assets: Cash and cash equivalents (Note 6) $ 137 $ 36 Receivables, less allowance for doubtful accounts of $3 and $2 1,277 856 Inventories (Note 21) 1,310 980 Other current assets 252 146 ------- ------- Total current assets 2,976 2,018 Investments and long-term receivables (Note 20) 603 455 Property, plant and equipment -- net (Note 17) 10,429 7,566 Prepaid pensions (Note 15) 241 290 Other noncurrent assets 295 236 ------- ------- Total assets $14,544 $10,565 Liabilities Current liabilities: Notes payable $ 132 $ 108 Accounts payable 1,980 1,348 Distribution payable to minority shareholder of Marathon Ashland Petroleum LLC (Note 6) 103 -- Payroll and benefits payable 150 142 Accrued taxes 95 102 Deferred income taxes (Note 19) 4 61 Accrued interest 87 84 Long-term debt due within one year (Note 13) 59 417 ------- ------- Total current liabilities 2,610 2,262 Long-term debt (Note 13) 3,456 2,476 Long-term deferred income taxes (Note 19) 1,450 1,318 Employee benefits (Note 15) 553 375 Deferred credits and other liabilities 389 332 Preferred stock of subsidiary (Note 10) 184 184 Minority interest in Marathon Ashland Petroleum LLC (Note 5) 1,590 -- Common Stockholders' Equity (Note 18) 4,312 3,618 ------- ------- Total liabilities and common stockholders' equity $14,544 $10,565
The accompanying notes are an integral part of these financial statements. M-3
Statement of Cash Flows (Dollars in millions) 1998 1997 1996 Increase (decrease) in cash and cash equivalents Operating activities: Net income $ 310 $ 456 $ 664 Adjustments to reconcile to net cash provided from operating activities: Minority interest in income of Marathon Ashland Petroleum LLC -- net of distributions 38 -- -- Depreciation, depletion and amortization 941 664 693 Exploratory dry well costs 186 78 54 Inventory market valuation charges (credits) 267 284 (209) Pensions and other postretirement benefits 34 6 12 Deferred income taxes 26 30 104 Gain on ownership change in Marathon Ashland Petroleum LLC (245) -- -- Gain on disposal of assets (28) (37) (55) Changes in: Current receivables -- sold -- (340) -- -- operating turnover 240 97 (119) Inventories (13) 18 72 Current accounts payable and accrued expenses (233) 11 211 All other -- net (92) (21) 76 ------- ------- ---------- Net cash provided from operating activities 1,431 1,246 1,503 ------- ------- ---------- Investing activities: Capital expenditures (1,270) (1,038) (751) Acquisition of Tarragon Oil and Gas Limited (686) -- -- Disposal of assets 65 60 282 Restricted cash -- withdrawals 11 108 -- -- deposits (32) (10) (98) Affiliates -- investments (42) (193) (31) -- loans and advances (103) (46) (6) -- repayments of loans and advances 63 5 15 All other -- net (10) 1 9 ------- ------- ---------- Net cash used in investing activities (2,004) (1,113) (580) ------- ------- ---------- Financing activities (Note 4): Increase (decrease) in Marathon Group's portion of USX consolidated debt 329 97 (769) Specifically attributed debt: Borrowings 366 -- -- Repayments (389) (39) (1) Marathon Stock issued 613 34 2 Dividends paid (246) (219) (201) ------- ------- ---------- Net cash provided from (used in) financing activities 673 (127) (969) ------- ------- ---------- Effect of exchange rate changes on cash 1 (2) 1 ------- ------- ---------- Net increase (decrease) in cash and cash equivalents 101 4 (45) Cash and cash equivalents at beginning of year 36 32 77 ------- ------- ---------- Cash and cash equivalents at end of year $ 137 $ 36 $ 32
See Note 14, 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 11. Although the financial statements of the Marathon Group and the U. S. Steel Group separately report the assets, liabilities (including contingent liabilities) and stockholders' equity of USX attributed to each such Group, such attribution of assets, liabilities (including contingent liabilities) and stockholders' equity between the Marathon Group and the U. S. Steel Group for the purpose of preparing their respective financial statements does not affect legal title to such assets or responsibility for such liabilities. Holders of Marathon Stock and Steel Stock are holders of common stock of USX and continue to be subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts arising from one Group that affect the overall cost of USX's capital could affect the results of operations and financial condition of the other Group. In addition, net losses of either Group, as well as dividends and distributions on any class of USX Common Stock or series of preferred stock and repurchases of any class of USX Common Stock or series of preferred stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on both classes of Common Stock. Accordingly, the USX consolidated financial information should be read in connection with the Marathon Group financial information. 2. Summary of Principal Accounting Policies Principles applied in consolidation -- These financial statements include the accounts of the businesses comprising the Marathon Group. The Marathon Group and the U. S. Steel Group financial statements, taken together, comprise all of the accounts included in the USX consolidated financial statements. Investments in unincorporated oil and gas joint ventures, undivided interest pipelines and jointly owned gas processing plants are consolidated on a pro rata basis. Investments in other entities over which the Marathon Group has significant influence are accounted for using the equity method of accounting and are carried at the Marathon Group's share of net assets plus loans and advances. Investments in other companies whose stock is publicly traded are carried at market value. The difference between the cost of these investments and market value is recorded in other comprehensive income (net of tax). Investments in companies whose stock has no readily determinable fair value are carried at cost. Use of estimates -- Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at year-end and the reported amounts of revenues and expenses during the year. Significant items subject to such estimates and assumptions include the carrying value of long-lived assets; valuation allowances for receivables, inventories and deferred income tax assets; environmental liabilities; liabilities for potential tax deficiencies and potential litigation claims and settlements; and assets and obligations related to employee benefits. Additionally, certain estimated liabilities are recorded when management commits to a plan to close an operating facility or to exit a business activity. Actual results could differ from the estimates and assumptions used. Revenue recognition -- Revenues principally include sales, dividend and affiliate income, gains or losses on the disposal of assets and gains or losses from changes in ownership interests. Sales are recognized when products are shipped or services are provided to customers. Consumer excise taxes on petroleum products and merchandise and matching crude oil and refined products buy/sell transactions settled in cash are included in both revenues and costs and expenses, with no effect on income. M-5 Dividend and affiliate income includes the Marathon Group's proportionate share of income from equity method investments and dividend income from other investments. Dividend income is recognized when dividend payments are received. When long-lived assets depreciated on an individual basis are sold or otherwise disposed of, any gains or losses are reflected in income. Such gains or losses on the disposal of long- lived assets are recognized when title passes to the buyer and, if applicable, all significant regulatory approvals are received. Proceeds from disposal of long-lived assets depreciated on a group basis are credited to accumulated depreciation, depletion and amortization with no immediate effect on income. Gains or losses from a change in ownership of a consolidated subsidiary or an unconsolidated affiliate are recognized in revenues in the period of change. Cash and cash equivalents -- Cash and cash equivalents include cash on hand and on deposit and investments in highly liquid debt instruments with maturities generally of three months or less. Inventories -- Inventories are carried at lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method. Derivative instruments -- The Marathon Group engages in commodity and currency risk management activities within the normal course of its business as an end-user of derivative instruments (Note 25). Management is authorized to manage exposure to price fluctuations related to the purchase, production or sale of crude oil, natural gas, refined products and electricity through the use of a variety of derivative financial and nonfinancial instruments. Derivative financial instruments require settlement in cash and include such instruments as over-the-counter (OTC) commodity swap agreements and OTC commodity options. Derivative nonfinancial instruments require or permit settlement by delivery of commodities and include exchange-traded commodity futures contracts and options. At times, derivative positions are closed, prior to maturity, simultaneous with the underlying physical transaction and the effects are recognized in income accordingly. The Marathon Group's practice does not permit derivative positions to remain open if the underlying physical market risk has been removed. Derivative instruments relating to fixed price sales of equity production are marked-to-market in the current period and the related income effects are included within income from operations. All other changes in the market value of derivative instruments are deferred, including both closed and open positions, and are subsequently recognized in income, as sales or cost of sales, in the same period as the underlying transaction. Premiums on all commodity-based option contracts are initially recorded based on the amount paid or received; the options' market value is subsequently recorded as a receivable or payable, as appropriate. The margin receivable accounts required for open commodity contracts reflect changes in the market prices of the underlying commodity and are settled on a daily basis. Forward exchange contracts are used to manage currency risks related to commitments for capital expenditures and existing assets or liabilities denominated in a foreign currency. Gains or losses related to firm commitments are deferred and included with the underlying transaction; all other gains or losses are recognized in income in the current period as sales, cost of sales, interest income or expense, or other income, as appropriate. Forward exchange contract values are included in receivables or payables, as appropriate. Recorded deferred gains or losses are reflected within other current and noncurrent assets or accounts payable and deferred credits and other liabilities. Cash flows from the use of derivative instruments are reported in the same category as the hedged item in the statement of cash flows. Exploration and development -- The Marathon Group follows the successful efforts method of accounting for oil and gas exploration and development. Gas balancing -- The Marathon Group follows the sales method of accounting for gas production imbalances. Long-lived assets -- Depreciation and depletion of oil and gas producing properties are computed using predetermined rates based upon estimated proved oil and gas reserves applied on a units-of- production method. Other items of property, plant and equipment are depreciated principally by the straight-line method. The Marathon Group evaluates impairment of its oil and gas producing assets primarily on a field-by-field basis. Other assets are evaluated on an individual asset basis or by logical groupings of assets. Assets deemed to be impaired are written down to their fair value, including any related goodwill, using discounted future cash flows and, if available, comparable market values. Environmental liabilities -- The Marathon Group provides for remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. Generally, the timing of remediation accruals coincides with completion of a feasibility study or the commitment to a formal plan of action. Remediation liabilities are accrued based on estimates of known environmental exposure and are discounted in certain instances. If recoveries of remediation costs from third parties are probable, a receivable is recorded. Estimated abandonment and dismantlement costs of offshore production platforms are accrued based upon estimated proved oil and gas reserves on a units-of-production method. M-6 Insurance -- The Marathon Group is insured for catastrophic casualty and certain property and business interruption exposures, as well as those risks required to be insured by law or contract. Costs resulting from noninsured losses are charged against income upon occurrence. Reclassifications -- Certain reclassifications of prior years' data have been made to conform to 1998 classifications. 3. New Accounting Standards The following accounting standards were adopted by USX: Reporting comprehensive income -- Effective January 1, 1998, USX adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". This Standard establishes requirements for reporting and display of comprehensive income and its components in the financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events from nonowner sources. It includes all changes in equity during a period except those resulting from investments by and distributions to owners. See disclosures of comprehensive income at Note 18 and on page U-7 of the USX consolidated financial statements. Disclosures of operating segments -- USX adopted in 1998, Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes new standards for reporting information about operating segments and related disclosures about products and services, geographic areas and major customers. The most significant new requirement of this Standard is that reportable operating segments be based on an enterprise's internally reported business segments. See disclosures of operating segments at Note 11. Disclosures of postretirement benefits -- USX adopted in 1998, Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (SFAS No. 132), which revises and standardizes the reporting requirements for postretirement benefits. However, the Standard does not change the measurement and recognition of those benefits. The Marathon Group has complied with SFAS No. 132 by disclosing pension and other postretirement benefits at Note 15. Environmental remediation liabilities -- Effective January 1, 1997, USX adopted American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" (SOP 96-1), which provides additional interpretation of existing accounting standards related to recognition, measurement and disclosure of environmental remediation liabilities. As a result of adopting SOP 96-1, the Marathon Group identified additional environmental remediation liabilities of $11 million. Estimated receivables for recoverable costs related to adoption of SOP 96-1 were $4 million. The net unfavorable effect of adoption on the Marathon Group's income from operations at January 1, 1997, was $7 million. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). This new Standard requires recognition of all derivatives as either assets or liabilities at fair value. SFAS No. 133 may result in additional volatility in both current period earnings and other comprehensive income as a result of recording recognized and unrecognized gains and losses resulting from changes in the fair value of derivative instruments. SFAS No. 133 requires a comprehensive review of all outstanding derivative instruments to determine whether or not their use meets the hedge accounting criteria. It is possible that there will be derivative instruments employed in our businesses that do not meet all of the designated hedge criteria and they will be reflected in income on a mark-to- market basis. Based upon the strategies currently employed by the Marathon Group and the level of activity related to forward exchange contracts and commodity-based derivative instruments in recent periods, the Marathon Group does not anticipate the effect of adoption to have a material impact on either financial position or results of operations. The Marathon Group plans to adopt SFAS No. 133 effective January 1, 2000, as required. M-7 4. Corporate Activities Financial activities -- As a matter of policy, USX manages most financial activities on a centralized, consolidated basis. Such financial activities include the investment of surplus cash; the issuance, repayment and repurchase of short-term and long-term debt; the issuance, repurchase and redemption of preferred stock; and the issuance and repurchase of common stock. Transactions related primarily to invested cash, short-term and long-term debt (including convertible debt), related net interest and other financial costs, and preferred stock and related dividends are attributed to the Marathon Group, the U. S. Steel Group and, prior to November 1, 1997, the Delhi Group based upon the cash flows of each group for the periods presented and the initial capital structure of each group. Most financing transactions are attributed to and reflected in the financial statements of all groups. See Note 10, for the Marathon Group's portion of USX's financial activities attributed to all groups. However, transactions such as leases, certain collaterized financings, certain indexed debt instruments, financial activities of consolidated entities which are less than wholly owned by USX and transactions related to securities convertible solely into any one class of common stock are or will be specifically attributed to and reflected in their entirety in the financial statements of the group to which they relate. Corporate general and administrative costs -- Corporate general and administrative costs are allocated to the Marathon Group, the U. S. Steel Group and, prior to November 1, 1997, the Delhi Group based upon utilization or other methods management believes to be reasonable and which consider certain measures of business activities, such as employment, investments and sales. The costs allocated to the Marathon Group were $28 million in 1998, $37 million in 1997 and $30 million in 1996, and primarily consist of employment costs including pension effects, professional services, facilities and other related costs associated with corporate activities. Income taxes -- All members of the USX affiliated group are included in the consolidated United States federal income tax return filed by USX. Accordingly, the provision for federal income taxes and the related payments or refunds of tax are determined on a consolidated basis. The consolidated provision and the related tax payments or refunds have been reflected in the Marathon Group, the U. S. Steel Group and, prior to November 1, 1997, the Delhi Group financial statements in accordance with USX's tax allocation policy. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated among the Marathon Group, the U. S. Steel Group and, prior to November 1, 1997, the Delhi Group, for group financial statement purposes, based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to the respective groups. For tax provision and settlement purposes, tax benefits resulting from attributes (principally net operating losses and various tax credits), which cannot be utilized by one of the groups on a separate return basis but which can be utilized on a consolidated basis in that year or in a carryback year, are allocated to the group that generated the attributes. To the extent that one of the groups is allocated a consolidated tax attribute which, as a result of expiration or otherwise, is not ultimately utilized on the consolidated tax return, the prior years' allocation of such attribute is adjusted such that the effect of the expiration is borne by the group that generated the attribute. Also, if a tax attribute cannot be utilized on a consolidated basis in the year generated or in a carryback year, the prior years' allocation of such consolidated tax effects is adjusted in a subsequent year to the extent necessary to allocate the tax benefits to the group that would have realized the tax benefits on a separate return basis. As a result, the allocated group amounts of taxes payable or refundable are not necessarily comparable to those that would have resulted if the groups had filed separate tax returns. 5. Business Combinations In August 1998, Marathon acquired Tarragon Oil and Gas Limited (Tarragon), a Canadian oil and gas exploration and production company. Securityholders of Tarragon received, at their election, Cdn$14.25 for each Tarragon share, or the economic equivalent in Exchangeable Shares of an indirect Canadian subsidiary of Marathon, which are exchangeable solely on a one-for-one basis into Marathon Stock. The purchase price included cash payments of $686 million, issuance of 878,074 Exchangeable Shares valued at $29 million and the assumption of $345 million in debt. The Exchangeable Shares are exchangeable at the option of the holder at any time and automatically redeemable on August 11, 2003 (and, in certain circumstances, as early as August 11, 2001). The holders of Exchangeable Shares are entitled to receive declared dividends equivalent to dividends declared from time to time by USX on Marathon Stock. Marathon accounted for the acquisition using the purchase method of accounting. The 1998 results of operations include the operations of Marathon Canada Limited, formerly known as Tarragon, commencing August 12, 1998. M-8 During 1997, Marathon and Ashland Inc. (Ashland) agreed to combine the major elements of their refining, marketing and transportation (RM&T) operations. On January 1, 1998, Marathon transferred certain RM&T net assets to Marathon Ashland Petroleum LLC (MAP), a new consolidated subsidiary. Also on January 1, 1998, Marathon acquired certain RM&T net assets from Ashland in exchange for a 38% interest in MAP. The acquisition was accounted for under the purchase method of accounting. The purchase price was determined to be $1.9 billion, based upon an external valuation. The change in Marathon's ownership interest in MAP resulted in a gain of $245 million, which is included in 1998 revenues. In connection with the formation of MAP, Marathon and Ashland entered into a Limited Liability Company Agreement dated January 1, 1998 (the LLC Agreement). The LLC Agreement provides for an initial term of MAP expiring on December 31, 2022 (25 years from its formation). The term will automatically be extended for ten- year periods, unless a termination notice is given by either party. Also in connection with the formation of MAP, the parties entered into a Put/Call, Registration Rights and Standstill Agreement (the Put/Call Agreement). The Put/Call Agreement provides that at any time after December 31, 2004, Ashland will have the right to sell to Marathon all of Ashland's ownership interest in MAP, for an amount in cash and/or Marathon or USX debt or equity securities equal to the product of 85% (90% if equity securities are used) of the fair market value of MAP at that time, multiplied by Ashland's percentage interest in MAP. Payment could be made at closing, or at Marathon's option, in three equal annual installments, the first of which would be payable at closing. At any time after December 31, 2004, Marathon will have the right to purchase all of Ashland's ownership interests in MAP, for an amount in cash equal to the product of 115% of the fair market value of MAP at that time, multiplied by Ashland's percentage interest in MAP. The following unaudited pro forma data for the Marathon Group includes the results of operations of Tarragon for 1998 and 1997, and the Ashland RM&T net assets for 1997, giving effect to the acquisitions as if they had been consummated at the beginning of the years presented. The pro forma data is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations.
(In millions, except per share amounts) 1998 1997 Revenues $22,169 $23,333 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, 1998, MAP included in their cash and cash equivalents, a $103 million demand note invested with Ashland, which is payable March 15, 1999. During 1998, MAP's petroleum products' sales to Ashland were $185 million and MAP's purchases of products and services from Ashland were $45 million. These transactions were conducted on an arm's-length basis. At December 31, 1998, MAP had current receivables from Ashland of $22 million and current payables, including distributions payable, to Ashland of $106 million. 7. Revenues
The items below are included in revenues and costs and expenses, with no effect on income. (In millions) 1998 1997 1996 Matching crude oil and refined product buy/sell transactions settled in cash $3,948 $2,436 $2,912 Consumer excise taxes on petroleum products and merchandise 3,581 2,736 2,768
M-9 8. Other Items
(In millions) 1998 1997 1996 Net interest and other financial costs Interest and other financial income/(a)/: Interest income $ 30 $ 7 $ 4 Other 4 (6) (1) ----- ----- ----- Total 34 1 3 ----- ----- ----- Interest and other financial costs/(a)/: Interest incurred 285 232 260 Less interest capitalized 40 24 3 ----- ----- ----- Net interest 245 208 257 Interest on tax issues 5 7 4 Financial costs on preferred stock of subsidiary 17 16 16 Amortization of discounts 4 4 7 Expenses on sales of accounts receivable -- 19 20 Other -- 7 4 ----- ----- ----- Total 271 261 308 ----- ----- ----- Net interest and other financial costs/(a)/ $ 237 $ 260 $ 305
/(a)/ See Note 4, for discussion of USX net interest and other financial costs attributable to the Marathon Group. Foreign currency transactions For 1998, 1997 and 1996, the aggregate foreign currency transaction gains (losses) included in determining net income were $13 million, $4 million and $(24) million, respectively. 9. Extraordinary Loss On December 30, 1996, USX irrevocably called for redemption on January 30, 1997, $120 million of debt, resulting in a 1996 extraordinary loss to the Marathon Group of $7 million, net of a $4 million income tax benefit. 10. Financial Activities Attributed to Groups The following is the portion of USX financial activities attributed to the Marathon Group. These amounts exclude amounts specifically attributed to the Marathon Group.
Marathon Group Consolidated USX (a) (In millions) December 31 1998 1997 1998 1997 Cash and cash equivalents $ 4 $ 5 $ 4 $ 6 Receivables/(b)/ -- 9 -- 10 Other noncurrent assets/(b)/ 7 7 8 8 ------ ------ ------ ------ Total assets $ 11 $ 21 $ 12 $ 24 Notes payable $ 132 $ 108 $ 145 $ 121 Accounts payable -- 1 -- 1 Accrued interest 80 79 88 89 Long-term debt due within one year (Note 13) 59 417 66 466 Long-term debt (Note 13) 3,456 2,452 3,762 2,704 Preferred stock of subsidiary 184 184 250 250 ------ ------ ------ ------ Total liabilities $3,911 $3,241 $4,311 $3,631
Marathon Group (c) Consolidated USX (In millions) 1998 1997 1996 1998 1997 1996 Net interest and other financial costs (Note 8) $ 295 $ 246 $ 277 $ 324 $ 309 $ 376
/(a)/ For details of USX long-term debt and preferred stock of subsidiary, see Notes 17 and 25, respectively, to the USX consolidated financial statements. /(b)/ Primarily reflects 1997 forward currency contracts used to manage currency risks related to USX debt and interest denominated in a foreign currency. /(c)/ The Marathon Group's net interest and other financial costs reflect weighted average effects of all financial activities attributed to all groups. M-10 11. Segment Information The Marathon Group's operations consists of three reportable operating segments: 1) Exploration and Production -- explores for and produces crude oil and natural gas on a worldwide basis; 2) Refining, Marketing and Transportation -- refines, markets and transports crude oil and petroleum products, primarily in the Midwest and southeastern United States through MAP; and 3) Other Energy Related Businesses. Other Energy Related Businesses is an aggregation of two segments which fall below the quantitative reporting thresholds: 1) Natural Gas and Crude Oil Marketing and Transportation -- markets and transports its own and third- party natural gas and crude oil in the United States; and 2) Power Generation-- develops, constructs and operates independent electric power projects worldwide. For information on sales by product line, see table of revenues on page M-25 of Management's Discussion and Analysis. Segment income represents income from operations allocable to operating segments. USX corporate general and administrative costs are not allocated to operating segments. These costs primarily consist of employment costs including pension effects, professional services, facilities and other related costs associated with corporate activities. Certain general and administrative costs related to all Marathon Group operating segments in excess of amounts billed to MAP under service contracts and amounts charged out to operating segments under Marathon's shared services procedures also are not allocated to operating segments. Additionally, the following items are not allocated to operating segments: inventory market valuation adjustments and gain on ownership change in MAP.
Refining, Other Exploration Marketing Energy and and Related (In millions) Production Transportation Businesses Total 1998 Revenues: Customer $2,085 $19,290 $306 $21,681 Intersegment/(a)/ 144 10 17 171 Intergroup/(a)/ 13 -- 7 20 Equity in earnings of unconsolidated affiliates 2 12 14 28 Other 26 40 11 77 ------ ------- ---- ------- Total revenues $2,270 $19,352 $355 $21,977 ====== ======= ==== ======= Segment income $ 278 $ 896 $ 33 $ 1,207 Significant noncash items included in segment income: Depreciation, depletion and amortization/(b)/ 581 272 6 859 Pension expenses/(c)/ 3 16 2 21 Capital expenditures/(d)/ 839 410 8 1,257 Affiliates -- investments/(d)/ -- 22 17 39 1997 Revenues: Customer $1,575 $13,606 $381 $15,562 Intersegment/(a)/ 619 -- -- 619 Intergroup/(a)/ 99 -- 6 105 Equity in earnings of unconsolidated affiliates 14 4 7 25 Other 7 20 30 57 ------ ------- ---- ------- Total revenues $2,314 $13,630 $424 $16,368 ====== ======= ==== ======= Segment income $ 773 $ 563 $ 48 $ 1,384 Significant noncash items included in segment income: Depreciation, depletion and amortization/(b)/ 469 173 7 649 Pension expenses/(c)/ 3 8 1 12 Capital expenditures/(d)/ 810 205 6 1,021 Affiliates -- investments/(d)/ 114 -- 73 187 1996 Revenues: Customer $1,765 $14,130 $299 $16,194 Intersegment/(a)/ 776 -- -- 776 Intergroup/(a)/ 83 -- 4 87 Equity in earnings of unconsolidated affiliates 6 8 11 25 Other 10 13 13 36 ------ ------- ---- ------- Total revenues $2,640 $14,151 $327 $17,118 ====== ======= ==== ======= Segment income $ 900 $ 249 $ 57 $ 1,206 Significant noncash items included in segment income: Depreciation, depletion and amortization/(b)/ 499 173 6 678 Pension expenses/(c)/ 2 8 1 11 Capital expenditures/(d)/ 504 234 3 741 Affiliates -- investments/(d)/ 20 -- 11 31
/(a)/ Intersegment and intergroup sales and transfers were conducted on an arm's-length basis. /(b)/ Differences between segment totals and group totals represent amounts included in administrative expenses and, in 1998, international exploration and production property impairments. /(c)/ Differences between segment totals and group totals represent amounts included in administrative expenses. /(d)/ Differences between segment totals and group totals represent amounts related to corporate administrative activities. M-11 The following schedule reconciles segment revenues and income to amounts reported in the Marathon Group financial statements:
(In millions) 1998 1997 1996 Revenues: Revenues of reportable segments $21,977 $16,368 $17,118 Items not allocated to segments: Gain on ownership change in MAP 245 -- -- Other 24 -- 35 Elimination of intersegment revenues (171) (619) (776) Administrative revenues -- 5 17 ------- ------- ------- Total Group revenues $22,075 $15,754 $16,394 ======= ======= ======= Income: Income for reportable segments $ 1,207 $ 1,384 $ 1,206 Items not allocated to segments: Gain on ownership change in MAP 245 -- -- Administrative expenses (106) (168) (133) Inventory market valuation adjustments (267) (284) 209 Other/(a)/ (141) -- 14 ------- ------- ------- Total Group income from operations $ 938 $ 932 $ 1,296
/(a)/ Represents international exploration and production property impairments, suspended exploration well write-offs, gas contract settlement and MAP transition charges in 1998. Represents net gains on certain asset sales, charges for withdrawal from a nonprofit oil spill response group and certain state tax adjustments in 1996. Geographic Area: The information below summarizes the operations in different geographic areas. Transfers between geographic areas are at prices which approximate market.
Revenues ---------- Within Between Geographic Geographic (In millions) Year Areas Areas Total Assets/(a)/ United States 1998 $21,296 $ -- $21,296 $ 7,675 1997 15,034 -- 15,034 5,588 1996 15,509 -- 15,509 5,192 United Kingdom 1998 532 -- 532 1,788 1997 698 -- 698 1,932 1996 859 -- 859 2,002 Other Foreign Countries 1998 247 420 667 1,497 1997 22 39 61 444 1996 26 43 69 270 Eliminations 1998 -- (420) (420) -- 1997 -- (39) (39) -- 1996 -- (43) (43) -- Total 1998 $22,075 $ -- $22,075 $10,960 1997 15,754 -- 15,754 7,964 1996 16,394 -- 16,394 7,464 - ------------------------------------------------------------------------------------------------------------------------------------
/(a)/ Includes property, plant and equipment and investments in affiliates. 12. Leases Future minimum commitments for operating leases having remaining noncancelable lease terms in excess of one year are as follows:
(In millions) 1999 $ 113 2000 188 2001 79 2002 64 2003 43 Later years 138 Sublease rentals (15) ---- Total minimum lease payments $ 610
Operating lease rental expense:
(In millions) 1998 1997 1996 Minimum rental $ 157 $ 102 $ 96 Contingent rental 10 10 10 Sublease rentals (7) (7) (6) ----- ----- ----- Net rental expense $ 160 $ 105 $ 100
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 $107 million may be declared immediately due and payable. 13. Long-Term Debt The Marathon Group's portion of USX's consolidated long-term debt is as follows:
Marathon Group Consolidated USX/(a)/ (In millions) December 31 1998 1997 1998 1997 Specifically attributed debt/(b)/: Sale-leaseback financing and capital leases $ -- $ 24 $ 95 $ 123 Indexed debt less unamortized discount -- -- 68 110 ------ ------ ------ ------ Total -- 24 163 233 Less amount due within one year -- -- 5 5 ------ ------ ------ ------ Total specifically attributed long-term debt $ -- $ 24 $ 158 $ 228 Debt attributed to groups/(c)/ $3,537 $2,889 $3,853 $3,194 Less unamortized discount 22 20 25 24 Less amount due within one year 59 417 66 466 ------ ------ ------ ------ Total long-term debt attributed to groups $3,456 $2,452 $3,762 $2,704 Total long-term debt due within one year $ 59 $ 417 $ 71 $ 471 Total long-term debt due after one year 3,456 2,476 3,920 2,932
/(a)/ See Note 17, to the USX consolidated financial statements for details of interest rates, maturities and other terms of long-term debt. /(b)/ As described in Note 4, certain financial activities are specifically attributed only to the Marathon Group and the U. S. Steel Group. /(c)/ Most long-term debt activities of USX Corporation and its wholly owned subsidiaries are attributed to all groups (in total, but not with respect to specific debt issues) based on their respective cash flows (Notes 4, 10 and 14).
14. Supplemental Cash Flow Information (In millions) 1998 1997 1996 Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $ (260) $ (257) $ (339) Income taxes paid, including settlements with other groups (154) (178) (74) USX debt attributed to all groups -- net: Commercial paper: Issued $ 1,650 $ -- $ 1,422 Repayments (950) -- (1,555) Credit agreements: Borrowings 15,836 10,454 10,356 Repayments (15,867) (10,449) (10,340) Other credit arrangements -- net 55 36 (36) Other debt: Borrowings 671 10 78 Repayments (1,053) (741) (705) -------- -------- -------- Total $ 342 $ (690) $ (780) Marathon Group activity $ 329 $ 97 $ (769) U. S. Steel Group activity 13 (561) (31) Delhi Group activity -- (226) 20 -------- -------- -------- Total $ 342 $ (690) $ (780) Noncash investing and financing activities: Marathon Stock issued for Dividend Reinvestment Plan and employee stock plans $ 3 $ 5 $ 2 Acquisition of Tarragon -- Exchangeable Shares issued 29 -- -- -- liabilities assumed 433 -- -- Acquisition of Ashland RM&T net assets -- 38% interest in MAP 1,900 -- -- -- liabilities assumed 1,038 -- -- Disposal of assets liabilities assumed by buyers -- 5 25 Marathon Stock issued for Exchangeable Shares 11 -- --
M-13 15. Pensions and Other Postretirement Benefits The Marathon Group has noncontributory defined benefit pension plans covering substantially all employees. Benefits under these plans are based primarily upon years of service and final average pensionable earnings. Certain subsidiaries provide benefits for employees covered by other plans based primarily upon employees' service and career earnings. The Marathon Group also has defined benefit retiree health and life insurance plans (other benefits) covering most employees upon their retirement. Health benefits are provided, for the most part, through comprehensive hospital, surgical and major medical benefit provisions subject to various cost sharing features. Life insurance benefits are provided to certain nonunion and most union represented retiree beneficiaries primarily based on employees' annual base salary at retirement. Other benefits have not been prefunded.
Pension Benefits Other Benefits (In millions) 1998 1997 1998 1997 Change in benefit obligations Benefit obligations at January 1 $ 771 $ 627 $ 381 $ 306 Service cost 48 31 12 6 Interest cost 57 45 31 22 Plan amendments 6 36 (30) -- Actuarial losses 121 85 141 63 Acquisition 145 -- 98 -- Benefits paid (68) (53) (17) (16) ------- ------- ----- ----- Benefit obligations at December 31 $ 1,080 $ 771 $ 616 $ 381 Change in plan assets Fair value of plan assets at January 1 $ 1,150 $ 989 Actual return on plan assets 199 217 Acquisition 55 -- Employer contributions (6) (5) Benefits paid (67) (51) ------- ------- Fair value of plan assets at December 31 $ 1,331 $ 1,150 Funded status of plans at December 31 $ 251/(a)/ $ 379/(a)/ $(616) $(381) Unrecognized net gain from transition (35) (40) -- -- Unrecognized prior service costs (credits) 48 45 (45) (18) Unrecognized actuarial (gains) losses (88) (115) 211 73 Additional minimum liability/(b)/ (18) (14) -- --- ------- ------- ----- ----- Prepaid (accrued) benefit cost $ 158 $ 255 $(450) $(326)
/(a)/ Includes several small plans that have accumulated benefit obligations in excess of plan assets: Projected benefit obligation (PBO) $ (52) $ (82) Plan assets -- 24 ------- ------- PBO in excess of plan assets $ (52) $ (58) /(b)/ Additional minimum liability recorded was offset by the following: Intangible asset $ 2 $ 3 Accumulated other comprehensive income (losses): Beginning of year $ (7) $ (5) Change during year (net of tax) (3) (2) ------- ------- Balance at end of year $ (10) $ (7)
Pension Benefits Other Benefits (In millions) 1998 1997 1996 1998 1997 1996 Components of net periodic benefit cost (credit) Service cost $ 48 $ 31 $ 35 $ 12 $ 6 $ 8 Interest cost 57 45 45 31 22 23 Return on plan assets -- actual (199) (217) (139) -- -- -- -- deferred gain 92 132 55 -- -- -- Amortization of unrecognized gains (2) (3) (3) -- (3) (3) Other plans 5 4 4 -- -- -- ----- ----- ----- ----- ----- ----- Net periodic benefit cost (credit) $ 1 $ (8) $ (3) $ 43 $ 25 $ 28
M-14
Pension Benefits Other Benefits ------------------ ---------------- 1998 1997 1998 1997 Actuarial assumptions at December 31: Discount rate 6.5% 7.0% 6.5% 7.0% Expected annual return on plan assets 9.5% 9.5% 9.5% 9.5% Increase in compensation rate 5.0% 5.0% 5.0% 5.0%
For measurement purposes, an 8% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 5% for 2005 and remain at that level thereafter. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage- (In millions) Point Increase Point Decrease Effect on total of service and interest cost components $ 7 $ (4) Effect on other postretirement benefit obligations 96 (76)
16. Dividends In accordance with the USX Certificate of Incorporation, dividends on the Marathon Stock and Steel Stock are limited to the legally available funds of USX. Net losses of either Group, as well as dividends and distributions on any class of USX Common Stock or series of preferred stock and repurchases of any class of USX Common Stock or series of preferred stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on both classes of Common Stock. Subject to this limitation, the Board of Directors intends to declare and pay dividends on the Marathon Stock based on the financial condition and results of operations of the Marathon Group, although it has no obligation under Delaware law to do so. In making its dividend decisions with respect to Marathon Stock, the Board of Directors considers among other things, the long-term earnings and cash flow capabilities of the Marathon Group as well as the dividend policies of similar publicly traded energy companies. 17. Property, Plant and Equipment
(In millions) December 31 1998 1997 Production $14,707 $13,219 Refining 2,251 1,703 Marketing 2,103 1,442 Transportation 1,402 626 Other 265 243 ------- ------- Total 20,728 17,233 Less accumulated depreciation, depletion and amortization 10,299 9,667 ------- ------- Net $10,429 $ 7,566 Gross assets acquired under capital leases were fully depreciated at December 31, 1998 and 1997.
18. Common Stockholders' Equity
(In millions, except per share data) 1998 1997 1996 Balance at beginning of year $3,618 $ 3,340 $ 2,872 Net income 310 456 664 Marathon Stock issued 617 39 4 Exchangeable Shares: Issued 29 -- -- Exchanged for Marathon Stock (12) -- -- Dividends on Marathon Stock (per share: $.84 in 1998, $.76 in 1997 and $.70 in 1996) (248) (219) (201) Deferred compensation 2 1 -- Accumulated other comprehensive income (loss)/(a)/: Foreign currency translation adjustments 2 -- -- Minimum pension liability adjustments (Note 15) (3) (2) 1 Unrealized holding gains (losses) on investments (3) 3 -- ------ ------- ------- Balance at end of year $4,312 $ 3,618 $ 3,340
/(a)/ See page U-7 of the USX consolidated financial statements relative to the annual activity of these adjustments and gains (losses). Total comprehensive income for the Marathon Group for the years 1998, 1997 and 1996 was $306 million, $457 million and $665 million, respectively. M-15 19. Income Taxes Income tax provisions and related assets and liabilities attributed to the Marathon Group are determined in accordance with the USX group tax allocation policy (Note 4). Provisions (credits) for estimated income taxes were:
1998 1997 1996 (In millions) Current Deferred Total Current Deferred Total Current Deferred Total Federal $ 83 $ 19 $102 $171 $ (5) $ 166 $ 193 $ 13 $ 206 State and local 30 9 39 3 7 10 12 9 21 Foreign 3 (2) 1 12 28 40 11 82 93 ---- ----- ---- ---- ----- ----- ------ ----- ------ Total $116 $ 26 $142 $186 $ 30 $ 216 $ 216 $ 104 $ 320
A reconciliation of federal statutory tax rate (35%) to total provisions follows:
(In millions) 1998 1997 1996 Statutory rate applied to income before income taxes $ 158 $ 235 $ 347 Effects of foreign operations, including foreign tax credits (26) (8) (14) State and local income taxes after federal income tax effects 25 6 14 Credits other than foreign tax credits (9) (9) (8) Effects of partially owned companies (4) (6) (10) Nondeductible business and amortization expenses 2 3 3 Dispositions of subsidiary investments -- -- (8) Adjustment of prior years' income taxes (5) (4) (6) Adjustment of valuation allowances -- (4) -- Other 1 3 2 ----- ------ ------ Total provisions $ 142 $ 216 $ 320
Deferred tax assets and liabilities resulted from the following:
(In millions) December 31 1998 1997 Deferred tax assets: Minimum tax credit carryforwards $ 15 $ 42 State tax loss carryforwards (expiring in 1999 through 2018) 54 52 Foreign tax loss carryforwards (portion of which expire in 1999 through 2013) 414 483 Employee benefits 201 172 Expected federal benefit for: Crediting certain foreign deferred income taxes 528 249 Deducting state and other foreign deferred income taxes 51 53 Contingency and other accruals 140 148 Investments in subsidiaries and affiliates 59 14 Other 66 38 Valuation allowances: Federal (30) -- State (29) (39) Foreign (260) (272) ------ ------ Total deferred tax assets/(a)/ 1,209 940 ------ ------ Deferred tax liabilities: Property, plant and equipment 2,137 1,820 Inventory 170 199 Prepaid pensions 125 129 Other 150 112 ------ ------ Total deferred tax liabilities 2,582 2,260 ------ ------ Net deferred tax liabilities $1,373 $1,320
/(a)/ USX expects to generate sufficient future taxable income to realize the benefit of the Marathon Group's deferred tax assets. In addition, the ability to realize the benefit of foreign tax credits is based upon certain assumptions concerning future operating conditions (particularly as related to prevailing oil prices), income generated from foreign sources and USX's tax profile in the years that such credits may be claimed. The consolidated tax returns of USX for the years 1990 through 1994 are under various stages of audit and administrative review by the IRS. USX believes it has made adequate provision for income taxes and interest which may become payable for years not yet settled. Pretax income (loss) included $(75) million, $250 million and $341 million attributable to foreign sources in 1998, 1997 and 1996, respectively. Undistributed earnings of certain consolidated foreign subsidiaries at December 31, 1998, amounted to $132 million. No provision for deferred U.S. income taxes has been made for these subsidiaries because the Marathon Group intends to permanently reinvest such earnings in those foreign operations. If such earnings were not permanently reinvested, a deferred tax liability of $46 million would have been required. M-16 20. Investments and Long-Term Receivables
(In millions) December 31 1998 1997 Equity method investments $ 498 $ 366 Other investments 33 32 Receivables due after one year 46 49 Deposits of restricted cash 21 -- Other 5 8 ------ ----- Total $ 603 $ 455
Summarized financial information of affiliates accounted for by the equity method of accounting follows:
(In millions) 1998 1997 1996 Income data -- year: Revenues $ 347 $ 562 $ 405 Operating income 132 114 95 Net income 79 52 53 Balance sheet data -- December 31: Current assets $ 262 $ 170 Noncurrent assets 2,233 1,470 Current liabilities 243 236 Noncurrent liabilities 1,254 721
Dividends and partnership distributions received from equity affiliates were $23 million in 1998, $21 million in 1997 and $24 million in 1996. Marathon Group purchases from equity affiliates totaled $64 million, $37 million and $49 million in 1998, 1997 and 1996, respectively. Marathon Group sales to equity affiliates were immaterial in 1998, $10 million in 1997 and $6 million in 1996. 21. Inventories
(In millions) December 31 1998 1997 Crude oil and natural gas liquids $ 731 $ 452 Refined products and merchandise 1,023 735 Supplies and sundry items 107 77 ------ ------ Total (at cost) 1,861 1,264 Less inventory market valuation reserve 551 284 ------ ------ Net inventory carrying value $1,310 $ 980
Inventories of crude oil and refined products are valued by the LIFO method. The LIFO method accounted for 88% and 91% of total inventory value at December 31, 1998 and 1997, respectively. The inventory market valuation reserve reflects the extent that the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. The reserve is decreased to reflect increases in market prices and inventory turnover and increased to reflect decreases in market prices. Changes in the inventory market valuation reserve result in noncash charges or credits to costs and expenses. 22. Stock-Based Compensation Plans and Stockholder Rights Plan USX Stock-Based Compensation Plans and Stockholder Rights Plan are discussed in Note 21, and Note 23, respectively, to the USX consolidated financial statements. In 1996, USX adopted SFAS No. 123, Accounting for Stock- Based Compensation and elected to continue to follow the accounting provisions of APB No. 25, as discussed in Note 2, to the USX consolidated financial statements. The Marathon Group's actual stock-based compensation expense (credit) was $(3) million in 1998, $20 million in 1997 and $6 million in 1996. Incremental compensation expense, as determined under SFAS No. 123, was not material ($.02 or less per share for all years presented). Therefore, pro forma net income and earnings per share data have been omitted. M-17 23. Income Per Common Share The method of calculating net income per share for the Marathon Stock, the Steel Stock and, prior to November 1, 1997, the Delhi Stock reflects the USX Board of Directors' intent that the separately reported earnings and surplus of the Marathon Group, the U. S. Steel Group and the Delhi Group, as determined consistent with the USX Certificate of Incorporation, are available for payment of dividends to the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. Basic net income per share is based on the weighted average number of common shares outstanding. Diluted net income per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options, provided in each case, the effect is not antidilutive.
1998 1997 1996 Computation of Income Per Share Basic Diluted Basic Diluted Basic Diluted Net income (millions): Income before extraordinary loss $ 310 $ 310 $ 456 $ 456 $ 671 $ 671 Extraordinary loss -- -- -- -- 7 7 -------- -------- -------- -------- -------- -------- Net income 310 310 456 456 664 664 Effect of dilutive securities -- Convertible debentures -- -- -- 3 -- 14 -------- -------- -------- -------- -------- -------- Net income assuming conversions $ 310 $ 310 $ 456 $ 459 $ 664 $ 678 ======== ======== ======== ======== ======== ======== Shares of common stock outstanding (thousands): Average number of common shares outstanding 292,876 292,876 288,038 288,038 287,460 287,460 Effect of dilutive securities: Convertible debentures -- -- -- 1,936 -- 8,975 Stock options -- 559 -- 546 -- 133 -------- -------- -------- -------- -------- -------- Average common shares and dilutive effect 292,876 293,435 288,038 290,520 287,460 296,568 ======== ======== ======== ======== ======== ======== Per share: Income before extraordinary loss $ 1.06 $ 1.05 $ 1.59 $ 1.58 $ 2.33 $ 2.31 Extraordinary loss -- -- -- -- .02 .02 -------- -------- -------- -------- -------- -------- Net income $ 1.06 $ 1.05 $ 1.59 $ 1.58 $ 2.31 $ 2.29 ======== ======== ======== ======== ======== ========
24. Intergroup Transactions Sales and purchases -- Marathon Group sales to other groups totaled $21 million, $105 million and $87 million in 1998, 1997 and 1996, respectively. Marathon Group purchases from other groups totaled $2 million in 1998, $18 million in 1997 and $9 million in 1996. At December 31, 1998 and 1997, Marathon Group receivables included $3 million related to transactions with the U. S. Steel Group. Since October 31, 1997, transactions with the Delhi Companies are third- party transactions. Income taxes receivable from/payable to the U. S. Steel Group -- At December 31, 1998 and 1997, amounts receivable or payable for income taxes were included in the balance sheet as follows:
(In millions) December 31 1998 1997 Current: Receivables $ 2 $ 2 Accounts payable -- 22 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 among the groups until the audit of those respective tax years is closed. The amounts ultimately settled for open tax years will be different than recorded noncurrent amounts based on the final resolution of all of the audit issues for those years. 25. Derivative Instruments The Marathon Group uses commodity-based derivative instruments to manage exposure to price fluctuations related to the anticipated purchase or production and sale of crude oil, natural gas, refined products and electricity. The derivative instruments used, as a part of an overall risk management program, include exchange-traded futures contracts and options, and instruments which require settlement in cash such as OTC commodity swaps and OTC options. While risk management activities generally reduce market risk exposure due to unfavorable commodity price changes for raw material purchases and products sold, such activities can also encompass strategies which assume certain price risk in isolated transactions. The Marathon Group uses forward exchange contracts to minimize its exposure to foreign currency price fluctuations. M-18 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:
Fair Carrying Recorded Value Amount Deferred Aggregate Assets Assets Gain or Contract (In millions) (Liabilities)/(a)/ (Liabilities) (Loss) Values/(b)/ December 31, 1998: Exchange-traded commodity futures $ -- $ -- $ (2) $ 104 Exchange-traded commodity options 3 /(c)/ 2 3 776 OTC commodity swaps/(d)/ (2) /(e)/ (2) -- 243 OTC commodity options 3 3 3 147 ---- ---- ---- ------ Total commodities $ 4 $ 3 $ 4 $1,270 ==== ==== ==== ====== Forward exchange contracts/(f)/: -- receivable $ 36 $ 36 $ -- $ 36 December 31, 1997: Exchange-traded commodity futures $ -- $ -- $ -- $ 30 Exchange-traded commodity options 1 /(c)/ 1 2 129 OTC commodity swaps (2) /(e)/ (2) (3) 30 OTC commodity options -- -- -- 6 ---- ---- ---- ------ Total commodities $ (1) $ (1) $ (1) $ 195 ==== ==== ==== ====== Forward exchange contracts/(g)/: -- receivable $10 $ 9 $ -- $ 52 -- payable (1) (1) (1) 5 ---- ---- ---- ------ Total currencies $ 9 $ 8 $ (1) $ 57 ---- ---- ---- ------
/(a)/ The fair value amounts for OTC positions are based on various indices or dealer quotes. The fair value amounts for currency contracts are based on dealer quotes of forward prices covering the remaining duration of the forward exchange contract. The exchange-traded futures contracts and certain option contracts do not have a corresponding fair value since changes in the market prices are settled on a daily basis. /(b)/ Contract or notional amounts do not quantify risk exposure, but are used in the calculation of cash settlements under the contracts. The contract or notional amounts do not reflect the extent to which positions may offset one another. /(c)/ Includes fair values as of December 31, 1998 and 1997, for assets of $23 million and $3 million and liabilities of $(20) million and $(2) million, respectively. /(d)/ The OTC swap arrangements vary in duration with certain contracts extending into 2008. /(e)/ Includes fair values as of December 31, 1998 and 1997, for assets of $29 million and $1 million and liabilities of $(31) million and $(3) million, respectively. /(f)/ The forward exchange contracts relating to foreign operations have various maturities ending in December 1999. /(g)/ The forward exchange contracts relating to foreign denominated debt matured in 1998. 26. Fair Value of Financial Instruments Fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. The following table summarizes financial instruments, excluding derivative financial instruments disclosed in Note 25, by individual balance sheet account. As described in Note 4, the Marathon Group's specifically attributed financial instruments and the Marathon Group's portion of USX's financial instruments attributed to all groups are as follows:
1998 1997 Fair Carrying Fair Carrying (In millions) December 31 Value Amount Value Amount Financial assets: Cash and cash equivalents $ 137 $ 137 $ 36 $ 36 Receivables 1,277 1,277 856 856 Investments and long-term receivables 157 101 143 86 ------ ------ ------ ------ Total financial assets $1,571 $1,515 $1,035 $ 978 Financial liabilities: Notes payable $ 132 $ 132 $ 108 $ 108 Accounts payable 1,980 1,980 1,348 1,348 Distribution payable to minority shareholder of MAP 103 103 -- -- Accrued interest 87 87 84 84 Long-term debt (including amounts due within one year) 3,797 3,515 3,198 2,869 Preferred stock of subsidiary 183 184 187 184 ------ ------ ------ ------ Total financial liabilities $6,282 $6,001 $4,925 $4,593
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 27. 27. Contingencies and Commitments USX is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Marathon Group involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Marathon Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Marathon Group. Environmental matters -- The Marathon Group is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At December 31, 1998 and 1997, accrued liabilities for remediation totaled $48 million and $52 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in cleanup efforts related to underground storage tanks at retail marketing outlets, were $41 million at December 31, 1998, and $42 million at December 31, 1997. For a number of years, the Marathon Group has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In 1998 and 1997, such capital expenditures totaled $124 million and $81 million, respectively. The Marathon Group anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. At December 31, 1998 and 1997, accrued liabilities for platform abandonment and dismantlement totaled $141 million and $128 million, respectively. Guarantees -- Guarantees by USX and its consolidated subsidiaries of the liabilities of affiliated entities of the Marathon Group totaled $131 million and $23 million at December 31, 1998 and 1997, respectively. As of December 31, 1998, the largest guarantee for a single affiliate was $131 million. At December 31, 1998 and 1997, the Marathon Group's pro rata share of obligations of LOOP LLC and various pipeline affiliates secured by throughput and deficiency agreements totaled $164 million and $165 million, respectively. Under the agreements, the Marathon Group is required to advance funds if the affiliates are unable to service debt. Any such advances are prepayments of future transportation charges. Commitments -- At December 31, 1998 and 1997, the Marathon Group's contract commitments to acquire property, plant and equipment and long-term investments totaled $624 million and $377 million, respectively. The Marathon Group is a party to a 15-year transportation services agreement with a natural gas transmission company. The contract requires the Marathon Group to pay a minimum annual demand charge of approximately $5 million starting in the year 2000 and concluding in the year 2014. The payments are required even if the transportation facility is not utilized. M-20 Selected Quarterly Financial Data (Unaudited)
1998 1997 (In millions, except per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. Revenues $5,353 $5,662 $5,562 $5,498 $3,920 $3,944 $3,787 $4,103 Income (loss) from operations (132) 215 453 402 94 360 243 235 Includes: Inventory market valuation charges (credits) 245 50 (3) (25) 147 (41) 64 114 Gain on ownership change in MAP -- (1) (2) 248 -- -- -- -- Net income (loss) (86) 51 162 183 38 192 118 108 Marathon Stock data: - -------------------- Net income (loss) per share: Basic $ (.29) $ .18 $ .56 $ .63 $ .14 $ .67 $ .41 $ .37 Diluted (.29) .17 .56 .63 .13 .66 .41 .37 Dividends paid per share .21 .21 .21 .21 .19 .19 .19 .19 Price range of Marathon Stock /(a)/: --Low 26-11/16 25 32-3/16 31 29 28-15/16 25-5/8 23-3/4 --High 38-1/8 37-1/8 38-7/8 40-1/2 38-7/8 38-3/16 31-1/8 28-1/2
/(a)/ Composite tape. Principal Unconsolidated Affiliates (Unaudited)
December 31, 1998 Company Country Ownership Activity CLAM Petroleum BV Netherlands 50% Oil & Gas Production Kenai LNG Corporation United States 30% Natural Gas Liquification LOCAP, Inc. United States 50%/(a)/ Pipeline & Storage Facilities LOOP LLC United States 47%/(a)/ Offshore Oil Port Minnesota Pipe Line Company United States 33%/(a)/ Pipeline Facility Nautilus Pipeline Company, LLC United States 24% Natural Gas Transmission Odyssey Pipeline LLC United States 29% Pipeline Facility Poseidon Oil Pipeline Company LLC United States 28% Crude Oil Transportation Sakhalin Energy Investment Company Ltd. Russia 38% Oil & Gas Development
/(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
1998 1997 1996 1995 1994 Net Liquid Hydrocarbon Production (thousands of barrels per day) United States (by region) Alaska -- -- 8 9 9 Gulf Coast 55 29 30 33 12 Southern 6 8 9 11 12 Central 4 5 4 8 9 Mid-Continent Yates 23 25 25 24 23 Mid-Continent Other 21 21 20 19 18 Rocky Mountain 26 27 26 28 27 ------ ------ ------ ------ ------- Total United States 135 115 122 132 110 ------ ------ ------ ------ ------- International Abu Dhabi -- -- -- -- 1 Canada 6 -- -- -- Egypt 8 8 8 5 7 Indonesia -- -- -- 10 3 Gabon 5 -- -- -- -- Norway 1 2 3 2 2 Tunisia -- -- -- 2 3 United Kingdom 41 39 48 54 46 ------ ------ ------ ------ ------- Total International 61 49 59 73 62 ------ ------ ------ ------ ------- Total 196 164 181 205 172 Natural gas liquids included in above 17 17 17 17 15 Net Natural Gas Production (millions of cubic feet per day) United States (by region) Alaska 144 151 145 133 123 Gulf Coast 84 78 88 94 79 Southern 208 189 161 142 134 Central 117 119 109 105 110 Mid-Continent 125 125 122 112 89 Rocky Mountain 66 60 51 48 39 ------ ------ ------ ------ ------- Total United States 744 722 676 634 574 ------ ------ ------ ------ ------- International Canada 65 -- -- -- -- Egypt 16 11 13 15 17 Ireland 168 228 259 269 263 Norway 27 54 87 81 81 United Kingdom -- equity 165 130 140 98 39 -- other/(a)/ 23 32 32 35 -- ------ ------ ------ ------ ------- Total International 464 455 531 498 400 ------ ------ ------ ------ ------- Consolidated 1,208 1,177 1,207 1,132 974 Equity affiliate/(b)/ 33 42 45 44 40 ------ ------ ------ ------ ------- Total 1,241 1,219 1,252 1,176 1,014 Average Sales Prices Liquid Hydrocarbons (dollars per barrel)/(c)/ United States $10.42 $16.88 $18.58 $14.59 $13.53 International 12.24 18.77 20.34 16.66 15.61 Natural Gas (dollars per thousand cubic feet)/(c)/ United States $1.79 $2.20 $2.09 $1.63 $1.94 International 1.94 2.00 1.97 1.80 1.58 Net Proved Reserves at year-end (developed and undeveloped) Liquid Hydrocarbons (millions of barrels) United States 568 609 589 558 553 International 316 187 203 206 242 ------ ------ ------ ------ ------- Consolidated 884 796 792 764 795 Equity affiliate/(d)/ 80 82 -- -- -- ------ ------ ------ ------ ------- Total 964 878 792 764 795 Developed reserves as % of total net reserves 70% 75% 78% 88% 90% Natural Gas (billions of cubic feet) United States 2,151 2,220 2,239 2,210 2,127 International 1,796 1,071 1,199 1,379 1,527 ------ ------ ------ ------ ------- Consolidated 3,947 3,291 3,438 3,589 3,654 Equity affiliate (b) 110 111 132 131 153 ------ ------ ------ ------ ------- Total 4,057 3,402 3,570 3,720 3,807 Developed reserves as % of total net reserves 79% 83% 83% 80% 79%
/(a)/ Represents gas acquired for injection and subsequent resale. /(b)/ Represents Marathon's equity interest in CLAM Petroleum B.V. /(c)/ Prices exclude gains losses from hedging activities. /(d)/ Represents Marathon's equity interest in Sakhalin Energy Investment Company Ltd. M-22 Five-Year Operating Summary CONTINUED
1998/(a)/ 1997 1996 1995 1994 U.S. Refinery Operations (thousands of barrels per day) In-use crude oil capacity at year-end 935 575 570 570 570 Refinery runs -- crude oil refined 894 525 511 503 491 -- other charge and blend stocks 127 99 96 94 107 In-use crude oil capacity utilization rate 96% 92% 90% 88% 86% Source of Crude Processed (thousands of barrels per day) United States 317 202 229 254 218 Europe 15 10 12 6 31 Middle East and Africa 394 241 193 183 171 Other International 168 72 79 58 70 ------- ------- ------- ------- ------- Total 894 525 513 501 490 Refined Product Yields (thousands of barrels per day) Gasoline 545 353 345 339 340 Distillates 270 154 155 146 146 Propane 21 13 13 12 13 Feedstocks and special products 64 36 35 38 33 Heavy fuel oil 49 35 30 31 38 Asphalt 68 39 36 36 30 ------- ------- ------- ------- ------- Total 1,017 630 614 602 600 Refined Products Yields (% breakdown) Gasoline 54% 56% 56% 57% 57% Distillates 27 24 25 24 24 Other products 19 20 19 19 19 ------- ------- ------- ------- ------- Total 100% 100% 100% 100% 100% U.S. Refined Product Sales (thousands of barrels per day) Gasoline 671 452 468 445 443 Distillates 318 198 192 180 183 Propane 21 12 12 12 16 Feedstocks and special products 67 40 37 44 32 Heavy fuel oil 49 34 31 31 38 Asphalt 72 39 35 35 31 ------- ------- ------- ------- ------- Total 1,198 775 775 747 743 Matching buy sell/volumes included in above 39 51 71 47 73 Refined Products Sales by Class of Trade (as a % of total sales) Wholesale -- independent private-brand marketers and consumers 65% 61% 62% 61% 62% Marathon and Ashland brand jobbers and dealers 11 13 13 13 13 Speedway SuperAmerica retail outlets 24 26 25 26 25 ------- ------- ------- ------- ------- Total 100% 100% 100% 100% 100% Refined Products (dollars per barrel) Average sales price $21.43 $26.38 $27.43 $23.80 $ 22.75 Average cost of crude oil throughput 13.02 19.00 21.94 18.09 16.59 Petroleum Inventories at year-end (thousands of barrels) Crude oil, raw materials and natural gas liquids 35,630 19,351 20,047 22,224 22,987 Refined products 32,334 20,598 21,283 22,102 23,657 U.S. Refined Product Marketing Outlets at year-end MAP operated terminals 88 51 51 51 51 Retail -- Marathon and Ashland brand outlets 3,117 2,465 2,392 2,380 2,356 -- Speedway SuperAmerica outlets 2,257 1,544 1,592 1,627 1,659 Pipelines (miles of common carrier pipelines)/(b)/ Crude Oil -- gathering lines 2,827 1,003 1,052 1,115 1,115 -- trunklines 4,859 2,665 2,665 2,666 2,672 Products -- trunklines 2,861 2,310 2,310 2,311 2,311 ------- ------- ------- ------- ------- Total 10,547 5,978 6,027 6,092 6,098 Pipeline Barrels Handled (millions)/(c)/ Crude Oil -- gathering lines 47.8 43.9 43.2 43.8 43.4 -- trunklines 571.9 369.6 378.7 371.3 353.0 Products -- trunklines 329.7 262.4 274.8 252.3 282.2 ------- ------- ------- ------- ------- Total 949.4 675.9 696.7 667.4 678.6 River Operations Barges -- owned/leased 169 -- -- -- -- Boats -- owned/leased 8 -- -- -- --
/(a)/ 1998 statistics include 100% of MAP and should be considered when compared to prior periods. /(b)/ Pipelines for downstream operations also include non-common carrier, leased and equity affiliates. /(c)/ Pipeline barrels handled on owned common carrier pipelines, excluding equity affiliates. M-23 Five-Year Financial Summary
(Dollars in millions, except as noted) 1998/(a)/ 1997 1996 1995 1994 Revenues Sales by product: Refined products $ 9,091 $ 7,012 $ 7,132 $ 6,127 $ 5,622 Merchandise 1,873 1,045 1,000 941 869 Liquid hydrocarbons 1,818 941 1,111 881 800 Natural gas 1,144 1,331 1,194 950 670 Transportation and other products 271 167 180 197 183 Gain on ownership change in MAP 245 -- -- -- -- Other/(b)/ 104 86 97 42 192 ------- ------- ------- ------- ------- Subtotal 14,546 10,582 10,714 9,138 8,336 Matching buy sell transactions/(c)/ 3,948 2,436 2,912 2,067 2,071 Excise taxes/(c)/ 3,581 2,736 2,768 2,708 2,542 ------- ------- ------- ------- ------- Total revenues $22,075 $15,754 $16,394 $13,913 $12,949 Income From Operations Exploration and production (E&P) Domestic $ 190 $ 500 $ 547 $ 306 $ 158 International 88 273 353 178 74 ------- ------- ------- ------- ------- Income for E&P reportable segment 278 773 900 484 232 Refining, marketing and transportation 896 563 249 259 293 Other energy related businesses 33 48 57 60 34 ------- ------- ------- ------- ------- Income for reportable segments 1,207 1,384 1,206 803 559 Items not allocated to reportable segments: Administrative expenses (106) (168) (133) (85) (69) Inventory market valuation adjustments (267) (284) 209 70 160 Gain on ownership change & transition charges -- MAP 223 -- -- -- -- Int'l. write-offs, exploration well write-offs & gas contract settlement (119) -- -- -- -- Impairment of long-lived assets -- -- -- (659) -- Other items -- -- 14 18 126 ------- ------- ------- ------- ------- Income from operations 938 932 1,296 147 776 Minority interest in income of MAP 249 -- -- -- -- Net interest and other financial costs 237 260 305 337 300 Provision (credit) for income taxes 142 216 320 (107) 155 ------- ------- ------- ------- ------- Income (Loss) Before Extraordinary Loss $ 310 $ 456 $ 671 $ (83) $ 321 Per common share -- basic (in dollars) 1.06 1.59 2.33 (.31) 1.10 -- diluted (in dollars) 1.05 1.58 2.31 (.31) 1.10 Net Income (Loss) $ 310 $ 456 $ 664 $ (88) $ 321 Per common share -- basic (in dollars) 1.06 1.59 2.31 (.33) 1.10 -- diluted (in dollars) 1.05 1.58 2.29 (.33) 1.10 Balance Sheet Position at year-end Current assets $ 2,976 $ 2,018 $ 2,046 $ 1,888 $ 1,737 Net property, plant and equipment 10,429 7,566 7,298 7,521 8,471 Total assets 14,544 10,565 10,151 10,109 10,951 Short-term debt 191 525 323 384 56 Other current liabilities 2,419 1,737 1,819 1,641 1,656 Long-term debt 3,456 2,476 2,642 3,367 3,983 Minority interest in MAP 1,590 -- -- -- -- Common stockholders' equity 4,312 3,618 3,340 2,872 3,163 Per share (in dollars) 13.95 12.53 11.62 9.99 11.01 Cash Flow Data Net cash from operating activities $ 1,431 $ 1,246 $ 1,503 $ 1,044 $ 720 Capital expenditures 1,270 1,038 751 642 753 Disposal of assets 65 60 282 77 263 Dividends paid 246 219 201 199 201 Employee Data/(d)/ Marathon Group: Total employment costs $ 1,054 $ 854 $ 790 $ 781 $ 856 Average number of employees 24,344 20,695 20,461 21,015 21,005 Number of pensioners at year-end 3,378 3,099 3,203 3,378 3,495 Speedway SuperAmerica LLC (SSA): (Included in Marathon Group totals) Total employment costs $ 283 $ 263 $ 241 $ 229 $ 221 Average number of employees 12,831 12,816 12,474 12,087 11,669 Number of pensioners at year-end 212 215 207 206 199 Stockholder Data at year-end Number of common shares outstanding (in millions) 308.5 288.8 287.5 287.4 287.2 Registered shareholders (in thousands) 77.3 84.0 92.1 101.2 110.4 Market price of common stock $30.125 $33.750 $23.875 $19.500 $16.375
/(a)/ 1998 statistics, other than employee data, include 100% of MAP, which should be considered when making comparisons to prior periods. /(b)/ Includes dividend and affiliate income, net gains on disposal of assets and other income. /(c)/ These items are included in both revenues and costs and expenses, resulting in no effect on income. /(d)/ Employee Data for 1998 includes Ashland employees from the date of their payroll transfer to MAP, which occurred at various times throughout 1998. These employees were contracted to MAP in 1998, prior to their payroll transfer. As of December 31, 1998, active employees for the Marathon Group were 32,862, which included 28,449 MAP employees. Of the MAP total, 21,586 were employees of SSA. M-24 Management's Discussion and Analysis The Marathon Group includes Marathon Oil Company ("Marathon") and certain other subsidiaries of USX Corporation ("USX"), which are engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of petroleum products primarily through Marathon Ashland Petroleum LLC ("MAP"), owned 62% by Marathon; and other energy related businesses. Effective August 11, 1998, Marathon acquired Tarragon Oil and Gas Limited ("Tarragon"), a Canadian oil and gas exploration and production company. Results for 1998 include the operations of Marathon Canada Limited ("MCL"), formerly known as Tarragon, commencing August 12, 1998. For 1998, certain financial measures such as revenues, income from operations and capital expenditures include 100% of MAP and are not comparable to prior period amounts. Net income and related per share amounts for 1998 are net of Ashland's 38% minority interest in MAP's income. For further discussion of MAP and MCL, see Note 5 to the Marathon Group Financial Statements. The Management's Discussion and Analysis should be read in conjunction with the Marathon Group's Financial Statements and Notes to Financial Statements. The Marathon Group's 1998 financial performance was significantly impacted by the lowest oil prices in 24 years, lower natural gas prices and decreased refining crack spreads (the difference between light products prices and crude costs). Nevertheless, in 1998, Marathon upstream operations achieved nearly a 20% growth in worldwide liquids production and MAP had a highly successful first year of operations, achieving annual repeatable operating efficiencies of approximately $150 million. Certain sections of Management's Discussion and Analysis include forward-looking statements concerning trends or events potentially affecting the businesses of the Marathon Group. These statements typically contain words such as "anticipates", "believes", "estimates", "expects", "targets" or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in forward-looking statements. For additional risk factors affecting the businesses of the Marathon Group, see Supplementary Data -- Disclosures About Forward-Looking Statements in USX's 1998 Form 10-K. Management's Discussion and Analysis of Income and Operations Revenues for each of the last three years are summarized in the following table, which is covered by the report of independent accountants:
(Dollars in millions) 1998 1997 1996 Sales by product: Refined products $ 9,091 $ 7,012 $ 7,132 Merchandise 1,873 1,045 1,000 Liquid hydrocarbons 1,818 941 1,111 Natural gas 1,144 1,331 1,194 Transportation and other products 271 167 180 Gain on ownership change in MAP/(a)/ 245 -- -- Other/(b)/ 104 86 97 ------- ------- ------- Subtotal 14,546 10,582 10,714 ------- ------- ------- Matching buy/sell transactions/(c)(e)/ 3,948 2,436 2,912 Excise taxes/(d)(e)/ 3,581 2,736 2,768 ------- ------- ------- Total revenues $22,075 $15,754 $16,394
/(a)/ See Note 5 to the Marathon Group Financial Statements for a discussion of the gain on ownership change in MAP. /(b)/ Includes dividend and affiliate income, net gains on disposal of assets and other income. /(c)/ Matching crude oil and refined products buy/sell transactions settled in cash. /(d)/ Consumer excise taxes on petroleum products and merchandise. /(e)/ Included in both revenues and costs and expenses, resulting in no effect on income. In 1998, Marathon Group revenues included 100% of MAP revenues, and MCL's revenues commencing August 12, 1998. On a pro forma basis, assuming the acquisitions of Tarragon's operations and Ashland's RM&T net assets had occurred on January 1, 1997, revenues (excluding matching buy/sell transactions and excise taxes) for 1997 would have been $16,278 million. M-25 Management's Discussion and Analysis continued Revenues (excluding matching buy/sell transactions and excise taxes) decreased by $1,732 million in 1998 from pro forma 1997. The decrease in 1998 mainly reflected lower prices for refined products, lower worldwide liquid hydrocarbon prices and lower domestic natural gas prices, partially offset by higher liquid hydrocarbon sales volumes. The increase in liquid hydrocarbon sales volumes was due to a higher volume of upstream production being sold to third parties. Revenues (excluding matching buy/sell transactions and excise taxes) decreased $132 million in 1997 (as reported) from 1996, mainly due to lower average refined product prices and lower worldwide liquid hydrocarbon prices and volumes, partially offset by increased volumes of refined products and higher domestic natural gas volumes and prices. Income from operations for each of the last three years is summarized in the following table:
(Dollars in millions) 1998 1997 1996 Exploration & production ("E&P") Domestic $ 190 $ 500 $ 547 International 88 273 353 ------ ------ ------ Income for E&P reportable segment 278 773 900 Refining, marketing & transportation/(a)/ 896 563 249 Other energy related businesses/(b)/ 33 48 57 ------ ------ ------ Income for reportable segments 1,207 1,384 1,206 Items not allocated to reportable segments: Administrative expenses/(c)/ (106) (168) (133) IMV reserve adjustment/(d)/ (267) (284) 209 Gain on ownership change & transition charges -- MAP/(e)/ 223 -- -- Int'l investment write-offs, suspended exploration well write-offs & gas contract settlement/(f)/ (119) -- -- Other items (net) -- -- 14 ------ ------ ------ Total income from operations $ 938 $ 932 $1,296
/(a)/ In 1998, segment income includes 100% of MAP and is not comparable to prior periods. /(b)/ Includes marketing and transportation of domestic natural gas and crude oil, and power generation. /(c)/ Includes the portion of the Marathon Group's administrative costs not charged to the operating components and the portion of USX corporate general and administrative costs allocated to the Marathon Group. /(d)/ The inventory market valuation ("IMV") reserve reflects the extent to which the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. /(e)/ The gain on ownership change and one-time transition charges relate to the formation of MAP. For additional discussion of the gain on ownership change in MAP, see Note 5 to the Marathon Group Financial Statements. /(f)/ Includes a write-off of certain non-revenue producing international investments and several exploratory wells which had encountered hydrocarbons, but had been suspended pending further evaluation. It also includes a gain from the resolution of a contract dispute with a purchaser of Marathon's natural gas production from certain domestic properties. In 1998, Marathon Group income from operations included 100% of MAP, and MCL's results of operations commencing August 12, 1998. On a pro forma basis, assuming the acquisitions of Ashland's RM&T net assets and Tarragon's operations had occurred on January 1, 1997, income for reportable segments for 1997 would have been $1,728 million. Income for reportable segments decreased by $521 million in 1998 from pro forma 1997 and increased by $178 million in 1997 (as reported) from 1996. The decrease in 1998 was primarily due to lower worldwide liquid hydrocarbon prices, lower domestic natural gas prices and lower refining crack spreads, partially offset by higher liquid hydrocarbon production. The increase in 1997 was primarily due to higher average refined product margins and higher worldwide natural gas prices, partially offset by lower worldwide liquid hydrocarbon production and prices and higher worldwide exploration expense. M-26 Management's Discussion and Analysis continued Average Volumes and Selling Prices
1998 1997 1996 (thousands of barrels per day) Net liquids production/(a)/ -U.S. 135 115 122 -International/(b)/ 61 49 59 ------------------------- ------ ------ ------ -Worldwide 196 164 181 (millions of cubic feet per day) Net natural gas production -U.S. 744 722 676 -International - equity 441 423 499 -International - other/(c)/ 23 32 32 ------ ------ ------ -Total Consolidated 1,208 1,177 1,207 -Equity affiliate 33 42 45 ------ ------ ------ -Worldwide 1,241 1,219 1,252 (dollars per barrel) Liquid hydrocarbons/(a)(d)/ -U.S. $10.42 $16.88 $18.58 -International 12.24 18.77 20.34 (dollars per mcf) Natural gas/(d)/ -U.S. $ 1.79 $ 2.20 $ 2.09 -International - equity 1.94 2.00 1.97 (thousands of barrels per day) Refined products sold/(e)/ 1,198 775 775 Matching buy/sell volumes included in above 39 51 71
/(a)/ Includes crude oil, condensate and natural gas liquids. /(b)/ Represents equity tanker liftings, truck deliveries and direct deliveries. /(c)/ Represents gas acquired for injection and subsequent resale. /(d)/ Prices exclude gains/losses from hedging activities. /(e)/ In 1998, refined products sold and matching buy/sell volumes include 100% of MAP and are not comparable to prior periods. Domestic E&P income decreased by $310 million in 1998 from 1997 following a decrease of $47 million in 1997 from 1996. The decrease in 1998 was primarily due to lower liquid hydrocarbon and natural gas prices, partially offset by increased liquid hydrocarbon production and natural gas volumes. The 17%, or 20,000 barrels per day ("bpd"), increase in liquid hydrocarbon production was mainly attributable to new production in the Gulf of Mexico, while the increase in natural gas volumes was mainly attributable to properties in east Texas. The decrease in 1997 was primarily due to lower liquid hydrocarbon prices and production and higher exploration expense, partially offset by increased natural gas production and prices. The lower liquid hydrocarbon production was mostly due to the 1996 disposal of oil producing properties in Alaska. The increase in natural gas volumes was mainly attributable to properties in east Texas, Oklahoma and Wyoming. International E&P income decreased by $185 million in 1998 following a decrease of $80 million in 1997. The decrease in 1998 was primarily due to lower liquid hydrocarbon and natural gas prices and higher exploration and operating expenses. These items were partially offset by increased liquid hydrocarbon production and natural gas volumes. The 24%, or 12,000 bpd, increase in liquid hydrocarbon production was mainly attributable to the acquired production in Canada and new operations in Gabon. The increase in natural gas volumes was mainly attributable to acquired production in Canada. The decrease in 1997 was primarily due to lower liquid hydrocarbon volumes, lower natural gas volumes and lower liquid hydrocarbon prices. These items were partially offset by reduced pipeline and terminal expenses and reduced DD&A expenses, due largely to the lower volumes. The lower liquid hydrocarbon volumes primarily reflected lower production in the U.K. North Sea, while the lower natural gas volumes were mainly due to natural field declines in Ireland and Norway. Refining, marketing and transportation ("downstream") reportable segment income in 1998 included 100 percent of MAP. On a pro forma basis, assuming the acquisition of Ashland's RM&T net assets had occurred on January 1, 1997, income for the reportable segments of the combined downstream operations of Marathon and Ashland for 1997 would have been $869 million. On this basis, 1998 downstream reportable segment income of $896 million was slightly higher than pro forma 1997 downstream reportable segment income. During 1998, the effects of lower refining crack Management's Discussion and Analysis continued spreads were offset by strong performances from MAP's asphalt and retail operations, realization of operating efficiencies as a result of combining Marathon and Ashland's downstream operations and lower energy costs. Downstream reportable segment income in 1997 increased $314 million over 1996 due mainly to improved refined product margins as favorable effects of reduced crude oil and other feedstock costs more than offset a decrease in refined product sales prices. Other energy related businesses reportable segment income decreased by $15 million in 1998 following a decrease of $9 million in 1997. The decrease in 1998 was mainly due to a gain on the sale of an equity interest in a domestic pipeline company included in 1997 reportable segment income. Items not allocated to reportable segments Administrative expenses decreased by $62 million in 1998 following an increase of $35 million in 1997 from 1996. The decrease in 1998 mainly reflected an increase in administrative costs charged to the RM&T reportable segment, lower accruals for employee benefit and compensation plans and lower litigation accruals. The increase in 1997 mainly reflected higher accruals for employee benefit and compensation plans, including Marathon's performance-based variable pay plan. IMV reserve adjustment -- When U. S. Steel Corporation acquired Marathon Oil Company in March 1982, crude oil and refined product prices were at historically high levels. In applying the purchase method of accounting, the Marathon Group's crude oil and refined product inventories were revalued by reference to current prices at the time of acquisition, and this became the new LIFO cost basis of the inventories. Generally accepted accounting principles require that inventories be carried at lower of cost or market. Accordingly, the Marathon Group has established an IMV reserve to reduce the cost basis of its inventories to net realizable value. Quarterly adjustments to the IMV reserve result in noncash charges or credits to income from operations. When Marathon acquired the crude oil and refined product inventories associated with Ashland's RM&T operations on January 1, 1998, the Marathon Group established a new LIFO cost basis for those inventories. The acquisition cost of these inventories lowered the overall average cost of the Marathon Group's combined RM&T inventories. As a result, the price threshold at which an IMV reserve will be recorded was also lowered. These adjustments affect the comparability of financial results from period to period as well as comparisons with other energy companies, many of which do not have such adjustments. Therefore, the Marathon Group reports separately the effects of the IMV reserve adjustments on financial results. In management's opinion, the effects of such adjustments should be considered separately when evaluating operating performance. Net interest and other financial costs for 1998, 1997 and 1996 are set forth in the following table:
(Dollars in millions) 1998 1997 1996 Interest and other financial income $ 34 $ 1 $ 3 Interest and other financial costs (271) (261) (308) ----- ----- ----- Net interest and other financial costs $(237) $(260) $(305)
In 1998, net interest and other financial costs decreased primarily due to increased interest income and higher capitalized interest on upstream projects, partially offset by higher interest and other financial costs resulting from the debt incurred for the Tarragon acquisition. In 1997, net interest and other financial costs decreased primarily due to lower average debt levels and higher capitalized interest on worldwide exploration and production projects. For additional details, see Note 8 to the Marathon Group Financial Statements. The provision for estimated income taxes of $142 million in 1998 included $24 million of favorable income tax accrual adjustments relating to foreign operations. An extraordinary loss on extinguishment of debt of $7 million in 1996 represents the portion of the loss on early extinguishment of USX debt attributed to the Marathon Group. For additional information, see Note 9 to the Marathon Group Financial Statements. Net income decreased by $146 million in 1998 from 1997, following a decrease of $208 million in 1997 from 1996, primarily reflecting the factors discussed above. M-28 Management's Discussion and Analysis continued Management's Discussion and Analysis of Financial Condition, Cash Flows and Liquidity Current assets increased $958 million from year-end 1997, primarily due to an increase in receivables, inventories and cash and cash equivalents. The accounts receivable and inventory increases were mainly due to the acquisition of Ashland's RM&T net assets. Current liabilities increased $348 million from year-end 1997. This increase included an increase in accounts payable, which was primarily due to the acquisition of Ashland's RM&T net assets and an increase in the distribution payable to the minority interest owner of MAP, which was paid in early January 1999. These were partially offset by a decrease in long-term debt due within a year. Net property, plant and equipment increased $2,863 million from year-end 1997, primarily due to the acquisitions of Ashland's RM&T net assets and Tarragon. Net property, plant and equipment for each of the last three years is summarized in the following table:
(Dollars in millions) 1998 1997 1996 Exploration and production Domestic $ 3,688 $3,469 $3,181 International 3,027 2,156 2,197 ------- ------ ------ Total exploration and production 6,715 5,625 5,378 Refining, marketing and transportation 3,517 1,755 1,741 Other/(a)/ 197 186 179 ------- ------ ------ Total $10,429 $7,566 $7,298
/(a)/ Includes other energy related businesses and other miscellaneous corporate net property, plant and equipment. Total long-term debt and notes payable at December 31, 1998 were $3.6 billion, an increase of $646 million from year-end 1997. This increase is mainly due to the Tarragon acquisition. Virtually all of the debt is a direct obligation of, or is guaranteed by, USX. Net cash provided from operating activities totaled $1,431 million in 1998, compared with $1,246 million in 1997 and $1,503 million in 1996. Operating cash flow in 1997 included the impact of terminating Marathon's participation in an accounts receivable sales program, resulting in a cash outflow of $340 million, while 1996 included payments of $39 million related to certain state tax issues. Excluding the effects of these items, net cash from operating activities decreased by $155 million in 1998 from 1997 and increased by $44 million in 1997 from 1996. The decrease in 1998 was mainly due to unfavorable working capital changes. The increase in 1997 mainly reflected improved net income (excluding the IMV reserve adjustment and other noncash items), partially offset by increased income tax payments. Capital expenditures, excluding the acquisition of Tarragon, for each of the last three years are summarized in the following table:
(Dollars in millions) 1998 1997 1996 Exploration and production ("upstream") Domestic $ 652 $ 647 $ 424 International 187 163 80 ------ ------ ----- Total exploration and production 839 810 504 Refining, marketing and transportation ("downstream")/(a)/ 410 205 234 Other/(b)/ 21 23 13 ------ ------ ----- Total $1,270 $1,038 $ 751
/(a)/ Amounts for 1998 include 100% of MAP. /(b)/ Includes other energy related businesses and other miscellaneous corporate capital expenditures. During 1998, domestic upstream capital spending mainly included continuing development of Viosca Knoll 786 ("Petronius"), Green Canyon 244 ("Troika") and Green Canyon 112/113 ("Stellaria") in the Gulf of Mexico. International upstream projects included continued development of the Tchatamba South field, offshore Gabon. Downstream spending by MAP consisted of upgrades and expansions of retail marketing outlets and refinery modifications. Capital expenditures in 1999 are expected to be approximately $1.3 billion which is consistent with 1998 levels; however, Marathon's plans will remain responsive to the economic conditions impacting the petroleum industry. Domestic upstream projects planned for 1999 include continued M-29 Management's Discussion and Analysis continued development of Petronius and Stellaria in the Gulf of Mexico and natural gas developments in East Texas and other gas basins throughout the western United States. International upstream projects include oil and natural gas developments in Canada and completion of the Tchatamba South development. Downstream spending by MAP will primarily consist of upgrades and expansions of retail marketing outlets, refinery improvements and expansion and enhancement of logistic systems. Investments in affiliates of $42 million in 1998 mainly reflected MAP's acquisition of an interest in Southcap Pipe Line Company for $22 million and continued investment in pipeline and power projects. Loans and advances to affiliates of $103 million in 1998 primarily reflected continued funding of Sakhalin Energy Investment Company Ltd. ("Sakhalin Energy") in conjunction with the Sakhalin II project. Repayments of loans and advances to affiliates of $63 million in 1998 were primarily a result of repayments by Sakhalin Energy of advances made by Marathon in conjunction with the Sakhalin II project. In 1999, net investments in affiliates are expected to be approximately $80 million, primarily reflecting continued development spending for the Sakhalin II project. Contract commitments for property, plant and equipment acquisitions and long-term investments at year-end 1998 were $624 million, compared with $377 million at year-end 1997. The 1998 increase was primarily due to increased commitments for domestic production in the Gulf Coast. The above statements with respect to future capital expenditures and investments are forward-looking statements, reflecting management's best estimates, based on information currently available. To the extent this information proves to be inaccurate, the timing and levels of future spending could differ materially from those included in the forward-looking statements. Factors that could cause future capital expenditures and investments to differ materially from present expectations include continued low prices, worldwide supply and demand for petroleum products, general worldwide economic conditions, levels of cash flow from operations, available business opportunities, unforeseen hazards such as weather conditions, and/or by delays in obtaining government or partner approvals. The acquisition of Tarragon Oil and Gas Limited included cash payments of $686 million. For further discussion of Tarragon, see Note 5 to the Marathon Group Financial Statements. Cash from disposal of assets was $65 million in 1998, compared with $60 million in 1997 and $282 million in 1996. Proceeds in 1998 were mainly from the sales of domestic production properties and equipment. Proceeds in 1997 were mainly from the sales of interests in various domestic upstream properties, certain investments and an interest in a domestic pipeline company. Proceeds in 1996 primarily reflected the sales of interests in certain domestic and international oil and gas production properties and the sale of an equity interest in a domestic pipeline company. The net change in restricted cash was a net deposit of $21 million in 1998 compared to a net withdrawal of $98 million in 1997. The 1998 amount represents cash deposited from the sales of domestic production properties and equipment, partially offset by cash withdrawn for the purchase of offshore production leases. The 1997 amount represents cash withdrawn from an interest-bearing escrow account that was established in the fourth quarter of 1996 in connection with the 1996 disposal of oil production properties in Alaska. Financial obligations, which consist of the Marathon Group's portion of USX debt and preferred stock of a subsidiary attributed to both groups, as well as debt specifically attributed to the Marathon Group, increased by $306 million in 1998. Financial obligations increased primarily because capital expenditures, cash payments for Tarragon, dividend payments and the increase in cash and cash equivalents exceeded cash from operating activities and proceeds from the issuance of USX -- Marathon Group Common Stock. For further details, see USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. Dividends paid in 1998 increased by $27 million from 1997, primarily due to the two cents per share increase in the quarterly USX -- Marathon Group Common Stock dividend rate. This increase was initially declared in January 1998. Derivative Instruments See Quantitative and Qualitative Disclosures About Market Risk for a discussion of derivative instruments and associated market risk. M-30 Management's Discussion and Analysis continued Liquidity For discussion of USX's liquidity and capital resources, see Management's Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and Liquidity. Management's Discussion and Analysis of Environmental Matters, Litigation and Contingencies The Marathon Group has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the Marathon Group's products and services, operating results will be adversely affected. The Marathon Group believes that substantially all of its competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and whether or not it is engaged in the petrochemical business, power business or the marine transportation of crude oil and refined products. Marathon Group environmental expenditures for each of the last three years were/(a)/:
(Dollars in millions) 1998/(b)/ 1997 1996 Capital $124 $ 81 $ 66 Compliance Operating & maintenance 126 84 75 Remediation/(c)/ 10 19 26 ---- ----- ----- Total $260 $ 184 $ 167
/(a)/ Amounts are determined based on American Petroleum Institute survey guidelines. /(b)/ Amounts for 1998 include 100% of MAP. /(c)/ These amounts include spending charged against such reserves, net of recoveries, where permissible, but do not include noncash provisions recorded for environmental remediation. The Marathon Group's environmental capital expenditures accounted for 10% of total capital expenditures in 1998 (excluding the acquisition of Tarragon), 8% in 1997 and 9% in 1996. During 1996 through 1998, compliance expenditures represented 1% of the Marathon Group's total operating costs. Remediation spending during this period was primarily related to retail marketing outlets which incur ongoing clean-up costs for soil and groundwater contamination associated with underground storage tanks and piping. USX has been notified that it is a potentially responsible party ("PRP") at 17 waste sites related to the Marathon Group under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of December 31, 1998. In addition, there are 8 sites related to the Marathon Group where USX has received information requests or other indications that USX may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability. There are also 92 additional sites, excluding retail marketing outlets, related to the Marathon Group where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. Of these sites, 16 were associated with properties conveyed to MAP by Ashland for which Ashland has retained liability for all costs associated with remediation. At many of these sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. The Marathon Group accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. See Note 27 to the Marathon Group Financial Statements. Effective January 1, 1997, USX adopted the American Institute of Certified Public Accountants Statement of Position No. 96-1 -- "Environmental Remediation Liabilities" -- which requires that companies include direct costs in accruals for remediation liabilities. Income from operations in 1997 included first quarter charges of $7 million (net of expected recoveries) related to such adoption, primarily for accruals of post-closure monitoring costs, study costs and administrative costs. See Note 3 to the Marathon Group Financial Statements for additional discussion. M-31 Management's Discussion and Analysis continued New or expanded environmental requirements, which could increase the Marathon Group's environmental costs, may arise in the future. USX intends to comply with all legal requirements regarding the environment, but since many of them are not fixed or presently determinable (even under existing legislation) and may be affected by future legislation, it is not possible to predict accurately the ultimate cost of compliance, including remediation costs which may be incurred and penalties which may be imposed. However, based on presently available information, and existing laws and regulations as currently implemented, the Marathon Group does not anticipate that environmental compliance expenditures (including operating and maintenance and remediation) will materially increase in 1999. The Marathon Group's environmental capital expenditures are expected to be approximately $64 million in 1999. Predictions beyond 1999 can only be broad-based estimates which have varied, and will continue to vary, due to the ongoing evolution of specific regulatory requirements, the possible imposition of more stringent requirements and the availability of new technologies, among other matters. Based upon currently identified projects, the Marathon Group anticipates that environmental capital expenditures will be approximately $82 million in 2000; however, actual expenditures may vary as the number and scope of environmental projects are revised as a result of improved technology or changes in regulatory requirements and could increase if additional projects are identified or additional requirements are imposed. In October 1998, the National Enforcement Investigations Center and Region V of the United States Environmental Protection Agency conducted a multi-media inspection of MAP's Detroit refinery. Subsequently, in November 1998, Region V conducted a multi-media inspection of MAP's Robinson refinery. These inspections covered compliance with the Clean Air Act (New Source Performance Standards, Prevention of Significant Deterioration, and the National Emission Standards for Hazardous Air Pollutants for Benzene), the Clean Water Act (Permit exceedances for the Waste Water Treatment Plant), reporting obligations under the Emergency Planning and Community Right to Know Act and the handling of process waste. Although MAP has been advised as to certain compliance issues, including one contested Notice of Violation regarding MAP's Detroit refinery, it is not known when complete findings on the results of the inspections will be issued. In an action separate from the multi-media inspection, the Department of Justice filed a civil complaint in February 1999, alleging violation of the Clean Air Act with respect to benzene releases at the Robinson refinery. USX is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Marathon Group involving a variety of matters, including laws and regulations relating to the environment, certain of which are discussed in Note 27 to the Marathon Group Financial Statements. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Marathon Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Marathon Group. See Management's Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and Liquidity. Outlook The outlook regarding the Marathon Group's upstream revenues and income is largely dependent upon future prices and volumes of liquid hydrocarbons and natural gas. Prices have historically been volatile and have frequently been affected by unpredictable changes in supply and demand resulting from fluctuations in worldwide economic activity and political developments in the world's major oil and gas producing and consuming areas. During 1998, worldwide liquid hydrocarbon and natural gas prices realized by Marathon were significantly lower than 1997. In 1998, West Texas Intermediate crude oil postings reached their lowest levels in 24 years. The continuation of this depressed pricing environment in 1999 will adversely impact upstream results. Expected increases in liquid hydrocarbon and natural gas production should partially offset the effects of these lower prices. Continued lower prices could adversely affect the quantity of crude oil and natural gas reserves that can be economically produced and the amount of capital available for exploration and development. In 1999, worldwide liquid hydrocarbon production, including Marathon's share of equity affiliates, is expected to increase by 17 percent, to average approximately 230,000 bpd. Most of the increase is anticipated in the second half of the year. This primarily reflects projected new production from the Phase I development of the Piltun-Astokhskoye ("P-A") field in mid-1999 (discussed below), start-up of the Tchatamba South field in the third quarter of 1999 and a full year of production by MCL, partially offset by natural production declines of mature fields. In 1999, worldwide natural gas volumes, M-32 Management's Discussion and Analysis continued including Marathon's share of equity affiliates, are expected to increase by 11 percent, to approximately 1.38 billion cubic feet per day. This primarily reflects increases in North American gas production, offset by natural declines in mature international fields, primarily in Ireland and Norway. In 2000, worldwide liquid hydrocarbon production and natural gas volumes are expected to remain consistent with 1999 levels. In 2001, liquid hydrocarbon production is expected to increase by 10 to 15 percent over 2000 production levels and natural gas volumes are expected to increase by approximately 4 percent over 2000 levels. These projections are based on known discoveries and do not include any additions from potential or future acquisitions or future wildcat drilling. Petronius, in the Gulf of Mexico, was originally scheduled to begin production in the second quarter of 1999, but the project was delayed when the last platform topsides module fell into the sea during installation work. The lost module will have to be replaced. Third party insurance is expected to cover costs associated with the replacement and installation on the platform. First production is now expected to begin in the fourth quarter of 2000. Marathon holds a 37.5% interest in Sakhalin Energy Investment Company Ltd. ("Sakhalin Energy"), an incorporated joint venture company responsible for the overall management of the Sakhalin II project. This project includes development of the P-A oil field and the Lunskoye gas-condensate field, which are located 8-12 miles offshore Sakhalin Island in the Russian Far East Region. The Russian State Reserves Committee has approved estimated combined reserves for the P-A and Lunskoye fields of one billion gross barrels of liquid hydrocarbons and 14 trillion cubic feet of natural gas. In 1997, a Development Plan for the P-A license area, Phase I: Astokh Feature was approved. Offshore drilling and production facilities for the Astokh Feature were set in place on September 1, 1998. Drilling of development wells commenced in December of 1998. First production from the Astokh Feature is scheduled for mid-1999, with sales forecast to average 45,000 gross bpd of oil annually as early as 2000. This rate is based on six months of offshore loading operations during the ice-free weather window at an estimated daily rate of 90,000 gross barrels. Marathon's equity share of reserves from primary production in the Astokh Feature is 80 million barrels of oil. The approved Development Plan also provides for further appraisal work for the remainder of the P-A field. An appraisal well was drilled during the summer weather window in 1998 and the results are being evaluated. Conceptual design work for further development of the P-A field, including pressure maintenance for the Astokh Feature, continues. With respect to the Lunskoye field, appraisal work and efforts to secure long-term gas sales markets continue. Commencement of gas production from the Lunskoye field, which will be contingent upon the conclusion of a gas sales contract, is anticipated to occur in 2005 or later. Late in 1997, the Sakhalin Energy consortium arranged a limited recourse project financing facility of $348 million. Sakhalin Energy borrowed the full amount of this facility in 1998 to fund Phase I expenditures and to repay amounts previously advanced to Sakhalin Energy by its shareholders. In the area of significant Russian legislation, the Russian Parliament passed a Production Sharing Agreement ("PSA") Amendments Law and a PSA Enabling Law, which brings other Russian legislation into conformance with the PSA Law. These laws were signed by President Yeltsin and enacted in 1999. At December 31, 1998, Marathon's investment in the Sakhalin II project was $275 million. The above discussion includes forward-looking statements with respect to worldwide liquid hydrocarbon production and natural gas volumes for 1999, 2000 and 2001, commencement of projects and dates of initial production. These statements are based on a number of assumptions, including (among others) prices, amount of capital available for exploration and development, worldwide supply and demand for petroleum products, regulatory constraints, reserve estimates, production decline rates of mature fields, timing of commencing production from new wells, timing and results of future development drilling, reserve replacement rates and other geological, operating and economic considerations. In addition, development of new production properties in countries outside the United States may require protracted negotiations with host governments and is frequently subject to political considerations, such as tax regulations, which could adversely affect the timing and economics of projects. To the extent these assumptions prove inaccurate and/or negotiations and other considerations are not satisfactorily resolved, actual results could be materially different than present expectations. M-33 Management's Discussion and Analysis continued Downstream income of the Marathon Group is largely dependent upon refining crack spreads (the difference between light product prices and crude costs). Refined product margins have been historically volatile and vary with the level of economic activity in the various marketing areas, the regulatory climate and the available supply of crude oil and refined products. Key external factors look promising for the refining and marketing industry. Demand for petroleum products is expected to grow modestly, due to a leveling of fuel efficiency in the passenger car fleet, increasing sales of light-truck and sport-utility vehicles which average fewer miles per gallon than passenger cars, and an increasing number of vehicle miles traveled. Refinery utilization rates are strong, reflecting the increased demand, which should be beneficial for MAP's refining margins. Also, increased highway construction funding should benefit MAP, the largest U.S. supplier of asphalt. As a result of Marathon and Ashland combining major elements of their downstream operations, MAP achieved approximately $150 million in annual repeatable pre-tax operating efficiencies in 1998 and has targeted an additional $100 million in 1999. MAP presently expects to derive efficiencies of $350 million annually on a pre- tax basis in 2001. This exceeds its original goal of achieving efficiencies of $200 million annually on a pre-tax basis. Efficiencies will continue to be identified in the logistical, retail marketing, wholesale marketing and refining operations, as well as administrative functions, that Marathon and Ashland transferred to MAP. MAP and a third party are constructing facilities to produce 800 million pounds per year of polymer grade propylene and polypropylene at the Garyville refinery. MAP is building and will own and operate facilities to produce polymer grade propylene. The third party is constructing and will own and operate the polypropylene facilities and market its output. Production of the polymer grade propylene is scheduled to begin in the second quarter of 1999. MAP plans to build a pipeline from its Catlettsburg refinery to Columbus, Ohio. The wholly owned pipeline is expected to initially move about 50,000 bpd of refined products into central Ohio. Construction is expected to commence in the summer of 1999 after final regulatory approvals. The pipeline is expected to be operational in the first half of 2000. A project to increase crude throughput and light product output is being undertaken at MAP's Robinson, IL refinery. This project is expected to be completed in 2001. The above statements with respect to demand for petroleum products, the amount and timing of efficiencies to be realized by MAP, and the statements with respect to the propylene, pipeline and refinery improvement projects are forward looking statements. Some factors that could potentially cause actual results to differ materially from present expectations include (among others) the price of petroleum products, unanticipated costs or delays associated with implementing shared technology, completing logistical infrastructure projects, leveraging procurement strategies, levels of cash flow from operations, obtaining the necessary construction and environmental permits, unforeseen hazards such as weather conditions and regulatory constraints. Year 2000 Readiness Disclosure The Marathon Group is executing action plans which include: . prioritizing and focusing on those computerized and automated systems and processes critical to the operations in terms of material operational, safety, environmental and financial risk to the company. . allocating and committing appropriate resources to fix the problem. . developing detailed contingency plans for those computerized and automated systems and processes critical to the operations in terms of material operational, safety, environmental and financial risk to the company. . communicating with, and aggressively pursuing, critical third parties to help ensure the Year 2000 readiness of their products and services through use of mailings, telephone contacts, and the inclusion of Year 2000 readiness language in purchase orders and contracts. . performing rigorous Year 2000 tests of critical systems. participating in, and exchanging Year 2000 information with industry trade associations, such as the American Petroleum Institute (API). . engaging qualified outside engineering and information technology consulting firms to assist in the Year 2000 inventory, assessment and readiness. M-34 Management's Discussion and Analysis continued State of Readiness Readiness efforts and critical systems testing is 92% complete for Information Technology (IT) systems. The remaining systems are to be completed by end of the third quarter of 1999. Responses have been received from over 80% of the Marathon Group's third party software vendors, with 99% indicating that they are or will be Year 2000 ready and will provide updated software on a timely basis. The Marathon Group has completed the inventory on 93% of the Non-Information Technology (Non-IT) systems. Assessment of these inventories is being completed to identify those systems that will require remediation. All Non-IT systems are scheduled to be ready by the end of the third quarter of 1999 with minor exceptions. Plant maintenance shutdowns scheduled for the fourth quarter of 1999 will allow us to complete any final readiness efforts. The following chart provides the percent of completion for the inventory of systems and processes that may be affected by the Year 2000 ("Y2K Inventory"), analysis performed to determine the Year 2000 date impact of inventoried systems and processes ("Y2K Impact Assessment") and the Year 2000 readiness of the Marathon Group's Year 2000 inventory ("Y2K Readiness of Overall Inventory"). The percent of completion for Y2K Readiness of Overall Inventory includes all inventory items not date impacted, those items already Year 2000 ready and those corrected and made Year 2000 ready through the renovation/replacement, testing and implementation activities; however, the implementation of certain Year 2000 ready IT and Non-IT systems has been deferred until 1999, to avoid unnecessary disruption of operations.
Percent Completed Y2K Y2K Readiness Impact of Y2K Assess- Overall As of January 31, 1999 Inventory ment Inventory Information technology 100% 100% 92% Non-information technology 93% 60% 52%
Third Parties Third parties are suppliers, customers and vendors, excluding third party software vendors discussed previously. Contacts have been made with all critical third parties to determine if they will be able to provide their service to the Marathon Group after the year 2000. Follow-up continues with those third parties not responding or returning an unacceptable response. If it is determined that there is a significant risk, an effort will be made to work with such parties. If this is not successful, a new provider of the same services will be sought. The Costs to Address Year 2000 Issues The estimated costs associated with Year 2000 readiness, are approximately $36 million, including $19 million of incremental costs. This reflects an increase of $8 million from the previously reported estimate of total incremental costs. The estimated cost increase results primarily from increased use of external consultants and increased internal staffing of Y2K operational teams. Total costs incurred as of January 31, 1999, were $17 million, including $8 million of incremental costs. As Y2K impact assessment nears completion and the renovation planning, readiness implementation and testing evolve, the estimated costs may change. The Risks of the Company's Year 2000 Issues The most reasonably likely worst case Year 2000 scenario would be the inability of critical third party suppliers, such as utility providers, telecommunication companies, and other critical suppliers, such as drilling equipment suppliers, platform suppliers, crude oil suppliers and pipeline carriers, to continue providing their products and services. This could pose the greatest material operational, safety, environmental and/or financial risk to the company. In addition, the lack of accurate and timely Year 2000 date impact information from suppliers of automation and process control systems and processes is a concern. Without quality information from suppliers, specifically on embedded chip technology, some Year 2000 problems could go undetected until after January 1, 2000. M-35 Management's Discussion and Analysis continued Contingency Planning Representatives of the Marathon Group have participated with a work group of the API Year 2000 Task force to develop a contingency plan format. This format includes guidelines to develop a plan that will cover the Year 2000 areas of concern. Many business unit contingency planning teams have been formed and are actively working on contingency plans for the systems and processes critical to the operations in terms of material operational, safety, environmental and financial risk to the company. These plans are to be completed and tested, when practical, by the end of the third quarter of 1999. The foregoing Year 2000 discussion includes forward-looking statements of the Marathon Group's efforts and management's expectations relating to Year 2000 readiness. These statements are based on certain assumptions including, but not limited to, the availability of programming and testing resources, vendors' ability to install or modify proprietary hardware and software, unanticipated problems identified in the ongoing Year 2000 readiness review, the effectiveness and execution of contingency plans and the level of incremental costs associated with Year 2000 readiness efforts. If these assumptions prove to be incorrect, actual results could differ materially from present expectations. Accounting Standards In March 1998, the American Institute of Certified Public Accountants issued Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidelines for companies to capitalize or expense costs incurred to develop or obtain internal- use software. USX adopted SOP 98-1 effective January 1, 1999. The incremental impact on results of operations of adoption of SOP 98-1 is likely to be initially favorable since certain qualifying costs will be capitalized and amortized over future periods. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". This new standard requires recognition of all derivatives as either assets or liabilities at fair value. This new standard may result in additional volatility in both current period earnings and other comprehensive income as a result of recording recognized and unrecognized gains and losses resulting from changes in the fair value of derivative instruments. At adoption this new standard requires a comprehensive review of all outstanding derivative instruments to determine whether or not their use meets the hedge accounting criteria. It is possible that there will be derivative instruments employed in our businesses that do not meet all of the designated hedge criteria and they will be reflected in income on a mark-to-market basis. Based upon the strategies currently used by USX and the level of activity related to forward exchange contracts and commodity-based derivative instruments in recent periods, USX does not anticipate the effect of adoption to have a material impact on either financial position or results of operations of the Marathon Group. USX plans to adopt the standard effective January 1, 2000, as required. M-36 Quantitative and Qualitative Disclosures About Market Risk Management Opinion Concerning Derivative Instruments USX employs a strategic approach of limiting its use of derivative instruments principally to hedging activities, whereby gains and losses are generally offset by price changes in the underlying commodity. Based on this approach, combined with risk assessment procedures and internal controls, management believes that its use of derivative instruments does not expose the Marathon Group to material risk; however, the Marathon Group's use of derivative instruments for hedging activities could materially affect the Marathon Group's results of operations in particular quarterly or annual periods. This is primarily because use of such instruments may limit the company's ability to benefit from favorable price movements. However, management believes that use of these instruments will not have a material adverse effect on financial position or liquidity. For a summary of accounting policies related to derivative instruments, see Note 2 to the Marathon Group Financial Statements. Commodity Price Risk and Related Risks In the normal course of its business, the Marathon Group is exposed to market risk or price fluctuations related to the purchase, production or sale of crude oil, natural gas and refined products. To a lesser extent, the Marathon Group is exposed to the risk of price fluctuations on natural gas liquids, electricity and petroleum feedstocks used as raw materials. The Marathon Group is also exposed to effects of price fluctuations on the value of its commodity inventories. The Marathon Group's market risk strategy has generally been to obtain competitive prices for its products and services and allow operating results to reflect market price movements dictated by supply and demand. However, the Marathon Group uses fixed-price contracts and derivative commodity instruments to manage a relatively small portion of its commodity price risk. The Marathon Group uses fixed-price contracts for portions of its natural gas production to manage exposure to fluctuations in natural gas prices. In addition, the Marathon Group uses derivative commodity instruments such as exchange-traded futures contracts and options, and over-the-counter ("OTC") commodity swaps and options to manage exposure to market risk related to the purchase, production or sale of crude oil, natural gas, refined products and electricity. The Marathon Group's strategic approach is to limit the use of these instruments principally to hedging activities. Accordingly, gains and losses on derivative commodity instruments are generally offset by the effects of price changes in the underlying commodity. However, certain derivative commodity instruments have the effect of restoring the equity portion of fixed-price sales of natural gas to variable market-based pricing. These instruments are used as part of the Marathon Group's overall risk management programs. M-37 Quantitative and qualitative Disclosures About Market Risk continued Sensitivity analyses of the incremental effects on pretax income of hypothetical 10% and 25% changes in commodity prices for open derivative commodity instruments for the Marathon Group as of December 31, 1998, are provided in the following table/(a)/:
(Dollars in millions) Incremental Decrease in Pretax Income Assuming a Hypothetical Price Change of/(a)/ Derivative Commodity Instruments 10% 25% Marathon Group/(b)(c)/: Crude oil (price increase)/(d)/ $2.6 $12.8 Natural gas (price decrease)/(d)/ 9.4 24.0 Refined products (price increase)/(d)/ 1.9 6.5
/(a)/ Gains and losses on derivative commodity instruments are generally offset by price changes in the underlying commodity. Effects of these offsets are not reflected in the sensitivity analyses. Amounts reflect the estimated incremental effect on pretax income of hypothetical 10% and 25% changes in closing commodity prices for each open contract position at December 31, 1998. Marathon Group management evaluates its portfolio of derivative commodity instruments on an ongoing basis and adds or revises strategies to reflect anticipated market conditions and changes in risk profiles. Changes to the portfolio subsequent to December 31, 1998, would cause future pretax income effects to differ from those presented in the table. /(b)/ The number of net open contracts varied throughout 1998, from a low of 1,268 contracts at January 1, to a high of 17,359 contracts at September 24, and averaged 8,171 for the year. The derivative commodity instruments used and hedging positions taken also varied throughout 1998, and will continue to vary in the future. Because of these variations in the composition of the portfolio over time, the number of open contracts, by itself, cannot be used to predict future income effects. /(c)/ The calculation of sensitivity amounts for basis swaps assumes that the physical and paper indices are perfectly correlated. Gains and losses on options are based on changes in intrinsic value only. /(d)/ The direction of the price change used in calculating the sensitivity amount for each commodity reflects that which would result in the largest incremental decrease in pretax income when applied to the derivative commodity instruments used to hedge that commodity. While derivative commodity instruments are generally used to reduce risks from unfavorable commodity price movements, they also may limit the opportunity to benefit from favorable movements. During the fourth quarter of 1996, certain hedging strategies matured which limited the Marathon Group's ability to benefit from favorable market price increases on the sales of equity crude oil and natural gas production, resulting in pretax hedging losses of $33 million. In total, Marathon's upstream operations recorded net pretax hedging losses of $3 million in 1998, compared with net losses of $3 million in 1997, and net losses of $38 million in 1996. Marathon's downstream operations generally use derivative commodity instruments to lock-in costs of certain raw material purchases, to protect carrying values of inventories and to protect margins on fixed-price sales of refined products. In total, Marathon's downstream operations recorded net pretax hedging gains, net of the 38% minority interest in MAP, of $28 million in 1998, compared with net gains of $29 million in 1997, and net losses of $22 million in 1996. Essentially, all of these upstream and downstream gains and losses were offset by changes in the prices of the underlying hedged commodities, with the net effect approximating the targeted results of the hedging strategies. For additional quantitative information relating to derivative commodity instruments, including aggregate contract values and fair values, where appropriate, see Note 25 to the Marathon Group Financial Statements. The Marathon Group is subject to basis risk, caused by factors that affect the relationship between commodity futures prices reflected in derivative commodity instruments and the cash market price of the underlying commodity. Natural gas transaction prices are frequently based on industry reference prices that may vary from prices experienced in local markets. For example, New York Mercantile Exchange ("NYMEX") contracts for natural gas are priced at Louisiana's Henry Hub, while the underlying quantities of natural gas may be produced and sold in the Western United States at prices that do not move in strict correlation with NYMEX prices. To the extent that commodity price changes in one region are not reflected in other regions, derivative commodity instruments may no longer provide the expected hedge, resulting in increased exposure to basis risk. These regional price differences could yield favorable or unfavorable results. OTC transactions are being used to manage exposure to a portion of basis risk. M-38 Quantitative and qualitative Disclosures About Market Risk continued The Marathon Group is subject to liquidity risk, caused by timing delays in liquidating contract positions due to a potential inability to identify a counterparty willing to accept an offsetting position. Due to the large number of active participants, liquidity risk exposure is relatively low for exchange-traded transactions. Interest Rate Risk USX is subject to the effects of interest rate fluctuations on certain of its non-derivative financial instruments. A sensitivity analysis of the projected incremental effect of a hypothetical 10% decrease in year-end 1998 interest rates on the fair value of the Marathon Group's specifically attributed non-derivative financial instruments and the Marathon Group's portion of USX's non- derivative financial instruments attributed to both groups, is provided in the following table:
(Dollars in millions) As of December 31, 1998 Incremental Increase in Carrying Fair Fair Non-Derivative Financial Instruments/(a)/ Value/(b)/ Value/(b)/ Value/(c)/ Financial assets: Investments and long-term receivables/(d)/ $ $101 $ 157 $ -- Financial liabilities: Long-term debt (including amounts due within one year)/(e)/ $ 3,515 $ 3,797 $ 141 Preferred stock of subsidiary/(f)/ 184 183 15 ------- ------- ------- Total $ 3,699 $ 3,980 $ 156
/(a)/ Fair values of cash and cash equivalents, receivables, notes payable, accounts payable and accrued interest, approximate carrying value and are relatively insensitive to changes in interest rates due to the short-term maturity of the instruments. Accordingly, these instruments are excluded from the table. /(b)/ See Note 26 to the Marathon Group Financial Statements. /(c)/ Reflects, by class of financial instrument, the estimated incremental effect of a hypothetical 10% decrease in interest rates at December 31, 1998, on the fair value of non-derivative financial instruments. For financial liabilities, this assumes a 10% decrease in the weighted average yield to maturity of USX's long-term debt at December 31, 1998. /(d)/ For additional information, see Note 20 to the Marathon Group Financial Statements. /(e)/ Fair value was based on market prices where available, or current borrowing rates for financings with similar terms and maturities. For additional information, see Note 13 to the Marathon Group Financial Statements. /(f)/ See Note 25 to the USX Consolidated Financial Statements. At December 31, 1998, USX's portfolio of long-term debt was comprised primarily of fixed-rate instruments. Therefore, the fair value of the portfolio is relatively sensitive to effects of interest rate fluctuations. This sensitivity is illustrated by the $107 million increase in the fair value of long-term debt assuming a hypothetical 10% decrease in interest rates. However, USX's sensitivity to interest rate declines and corresponding increases in the fair value of its debt portfolio would unfavorably affect USX's results and cash flows only to the extent that USX elected to repurchase or otherwise retire all or a portion of its fixed-rate debt portfolio at prices above carrying value. M-39 Quantitative and qualitative Disclosures About Market Risk continued Foreign Currency Exchange Rate Risk USX is subject to the risk of price fluctuations related to anticipated revenues and operating costs, firm commitments for capital expenditures and existing assets or liabilities denominated in currencies other than U.S. dollars. USX has not generally used derivative instruments to manage this risk. However, USX has made limited use of forward currency contracts to manage exposure to certain currency price fluctuations. At December 31, 1998, USX had open Canadian dollar forward purchase contracts with a total carrying value of $36 million. A 10% increase in the December 31, 1998, Canadian dollar to U.S. dollar forward rate would result in a charge to income of $3 million. The entire amount of these contracts is attributed to the Marathon Group. Equity Price Risk At December 31, 1998, the Marathon Group had no material exposure to equity price risk. Safe Harbor The Marathon Group's quantitative and qualitative disclosures about market risk include forward-looking statements with respect to management's opinion about risks associated with the Marathon Group's use of derivative instruments. These statements are based on certain assumptions with respect to market prices and industry supply of and demand for crude oil, natural gas and refined products. To the extent that these assumptions prove to be inaccurate, future outcomes with respect to the Marathon Group's hedging programs may differ materially from those discussed in the forward-looking statements. M-40 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 generally accepted accounting principles. They necessarily include some amounts that are based on best judgments and estimates. The U. S. Steel Group financial information displayed in other sections of this report is consistent with these financial statements. USX seeks to assure the objectivity and integrity of its financial records by careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communications programs aimed at assuring that its policies and methods are understood throughout the organization. USX has a comprehensive formalized system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that financial records are reliable. Appropriate management monitors the system for compliance, and the internal auditors independently measure its effectiveness and recommend possible improvements thereto. In addition, as part of their audit of the financial statements, USX's independent accountants, who are elected by the stockholders, review and test the internal accounting controls selectively to establish a basis of reliance thereon in determining the nature, extent and timing of audit tests to be applied. The Board of Directors pursues its oversight role in the area of financial reporting and internal accounting control through its Audit Committee. This Committee, composed solely of nonmanagement directors, regularly meets (jointly and separately) with the independent accountants, management and internal auditors to monitor the proper discharge by each of its responsibilities relative to internal accounting controls and the consolidated and group financial statements.
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, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of USX's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The U. S. Steel Group is a business unit of USX Corporation (as described in Note 1, page S-5); accordingly, the financial statements of the U. S. Steel Group should be read in connection with the consolidated financial statements of USX Corporation. PricewaterhouseCoopers LLP 600 Grant Street, Pittsburgh, Pennsylvania 15219-2794 February 9, 1999 S-1 Statement of Operations
(Dollars in millions) 1998 1997 1996 Revenues: Sales $6,184 $6,814 $6,533 Income from affiliates 46 69 66 Gain on disposal of assets 54 57 16 Gain on affiliate stock offering (Note 5) -- -- 53 Other income (loss) (1) 1 2 ------ ------ ------ Total revenues 6,283 6,941 6,670 ------ ------ ------ Costs and expenses: Cost of sales (excludes items shown below) 5,410 5,762 5,829 Selling, general and administrative expenses (credits) (Note 12) (201) (137) (165) Depreciation, depletion and amortization 283 303 292 Taxes other than income taxes 212 240 231 ------ ------ ------ Total costs and expenses 5,704 6,168 6,187 ------ ------ ------ Income from operations 579 773 483 Net interest and other financial costs (Note 7) 42 87 116 ------ ------ ------ Income before income taxes and extraordinary loss 537 686 367 Provision for estimated income taxes (Note 15) 173 234 92 ------ ------ ------ Income before extraordinary loss 364 452 275 Extraordinary loss (Note 6) -- -- 2 ------ ------ ------ Net income 364 452 273 Noncash credit from exchange of preferred stock (Note 19) -- 10 -- Dividends on preferred stock (9) (13) (22) ------ ------ ------ Net income applicable to Steel Stock $ 355 $ 449 $ 251
Income Per Common Share Applicable to Steel Stock
1998 1997 1996 Basic: Income before extraordinary loss $4.05 $5.24 $3.00 Extraordinary loss -- -- .02 ----- ----- ----- Net income $4.05 $5.24 $2.98 Diluted: Income before extraordinary loss $3.92 $4.88 $2.97 Extraordinary loss -- -- .02 ----- ----- ----- Net income $3.92 $4.88 $2.95
See Note 23, for a description and computation of income per common share. The accompanying notes are an integral part of these financial statements. S-2
Balance Sheet (Dollars in millions) December 31 1998 1997 Assets Current assets: Cash and cash equivalents $ 9 $ 18 Receivables, less allowance for doubtful accounts of $9 and $13 (Note 22) 392 588 Inventories (Note 14) 698 705 Deferred income tax benefits (Note 15) 176 220 ------ ----------- Total current assets 1,275 1,531 Investments and long-term receivables, less reserves of $10 and $15 (Note 16) 743 670 Property, plant and equipment--net (Note 18) 2,500 2,496 Long-term deferred income tax benefits (Note 15) -- 19 Prepaid pensions (Note 12) 2,172 1,957 Other noncurrent assets 3 21 ------ ----------- Total assets $6,693 $6,694 Liabilities Current liabilities: Notes payable $ 13 $ 13 Accounts payable 501 687 Payroll and benefits payable 330 379 Accrued taxes 150 190 Accrued interest 10 11 Long-term debt due within one year (Note 11) 12 54 ------ ----------- Total current liabilities 1,016 1,334 Long-term debt (Note 11) 464 456 Employee benefits (Note 12) 2,315 2,338 Deferred credits and other liabilities 557 536 Preferred stock of subsidiary (Note 10) 66 66 USX obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely junior subordinated convertible debentures of USX (Note 19) 182 182 Stockholders' Equity (Note 20) Preferred stock 3 3 Common stockholders' equity 2,090 1,779 ------ ----------- Total stockholders' equity 2,093 1,782 ------ ----------- Total liabilities and stockholders' equity $6,693 $6,694
The accompanying notes are an integral part of these financial statements. S-3
Statement of Cash Flows (Dollars in millions) 1998 1997 1996 Increase (decrease) in cash and cash equivalents Operating activities: Net income $ 364 $ 452 $ 273 Adjustments to reconcile to net cash provided from operating activities: Depreciation, depletion and amortization 283 303 292 Pensions and other postretirement benefits (215) (349) (164) Deferred income taxes 158 193 150 Gain on disposal of assets (54) (57) (16) Gain on affiliate stock offering -- -- (53) Changes in: Current receivables -- sold (30) -- -- -- operating turnover 232 (24) (10) Inventories 7 (57) (47) Current accounts payable and accrued expenses (285) 61 (193) All other -- net (88) (52) (146) ----- ----- ----- Net cash provided from operating activities 372 470 86 ----- ----- ----- Investing activities: Capital expenditures (310) (261) (337) Disposal of assets 21 420 161 Restricted cash -- withdrawals 35 -- -- -- deposits (35) -- -- Affiliates -- investments (73) (26) (1) All other -- net 21 7 38 ----- ----- ----- Net cash provided from (used in) investing activities (341) 140 (139) ----- ----- ----- Financing activities (Note 4): Increase (decrease) in U. S. Steel Group's portion of USX consolidated debt 13 (561) (31) Specifically attributed debt: Borrowings -- -- 113 Repayments (4) (6) (5) Steel Stock issued 55 48 51 Preferred stock repurchased (8) -- -- Dividends paid (96) (96) (104) ----- ----- ----- Net cash provided from (used in) financing activities (40) (615) 24 ----- ----- ----- Net decrease in cash and cash equivalents (9) (5) (29) Cash and cash equivalents at beginning of year 18 23 52 ----- ----- ----- Cash and cash equivalents at end of year $ 9 $ 18 $ 23
See Note 9, 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 8. Although the financial statements of the U. S. Steel Group and the Marathon Group separately report the assets, liabilities (including contingent liabilities) and stockholders' equity of USX attributed to each such Group, such attribution of assets, liabilities (including contingent liabilities) and stockholders' equity between the U. S. Steel Group and the Marathon Group for the purpose of preparing their respective financial statements does not affect legal title to such assets or responsibility for such liabilities. Holders of Steel Stock and Marathon Stock are holders of common stock of USX, and continue to be subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts arising from one Group that affect the overall cost of USX's capital could affect the results of operations and financial condition of the other Group. In addition, net losses of either Group, as well as dividends and distributions on any class of USX Common Stock or series of preferred stock and repurchases of any class of USX Common Stock or series of preferred stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on both classes of Common Stock. Accordingly, the USX consolidated financial information should be read in connection with the U. S. Steel Group financial information. 2. Summary of Principal Accounting Policies Principles applied in consolidation -- These financial statements include the accounts of the U. S. Steel Group. The U. S. Steel Group and the Marathon Group financial statements, taken together, comprise all of the accounts included in the USX consolidated financial statements. Investments in entities over which the U. S. Steel Group has significant influence are accounted for using the equity method of accounting and are carried at the U. S. Steel Group's share of net assets plus loans and advances. Investments in companies whose stock has no readily determinable fair value are carried at cost. Use of estimates -- Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at year-end and the reported amounts of revenues and expenses during the year. Significant items subject to such estimates and assumptions include the carrying value of long-lived assets; valuation allowances for receivables, inventories and deferred income tax assets; environmental liabilities; liabilities for potential tax deficiencies and potential litigation claims and settlements; and assets and obligations related to employee benefits. Additionally, certain estimated liabilities are recorded when management commits to a plan to close an operating facility or to exit a business activity. Actual results could differ from the estimates and assumptions used. Revenue recognition -- Revenues principally include sales, dividend and affiliate income, gains or losses on the disposal of assets and gains or losses from changes in ownership interests. Sales are recognized when products are shipped or services are provided to customers. Income from affiliates includes the U. S. Steel Group's proportionate share of income from equity method investments. When long-lived assets depreciated on an individual basis are sold or otherwise disposed of, any gains or losses are reflected in income. Such gains or losses on the disposal of long- lived assets are recognized when title passes to the buyer and, if applicable, all significant regulatory approvals are received. Proceeds from disposal of long-lived assets depreciated on a group basis are credited to accumulated depreciation, depletion and amortization with no immediate effect on income. Gains or losses from a change in ownership of an unconsolidated affiliate are recognized in revenues in the period of change. S-5 Cash and cash equivalents -- Cash and cash equivalents include cash on hand and on deposit and highly liquid debt instruments with maturities generally of three months or less. Inventories -- Inventories are carried at lower of cost or market. Cost of inventories is determined primarily under the last- in, first-out (LIFO) method. Derivative instruments -- The U. S. Steel Group engages in commodity risk management activities within the normal course of its business as an end-user of derivative instruments (Note 25). Management is authorized to manage exposure to price fluctuations related to the purchase of natural gas, refined products and nonferrous metals through the use of a variety of derivative financial and nonfinancial instruments. Derivative financial instruments require settlement in cash and include such instruments as over-the-counter (OTC) commodity swap agreements and OTC commodity options. Derivative nonfinancial instruments require or permit settlement by delivery of commodities and include exchange- traded commodity futures contracts and options. At times, derivative positions are closed, prior to maturity, simultaneous with the underlying physical transaction and the effects are recognized in income accordingly. The U. S. Steel Group's practice does not permit derivative positions to remain open if the underlying physical market risk has been removed. Changes in the market value of derivative instruments are deferred, including both closed and open positions, and are subsequently recognized in income as cost of sales in the same period as the underlying transaction. Premiums on all commodity-based option contracts are initially recorded based on the amount paid or received; the options' market value is subsequently recorded as a receivable or payable, as appropriate. The margin receivable accounts required for open commodity contracts reflect changes in the market prices of the underlying commodity and are settled on a daily basis. Forward exchange contracts are used to manage currency risks related to commitments for capital expenditures and existing assets or liabilities denominated in a foreign currency. Gains or losses related to firm commitments are deferred and included with the underlying transaction; all other gains or losses are recognized in income in the current period as sales, cost of sales, interest income or expense, or other income, as appropriate. Forward exchange contract values are included in receivables or payables, as appropriate. Recorded deferred gains or losses are reflected within other current and noncurrent assets or accounts payable and deferred credits and other liabilities. Cash flows from the use of derivative instruments are reported in the same category as the hedged item in the statement of cash flows. Long-lived assets -- Depreciation is generally computed using a modified straight-line method based upon estimated lives of assets and production levels. The modification factors range from a minimum of 85% at a production level below 81% of capability, to a maximum of 105% for a 100% production level. No modification is made at the 95% production level, considered the normal long-range level. Depletion of mineral properties is based on rates which are expected to amortize cost over the estimated tonnage of minerals to be removed. The U. S. Steel Group evaluates impairment of its long-lived assets on an individual asset basis or by logical groupings of assets. Assets deemed to be impaired are written down to their fair value, including any related goodwill, using discounted future cash flows and, if available, comparable market values. Environmental remediation -- The U. S. Steel Group provides for remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. Generally, the timing of remediation accruals coincides with completion of a feasibility study or the commitment to a formal plan of action. Remediation liabilities are accrued based on estimates of known environmental exposure and are discounted in certain instances. Postemployment benefits -- The U. S. Steel Group recognizes an obligation to provide postemployment benefits, primarily for disability-related claims covering indemnity and medical payments. The obligation for these claims and the related periodic costs are measured using actuarial techniques and assumptions, including an appropriate discount rate, analogous to the required methodology for measuring pension and other postretirement benefit obligations. Actuarial gains and losses are deferred and amortized over future periods. Insurance -- The U. S. Steel Group is insured for catastrophic casualty and certain property and business interruption exposures, as well as those risks required to be insured by law or contract. Costs resulting from noninsured losses are charged against income upon occurrence. Reclassifications -- Certain reclassifications of prior years' data have been made to conform to 1998 classifications. 3. New Accounting Standards The following accounting standards were adopted by USX: Reporting comprehensive income -- Effective January 1, 1998, USX adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". This Standard establishes requirements for reporting and display of comprehensive income and its components in the financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events from nonowner sources. It includes all changes in equity during a period except those resulting from investments by and distributions to owners. See disclosures of comprehensive income at Note 20 and on page U-7 of the USX consolidated financial statements. S-6 Disclosures of operating segments -- USX adopted in 1998, Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes new standards for reporting information about operating segments and related disclosures about products and services, geographic areas and major customers. The most significant new requirement of this Standard is that reportable operating segments be based on an enterprise's internally reported business segments. See disclosures of operating segments at Note 8. Disclosures of postretirement benefits -- USX adopted in 1998, Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (SFAS No. 132), which revises and standardizes the reporting requirements for postretirement benefits. However, the Standard does not change the measurement and recognition of those benefits. The U. S. Steel Group has complied with SFAS No. 132 by disclosing pension and other postretirement benefits at Note 12. Environmental remediation liabilities -- Effective January 1, 1997, USX adopted American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" (SOP 96-1), which provides additional interpretation of existing accounting standards related to recognition, measurement and disclosure of environmental remediation liabilities. As a result of adopting SOP 96-1, the U. S. Steel Group identified additional environmental remediation liabilities of $35 million, of which $28 million was discounted to a present value of $13 million and $7 million was not discounted. Assumptions used in the calculation of the present value amount included an inflation factor of 2% and an interest rate of 7% over a range of 22 to 30 years. The net unfavorable effect of adoption on the U. S. Steel Group's income from operations at January 1, 1997, was $20 million. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). This new Standard requires recognition of all derivatives as either assets or liabilities at fair value. SFAS No. 133 may result in additional volatility in both current period earnings and other comprehensive income as a result of recording recognized and unrecognized gains and losses resulting from changes in the fair value of derivative instruments. SFAS No. 133 requires a comprehensive review of all outstanding derivative instruments to determine whether or not their use meets the hedge accounting criteria. It is possible that there will be derivative instruments employed in our businesses that do not meet all of the designated hedge criteria and they will be reflected in income on a mark-to- market basis. Based upon the strategies currently employed by the U. S. Steel Group and the level of activity related to commodity- based derivative instruments in recent periods, the U. S. Steel Group does not anticipate the effect of adoption to have a material impact on either financial position or results of operations. The U. S. Steel Group plans to adopt SFAS No. 133 effective January 1, 2000, as required. 4. Corporate Activities Financial activities -- As a matter of policy, USX manages most financial activities on a centralized, consolidated basis. Such financial activities include the investment of surplus cash; the issuance, repayment and repurchase of short-term and long-term debt; the issuance, repurchase and redemption of preferred stock; and the issuance and repurchase of common stock. Transactions related primarily to invested cash, short-term and long-term debt (including convertible debt), related net interest and other financial costs, and preferred stock and related dividends are attributed to the U. S. Steel Group, the Marathon Group and, prior to November 1, 1997, the Delhi Group based upon the cash flows of each group for the periods presented and the initial capital structure of each group. Most financing transactions are attributed to and reflected in the financial statements of the groups. See Note 10, for the U. S. Steel Group's portion of USX's financial activities attributed to the groups. However, transactions such as leases, certain collateralized financings, certain indexed debt instruments, financial activities of consolidated entities which are less than wholly owned by USX and transactions related to securities convertible solely into any one class of common stock are or will be specifically attributed to and reflected in their entirety in the financial statements of the group to which they relate. Corporate general and administrative costs -- Corporate general and administrative costs are allocated to the U. S. Steel Group, the Marathon Group and, prior to November 1, 1997, the Delhi Group based upon utilization or other methods management believes to be reasonable and which consider certain measures of business activities, such as employment, investments and sales. The costs allocated to the U. S. Steel Group were $24 million in 1998, $33 million in 1997 and $28 million in 1996, and primarily consist of employment costs including pension effects, professional services, facilities and other related costs associated with corporate activities. Income taxes -- All members of the USX affiliated group are included in the consolidated United States federal income tax return filed by USX. Accordingly, the provision for federal income taxes and the related payments or refunds of tax are determined on a consolidated basis. The consolidated provision and the related tax payments or refunds have been reflected in the U. S. Steel Group, the S-7 Marathon Group and, prior to November 1, 1997, the Delhi Group financial statements in accordance with USX's tax allocation policy. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated among the U. S. Steel Group, Marathon Group and, prior to November 1, 1997, the Delhi Group, for group financial statement purposes, based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to the respective groups. For tax provision and settlement purposes, tax benefits resulting from attributes (principally net operating losses and various tax credits), which cannot be utilized by one of the groups on a separate return basis but which can be utilized on a consolidated basis in that year or in a carryback year, are allocated to the group that generated the attributes. To the extent that one of the groups is allocated a consolidated tax attribute which, as a result of expiration or otherwise, is not ultimately utilized on the consolidated tax return, the prior years' allocation of such attribute is adjusted such that the effect of the expiration is borne by the group that generated the attribute. Also, if a tax attribute cannot be utilized on a consolidated basis in the year generated or in a carryback year, the prior years' allocation of such consolidated tax effects is adjusted in a subsequent year to the extent necessary to allocate the tax benefits to the group that would have realized the tax benefits on a separate return basis. As a result, the allocated group amounts of taxes payable or refundable are not necessarily comparable to those that would have resulted if the groups had filed separate tax returns. 5. Gain on Affiliate Stock Offering In 1996, an aggregate of 6.9 million shares of RTI International Metals, Inc. (RTI) (formerly RMI Titanium Company) common stock was sold in a public offering at a price of $18.50 per share and total net proceeds of $121 million. Included in the offering were 2.3 million shares sold by USX for net proceeds of $40 million. The U. S. Steel Group recognized a total pretax gain of $53 million, of which $34 million was attributable to the shares sold by USX and $19 million was attributable to the increase in value of its investment as a result of the shares sold by RTI. The income tax effect related to the total gain was $19 million. As a result of this transaction, USX's ownership in RTI decreased from approximately 50% to 27%. The U. S. Steel Group continues to account for its investment in RTI under the equity method of accounting. 6. Extraordinary Loss On December 30, 1996, USX irrevocably called for redemption on January 30, 1997, $120 million of debt, resulting in a 1996 extraordinary loss to the U. S. Steel Group of $2 million, net of a $1 million income tax benefit. 7. Net Interest and Other Financial Costs
(In millions) 1998 1997 1996 Interest and other financial income/(a)/ -- Interest income $ 5 $ 4 $ 4 ----- ----- ----- Interest and other financial costs/(a)/: Interest incurred 40 57 85 Less interest capitalized 6 7 8 ----- ----- ----- Net interest 34 50 77 Interest on tax issues 16 13 10 Financial costs on trust preferred securities 13 10 -- Financial costs on preferred stock of subsidiary 5 5 5 Amortization of discounts 2 2 2 Expenses on sales of accounts receivable (Note 22) 21 21 20 Adjustment to settlement value of indexed debt (44) (10) 6 ----- ----- ----- Total 47 91 120 ----- ----- ----- Net interest and other financial costs/(a)/ $ 42 $ 87 $ 116
/(a)/ See Note 4, for discussion of USX net interest and other financial costs attributable to the U. S. Steel Group. S-8 8. Segment Information The U. S. Steel Group consists of one operating segment, U. S. Steel. U. S. Steel is engaged in the production and sale of steel mill products, coke and taconite pellets. U. S. Steel also engages in the following related business activities: the management of mineral resources, domestic coal mining, engineering and consulting services, and real estate development and management. For information on sales by product line, see table of revenues on page S-25 of Management's Discussion and Analysis. Segment income represents income from operations allocable to U. S. Steel and does not include net interest and other financial costs, provisions for estimated income taxes and USX corporate general and administrative costs. These corporate costs primarily consist of employment costs including pension effects, professional services, facilities and other related costs associated with corporate activities. Also, certain general and administrative costs associated with former businesses and the gain on affiliate stock offering are not allocated to the segment. In addition, pension credits associated with pension plan assets and liabilities allocated to pre-1987 retirees and former businesses are not allocated to the segment. The following table represents the operations of U. S. Steel:
(In millions) 1998 1997 1996 Revenues: Customer $6,180 $6,812 $6,535 Intergroup/(a)/ 2 2 -- Equity in earnings of unconsolidated affiliates 46 69 66 Other 55 58 16 ------ ------ ------ Total revenues $6,283 $6,941 $6,617 ====== ====== ====== Segment income $ 330 $ 618 $ 248 Significant noncash items included in segment income: Depreciation, depletion and amortization 283 303 292 Pension expenses/(b)/ 187 169 172 Capital expenditures/(c)/ 305 256 336 Affiliates -- investments/(c)/ 71 26 --
/(a)/ Intergroup sales and transfers were conducted on an arm's- length basis. /(b)/ Differences between segment total and group total represent unallocated pension credits and amounts included in administrative expenses. /(c)/ Differences between segment total and group total represent amounts related to corporate administrative activities. The following schedule reconciles segment revenues and income to amounts reported in the U. S. Steel Group's financial statements:
(In millions) 1998 1997 1996 Revenues: Revenues of reportable segment $6,283 $6,941 $6,617 Items not allocated to segment Gain on affiliate stock offering -- -- 53 ----- ------ ------ Total Group revenues $6,283 $6,941 $6,670 ===== ====== ====== Income: Income for reportable segment $ 330 $ 618 $ 248 Items not allocated to segment: Gain on affiliate stock offering -- -- 53 Administrative expenses (24) (33) (28) Pension credits 373 313 330 Costs related to former businesses activities (100) (125) (120) ------ ------ ------ Total Group income from operations $ 579 $ 773 $ 483
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 1998 $6,266 $ -- $6,266 $3,043 1997 6,926 -- 6,926 3,023 1996 6,642 -- 6,642 3,024 Foreign Countries 1998 17 -- 17 69 1997 15 -- 15 1 1996 28 -- 28 2 Total 1998 $6,283 $ -- $6,283 $3,112 1997 6,941 -- 6,941 3,024 1996 6,670 -- 6,670 3,026 - ------------------------------------------------------------------------------------------------------------------------------------
/(a)/ Includes property, plant and equipment and investments in affiliates. 9. Supplemental Cash Flow Information
(In millions) 1998 1997 1996 Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $ (76) $ (99) $ (129) Income taxes paid, including settlements with other groups (29) (48) (53) USX debt attributed to all groups -- net: Commercial paper: Issued $ 1,650 $ -- $ 1,422 Repayments (950) -- (1,555) Credit agreements: Borrowings 15,836 10,454 10,356 Repayments (15,867) (10,449) (10,340) Other credit arrangements -- net 55 36 (36) Other debt: Borrowings 671 10 78 Repayments (1,053) (741) (705) -------- -------- -------- Total $ 342 $ (690) $ (780) U. S. Steel Group activity $ 13 $ (561) $ (31) Marathon Group activity 329 97 (769) Delhi Group activity -- (226) 20 -------- -------- -------- Total $ 342 $ (690) $ (780) Noncash investing and financing activities: Steel Stock issued for Dividend Reinvestment Plan and employee stock plans $ 2 $ 5 $ 4 Disposal of assets -- notes received 2 -- 12 Trust preferred securities exchanged for preferred stock -- 182 --
S-10 10. Financial Activities Attributed to Groups The following is the portion of USX financial activities attributed to the U. S. Steel Group. These amounts exclude amounts specifically attributed to the U. S. Steel Group.
U. S. Steel Group Consolidated USX/(a)/ ----------------------- ----------------------- (In millions) December 31 1998 1997 1998 1997 Cash and cash equivalents $ -- $ 1 $ 4 $ 6 Receivables/(b)/ -- 1 -- 10 Other noncurrent assets/(b)/ 1 1 8 8 ----- ----- ------ ------ Total assets $ 1 $ 3 $ 12 $ 24 Notes payable $ 13 $ 13 $ 145 $ 121 Accounts payable -- -- -- 1 Accrued interest 8 10 88 89 Long-term debt due within one year (Note 11) 7 49 66 466 Long-term debt (Note 11) 306 252 3,762 2,704 Preferred stock of subsidiary 66 66 250 250 ----- ----- ------ ------ Total liabilities $ 400 $ 390 $4,311 $3,631 U. S. Steel Group/(c)/ Consolidated USX ------------------------ ------------------------ (In millions) 1998 1997 1996 1998 1997 1996 Net interest and other financial costs (Note 7) $ 29 $ 46 $ 81 $ 324 $ 309 $ 376
/(a)/ For details of USX long-term debt and preferred stock of subsidiary, see Notes 17 and 25, respectively, to the USX consolidated financial statements. /(b)/ Primarily reflects 1997 forward currency contracts used to manage currency risks related to USX debt and interest denominated in a foreign currency. /(c)/ The U. S. Steel Group's net interest and other financial costs reflect weighted average effects of all financial activities attributed to all groups.
11. Long-Term Debt The U. S. Steel Group's portion of USX's consolidated long-term debt is as follows: U. S. Steel Group Consolidated USX/(a)/ ----------------- -------------------- (In millions) December 31 1998 1997 1998 1997 Specifically attributed debt/(b)/: Sale-leaseback financing and capital leases $ 95 $ 99 $ 95 $ 123 Indexed debt less unamortized discount 68 110 68 110 ----- ----- ------ --------- Total 163 209 163 233 Less amount due within one year 5 5 5 5 ----- ----- ------ --------- Total specifically attributed long-term debt $ 158 $ 204 $ 158 $ 228 Debt attributed to groups/(c)/ $ 316 $ 305 $3,853 $3,194 Less unamortized discount 3 4 25 24 Less amount due within one year 7 49 66 466 ----- ----- ------ --------- Total long-term debt attributed to groups $ 306 $ 252 $3,762 $2,704 Total long-term debt due within one year $ 12 $ 54 $ 71 $ 471 Total long-term debt due after one year 464 456 3,920 2,932
/(a)/ See Note 17, to the USX consolidated financial statements for details of interest rates, maturities and other terms of long-term debt. /(b)/ As described in Note 4, certain financial activities are specifically attributed only to the U. S. Steel Group and the Marathon Group. /(c)/ Most long-term debt activities of USX Corporation and its wholly owned subsidiaries are attributed to all groups (in total, but not with respect to specific debt issues) based on their respective cash flows (Notes 4, 9 and 10). S-11 12. Pensions and Other Postretirement Benefits The U. S. Steel Group has noncontributory defined benefit pension plans covering substantially all employees. Benefits under these plans are based upon years of service and final average pensionable earnings, or a minimum benefit based upon years of service, whichever is greater. In addition, pension benefits are also provided to most salaried employees based upon a percent of total career pensionable earnings. Certain of these plans provide benefits to USX corporate employees, and the related costs or credits for such employees are allocated to all groups (Note 4). The U. S. Steel Group also participates in multiemployer plans, most of which are defined benefit plans associated with coal operations. The U. S. Steel Group also has defined benefit retiree health and life insurance plans (other benefits) covering most employees upon their retirement. Health benefits are provided, for the most part, through comprehensive hospital, surgical and major medical benefit provisions subject to various cost sharing features. Life insurance benefits are provided to nonunion retiree beneficiaries primarily based on employees' annual base salary at retirement. These plans provide benefits to USX corporate employees, and the related costs for such employees are allocated to all groups (Note 4). For union retirees, benefits are provided for the most part based on fixed amounts negotiated in labor contracts with the appropriate unions. Except for certain life insurance benefits paid from reserves held by insurance carriers and benefits required to be funded by union contracts, most other benefits have not been prefunded.
Pension Benefits Other Benefits --------------------- ------------------ (In millions) 1998 1997 1998 1997 Change in benefit obligations Benefit obligations at January 1 $ 7,314 $ 7,258 $ 2,070 $ 2,111 Service cost 71 65 15 15 Interest cost 487 517 141 153 Plan amendments 8 1 -- -- Actuarial (gains) losses 516 377 23 (74) Settlement, curtailment and termination benefits 10 4 7 -- Benefits paid (857) (908) (143) (135) -------- -------- ------- ------- Benefit obligations at December 31 $ 7,549 $ 7,314 $ 2,113 $ 2,070 Change in plan assets Fair value of plan assets at January 1 $ 9,775 $ 8,860 $ 258 $ 111 Actual return on plan assets 1,308 1,755 31 19 Employer contributions -- 49 -- 150 Benefits paid (840) (889) (24) (22) -------- -------- ------- ------- Fair value of plan assets at December 31 $ 10,243 $ 9,775 $ 265 $ 258 Funded status of plans at December 31 $ 2,694/(a)/ $ 2,461/(a)/ $(1,848) $(1,812) Unrecognized net gain from transition (140) (209) -- -- Unrecognized prior service cost 518 583 7 11 Unrecognized actuarial gains (905) (878) (292) (327) Additional minimum liability/(b)/ (57) (65) -- -- -------- -------- ------- ------- Prepaid (accrued) benefit cost $ 2,110 $ 1,892 $(2,133) $(2,128) /(a)/ Includes several small plans that have accumulated benefit obligations in excess of plan assets: Projected benefit obligation (PBO) $ (68) $ (69) Plan assets -- -- -------- -------- PBO in excess of plan assets $ (68) $ (69) /(b)/ Additional minimum liability recorded was offset by the following: Intangible asset $ 16 $ 27 -------- -------- Accumulated other comprehensive income (losses): Beginning of year $ (25) $ (17) Change during year (net of tax) (2) (8) -------- -------- Balance at end of year $ (27) $ (25)
S-12
Pension Benefits Other Benefits ------------------------------------ ------------------------------------- (In millions) 1998 1997 1996 1998 1997 1996 Components of net periodic benefit cost (credit) Service cost $ 71 $ 65 $ 69 $ 15 $ 15 $ 18 Interest cost 487 517 523 141 153 160 Return on plan assets -- actual (1,308) (1,755) (1,136) (31) (19) (12) -- deferred gain 539 1,012 367 10 8 1 Amortization of unrecognized (gains) losses 9 6 10 (12) (9) 5 Multiemployer and other plans 1 2 2 13/(a)/ 15/(a)/ 15/(a)/ Settlement and termination costs 10/(b)/ 4 6 -- -- -- ----- ------- ------- ------ ------- ------ Net periodic benefit cost (credit) $(191) $ (149) $ (159) $ 136 $ 163 $ 187
/(a)/ Represents payments to a multiemployer health care benefit plan created by the Coal Industry Retiree Health Benefit Act of 1992 based on assigned beneficiaries receiving benefits. The present value of this unrecognized obligation is broadly estimated to be $103 million, including the effects of future medical inflation, and this amount could increase if additional beneficiaries are assigned . /(b)/ Represents costs of the 1998 voluntary early retirement program.
Pension Benefits Other Benefits ------------------ ---------------- 1998 1997 1998 1997 Actuarial assumptions at December 31: Discount rate 6.5% 7.0% 6.5% 7.0% Expected annual return on plan assets 9.0% 9.5% 9.0% 9.5% Increase in compensation rate 4.0% 4.0% 4.0% 4.0%
For measurement purposes, an 8% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 5% for 2005 and remain at that level thereafter. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage- (In millions) Point Increase Point Decrease Effect on total of service and interest cost components $ 16 $ (13) Effect on other postretirement benefit obligations 192 (161)
13. Intergroup Transactions Sales and purchases -- U. S. Steel Group sales to the Marathon Group totaled $2 million in 1998 and 1997. U. S. Steel Group purchases from the Marathon Group totaled $21 million, $29 million and $21 million in 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, U. S. Steel Group accounts payable included $3 million related to transactions with the Marathon Group. These transactions were conducted on an arm's-length basis. Income taxes receivable from/payable to the Marathon Group -- At December 31, 1998 and 1997, amounts receivable or payable for income taxes were included in the balance sheet as follows:
(In millions) December 31 1998 1997 Current: Receivables $ -- $ 22 Accounts payable 2 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 among the groups until the audit of those respective tax years is closed. The amounts ultimately settled for open tax years will be different than recorded noncurrent amounts based on the final resolution of all of the audit issues for those years. 14. Inventories
(In millions) December 31 1998 1997 Raw materials $ 185 $ 130 Semi-finished products 282 331 Finished products 182 187 Supplies and sundry items 49 57 ----- ----- Total $ 698 $ 705
At December 31, 1998 and 1997, respectively, the LIFO method accounted for 94% and 93% of total inventory value. Current acquisition costs were estimated to exceed the above inventory values at December 31 by approximately $310 million and $300 million in 1998 and 1997, respectively. S-13 15. Income Taxes Income tax provisions and related assets and liabilities attributed to the U. S. Steel Group are determined in accordance with the USX group tax allocation policy (Note 4). Provisions (credits) for estimated income taxes were:
1998 1997 1996 -------- -------- --------- (In millions) Current Deferred Total Current Deferred Total Current Deferred Total Federal $19 $ 149 $168 $37 $ 168 $ 205 $ (51) $ 138 $ 87 State and local 3 9 12 4 25 29 -- 12 12 Foreign (7) -- (7) -- -- -- (7) -- (7) --- ----- ---- --- ----- ------ ----- ----- ------ Total $15 $ 158 $173 $41 $ 193 $ 234 $ (58) $ 150 $ 92
A reconciliation of federal statutory tax rate (35%) to total provisions follows:
(In millions) 1998 1997 1996 Statutory rate applied to income before income taxes $ 188 $ 240 $ 129 Excess percentage depletion (11) (10) (7) Effects of foreign operations, including foreign tax credits (11) (3) (2) State and local income taxes after federal income tax effects 8 19 8 Credits other than foreign tax credits (3) (15) (40) Nondeductible business expenses 1 2 2 Effects of partially owned companies -- (3) (6) Adjustment of prior years' income taxes -- 6 9 Adjustment of valuation allowances -- (1) -- Other 1 (1) (1) ----- ------- ------ Total provisions $ 173 $ 234 $ 92
Deferred tax assets and liabilities resulted from the following:
(In millions) December 31 1998 1997 Deferred tax assets: Minimum tax credit carryforwards $ 185 $ 180 State tax loss carryforwards (expiring in 1999 through 2018) 64 75 Employee benefits 969 907 Receivables, payables and debt 52 59 Contingency and other accruals 48 50 Other 12 15 Valuation allowances -- state (44) (52) -------- ----------- Total deferred tax assets/(a)/ 1,286 1,234 -------- ----------- Deferred tax liabilities: Property, plant and equipment 272 242 Prepaid pensions 792 661 Inventory 16 13 Investments in subsidiaries and affiliates 116 88 Federal effect of state deferred tax assets 3 6 Other 40 21 -------- ----------- Total deferred tax liabilities 1,239 1,031 -------- ----------- Net deferred tax assets $ 47 $ 203
/(a)/ USX expects to generate sufficient future taxable income to realize the benefit of the U. S. Steel Group's deferred tax assets. The consolidated tax returns of USX for the years 1990 through 1994 are under various stages of audit and administrative review by the IRS. USX believes it has made adequate provision for income taxes and interest which may become payable for years not yet settled. S-14 16. Investments and Long-Term Receivables
(In millions) December 31 1998 1997 Equity method investments $ 564 $ 472 Other investments 48 56 Receivables due after one year 10 22 Income tax receivable from the Marathon Group (Note 13) 97 97 Other 24 23 ------ ------ Total $ 743 $ 670
Summarized financial information of affiliates accounted for by the equity method of accounting follows:
(In millions) 1998 1997 1996 Income data -- year: Revenues $3,163 $3,143 $2,868 Operating income 193 228 223 Net income 97 139 140 Balance sheet data -- December 31: Current assets $1,028 $ 924 Noncurrent assets 2,149 2,006 Current liabilities 631 627 Noncurrent liabilities 883 800
Dividends and partnership distributions received from equity affiliates were $19 million in 1998, $13 million in 1997 and $25 million in 1996. U. S. Steel Group purchases of transportation services and semi-finished steel from equity affiliates totaled $331 million, $424 million and $460 million in 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, U. S. Steel Group payables to these affiliates totaled $15 million and $21 million, respectively. U. S. Steel Group sales of steel and raw materials to equity affiliates totaled $725 million, $802 million and $824 million in 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, U. S. Steel Group receivables from these affiliates were $177 million and $149 million, respectively. Generally, these transactions were conducted under long-term, market-based contractual arrangements. 17. Leases Future minimum commitments for capital leases (including sale- leasebacks accounted for as financings) and for operating leases having remaining noncancelable lease terms in excess of one year are as follows:
Capital Operating (In millions) Leases Leases 1999 $ 10 $ 116 2000 11 105 2001 11 121 2002 11 52 2003 11 39 Later years 117 70 Sublease rentals -- (1) ----- ----- Total minimum lease payments 171 $ 502 ===== Less imputed interest costs (76) ----- Present value of net minimum lease payments included in long-term debt $ 95
Operating lease rental expense:
(In millions) 1998 1997 1996 Minimum rental $ 136 $ 135 $ 131 Contingent rental 19 15 5 Sublease rentals (1) (1) (2) ----- ----- ----------- Net rental expense $ 154 $ 149 $ 134
The U. S. Steel Group leases a wide variety of facilities and equipment under operating leases, including land and building space, office equipment, production facilities and transportation equipment. Most long-term leases include renewal options and, in certain leases, purchase options. In the event of a change in control of USX, as defined in the agreements, or certain other circumstances, lease obligations totaling $8 million may be declared immediately due and payable. S-15 18. Property, Plant and Equipment
(In millions) December 31 1998 1997 Land and depletable property $ 151 $ 161 Buildings 469 477 Machinery and equipment 7,711 7,548 Leased assets 108 109 ------ ----------- Total 8,439 8,295 Less accumulated depreciation, depletion and amortization 5,939 5,799 ------ ----------- Net $2,500 $2,496
Amounts in accumulated depreciation, depletion and amortization for assets acquired under capital leases (including sale-leasebacks accounted for as financings) were $77 million and $70 million at December 31, 1998 and 1997, respectively. 19. Trust Preferred Securities In 1997, USX exchanged approximately 3.9 million 6.75% Convertible Quarterly Income Preferred Securities (Trust Preferred Securities) of USX Capital Trust I, a Delaware statutory business trust (Trust), for an equivalent number of shares of its 6.50% Cumulative Convertible Preferred Stock (6.50% Preferred Stock) (Exchange). The Exchange resulted in the recording of Trust Preferred Securities at a fair value of $182 million and a noncash credit to Retained Earnings of $10 million. USX owns all of the common securities of the Trust, which was formed for the purpose of the Exchange. (The Trust Common Securities and the Trust Preferred Securities are together referred to as the Trust Securities.) The Trust Securities represent undivided beneficial ownership interests in the assets of the Trust, which consist solely of USX 6.75% Convertible Junior Subordinated Debentures maturing March 31, 2037 (Debentures), having an aggregate principal amount equal to the aggregate initial liquidation amount ($50.00 per security and $203 million in total) of the Trust Securities issued by the Trust. Interest and principal payments on the Debentures will be used to make quarterly distributions and to pay redemption and liquidation amounts on the Trust Preferred Securities. The quarterly distributions, which accumulate at the rate of 6.75% per annum on the Trust Preferred Securities and the accretion from fair value to the initial liquidation amount, are charged to income and included in net interest and other financial costs. Under the terms of the Debentures, USX has the right to defer payment of interest for up to 20 consecutive quarters and, as a consequence, monthly distributions on the Trust Preferred Securities will be deferred during such period. If USX exercises this right, then, subject to limited exceptions, it may not pay any dividend or make any distribution with respect to any shares of its capital stock. The Trust Preferred Securities are convertible at any time prior to the close of business on March 31, 2037 (unless such right is terminated earlier under certain circumstances) at the option of the holder, into shares of Steel Stock at a conversion price of $46.25 per share of Steel Stock (equivalent to a conversion ratio of 1.081 shares of Steel Stock for each Trust Preferred Security), subject to adjustment in certain circumstances. The Trust Preferred Securities may be redeemed at any time at the option of USX, at a premium of 103.25% of the initial liquidation amount through March 31, 1999, and thereafter, declining annually to the initial liquidation amount on April 1, 2003, and thereafter. They are mandatorily redeemable at March 31, 2037, or earlier under certain circumstances. Payments related to quarterly distributions and to the payment of redemption and liquidation amounts on the Trust Preferred Securities by the Trust are guaranteed by USX on a subordinated basis. In addition, USX unconditionally guarantees the Trust's Debentures. The obligations of USX under the Debentures, and the related indenture, trust agreement and guarantee constitute a full and unconditional guarantee by USX of the Trust's obligations under the Trust Preferred Securities. S-16 20. Stockholders' Equity
(In millions, except per share data) 1998 1997 1996 Preferred stock: Balance at beginning of year $ 3 $ 7 $ 7 Exchanged for trust preferred securities -- (4) -- ------ ------ ------- Balance at end of year $ 3 $ 3 $ 7 Common stockholders' equity: Balance at beginning of year $1,779 $1,559 $1,337 Net income 364 452 273 6.50% preferred stock: Repurchased (8) -- -- Exchanged for trust preferred securities (Note 19) -- (188) -- Steel Stock issued 59 53 55 Dividends on preferred stock (9) (13) (22) Dividends on Steel Stock (per share $1.00) (88) (86) (85) Deferred compensation -- -- 1 Accumulated other comprehensive income (loss)/(a)/: Foreign currency translation adjustments (5) -- -- Minimum pension liability adjustments (Note 12) (2) (8) -- Other -- 10 -- ------ ------ ------- Balance at end of year $2,090 $1,779 $1,559 Total stockholders' equity $2,093 $1,782 $1,566
/(a)/ See page U-7 of the USX consolidated financial statements relative to the annual activity of these adjustments. Total comprehensive income for the U. S. Steel Group for the years 1998, 1997 and 1996 was $357 million, $444 million and $273 million, respectively. 21. Dividends In accordance with the USX Certificate of Incorporation, dividends on the Steel Stock and Marathon Stock are limited to the legally available funds of USX. Net losses of either Group, as well as dividends and distributions on any class of USX Common Stock or series of preferred stock and repurchases of any class of USX Common Stock or series of preferred stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on both classes of Common Stock. Subject to this limitation, the Board of Directors intends to declare and pay dividends on the Steel Stock based on the financial condition and results of operations of the U. S. Steel Group, although it has no obligation under Delaware law to do so. In making its dividend decisions with respect to Steel Stock, the Board of Directors considers, among other things, the long-term earnings and cash flow capabilities of the U. S. Steel Group as well as the dividend policies of similar publicly traded steel companies. Dividends on the Steel Stock are further limited to the Available Steel Dividend Amount. At December 31, 1998, the Available Steel Dividend Amount was at least $3,336 million. The Available Steel Dividend Amount will be increased or decreased, as appropriate, to reflect U. S. Steel Group net income, dividends, repurchases or issuances with respect to the Steel Stock and preferred stock attributed to the U. S. Steel Group and certain other items. 22. Sales of Receivables The U. S. Steel Group participates in an agreement (the program) to sell an undivided interest in certain accounts receivable. Payments are collected from the sold accounts receivable; the collections are reinvested in new accounts receivable for the buyers; and a yield, based on defined short-term market rates, is transferred to the buyers. At December 31, 1998, the amount sold under the program that had not been collected was $320 million, which will be forwarded to the buyers at the end of the agreement in 1999, or in the event of earlier contract termination. If the U. S. Steel Group does not have a sufficient quantity of eligible accounts receivable to reinvest in for the buyers, the size of the program will be reduced accordingly. The amount sold under the program averaged $347 million in 1998 and $350 million in 1997 and 1996. The buyers have rights to a pool of receivables that must be maintained at a level of at least 115% of the program size. The U. S. Steel Group does not generally require collateral for accounts receivable, but significantly reduces credit risk through credit extension and collection policies, which include analyzing the financial condition of potential customers, establishing credit limits, monitoring payments and aggressively pursuing delinquent accounts. In the event of a change in control of USX, as defined in the agreement, the U. S. Steel Group may be required to forward payments collected on sold accounts receivable to the buyers. S-17 23. Income Per Common Share The method of calculating net income per share for the Steel Stock, the Marathon Stock and, prior to November 1, 1997, the Delhi Stock reflects the USX Board of Directors' intent that the separately reported earnings and surplus of the U. S. Steel Group, the Marathon Group and the Delhi Group, as determined consistent with the USX Certificate of Incorporation, are available for payment of dividends to the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. Basic net income per share is calculated by adjusting net income for dividend requirements of preferred stock and, in 1997, the noncash credit on exchange of preferred stock and is based on the weighted average number of common shares outstanding. Diluted net income per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options, provided in each case, the effect is not antidilutive.
1998 1997 1996 ----------------- ---------------- ---------------- Basic Diluted Basic Diluted Basic Diluted -------- ------- -------- ------- -------- -------- Computation of Income Per Share ------------------------------- Net income (millions): Income before extraordinary loss $ 364 $ 364 $ 452 $ 452 $ 275 $ 275 Dividends on preferred stock (9) -- (13) -- (22) (22) Noncash credit from exchange of preferred stock -- -- 10 -- -- -- Extraordinary loss -- -- -- -- (2) (2) ------- ------- ------- ------- ------- ------- Net income applicable to Steel Stock 355 364 449 452 251 251 Effect of dilutive securities: Trust preferred securities -- 8 -- 6 -- -- Convertible debentures -- -- -- 2 -- 3 ------- ------- ------- ------- ------- ------- Net income assuming conversions $ 355 $ 372 $ 449 $ 460 $ 251 $ 254 ======= ======= ======= ======= ======= ======= Shares of common stock outstanding (thousands): Average number of common shares outstanding 87,508 87,508 85,672 85,672 84,025 84,025 Effect of dilutive securities: Trust preferred securities -- 4,256 -- 2,660 -- -- Preferred stock -- 3,143 -- 4,811 -- -- Convertible debentures -- -- -- 1,025 -- 1,925 Stock options -- 36 -- 35 -- 12 ------- ------- ------- ------- ------- ------- Average common shares and dilutive effect 87,508 94,943 85,672 94,203 84,025 85,962 ======= ======= ======= ======= ======= ======= Per share: Income before extraordinary loss $ 4.05 $ 3.92 $ 5.24 $ 4.88 $ 3.00 $ 2.97 Extraordinary loss -- -- -- -- .02 .02 ------- ------- ------- ------- ------- ------- Net income $ 4.05 $ 3.92 $ 5.24 $ 4.88 $ 2.98 $ 2.95 ======= ======= ======= ======= ======= =======
24. Stock-Based Compensation Plans and Stockholder Rights Plan USX Stock-Based Compensation Plans and Stockholder Rights Plan are discussed in Note 21, and Note 23, respectively, to the USX consolidated financial statements. In 1996, USX adopted SFAS No. 123, Accounting for Stock-Based Compensation and elected to continue to follow the accounting provisions of APB No. 25, as discussed in Note 2, to the USX consolidated financial statements. The U. S. Steel Group's actual stock-based compensation expense was $-0- in 1998, $8 million in 1997 and $2 million in 1996. Incremental compensation expense, as determined under SFAS No. 123, was not material ($.02 or less per share for all years presented). Therefore, pro forma net income and earnings per share data have been omitted. S-18 25. Derivative Instruments The U. S. Steel Group uses derivative instruments, such as commodity swaps, to manage exposure to price fluctuations relevant to the cost of natural gas, refined products and nonferrous metals used in steel operations. The U. S. Steel Group remains at risk for possible changes in the market value of the derivative instrument; however, such risk should be mitigated by price changes in the underlying hedged item. The U. S. Steel Group is also exposed to credit risk in the event of nonperformance by counterparties. The credit worthiness of counterparties is subject to continuing review, including the use of master netting agreements to the extent practical, and full performance is anticipated. The following table sets forth quantitative information by class of derivative instrument:
Fair Carrying Recorded Value Amount Deferred Aggregate Assets Assets Gain or Contract (In millions) (Liabilities)/(a)/ (Liabilities) (Loss) Values /(b)/ December 31, 1998: OTC commodity swaps/(c)/ $(7) $(7) $(7) $ 54 December 31, 1997: OTC commodity swaps $(1) $(1) $(1) $ 20 ---- ---- ---- ------- Forward exchange contract/(d)/: receivable $ 1 $ 1 $-- $ 7
/(a)/ The fair value amounts are based on exchange-traded index prices and dealer quotes. /(b)/ Contract or notional amounts do not quantify risk exposure, but are used in the calculation of cash settlements under the contracts. /(c)/ The OTC swap arrangements vary in duration with certain contracts extending into 2000. /(d)/ The forward exchange contract matured in 1998. 26. Fair Value of Financial Instruments Fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. The following table summarizes financial instruments, excluding derivative financial instruments disclosed in Note 25, by individual balance sheet account. As described in Note 4, the U. S. Steel Group's specifically attributed financial instruments and the U. S. Steel Group's portion of USX's financial instruments attributed to all groups are as follows:
1998 1997 Fair Carrying Fair Carrying (In millions) December 31 Value Amount Value Amount Financial assets: Cash and cash equivalents $ 9 $ 9 $ 18 $ 18 Receivables 392 392 588 588 Investments and long-term receivables 120 120 131 131 ------ ------ ------ -------- Total financial assets $ 521 $ 521 $ 737 $ 737 Financial liabilities: Notes payable $ 13 $ 13 $ 13 $ 13 Accounts payable 501 501 687 687 Accrued interest 10 10 11 11 Long-term debt (including amounts due within one year) 406 381 448 412 Preferred stock of subsidiary and trust preferred securities 231 248 248 248 ------ ------ ------ -------- Total financial liabilities $1,161 $1,153 $1,407 $1,371
Fair value of financial instruments classified as current assets or liabilities approximates carrying value due to the short- term maturity of the instruments. Fair value of investments and long-term receivables was based on discounted cash flows or other specific instrument analysis. Fair value of preferred stock of subsidiary and trust preferred securities was based on market prices. Fair value of long-term debt instruments was based on market prices where available or current borrowing rates available for financings with similar terms and maturities. The U. S. Steel Group's unrecognized financial instruments consist of receivables sold and financial guarantees. It is not practicable to estimate the fair value of these forms of financial instrument obligations because there are no quoted market prices for transactions which are similar in nature. For details relating to sales of receivables see Note 22, and for details relating to financial guarantees see Note 27. S-19 27. Contingencies and Commitments USX is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments relating to the U. S. Steel Group involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the U. S. Steel Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the U. S. Steel Group. Environmental matters -- The U. S. Steel Group is subject to federal, state, and local laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. Accrued liabilities for remediation totaled $97 million and $106 million at December 31, 1998 and 1997, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. For a number of years, the U. S. Steel Group has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In 1998 and 1997, such capital expenditures totaled $49 million and $43 million, respectively. The U. S. Steel Group anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. Guarantees -- Guarantees by USX of the liabilities of affiliated entities of the U. S. Steel Group totaled $81 million at December 31, 1998, and $50 million at December 31, 1997. In the event that any defaults of guaranteed liabilities occur, USX has access to its interest in the assets of the affiliates to reduce potential U. S. Steel Group losses resulting from these guarantees. As of December 31, 1998, the largest guarantee for a single affiliate was $53 million. Commitments -- At December 31, 1998 and 1997, the U. S. Steel Group's contract commitments to acquire property, plant and equipment totaled $188 million and $156 million, respectively. USX entered into a 15-year take-or-pay arrangement in 1993, which requires the U. S. Steel Group to accept pulverized coal each month or pay a minimum monthly charge of approximately $1.3 million. Charges for deliveries of pulverized coal totaled $23 million in 1998 and $24 million in 1997. If USX elects to terminate the contract early, a maximum termination payment of $108 million, which declines over the duration of the agreement, may be required. Other -- On August 1, 1999, U. S. Steel, along with several major steel competitors, faces the expiration of the labor agreement with the United Steelworkers of America. U. S. Steel's ability to negotiate an acceptable labor contract is essential to its ongoing operations. Any labor interruptions could have an adverse effect on operations, financial results and cash flow. S-20 Selected Quarterly Financial Data (Unaudited)
1998 1997 (In millions, except per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. Revenues $1,357 $1,497 $1,733 $1,696 $ 1,838 $ 1,735 $ 1,737 $1,631 Income from operations 95 105 217 162 252 197 193 131 Net income 76 65 136 87 152 116 97 87 Steel Stock data: - --------------------------- Net income applicable to Steel Stock $ 74 $ 63 $ 133 $ 85 $ 149 $ 114 $ 105 $ 81 -- Per share: basic .83 .72 1.53 .98 1.74 1.32 1.23 .96 diluted .81 .71 1.46 .95 1.64 1.25 1.06 .93 Dividends paid per share .25 .25 .25 .25 .25 .25 .25 .25 Price range of Steel Stock/(a)/: -- Low 21-5/8 20- 7/16 31 28-7/16 26-7/8 34-3/16 25-3/8 26-3/8 -- High 27-3/4 33-1/2 43-1/16 42-1/8 36-15/16 40-3/4 35-5/8 33-3/8
/(a)/ Composite tape. S-21 Principal Unconsolidated Affiliates (Unaudited)
December 31, 1998 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 RTI International Metals, Inc./(a)/ United States 26% Titanium & Specialty Metals Transtar, Inc. United States 46% Transportation USS/Kobe Steel Company United States 50% Steel Products USS-POSCO Industries United States 50% Steel Processing VSZ U. S. Steel, s. r.o. Slovakia 50% Tin Mill Products Worthington Specialty Processing United States 50% Steel Processing
/(a)/ Formerly RMI Titanium Company. Supplementary Information on Mineral Reserves (Unaudited) See the USX consolidated financial statements for Supplementary Information on Mineral Reserves relating to the U. S. Steel Group, page U-30. S-22 Five-Year Operating Summary
(Thousands of net tons, unless otherwise noted) 1998 1997 1996 1995 1994 Raw Steel Production Gary, IN 6,468 7,428 6,840 7,163 6,768 Mon Valley, PA 2,594 2,561 2,746 2,740 2,669 Fairfield, AL 2,152 2,361 1,862 2,260 2,240 ------ ------ ------ ------ ------ Total 11,214 12,350 11,448 12,163 11,677 Raw Steel Capability Continuous cast 12,800 12,800 12,800 12,500 11,990 Total production as % of total capability 87.6 96.5 89.4 97.3 97.4 Hot Metal Production 9,743 10,591 9,716 10,521 10,328 Coke Production/(a)/ 4,835 5,757 6,777 6,770 6,777 Iron Ore Pellets -- Minntac, MN Shipments 15,446 16,319 14,962 15,218 16,174 Coal Production 8,150 7,528 7,283 7,509 7,424 Coal Shipments 7,670 7,811 7,117 7,502 7,698 Steel Shipments by Product Sheet and semi-finished steel products 7,608 8,170 8,677 8,721 7,988 Tubular, plate and tin mill products 3,078 3,473 2,695 2,657 2,580 ------ ------ ------ ------ ------ Total 10,686 11,643 11,372 11,378 10,568 Total as % of domestic steel industry 10.3 10.9 11.3 11.7 11.1 Steel Shipments by Market Steel service centers 2,563 2,746 2,831 2,564 2,780 Transportation 1,785 1,758 1,721 1,636 1,952 Further conversion: Joint ventures 1,473 1,568 1,542 1,332 1,308 Trade customers 1,140 1,378 1,227 1,084 1,058 Containers 794 856 874 857 962 Construction 987 994 865 671 722 Oil, gas and petrochemicals 509 810 746 748 367 Export 382 453 493 1,515 355 All other 1,053 1,080 1,073 971 1,064 ------ ------ ------ ------ ------ Total 10,686 11,643 11,372 11,378 10,568
/(a)/ The reduction in coke production in 1997 and 1998 reflected U. S. Steel's entry into a strategic partnership with two limited partners on June 1, 1997, to acquire an interest in three coke batteries at its Clairton (Pa.) Works. S-23 Five-Year Financial Summary
(Dollars in millions, except as noted) 1998 1997 1996 1995 1994 Revenues Sales by product: Sheet and semi-finished steel products $ 3,501 $ 3,820 $ 3,677 $ 3,623 $ 3,335 Tubular, plate and tin mill products 1,513 1,754 1,635 1,677 1,518 Raw materials (coal, coke and iron ore) 591 671 757 731 754 Other/(a)/ 578 570 466 425 463 Income from affiliates 46 69 66 80 59 Gain on disposal of assets 54 57 16 21 12 Gain on affiliate stock offering -- -- 53 -- -- ------- ------- ------- ------- --------- Total revenues $ 6,283 $ 6,941 $ 6,670 $ 6,557 $ 6,141 Income From Operations Segment income for U. S. Steel operations $ 330 $ 618 $ 248 $ 472 $ 277 Items not allocated to segment: Gain on affiliate stock offering -- -- 53 -- -- Administration expenses (24) (33) (28) (43) (36) Pension credits 373 313 330 294 287 Costs of former businesses (100) (125) (120) (141) (140) ------- ------- ------- ------- --------- Total income from operations 579 773 483 582 388 Net interest and other financial costs 42 87 116 129 140 Provision for income taxes 173 234 92 150 47 Income Before Extraordinary Loss $ 364 $ 452 $ 275 $ 303 $ 201 Per common share -- basic (in dollars) 4.05 5.24 3.00 3.53 2.35 -- diluted (in dollars) 3.92 4.88 2.97 3.43 2.33 Net Income $ 364 $ 452 $ 273 $ 301 $ 201 Per common share -- basic (in dollars) 4.05 5.24 2.98 3.51 2.35 -- diluted (in dollars) 3.92 4.88 2.95 3.41 2.33 Pension Costs Included in U. S. Steel Operations $ 187 $ 169 $ 172 $ 164 $ 163 Balance Sheet Position at year-end Current assets $ 1,275 $ 1,531 $ 1,428 $ 1,444 $ 1,780 Net property, plant and equipment 2,500 2,496 2,551 2,512 2,536 Total assets 6,693 6,694 6,580 6,521 6,480 Short-term debt 25 67 91 101 21 Other current liabilities 991 1,267 1,208 1,418 1,246 Long-term debt 464 456 1,014 923 1,432 Employee benefits 2,315 2,338 2,430 2,424 2,496 Trust preferred securities and preferred stock of subsidiary 248 248 64 64 64 Common stockholders' equity 2,090 1,779 1,559 1,337 913 Per share (in dollars) 23.66 20.56 18.37 16.10 12.01 Cash Flow Data Net cash from operating activities $ 372 $ 470 $ 86 $ 587 $ 78 Capital expenditures 310 261 337 324 248 Disposal of assets 21 420 161 67 19 Dividends paid 96 96 104 93 98 Employee Data Total employment costs $ 1,305 $ 1,417 $ 1,372 $ 1,381 $ 1,402 Average employment cost (dollars per hour) 30.42 31.56 30.35 31.24 31.15 Average number of employees 20,267 20,683 20,831 20,845 21,310 Number of pensioners at year-end 92,051 93,952 96,510 99,062 101,732 Stockholder Data at year-end Number of common shares outstanding (in millions) 88.3 86.6 84.9 83.0 76.0 Registered shareholders (in thousands) 60.2 65.1 71.0 76.7 81.2 Market price of common stock $23.000 $31.250 $31.375 $30.750 $ 35.500
/(a)/ Includes revenue from the sale of steel production by- products, engineering and consulting services, real estate development and resource management. 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/Kobe Steel Company ("USS/Kobe"), USS-POSCO Industries ("USS-POSCO"), PRO-TEC Coating Company ("PRO-TEC"), Transtar, Inc. ("Transtar"), Clairton 1314B Partnership, VSZ U. S. Steel, s. r.o. and RTI International Metals, Inc. ("RTI"). Management's Discussion and Analysis should be read in conjunction with the U. S. Steel Group's Financial Statements and Notes to Financial Statements. In 1998, segment income for U. S. Steel operations decreased primarily due to lower average steel product prices, lower shipment volumes, and less efficient operating levels, resulting from an increase in imports and weak tubular markets. Certain sections of Management's Discussion and Analysis include forward-looking statements concerning trends or events potentially affecting the businesses of the U. S. Steel Group. These statements typically contain words such as "anticipates," "believes," "estimates," "expects" or similar words indicating that future outcomes are not known with certainty and subject to risk factors that could cause these outcomes to differ significantly from those projected. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in forward-looking statements. For additional risk factors affecting the businesses of the U. S. Steel Group, see Supplementary Data-- Disclosures About Forward-Looking Information in USX Form 10-K. Management's Discussion and Analysis of Income Revenues for each of the last three years are summarized in the following table, which is covered by the report of independent accountants.
(Dollars in millions) 1998 1997 1996 Sales by product: Sheet and semi-finished steel products $3,501 $3,820 $3,677 Tubular, plate, and tin mill products 1,513 1,754 1,635 Raw materials (coal, coke and iron ore) 591 671 757 Other/(a)/ 578 570 466 Income from affiliates 46 69 66 Gain on disposal of assets 54 57 16 Gain on affiliate stock offering/(b)/ -- -- 53 ------ ------ ------ Total revenues $6,283 $6,941 $6,670
/(a)/Includes revenue from the sale of steel production by- products, engineering and consulting services, real estate development and resource management. /(b)/For further details, see Note 5 to the U. S. Steel Group Financial Statements. Total revenues decreased by $658 million in 1998 from 1997 primarily due to lower average realized prices, lower steel shipment volumes, and lower income from affiliates. Total revenues increased by $271 million in 1997 from 1996 primarily due to higher average steel product prices and higher shipment volumes. S-25 Management's Discussion and Analysis of Income CONTINUED Income from operations for the U. S. Steel Group for the last three years was:
(Dollars in millions) 1998 1997 1996 Segment income for U. S. Steel operations/(a)/ $ 330 $ 618 $ 248 Items not allocated to segment: Pension credits 373 313 330 Administrative expenses (24) (33) (28) Costs related to former business activities/(b)/ (100) (125) (120) Gain on affiliate stock offering/(c)/ -- -- 53 ----- ----- ----- Total income from operations $ 579 $ 773 $ 483
/(a)/Includes income from the production and sale of steel mill products, coke and taconite pellets; the management of mineral resources; domestic coal mining; real estate development; and engineering and consulting services. /(b)/Includes the portion of postretirement benefit costs and certain other expenses principally attributable to former business units of the U. S. Steel Group. Results in 1997 included charges of $9 million related to environmental accruals and the adoption of SOP 96-1. /(c)/For further details, see Note 5 to the U. S. Steel Group Financial Statements. Segment income for U. S. Steel operations Segment income for U. S. Steel operations, which decreased $288 million in 1998 from 1997, included a net favorable $30 million for an insurance litigation settlement pertaining to the 1995 Gary (Ind.) Works No. 8 blast furnace explosion and charges of $10 million related to a voluntary workforce reduction plan. Results in 1997 included a benefit of $40 million in insurance settlement payments related to the 1996 hearth breakout at Gary Works No. 13 blast furnace and a $15 million gain on the sale of the plate mill at U. S. Steel's former Texas Works. In addition to the effects of these items, the decrease in segment income in 1998 for U. S. Steel operations was primarily due to lower average steel prices, lower shipments, less efficient operating levels, the cost effects of the 10 day outage at Gary Works No. 13 blast furnace following a tap hole failure, and lower income from affiliates. These unfavorable items were partially offset by lower 1998 accruals for profit sharing. The increase in imports and weak tubular markets negatively affected steel shipment levels, steel product prices and operating levels in 1998. U. S. Steel shipments declined 8% in 1998 compared to 1997. In 1998, raw steel production was negatively affected by a planned reline at Gary Works No. 6 blast furnace, an unplanned blast furnace outage at the Gary Works No. 13 blast furnace, and the idling of certain facilities to control inventory as a result of the increase in imports. In 1998, raw steel capability utilization averaged 87.6%, compared to 96.5% in 1997. Segment income for U. S. Steel operations increased $370 million in 1997 compared to 1996. Results in 1996 included $39 million of charges related to repair of the Gary Works No. 13 blast furnace and $13 million of charges related to a voluntary workforce reduction at the Fairless (Pa.) Works. In addition to the effects of these items, the increase in 1997 was primarily due to higher steel shipments, higher average realized steel prices, and improved operating efficiencies, including the full year availability of the Gary Works No. 13 blast furnace. These improvements were partially offset by higher 1997 accruals for profit sharing. S-26 Management's Discussion and Analysis of Income CONTINUED The Gary Works No. 13 blast furnace, which represents about half of Gary Works iron producing capacity and roughly one-fourth of U. S. Steel's iron capacity, was idled on April 2, 1996 due to a hearth breakout. In addition to direct repair costs, 1996 operating results were adversely affected by production inefficiencies at Gary, as well as at other U. S. Steel plants, reduced shipments and higher costs for purchased iron and semifinished steel. The total effect of this unplanned outage on 1996 segment income is estimated to have been more than $100 million. USX maintained property damage and business interruption insurance coverages for the No. 13 blast furnace hearth breakout and the 1995 Gary Works No. 8 blast furnace explosion, subject to a $50 million deductible per occurrence for recoverable items. In 1998, USX and its insurance companies settled the Gary Works No. 8 blast furnace loss for approximately $30 million (net of charges and reserves) in excess of the deductible. In 1997, USX and its insurance companies settled the Gary Works No. 13 blast furnace loss for $40 million in excess of the deductible. Segment income for U. S. Steel operations included pension costs (which are primarily noncash) allocated to the ongoing operations of U. S. Steel of $187 million, $169 million, and $172 million in 1998, 1997 and 1996, respectively. Pension costs in 1998 included $10 million for termination benefits associated to a voluntary early retirement program, the settlements for which will principally occur in the first half of 1999. Items not allocated to segment Pension credits associated with pension plan assets and liabilities allocated to pre-1987 retirees and former businesses are not included in segment income for U. S. Steel operations. These pension credits, which are primarily noncash, totaled $373 million in 1998, compared to $313 million and $330 million in 1997 and 1996, respectively. Pension credits, combined with pension costs included in segment income for U. S. Steel operations, resulted in net pension credits of $186 million in 1998, $144 million in 1997 and $158 million in 1996. Net pension credits are expected to be approximately $205 million in 1999. Future net pension credits can be volatile dependent upon the future marketplace performance of plan assets, changes in actuarial assumptions regarding such factors as a selection of a discount rate and rate of return on assets, changes in the amortization levels of transition amounts or prior period service costs, plan amendments affecting benefit payout levels and profile changes in the beneficiary populations being valued. Changes in any of these factors could cause net pension credits to change. To the extent net pension credits decline in the future, income from operations would be adversely affected. For additional information on pensions, see Note 12 to the U. S. Steel Group Financial Statements. Net interest and other financial costs for each of the last three years are summarized in the following table:
(Dollars in millions) 1998 1997 1996 Net interest and other financial costs $ 42 $ 87 $ 116 Less: Favorable (unfavorable) adjustment to carrying value of Indexed Debt/(a)/ 44 10 (6) ----- ----- ----- Net interest and other financial costs adjusted to exclude above item $ 86 $ 97 $ 110
/(a)/In December 1996, USX issued $117 million of 6-3/4% Exchangeable Notes Due February 1, 2000 ("Indexed Debt") indexed to the price of RTI common stock. At maturity, USX must exchange these notes for shares of RTI common stock, or redeem the notes for the equivalent amount of cash. The carrying value of Indexed Debt is adjusted quarterly to settlement value, based on changes in the value of RTI common stock. Any resulting adjustment is charged or credited to income and included in interest and other financial costs. USX's 26% interest in RTI continues to be accounted for under the equity method. S-27 Management's Discussion and Analysis of Income CONTINUED Adjusted net interest and other financial costs decreased by $11 million in 1998 as compared with 1997, and by $13 million in 1997 as compared with 1996, due primarily to lower average debt levels. The provision for estimated income taxes in 1998 decreased compared to 1997 due to a decline in income from operations, and a $9 million favorable foreign tax adjustment in 1998 as a result of a favorable resolution of foreign tax litigation. The provision for estimated income taxes in 1997 increased compared to 1996 due to improved income from operations, a reduction in estimated tax credits other than foreign tax credits (primarily nonconventional source fuel credits) and an increase in estimated state income tax expense. A significant portion of the reduction in the nonconventional source fuel credits resulted from U. S. Steel Group's entry into a strategic partnership with two limited partners to acquire an interest in three coke batteries at its Clairton (Pa.) Works. For further discussion on income taxes, see Note 15 to the U. S. Steel Group Financial Statements. The extraordinary loss on extinguishment of debt of $2 million in 1996 represents the portion of the loss on early extinguishment of USX debt attributed to the U. S. Steel Group. For additional information, see Note 6 to the U. S. Steel Group Financial Statements. Net income in 1998 was $364 million, compared with net income of $452 million in 1997 and net income of $273 million in 1996. Net income decreased $88 million in 1998 from 1997, compared with a increase of $179 million in 1997 from 1996. The changes in net income primarily reflect the factors discussed above. Noncash credit from exchange of preferred stock totaled $10 million in 1997. On May 16, 1997, USX exchanged approximately 3.9 million 6.75% Convertible Quarterly Income Preferred Securities ("Trust Preferred Securities") of USX Capital Trust I, for an equivalent number of shares of its outstanding 6.50% Cumulative Convertible Preferred Stock ("6.50% Preferred Stock"). The noncash credit from exchange of preferred stock represents the difference between the carrying value of the 6.50% Preferred Stock ($192 million) and the fair value of the Trust Preferred Securities of USX Capital Trust I ($182 million), at the date of the exchange. For additional discussion on the exchange, see Note 19 to the U. S. Steel Group Financial Statements. Management's Discussion and Analysis of Financial Condition, Cash Flows and Liquidity Current assets at year-end 1998 decreased $256 million from year-end 1997 primarily due to lower trade receivables (which were impacted by a decline in revenues) and lower deferred income taxes. Current liabilities in 1998 decreased $318 million from 1997 primarily due to decreased accounts payable, payroll and benefits payable, and accrued taxes, which were impacted by a decline in revenues and income. The decline in income resulted in lower profit sharing accruals in 1998. Total long-term debt and notes payable at December 31, 1998 of $489 million was $34 million lower than year-end 1997. Total long- term debt and notes payable included favorable adjustments to carrying value of Indexed Debt of $44 million and $10 million in 1998 and 1997, respectively. Excluding these adjustments, total debt did not change substantially in 1998. Virtually all of the debt is a direct obligation of, or is guaranteed by, USX. S-28 Management's Discussion and Analysis of Income CONTINUED Net cash provided from operating activities in 1998 was $372 million compared with $470 million in 1997. The 1998 period included proceeds of $38 million for the insurance litigation settlement pertaining to the 1995 Gary Works No. 8 blast furnace explosion and the payment of $30 million for the repurchase of sold accounts receivable. The 1997 period included payments of $80 million in elective funding of retiree life insurance of union and nonunion participants, $70 million to the United Steelworkers of America ("USWA") Voluntary Employee Benefit Association Trust (VEBA) ($40 million represented prefunding for years 1998 and 1999), $49 million to fund the U. S. Steel Group's principal pension plan for the 1996 plan year and receipts of $40 million in insurance recoveries related to the 1996 Gary Works No. 13 hearth breakout. Excluding these items, net cash provided from operating activities decreased $265 million in 1998 due mainly to decreased profitability and unfavorable working capital changes. The U. S. Steel Group's net cash provided from operating activities in 1996 reflects payment of $59 million to the Internal Revenue Service for certain agreed and unagreed adjustments relating to the tax year 1990, and a payment of $28 million related to settlement of the Pickering litigation. Excluding these items, net cash provided from operating activities increased $456 million in 1997 due mainly to increased profitability and favorable working capital changes. Capital expenditures in 1998 included a reline of the Gary Works No. 6 blast furnace, an upgrade to the galvanizing line at Fairless Works, replacement of coke battery thruwalls at Gary Works, conversion of the Fairfield pipemill to use round instead of square blooms and additional environmental expenditures primarily at Fairfield Works and Gary Works. Capital expenditures in 1997 included a blast furnace reline at Mon Valley Works, a new heat treat line for plates at Gary Works and additional environmental expenditures primarily at Gary Works. Capital expenditures in 1996 included a blast furnace reline and new galvanizing line at Fairfield Works, environmental expenditures primarily at Gary Works, and certain spending related to the Gary No. 13 blast furnace hearth breakout. Contract commitments for capital expenditures at year-end 1998 were $188 million, compared with $156 million at year-end 1997. Capital expenditures for 1999 are expected to be approximately $290 million including a new 64" pickle line and upgrades to the cold rolling mill at Mon Valley Works, the upgrade of the hot strip mill coilers and replacement of coke battery thruwalls at Gary Works, the basic oxygen furnace emissions project at Fairfield Works, the new customer service center in Detroit to support the automotive business, and additional environmental expenditures, primarily at Gary Works. The preceding statement concerning expected 1999 capital expenditures is a forward-looking statement. This forward-looking statement is based on assumptions, which can be affected by (among other things) levels of cash flow from operations, unforeseen hazards such as weather conditions, explosions or fires, and delays in obtaining government or partner approval, which could delay the timing of completion of particular capital projects. Accordingly, actual results may differ materially from current expectations in the forward-looking statement. Net cash used in investments in affiliates in 1998 of $73 million mainly reflects funding for entry into a joint venture in Slovakia with VSZ a.s. ("VSZ"). In February 1998, this 50-50 joint venture, doing business as VSZ U. S. Steel, s. r.o., took over ownership and operation of an existing tin mill facility at VSZ's Ocel plant in Kosice, with annual production capability of 140,000 metric tons. Net cash used in investments in affiliates in 1997 of $26 million included funding of equity affiliate capital projects (mainly the construction of a second galvanizing line at PRO-TEC), partially offset by dividends from equity affiliates. Investments in affiliates in 1996 used net cash of $1 million. S-29 Management's Discussion and Analysis of Income CONTINUED Cash from disposal of assets totaled $21 million in 1998, compared with $420 million in 1997 and $161 million in 1996. The 1997 proceeds included $361 million from U. S. Steel's entry into a strategic partnership with two limited partners to acquire an interest in three coke batteries at its Clairton Works. The 1996 proceeds reflected the sale of U. S. Steel Group's investment in National-Oilwell and a portion of its investment in RTI common stock. In 1996, an aggregate of 6.9 million shares of RTI common stock was sold in a public offering. Included in the offering were 2.3 million shares sold by USX for net proceeds of $40 million. USX currently owns approximately 26% of the outstanding common stock of RTI. For additional information, see Note 5 to the U. S. Steel Group Financial Statements. Financial obligations increased by $9 million in 1998 compared with a decrease of $567 million in 1997, and an increase of $77 million in 1996. Financial obligations consist of the U. S. Steel Group's portion of USX debt and preferred stock of a subsidiary attributed to both groups as well as debt and financing agreements specifically attributed to the U. S. Steel Group. The decrease in 1997 primarily reflected the net effects of cash from operating activities, asset sales and capital expenditures. For a discussion of USX financing activities attributed to both groups, see Management's Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and Liquidity. Pension Activity USX contributed $49 million in 1997 to fund the U. S. Steel Group's principal pension plan for the 1996 plan year. Derivative Instruments See Quantitative and Qualitative Disclosures About Market Risk for discussion of derivative instruments and associated market risk for U. S. Steel Group. Liquidity For discussion of USX's liquidity and capital resources, see Management's Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and Liquidity. Management's Discussion and Analysis of Environmental Matters, Litigation and Contingencies The U. S. Steel Group has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. In recent years, these expenditures have been mainly for process changes in order to meet Clean Air Act obligations, although ongoing compliance costs have also been significant. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the U. S. Steel Group's products and services, operating results will be adversely affected. The U. S. Steel Group believes that all of its domestic competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and the specific products and services it provides. To the extent that competitors are not required to undertake equivalent costs in their operations, the competitive position of the U. S. Steel Group could be adversely affected. S-30 Management's Discussion and Analysis of Income CONTINUED The U. S. Steel Group's environmental expenditures for the last three years were/(a)/:
(Dollars in millions) 1998 1997 1996 Capital $ 49 $ 43 $ 90 Compliance Operating & maintenance 198 196 199 Remediation/(b)/ 19 29 33 ----- ----- ----- Total U. S. Steel Group $ 266 $ 268 $ 322
/(a)/Based on previously established U. S. Department of Commerce survey guidelines. /(b)/These amounts include spending charged against such reserves, net of recoveries where permissible, but do not include noncash provisions recorded for environmental remediation. The U. S. Steel Group's environmental capital expenditures accounted for 16%, 16% and 27% of total capital expenditures in 1998, 1997 and 1996, respectively. Compliance expenditures represented 4% of the U. S. Steel Group's total costs and expenses in 1998, 1997 and 1996. Remediation spending during 1996 to 1998 was mainly related to remediation activities at former and present operating locations. These projects include continuing remediation at an in situ uranium mining operation and former coke-making facilities and the closure of permitted hazardous and non-hazardous waste landfills. The Resource Conservation and Recovery Act ("RCRA") establishes standards for the management of solid and hazardous wastes. Besides affecting current waste disposal practices, RCRA also addresses the environmental effects of certain past waste disposal operations, the recycling of wastes and the regulation of storage tanks. The U. S. Steel Group is in the study phase of RCRA corrective action programs at its Fairless Works and its former Geneva Works. A RCRA corrective action program has been initiated at its Gary Works and its Fairfield Works. Until the studies are completed at these facilities, USX is unable to estimate the cost of remediation activities, if any, that will be required. USX has been notified that it is a potential responsible party ("PRP") at 29 waste sites related to the U. S. Steel Group under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of December 31, 1998. In addition, there are 17 sites related to the U. S. Steel Group where USX has received information requests or other indications that USX may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability or make any judgment as to the amount thereof. There are also 34 additional sites related to the U. S. Steel Group where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. At many of these sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. The U. S. Steel Group accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. See Note 27 to the U. S. Steel Group Financial Statements. In 1998, USX entered into a consent decree with the Environmental Protection Agency ("EPA") which resolved alleged violations of the Clean Water Act National Pollution Discharge Elimination System ("NPDES") permit at Gary Works and provides for a sediment remediation project for a section S-31 Management's Discussion and Analysis of Income CONTINUED of the Grand Calumet River that runs through Gary Works. Contemporaneously, USX entered into a consent decree with the public trustees which resolves potential liability for natural resource damages on the same section of the Grand Calumet River. USX has agreed to pay civil penalties of $2.9 million for the alleged water act violations and $0.5 million in natural resource damages assessment costs, which will be paid in 1999. In addition, USX will pay the EPA $1 million at the end of the remediation project for future monitoring costs. During the negotiations leading up to the settlement with EPA, capital improvements were made to upgrade plant systems to comply with the NPDES requirements. The sediment remediation project is an approved final interim measure under the corrective action program for Gary Works and is expected to cost approximately $30 million over the next six years. Estimated remediation and monitoring costs for this project have been accrued. In 1997, USX adopted American Institute of Certified Public Accountants Statement of Position No. 96-1 -- "Environmental Remediation Liabilities", which resulted in a $20 million charge. For additional information, see Note 3 to the U. S. Steel Group Financial Statements. New or expanded environmental requirements, which could increase the U. S. Steel Group's environmental costs, may arise in the future. USX intends to comply with all legal requirements regarding the environment, but since many of them are not fixed or presently determinable (even under existing legislation) and may be affected by future legislation, it is not possible to predict accurately the ultimate cost of compliance, including remediation costs which may be incurred and penalties which may be imposed. However, based on presently available information, and existing laws and regulations as currently implemented, the U. S. Steel Group does not anticipate that environmental compliance expenditures (including operating and maintenance and remediation) will materially increase in 1999. The U. S. Steel Group's capital expenditures for environmental are expected to be approximately $32 million in 1999 and are expected to be spent on projects primarily at Gary Works and Fairfield Works. Predictions beyond 1999 can only be broad-based estimates which have varied, and will continue to vary, due to the ongoing evolution of specific regulatory requirements, the possible imposition of more stringent requirements and the availability of new technologies to remediate sites, among other matters. Based upon currently identified projects, the U. S. Steel Group anticipates that environmental capital expenditures will be approximately $28 million in 2000; however, actual expenditures may vary as the number and scope of environmental projects are revised as a result of improved technology or changes in regulatory requirements and could increase if additional projects are identified or additional requirements are imposed. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the U. S. Steel Group involving a variety of matters, including laws and regulations relating to the environment, certain of which are discussed in Note 27 to the U. S. Steel Group Financial Statements. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the U. S. Steel Group Financial Statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the U. S. Steel Group. Management's Discussion and Analysis of Operations Average realized steel prices were 2.1% lower in 1998 versus 1997 due primarily to U. S. Steel realizing lower prices on sheet products. In 1997, average realized steel prices were 2.6% higher versus 1996 due primarily to U. S. Steel realizing higher prices for tubular and sheet products. S-32 Management's Discussion and Analysis of Income CONTINUED Steel shipments were 10.7 million tons in 1998, 11.6 million tons in 1997, and 11.4 million tons in 1996. U. S. Steel Group shipments comprised approximately 10% of the domestic steel market in 1998. In 1998, U. S. Steel shipments were negatively affected by an increase in imports and weak tubular markets. Exports accounted for approximately 4% of U. S. Steel Group shipments in 1998, 1997 and 1996. Raw steel production was 11.2 million tons in 1998, compared with 12.3 million tons in 1997 and 11.4 million tons in 1996. Raw steel production averaged 88% of capability in 1998, compared with 97% of capability in 1997 and 89% of capability in 1996. In 1998, raw steel production was negatively affected by a planned reline at Gary Works No. 6 blast furnace, an unplanned blast furnace outage at the Gary Works No. 13 blast furnace, and the idling of certain facilities as a result of the increase in imports. U. S. Steel Group curtailed its production by keeping the Gary Works No. 6 blast furnace out of service after a scheduled reline was completed in mid-August, 1998, until February, 1999. In addition, raw steel production was cut back at Mon Valley Works and Fairfield Works. In 1996, raw steel production was negatively affected by an unplanned blast furnace outage at the Gary Works No. 13 blast furnace. U. S. Steel's stated annual raw steel production capability was 12.8 million tons in 1998, 1997 and 1996. In addition to cutting back raw steel production in 1998, U. S. Steel suspended one of Minntac's five taconite pellet production lines in Minnesota, idled the Fairfield Works pipe mill for several multiple week periods, and curtailed selected sheet facilities at Fairless Works (the curtailments at Fairless Works represented about 70 percent of operations as of December 31, 1998). On September 30, 1998, U. S. Steel joined with 11 other producers and the USWA to file trade cases against Japan, Russia, and Brazil. Those filings contend that millions of tons of unfairly traded hot rolled carbon sheet products have caused serious injury to the domestic steel industry through rapidly falling prices and lost business. The U. S. International Trade Commission ("ITC"), in its preliminary determination in November 1998, found the domestic steel industry was being threatened with material injury as a result of imports of hot rolled carbon sheet products from these three countries. This preliminary determination of injury is subject to further investigation by the ITC and U.S. Department of Commerce ("Commerce"). On February 12, 1999, Commerce announced preliminary anti-dumping duty margins on hot rolled imports from Japan (ranging from approximately 25% to 67%) and Brazil (ranging from approximately 50% to 71%) and preliminary countervailing duty margins on imports from Brazil (ranging from more than 6% to more than 9%). On February 22, 1999, Commerce announced preliminary anti-dumping duty margins on hot rolled imports from Russia (ranging from approximately 71% to more than 217%). However, Commerce announced at the same time that it had initialed an agreement with Russia to suspend the anti-dumping investigation on hot rolled imports from Russia. This agreement, if approved, allows the annual import of 750,000 metric tons of hot rolled steel product from Russia at a minimum price ranging from $255 to $280 FOB per metric ton. U. S. Steel is opposed to this agreement and is reviewing all available remedies to challenge this agreement. U. S. Steel will pursue the hot rolled import case against Russia to obtain the issuance of final determinations by Commerce and the ITC. The preliminary injury determination and the preliminary anti- dumping and countervailing duty margin determinations are subject to further investigation by the ITC and Commerce. It is presently expected that Commerce will issue its final anti-dumping and countervailing duty margin determinations on April 28, 1999 and the ITC will issue its final injury determination on June 2, 1999. S-33 Management's Discussion and Analysis of Income CONTINUED In addition to announcing the preliminary anti-dumping duty margins on hot rolled imports from Russia and the proposed suspension agreement on those imports, Commerce also announced on February 22, 1999 that it had initialed an agreement with Russia to restrict imports of major steel products, other than hot rolled and cut-to-length plate, from Russia. U. S. Steel is opposed to this agreement. Plate products accounted for 10%, 8% and 9% of U. S. Steel Group shipments in 1998, 1997 and 1996, respectively. On November 5, 1996, two other domestic steel plate producers filed anti-dumping cases with Commerce and the ITC asserting that People's Republic of China, the Russia Federation, Ukraine, and South Africa have engaged in unfair trade practices with respect to the export of carbon cut-to-length plate to the United States. U. S. Steel Group has supported these cases. Commerce issued final affirmative determination of dumping for each country in October 1997, finding substantial dumping margins on cut-to-length steel plate imports from those countries. In December 1997, the ITC voted unanimously that the United States industry producing cut-to-length carbon steel plate was injured due to imports of dumped cut-to-length plate from the four countries. The United States has negotiated suspension agreements that limit imports of cut-to-length carbon steel plate from the four countries to a total of approximately 440,000 tons per year for the next five years, a reduction of about two-thirds from 1996 import levels, and provide for an average 10- 15% increase in import prices to remove the injurious impact of the imports. Any violation or abrogation of the suspension agreements will result in imposition of the dumping duties found by Commerce. On February 16, 1999, U. S. Steel, along with Bethlehem Steel Corporation, IPSCO, Inc., Tuscaloosa Steel Company, and the USWA, filed trade cases against South Korea, France, Italy, Macedonia, India, the Czech Republic, Japan, and Indonesia, contending that dumped and subsidized cut-to-length plate are being imported into the United States from these countries. USX intends to file additional anti-dumping and countervailing duty petitions if unfairly traded imports adversely impact, or threaten to adversely impact, the results of the U. S. Steel Group. For additional information regarding levels of imported steel, see discussion of "Outlook for 1999" below. U. S. Steel Mining Company, LLC ("U. S. Steel Mining") entered into a five year contract with the United Mine Workers of America ("UMWA"), effective January 1, 1998, covering approximately 1,000 employees. This agreement followed that of other major mining companies. The U. S. Steel Group depreciates steel assets by modifying straight-line depreciation based on the level of production. Depreciation charges for 1998, 1997, and 1996 were 93%, 102%, and 94%, respectively, of straight-line depreciation based on production levels for each of the years. See Note 2 to the U. S. Steel Group Financial Statements. Outlook for 1999 U. S. Steel expects that shipment volumes and average steel product prices will continue to be impacted by the effects of high levels of low priced steel imports and growing domestic minimill production capability for flat rolled products. Scrap prices are currently at low levels and provide minimills a cost advantage. In recent years, demand for steel in the United States has been at high levels. Any weakness in the U.S. economy for capital goods or consumer durables could adversely impact U. S. Steel Group's product prices and shipment levels. S-34 Management's Discussion and Analysis of Income CONTINUED On August 1, 1999, U. S. Steel, along with several major steel competitors, faces the expiration of the labor agreement with the USWA. U. S. Steel's ability to negotiate an acceptable labor contract is essential to ongoing operations. Any labor interruptions could have an adverse effect on operations, financial results and cash flow. Steel imports to the United States accounted for an estimated 30%, 24% and 23% of the domestic steel market for the years 1998, 1997 and 1996, respectively. In November 1998, steel imports accounted for an estimated 37% of the domestic steel market. Steel imports of hot rolled and cold rolled steel increased 42% in 1998, compared to 1997. Steel imports of plates increased 75% in 1998, compared to 1997. The preceding statements concerning anticipated steel demand, steel pricing, and shipment levels are forward-looking and are based upon assumptions as to future product prices and mix, and levels of steel production capability, production and shipments. These forward-looking statements can be affected by imports, domestic and international economies, domestic production capacity, and customer demand. In the event these assumptions prove to be inaccurate, actual results may differ significantly from those presently anticipated. Year 2000 Readiness Disclosure A multi-functional Year 2000 task force continues to execute a preparedness plan which addresses readiness requirements for business computer systems, technical infrastructure, end-user computing, third parties, manufacturing, environmental operations, systems products produced and sold, and dedicated R&D test facilities. The U. S. Steel Group is executing a Year 2000 readiness plan which includes: . prioritizing and focusing on those computerized and automated systems and processes critical to the operations in terms of material safety, operational, environmental, quality and financial risk to the company. . allocating and committing appropriate resources to fix the problem. . communicating with, and aggressively pursuing, critical third parties to help ensure the Year 2000 readiness of their products and services through use of mailings, telephone contacts, on-site assessments and the inclusion of Year 2000 readiness language in purchase orders and contracts. . performing rigorous Year 2000 tests of critical systems. . participating in, and exchanging Year 2000 information with industry trade associations, such as the American Iron & Steel Institute, Association of Iron & Steel Engineers and the Steel Industry Systems Association. . engaging qualified outside engineering and information technology consulting firms to assist in the Year 2000 impact assessment and readiness effort. State of Readiness The U. S. Steel Group's progress on achieving Year 2000 readiness is currently on pace with our objectives. Certain systems/processes are to be replaced and/or upgraded with third- party Year 2000 ready products and services. All systems and processes are targeted to be Year 2000 ready, including integration testing, by the end of the third quarter, 1999. This schedule may be impacted by the availability of information and services from third-party suppliers/vendors on the Year 2000 readiness S-35 Management's Discussion and Analysis of Income CONTINUED of their products and services. Generally, efforts in 1999 will be primarily devoted to both Year 2000 systems and integration testing, tracking of the readiness of third parties, developing contingency plans and verifying the state of Year 2000 readiness. The following chart provides the percent of completion for the inventory of systems and processes that may be affected by the year 2000 ("Y2K Inventory"), the analysis performed to determine the Year 2000 date impact on inventoried systems and processes ("Y2K Impact Assessment") and the year 2000 readiness of the U. S. Steel Group`s year 2000 inventory ("Y2K Readiness of Overall Inventory"). The percent of completion for Y2K Readiness of Overall Inventory includes all inventory items not date impacted, those items already Year 2000 ready and those corrected and made Year 2000 ready through the renovation/replacement, testing and implementation activities.
Percent Completed Y2K Y2K Readiness Impact of Y2K Assess- Overall As of January 31, 1999 Inventory ment Inventory Information technology 100% 98% 95% Non-information technology 100% 84% 81%
Third Parties The U. S. Steel Group continues to review its third party (including, but not limited to outside processors, process control systems and hardware suppliers, telecommunication providers, and transportation carriers) relationships to determine those critical to its operations. The majority of contacts have been made with critical third parties to determine if they will be able to provide their product and service to the U. S. Steel Group after the Year 2000. An aggressive follow-up process with those third parties not responding or returning an unacceptable response is underway. Communications with U. S. Steel Group's third parties is an on- going process which includes mailings, telephone contacts and on- site visits. If it is determined that there is a significant risk with the third parties, an effort will be made to work with the third parties to resolve the issue, or a new provider of the same products or services will be investigated and secured. As of December 31, 1998, the U. S. Steel Group has sent out approximately 700 inquiries and received over 600 responses. The Costs to Address Year 2000 Issues The current estimated cost associated with Year 2000 readiness, is approximately $29 million, which includes $16 million in incremental cost. Total costs incurred as of January 31, 1999, were $14 million, including $6 million of incremental costs. As Y2K Impact Assessment nears completion and the renovation planning, readiness implementation and testing evolve, the estimated costs may change. Year 2000 Risks to the Company The most reasonably likely worst case Year 2000 scenario would be the inability of third party suppliers, such as utility providers, telecommunication companies, outside processors, and other critical suppliers, to continue providing their products and services. This could pose the greatest material safety, operational, environmental, quality and/or financial risk to the company. S-36 Management's Discussion and Analysis of Income CONTINUED In addition, the lack of accurate and timely Year 2000 date impact information from suppliers of automation and process control systems and processes is a concern to the U. S. Steel Group. Without timely and quality information from suppliers, specifically on embedded chip technology, schedules for attaining readiness can be impacted and some Year 2000 problems could go undetected during the transition to the year 2000. Contingency Planning General guidelines have been issued to all business units for creating contingency plans to address those critical facets of operations that can cause a material safety, operational, environmental, or financial risk to the company. Representatives of the U. S. Steel Group are working with the Association of Iron & Steel Engineers and the American Iron & Steel Institute to develop contingency planning guidelines to address issues specific to the steel industry. These guidelines are intended to help entities develop specific contingency plans that will cover their associated Year 2000 risks and areas of concern. The U. S. Steel Group currently expects to have contingency plans completed and tested, when practical, by the middle of 1999. This discussion includes forward-looking statements of the U. S. Steel Group's efforts and management's expectations relating to Year 2000 readiness. The Steel Group's ability to achieve Year 2000 readiness and the level of incremental costs associated therewith, could be adversely impacted by, among other things, the availability and cost of programming and testing resources, vendors' ability to install or modify proprietary hardware and software and unanticipated problems identified in the ongoing Year 2000 readiness review. Also, the U. S. Steel Group's ability to mitigate Year 2000 risks could be adversely impacted by the ability to complete, and the effectiveness of, contingency plans. Accounting Standards In March 1998, the American Institute of Certified Public Accountants issued its Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidelines for companies to capitalize or expense costs incurred to develop or obtain internal-use software. Effective January 1, 1999, USX adopted SOP 98-1. The incremental impact on results of operations of adoption of SOP 98-1 is likely to be initially favorable since certain qualifying costs will be capitalized and amortized over future periods. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". This new standard requires recognition of all derivatives as either assets or liabilities at fair value. This new standard may result in additional volatility in both current period earnings and other comprehensive income as a result of recording recognized and unrecognized gains and losses resulting from changes in the fair value of derivative instruments. At adoption this new standard requires a comprehensive review of all outstanding derivative instruments to determine whether or not their use meets the hedge accounting criteria. It is possible that there will be derivative instruments employed in our businesses that do not meet all of the designated hedge criteria and they will be reflected in income on a mark-to-market basis. Based upon the strategies currently used by USX and the level of activity related to forward exchange contracts and commodity-based derivative instruments in recent periods, USX does not anticipate the effect of adoption to have a material impact on either financial position or results of operations for the U. S. Steel Group. USX plans to adopt the standard effective January 1, 2000, as required. S-37 Quantitative and Qualitative Disclosures About Market Risk Management Opinion Concerning Derivative Instruments USX employs a strategic approach of limiting its use of derivative instruments principally to hedging activities, whereby gains and losses are generally offset by price changes in the underlying commodity. Based on this approach, combined with risk assessment procedures and internal controls, management believes that its use of derivative instruments does not expose the U. S. Steel Group to material risk; however, the U. S. Steel Group's use of derivative instruments for hedging activities could materially affect the U. S. Steel Group's results of operations in particular quarterly or annual periods. This is primarily because use of such instruments may limit the company's ability to benefit from favorable price movements. However, management believes that use of these instruments will not have a material adverse effect on financial position or liquidity. For a summary of accounting policies related to derivative instruments, see Note 2 to the U. S. Steel Group Financial Statements. Commodity Price Risk and Related Risks In the normal course of its business, the U. S. Steel Group is exposed to market risk or price fluctuations related to the production and sale of steel products. To a lesser extent, the U. S. Steel Group is exposed to price risk related to the purchase, production or sale of coal and coke and the purchase of natural gas, steel scrap and certain nonferrous metals used as raw materials. The U. S. Steel Group is also exposed to effects of price fluctuations on the value of its raw material and steel product inventories. The U. S. Steel Group's market risk strategy has generally been to obtain competitive prices for its products and services and allow operating results to reflect market price movements dictated by supply and demand. However, the U. S. Steel Group uses derivative commodity instruments (primarily over-the-counter commodity swaps) to manage exposure to fluctuations in the purchase price of natural gas, heating oil and certain nonferrous metals. The use of these instruments has not been significant in relation to the U. S. Steel Group's overall business activity. Sensitivity analyses of the incremental effects on pretax income of hypothetical 10% and 25% decreases in commodity prices for open derivative commodity instruments as of December 31, 1998, are provided in the following table/(a)/:
(Dollars in millions) Incremental Decrease in Pretax Income Assuming a Hypothetical Price Change of/(a)/ Derivative Commodity Instruments 10% 25% Natural gas $2.3 $5.6 Zinc 1.6 3.9 Nickel .1 .2 Tin .1 .2 Heating oil -- .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, 1998. U. S. Steel Group management evaluates its portfolio of derivative commodity instruments on an ongoing basis and adds or revises strategies to reflect anticipated market conditions and changes in risk profiles. Changes to the portfolio subsequent to December 31, 1998, would cause future pretax income effects to differ from those presented in the table. S-38 Quantitative and Qualitative Disclosures About Market Risk CONTINUED While these derivative commodity instruments are generally used to reduce risks from unfavorable commodity price movements, they also may limit the opportunity to benefit from favorable movements. The U. S. Steel Group recorded net pretax hedging losses of $6 million in 1998, compared with net gains of $5 million in 1997, and net gains of $21 million in 1996. These gains and losses were offset by changes in the realized prices of the underlying hedged commodities. For additional quantitative information relating to derivative commodity instruments, including aggregate contract values and fair values, where appropriate, see Note 25 to the U. S. Steel Group Financial Statements. Interest Rate Risk USX is subject to the effects of interest rate fluctuations on certain of its non-derivative financial instruments. A sensitivity analysis of the projected incremental effect of a hypothetical 10% decrease in year-end 1998 interest rates on the fair value of the U. S. Steel Group's specifically attributed non-derivative financial instruments and the U. S. Steel Group's portion of USX's non-derivative financial instruments attributed to both groups, is provided in the following table:
(Dollars in millions) As of December 31, 1998 Incremental Increase in Carrying Fair Fair Non-Derivative Financial Instruments/(a)/ Value/(b)/ Value/(b)/ Value/(c)/ Financial assets: Investments and long-term receivables/(d)/ $ 23 $ 23 $ -- Financial liabilities: Long-term debt (including amounts due within one year)/(e)/ $381 $406 $ 17 Preferred stock of subsidiary/(f)/ 66 66 5 USX obligated mandatorily redeemable convertible preferred securities of a subsidiary trust/(f)/ 182 165 13 ---- ---- ----- Total $629 $637 $ 35
/(a)/ Fair values of cash and cash equivalents, receivables, notes payable, accounts payable and accrued interest, approximate carrying value and are relatively insensitive to changes in interest rates due to the short-term maturity of the instruments. Accordingly, these instruments are excluded from the table. /(b)/ See Note 26 to the U. S. Steel Group Financial Statements. /(c)/ Reflects, by class of financial instrument, the estimated incremental effect of a hypothetical 10% decrease in interest rates at December 31, 1998, on the fair value of non-derivative financial instruments. For financial liabilities, this assumes a 10% decrease in the weighted average yield to maturity of USX's long-term debt at December 31, 1998. /(d)/ For additional information, see Note 16 to the U. S. Steel Group Financial Statements. /(e)/ Fair value was based on market prices where available, or current borrowing rates for financings with similar terms and maturities. For additional information, see Note 11 to the U. S. Steel Group Financial Statements. /(f)/ See Note 25 to the USX Consolidated Financial Statements. At December 31, 1998, USX's portfolio of long-term debt was comprised primarily of fixed-rate instruments. Therefore, the fair value of the portfolio is relatively sensitive to effects of interest rate fluctuations. This sensitivity is illustrated by the $13 million increase in the fair value of long-term debt assuming a hypothetical 10% decrease in interest rates. However, USX's sensitivity to interest rate declines and corresponding increases in the fair value of its debt portfolio would unfavorably affect USX's results and cash flows only to the extent that USX elected to repurchase or otherwise retire all or a portion of its fixed-rate debt portfolio at prices above carrying value. S-39 Quantitative and Qualitative Disclosures About Market Risk CONTINUED Foreign Currency Exchange Rate Risk At December 31, 1998, the U. S. Steel Group had no material exposure to foreign currency exchange rate risk. Equity Price Risk The U. S. Steel Group is subject to equity price risk resulting from USX's issuance in December 1996 of $117 million of 6-3/4% Exchangeable Notes Due February 1, 2000 ("Indexed Debt"). At maturity, USX must exchange the notes for shares of RTI International Metals, Inc. (formerly RMI Titanium Company) ("RTI") common stock, or redeem the notes for the equivalent amount of cash. Each quarter, USX adjusts the carrying value of Indexed Debt to settlement value, based on changes in the value of RTI common stock. Any resulting adjustment is charged or credited to income and included in interest and other financial costs. During 1998, USX recorded a favorable adjustment of $44 million. At year-end 1998, a hypothetical 10% increase in the value of RTI common stock would have resulted in a $7 million unfavorable effect on pretax income. USX holds a 26% interest in RTI which is accounted for under the equity method. At December 31, 1998, USX's investment in RTI common stock had a fair market value of $77 million and USX's carrying value of the Indexed Debt was $69 million. The unfavorable effects on income described above would generally be offset by changes in the market value of USX's investment in RTI. However, under the equity method of accounting, USX cannot recognize in income these changes in the market value until the investment is liquidated. The entire effect of adjustments to the carrying value of Indexed Debt is reflected in the U. S. Steel Group Financial Statements. Safe Harbor The U. S. Steel Group's quantitative and qualitative disclosures about market risk include forward-looking statements with respect to management's opinion about risks associated with the U. S. Steel Group's use of derivative instruments. These statements are based on certain assumptions with respect to market prices and industry supply of and demand for steel products and certain raw materials. To the extent that these assumptions prove to be inaccurate, future outcomes with respect to U. S. Steel Group's hedging programs may differ materially from those discussed in the forward-looking statements. S-40 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the directors of USX required by this item is incorporated by reference to the material appearing under the heading "Election of Directors" in USX's Proxy Statement dated March 8, 1999, for the 1999 Annual Meeting of Stockholders. The executive officers of USX or its subsidiaries and their ages as of February 1, 1999, are as follows:
USX - Corporate Albert E. Ferrara, Jr.... 50 Vice President-Strategic Planning Edward F. Guna........... 50 Vice President & Treasurer Robert M. Hernandez...... 54 Vice Chairman & Chief Financial Officer Kenneth L. Matheny....... 51 Vice President & Comptroller Dan D. Sandman........... 50 General Counsel, Secretary and Senior Vice President-Human Resources & Public Affairs Terrence D. Straub....... 53 Vice President-Governmental Affairs Thomas J. Usher.......... 56 Chairman of the Board of Directors & Chief Executive Officer Charles D. Williams...... 63 Vice President-Investor Relations USX - Marathon Group Ronald G. Becker......... 45 Vice President-Natural Gas & Crude Oil Sales - Marathon Oil Company Victor G. Beghini........ 64 Vice Chairman-Marathon Group and President-Marathon Oil Company Carl P. Giardini......... 63 Executive Vice President-Exploration & Production-Marathon Oil Company Ron S. Keisler........... 52 Senior Vice President-Worldwide Exploration-Marathon Oil Company William F. Madison....... 56 Senior Vice President-Worldwide Production-Marathon Oil Company John T. Mills............ 51 Senior Vice President-Finance & Administration-Marathon Oil Company John V. Parziale......... 58 Senior Vice President-Planning & Technical Resources-Marathon Oil Company William F. Schwind, Jr... 54 General Counsel & Secretary-Marathon Oil Company USX - U. S. Steel Group Charles G. Carson, III... 56 Vice President-Environmental Affairs John J. Connelly......... 52 Vice President-International Business Roy G. Dorrance.......... 53 Executive Vice President-Sheet Products Charles C. Gedeon........ 58 Executive Vice President-Raw Materials & Diversified Businesses Gretchen R. Haggerty..... 43 Vice President-Accounting & Finance Bruce A. Haines.......... 54 Vice President-Technology & Management Services J. Paul Kadlic........... 57 Vice President-Sales Stephan K. Todd.......... 53 General Counsel Thomas W. Sterling, III.. 51 Vice President-Employee Relations Paul J. Wilhelm.......... 56 President-U. S. Steel Group
All of the executive officers have held responsible management or professional positions with USX or its subsidiaries for more than the past five years. 52 Item 11. MANAGEMENT REMUNERATION Information required by this item is incorporated by reference to the material appearing under the heading "Executive Compensation and Other Information" in USX's Proxy Statement dated March 8, 1999, for the 1999 Annual Meeting of Stockholders. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item is incorporated by reference to the material appearing under the headings, "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Directors and Executive Officers" in USX's Proxy Statement dated March 8, 1999, for the 1999 Annual Meeting of Stockholders. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is incorporated by reference to the material appearing under the heading "Transactions" in USX's Proxy Statement dated March 8, 1999, for the 1999 Annual Meeting of Stockholders. 53 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K A. Documents Filed as Part of the Report 1. Financial Statements Financial Statements filed as part of this report are listed on the Index to Financial Statements, Supplementary Data, Management's Discussion and Analysis, and Quantitative and Qualitative Disclosures About Market Risk of USX Consolidated, the Marathon Group and the U. S. Steel Group, immediately preceding pages U-1, M-1 and S-1, respectively. 2. Financial Statement Schedules and Supplementary Data Financial Statement Schedules are omitted because they are not applicable or the required information is contained in the applicable financial statements or notes thereto. Supplementary Data - Summarized Financial Information of Marathon Oil Company is provided on page 60. Disclosures About Forward-Looking Statements are provided beginning on page 61. B. Reports on Form 8-K Form 8-K dated November 5, 1998, reporting under Item 5. Other Events, the announcement of third quarter 1998 earnings and filing the related press releases. Form 8-K dated January 22, 1999, reporting under Item 5. Other Events, the announcement of fourth quarter and 1998 earnings and filing the related press releases. Form 8-K/A dated January 22, 1999, reporting under Item 5. Other Events, the announcement of fourth quarter and 1998 earnings and filing the related press releases in substantially the form as released, which superseded USX Corporation's earlier filing of such announcements. Form 8-K dated January 26, 1999, reporting under Item 5. Other Events, the announcement of the USX- Marathon Group 1999 capital, investment and exploration budget and filing the related press release. Also, under Item 5. Other Events, USX Corporation filed revised calculations of the computation of ratio of earnings to combined fixed charges and preferred stock dividends and the computation of the ratio of earnings to fixed charges for each of the year-to-date periods ended March 31, June 30, and September 30, 1998. Form 8-K dated January 27, 1999, reporting under Item 5. Other Events, an Underwriting Agreement in connection with the issuance of 6.65% Notes Due 2006 pursuant to a shelf registration on Form S- 3, File No. 333-56867. C. Exhibits Exhibit No. 2. Plan of Acquisition, Reorganization, Arrangement Liquidation or Succession Stock Purchase and Sale Agreement.......Incorporated by reference to Exhibit 2 to the USX Form 8-K dated October 22, 1997. 54 3. Articles of Incorporation and By-Laws (a) USX Restated Certificate of Incorporation dated September 1, 1996.....Incorporated by reference to Exhibit 3.1 to the USX Report on Form 10-Q for the quarter ended March 31, 1997. (b) USX By-Laws, effective as of July 30, 1996.......................Incorporated by reference to Exhibit 3(a) to the USX Report on Form 10-Q for the quarter ended June 30, 1996. (c) Amendment to USX By-Laws adopted by the Board of Directors on February 23, 1999......................... 4. Instruments Defining the Rights of Security Holders, Including Indentures (a) Credit Agreement dated as of August 18, 1994, as amended by an Amended and Restated Credit Agreement dated August 7, 1996.............................Incorporated by reference to Exhibit 4(a) to USX Reports on Form 10-Q for the quarters ended September 30, 1994, and June 30, 1996. (b) Amended and Restated Rights Agreement......Incorporated by reference to Form 8 Amendment to Form 8-A filed on October 5, 1992. (c) Pursuant to 17 CFR 229.601(b)(4)(iii), instruments with respect to long-term debt issues have been omitted where the amount of securities authorized under such instruments does not exceed 10% of the total consolidated assets of USX. USX hereby agrees to furnish a copy of any such instrument to the Commission upon its request. 10. Material Contracts (a) USX 1986 Stock Option Incentive Plan, As Amended May 28, 1991.......................Incorporated by reference to Exhibit 10(b) to the USX Form 10-K for the year ended December 31, 1991. (b) USX 1990 Stock Plan, As Amended April 28, 1998.....................Incorporated by reference to Annex II to the USX Proxy Statement dated March 9, 1998. (c) USX Annual Incentive Compensation Plan, As Amended March 26, 1991............Incorporated by reference to Exhibit 10(d) to the USX Form 10-K for the year ended December 31, 1991. 55 (d) USX Senior Executive Officer Annual Incentive Compensation Plan, As Amended April 28, 1998.............................Incorporated by reference to Annex I to the USX Proxy Statement dated March 9, 1998. (e) Marathon Oil Company Annual Incentive Compensation Plan..........................Incorporated by reference to Exhibit 10(e) to the USX Form 10-K for the year ended December 31, 1992. (f) USX Executive Management Supplemental Pension Program, As Amended October 27, 1998........................... (g) USX Supplemental Thrift Program, As Amended November 1, 1994...........................Incorporated by reference to Exhibit 10(h) to the USX Form 10-K for the year ended December 31, 1994. (h) Limited Liability Company Agreement of Marathon Ashland Petroleum LLC dated January 1, 1998......................Incorporated by reference to Exhibit 10.1 of USX Form 8-K dated January 1, 1998. (i) Put/Call, Registration Rights and Standstill Agreement of Marathon Ashland Petroleum LLC dated January 1, 1998......................Incorporated by reference to Exhibit 10.2 of USX Form 8-K dated January 1, 1998. (j) Form of agreements Between the Corporation and Various Officers.......................Incorporated by reference to Exhibit 10(h) to the USX Form 10-K for the year ended December 31, 1995. (k) USX Deferred Compensation Plan For Non-Employee Directors effective January 1, 1997..................Incorporated by reference to Exhibit 10 (K) to the USX Form 10-K for the years ended December 31, 1996. 12.1 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 12.2 Computation of Ratio of Earnings to Fixed Charges 21. List of Significant Subsidiaries 23. Consent of Independent Accountants 27. Financial Data Schedule 56 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity indicated on March 8, 1999. USX CORPORATION By /s/ Kenneth L. Matheny ------------------------------ Kenneth L. Matheny Vice President & Comptroller
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/ Victor G. Beghini Director - ----------------------------- Victor G. Beghini /s/ Jeanette G. Brown Director - ----------------------------- Jeanette G. Brown /s/ Charles A. Corry Director - ----------------------------- Charles A. Corry /s/ Charles R. Lee Director - ----------------------------- Charles R. Lee /s/ Paul E. Lego Director - ----------------------------- Paul E. Lego Director - ----------------------------- Ray Marshall /s/ John F. McGillicuddy Director - ----------------------------- John F. McGillicuddy /s/ John M. Richman Director - ----------------------------- John M. Richman /s/ Seth E. Schofield Director - ----------------------------- Seth E. Schofield /s/ John W. Snow Director - ----------------------------- John W. Snow /s/ Paul J. Wilhelm Director - ----------------------------- Paul J. Wilhelm /s/ Douglas C. Yearley Director - ----------------------------- Douglas C. Yearley
57 Glossary of Certain Defined Terms The following definitions apply to terms used in this document: Arnold...................Ewing Bank Block 963 bcf......................billion cubic feet BOE......................barrels of oil equivalent bpd......................barrels per day CAA......................Clean Air Act, as amended by the 1990 Amendments Carnegie.................Carnegie Natural Gas Company CERCLA...................Comprehensive Environmental Response, Compensation, and Liability Act CIPCO....................Carnegie Interstate Pipeline Company Clairton Partnership.....Clairton 1314B Partnership, L.P. CLAM.....................CLAM Petroleum B.V. CWA......................Clean Water Act DD&A.....................depreciation, depletion and amortization Delhi Companies..........Delhi Gas Pipeline Company and other subsidiaries of USX that comprised all of the Delhi Group Delhi Stock..............USX-Delhi Group Common Stock DESCO....................Double Eagle Steel Coating Company DOE......................Department of Energy DOJ......................U.S. Department of Justice downstream...............refining, marketing and transportation operations exploratory..............wildcat and delineation, i.e., exploratory wells IMV......................Inventory Market Valuation Indexed Debt.............6-3/4% Exchangeable Notes Due February 1, 2000 Kobe.....................Kobe Steel Ltd. LNG......................liquefied natural gas MACT.....................Maximum Achievable Control Technology MAP......................Marathon Ashland Petroleum LLC Marathon.................Marathon Oil Company Marathon Power...........Marathon Power Company, Ltd. Marathon Stock...........USX-Marathon Group Common Stock mcf......................thousand cubic feet MCL......................Marathon Canada Limited Minntac..................U.S. Steel's iron ore operations at Mt. Iron, Minn. MIPS.....................8-3/4% Cumulative Monthly Income Preferred Stock mmcfd....................million cubic feet per day NOV......................Notice of Violation Oyster...................Ewing Bank Block 917 P-A......................Piltun-Astokhskoye PaDER....................Pennsylvania Department of Environmental Resources Petronius................Viosca Knoll Block 786 POSCO....................Pohang Iron & Steel Co., Ltd. PRO-TEC..................PRO-TEC Coating Company, a USX and Kobe joint venture. PRP......................potentially responsible party RCRA.....................Resource Conservation and Recovery Act RFI......................RCRA Facility Investigation RI/FS....................Remedial Investigation and Feasibility Study RM&T.....................refining, marketing and transportation RTI......................RTI International Metals, Inc. (formerly RMI Titanium Company) SAGE.....................Scottish Area Gas Evacuation Sakhalin Energy..........Sakhalin Energy Investment Company Ltd. SG&A.....................selling, general and administrative SSA......................Speedway SuperAmerica LLC Steel Stock..............USX-U. S. Steel Group Common Stock Tarragon.................Tarragon Oil and Gas Limited Trust Preferred Securities.............6.75% Convertible Quarterly Income Preferred Securities of USX Capital Trust I upstream.................exploration and production operations USS-POSCO................USS-POSCO Industries, USX and Pohang Iron & Steel Co., Ltd., joint venture. USS/Kobe.................USX and Kobe Steel Ltd. joint venture. USTs.....................underground storage tanks VSZ U. S. Steel s. r.o...U.S. Steel and VSZ a.s. joint venture in Kosice, Slovakia 58 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 ---------------------------- 1998(b) 1997 1996 ---------- ------- ------- Income Data: Revenues(a)................................... $22,048 $15,715 $16,350 Income from operations........................ 964 961 1,320 Total income before extraordinary loss........ 281 430 618 Net income.................................... 281 430 608
December 31 -------------------- 1998(b) 1997 ------- ------- Balance Sheet Data: Assets: Current assets............................... $ 4,742 $ 3,436 Noncurrent assets............................ 11,420 8,413 ------- ------- Total assets................................ $16,162 $11,849 ======= ======= Liabilities and stockholder's equity: Current liabilities.......................... $ 2,543 $ 1,997 Noncurrent liabilities....................... 9,428 7,569 Preferred stock of subsidiary................ 17 - Minority interest in Marathon Ashland........ Petroleum LLC............................... 1,590 - Stockholder's equity......................... 2,584 2,283 ------- ------- Total liabilities and stockholder's equity.. $16,162 $11,849 ======= =======
(a) Consists of sales, dividend and affiliate income, gain on ownership change in MAP, net gains on disposal of assets and other income. (b) Amounts in 1998 include 100% of MAP and are not comparable to prior periods. 59 Supplementary Data Disclosures About Forward-Looking Statements USX includes forward-looking statements concerning trends, market forces, commitments, material events or other contingencies potentially affecting USX or the businesses of its Marathon Group or U. S. Steel Group in reports filed with the Securities and Exchange Commission, external documents or oral presentations. In order to take advantage of "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, USX is filing the following cautionary language identifying important factors (though not necessarily all such factors) that could cause actual outcomes to differ materially from information set forth in forward-looking statements made by, or on behalf of, USX, its representatives and its individual Groups. Cautionary Language Concerning Forward-Looking Statements USX Forward-looking statements with respect to USX may include, but are not limited to, comments about general business strategies, financing decisions or corporate structure. The following discussion is intended to identify important factors (though not necessarily all such factors) that could cause future outcomes to differ materially from those set forth in forward-looking statements. Liquidity Factors USX's ability to finance its future business requirements through internally generated funds, proceeds from the sale of stock, borrowings and other external financing sources is affected by the performance of each of its Groups (as measured by various factors, including cash provided from operating activities), the state of worldwide debt and equity markets, investor perceptions and expectations of past and future performance and actions, the overall U.S. financial climate, and, in particular, with respect to borrowings, by USX's outstanding debt and credit ratings by investor services. To the extent that USX Management's assumptions concerning these factors prove to be inaccurate, USX's liquidity position could be materially adversely affected. Other Factors Holders of USX-Marathon Group Common Stock or USX-U. S. Steel Group Common Stock are holders of common stock of USX and are subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts, arising from either of the groups, which affect the overall cost of USX's capital could affect the results of operations and financial condition of all groups. For further discussion of certain of the factors described herein, see Item 1. Business, Item 5. Market For Registrant's Common Equity and Related Stockholder Matters, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Information About Market Risk. USX-Marathon Group Forward-looking statements with respect to the Marathon Group may include, but are not limited to, levels of revenues, gross margins, income from operations, net income or earnings per share; levels of capital, exploration, environmental or maintenance expenditures; the success or timing of completion of ongoing or anticipated capital, exploration or maintenance projects; volumes of production, sales, throughput or shipments of liquid hydrocarbons, natural gas and refined products; levels of worldwide prices of liquid hydrocarbons, natural gas and refined products; levels of reserves, proved or otherwise, of liquid hydrocarbons or natural gas; the acquisition or divestiture of assets; the effect of restructuring or reorganization of business components; the potential effect of judicial proceedings on the business and financial condition; and the anticipated effects of actions of third parties such as competitors, or federal, state or local regulatory authorities. 60 Forward-looking statements typically contain words such as "anticipates", "believes", "estimates", "expects", "forecasts", "predicts" or "projects" or variations of these words, suggesting that future outcomes are uncertain. The following discussion is intended to identify important factors (though not necessarily all such factors) that could cause future outcomes to differ materially from those set forth in forward-looking statements with respect to the Marathon Group. The oil and gas industry is characterized by a large number of companies, none of which is dominant within the industry, but a number of which have greater resources than Marathon. Marathon must compete with these companies for the rights to explore for oil and gas. Marathon's expectations as to revenues, margins and income are based upon assumptions as to future prices and volumes of liquid hydrocarbons, natural gas and refined products. Prices have historically been volatile and have frequently been driven by unpredictable changes in supply and demand resulting from fluctuations in economic activity and political developments in the world's major oil and gas producing areas, including OPEC member countries. Any substantial decline in such prices could have a material adverse effect on Marathon's results of operations. A decline in such prices could also adversely affect the quantity of liquid hydrocarbons and natural gas that can be economically produced and the amount of capital available for exploration and development. The Marathon Group uses commodity-based derivative instruments such as exchange-traded futures contracts and options and over-the-counter commodity swaps and options to manage exposure to market price risk. The Marathon Group's strategic approach is to limit the use of these instruments principally to hedging activities. Accordingly, gains and losses on futures contracts and swaps generally offset the effects of price changes in the underlying commodity. While commodity-based derivative instruments are generally used to reduce risks from unfavorable commodity price movements, they also may limit the opportunity to benefit from favorable movements. Levels of hedging activity vary among oil industry competitors and could affect the Marathon Group's competitive position with respect to those competitors. Factors Affecting Exploration and Production Operations Projected production levels for liquid hydrocarbons and natural gas are based on a number of assumptions, including (among others) prices, supply and demand, regulatory constraints, reserve estimates, production decline rates for mature fields, reserve replacement rates, drilling rig availability and geological and operating considerations. These assumptions may prove to be inaccurate. Exploration and production operations are subject to various hazards, including explosions, fires and uncontrollable flows of oil and gas. Offshore production and marine operations in areas such as the Gulf of Mexico, the North Sea, Gabon and the Russian Far East Region are also subject to severe weather conditions such as hurricanes or violent storms or other hazards. Development of new production properties in countries outside the United States may require protracted negotiations with host governments and are frequently subject to political considerations, such as tax regulations, which could adversely affect the economics of projects. Factors Affecting Refining, Marketing and Transportation Operations Marathon conducts domestic refining, marketing and transportation operations primarily through its consolidated subsidiary, Marathon Ashland Petroleum LLC ("MAP"). MAP's operations are conducted mainly in the Midwest, Southeast, Ohio River Valley and the upper Great Plains. The profitability of these operations depends largely on the margin between the cost of crude oil and other feedstocks refined and the selling prices of refined products. MAP is a purchaser of crude oil in order to satisfy its refinery throughput requirements. As a result, its overall profitability could be adversely affected by rising crude oil and other feedstock prices which are not recovered in the marketplace. Refined product margins have been historically volatile and vary with the level of economic activity in the various marketing areas, the regulatory climate and the available supply of refined products. Gross margins on merchandise sold at retail outlets tend to moderate the volatility experienced in the retail sale of gasoline and diesel fuel. Environmental regulations, particularly the 1990 Amendments to the Clean Air Act, have imposed (and are expected to continue to impose) increasingly stringent and costly requirements on refining and marketing operations which may have an adverse effect on margins. Refining, marketing and transportation operations are subject to business interruptions due to unforeseen events such as explosions, fires, 61 crude oil or refined product spills, inclement weather, or labor disputes. They are also subject to the additional hazards of marine operations, such as capsizing, collision and damage or loss from severe weather conditions. Technology Factors Longer-term projections of corporate strategy, including the viability, timing or expenditures required for capital projects, can be affected by changes in technology, especially innovations in processes used in the exploration, production or refining of hydrocarbons. While specific future changes are difficult to project, recent innovations affecting the oil industry include the development of three-dimensional seismic imaging and deep-water and horizontal drilling capabilities. Other Factors Holders of USX-Marathon Group Common Stock are holders of common stock of USX and are subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts, arising from either of the groups, which affect the overall cost of USX's capital could affect the results of operations and financial condition of both groups. For further discussion of certain of the factors described herein, and their potential effects on the businesses of the Marathon Group, see Item 1. Business, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures About Market Risk. USX-U. S. Steel Group Forward-looking statements with respect to the U. S. Steel Group may include, but are not limited to, projections of levels of revenues, income from operations or income from operations per ton, net income or earnings per share; levels of capital, environmental or maintenance expenditures; the success or timing of completion of ongoing or anticipated capital or maintenance projects; levels of raw steel production capability, prices, production, shipments, or labor and raw material costs; the acquisition, idling, shutdown or divestiture of assets or businesses; the effect of restructuring or reorganization of business components; the effect of potential judicial proceedings on the business and financial condition; and the effects of actions of third parties such as competitors, or federal, state or local regulatory authorities. Forward-looking statements typically contain words such as "anticipates", "believes", "estimates", "expects", "forecasts", "predicts" or "projects", or variations of these words, suggesting that future outcomes are uncertain. The following discussion is intended to identify important factors (though not necessarily all such factors) that could cause future outcomes to differ materially from those set forth in forward-looking statements with respect to the U. S. Steel Group. Market Factors The U. S. Steel Group's expectations as to levels of production and revenues, gross margins, income from operations and income from operations per ton are based upon assumptions as to future product prices and mix, and levels of raw steel production capability, production and shipments. These assumptions may prove to be inaccurate. The steel industry is characterized by excess world supply which has restricted the ability of U. S. Steel and the industry to raise prices during periods of economic growth and resist price decreases during economic contraction. Over the next several years, construction of additional flat-rolled steel production facilities could result in increased domestic capacity of up to three million tons over 1998 levels. Several of the additional facilities are minimills which are less expensive to build than integrated facilities, and are typically staffed by non-unionized work forces with lower base labor costs and more flexible work 62 rules. Through the use of thin slab casting technology, minimill competitors are increasingly able to compete directly with integrated producers of higher value- added products. Such competition could adversely affect the U. S. Steel Group's future product prices and shipment levels. The domestic steel industry has, in the past, been adversely affected by unfairly traded imports. Steel imports to the United States accounted for an estimated 30%, 24% and 23% of the domestic steel market in the first eleven months of 1998, and for the years 1997 and 1996, respectively. Foreign competitors typically have lower labor costs, and are often owned, controlled or subsidized by their governments, allowing their production and pricing decisions to be influenced by political and economic policy considerations as well as prevailing market conditions. Increases in levels of imported steel could adversely affect future market prices and demand levels for domestic steel. The U. S. Steel Group also competes in many markets with producers of substitutes for steel products, including aluminum, cement, composites, glass, plastics and wood. The emergence of additional substitutes for steel products could adversely affect future prices and demand for steel products. The businesses of the U. S. Steel Group are aligned with cyclical industries such as the automotive, appliance, containers, construction and energy industries. As a result, future downturns in the U.S. economy could adversely affect the profitability of the U. S. Steel Group. Operating and Cost Factors The operations of the U. S. Steel Group are subject to planned and unplanned outages due to maintenance, equipment malfunctions or work stoppages; and various hazards, including explosions, fires and severe weather conditions, which could disrupt operations or the availability of raw materials, resulting in reduced production volumes and increased production costs. Labor costs for the U. S. Steel Group are affected by collective bargaining agreements. U. S. Steel entered into a five and one-half year contract with the United Steel Workers of America, effective February 1, 1994, covering approximately 15,000 employees. The contract provided for reopener negotiations of specific payroll items. These negotiations were resolved by following the settlements reached by other major integrated producers (including the timing of a final lump-sum bonus payment in July 1999), with revised contract terms becoming effective as of February 1, 1997. This agreement expires on August 1, 1999. To the extent that increased costs associated with any renegotiated issues are not recoverable through the sales prices of products, future income from operations would be adversely affected. Any labor interruptions resulting from the expiration of this agreement would have an adverse effect on operations, financial results and cash flow. Income from operations for the U. S. Steel Group includes periodic pension credits (which are primarily noncash) which are not allocated to the operating segment and pension costs which are included in segment income for U. S. Steel operations. The resulting net pension credits totaled $186 million, $144 million and $158 million in 1998, 1997 and 1996, respectively. Future net pension credits can be volatile dependent upon the future marketplace performance of plan assets, changes in actuarial assumptions regarding such factors as a selection of a discount rate and rate of return on assets, changes in the amortization levels of transition amounts or prior period service costs, plan amendments affecting benefit payout levels and profile changes in the beneficiary populations being valued. Changes in any of these factors could cause net pension credits to change. To the extent that these credits decline in the future, income from operations would be adversely affected. The U. S. Steel Group provides health care and life insurance benefits to most employees upon retirement. Most of these benefits have not been prefunded. The accrued liability for such benefits as of December 31, 1998, was $2,133 million. To the extent that competitors do not provide similar benefits, or have been relieved of obligations to provide such benefits following bankruptcy reorganization, the competitive position of the U. S. Steel Group may be adversely affected, depending on future costs of health care. 63 Legal and Environmental Factors The profitability of the U. S. Steel Group's operations could be affected by a number of contingencies, including legal actions. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the U. S. Steel Group financial statements. The businesses of the U. S. Steel Group are subject to numerous environmental laws. Certain current and former U. S. Steel Group operating facilities, have been in operation for many years, and could require significant future accruals and expenditures to meet existing and future requirements under these laws. To the extent that competitors are not required to undertake equivalent costs in their operations, the competitive position of the U. S. Steel Group could be adversely affected. Other Factors Holders of USX-U. S. Steel Group Common Stock are holders of common stock of USX and are subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts, arising from either of the groups, which affect the overall cost of USX's capital could affect the results of operations and financial condition of both groups. For further discussion of certain of the factors described herein, and their potential effects on the businesses of the U.S. Steel Group, see Item 1. Business, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 64 EX-3.C 2 AMENDMENT TO BY-LAWS Exhibit 3(c) USX CORPORATION AMENDMENT TO USX BY-LAWS ADOPTED BY THE BOARD OF DIRECTORS ON FEBRUARY 23, 1999 --------------------------------------- ARTICLE I. Stockholders Section 3. Nomination of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for election to the Board of Directors. Nominations for election to the Board of Directors of the Corporation at a meeting of stockholders may be made by the Board of Directors or by any stockholder of record of the Corporation entitled to vote generally for the election of directors at such meeting who complies with the notice procedures set forth in this Section 3. Such nominations, other than those made by or on behalf of the Board of Directors, shall be made by notice in writing delivered or mailed by first class United States mail, postage prepaid, to the Secretary, and received not less than 45 days nor more than 75 days prior to the first anniversary of the date on which the Corporation first mailed its proxy materials for the preceding year's annual meeting of stockholders; provided, however, that if the date of the annual meeting is advanced more than 30 days prior to or delayed by more than 30 days after the anniversary of the preceding year's annual meeting, notice by the stockholder to be timely must be so delivered not later than the close of business on the later of (i) the 90th day prior to such annual meeting or (ii) the 10th day following the day on which public announcement of the date of such meeting is first made. Such notice shall set forth (a) as to each proposed nominee (i) the name, age, business address and, if known, residence address of each such nominee, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of each class of the capital stock of the Corporation which are beneficially owned by each such nominee, and (iv) any other information concerning the nominee that must be disclosed as to nominees in proxy solicitations pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to be named as a nominee and to serve as a director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such stockholder and (ii) the number of shares of each class of the capital stock of the Corporation which are beneficially owned by such stockholder. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation. The Chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Section 4. Notice of Business at Annual Meetings At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a stockholder of record. For business to be properly brought before an annual meeting by a stockholder of record, if such business relates to the election of directors of the Corporation, the procedures in Article I, Section 3 must be complied with. If such business relates to any other matter, the stockholder must have given timely notice thereof in writing to the Secretary. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 45 days nor more than 75 days prior to the first anniversary of the date on which the Corporation first mailed its proxy materials for the preceding year's annual meeting of stockholders; provided, however, that if the date of the annual meeting is advanced more than 30 days prior to or delayed by more than 30 days after the anniversary of the preceding year's annual meeting, notice by the stockholder to be timely must be so delivered not later than the Exhibit 3(c) (Contd.) close of business on the later of (i) the 90th day prior to such annual meeting or (ii) the 10th day following the day on which public announcement of the date of such meeting is first made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the number of shares of each class of the capital stock of the Corporation which are beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 4 and in Section 3 of this Article I, except that any stockholder proposal which complies with Rule 14a-8 of the proxy rules (or any successor provision) promulgated under the Securities Exchange Act of 1934, as amended, and is to be included in the Corporation's proxy statement for an annual meeting of stockholders shall be deemed to comply with the requirements of this Section 4. EX-10.F 3 EXECUTIVE MANAGEMENT SUPPLEMENTAL PENSION Exhibit 10(f) USX CORPORATION EXECUTIVE MANAGEMENT SUPPLEMENTAL PENSION PROGRAM, AS AMENDED OCTOBER 27, 1998 --------------------------------------------------------- The term "Member" as used herein means an employee of USX Corporation (hereinafter "the Corporation") or a Subsidiary Company who is (a) a member of the Executive Management Group as established from time to time by the USX Board of Directors or (b) a key manager designated by name as a "Member" under this Program by the Compensation Committee of the USX Board of Directors. The terms "continuous service", "allowed service", "surviving spouse" and "Subsidiary Company" as used herein mean Continuous Service, Allowed Service, and surviving spouse as determined under, and Subsidiary Company as defined in, the United States Steel 1994 Salaried Pension Rules adopted under the United States Steel Corporation Plan for Non-Union Employee Pension Benefits (hereinafter "the Plan"); provided, however, that the term "continuous service" for the purpose of determining the amount of the supplemental pension and supplemental surviving spouse benefit under this Program shall exclude the Member's continuous service that (1) is creditable under a pension plan adopted by the Corporation or a Subsidiary Company, if the pension plan includes bonus payments as creditable earnings for pension purposes, or (2) occurs following the date an employee ceases to be a member of the Executive Management Group or ceases to be designated as a Member under this Program by the USX Compensation Committee. Any benefits payable with respect to a former Member shall be based on bonuses received before such employee ceases to be a Member and shall be calculated in accordance with the provisions of the Plan in effect as of the date such employee ceases to be a Member. Notwithstanding the above, no benefits payable with respect to a key manager designated for coverage under this Program shall be based on any bonuses paid to such key manager prior to the date of his designation. Any member who retires or otherwise terminates employment under conditions of eligibility for a pension, other than a deferred vested pension, pursuant to the provisions of the Plan, excluding any Member who retires without the consent of the Corporation prior to age 60 pursuant to the 30-year sole option provisions, will be eligible to receive the supplemental pension provided under this Program. In no event shall the supplemental pension be less than the Member's accrued benefit under this Program. The surviving spouse of any Member who has accrued at least 15 years of continuous service and who dies (i) prior to retirement, (ii) after retirement under conditions of eligibility for an immediate pension pursuant to the provisions of the Plan, excluding any Member who retires without the consent of the Corporation prior to age 60 pursuant to the 30-year sole option provisions, will be eligible to receive the supplemental surviving spouse benefit provided under this Program. Average Earnings as used herein shall be equal to the total bonuses paid or credited to the Member pursuant to the USX Corporation Annual Incentive Compensation Plan (or such other payments or deferrals as shall have been designated as creditable under the Program by the Compensation Committee of the Board of Directors of the Corporation) with respect to the three calendar years for which total bonus payments or deferrals (or such other payments) were the highest out of the last ten consecutive calendar years immediately prior to the calendar year in which retirement or death occurs (or, if earlier, the date the Member ceased to accrue continuous service for the purpose of determining the amount of benefits under this Program) divided by thirty-six. Bonus payments or deferrals (or such other payments) will be considered as having been made for the calendar year in which the applicable services were performed rather than for the calendar year in which the bonus payment was actually received. The Average Earnings used in the determination of benefits under this Program as of retirement will be recalculated using any bonus payable for the calendar year in which retirements occurs if such bonus produces Average Earnings greater than that determined at retirement. Exhibit 10(f) (Contd.) The Supplemental Pension provided under this Program shall be determined by multiplying Average Earnings by a percentage which shall be equal to the sum of 1.54% for each year of continuous service and each year of allowed service. The Supplemental Surviving Spouse Benefit provided under this Program shall be equal to 50% of the Supplemental Pension (i) that would have been payable to the Member had the Member retired as of the date of death in the case of death prior to retirement, or (ii) that was being paid to the Member in the case of death after retirement. Payments shall be payable monthly for the life of the surviving spouse and shall commence with the month following the month in which the Member's death occurs. Except as a Member elects, prior to the earlier of retirement or death, to have both the benefits payable to him and the benefits payable to his surviving spouse paid on a monthly basis or to have the benefits payable to him (but not the benefits payable to his surviving spouse) paid on a monthly basis, he shall receive a lump sum distribution of both the monthly pension and monthly surviving spouse benefits payable. The lump sum distribution shall be equal to the present value of the amounts payable to the Member and the Member's spouse based on the joint life expectancy of said individuals, using tables adopted by the Corporation, or the life expectancy of the Member's spouse in the event of the employee's death prior to retirement or in the event that the Member has elected to receive his monthly benefits in the form of an annuity but has not made the same election on behalf of his spouse with respect to surviving spouse benefits, and the interest rate established under the Pension Benefit Guaranty Corporation regulations to determine the present value of immediate annuities in the event of plan termination. Any lump sum distribution shall be payable within 60 days following retirement, or death, and shall represent full and final settlement of all benefits provided hereunder. Effective November 1, 1998, notwithstanding anything to the contrary contained herein, no benefits will be payable under this program to any Member who retires under a voluntary early retirement program authorized by the Board of Directors on October 27, 1998. Benefits provided by this Program shall be paid out of general assets of the Member's Employing Company. The Vice President-Administration of the United States Steel and Carnegie Pension Fund is responsible for administration of this Program. The Corporation may at any time, and from time-to-time, by action of its Board of Directors, modify or amend, in whole or in part, or terminate any or all of the provisions of this Program. EX-12.1 4 RATIO OF EARNINGS TO COMBINED FIXED CHARGES Exhibit 12.1 USX Corporation Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends TOTAL ENTERPRISE BASIS -- Unaudited Continuing Operations (Dollars in Millions)
Year Ended December 31 ------------------------------------- 1998 1997 1996 1995 1994 ------ ------ ------ ----- ------ Portion of rentals representing interest...... $ 105 $ 82 $ 78 $ 76 $ 83 Capitalized interest.......................... 46 31 11 13 58 Other interest and fixed charges.............. 328 312 382 452 456 Pretax earnings which would be required to cover preferred stock dividend requirements of parent.................................... 15 20 36 46 49 ------ ------ ------ ----- ------ Combined fixed charges and preferred stock dividends (A)................................ $ 494 $ 445 $ 507 $ 587 $ 646 ====== ====== ====== ===== ====== Earnings -- pretax income with applicable adjustments (B)................... $1,662 $1,745 $1,837 $ 877 $1,300 ====== ====== ====== ===== ====== Ratio of (B) to (A)........................... 3.36 3.92 3.62 1.49 2.01 ====== ====== ====== ===== ====== - -------------------
EX-12.2 5 RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12.2 Computation of Ratio of Earnings to Fixed Charges TOTAL ENTERPRISE BASIS -- Unaudited Continuing Operations (Dollars in Millions)
Year Ended December 31 ------------------------------------- 1998 1997 1996 1995 1994 ------ ------ ------ ----- ------ Portion of rentals representing interest.. $ 105 $ 82 $ 78 $ 76 $ 83 Capitalized interest...................... 46 31 11 13 58 Other interest and fixed charges.......... 328 312 382 452 456 ------ ------ ------ ----- ------ Total fixed charges (A)................... $ 479 $ 425 $ 471 $ 541 $ 597 ====== ====== ====== ===== ====== Earnings -- pretax income with applicable adjustments (B)............... $1,662 $1,745 $1,837 $ 877 $1,300 ====== ====== ====== ===== ====== Ratio of (B) to (A)....................... 3.47 4.11 3.90 1.62 2.18 ====== ====== ====== ===== ======
EX-21 6 LIST OF SIGNIFICANT SUBSIDIARIES Exhibit 21. List of Significant Subsidiaries The following subsidiaries were 100 percent owned and were consolidated by the Corporation at December 31, 1998: State or other jurisdiction Name of subsidiary in which incorporated --------------------------------------- --------------------------- Carnegie Interstate Pipeline Company Delaware Carnegie Natural Gas Company Pennsylvania Carnegie Production Company Pennsylvania Marathon Canada Limited Canada Marathon Guaranty Corporation Delaware Marathon International Oil Company Delaware Marathon International Petroleum Ireland Limited Cayman Islands Marathon Oil Company Ohio Marathon Oil U.K., Ltd. Delaware Marathon Petroleum Ashrafi, Ltd. Delaware Marathon Petroleum Company (Norway) Delaware Marathon Petroleum Egypt, Ltd. Delaware Marathon Petroleum Investment, Ltd. Delaware Marathon Sakhalin Limited Cayman Islands U. S. Steel Mining Company, LLC Delaware United States Steel International, Inc. New Jersey USX Capital LLC Turks & Caicos Islands USX Capital Trust I Delaware USX Engineers and Consultants, Inc. Delaware USX Portfolio Delaware, Inc. Delaware The following subsidiary was 62 percent owned and was consolidated by the Corporation at December 31, 1998: Marathon Ashland Petroleum LLC Delaware Exhibit 21. (Contd.) The following companies or joint ventures were not consolidated at December 31, 1998:
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 Minnesota Pipe Line Company United States 33% (a) Pipeline Facility Nautilus Pipeline Company, LLC United States 24% Natural Gas Transmission Odyssey Pipeline LLC United States 29% Pipeline Facility Poseidon Oil Pipeline Company LLC United States 28% Crude Oil Transportation PRO-TEC Coating Company United States 50% Steel Processing RTI International Metals, Inc. (b) United States 26% Titanium & Specialty Metals Sakhalin Energy Investment Company Ltd. Russia 38% Oil & Gas Development Transtar, Inc. United States 46% Transportation USS/Kobe Steel Company United States 50% Steel Products USS-POSCO Industries United States 50% Steel Processing VSZ U. S. Steel, s. r.o. Slovakia 50% Tin Mill Products Worthington Specialty Processing United States 50% Steel Processing
(a) Represents MAP's total ownership interest. (b) Formerly RMI Titanium Company The names of other subsidiaries, both consolidated and unconsolidated, have been omitted as these unnamed subsidiaries, considered in the aggregate as a single subsidiary, do not constitute a significant subsidiary. EX-23 7 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23. CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the prospectuses constituting part of the Registration Statements listed below of our reports dated February 9, 1999, relating to the Consolidated Financial Statements of USX Corporation, the Financial Statements of the Marathon Group and the Financial Statements of the U. S. Steel Group, appearing on pages U-1, M-1 and S-1 respectively, of this Form 10-K: On Form S-3: Relating to: File No. 33-34703 Marathon Group Dividend Reinvestment Plan 33-43719 U. S. Steel Group Dividend Reinvestment Plan 33-57997 Marathon Group Dividend Reinvestment Plan 33-60172 U. S. Steel Group Dividend Reinvestment Plan 333-56867 USX Corporation Debt Securities, Preferred Stock and Common Stock On Form S-8: Relating to: File No. 33-6248 1986 Stock Option Plan 33-41864 1990 Stock Plan 33-54333 Parity Investment Bonus 33-60667 Parity Investment Bonus 33-56828 Marathon Oil Company Thrift Plan 33-52917 Savings Fund Plan 333-00429 Savings Fund Plan 333-29699 1990 Stock Plan 333-29709 Marathon Oil Company Thrift Plan 333-52751 1990 Stock Plan PRICEWATERHOUSECOOPERS LLP 600 Grant Street Pittsburgh, PA 15219-2794 March 8, 1999 EX-27 8 FINANCIAL DATA SCHEDULE
5 1,000,000 12-MOS DEC-31-1998 DEC-31-1998 146 0 1,675 12 2,008 4,206 29,167 16,238 21,133 3,619 3,920 432 3 397 6,005 21,133 27,887 28,335 20,712 26,818 0 0 279 989 315 674 0 0 0 674 0 0 Consists of Marathon Stock issued, $308; Steel Stock issued, $88; Securities Exchangeable solely into Marathon Stock, $1. Basic earnings (loss) per share applicable to Marathon Stock, $1.06; Steel Stock, $4.05. Diluted earnings (loss) per share applicable to marathon Stock, $1.05; Steel Stock, $3.92.
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