-----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, MElZhH6bE4RyEZlpbxtin0cr0gRWDSmcu7HBHea7dPRi1Y1Lfyqaynt8bKpr2tDp 5rrWzeEZMLy5vbklowYEEQ== 0000950132-00-000082.txt : 20000218 0000950132-00-000082.hdr.sgml : 20000218 ACCESSION NUMBER: 0000950132-00-000082 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000217 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20000217 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: 8-K SEC ACT: SEC FILE NUMBER: 001-05153 FILM NUMBER: 548404 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 8-K 1 FORM 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 ----------------------- Date of Report (Date of earliest event reported): February 17, 2000 USX Corporation - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 1-5153 25-0996816 --------------- ------------- ------------------ (State or other (Commission (IRS Employer jurisdiction of File Number) Identification No.) incorporation) 600 Grant Street, Pittsburgh, PA 15219-4776 - ----------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (412) 433-1121 ------------------------------ (Registrant's telephone number, including area code) Item 5. Other Events The audited Financial Statements and Supplementary Data for USX Corporation for the fiscal year ended December 31, 1999, reports of the independent accountants and Financial Data Schedule are filed herewith. Item 7. Financial Statements and Exhibits (c) Exhibits 23. Consent of PricewaterhouseCoopers LLP 27. Financial Data Schedule 99.1 USX Consolidated Financial Statements 99.2 Marathon Group Financial Statements 99.3 U. S. Steel Group Financial Statements SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. USX CORPORATION By /s/ Kenneth L. Matheny ------------------------------ Kenneth L. Matheny Vice President and Comptroller Dated: February 17, 2000 USX Index to Financial Statements and Supplementary Data
Page ---- USX Consolidated............................................... U-1 Marathon Group................................................. M-1 U. S. Steel Group.............................................. S-1
EX-23 2 CONSENT OF PRICEWATERHOUSECOOPERS LLP 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 8, 2000, 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, which appear on pages U-1, M-1, and S-1 respectively, of this Form 8-K: On Form S-3: Relating to: File No. 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 333-88947 Marathon Group and U.S. Steel Group Dividend Reinvestment and Direct Stock Purchase Plans 333-88797 USX Corporation Debt Securities, Preferred Stock and Common Stock On Form S-8: Relating to: File No. 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 333-86847 1990 Stock Plan PricewaterhouseCoopers LLP Pittsburgh, Pa February 17, 2000 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENT OF OPERATIONS AND BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 133 0 2,708 12 2,627 5,977 29,608 16,799 22,962 4,316 4,222 183 3 400 6,453 22,962 29,534 29,583 27,720 27,720 0 0 362 1,054 349 705 0 7 0 698 0 0 CONSISTS OF MARATHON STOCK ISSUED, $312; STEEL STOCK ISSUED, $88. BASIC EARNINGS PER SHARE APPLICABLE TO MARATHON STOCK, $2.11; STEEL STOCK, $.40. DILUTED EARNINGS PER SHARE APPLICABLE TO MARATHON STOCK, $2.11; STEEL STOCK, $.40.
EX-99.1 4 USX CONSOLIDATED FINANCIAL STATEMENTS Exhibit 99.1 USX Index to 1999 Consolidated Financial Statements and Supplementary Data
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
USX Explanatory Note Regarding Financial Information 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 does not affect legal title to such assets and responsibility for such liabilities. Holders of USX - Marathon Group Common Stock and USX - U. S. Steel Group Common Stock are holders of common stock of USX and continue to be subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts arising from one Group that affect the overall cost of USX's capital could affect the results of operations and financial condition of the other Group. In addition, net losses of either Group, as well as dividends or distributions on any class of USX Common Stock or series of Preferred Stock and repurchases of any class of USX Common Stock or series of Preferred Stock, will reduce the funds of USX legally available for payment of dividends on both classes of USX Common Stock. Management's Report The accompanying consolidated financial statements of USX Corporation and Subsidiary Companies (USX) are the responsibility of and have been prepared by USX in conformity with accounting principles generally accepted in the United States. They necessarily include some amounts that are based on best judgments and estimates. The consolidated financial information displayed in other sections of this report is consistent with these consolidated financial statements. USX seeks to assure the objectivity and integrity of its financial records by careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communications programs aimed at assuring that its policies and methods are understood throughout the organization. USX has a comprehensive formalized system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that financial records are reliable. Appropriate management monitors the system for compliance, and the internal auditors independently measure its effectiveness and recommend possible improvements thereto. In addition, as part of their audit of the consolidated financial statements, USX's independent accountants, who are elected by the stockholders, review and test the internal accounting controls selectively to establish a basis of reliance thereon in determining the nature, extent and timing of audit tests to be applied. The Board of Directors pursues its oversight role in the area of financial reporting and internal accounting control through its Audit Committee. This Committee, composed solely of nonmanagement directors, regularly meets (jointly and separately) with the independent accountants, management and internal auditors to monitor the proper discharge by each of its responsibilities relative to internal accounting controls and the consolidated financial statements. Thomas J. Usher Robert M. Hernandez Kenneth L. Matheny Chairman, Board of Directors Vice Chairman Vice President & Chief Executive Officer & Chief Financial Officer & Comptroller
Report of Independent Accountants To the Stockholders of USX Corporation: In our opinion, the accompanying consolidated financial statements appearing on pages U-2 through U-28 present fairly, in all material respects, the financial position of USX Corporation and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of USX's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP 600 Grant Street, Pittsburgh, Pennsylvania 15219-2794 February 8, 2000 U-1 Consolidated Statement of Operations
(Dollars in millions) 1999 1998 1997 ---------------------------------------------------------------------------------------- Revenues: Sales (Note 6) $29,534 $27,789 $22,467 Dividend and affiliate income (loss) (20) 96 105 Net gains on disposal of assets 21 82 94 Gain on ownership change in Marathon Ashland Petroleum LLC (Note 3) 17 245 - Other income 31 25 14 ------- ------- ------- Total revenues 29,583 28,237 22,680 ------- ------- ------- Costs and expenses: Cost of sales (excludes items shown below) 22,143 20,371 16,047 Selling, general and administrative expenses 203 304 218 Depreciation, depletion and amortization 1,254 1,224 967 Taxes other than income taxes 4,433 4,241 3,270 Exploration expenses 238 313 189 Inventory market valuation charges (credits) (Note 17) (551) 267 284 ------- ------- ------- Total costs and expenses 27,720 26,720 20,975 ------- ------- ------- Income from operations 1,863 1,517 1,705 Net interest and other financial costs (Note 7) 362 279 347 Minority interest in income of Marathon Ashland Petroleum LLC (Note 3) 447 249 - ------- ------- ------- Income from continuing operations before income taxes 1,054 989 1,358 Provision for estimated income taxes (Note 12) 349 315 450 ------- ------- ------- Income from continuing operations 705 674 908 ------- ------- ------- Discontinued operations (Note 5): Loss from operations (net of income tax) - - (1) Gain on disposal (net of income tax) - - 81 ------- ------- ------- Income from discontinued operations - - 80 ------- ------- ------- Extraordinary losses (Note 8) 7 - - ------- ------- ------- Net income 698 674 988 Noncash credit from exchange of preferred stock (Note 23) - - 10 Dividends on preferred stock (9) (9) (13) ------- ------- ------- Net income applicable to common stocks $ 689 $ 665 $ 985 ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. U-2 Income Per Common Share
(Dollars in millions, except per share data) 1999 1998 1997 ------------------------------------------------------------------- CONTINUING OPERATIONS Applicable to Marathon Stock: Net income $ 654 $ 310 $ 456 Per Share Data: Basic 2.11 1.06 1.59 Diluted 2.11 1.05 1.58 ------------------------------------------------------------------- Applicable to Steel Stock: Income before extraordinary losses $ 42 $ 355 $ 449 Extraordinary losses 7 - - ----- ----- ----- Net income $ 35 $ 355 $ 449 Per Share Data Basic: Income before extraordinary losses $ .48 $4.05 $5.24 Extraordinary losses .08 - - ----- ----- ----- Net income $ .40 $4.05 $5.24 Diluted: Income before extraordinary losses $ .48 $3.92 $4.88 Extraordinary losses .08 - - ----- ----- ----- Net income $ .40 $3.92 $4.88 ------------------------------------------------------------------- DISCONTINUED OPERATIONS Applicable to Delhi Stock: Net income $79.7 Per Share Data: Basic 8.43 Diluted 8.41 -------------------------------------------------------------------
See Note 22, for a description and computation of income per common share. The accompanying notes are an integral part of these consolidated financial statements. U-3 Consolidated Balance Sheet
(Dollars in millions) December 31 1999 1998 ------------------------------------------------------------------------------------------------------ Assets Current assets: Cash and cash equivalents (Note 4) $ 133 $ 146 Receivables, less allowance for doubtful accounts of $12 and $12 (Note 16) 2,696 1,663 Inventories (Note 17) 2,627 2,008 Deferred income tax benefits (Note 12) 303 217 Other current assets 218 172 ------- ------- Total current assets 5,977 4,206 Investments and long-term receivables, less reserves of $3 and $10 (Note 14) 1,247 1,249 Property, plant and equipment - net (Note 13) 12,809 12,929 Prepaid pensions (Note 10) 2,629 2,413 Other noncurrent assets 300 336 ------- ------- Total assets $22,962 $21,133 ------------------------------------------------------------------------------------------------------ Liabilities Current liabilities: Notes payable $ - $ 145 Accounts payable 3,397 2,438 Distribution payable to minority shareholder of Marathon Ashland Petroleum LLC (Note 4) - 103 Payroll and benefits payable 468 520 Accrued taxes 283 245 Accrued interest 107 97 Long-term debt due within one year (Note 16) 61 71 ------- ------- Total current liabilities 4,316 3,619 Long-term debt (Note 16) 4,222 3,920 Deferred income taxes (Note 12) 1,839 1,579 Employee benefits (Note 10) 2,809 2,868 Deferred credits and other liabilities 734 720 Preferred stock of subsidiary (Note 23) 250 250 USX obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely junior subordinated convertible debentures of USX (Note 23) 183 182 Minority interest in Marathon Ashland Petroleum LLC (Note 3) 1,753 1,590 Stockholders' Equity (Details on pages U-6 and U-7) Preferred stock (Note 24) - 6.50% Cumulative Convertible issued - 2,715,287 shares and 2,767,787 shares ($136 and $138 liquidation preference, respectively) 3 3 Common stocks: Marathon Stock issued - 311,767,181 shares and 308,458,835 shares (par value $1 per share, authorized 550,000,000 shares) 312 308 Steel Stock issued - 88,397,714 shares and 88,336,439 shares (par value $1 per share, authorized 200,000,000 shares) 88 88 Securities exchangeable solely into Marathon Stock - issued - 288,621 shares and 507,324 shares (Note 3) - 1 Additional paid-in capital 4,673 4,587 Deferred compensation - (1) Retained earnings 1,807 1,467 Accumulated other comprehensive income (loss) (27) (48) ------- ------- Total stockholders' equity 6,856 6,405 ------- ------- Total liabilities and stockholders' equity $22,962 $21,133 ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. U-4 Consolidated Statement of Cash Flows
(Dollars in millions) 1999 1998 1997 ----------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents Operating activities: Net income $ 698 $ 674 $ 988 Adjustments to reconcile to net cash provided from operating activities: Extraordinary losses 7 - - Minority interest in income of Marathon Ashland Petroleum LLC 447 249 - Depreciation, depletion and amortization 1,254 1,224 987 Exploratory dry well costs 109 186 78 Inventory market valuation charges (credits) (551) 267 284 Pensions and other postretirement benefits (220) (181) (342) Deferred income taxes 212 184 228 Gain on disposal of the Delhi Companies - - (287) Gain on ownership change in Marathon Ashland Petroleum LLC (17) (245) - Net gains on disposal of assets (21) (82) (94) Changes in: Current receivables - sold (320) (30) (390) - operating turnover (977) 451 16 Inventories (77) (6) (39) Current accounts payable and accrued expenses 1,240 (497) 91 All other - net 152 (172) (56) ------- ------- ------- Net cash provided from operating activities 1,936 2,022 1,464 ------- ------- ------- Investing activities: Capital expenditures (1,665) (1,580) (1,373) Acquisition of Tarragon Oil and Gas Limited - (686) - Proceeds from sale of the Delhi Companies - - 752 Disposal of assets 366 86 481 Restricted cash - withdrawals 60 241 108 - deposits (61) (67) (205) Affiliates - investments (74) (115) (219) - loans and advances (70) (104) (46) - returns and repayments 1 71 10 All other - net (25) (4) (3) ------- ------- ------- Net cash used in investing activities (1,468) (2,158) (495) ------- ------- ------- Financing activities: Commercial paper and revolving credit arrangements - net (381) 724 41 Other debt - borrowings 810 1,036 11 - repayments (242) (1,445) (786) Common stock - issued 89 668 82 - repurchased - (195) - Preferred stock repurchased (2) (8) - Dividends paid (354) (342) (316) Distributions to minority shareholder of Marathon Ashland Petroleum LLC (400) (211) - ------- ------- ------- Net cash provided from (used in) financing activities (480) 227 (968) ------- ------- ------- Effect of exchange rate changes on cash (1) 1 (2) ------- ------- ------- Net increase (decrease) in cash and cash equivalents (13) 92 (1) Cash and cash equivalents at beginning of year 146 54 55 ------- ------- ------- Cash and cash equivalents at end of year $ 133 $ 146 $ 54 -----------------------------------------------------------------------------------------------------------
See Note 18, for supplemental cash flow information. The accompanying notes are an integral part of these consolidated financial statements. U-5 Consolidated Statement of Stockholders' Equity After the redemption of the USX - Delhi Group Common Stock (Delhi Stock) on January 26, 1998 (Note 5), USX has two classes of common stock: USX - Marathon Group Common Stock (Marathon Stock) and USX - U. S. Steel Group Common Stock (Steel Stock), which are intended to reflect the performance of the Marathon and U. S. Steel Groups, respectively. (See Note 9, for a description of the two Groups.) During 1998, USX issued 878,074 Exchangeable Shares (exchangeable solely into Marathon Stock) related to the purchase of a Canadian company. (See Note 3.) On all matters where the holders of Marathon Stock and Steel Stock vote together as a single class, Marathon Stock has one vote per share and Steel Stock has a fluctuating vote per share based on the relative market value of a share of Steel Stock to the market value of a share of Marathon Stock. In the event of a disposition of all or substantially all the properties and assets of the U. S. Steel Group, USX must either distribute the net proceeds to the holders of the Steel Stock as a special dividend or in redemption of the stock, or exchange the Steel Stock for the Marathon Stock. In the event of liquidation of USX, the holders of the Marathon Stock and Steel Stock will share in the funds remaining for common stockholders based on the relative market capitalization of the respective Marathon Stock and Steel Stock to the aggregate market capitalization of both classes of common stock.
Dollars in millions Shares in thousands --------------------------------- ------------------------------------ 1999 1998 1997 1999 1998 1997 ---------------------------------------------------------------------------------------------------------------------- Preferred stock (Note 24) - 6.50% Cumulative Convertible: Outstanding at beginning of year $ 3 $ 3 $ 7 2,768 2,962 6,900 Repurchased - - - (53) (194) - Exchanged for trust preferred securities - - (4) - - (3,938) ----- ----- ----- ------- ------- ------- Outstanding at end of year $ 3 $ 3 $ 3 2,715 2,768 2,962 ---------------------------------------------------------------------------------------------------------------------- Common stocks: Marathon Stock: Outstanding at beginning of year $ 308 $ 289 $ 288 308,459 288,786 287,525 Issued in public offering - 17 - 67 17,000 - Issued for: Employee stock plans 3 2 1 2,903 2,236 1,209 Dividend Reinvestment and Direct Stock Purchase Plan - - - 120 66 52 Exchangeable Shares 1 - - 218 371 - ----- ----- ----- ------- ------- ------- Outstanding at end of year $ 312 $ 308 $ 289 311,767 308,459 288,786 ---------------------------------------------------------------------------------------------------------------------- Steel Stock: Outstanding at beginning of year $ 88 $ 86 $ 85 88,336 86,578 84,885 Issued for: Employee stock plans - 2 1 62 1,733 1,416 Dividend Reinvestment and Direct Stock Purchase Plan - - - - 25 277 ----- ----- ----- ------- ------- ------- Outstanding at end of year $ 88 $ 88 $ 86 88,398 88,336 86,578 ---------------------------------------------------------------------------------------------------------------------- Delhi Stock: Outstanding at beginning of year $ - $ - $ 9 - - 9,448 Canceled - employee stock plans - - - - - (3) Reclassified to redeemable Delhi Stock - - (9) - - (9,445) ----- ----- ----- ------- ------- ------- Outstanding at end of year $ - $ - $ - - - - ---------------------------------------------------------------------------------------------------------------------- Securities exchangeable solely into Marathon Stock: Outstanding at beginning of year $ 1 $ - $ - 507 - - Issued to acquire Tarragon stock - 1 - - 878 - Exchanged for Marathon Stock (1) - - (218) (371) - ----- ----- ----- ------- ------- ------- Outstanding at end of year $ - $ 1 $ - 289 507 - ----------------------------------------------------------------------------------------------------------------------
(Table continued on next page) U-6
Stockholders' Equity Comprehensive Income --------------------------------- ----------------------------- (Dollars in millions) 1999 1998 1997 1999 1998 1997 --------------------------------------------------------------------------------------- ----------------------------- Additional paid-in capital: Balance at beginning of year $4,587 $3,924 $4,150 Marathon Stock issued 92 598 38 Steel Stock issued 2 57 52 Exchangeable Shares: Issued - 28 - Exchanged for Marathon Stock (6) (12) - 6.50% preferred stock: Repurchased (2) (8) - Exchanged for trust preferred securities - - (188) Reclassified to redeemable Delhi Stock - - (128) ------ ------ ------ Balance at end of year $4,673 $4,587 $3,924 -------------------------------------------------------------------------------------- Deferred compensation (Note 19) $ - $ (1) $ (3) -------------------------------------------------------------------------------------- Retained earnings: Balance at beginning of year $1,467 $1,138 $ 517 Net income 698 674 988 $ 698 $ 674 $ 988 Dividends on preferred stock (9) (9) (13) Dividends on Marathon Stock (per share: $.84 in 1999 and 1998 and $.76 in 1997) (261) (248) (219) Dividends on Steel Stock (per share $1.00) (88) (88) (86) Dividends on Delhi Stock (per share $.15) - - (1) Reclassified to redeemable Delhi Stock - - (58) Noncash credit from exchange of preferred stock - - 10 ------ ------ ------ Balance at end of year $1,807 $1,467 $1,138 -------------------------------------------------------------------------------------- Accumulated other comprehensive income (loss): Minimum pension liability adjustments: Balance at beginning of year $ (37) $ (32) $ (22) Changes during year, net of taxes/(a)/ 27 (5) (10) 27 (5) (10) ------ ------ ------ Balance at end of year (10) (37) (32) ------ ------ ------ Foreign currency translation adjustments: Balance at beginning of year $ (11) $ (8) $ (8) Changes during year, net of taxes/(a)/ (6) (3) - (6) (3) - ------ ------ ------ Balance at end of year (17) (11) (8) ------ ------ ------ Unrealized holding gains on investments: Balance at beginning of year $ - $ 3 $ - Changes during year, net of taxes/(a)/ (1) 2 3 (1) 2 3 Reclassification adjustment included in net income 1 (5) - 1 (5) - ------ ------ ------ Balance at end of year - - 3 -------------------------------------------------------------------------------------- Total balances at end of year $ (27) $ (48) $ (37) --------------------------------------------------------------------------------------------------------------------- Total comprehensive income/(b)/ $ 719 $ 663 $ 981 --------------------------------------------------------------------------------------------------------------------- Total stockholders' equity $6,856 $6,405 $5,400 -------------------------------------------------------------------------------------- /(a)/ Related income tax provision (credit): 1999 1998 1997 ---- ---- ---- Minimum pension liability adjustments $ (13) $ 3 $ 5 Foreign currency translation adjustments 3 4 - Unrealized holding gains on investments - 2 (1) /(b)/ Total comprehensive income by Group: Marathon Group $ 660 $ 306 $ 457 U. S. Steel Group 59 357 444 Delhi Group - - 80 ------ ------ ------ Total $ 719 $ 663 $ 981 ====== ====== ======
The accompanying notes are an integral part of these consolidated financial statements. U-7 Notes to Consolidated Financial Statements 1. Summary of Principal Accounting Policies Principles applied in consolidation - The consolidated financial statements include the accounts of USX Corporation and the majority-owned subsidiaries which it controls (USX). Investments in unincorporated oil and gas joint ventures, undivided interest pipelines and jointly owned gas processing plants are consolidated on a pro rata basis. Investments in entities over which USX has significant influence are accounted for using the equity method of accounting and are carried at USX's share of net assets plus loans and advances. Investments in companies whose stock is publicly traded are carried at market value. The difference between the cost of these investments and market value is recorded in other comprehensive income (net of tax). Investments in companies whose stock has no readily determinable fair value are carried at cost. Use of estimates - Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at year-end and the reported amounts of revenues and expenses during the year. Significant items subject to such estimates and assumptions include the carrying value of long-lived assets; valuation allowances for receivables, inventories and deferred income tax assets; environmental liabilities; liabilities for potential tax deficiencies and potential litigation claims and settlements; and assets and obligations related to employee benefits. Additionally, certain estimated liabilities are recorded when management commits to a plan to close an operating facility or to exit a business activity. Actual results could differ from the estimates and assumptions used. Revenue recognition - Revenues principally include sales, dividend and affiliate income, gains or losses on the disposal of assets and gains or losses from changes in ownership interests. Sales - Sales are recognized when products are shipped or services are provided to customers. Consumer excise taxes on petroleum products and merchandise and matching crude oil and refined products buy/sell transactions settled in cash are included in both revenues and costs and expenses, with no effect on income. Dividend and Affiliate Income - Dividend and affiliate income includes USX's proportionate share of income from equity method investments and dividend income from other investments. Dividend income is recognized when dividend payments are received. Disposal of Assets - When long-lived assets depreciated on an individual basis are sold or otherwise disposed of, any gains or losses are reflected in income. Gains on disposal of long- lived assets are recognized when earned, which is generally at the time of closing. If a loss on disposal is expected, such losses are recognized when long-lived assets are reclassified as assets held for sale. Proceeds from disposal of long-lived assets depreciated on a group basis are credited to accumulated depreciation, depletion and amortization with no immediate effect on income. Gas Balancing - USX follows the sales method of accounting for gas production imbalances and would recognize a liability if the existing proved reserves were not adequate to cover the current imbalance situation. Changes in Ownership Interest - Gains or losses from a change in ownership of a consolidated subsidiary or an unconsolidated affiliate are recognized in revenues in the period of change. Cash and cash equivalents - Cash and cash equivalents include cash on hand and on deposit and investments in highly liquid debt instruments with maturities generally of three months or less. Inventories - Inventories are carried at lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method. Derivative instruments - USX uses commodity-based and foreign currency derivative instruments to manage its exposure to price risk. Management is authorized to use futures, forwards, swaps and options related to the purchase, production or sale of crude oil, natural gas, refined products, nonferrous metals and electricity. While USX's risk management activities generally reduce market risk exposure due to unfavorable commodity price changes for raw material purchases and products sold, such activities can also encompass strategies which assume price risk. U-8 Commodity-Based Hedging Transactions - For transactions that qualify for hedge accounting, the resulting gains or losses are deferred and subsequently recognized in income from operations, as a component of sales or cost of sales, in the same period as the underlying physical transaction. To qualify for hedge accounting, derivative positions cannot remain open if the underlying physical market risk has been removed. If such derivative positions remain in place, they would be marked-to- market and accounted for as trading or other activities. Recorded deferred gains or losses are reflected within other current and noncurrent assets or accounts payable and deferred credits and other liabilities, as appropriate. Commodity-Based Trading and Other Activities - Derivative instruments used for trading and other activities are marked-to-market and the resulting gains or losses are recognized in the current period within income from operations. This category also includes the use of derivative instruments that have no offsetting underlying physical market risk. Foreign Currency Transactions - USX uses forward exchange contracts to manage currency risks. Gains or losses related to firm commitments are deferred and recognized concurrent with the underlying transaction. All other gains or losses are recognized in income in the current period as sales, cost of sales, interest income or expense, or other income, as appropriate. Forward exchange contracts are recorded as receivables or payables, as appropriate. Exploration and development - USX follows the successful efforts method of accounting for oil and gas exploration and development. Long-lived assets - Except for oil and gas producing properties, depreciation is generally computed on the straight-line method based upon estimated lives of assets. USX's method of computing depreciation for steel producing assets modifies straight-line depreciation based on the level of production. The modification factors range from a minimum of 85% at a production level below 81% of capability, to a maximum of 105% for a 100% production level. No modification is made at the 95% production level, considered the normal long-range level. Depreciation and depletion of oil and gas producing properties are computed using predetermined rates based upon estimated proved oil and gas reserves applied on a units-of-production method. Depletion of mineral properties, other than oil and gas, is based on rates which are expected to amortize cost over the estimated tonnage of minerals to be removed. USX evaluates impairment of its oil and gas producing assets primarily on a field-by-field basis using undiscounted cash flows based on total proved reserves. Other assets are evaluated on an individual asset basis or by logical groupings of assets. Assets deemed to be impaired are written down to their fair value, including any related goodwill, using discounted future cash flows and, if available, comparable market values. Environmental liabilities - USX provides for remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. Generally, the timing of remediation accruals coincides with completion of a feasibility study or the commitment to a formal plan of action. Remediation liabilities are accrued based on estimates of known environmental exposure and are discounted in certain instances. If recoveries of remediation costs from third parties are probable, a receivable is recorded. Estimated abandonment and dismantlement costs of offshore production platforms are accrued based on production of estimated proved oil and gas reserves. Postemployment benefits - USX recognizes an obligation to provide postemployment benefits, primarily for disability-related claims covering indemnity and medical payments. The obligation for these claims and the related periodic costs are measured using actuarial techniques and assumptions, including an appropriate discount rate, analogous to the required methodology for measuring pension and other postretirement benefit obligations. Actuarial gains and losses are deferred and amortized over future periods. Insurance - USX is insured for catastrophic casualty and certain property and business interruption exposures, as well as those risks required to be insured by law or contract. Costs resulting from noninsured losses are charged against income upon occurrence. Reclassifications - Certain reclassifications of prior years' data have been made to conform to 1999 classifications. U-9 - -------------------------------------------------------------------------------- 2. New Accounting Standards Effective January 1, 1997, USX adopted American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" (SOP 96-1), which provides additional interpretation of existing accounting standards related to recognition, measurement and disclosure of environmental remediation liabilities. As a result of adopting SOP 96-1, USX identified additional environmental remediation liabilities of $46 million, of which $28 million was discounted to a present value of $13 million and $18 million was not discounted. Assumptions used in the calculation of the present value amount included an inflation factor of 2% and an interest rate of 7% over a range of 22 to 30 years. Estimated receivables for recoverable costs related to adoption of SOP 96-1 were $4 million. The net unfavorable effect of adoption on income from operations at January 1, 1997, was $27 million. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). This new Standard requires recognition of all derivatives as either assets or liabilities at fair value. SFAS No. 133 may result in additional volatility in both current period earnings and other comprehensive income as a result of recording recognized and unrecognized gains and losses resulting from changes in the fair value of derivative instruments. The transition adjustment resulting from adoption of SFAS No. 133 will be reported as a cumulative effect of a change in accounting principle. Under the new Standard, USX may elect not to designate certain derivative instruments as hedges even if the strategy qualifies for hedge accounting treatment. This approach would eliminate the administrative effort needed to measure effectiveness and monitor such instruments; however, this approach also may result in additional volatility in current period earnings. USX cannot reasonably estimate the effect of adoption on either the financial position or results of operations. It is not possible to estimate what effect this Statement will have on future results of operations, although greater period-to-period volatility is likely. USX plans to adopt the Standard effective January 1, 2001. - -------------------------------------------------------------------------------- 3. Business Combinations In August 1998, Marathon Oil Company (Marathon) acquired Tarragon Oil and Gas Limited (Tarragon), a Canadian oil and gas exploration and production company. Securityholders of Tarragon received, at their election, Cdn$14.25 for each Tarragon share, or the economic equivalent in Exchangeable Shares of an indirect Canadian subsidiary of Marathon, which are exchangeable solely on a one-for- one basis into Marathon Stock. The purchase price included cash payments of $686 million, issuance of 878,074 Exchangeable Shares valued at $29 million and the assumption of $345 million in debt. The Exchangeable Shares are exchangeable at the option of the holder at any time and automatically redeemable on August 11, 2003 (and, in certain circumstances, as early as August 11, 2001). The holders of Exchangeable Shares are entitled to receive declared dividends equivalent to dividends declared from time to time by USX on Marathon Stock. USX accounted for the acquisition using the purchase method of accounting. The 1998 results of operations include the operations of Marathon Canada Limited, formerly known as Tarragon, commencing August 12, 1998. During 1997, Marathon and Ashland Inc. (Ashland) agreed to combine the major elements of their refining, marketing and transportation (RM&T) operations. On January 1, 1998, Marathon transferred certain RM&T net assets to Marathon Ashland Petroleum LLC (MAP), a new consolidated subsidiary. Also on January 1, 1998, Marathon acquired certain RM&T net assets from Ashland in exchange for a 38% interest in MAP. The acquisition was accounted for under the purchase method of accounting. The purchase price was determined to be $1.9 billion, based upon an external valuation. The change in Marathon's ownership interest in MAP resulted in a gain of $245 million, which is included in 1998 revenues. In accordance with MAP closing agreements, Marathon and Ashland made capital contributions to MAP for environmental improvements. The closing agreements stipulate that ownership interests in MAP will not be adjusted as a result of such contributions. Accordingly, Marathon recognized a gain on ownership change of $17 million in 1999. U-10 In connection with the formation of MAP, Marathon and Ashland entered into a Limited Liability Company Agreement dated January 1, 1998 (the LLC Agreement). The LLC Agreement provides for an initial term of MAP expiring on December 31, 2022 (25 years from its formation). The term will automatically be extended for ten-year periods, unless a termination notice is given by either party. Also in connection with the formation of MAP, the parties entered into a Put/Call, Registration Rights and Standstill Agreement (the Put/Call Agreement). The Put/Call Agreement provides that at any time after December 31, 2004, Ashland will have the right to sell to Marathon all of Ashland's ownership interest in MAP, for an amount in cash and/or Marathon or USX debt or equity securities equal to the product of 85% (90% if equity securities are used) of the fair market value of MAP at that time, multiplied by Ashland's percentage interest in MAP. Payment could be made at closing, or at Marathon's option, in three equal annual installments, the first of which would be payable at closing. At any time after December 31, 2004, Marathon will have the right to purchase all of Ashland's ownership interests in MAP, for an amount in cash equal to the product of 115% of the fair market value of MAP at that time, multiplied by Ashland's percentage interest in MAP. The following unaudited pro forma data for USX includes the results of operations of Tarragon for 1998 and 1997, and the Ashland RM&T net assets for 1997, giving effect to the acquisitions as if they had been consummated at the beginning of the years presented. The pro forma data is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations.
(In millions, except per share amounts) 1998 1997 -------------------------------------------------------------------------------------------- Revenues $28,331 $30,259 Net income 643/(a)/ 989/(a)/ Net income per common share of Marathon Stock - Basic and diluted .95 1.58 --------------------------------------------------------------------------------------------
/(a)/ Excluding the pro forma inventory market valuation adjustment, pro forma net income would have been $747 million in 1998 and $1,151 million in 1997. Reported net income, excluding the reported inventory market valuation adjustment, would have been $778 million in 1998 and $1,167 million in 1997. - -------------------------------------------------------------------------------- 4. Transactions Between MAP and Ashland At December 31, 1999 and 1998, MAP had current receivables from Ashland of $26 million and $22 million, respectively, and current payables to Ashland of $2 million at December 31, 1999, and at December 31, 1998, $106 million, including distributions payable. At December 31, 1998, MAP's cash and cash equivalents included a $103 million demand note invested with Ashland, which was repaid in January 1999. MAP has a $190 million short-term revolving credit agreement with Ashland. Interest on borrowings is based on the Federal Funds Rate in effect each day during the period plus 0.30 of 1%. At December 31, 1999, there were no borrowings against this facility. During 1999 and 1998, MAP's sales to Ashland consisting primarily of petroleum products, were $198 million and $185 million, respectively, and MAP's purchases of products and services from Ashland were $25 million and $45 million, respectively. These transactions were conducted under terms comparable to those with unrelated parties. - -------------------------------------------------------------------------------- 5. Discontinued Operations Effective October 31, 1997, USX sold its stock in Delhi Gas Pipeline Corporation and other subsidiaries of USX that comprised all of the Delhi Group (Delhi Companies). The transaction involved a gross purchase price of $762 million. Under the USX Restated Certificate of Incorporation (USX Certificate), USX was required to elect one of three options to return the value of the net proceeds received in the transaction to the holders of shares in Delhi Stock (Delhi shareholders). Of the three options, USX elected to use the net proceeds of $195 million, or $20.60 per share, to redeem all shares of Delhi Stock. The net proceeds were distributed to the Delhi shareholders on January 26, 1998. After the redemption, 50,000,000 shares of Delhi Stock remain authorized but unissued. The sale of the Delhi Companies resulted in a gain on disposal of $81 million, net of $206 million income taxes. The financial results of the Delhi Group have been reclassified as discontinued operations for 1997 as presented in the Consolidated Statement of Operations and are summarized as follows:
(In millions) 1997/(a)/ ----------------------------------------------------------------------------------- Revenues $1,205 Costs and expenses 1,190 ------ Income from operations 15 Net interest and other financial costs 23 ------ Loss before income taxes (8) Credit for estimated income taxes (7) ------ Net loss $ (1) -----------------------------------------------------------------------------------
/(a)/ Represents ten months of operations. U-11 - -------------------------------------------------------------------------------- 6. Revenues The items below are included in revenues and costs and expenses, with no effect on income.
(In millions) 1999 1998 1997 ---------------------------------------------------------------------------------------------- Consumer excise taxes on petroleum products and merchandise $3,973 $3,824 $2,828 Matching crude oil and refined product buy/sell transactions settled in cash 3,539 3,948 2,436 ----------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 7. Other Items
(In millions) 1999 1998 1997 ---------------------------------------------------------------------------------------------- Net interest and other financial costs from continuing operations Interest and other financial income: Interest income $ 16 $ 35 $ 11 Other (13) 4 (6) ------ ------ ------ Total 3 39 5 ------ ------ ------ Interest and other financial costs: Interest incurred 326 325 289 Less interest capitalized 26 46 31 ------ ------ ------ Net interest 300 279 258 Interest on tax issues 20 21 20 Financial costs on trust preferred securities 13 13 10 Financial costs on preferred stock of subsidiary 22 22 21 Amortization of discounts 3 6 6 Expenses on sales of accounts receivable 15 21 40 Adjustment to settlement value of indexed debt (13) (44) (10) Other 5 - 7 ------ ------ ------ Total 365 318 352 ------ ------ ------ Net interest and other financial costs $ 362 $ 279 $ 347 ----------------------------------------------------------------------------------------------
Foreign currency transactions For 1999, 1998 and 1997, the aggregate foreign currency transaction gains (losses) included in determining income from continuing operations were $(12) million, $13 million and $4 million, respectively. - -------------------------------------------------------------------------------- 8. Extraordinary Losses In 1999, USX irrevocably deposited with a trustee the entire 5.5 million common shares it owned in RTI International Metals, Inc. (RTI). The deposit of the shares resulted in the satisfaction of USX's obligation under its 6 3/4% Exchangeable Notes (indexed debt) due February 1, 2000. Under the terms of the indenture, the trustee exchanged one RTI share for each note at maturity. All shares were required for satisfaction of the indexed debt; therefore, none reverted back to USX. As a result of the above transaction, USX recorded in 1999 an extraordinary loss of $5 million, net of a $3 million income tax benefit, representing prepaid interest expense and the write-off of unamortized debt issue costs, and a pretax charge of $22 million, representing the difference between the carrying value of the investment in RTI and the carrying value of the indexed debt, which is included in net gains on disposal of assets. In December 1996, USX had issued $117 million of notes indexed to the common share price of RTI. At maturity, USX would have been required to exchange the notes for shares of RTI common stock, or redeem the notes for the equivalent amount of cash. Since USX's investment in RTI was attributed to the U. S. Steel Group, the indexed debt was also attributed to the U. S. Steel Group. USX had a 26% investment in RTI and accounted for its investment using the equity method of accounting. Republic Technologies International, LLC, an equity method affiliate of USX, recorded in 1999 an extraordinary loss related to the early extinguishment of debt. As a result, USX recorded an extraordinary loss of $2 million, net of a $1 million income tax benefit, representing its share of the extraordinary loss. U-12 - -------------------------------------------------------------------------------- 9. Group and Segment Information After the redemption of the Delhi Stock on January 26, 1998, USX has two classes of common stock: Marathon Stock and Steel Stock, which are intended to reflect the performance of the Marathon Group and the U. S. Steel Group, respectively. A description of each group and its products and services is as follows: Marathon Group - The Marathon Group includes Marathon Oil Company and certain other subsidiaries of USX. Marathon Group revenues as a percentage of total consolidated USX revenues were 82% in 1999, 78% in 1998 and 69% in 1997. U. S. Steel Group - The U. S. Steel Group consists of U. S. Steel, the largest domestic integrated steel producer. U. S. Steel Group revenues as a percentage of total consolidated USX revenues were 18% in 1999, 22% in 1998 and 31% in 1997.
Group Operations: Income From Net Capital (In millions) Year Revenues Operations Income Expenditures Assets - -------------------------------------------------------------------------------------------------------------------------- Marathon Group 1999 $24,327 $1,713 $ 654 $1,378 $15,705 1998 21,977 938 310 1,270 14,544 1997 15,846 932 456 1,038 10,565 - ------------------------------------------------------------------------------------------------------------------------- U. S. Steel Group 1999 5,314 150 44 287 7,525 1998 6,283 579 364 310 6,749 1997 6,941 773 452 261 6,694 - ------------------------------------------------------------------------------------------------------------------------- Adjustments for 1999 (58) - - - (268) Discontinued 1998 (23) - - - (160) Operations and 1997 (107) - 80 74 25 Eliminations - ------------------------------------------------------------------------------------------------------------------------- Total USX 1999 $29,583 $1,863 $ 698 $1,665 $22,962 Corporation 1998 28,237 1,517 674 1,580 21,133 1997 22,680 1,705 988 1,373 17,284 - ------------------------------------------------------------------------------------------------------------------------- Sales by Product: (In millions) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Marathon Group Refined products $10,873 $8,750 $ 7,012 Merchandise 2,088 1,873 1,045 Liquid hydrocarbons 2,159 1,818 941 Natural gas 1,381 1,144 1,331 Transportation and other products 199 271 167 - ------------------------------------------------------------------------------------------------------------------------- U. S. Steel Group Sheet and semi-finished steel products $ 3,345 $3,501 $ 3,820 Tubular, plate and tin mill products 1,118 1,513 1,754 Raw materials (coal, coke and iron ore) 505 679 724 Other/(a)/ 414 490 517 - -------------------------------------------------------------------------------------------------------------------------
/(a)/ Includes revenue from the sale of steel production by-products, engineering and consulting services, real estate development and resource management. Operating Segments: USX's reportable operating segments are business units within the Marathon and U. S. Steel Groups, each providing their own unique products and services. Each operating segment is independently managed and requires different technology and marketing strategies. Segment income represents income from operations allocable to operating segments. The following items included in income from operations are not allocated to operating segments: . Gain on ownership change in MAP . Pension credits associated with pension plan assets and liabilities allocated to pre-1987 retirees and former businesses . Certain costs related to former U. S. Steel Group business activities . Certain general and administrative costs related to all Marathon Group operating segments in excess of amounts billed to MAP under service contracts and amounts charged out to operating segments under Marathon's shared services procedures . USX corporate general and administrative costs. These costs primarily consist of employment costs including pension effects, professional services, facilities and other related costs associated with corporate activities. . Inventory market valuation adjustments . Certain other items not allocated to operating segments for business performance reporting purposes (see (a) in reconcilement table on page U-15) U-13 The Marathon Group's operations 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 - ----------------------------------------------------------------------------------------------------------------------------------- 1999 Revenues: Customer $3,230 $20,210 $731 $24,171 $5,363 $29,534 Intersegment/(a)/ 202 47 40 289 - 289 Intergroup/(a)/ 19 - 22 41 17 58 Equity in earnings (losses) of unconsolidated affiliates (2) 17 26 41 (43) (2) Other 30 48 15 93 46 139 ------ ------- ---- ------- ------ ------- Total revenues $3,479 $20,322 $834 $24,635 $5,383 $30,018 ====== ======= ==== ======= ====== ======= Segment income (loss) $ 618 $ 611 $ 61 $ 1,290 $ (128) $ 1,162 Significant noncash items included in segment income: Depreciation, depletion and amortization/(b)/ 638 280 5 923 304 1,227 Pension expenses/(c)/ 3 32 2 37 219 256 Capital expenditures/(d)/ 744 612 4 1,360 286 1,646 Affiliates - investments 56 - 3 59 15 74 - -------------------------------------------------------------------------------------------------------------------------------- 1998 Revenues: Customer $2,085 $19,192 $306 $21,583 $6,180 $27,763 Intersegment/(a)/ 144 10 17 171 - 171 Intergroup/(a)/ 13 - 7 20 2 22 Equity in earnings of unconsolidated affiliates 2 12 14 28 46 74 Other 26 40 11 77 55 132 ------ ------- ---- -------- ------- -------- Total revenues $2,270 $19,254 $355 $21,879 $6,283 $28,162 ====== ======= ==== ======== ======= ======== Segment income $ 278 $ 896 $ 33 $ 1,207 $ 330 $ 1,537 Significant noncash items included in segment income: Depreciation, depletion and amortization/(b)/ 581 272 6 859 283 1,142 Pension expenses/(c)/ 3 16 2 21 187 208 Capital expenditures/(d)/ 839 410 8 1,257 305 1,562 Affiliates - investments/(e)/ - 22 17 39 71 110 - -------------------------------------------------------------------------------------------------------------------------------- 1997 Revenues: Customer $1,575 $13,698 $381 $15,654 $6,812 $22,466 Intersegment/(a)/ 619 - - 619 - 619 Intergroup/(a)/ 99 - 6 105 2 107 Equity in earnings of unconsolidated affiliates 14 4 7 25 69 94 Other 7 20 30 57 58 115 ------ ------- ---- ------- ------ ------- Total revenues $2,314 $13,722 $424 $16,460 $6,941 $23,401 ====== ======= ==== ======= ====== ======= Segment income $ 773 $ 563 $ 48 $ 1,384 $ 618 $ 2,002 Significant noncash items included in segment income: Depreciation, depletion and amortization/(b)/ 469 173 7 649 303 952 Pension expenses/(c)/ 3 8 1 12 169 181 Capital expenditures/(d)/ 810 205 6 1,021 256 1,277 Affiliates - investments/(e)/ 114 - 73 187 26 213 - --------------------------------------------------------------------------------------------------------------------------------
/(a)/ Intersegment and intergroup sales and transfers were conducted under terms comparable to those with unrelated parties. /(b)/ Differences between segment totals and consolidated totals represent amounts included in administrative expenses and, in 1999 and 1998, certain international and domestic exploration and production property impairments. /(c)/ Differences between segment totals and consolidated totals represent unallocated pension credits and amounts included in administrative expenses. /(d)/ Differences between segment totals and consolidated totals represent amounts related to corporate administrative activities and, in 1997, discontinued operations. /(e)/ Differences between segment totals and consolidated totals represent amounts related to corporate administrative activities. U-14 The following reconciles segment revenues and income to amounts reported in the Groups' financial statements:
Marathon Group U. S. Steel Group -------------------------------------- ----------------------------------- (In millions) 1999 1998 1997 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Revenues: Revenues of reportable segments $24,635 $21,879 $16,460 $5,383 $6,283 $6,941 Items not allocated to segments: Gain on ownership change in MAP 17 245 - - - - Losses related to investments in equity affiliates - - - (69) - - Other (36) 24 - - - - Elimination of intersegment revenues (289) (171) (619) - - - Administrative revenues - - 5 - - - ------- ------- ------- ------ ------ ------ Total Group revenues $24,327 $21,977 $15,846 $5,314 $6,283 $6,941 ======= ======= ======= ====== ====== ====== Income: Income (loss) for reportable segments $ 1,290 $ 1,207 $ 1,384 $ (128) $ 330 $ 618 Items not allocated to segments: Gain on ownership change in MAP 17 245 - - - - Administrative expenses (108) (106) (168) (17) (24) (33) Pension credits - - - 447 373 313 Costs related to former business activities - - - (83) (100) (125) Inventory market valuation adjustments 551 (267) (284) - - - Other/(a)/ (37) (141) - (69) - - ------- ------- ------- ------ ------ ------ Total Group income from operations $ 1,713 $ 938 $ 932 $ 150 $ 579 $ 773 - ----------------------------------------------------------------------------------------------------------------------------------
/(a)/ Represents in 1999, for the Marathon Group, primarily certain domestic exploration and production impairments, costs of a voluntary early retirement program and net losses on certain asset sales and, for the U. S. Steel Group, certain losses related to investments in equity method affiliates. Represents in 1998 certain international exploration and production property impairments, certain suspended exploration well write-offs, a gas contract settlement and MAP transition charges. Geographic Area: The information below summarizes the operations in different geographic areas. Transfers between geographic areas are at prices which approximate market.
Revenues ------------------------------------------- Within Between (In millions) Year Geographic Areas Geographic Areas Total Assets/(a)/ - ------------------------------------------------------------------------------------------------------------------------------------ Marathon Group: United States 1999 $23,337 $ - $23,337 $ 7,555 1998 21,191 - 21,191 7,659 1997 15,123 - 15,123 5,578 Canada 1999 425 521 946 1,112 1998 209 368 577 1,094 United Kingdom 1999 459 - 459 1,581 1998 462 - 462 1,739 1997 593 - 593 1,856 Other Foreign Countries 1999 106 88 194 735 1998 115 52 167 468 1997 130 39 169 530 Eliminations 1999 - (609) (609) - 1998 - (420) (420) - 1997 - (39) (39) - Total Marathon Group 1999 $24,327 $ - $24,327 $10,983 1998 21,977 - 21,977 10,960 1997 15,846 - 15,846 7,964 - ------------------------------------------------------------------------------------------------------------------------------------ U. S. Steel Group: United States 1999 $ 5,296 $ - $ 5,296 $ 2,889 1998 6,266 - 6,266 3,043 1997 6,926 - 6,926 3,023 Foreign Countries 1999 18 - 18 63 1998 17 - 17 69 1997 15 - 15 1 Total U. S. Steel Group 1999 $ 5,314 $ - $ 5,314 $ 2,952 1998 6,283 - 6,283 3,112 1997 6,941 - 6,941 3,024 - ------------------------------------------------------------------------------------------------------------------------------------ Adjustments for Discontinued 1999 $ (58) $ - $ (58) $ - Operations and Eliminations 1998 (23) - (23) - 1997 (107) - (107) - - ------------------------------------------------------------------------------------------------------------------------------------ Total USX Corporation 1999 $29,583 $ - $29,583 $13,935 1998 28,237 - 28,237 14,072 1997 22,680 - 22,680 10,988 - ------------------------------------------------------------------------------------------------------------------------------------
/(a)/ Includes property, plant and equipment and investments in affiliates. U-15 - -------------------------------------------------------------------------------- 10. Pensions and Other Postretirement Benefits USX has noncontributory defined benefit pension plans covering substantially all employees. Benefits under these plans are primarily based upon years of service and final average pensionable earnings, or a minimum benefit based upon years of service, whichever is greater. In addition, pension benefits based upon a percent of total career pensionable earnings cover certain participating salaried employees. USX also has defined benefit retiree health and life insurance plans (other benefits) covering most employees upon their retirement. Health benefits are provided through comprehensive hospital, surgical and major medical benefit provisions or through health maintenance organizations, both subject to various cost sharing features. Life insurance benefits are provided to certain nonunion and union represented retiree beneficiaries primarily based on employees' annual base salary at retirement. For most union retirees, benefits are provided for the most part based on fixed amounts negotiated in labor contracts with the appropriate unions. Except for certain life insurance benefits paid from reserves held by insurance carriers and benefits required to be funded by union contracts, most other benefits have not been prefunded.
Pension Benefits Other Benefits ------------------------ ----------------- (In millions) 1999 1998 1999 1998 ----------------------------------------------------------------------------------------------------- Change in benefit obligations Benefit obligations at January 1 $ 8,629 $ 8,085 $ 2,710 $ 2,451 Service cost 152 119 32 27 Interest cost 540 544 169 172 Plan amendments 399 /(a)/ 14 (30) (20) Actuarial (gains) losses (1,019) 637 (333) 135 Plan mergers and acquisitions 56 145 11 98 Settlements, curtailments and termination benefits (329) 10 - 7 Benefits paid (844) (925) (185) (160) -------- ------- ------- ------- Benefit obligations at December 31 $ 7,584 $ 8,629 $ 2,374 $ 2,710 ----------------------------------------------------------------------------------------------------- Change in plan assets Fair value of plan assets at January 1 $ 11,574 $10,925 $ 265 $ 258 Actual return on plan assets 865 1,507 20 31 Plan merger and acquisitions 38 55 1 - Employer contributions 2 8 34 - Trustee distributions/(b)/ (30) (14) - - Settlements paid (306) - - - Benefits paid from plan assets (838) (907) (39) (24) -------- ------- ------- ------- Fair value of plan assets at December 31 $ 11,305 $11,574 $ 281 $ 265 ----------------------------------------------------------------------------------------------------- Funded status of plans at December 31 $ 3,721 /(c)/ $ 2,945/(c)/ $(2,093) $(2,445) Unrecognized net gain from transition (95) (175) - - Unrecognized prior service costs (credits) 880 566 (53) (28) Unrecognized net actuarial gains (1,945) (993) (458) (110) Additional minimum liability/(d)/ (24) (75) - - -------- ------- ------- ------- Prepaid (accrued) benefit cost $ 2,537 $ 2,268 $(2,604) $(2,583) ----------------------------------------------------------------------------------------------------- /(a)/ Results primarily from a new five-year labor contract with the United Steelworkers of America ratified in August 1999. /(b)/ Represents transfers of excess pension assets to fund retiree health care benefits accounts under Section 420 of the Internal Revenue Code. /(c)/ Includes several plans that have accumulated benefit obligations in excess of plan assets: Aggregate accumulated benefit obligations $ (53) $ (98) Aggregate projected benefit obligations (76) (120) Aggregate plan assets - - /(d)/ Additional minimum liability recorded was offset by the following: Intangible asset $ 9 $ 18 -------- ------- Accumulated other comprehensive income (losses): Beginning of year $ (37) $ (32) Change during year (net of tax) 27 (5) -------- ------- Balance at end of year $ (10) $ (37) --------------------------------------------------------------------------------------------------
U-16
Pension Benefits Other Benefits -------------------------------- -------------------------------------- (In millions) 1999 1998 1997 1999 1998 1997 -------------------------------------------------------------------------------------------------------------------------- Components of net periodic benefit cost (credit) Service cost $ 152 $ 119 $ 96 $ 32 $ 27 $ 21 Interest cost 540 544 562 169 172 175 Expected return on plan assets (895) (876) (828) (21) (21) (11) Amortization - net transition gain (72) (74) (74) -- -- -- - prior service costs (credits) 87 75 73 (4) 1 1 - actuarial (gains) losses 7 6 4 (5) (13) (13) Multiemployer and other USX plans 5 6 6 7 /(a)/ 13 /(a)/ 15 /(a)/ Settlement and termination (gains) losses (42) /(b)/ 10 /(b)/ 4 -- -- -- ------ ------ ------ ------ ------ ------ Net periodic benefit cost (credit) $ (218) $ (190) $ (157) $ 178 $ 179 $ 188 --------------------------------------------------------------------------------------------------------------------------
/(a)/ Represents payments to a multiemployer health care benefit plan created by the Coal Industry Retiree Health Benefit Act of 1992 based on assigned beneficiaries receiving benefits. The present value of this unrecognized obligation is broadly estimated to be $90 million, including the effects of future medical inflation, and this amount could increase if additional beneficiaries are assigned. /(b)/ Relates primarily to the 1999 Marathon Group and 1998 U. S. Steel Group voluntary early retirement programs.
Pension Benefits Other Benefits ------------------------ ------------------- 1999 1998 1999 1998 ------------------------------------------------------------------------------------------------------------- Weighted average actuarial assumptions at December 31: Discount rate 8.0% 6.5% 8.0% 6.5% Expected annual return on plan assets 8.6% 9.1% 8.5% 9.0% Increase in compensation rate 4.1% 4.1% 4.1% 4.1% -------------------------------------------------------------------------------------------------------------
For measurement purposes, a 7.6% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2000. The rate was assumed to decrease gradually to 5% until 2005 for the U. S. Steel Group and until 2006 for the Marathon Group and remain at that level thereafter. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage- (In millions) Point Increase Point Decrease ---------------------------------------------------------------------------------------------------------- Effect on total of service and interest cost components $ 22 $ (18) Effect on other postretirement benefit obligations 207 (175) -----------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 11. Leases Future minimum commitments for capital leases (including sale- leasebacks accounted for as financings) and for operating leases having remaining noncancelable lease terms in excess of one year are as follows:
Capital Operating (In millions) Leases Leases ------------------------------------------------------------------------------------ 2000 $ 13 $ 302 2001 13 199 2002 13 115 2003 13 76 2004 13 65 Later years 119 200 Sublease rentals - (104) ----- ----- Total minimum lease payments 184 $ 853 ----- ===== Less imputed interest costs (77) ----- Present value of net minimum lease payments included in long-term debt $ 107 ------------------------------------------------------------------------------------
Operating lease rental expense from continuing operations:
(In millions) 1999 1998 1997 --------------------------------------------------------------------------------------------------- Minimum rental $ 266 $ 288 $ 232 Contingent rental 29 29 25 Sublease rentals (12) (14) (14) ----- ----- ----- Net rental expense $ 283 $ 303 $ 243 ---------------------------------------------------------------------------------------------------
USX leases a wide variety of facilities and equipment under operating leases, including land and building space, office equipment, production facilities and transportation equipment. Most long-term leases include renewal options and, in certain leases, purchase options. In the event of a change in control of USX, as defined in the agreements, or certain other circumstances, operating lease obligations totaling $105 million may be declared immediately due and payable. U-17 - -------------------------------------------------------------------------------- 12. Income Taxes Provisions (credits) for estimated income taxes on income from continuing operations were:
1999 1998 1997 ----------------------------- ---------------------------- ----------------------------- (In millions) Current Deferred Total Current Deferred Total Current Deferred Total ------------------------------------------------------------------------------------------------------------------ Federal $107 $ 257 $364 $102 $ 168 $ 270 $ 208 $ 163 $ 371 State and local 4 1 5 33 18 51 7 32 39 Foreign 26 (46) (20) (4) (2) (6) 12 28 40 ---- ----- ---- ---- ----- ----- ----- ----- ------ Total $137 $ 212 $349 $131 $ 184 $ 315 $227 $ 223 $ 450 ------------------------------------------------------------------------------------------------------------------
A reconciliation of federal statutory tax rate (35%) to total provisions from continuing operations follows:
(In millions) 1999 1998 1997 -------------------------------------------------------------------------------------------------------- Statutory rate applied to income from continuing operations before income taxes $ 369 $ 346 $ 475 Effects of foreign operations, including foreign tax credits (20) (37) (11) State and local income taxes after federal income tax effects 3 33 25 Credits other than foreign tax credits (10) (12) (24) Excess percentage depletion (7) (11) (10) Effects of partially owned companies (5) (4) (9) Dispositions of subsidiary investments 7 - - Adjustment of prior years' federal income taxes 4 (5) 2 Adjustment of valuation allowances - - (5) Other 8 5 7 ----- ----- ------ Total provisions on income from continuing operations $ 349 $ 315 $ 450 --------------------------------------------------------------------------------------------------------
Deferred tax assets and liabilities resulted from the following:
(In millions) December 31 1999 1998 ----------------------------------------------------------------------------------------------------------- Deferred tax assets: Minimum tax credit carryforwards $ 131 $ 200 State tax loss carryforwards (expiring in 2000 through 2019) 122 118 Foreign tax loss carryforwards (portion of which expire in 2000 through 2014) 382 414 Employee benefits 1,204 1,170 Expected federal benefit for: Crediting certain foreign deferred income taxes 530 528 Deducting state and other foreign deferred income taxes 36 48 Receivables, payables and debt 82 65 Contingency and other accruals 202 188 Investments in foreign subsidiaries 52 52 Other 45 50 Valuation allowances: Federal (30) (30) State (52) (52) Foreign (282) (260) ------- ------- Total deferred tax assets/(a)/ 2,422 2,491 ------- ------- Deferred tax liabilities: Property, plant and equipment 2,339 2,430 Prepaid pensions 1,048 917 Inventory 340 186 Investments in subsidiaries and affiliates 76 94 Other 155 190 ------- ------- Total deferred tax liabilities 3,958 3,817 ------- ------- Net deferred tax liabilities $ 1,536 $ 1,326 -----------------------------------------------------------------------------------------------------------
/(a)/ USX expects to generate sufficient future taxable income to realize the benefit of its deferred tax assets. In addition, the ability to realize the benefit of foreign tax credits is based upon certain assumptions concerning future operating conditions (particularly as related to prevailing oil prices), income generated from foreign sources and USX's tax profile in the years that such credits may be claimed. The consolidated tax returns of USX for the years 1990 through 1997 are under various stages of audit and administrative review by the IRS. USX believes it has made adequate provision for income taxes and interest which may become payable for years not yet settled. Pretax income (loss) from continuing operations included $63 million, $(75) million and $250 million attributable to foreign sources in 1999, 1998 and 1997, respectively. Undistributed earnings of certain consolidated foreign subsidiaries at December 31, 1999, amounted to $150 million. No provision for deferred U.S. income taxes has been made for these subsidiaries because USX intends to permanently reinvest such earnings in those foreign operations. If such earnings were not permanently reinvested, a deferred tax liability of $53 million would have been required. U-18 - -------------------------------------------------------------------------------- 13. Property, Plant and Equipment
(In millions) December 31 1999 1998 --------------------------------------------------------------------------------------- Marathon Group $20,860 $20,728 U. S. Steel Group 8,748 8,439 ------- ------- Total 29,608 29,167 Less accumulated depreciation, depletion and amortization 16,799 16,238 ------- ------- Net $12,809 $12,929 ---------------------------------------------------------------------------------------
Property, plant and equipment includes gross assets acquired under capital leases (including sale-leasebacks accounted for as financings) of $125 million at December 31, 1999, and $108 million at December 31, 1998; related amounts in accumulated depreciation, depletion and amortization were $81 million and $77 million, respectively. - -------------------------------------------------------------------------------- 14. Investments and Long-Term Receivables
(In millions) December 31 1999 1998 -------------------------------------------------------------------------------------------------- Equity method investments $1,055 $1,062 Other investments 71 81 Receivables due after one year 67 56 Deposits of restricted cash 22 21 Other 32 29 ------ ------ Total $1,247 $1,249 --------------------------------------------------------------------------------------------------
Summarized financial information of affiliates accounted for by the equity method of accounting follows:
(In millions) 1999 1998 1997 --------------------------------------------------------------------------------------------------- Income data - year: Revenues $3,449 $3,510 $3,705 Operating income 95 324 342 Net income (loss) (74) 176 191 --------------------------------------------------------------------------------------------------- Balance sheet data - December 31: Current assets $1,382 $1,290 Noncurrent assets 5,008 4,382 Current liabilities 1,481 874 Noncurrent liabilities 2,317 2,137 ---------------------------------------------------------------------------------------------------
In 1999, USX and Kobe Steel, Ltd. (Kobe Steel) completed a transaction that combined the steelmaking and bar producing assets of USS/Kobe Steel Company (USS/Kobe) with companies controlled by Blackstone Capital Partners II. The combined entity was named Republic Technologies International, LLC (Republic). In addition, USX made a $15 million equity investment in Republic. USX owned 50% of USS/Kobe and now owns 16% of Republic. USX accounts for its investment in Republic under the equity method of accounting. Dividend and affiliate income (loss) in 1999 includes $47 million in charges related to the impairment of the carrying value of USX's investment in USS/Kobe and costs related to the formation of Republic. The seamless pipe business of USS/Kobe was excluded from this transaction. That business, now known as Lorain Tubular Company, LLC, became a wholly owned subsidiary of USX at the close of business on December 31, 1999. Dividends and partnership distributions received from equity affiliates were $46 million in 1999, $42 million in 1998 and $34 million in 1997. USX purchases from equity affiliates totaled $411 million, $395 million and $461 million in 1999, 1998 and 1997, respectively. USX sales to equity affiliates totaled $853 million, $747 million and $838 million in 1999, 1998 and 1997, respectively. - -------------------------------------------------------------------------------- 15. Short-Term Credit Agreement USX has a short-term credit agreement totaling $125 million at December 31, 1999. Interest is based on the bank's prime rate or London Interbank Offered Rate (LIBOR), and carries a facility fee of .15%. Certain other banks provide short-term lines of credit totaling $150 million which require a .125% fee or maintenance of compensating balances of 3%. At December 31, 1999, there were no borrowings against these facilities. U-19 ________________________________________________________________________________ 16. Long-Term Debt
Interest December 31 (In millions) Rates - % Maturity 1999 1998 ------------------------------------------------------------------------------------------------------------ USX Corporation: Revolving credit facility/(a)/ 2001 $ 300 $ 700 Commercial paper/(a)/ 6.71 165 - Notes payable 6 13/20 - 9 4/5 2000 - 2023 2,525 2,267 Obligations relating to Industrial Development and Environmental Improvement Bonds and Notes/(b)/ 3 9/20 - 6 7/8 2009 - 2033 494 494 Receivables facility/(a)(c)/ 2004 350 - Indexed debt (Note 8) 6 3/4 - 69 All other obligations, including sale-leaseback financing and capital leases 2000 - 2012 92 94 Consolidated subsidiaries: Revolving credit facilities/(d)/ 2000 - 2003 - - Guaranteed Notes 7 2002 135 135 Guaranteed Loan/(e)/ 9 1/20 2000 - 2006 223 245 Notes payable 8 1/2 2000 - 2001 1 2 All other obligations, including capital leases 2000 - 2011 26 11 ------ ------ Total/(f)(g)/ 4,311 4,017 Less unamortized discount 28 26 Less amount due within one year 61 71 ------ ------ Long-term debt due after one year $4,222 $3,920 ------------------------------------------------------------------------------------------------------------
/(a)/ An amended agreement which terminates in August 2001, provides for borrowing under a $2,350 million revolving credit facility. Interest is based on defined short-term market rates. During the term of this agreement, USX is obligated to pay a variable facility fee on total commitments, which was .15 % at December 31, 1999. If the receivables facility discussed in (c) is not renewed annually, the balance outstanding of such facility could be refinanced by the revolving credit facility, or another long-term debt source; and therefore, is classified as long-term debt. The commercial paper is supported by the $2,050 million in unused and available credit and, accordingly, is classified as long-term debt. /(b)/ At December 31, 1999, USX had outstanding obligations relating to Environmental Improvement Bonds in the amount of $141 million, which were supported by letter of credit arrangements that could become short-term obligations under certain circumstances. /(c)/ In December 1999, USX entered into an agreement under which the U. S. Steel Group participates in a program to sell an undivided interest in certain accounts receivable. A previous program expired in October 1999 and was accounted for as a transfer of receivables. The new program is accounted for as a secured borrowing. Payments are collected from sold accounts receivable and invested in new accounts receivable for the purchaser and a yield, based on short-term market rates, is transferred to the purchaser. If the U. S. Steel Group does not have sufficient eligible receivables to reinvest for the purchaser, the size of the program is reduced accordingly. The purchaser has a security interest in a pool of receivables to secure USX's obligations under the program. The amounts sold under the previous receivables' programs averaged $291 million, $347 million and $705 million for the years 1999, 1998 and 1997, respectively. (The Marathon and Delhi Groups had a separate accounts receivable program that was terminated in late 1997.) /(d)/ MAP has a revolving credit facility for $100 million that terminates in July 2000 and a $400 million revolving credit facility that terminates in July 2003. Interest is based on defined short-term market rates for both facilities. During the terms of the agreements, MAP is obligated to pay a variable facility fee on total commitments. At December 31, 1999, the facility fee was .11% for the $100 million facility and .125% for the $400 million facility. At December 31, 1999, the unused and available credit was $429 million, which reflects reductions for outstanding letters of credit. In the event that MAP defaults on indebtedness (as defined in the agreement) in excess of $100 million, USX has guaranteed the payment of any outstanding obligations. /(e)/ The guaranteed loan was used to fund a portion of the costs in connection with the development of the East Brae Field and the SAGE pipeline in the North Sea. A portion of proceeds from a long-term gas sales contract is dedicated to loan service under certain circumstances. Prepayment of the loan may be required under certain situations, including events impairing the security interest. /(f)/ Required payments of long-term debt for the years 2001-2004 are $747 million, $210 million, $187 million and $690 million, respectively. /(g)/ In the event of a change in control of USX, as defined in the related agreements, debt obligations totaling $3,332 million may be declared immediately due and payable. The principal obligations subject to such a provision are Notes payable - $2,525 million; and Guaranteed Loan - $223 million. In such event, USX may also be required to either repurchase the leased Fairfield slab caster for $104 million or provide a letter of credit to secure the remaining obligation. U-20 - -------------------------------------------------------------------------------- 17. Inventories
(In millions) December 31 1999 1998 ------------------------------------------------------------------- Raw materials $ 830 $ 916 Semi-finished products 392 282 Finished products 1,239 1,205 Supplies and sundry items 166 156 ------ ------ Total (at cost) 2,627 2,559 Less inventory market valuation reserve - 551 ------ ------ Net inventory carrying value $2,627 $2,008 -------------------------------------------------------------------
At December 31, 1999 and 1998, the LIFO method accounted for 91% and 90%, respectively, of total inventory value. Current acquisition costs were estimated to exceed the above inventory values at December 31 by approximately $570 million and $310 million in 1999 and 1998, respectively. The inventory market valuation reserve reflects the extent that the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. The reserve is decreased to reflect increases in market prices and inventory turnover and increased to reflect decreases in market prices. Changes in the inventory market valuation reserve result in noncash charges or credits to costs and expenses. - -------------------------------------------------------------------------------- 18. Supplemental Cash Flow Information
(In millions) 1999 1998 1997 ----------------------------------------------------------------------------------------------------------- Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $ (366) $ (336) $ (382) Income taxes paid (98) (183) (400) ----------------------------------------------------------------------------------------------------------- Commercial paper and revolving credit arrangements - net: Commercial paper - issued $ 6,282 $ - $ - - repayments (6,117) - - Credit agreements - borrowings 5,529 17,486 10,454 - repayments (5,980) (16,817) (10,449) Other credit arrangements - net (95) 55 36 ------- -------- -------- Total $ (381) $ 724 $ 41 ----------------------------------------------------------------------------------------------------------- Noncash investing and financing activities: Common stock issued for dividend reinvestment and employee stock plans $ 6 $ 5 $ 10 Marathon Stock issued for Exchangeable Shares 7 11 - Trust preferred securities exchanged for preferred stock - - 182 Affiliate preferred stock received in conversion of affiliate loan 142 - - Disposal of assets: Deposit of RTI common shares in satisfaction of indexed debt 56 - - Interest in USS/Kobe contributed to Republic 40 - - Other disposals of assets: Notes or common stock received 20 2 - Liabilities assumed by buyers - - 240 Business combinations: Acquisition of Tarragon: Exchangeable Shares issued - 29 - Liabilities assumed - 433 - Acquisition of Ashland RM&T net assets: 38% interest in MAP - 1,900 - Liabilities assumed - 1,038 - Other acquisitions: Liabilities assumed 42 - - Affiliate liabilities consolidated in step acquisition 26 - - -----------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 19. Stock-Based Compensation Plans The 1990 Stock Plan, as amended and restated, authorizes the Compensation Committee of the Board of Directors to grant restricted stock, stock options and stock appreciation rights to key management employees. Such employees are generally granted awards of the class of common stock intended to reflect the performance of the group(s) to which their work relates. Up to .5 percent of the outstanding Marathon Stock and .8 percent of the outstanding Steel Stock, as determined on December 31 of the preceding year, are available for grants during each calendar year the 1990 Plan is in effect. In addition, awarded shares that do not result in shares being issued are available for subsequent grant, and any ungranted shares from prior years' annual allocations are available for subsequent grant U-21 during the years the 1990 Plan is in effect. As of December 31, 1999, 8,744,297 Marathon Stock shares and 2,540,519 Steel Stock shares were available for grants in 2000. The Stock-Based Compensation Plans' activity below includes the Delhi Stock prior to its January 1998 redemption (Note 5). Restricted stock represents stock granted for such consideration, if any, as determined by the Compensation Committee, subject to provisions for forfeiture and restricting transfer. Those restrictions may be removed as conditions such as performance, continuous service and other criteria are met. Restricted stock is issued at the market price per share at the date of grant and vests over service periods that range from one to five years. Deferred compensation is charged to stockholders' equity when the restricted stock is granted and subsequently adjusted for changes in the market value of the underlying stock. The deferred compensation is expensed over the balance of the vesting period and adjusted if conditions of the restricted stock grant are not met. The following table presents information on restricted stock grants:
Marathon Stock Steel Stock --------------------------- -------------------------------- 1999 1998 1997 1999 1998 1997 ----------------------------------------------------------------------------------------------- Number of shares granted 28,798 25,378 20,430 18,272 17,742 11,942 Weighted-average grant-date fair value per share $ 29.38 $ 34.00 $ 29.38 $ 28.22 $ 37.28 $ 32.00 -----------------------------------------------------------------------------------------------
Stock options represent the right to purchase shares of Marathon Stock, Steel Stock or Delhi Stock at the market value of the stock at date of grant. Certain options contain the right to receive cash and/or common stock equal to the excess of the fair market value of shares of common stock, as determined in accordance with the plan, over the option price of shares. Stock options vest after a one-year service period and expire 10 years from the date they are granted. The following is a Summary of Stock option activity:
Marathon Stock Steel Stock Delhi Stock ------------------------ ---------------------- -------------------------- Shares Price/(a)/ Shares Price/(a)/ Shares Price/(a)/ --------------------------------------------------------------------------------------------------------- Balance December 31, 1996 5,230,570 $23.78 1,345,595 $34.85 326,950 $15.60 Granted 756,260 29.38 457,590 32.00 94,250 13.31 Exercised (2,215,665) 23.86 (158,265) 31.85 (6,300) 12.21 Canceled (76,300) 26.91 (11,820) 34.36 (6,650) 15.73 ---------- --------- ------- Balance December 31, 1997 3,694,865 24.81 1,633,100 34.35 408,250 15.13 Granted 987,535 34.00 611,515 37.28 Exercised (594,260) 27.61 (230,805) 32.00 Canceled (13,200) 27.22 (21,240) 35.89 Redeemed - - (408,250) 20.60 /(b)/ ---------- --------- ------- Balance December 31, 1998 4,074,940 26.62 1,992,570 35.50 - Granted 1,005,000 29.38 656,400 28.22 Exercised (176,160) 27.27 (2,580) 24.92 Canceled (121,055) 30.19 (20,005) 38.51 ---------- --------- ------- Balance December 31, 1999 4,782,725 27.08 2,626,385 33.67 - ---------------------------------------------------------------------------------------------------------
/(a)/ Weighted-average exercise price /(b)/ Redemption price The weighted-average grant-date fair value per option for the Marathon Stock was $8.89 in 1999, $10.43 in 1998 and $9.01 in 1997. For the Steel Stock such amounts were $6.95 in 1999, $8.29 in 1998 and $6.72 in 1997. The following table represents stock options at December 31, 1999:
Outstanding Exercisable ------------------------------------------- ---------------------------- Weighted- Number Average Weighted- Number Weighted- Range of of Shares Remaining Average of Shares Average Exercise Under Contractual Exercise Under Exercise Prices Option Life Price Option Price ----------------------------------------------------------------------------------------------------------------------- Marathon Stock $ 17.00-23.44 1,679,060 4.6 years $20.60 1,679,060 $20.60 25.38-26.88 164,825 1.4 25.45 164,825 25.45 29.08-34.00 2,938,840 7.8 30.88 1,959,335 31.63 --------- ---------- Total 4,782,725 3,803,220 --------- ---------- Steel Stock $ 22.46-28.22 685,340 9.0 years $28.07 29,395 $24.82 31.69-34.44 1,073,095 6.2 32.57 1,073,095 32.57 37.28-44.19 867,950 6.8 39.45 867,950 39.45 --------- ---------- Total 2,626,385 1,970,440 ----------------------------------------------------------------------------------------------------------------------
Actual stock-based compensation expense (credit) was $(3) million in 1999 and 1998 and $30 million in 1997. Incremental compensation expense, as determined under a fair value model, was not material ($.02 or less per share for all years presented). Therefore, pro forma net income and earnings per share data have been omitted. U-22 Effective January 1, 1997, USX created a deferred compensation plan for non-employee directors of its Board of Directors. The plan permits participants to defer some or all of their annual retainers in the form of common stock units or cash and it requires new directors to defer at least half of their annual retainer in the form of common stock units. Common stock units are book entry units equal in value to a share of Marathon Stock or Steel Stock. Deferred stock benefits are distributed in shares of common stock within five business days after a participant leaves the Board of Directors. During 1999, 10,541 shares of Marathon Stock and 3,798 shares of Steel Stock were issued. During 1998 and 1997, no shares of common stock were distributed. - -------------------------------------------------------------------------------- 20. Dividends In accordance with the USX Certificate, dividends on the Marathon Stock and Steel Stock are limited to the legally available funds of USX. Net losses of any Group, as well as dividends and distributions on any class of USX Common Stock or series of preferred stock and repurchases of any class of USX Common Stock or series of preferred stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on all classes of Common Stock. Subject to this limitation, the Board of Directors intends to declare and pay dividends on the Marathon Stock and Steel Stock based on the financial condition and results of operations of the related group, although it has no obligation under Delaware law to do so. In making its dividend decisions with respect to each of the Marathon Stock and Steel Stock, the Board of Directors considers, among other things, the long-term earnings and cash flow capabilities of the related group as well as the dividend policies of similar publicly traded companies. Dividends on the Steel Stock are further limited to the Available Steel Dividend Amount. At December 31, 1999, the Available Steel Dividend Amount was at least $3,300 million. The Available Steel Dividend Amount will be increased or decreased, as appropriate, to reflect U. S. Steel Group net income, dividends, repurchases or issuances with respect to the Steel Stock and preferred stock attributed to the U. S. Steel Group and certain other items. - -------------------------------------------------------------------------------- 21. Stockholder Rights Plan On September 28, 1999, USX's Board of Directors adopted a new Stockholder Rights Plan and declared a dividend distribution of one right for each outstanding share of Marathon Stock and Steel Stock (referred to together as "Voting Stock") to stockholders of record on October 9, 1999. Each right becomes exercisable, at a price of $110, after any person or group has acquired, obtained the right to acquire or made a tender or exchange offer for 15% or more of the outstanding voting power represented by the outstanding Voting Stock, except pursuant to a qualifying all-cash tender offer for all outstanding shares of Voting Stock which results in the offeror owning shares of Voting Stock representing a majority of the voting power (other than Voting Stock beneficially owned by the offeror immediately prior to the offer). Each right entitles the holder, other than the acquiring person or group, to purchase one one- hundredth of a share of Series A Junior Preferred Stock or, upon the acquisition by any person of 15% or more of the outstanding voting power represented by the outstanding Voting Stock, Marathon Stock or Steel Stock (or, in certain circumstances, other property) having a market value of twice the exercise price. After a person or group acquires 15% or more of the outstanding voting power, if USX engages in a merger or other business combination where it is not the surviving corporation or where it is the surviving corporation and the Voting Stock is changed or exchanged, or if 50% or more of USX's assets, earnings power or cash flow are sold or transferred, each right entitles the holder to purchase common stock of the acquiring entity having a market value of twice the exercise price. The rights and the exercise price are subject to adjustment. The rights will expire on October 9, 2009, unless such date is extended or the rights are earlier redeemed by USX for one cent per right at any time prior to the point they become exercisable. Under certain circumstances, the Board of Directors has the option to exchange one share of the respective class of Voting Stock for each exercisable right. - -------------------------------------------------------------------------------- 22. Income Per Common Share The method of calculating net income per share for the Marathon Stock, the Steel Stock and, prior to November 1, 1997, the Delhi Stock reflects the USX Board of Directors' intent that the separately reported earnings and surplus of the Marathon Group, the U. S. Steel Group and the Delhi Group, as determined consistent with the USX Certificate, are available for payment of dividends on the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. The financial statements of the Marathon Group, the U. S. Steel Group and the Delhi Group, taken together, include all accounts which comprise the corresponding consolidated financial statements of USX. Basic net income per share is calculated by adjusting net income for dividend requirements of preferred stock and, in 1997, the noncash credit on exchange of preferred stock and is based on the weighted average number of common shares outstanding. Diluted net income per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options, provided in each case, the effect is not antidilutive. U-23
COMPUTATION OF INCOME PER SHARE 1999 1998 1997 ------------------- ------------------ ------------------ Basic Diluted Basic Diluted Basic Diluted - ---------------------------------------------------------------------------------------------------------------------- CONTINUING OPERATIONS Marathon Group - -------------- Net income (millions): Net income $ 654 $ 654 $ 310 $ 310 $ 456 $ 456 Dilutive effect of convertible debentures - - - - - 3 ------- ------- ------- ------- ------- ------- Net income assuming conversions $ 654 $ 654 $ 310 $ 310 $ 456 $ 459 ======= ======= ======= ======= ======= ======= Shares of common stock outstanding (thousands): Average number of common shares outstanding 309,696 309,696 292,876 292,876 288,038 288,038 Effect of dilutive securities: Convertible debentures - - - - - 1,936 Stock options - 314 - 559 - 546 ------- ------- ------- ------- ------- ------- Average common shares and dilutive effect 309,696 310,010 292,876 293,435 288,038 290,520 ======= ======= ======= ======= ======= ======= Net income per share $ 2.11 $ 2.11 $ 1.06 $ 1.05 $ 1.59 $ 1.58 - ---------------------------------------------------------------------------------------------------------------------- U.S. Steel Group - ---------------- Net income (millions): Income before extraordinary losses $ 51 $ 51 $ 364 $ 364 $ 452 $ 452 Noncash credit from exchange of preferred stock - - - - 10 - Dividends on preferred stock (9) (9) (9) - (13) - Extraordinary losses (7) (7) - - - - ------- ------- ------- ------- ------- ------- Net income applicable to Steel Stock 35 35 355 364 449 452 Effect of dilutive securities: Trust preferred securities - - - 8 - 6 Convertible debentures - - - - - 2 ------- ------- ------- ------- ------- ------- Net income assuming conversions $ 35 $ 35 $ 355 $ 372 $ 449 $ 460 ======= ======= ======= ======= ======= ======= Shares of common stock outstanding (thousands): Average number of common shares outstanding 88,392 88,392 87,508 87,508 85,672 85,672 Effect of dilutive securities: Trust preferred securities - - - 4,256 - 2,660 Preferred stock - - - 3,143 - 4,811 Convertible debentures - - - - - 1,025 Stock options - 4 - 36 - 35 ------- ------- ------- ------- ------- ------- Average common shares and dilutive effect 88,392 88,396 87,508 94,943 85,672 94,203 ======= ======= ======= ======= ======= ======= Per share: Income before extraordinary losses $ .48 $ .48 $ 4.05 $ 3.92 $ 5.24 $ 4.88 Extraordinary losses .08 .08 - - - - ------- ------- ------- ------- ------- ------- Net income $ .40 $ .40 $ 4.05 $ 3.92 $ 5.24 $ 4.88 - ---------------------------------------------------------------------------------------------------------------------- DISCONTINUED OPERATIONS Delhi Group - ----------- Net income (millions) $ 79.7 $ 79.7 ======= ======= Shares of common stock outstanding (thousands): Average number of common shares outstanding 9,449 9,449 Stock options - 21 ------- ------- Average common shares and dilutive effect 9,449 9,470 ======= ======= Net income per share $ 8.43 $ 8.41 - ----------------------------------------------------------------------------------------------------------------------
U-24 23. Preferred Stock of Subsidiary and Trust Preferred Securities USX Capital LLC, a wholly owned subsidiary of USX, sold 10,000,000 shares (carrying value of $250 million) of 8 3/4% Cumulative Monthly Income Preferred Shares (MIPS) (liquidation preference of $25 per share) in 1994. Proceeds of the issue were loaned to USX. USX has the right under the loan agreement to extend interest payment periods for up to 18 months, and as a consequence, monthly dividend payments on the MIPS can be deferred by USX Capital LLC during any such interest payment period. In the event that USX exercises this right, USX may not declare dividends on any share of its preferred or common stocks. The MIPS are redeemable at the option of USX Capital LLC and subject to the prior consent of USX, in whole or in part from time to time, for $25 per share, and will be redeemed from the proceeds of any repayment of the loan by USX. In addition, upon final maturity of the loan, USX Capital LLC is required to redeem the MIPS. The financial costs are included in net interest and other financial costs. In 1997, USX exchanged approximately 3.9 million 6.75% Convertible Quarterly Income Preferred Securities (Trust Preferred Securities) of USX Capital Trust I, a Delaware statutory business trust (Trust), for an equivalent number of shares of its 6.50% Cumulative Convertible Preferred Stock (6.50% Preferred Stock) (Exchange). The Exchange resulted in the recording of Trust Preferred Securities at a fair value of $182 million and a noncash credit to Retained Earnings of $10 million. USX owns all of the common securities of the Trust, which was formed for the purpose of the Exchange. (The Trust Common Securities and the Trust Preferred Securities are together referred to as the Trust Securities.) The Trust Securities represent undivided beneficial ownership interests in the assets of the Trust, which consist solely of USX 6.75% Convertible Junior Subordinated Debentures maturing March 31, 2037 (Debentures), having an aggregate principal amount equal to the aggregate initial liquidation amount ($50.00 per security and $203 million in total) of the Trust Securities issued by the Trust. Interest and principal payments on the Debentures will be used to make quarterly distributions and to pay redemption and liquidation amounts on the Trust Preferred Securities. The quarterly distributions, which accumulate at the rate of 6.75% per annum on the Trust Preferred Securities and the accretion from fair value to the initial liquidation amount, are charged to income and included in net interest and other financial costs. Under the terms of the Debentures, USX has the right to defer payment of interest for up to 20 consecutive quarters and, as a consequence, monthly distributions on the Trust Preferred Securities will be deferred during such period. If USX exercises this right, then, subject to limited exceptions, it may not pay any dividend or make any distribution with respect to any shares of its capital stock. The Trust Preferred Securities are convertible at any time prior to the close of business on March 31, 2037 (unless such right is terminated earlier under certain circumstances) at the option of the holder, into shares of Steel Stock at a conversion price of $46.25 per share of Steel Stock (equivalent to a conversion ratio of 1.081 shares of Steel Stock for each Trust Preferred Security), subject to adjustment in certain circumstances. The Trust Preferred Securities may be redeemed at any time at the option of USX, at a premium of 102.60% of the initial liquidation amount through March 31, 2000, and thereafter, declining annually to the initial liquidation amount on April 1, 2003, and thereafter. They are mandatorily redeemable at March 31, 2037, or earlier under certain circumstances. Payments related to quarterly distributions and to the payment of redemption and liquidation amounts on the Trust Preferred Securities by the Trust are guaranteed by USX on a subordinated basis. In addition, USX unconditionally guarantees the Trust's Debentures. The obligations of USX under the Debentures, and the related indenture, trust agreement and guarantee constitute a full and unconditional guarantee by USX of the Trust's obligations under the Trust Preferred Securities. - -------------------------------------------------------------------------------- 24. Preferred Stock USX is authorized to issue 40,000,000 shares of preferred stock, without par value - 6.50% Cumulative Convertible Preferred Stock (6.50% Preferred Stock) - As of December 31, 1999, 2,715,287 shares (stated value of $1.00 per share; liquidation preference of $50.00 per share) were outstanding. The 6.50% Preferred Stock is convertible at any time, at the option of the holder, into shares of Steel Stock at a conversion price of $46.125 per share of Steel Stock, subject to adjustment in certain circumstances. This stock is redeemable at USX's sole option, at a price of $51.30 per share beginning April 1, 1999, and thereafter at prices declining annually on each April 1 to an amount equal to $50.00 per share on and after April 1, 2003. U-25 - -------------------------------------------------------------------------------- 25. Derivative Instruments USX remains at risk for possible changes in the market value of the derivative instrument; however, such risk should be mitigated by price changes in the underlying hedged item. USX is also exposed to credit risk in the event of nonperformance by counterparties. The credit worthiness of counterparties is subject to continuing review, including the use of master netting agreements to the extent practical, and full performance is anticipated. The following table sets forth quantitative information by class of derivative instrument for derivative instruments categorized as trading or other than trading:
Recognized Fair Carrying Trading Recorded Value Amount Gain or Deferred Aggregate Assets Assets (Loss) for Gain or Contract (In millions) (Liabilities)/(a)(b)/ (Liabilities) the Year (Loss) Values/(c)/ - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1999: Exchange-traded commodity futures: Trading $ - $ - $ 4 $ - $ 8 Other than trading - - - 28 344 Exchange-traded commodity options: Trading - - 4 - 179 Other than trading (6) /(d)/ (6) - (10) 1,262 OTC commodity swaps/(e)/: Trading - - - - - Other than trading 6 /(f)/ 6 - 5 193 OTC commodity options: Trading - - - - - Other than trading 4 /(g)/ 4 - 5 238 ------------ ------------ ---------- -------- --------- Total commodities $ 4 $ 4 $ 8 $ 28 $ 2,224 ------------ ------------ ---------- -------- --------- Forward exchange contracts/(h)/: - receivable $ 52 $ 52 $ - $ - $ 51 - ----------------------------------------------------------------------------------------------------------------------------- December 31, 1998: Exchange-traded commodity futures $ - $ - $ (2) $ 104 Exchange-traded commodity options 3 /(d)/ 2 3 776 OTC commodity swaps (9) /(f)/ (9) (7) 297 OTC commodity options 3 /(g)/ 3 3 147 ------------ ------------ -------- --------- Total commodities $ (3) $ (4) $ (3) $ 1,324 ============ ------------ ======== ========= Forward exchange contracts: - receivable $ 36 $ 36 $ - $ 36 - -----------------------------------------------------------------------------------------------------------------------------
/(a)/ The fair value amounts for OTC positions are based on various indices or dealer quotes. The fair value amounts for currency contracts are based on dealer quotes of forward prices covering the remaining duration of the forward exchange contract. The exchange-traded futures contracts and certain option contracts do not have a corresponding fair value since changes in the market prices are settled on a daily basis. /(b)/ The aggregate average fair value of all trading activities for the period ending December 31, 1999, was $3 million. Detail by class of instrument was not available. /(c)/ Contract or notional amounts do not quantify risk exposure, but are used in the calculation of cash settlements under the contracts. The contract or notional amounts do not reflect the extent to which positions may offset one another. /(d)/ Includes fair values as of December 31, 1999 and 1998, for assets of $11 million and $23 million and for liabilities of $(17) million and $(20) million, respectively. /(e)/ The OTC swap arrangements vary in duration with certain contracts extending into 2008. /(f)/ Includes fair values as of December 31, 1999 and 1998, for assets of $11 million and $29 million and for liabilities of $(5) million and $(38) million, respectively. /(g)/ Includes fair values as of December 31, 1999 and 1998, for assets of $5 million and for liabilities of $(1) million and $(2) million, respectively. /(h)/ The forward exchange contracts relating to USX's foreign operations have various maturities ending in December 2000. U-26 - -------------------------------------------------------------------------------- 26. Fair Value of Financial Instruments Fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. The following table summarizes financial instruments, excluding derivative financial instruments disclosed in Note 25, by individual balance sheet account:
1999 1998 ------------------ ----------------- Fair Carrying Fair Carrying (In millions) December 31 Value Amount Value Amount --------------------------------------------------------------------------------------------------------- Financial assets: Cash and cash equivalents $ 133 $ 133 $ 146 $ 146 Receivables 2,696 2,696 1,663 1,663 Investments and long-term receivables 190 134 180 124 ------ ------ ------ ------ Total financial assets $3,019 $2,963 $1,989 $1,933 --------------------------------------------------------------------------------------------------------- Financial liabilities: Notes payable $ - $ - $ 145 $ 145 Accounts payable 3,397 3,397 2,438 2,438 Distribution payable to minority shareholder of MAP - - 103 103 Accrued interest 107 107 97 97 Long-term debt (including amounts due within one year) 4,278 4,176 4,203 3,896 Preferred stock of subsidiary and trust preferred securities 408 433 414 432 ------ ------ ------ ------ Total financial liabilities $8,190 $8,113 $7,400 $7,111 ---------------------------------------------------------------------------------------------------------
Fair value of financial instruments classified as current assets or liabilities approximates carrying value due to the short- term maturity of the instruments. Fair value of investments and long-term receivables was based on discounted cash flows or other specific instrument analysis. Fair value of preferred stock of subsidiary and trust preferred securities was based on market prices. Fair value of long-term debt instruments was based on market prices where available or current borrowing rates available for financings with similar terms and maturities. USX's unrecognized financial instruments consist of receivables sold in 1998 and financial guarantees. It is not practicable to estimate the fair value of these forms of financial instrument obligations because there are no quoted market prices for transactions which are similar in nature. For details relating to financial guarantees, see Note 27. - ------------------------------------------------------------------------------- 27. Contingencies and Commitments USX is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the consolidated financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably. Environmental matters - USX is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At December 31, 1999 and 1998, accrued liabilities for remediation totaled $170 million and $145 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in cleanup efforts related to underground storage tanks at retail marketing outlets, were $52 million at December 31, 1999, and $41 million at December 31, 1998. For a number of years, USX has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In 1999 and 1998, such capital expenditures totaled $78 million and $132 million, respectively. USX anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. At December 31, 1999 and 1998, accrued liabilities for platform abandonment and dismantlement totaled $152 million and $141 million, respectively. U-27 Guarantees - Guarantees of the liabilities of affiliated entities by USX and its consolidated subsidiaries totaled $219 million at December 31, 1999, and $212 million at December 31, 1998. In the event that any defaults of guaranteed liabilities occur, USX has access to its interest in the assets of most of the affiliates to reduce potential losses resulting from these guarantees. As of December 31, 1999, the largest guarantee for a single affiliate was $131 million. At December 31, 1999 and 1998, USX's pro rata share of obligations of LOOP LLC and various pipeline affiliates secured by throughput and deficiency agreements totaled $146 million and $164 million, respectively. Under the agreements, USX is required to advance funds if the affiliates are unable to service debt. Any such advances are prepayments of future transportation charges. Commitments - At December 31, 1999 and 1998, contract commitments to acquire property, plant and equipment and long-term investments totaled $568 million and $812 million, respectively. USX entered into a 15-year take-or-pay arrangement in 1993, which requires USX to accept pulverized coal each month or pay a minimum monthly charge of approximately $1 million. Charges for deliveries of pulverized coal totaled $23 million in both 1999 and 1998. If USX elects to terminate the contract early, a maximum termination payment of $102 million, which declines over the duration of the agreement, may be required. USX is a party to a 15-year transportation services agreement with a natural gas transmission company. The contract requires USX to pay a minimum annual demand charge of approximately $5 million starting in the year 2000 and concluding in the year 2014. The payments are required even if the transportation facility is not utilized. Selected Quarterly Financial Data (Unaudited)
1999 ------------------------------------------------------------------ (In millions, except per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. - ----------------------------------------------------------------------------------------------------- Revenues $8,950 $7,813 /(a)/ $6,766 $6,054 Income (loss) from operations 425 535 502 401 Includes: Inventory market valuation charges (credits) - (136) (66) (349) Gain on ownership change in MAP (6) (11) - - Income (loss) before extraordinary losses 205 201 /(a)/ 189 110 Net income (loss) 205 199 189 105 - ----------------------------------------------------------------------------------------------------- Marathon Stock data: - -------------------- Net income (loss) $ 171 $ 230 $ 134 $ 119 - Per share: basic .55 .74 .43 .38 diluted .55 .74 .43 .38 Dividends paid per share .21 .21 .21 .21 Price range of Marathon Stock/(c)/: - Low 23- 5/8 28- 1/2 25- 13/16 19- 5/8 - High 30- 5/8 33- 7/8 32- 3/4 31- 3/8 - ----------------------------------------------------------------------------------------------------- Steel Stock data: - ----------------- Income (loss) before extraordinary losses applicable to Steel Stock $ 32 $ (31) /(a)/ $ 52 $ (11) - Per share: basic .35 (.35) /(a)/ .60 (.13) diluted .35 (.35) /(a)/ .59 (.13) Dividends paid per share .25 .25 .25 .25 Price range of Steel Stock/(c)/: - Low 21- 3/4 24- 9/16 23- 1/2 22- 1/4 - High 33 30- 1/16 34- 1/4 29- 1/8 - -----------------------------------------------------------------------------------------------------
1998 ----------------------------------------------------------------------------- (In millions, except per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. - -------------------------------------------------------------------------------------------------------- Revenues $6,686 /(b)/ $7,091/(b)/ $7,260/(b)/ $7,200/(b)/ Income (loss) from operations (37) 320 670 564 Includes: Inventory market valuation charges (credits) 245 50 (3) (25) Gain on ownership change in MAP - 1 2 (248) Income (loss) before extraordinary losses (10) 116 298 270 Net income (loss) (10) 116 298 270 - ----------------------------------------------------------------------------------------------------- Marathon Stock data: - -------------------- Net income (loss) $ (86) $ 51 $ 162 $ 183 - Per share: basic (.29) .18 .56 .63 diluted (.29) .17 .56 .63 Dividends paid per share .21 .21 .21 .21 Price range of Marathon Stock/(c)/: - Low 26- 11/16 25 32- 3/16 31 - High 38- 1/8 37- 1/8 38- 7/8 40- 1/2 - ----------------------------------------------------------------------------------------------------- Steel Stock data: - ----------------- Income (loss) before extraordinary losses applicable to Steel Stock $ 74 $ 63 $ 133 $ 85 - Per share: basic .83 .72 1.53 .98 diluted .81 .71 1.46 .95 Dividends paid per share .25 .25 .25 .25 Price range of Steel Stock/(c)/: - Low 21- 5/8 20- 7/16 31 28- 7/16 - High 27- 3/4 33- 1/2 43- 1/16 42- 1/8 - --------------------------------------------------------------------------------------------------------
/(a)/ Restated to reflect current classifications. /(b)/ Reclassified to conform to 1999 classifications. /(c)/ Composite tape. U-29 Principal Unconsolidated Affiliates (Unaudited)
December 31, 1999 Company Country Ownership Activity - ----------------------------------------------------------------------------------------------------------------------------- Clairton 1314B Partnership, L.P. United States 10% Coke & Coke By-Products CLAM Petroleum B.V. Netherlands 50% Oil & Gas Production Double Eagle Steel Coating Company United States 50% Steel Processing Kenai LNG Corporation United States 30% Natural Gas Liquification LOCAP, Inc. United States 50% /(a)/ Pipeline & Storage Facilities LOOP LLC United States 47% /(a)/ Offshore Oil Port Manta Ray Offshore Gathering Company, LLC United States 24% Natural Gas Transmission Minnesota Pipe Line Company United States 33% /(a)/ Pipeline Facility Nautilus Pipeline Company, LLC United States 24% Natural Gas Transmission Odyssey Pipeline LLC United States 29% Pipeline Facility Poseidon Oil Pipeline Company, LLC United States 28% Crude Oil Transportation PRO-TEC Coating Company United States 50% Steel Processing Republic Technologies International, LLC United States 16% Steel Products Sakhalin Energy Investment Company Ltd. Russia 38% Oil & Gas Development Transtar, Inc. United States 46% Transportation USS-POSCO Industries United States 50% Steel Processing VSZ U. S. Steel, s. r.o. Slovak Republic 50% Tin Mill Products Worthington Specialty Processing United States 50% Steel Processing
/(a)/ Represents the ownership of MAP. Supplementary Information on Mineral Reserves (Unaudited) Mineral Reserves (other than oil and gas)
Reserves at December 31/(a)/ Production ---------------------------- --------------------- (Million tons) 1999 1998 1997 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------- Iron/(b)/ 726.1 738.6 754.8 14.3 15.8 16.8 Coal/(c)/ 787.4 789.7 798.8 6.2 7.3 7.5 - ----------------------------------------------------------------------------------------------------------
/(a)/ Commercially recoverable reserves include demonstrated (measured and indicated) quantities which are expressed in recoverable net product tons. /(b)/ In 1999, iron ore reserves decreased due to production, lease activity and engineering revisions. In 1998, iron ore reserves decreased due to production and engineering revisions. /(c)/ In 1999 and 1998, coal reserves decreased due to production, lease activity and engineering revisions. Supplementary Information on Oil and Gas Producing Activities (Unaudited) Capitalized Costs and Accumulated Depreciation, Depletion and Amortization/(a)/
United Other Equity (In millions) December 31 States Europe Intl. Consolidated Affiliates Total - ------------------------------------------------------------------------------------------------------------------------------- 1999 Capitalized costs: Proved properties $8,270 $4,465 $1,270 $14,005 $612 $14,617 Unproved properties 349 55 187 591 123 714 ------ ------ ------ ------- ---- ------- Total 8,619 4,520 1,457 14,596 735 15,331 ------ ------ ------ ------- ---- ------- Accumulated depreciation, depletion and amortization: Proved properties 5,019 2,859 136 8,014 169 8,183 Unproved properties 78 - 6 84 - 84 ------ ------ ------ ------- ---- ------- Total 5,097 2,859 142 8,098 169 8,267 ------ ------ ------ ------- ---- ------- Net capitalized costs $3,522 $1,661 $1,315 $ 6,498 $566 $ 7,064 - --------------------------------------------------------------------------------------------------------------------- 1998 Capitalized costs: Proved properties $8,366 $4,430 $1,288 $14,084 $628 $14,712 Unproved properties 400 43 90 533 7 540 ------ ------ ------ ------- ---- ------- Total 8,766 4,473 1,378 14,617 635 15,252 ------ ------ ------ ------- ---- ------- Accumulated depreciation, depletion and amortization: Proved properties 5,020 2,685 135 7,840 156 7,996 Unproved properties 91 - 5 96 - 96 ------ ------ ------ ------- ---- ------- Total 5,111 2,685 140 7,936 156 8,092 ------ ------ ------ ------- ---- ------- Net capitalized costs $3,655 $1,788 $1,238 $ 6,681 $479 $ 7,160 - ---------------------------------------------------------------------------------------------------------------------
/(a)/ Prior year amounts have been changed to conform with current year reporting practices. Supplementary Information on Oil and Gas Producing Activities (Unaudited) CONTINUED Results of Operations for Oil and Gas Producing Activities, Excluding Corporate Overhead and Interest Costs/(a)/
United Other Equity (In millions) States Europe Intl. Consolidated Affiliates Total - ---------------------------------------------------------------------------------------------------------------------------------- 1999: Revenues: Sales/(b)/ $ 474 $ 431 $ 198 $ 1,103 $ 33 $ 1,136 Transfers 882 - 88 970 - 970 ------ ----- ----- ------- ---- ------- Total revenues 1,356 431 286 2,073 33 2,106 Expenses: Production costs (322) (137) (99) (558) (25) (583) Exploration expenses (134) (42) (51) (227) (4) (231) Depreciation, depletion and amortization/(c)/ (378) (143) (99) (620) (13) (633) Other expenses (28) (7) (15) (50) - (50) ------ ----- ----- ------- ---- ------- Total expenses (862) (329) (264) (1,455) (42) (1,497) Other production-related earnings/(d)/ 1 4 4 9 1 10 ------ ----- ----- ------- ---- ------- Results before income taxes 495 106 26 627 (8) 619 Income taxes (credits) 168 33 (7) 194 (3) 191 ------ ----- ----- ------- ---- ------- Results of operations $ 327 $ 73 $ 33 $ 433 $ (5) $ 428 - ------------------------------------------------------------------------------------------------------------------------------------ 1998: Revenues: Sales/(b)/ $ 518 $ 454 $ 71 $ 1,043 $ 28 $ 1,071 Transfers 536 - 51 587 - 587 ------ ----- ----- ------- ---- ------- Total revenues 1,054 454 122 1,630 28 1,658 Expenses: Production costs (295) (153) (57) (505) (8) (513) Exploration expenses/(e)/ (179) (45) (86) (310) (5) (315) Depreciation, depletion and amortization/(c)/ (339) (150) (68) (557) (8) (565) Other expenses (37) (3) (11) (51) - (51) ------ ----- ----- ------- ---- ------- Total expenses (850) (351) (222) (1,423) (21) (1,444) Other production-related earnings/(d)/ 1 15 3 19 1 20 ------ ----- ----- ------- ---- ------- Results before income taxes 205 118 (97) 226 8 234 Income taxes (credits) 61 22 (28) 55 3 58 ------ ----- ----- ------- ---- ------- Results of operations $ 144 $ 96 $ (69) $ 171 $ 5 $ 176 - ------------------------------------------------------------------------------------------------------------------------------------ 1997: Revenues: Sales/(b)/ $ 581 $ 572 $ 21 $ 1,174 $ 42 $ 1,216 Transfers 724 - 38 762 - 762 ------ ----- ----- ------- ---- ------- Total revenues 1,305 572 59 1,936 42 1,978 Expenses: Production costs (337) (162) (12) (511) (15) (526) Exploration expenses (127) (34) (25) (186) (1) (187) Depreciation, depletion and amortization (300) (130) (16) (446) (8) (454) Other expenses (32) (3) (13) (48) - (48) ------ ----- ----- ------- ---- ------- Total expenses (796) (329) (66) (1,191) (24) (1,215) Other production-related earnings/(d)/ - 28 1 29 1 30 ------ ----- ----- ------- ---- ------- Results before income taxes 509 271 (6) 774 19 793 Income taxes (credits) 170 79 4 253 4 257 ------ ----- ----- ------- ---- ------- Results of operations $ 339 $ 192 $ (10) $ 521 $ 15 $ 536 - ------------------------------------------------------------------------------------------------------------------------------------
/(a)/ Includes the results of using derivative instruments to manage commodity and foreign currency risks. /(b)/ Includes net gains on asset dispositions and natural gas contract settlements, as of December 31, 1999, 1998 and 1997, of $2 million, $43 million and $7 million, respectively. /(c)/ Includes domestic property impairments of $16 million as of December 31, 1999 and international property impairments of $10 million as of December 31, 1998. /(d)/ Includes revenues, net of associated costs, from third-party activities that are an integral part of USX's production operations. Third-party activities may include the processing and/or transportation of third- party production, and the purchase and subsequent resale of gas utilized in reservoir management. /(e)/ Includes international property impairments and suspended exploration well write-offs of $73 million. Supplementary Information on Oil and Gas Producing Activities (Unaudited) CONTINUED Costs Incurred for Property Acquisition, Exploration and Development - Including Capital Expenditures/(a)/
United Other Equity (In millions) States Europe Intl. Consolidated Affiliates Total - --------------------------------------------------------------------------------------------------------------------------- 1999: Property acquisition: Proved $ 17 $ - $ 10 $ 27 $ - $ 27 Unproved 56 12 107 175 - 175 Exploration 141 47 64 252 7 259 Development 205 34 117 356 84 440 1998: Property acquisition: Proved $ 3 $ 3 $ 1,051 $1,057 $ - $1,057 Unproved 82 - 57 139 - 139 Exploration 217 39 75 331 11 342 Development 431 39 46 516 165 681 1997: Property acquisition: Proved $ 16 $ - $ - $ 16 $ - $ 16 Unproved 50 - - 50 - 50 Exploration 170 53 43 266 3 269 Development 477 67 27 571 135 706 - ---------------------------------------------------------------------------------------------------------------------------
/(a)/ Prior year amounts have been changed to conform with current year reporting practices. Estimated Quantities of Proved Oil and Gas Reserves The following estimates of net reserves have been determined by deducting royalties of various kinds from USX's gross reserves. The reserve estimates are believed to be reasonable and consistent with presently known physical data concerning size and character of the reservoirs and are subject to change as additional knowledge concerning the reservoirs becomes available. The estimates include only such reserves as can reasonably be classified as proved; they do not include reserves which may be found by extension of proved areas or reserves recoverable by secondary or tertiary recovery methods unless these methods are in operation and are showing successful results. Undeveloped reserves consist of reserves to be recovered from future wells on undrilled acreage or from existing wells where relatively major expenditures will be required to realize production. USX did not have any quantities of oil and gas reserves subject to long-term supply agreements with foreign governments or authorities in which USX acts as producer.
United Other Equity (Millions of barrels) States Europe Intl. Consolidated Affiliates Total - ----------------------------------------------------------------------------------------------------------------------------- Liquid Hydrocarbons Proved developed and undeveloped reserves: Beginning of year - 1997 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 Purchase of reserves in place 14 - 7 21 - 21 Revisions of previous estimates 2 (20) - (18) (3) (21) Improved recovery 11 - 1 12 - 12 Extensions, discoveries and other additions 9 - 5 14 - 14 Production (53) (12) (11) (76) - (76) Sales of reserves in place (12) - (9) (21) - (21) ------- ----- ----- ----- -------- -------- End of year - 1999 539 90 187 816 77 893 - ------------------------------------------------------------------------------------------------------------------------------- Proved developed reserves: Beginning of year - 1997 443 163 11 617 - 617 End of year - 1997 486 161 12 659 - 659 End of year - 1998 489 119 67 675 - 675 End of year - 1999 476 90 72 638 69 707 - -----------------------------------------------------------------------------------------------------------------------------
/(a)/ Represents reserves related to the acquisition of Tarragon Oil and Gas Limited in August 1998. Supplementary Information on Oil and Gas Producing Activities (Unaudited) CONTINUED Estimated Quantities of Proved Oil and Gas Reserves (continued)
United Other Equity (Billions of cubic feet) States Europe Intl. Consolidated Affiliates Total - ----------------------------------------------------------------------------------------------------------------------------------- Natural Gas Proved developed and undeveloped reserves: Beginning of year - 1997 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 Purchase of reserves in place 5 - 11 16 - 16 Revisions of previous estimates (83) (81) (3) (167) 13 (154) Improved recovery 8 - 2 10 - 10 Extensions, discoveries and other additions 281 - 94 375 13 388 Production (275) (111) (59) (445) (13) (458) Sales of reserves in place (42) - (42) (84) - (84) ----- ----- --- ----- ----- ----- End of year - 1999 2,045 774 833 3,652 123 3,775 - ---------------------------------------------------------------------------------------------------------------------------- Proved developed reserves: Beginning of year - 1997 1,720 1,133 16 2,869 100 2,969 End of year - 1997 1,702 1,024 19 2,745 78 2,823 End of year - 1998 1,678 909 534 3,121 76 3,197 End of year - 1999 1,550 741 497 2,788 65 2,853 - ----------------------------------------------------------------------------------------------------------------------------
/(a)/ 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. 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, 1999: Future cash inflows $ 15,817 $ 4,426 $ 5,242 $ 25,485 $ 2,154 $27,639 Future production costs (4,690) (1,864) (1,107) (7,661) (850) (8,511) Future development costs (465) (86) (315) (866) (88) (954) Future income tax expenses (3,232) (987) (1,581) (5,800) (328) (6,128) -------- ------- --------- ------- --------- ------- Future net cash flows 7,430 1,489 2,239 11,158 888 12,046 10% annual discount for estimated timing of cash flows (3,451) (374) (862) (4,687) (372) (5,059) -------- ------- --------- ------- --------- ------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves $ 3,979 $ 1,115 $ 1,377 $ 6,471 $ 516 $ 6,987 ------------------------------------------------------------------------------------------------------------- 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 expenses 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 -------------------------------------------------------------------------------------------------------------
Summary of Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves/(a)/
Consolidated Equity Affiliates Total ------------------------------ ----------------------------- ----------------------------- (In millions) 1999 1998 1997 1999 1998 1997 1999 1998 1997 ---------------------------------------------------------------------------------------------------------------------- Sales and transfers of oil and gas produced, net of production costs $(1,516) $(1,125) $(1,424) $ (8) $ (20) $ (28) $(1,524) $(1,145) $(1,452) Net changes in prices and production costs related to future production 6,061 (3,662) (3,677) 484 (372) (36) 6,545 (4,034) (3,713) Extensions, discoveries and improved recovery, less related costs 566 284 458 9 4 263 575 288 721 Development costs incurred during the period 356 516 571 84 165 135 440 681 706 Changes in estimated future development costs (38) (306) (302) (52) (100) (121) (90) (406) (423) Revisions of previous quantity estimates (348) (110) 43 (8) (2) (5) (356) (112) 38 Net changes in purchases and sales of minerals in place 68 636 14 - - - 68 636 14 Accretion of discount 386 639 1,065 18 39 13 404 678 1,078 Net change in income taxes (2,062) 869 1,350 (117) 57 (29) (2,179) 926 1,321 Other 24 366 (764) (39) 102 (4) (15) 468 (768) ---------------------------------------------------------------------------------------------------------------------- Net change for the year 3,497 (1,893) (2,666) 371 (127) 188 3,868 (2,020) (2,478) Beginning of year 2,974 4,867 7,533 145 272 84 3,119 5,139 7,617 ---------------------------------------------------------------------------------------------------------------------- End of year $ 6,471 $ 2,974 $ 4,867 $ 516 $ 145 $ 272 $ 6,987 $ 3,119 $ 5,139 ----------------------------------------------------------------------------------------------------------------------
/(a)/ Prior year amounts have been changed to conform with current year reporting practices. U-34 EX-99.2 5 MARATHON GROUP FINANCIAL STATEMENTS Exhibit 99.2 Marathon Group Index to 1999 Financial Statements and Supplementary Data
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
Marathon Group Explanatory Note Regarding Financial Information 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 does not affect legal title to such assets and responsibility for such liabilities. Holders of USX - Marathon Group Common Stock and USX -U. S. Steel Group Common Stock are holders of common stock of USX and continue to be subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts arising from one Group that affect the overall cost of USX's capital could affect the results of operations and financial condition of the other Group. In addition, net losses of either Group, as well as dividends or distributions on any class of USX Common Stock or series of Preferred Stock and repurchases of any class of USX Common Stock or series of Preferred Stock, 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 financial information. Management's Report The accompanying financial statements of the Marathon Group are the responsibility of and have been prepared by USX Corporation (USX) in conformity with accounting principles generally accepted in the United States. They necessarily include some amounts that are based on best judgments and estimates. The Marathon Group financial information displayed in other sections of this report is consistent with these financial statements. USX seeks to assure the objectivity and integrity of its financial records by careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communications programs aimed at assuring that its policies and methods are understood throughout the organization. USX has a comprehensive formalized system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that financial records are reliable. Appropriate management monitors the system for compliance, and the internal auditors independently measure its effectiveness and recommend possible improvements thereto. In addition, as part of their audit of the financial statements, USX's independent accountants, who are elected by the stockholders, review and test the internal accounting controls selectively to establish a basis of reliance thereon in determining the nature, extent and timing of audit tests to be applied. The Board of Directors pursues its oversight role in the area of financial reporting and internal accounting control through its Audit Committee. This Committee, composed solely of nonmanagement directors, regularly meets (jointly and separately) with the independent accountants, management and internal auditors to monitor the proper discharge by each of its responsibilities relative to internal accounting controls and the consolidated and group financial statements. Thomas J. Usher Robert M. Hernandez Kenneth L. Matheny Chairman, Board of Directors Vice Chairman Vice President & Chief Executive Officer & Chief Financial Officer & Comptroller
Report of Independent Accountants To the Stockholders of USX Corporation: In our opinion, the accompanying financial statements appearing on pages M-2 through M-20 present fairly, in all material respects, the financial position of the Marathon Group at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of USX's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The Marathon Group is a business unit of USX Corporation (as described in Note 1, page M-5); accordingly, the financial statements of the Marathon Group should be read in connection with the consolidated financial statements of USX Corporation. PricewaterhouseCoopers LLP 600 Grant Street, Pittsburgh, Pennsylvania 15219-2794 February 8, 2000 M-1 Statement of Operations
(Dollars in millions) 1999 1998 1997 ------------------------------------------------------------------------------------- Revenues: Sales (Note 7) $24,212 $21,628 $15,760 Dividend and affiliate income 69 50 36 Net gains on disposal of assets - 28 37 Gain on ownership change in Marathon Ashland Petroleum LLC (Note 5) 17 245 - Other income 29 26 13 ------- ------- ------- Total revenues 24,327 21,977 15,846 ------- ------- ------- Costs and expenses: Cost of sales (excludes items shown below) 17,273 14,984 10,392 Selling, general and administrative expenses 486 505 355 Depreciation, depletion and amortization 950 941 664 Taxes other than income taxes 4,218 4,029 3,030 Exploration expenses 238 313 189 Inventory market valuation charges (credits) (Note 20) (551) 267 284 ------- ------- ------- Total costs and expenses 22,614 21,039 14,914 ------- ------- ------- Income from operations 1,713 938 932 Net interest and other financial costs (Note 8) 288 237 260 Minority interest in income of Marathon Ashland Petroleum LLC (Note 5) 447 249 - ------- ------- ------- Income before income taxes 978 452 672 Provision for estimated income taxes (Note 18) 324 142 216 ------- ------- ------- Net income $ 654 $ 310 $ 456 ------------------------------------------------------------------------------------- Income Per Common Share 1999 1998 1997 ------------------------------------------------------------------------------------- Basic $ 2.11 $ 1.06 $ 1.59 Diluted 2.11 1.05 1.58 -------------------------------------------------------------------------------------
See Note 22, for a description and computation of income per common share. The accompanying notes are an integral part of these financial statements. M-2 Balance Sheet
(Dollars in millions) December 31 1999 1998 ------------------------------------------------------------------------------------------------------ Assets Current assets: Cash and cash equivalents (Note 6) $ 111 $ 137 Receivables, less allowance for doubtful accounts of $2 and $3 1,866 1,277 Inventories (Note 20) 1,884 1,310 Other current assets 241 252 ------- ------- Total current assets 4,102 2,976 Investments and long-term receivables (Note 19) 772 603 Property, plant and equipment - net (Note 16) 10,293 10,429 Prepaid pensions (Note 14) 225 241 Other noncurrent assets 313 295 ------- ------- Total assets $15,705 $14,544 ------------------------------------------------------------------------------------------------------ Liabilities Current liabilities: Notes payable $ - $ 132 Accounts payable 2,659 1,940 Income taxes payable (Note 23) 97 - Distribution payable to minority shareholder of Marathon Ashland Petroleum LLC (Note 6) - 103 Payroll and benefits payable 146 190 Accrued taxes 107 99 Accrued interest 92 87 Long-term debt due within one year (Note 12) 48 59 ------- ------- Total current liabilities 3,149 2,610 Long-term debt (Note 12) 3,320 3,456 Deferred income taxes (Note 18) 1,495 1,450 Employee benefits (Note 14) 564 553 Deferred credits and other liabilities (Note 23) 440 389 Preferred stock of subsidiary (Note 9) 184 184 Minority interest in Marathon Ashland Petroleum LLC (Note 5) 1,753 1,590 Common Stockholders' Equity (Note 17) 4,800 4,312 ------- ------- Total liabilities and common stockholders' equity $15,705 $14,544 -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. M-3 Statement of Cash Flows
(Dollars in millions) 1999 1998 1997 ---------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents Operating activities: Net income $ 654 $ 310 $ 456 Adjustments to reconcile to net cash provided from operating activities: Minority interest in income of Marathon Ashland Petroleum LLC 447 249 - Depreciation, depletion and amortization 950 941 664 Exploratory dry well costs 109 186 78 Inventory market valuation charges (credits) (551) 267 284 Pensions and other postretirement benefits 36 34 6 Deferred income taxes 105 26 30 Gain on ownership change in Marathon Ashland Petroleum LLC (17) (245) - Net gains on disposal of assets - (28) (37) Changes in: Current receivables - sold - - (340) - operating turnover (833) 240 97 Inventories (63) (13) 18 Current accounts payable and accrued expenses 1,095 (233) 11 All other - net 84 (92) (21) ------- ------- ------- Net cash provided from operating activities 2,016 1,642 1,246 ------- ------- ------- Investing activities: Capital expenditures (1,378) (1,270) (1,038) Acquisition of Tarragon Oil and Gas Limited - (686) - Disposal of assets 356 65 60 Restricted cash - withdrawals 45 11 108 - deposits (44) (32) (10) Affiliates - investments (59) (42) (193) - loans and advances (70) (103) (46) - returns and repayments 1 71 8 All other - net (25) (18) (2) ------- ------- ------- Net cash used in investing activities (1,174) (2,004) (1,113) ------- ------- ------- Financing activities (Note 9): Increase (decrease) in Marathon Group's portion of USX consolidated debt (296) 329 97 Specifically attributed debt: Borrowings 141 366 - Repayments (144) (389) (39) Marathon Stock issued 89 613 34 Dividends paid (257) (246) (219) Distributions to minority shareholder of Marathon Ashland Petroleum LLC (400) (211) - ------- ------- ------- Net cash provided from (used in) financing activities (867) 462 (127) ------- ------- ------- Effect of exchange rate changes on cash (1) 1 (2) ------- ------- ------- Net increase (decrease) in cash and cash equivalents (26) 101 4 Cash and cash equivalents at beginning of year 137 36 32 ------- ------- ------- Cash and cash equivalents at end of year $ 111 $ 137 $ 36 ----------------------------------------------------------------------------------------------------------------------
See Note 13, for supplemental cash flow information. The accompanying notes are an integral part of these financial statements. M-4 Notes to Financial Statements 1. Basis of Presentation After the redemption of the USX - Delhi Group stock on January 26, 1998, USX Corporation (USX) has two classes of common stock: USX - Marathon Group Common Stock (Marathon Stock) and USX - U. S. Steel Group Common Stock (Steel Stock), which are intended to reflect the performance of the Marathon Group and the U. S. Steel Group, respectively. The financial statements of the Marathon Group include the financial position, results of operations and cash flows for the businesses of Marathon Oil Company (Marathon) and certain other subsidiaries of USX, and a portion of the corporate assets and liabilities and related transactions which are not separately identified with ongoing operating units of USX. The Marathon Group financial statements are prepared using the amounts included in the USX consolidated financial statements. For a description of the Marathon Group's operating segments, see Note 10. Although the financial statements of the Marathon Group and the U. S. Steel Group separately report the assets, liabilities (including contingent liabilities) and stockholders' equity of USX attributed to each such Group, such attribution of assets, liabilities (including contingent liabilities) and stockholders' equity between the Marathon Group and the U. S. Steel Group for the purpose of preparing their respective financial statements does not affect legal title to such assets or responsibility for such liabilities. Holders of Marathon Stock and Steel Stock are holders of common stock of USX and continue to be subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts arising from one Group that affect the overall cost of USX's capital could affect the results of operations and financial condition of the other Group. In addition, net losses of either Group, as well as dividends and distributions on any class of USX Common Stock or series of preferred stock and repurchases of any class of USX Common Stock or series of preferred stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on both classes of Common Stock. Accordingly, the USX consolidated financial information should be read in connection with the Marathon Group financial information. - -------------------------------------------------------------------------------- 2. Summary of Principal Accounting Policies Principles applied in consolidation - These financial statements include the accounts of the businesses comprising the Marathon Group. The Marathon Group and the U. S. Steel Group financial statements, taken together, comprise all of the accounts included in the USX consolidated financial statements. Investments in unincorporated oil and gas joint ventures, undivided interest pipelines and jointly owned gas processing plants are consolidated on a pro rata basis. Investments in entities over which the Marathon Group has significant influence are accounted for using the equity method of accounting and are carried at the Marathon Group's share of net assets plus loans and advances. Investments in companies whose stock is publicly traded are carried at market value. The difference between the cost of these investments and market value is recorded in other comprehensive income (net of tax). Investments in companies whose stock has no readily determinable fair value are carried at cost. Use of estimates - Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at year-end and the reported amounts of revenues and expenses during the year. Significant items subject to such estimates and assumptions include the carrying value of long-lived assets; valuation allowances for receivables, inventories and deferred income tax assets; environmental liabilities; liabilities for potential tax deficiencies and potential litigation claims and settlements; and assets and obligations related to employee benefits. Additionally, certain estimated liabilities are recorded when management commits to a plan to close an operating facility or to exit a business activity. Actual results could differ from the estimates and assumptions used. M-5 Revenue recognition - Revenues principally include sales, dividend and affiliate income, gains or losses on the disposal of assets and gains or losses from changes in ownership interests. Sales - Sales are recognized when products are shipped or services are provided to customers. Consumer excise taxes on petroleum products and merchandise and matching crude oil and refined products buy/sell transactions settled in cash are included in both revenues and costs and expenses, with no effect on income. Dividend and Affiliate Income - Dividend and affiliate income includes the Marathon Group's proportionate share of income from equity method investments and dividend income from other investments. Dividend income is recognized when dividend payments are received. Disposal of Assets - When long-lived assets depreciated on an individual basis are sold or otherwise disposed of, any gains or losses are reflected in income. Gains on disposal of long-lived assets are recognized when earned, which is generally at the time of closing. If a loss on disposal is expected, such losses are recognized when long-lived assets are reclassified as assets held for sale. Proceeds from disposal of long-lived assets depreciated on a group basis are credited to accumulated depreciation, depletion and amortization with no immediate effect on income. Gas Balancing - The Marathon Group follows the sales method of accounting for gas production imbalances and would recognize a liability if the existing proved reserves were not adequate to cover the current imbalance situation. Change in Ownership Interest - Gains or losses from a change in ownership of a consolidated subsidiary or an unconsolidated affiliate are recognized in revenues in the period of change. Cash and cash equivalents - Cash and cash equivalents include cash on hand and on deposit and investments in highly liquid debt instruments with maturities generally of three months or less. Inventories - Inventories are carried at lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method. Derivative instruments - The Marathon Group uses commodity-based and foreign currency derivative instruments to manage its exposure to price risk. Management is authorized to use futures, forwards, swaps and options related to the purchase, production or sale of crude oil, natural gas, refined products and electricity. While the Marathon Group's risk management activities generally reduce market risk exposure due to unfavorable commodity price changes for raw material purchases and products sold, such activities can also encompass strategies which assume price risk. Commodity-Based Hedging Transactions - For transactions that qualify for hedge accounting, the resulting gains or losses are deferred and subsequently recognized in income from operations, as a component of sales or cost of sales, in the same period as the underlying physical transaction. To qualify for hedge accounting, derivative positions cannot remain open if the underlying physical market risk has been removed. If such derivative positions remain in place, they would be marked-to-market and accounted for as trading or other activities. Recorded deferred gains or losses are reflected within other current and noncurrent assets or accounts payable and deferred credits and other liabilities, as appropriate. Commodity-Based Trading and Other Activities - Derivative instruments used for trading and other activities are marked-to-market and the resulting gains or losses are recognized in the current period within income from operations. This category also includes the use of derivative instruments that have no offsetting underlying physical market risk. Foreign Currency Transactions - The Marathon Group uses forward exchange contracts to manage currency risks. Gains or losses related to firm commitments are deferred and recognized concurrent with the underlying transaction. All other gains or losses are recognized in income in the current period as sales, cost of sales, interest income or expense, or other income, as appropriate. Forward exchange contracts are recorded as receivables or payables, as appropriate. Exploration and development - The Marathon Group follows the successful efforts method of accounting for oil and gas exploration and development. M-6 Long-lived assets - Depreciation and depletion of oil and gas producing properties are computed using predetermined rates based upon estimated proved oil and gas reserves applied on a units-of- production method. Other items of property, plant and equipment are depreciated principally by the straight-line method. The Marathon Group evaluates impairment of its oil and gas producing assets primarily on a field-by-field basis using undiscounted cash flows based on total proved reserves. Other assets are evaluated on an individual asset basis or by logical groupings of assets. Assets deemed to be impaired are written down to their fair value, including any related goodwill, using discounted future cash flows and, if available, comparable market values. Environmental liabilities - The Marathon Group provides for remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. Generally, the timing of remediation accruals coincides with completion of a feasibility study or the commitment to a formal plan of action. Remediation liabilities are accrued based on estimates of known environmental exposure and are discounted in certain instances. If recoveries of remediation costs from third parties are probable, a receivable is recorded. Estimated abandonment and dismantlement costs of offshore production platforms are accrued based upon estimated proved oil and gas reserves on a units-of-production method. Insurance - The Marathon Group is insured for catastrophic casualty and certain property and business interruption exposures, as well as those risks required to be insured by law or contract. Costs resulting from noninsured losses are charged against income upon occurrence. Reclassifications - Certain reclassifications of prior years' data have been made to conform to 1999 classifications. - -------------------------------------------------------------------------------- 3. New Accounting Standards Effective January 1, 1997, USX adopted American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" (SOP 96-1), which provides additional interpretation of existing accounting standards related to recognition, measurement and disclosure of environmental remediation liabilities. As a result of adopting SOP 96-1, the Marathon Group identified additional environmental remediation liabilities of $11 million. Estimated receivables for recoverable costs related to adoption of SOP 96-1 were $4 million. The net unfavorable effect of adoption on the Marathon Group's income from operations at January 1, 1997, was $7 million. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). This new Standard requires recognition of all derivatives as either assets or liabilities at fair value. SFAS No. 133 may result in additional volatility in both current period earnings and other comprehensive income as a result of recording recognized and unrecognized gains and losses resulting from changes in the fair value of derivative instruments. The transition adjustment resulting from adoption of SFAS No. 133 will be reported as a cumulative effect of a change in accounting principle. Under the new Standard, USX may elect not to designate certain derivative instruments as hedges even if the strategy qualifies for hedge accounting treatment. This approach would eliminate the administrative effort needed to measure effectiveness and monitor such instruments; however, this approach also may result in additional volatility in current period earnings. USX cannot reasonably estimate the effect of adoption on either the financial position or results of operations. It is not possible to estimate what effect this Statement will have on future results of operations, although greater period-to-period volatility is likely. USX plans to adopt the Standard effective January 1, 2001. M-7 - -------------------------------------------------------------------------------- 4. Corporate Activities Financial activities - As a matter of policy, USX manages most financial activities on a centralized, consolidated basis. Such financial activities include the investment of surplus cash; the issuance, repayment and repurchase of short-term and long-term debt; the issuance, repurchase and redemption of preferred stock; and the issuance and repurchase of common stock. Transactions related primarily to invested cash, short-term and long-term debt (including convertible debt), related net interest and other financial costs, and preferred stock and related dividends are attributed to the Marathon Group, the U. S. Steel Group and, prior to November 1, 1997, the Delhi Group based upon the cash flows of each group for the periods presented and the initial capital structure of each group. Most financing transactions are attributed to and reflected in the financial statements of all groups. See Note 9, for the Marathon Group's portion of USX's financial activities attributed to all groups. However, transactions such as leases, certain collaterized financings, certain indexed debt instruments, financial activities of consolidated entities which are less than wholly owned by USX and transactions related to securities convertible solely into any one class of common stock are or will be specifically attributed to and reflected in their entirety in the financial statements of the group to which they relate. Corporate general and administrative costs - Corporate general and administrative costs are allocated to the Marathon Group, the U. S. Steel Group and, prior to November 1, 1997, the Delhi Group based upon utilization or other methods management believes to be reasonable and which consider certain measures of business activities, such as employment, investments and sales. The costs allocated to the Marathon Group were $26 million in 1999, $28 million in 1998 and $37 million in 1997, and primarily consist of employment costs including pension effects, professional services, facilities and other related costs associated with corporate activities. Income taxes - All members of the USX affiliated group are included in the consolidated United States federal income tax return filed by USX. Accordingly, the provision for federal income taxes and the related payments or refunds of tax are determined on a consolidated basis. The consolidated provision and the related tax payments or refunds have been reflected in the Marathon Group, the U. S. Steel Group and, prior to November 1, 1997, the Delhi Group financial statements in accordance with USX's tax allocation policy. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated among the Marathon Group, the U. S. Steel Group and, prior to November 1, 1997, the Delhi Group, for group financial statement purposes, based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to the respective groups. For tax provision and settlement purposes, tax benefits resulting from attributes (principally net operating losses and various tax credits), which cannot be utilized by one of the groups on a separate return basis but which can be utilized on a consolidated basis in that year or in a carryback year, are allocated to the group that generated the attributes. To the extent that one of the groups is allocated a consolidated tax attribute which, as a result of expiration or otherwise, is not ultimately utilized on the consolidated tax return, the prior years' allocation of such attribute is adjusted such that the effect of the expiration is borne by the group that generated the attribute. Also, if a tax attribute cannot be utilized on a consolidated basis in the year generated or in a carryback year, the prior years' allocation of such consolidated tax effects is adjusted in a subsequent year to the extent necessary to allocate the tax benefits to the group that would have realized the tax benefits on a separate return basis. As a result, the allocated group amounts of taxes payable or refundable are not necessarily comparable to those that would have resulted if the groups had filed separate tax returns. - -------------------------------------------------------------------------------- 5. Business Combinations In August 1998, Marathon acquired Tarragon Oil and Gas Limited (Tarragon), a Canadian oil and gas exploration and production company. Securityholders of Tarragon received, at their election, Cdn$14.25 for each Tarragon share, or the economic equivalent in Exchangeable Shares of an indirect Canadian subsidiary of Marathon, which are exchangeable solely on a one-for-one basis into Marathon Stock. The purchase price included cash payments of $686 million, issuance of 878,074 Exchangeable Shares valued at $29 million and the assumption of $345 million in debt. The Exchangeable Shares are exchangeable at the option of the holder at any time and automatically redeemable on August 11, 2003 (and, in certain circumstances, as early as August 11, 2001). The holders of Exchangeable Shares are entitled to receive declared dividends equivalent to dividends declared from time to time by USX on Marathon Stock. Marathon accounted for the acquisition using the purchase method of accounting. The 1998 results of operations include the operations of Marathon Canada Limited, formerly known as Tarragon, commencing August 12, 1998. M-8 During 1997, Marathon and Ashland Inc. (Ashland) agreed to combine the major elements of their refining, marketing and transportation (RM&T) operations. On January 1, 1998, Marathon transferred certain RM&T net assets to Marathon Ashland Petroleum LLC (MAP), a new consolidated subsidiary. Also on January 1, 1998, Marathon acquired certain RM&T net assets from Ashland in exchange for a 38% interest in MAP. The acquisition was accounted for under the purchase method of accounting. The purchase price was determined to be $1.9 billion, based upon an external valuation. The change in Marathon's ownership interest in MAP resulted in a gain of $245 million, which is included in 1998 revenues. In accordance with MAP closing agreements, Marathon and Ashland made capital contributions to MAP for environmental improvements. The closing agreements stipulate that ownership interests in MAP will not be adjusted as a result of such contributions. Accordingly, Marathon recognized a gain on ownership change of $17 million in 1999. In connection with the formation of MAP, Marathon and Ashland entered into a Limited Liability Company Agreement dated January 1, 1998 (the LLC Agreement). The LLC Agreement provides for an initial term of MAP expiring on December 31, 2022 (25 years from its formation). The term will automatically be extended for ten-year periods, unless a termination notice is given by either party. Also in connection with the formation of MAP, the parties entered into a Put/Call, Registration Rights and Standstill Agreement (the Put/Call Agreement). The Put/Call Agreement provides that at any time after December 31, 2004, Ashland will have the right to sell to Marathon all of Ashland's ownership interest in MAP, for an amount in cash and/or Marathon or USX debt or equity securities equal to the product of 85% (90% if equity securities are used) of the fair market value of MAP at that time, multiplied by Ashland's percentage interest in MAP. Payment could be made at closing, or at Marathon's option, in three equal annual installments, the first of which would be payable at closing. At any time after December 31, 2004, Marathon will have the right to purchase all of Ashland's ownership interests in MAP, for an amount in cash equal to the product of 115% of the fair market value of MAP at that time, multiplied by Ashland's percentage interest in MAP. The following unaudited pro forma data for the Marathon Group includes the results of operations of Tarragon for 1998 and 1997, and the Ashland RM&T net assets for 1997, giving effect to the acquisitions as if they had been consummated at the beginning of the years presented. The pro forma data is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations.
(In millions, except per share amounts) 1998 1997 ------------------------------------------------------------------------------------- Revenues $ 22,071 $ 23,425 Net income 279 /(a)/ 457 /(a)/ Net income per common share - Basic and diluted .95 1.58 -------------------------------------------------------------------------------------
/(a)/ Excluding the pro forma inventory market valuation adjustment, pro forma net income would have been $383 million in 1998 and $619 million in 1997. Reported net income, excluding the reported inventory market valuation adjustment, would have been $414 million in 1998 and $635 million in 1997. - -------------------------------------------------------------------------------- 6. Transactions Between MAP and Ashland At December 31, 1999 and 1998, MAP had current receivables from Ashland of $26 million and $22 million, respectively, and current payables to Ashland of $2 million at December 31, 1999, and at December 31, 1998, $106 million, including distributions payable. At December 31, 1998, MAP's cash and cash equivalents included a $103 million demand note invested with Ashland, which was repaid in January 1999. MAP has a $190 million short-term revolving credit agreement with Ashland. Interest on borrowings is based on the Federal Funds Rate in effect each day during the period plus 0.30 of 1%. At December 31, 1999, there were no borrowings against this facility. During 1999 and 1998, MAP's sales to Ashland consisting primarily of petroleum products, were $198 million and $185 million, respectively, and MAP's purchases of products and services from Ashland were $25 million and $45 million, respectively. These transactions were conducted under terms comparable to those with unrelated parties. - -------------------------------------------------------------------------------- 7. Revenues The items below are included in revenues and costs and expenses, with no effect on income.
(In millions) 1999 1998 1997 --------------------------------------------------------------------------------- Consumer excise taxes on petroleum products and merchandise $ 3,973 $ 3,824 $ 2,828 Matching crude oil and refined product buy/sell transactions settled in cash 3,539 3,948 2,436 ---------------------------------------------------------------------------------
M-9 - -------------------------------------------------------------------------------- 8. Other Items
(In millions) 1999 1998 1997 ----------------------------------------------------------------------------------------------- Net interest and other financial costs Interest and other financial income/(a)/: Interest income $ 15 $ 30 $ 7 Other (13) 4 (6) ----- ----- ----- Total 2 34 1 ----- ----- ----- Interest and other financial costs/(a)/: Interest incurred 281 285 232 Less interest capitalized 20 40 24 ----- ----- ----- Net interest 261 245 208 Interest on tax issues 5 5 7 Financial costs on preferred stock of subsidiary 17 17 16 Amortization of discounts 2 4 4 Expenses on sales of accounts receivable - - 19 Other 5 - 7 ----- ----- ----- Total 290 271 261 ----- ----- ----- Net interest and other financial costs/(a)/ $ 288 $ 237 $ 260 -----------------------------------------------------------------------------------------------
/(a)/ See Note 4, for discussion of USX net interest and other financial costs attributable to the Marathon Group. ---------------------------------------------------------------- Foreign currency transactions For 1999, 1998 and 1997, the aggregate foreign currency transaction gains (losses) included in determining net income were $(12) million, $13 million and $4 million, respectively. - -------------------------------------------------------------------------------- 9. Financial Activities Attributed to Groups The following is the portion of USX financial activities attributed to the Marathon Group. These amounts exclude amounts specifically attributed to the Marathon Group.
Marathon Group Consolidated USX/(a)/ -------------- --------------------- (In millions) December 31 1999 1998 1999 1998 ------------------------------------------------------------------------------------------------------ Cash and cash equivalents $ 8 $ 4 $ 9 $ 4 Other noncurrent assets 7 7 8 8 ------ ------ ------ ------ Total assets $ 15 $ 11 $ 17 $ 12 ------------------------------------------------------------------------------------------------------ Notes payable $ - $ 132 $ - $ 145 Accrued interest 82 80 95 88 Long-term debt due within one year (Note 12) 47 59 54 66 Long-term debt (Note 12) 3,305 3,456 3,771 3,762 Preferred stock of subsidiary 184 184 250 250 ------ ------ ------ ------ Total liabilities $3,618 $3,911 $4,170 $4,311 ------------------------------------------------------------------------------------------------------ Marathon Group/(b)/ Consolidated USX ------------------- ---------------- (In millions) 1999 1998 1997 1999 1998 1997 ------------------------------------------------------------------------------------------------------------------ Net interest and other financial costs (Note 8) $ 295 $ 295 $ 246 $ 334 $ 324 $ 309 ------------------------------------------------------------------------------------------------------------------
/(a)/ For details of USX long-term debt and preferred stock of subsidiary, see Notes 16 and 23, respectively, to the USX consolidated financial statements. /(b)/ The Marathon Group's net interest and other financial costs reflect weighted average effects of all financial activities attributed to all groups. - -------------------------------------------------------------------------------- 10. Segment Information The Marathon Group's operations 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. M-10 Sales by product line are:
(In millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Refined products $10,873 $8,750 $7,012 Merchandise 2,088 1,873 1,045 Liquid hydrocarbons 2,159 1,818 941 Natural gas 1,381 1,144 1,331 Transportation and other products 199 271 167 - --------------------------------------------------------------------------------
Segment income represents income from operations allocable to operating segments. USX corporate general and administrative costs are not allocated to operating segments. These costs primarily consist of employment costs including pension effects, professional services, facilities and other related costs associated with corporate activities. Certain general and administrative costs related to all Marathon Group operating segments in excess of amounts billed to MAP under service contracts and amounts charged out to operating segments under Marathon's shared services procedures also are not allocated to operating segments. Additionally, the following items are not allocated to operating segments: inventory market valuation adjustments, gain on ownership change in MAP and certain other items not allocated to operating segments for business performance reporting purposes (see (a) in reconcilement table on page M-12).
Refining, Other Exploration Marketing Energy and and Related (In millions) Production Transportation Businesses Total - -------------------------------------------------------------------------------------------------------------------------------- 1999 Revenues: Customer $3,230 $20,210 $731 $24,171 Intersegment/(a)/ 202 47 40 289 Intergroup/(a)/ 19 - 22 41 Equity in earnings (losses) of unconsolidated affiliates (2) 17 26 41 Other 30 48 15 93 ------ ------- ---- ------- Total revenues $3,479 $20,322 $834 $24,635 ====== ======= ==== ======= Segment income $ 618 $ 611 $ 61 $ 1,290 Significant noncash items included in segment income: Depreciation, depletion and amortization/(b)/ 638 280 5 923 Pension expenses/(c)/ 3 32 2 37 Capital expenditures/(d)/ 744 612 4 1,360 Affiliates - investments 56 - 3 59 - -------------------------------------------------------------------------------------------------------------------------------- 1998 Revenues: Customer $2,085 $19,192 $306 $21,583 Intersegment/(a)/ 144 10 17 171 Intergroup/(a)/ 13 - 7 20 Equity in earnings of unconsolidated affiliates 2 12 14 28 Other 26 40 11 77 ------ ------- ---- ------- Total revenues $2,270 $19,254 $355 $21,879 ====== ======= ==== ======= Segment income $ 278 $ 896 $ 33 $ 1,207 Significant noncash items included in segment income: Depreciation, depletion and amortization/(b)/ 581 272 6 859 Pension expenses/(c)/ 3 16 2 21 Capital expenditures/(d)/ 839 410 8 1,257 Affiliates - investments/(d)/ - 22 17 39 - -------------------------------------------------------------------------------------------------------------------------------- 1997 Revenues: Customer $1,575 $13,698 $381 $15,654 Intersegment/(a)/ 619 - - 619 Intergroup/(a)/ 99 - 6 105 Equity in earnings of unconsolidated affiliates 14 4 7 25 Other 7 20 30 57 ------ ------- ---- ------- Total revenues $2,314 $13,722 $424 $16,460 ====== ======= ==== ======= Segment income $ 773 $ 563 $ 48 $ 1,384 Significant noncash items included in segment income: Depreciation, depletion and amortization/(b)/ 469 173 7 649 Pension expenses/(c)/ 3 8 1 12 Capital expenditures/(d)/ 810 205 6 1,021 Affiliates - investments/(d)/ 114 - 73 187 - --------------------------------------------------------------------------------------------------------------------------------
/(a)/ Intersegment and intergroup sales and transfers were conducted under terms comparable to those with unrelated parties. /(b)/ Differences between segment totals and group totals represent amounts included in administrative expenses and, in 1999 and 1998, international and domestic exploration and production property impairments. /(c)/ Differences between segment totals and group totals represent amounts included in administrative expenses. /(d)/ Differences between segment totals and group totals represent amounts related to corporate administrative activities. The following reconciles segment revenues and income to amounts reported in the Marathon Group financial statements:
(In millions) 1999 1998 1997 - --------------------------------------------------------------------------------------------------- Revenues: Revenues of reportable segments $24,635 $21,879 $16,460 Items not allocated to segments: Gain on ownership change in MAP 17 245 - Other (36) 24 - Elimination of intersegment revenues (289) (171) (619) Administrative revenues - - 5 ------- ------- ------- Total Group revenues $24,327 $21,977 $15,846 ======= ======= ======= Income: Income for reportable segments $ 1,290 $ 1,207 $ 1,384 Items not allocated to segments: Gain on ownership change in MAP 17 245 - Administrative expenses (108) (106) (168) Inventory market valuation adjustments 551 (267) (284) Other/(a)/ (37) (141) - ------- ------- ------- Total Group income from operations $ 1,713 $ 938 $ 932 - ---------------------------------------------------------------------------------------------------
/(a)/ Represents in 1999, primarily certain domestic exploration and production impairments, net losses on certain asset sales and costs of a voluntary early retirement program. Represents in 1998 certain international exploration and production property impairments, certain suspended exploration well write-offs, a gas contract settlement and MAP transition charges. Geographic Area: The information below summarizes the operations in different geographic areas. Transfers between geographic areas are at prices which approximate market.
Revenues -------------------------------------------- Within Between (In millions) Year Geographic Areas Geographic Areas Total Assets/(a)/ - ---------------------------------------------------------------------------------------------------------- United States 1999 $23,337 $ - $23,337 $ 7,555 1998 21,191 - 21,191 7,659 1997 15,123 - 15,123 5,578 Canada 1999 425 521 946 1,112 1998 209 368 577 1,094 United Kingdom 1999 459 - 459 1,581 1998 462 - 462 1,739 1997 593 - 593 1,856 Other Foreign Countries 1999 106 88 194 735 1998 115 52 167 468 1997 130 39 169 530 Eliminations 1999 - (609) (609) - 1998 - (420) (420) - 1997 - (39) (39) - Total 1999 $24,327 $ - $24,327 $10,983 1998 21,977 - 21,977 10,960 1997 15,846 - 15,846 7,964 - ----------------------------------------------------------------------------------------------------------
/(a)/ Includes property, plant and equipment and investments in affiliates. - -------------------------------------------------------------------------------- 11. Leases Future minimum commitments for capital leases (including sale- leasebacks accounted for as financings) and for operating leases having remaining noncancelable lease terms in excess of one year are as follows:
Capital Operating (In millions) Leases Leases ---------------------------------------------------------------------------------------- 2000 $ 2 $ 198 2001 2 77 2002 2 64 2003 2 40 2004 2 33 Later years 14 120 Sublease rentals - (35) ------ ------ Total minimum lease payments 24 $ 497 ====== ====== Less imputed interest costs (9) ------ Present value of net minimum lease payments included in long-term debt $ 15 ---------------------------------------------------------------------------------------- Operating lease rental expense: (In millions) 1999 1998 1997 ---------------------------------------------------------------------------------------- Minimum rental $ 142 $ 157 $ 102 Contingent rental 11 10 10 Sublease rentals (6) (7) (7) ----- ----- ----- Net rental expense $ 147 $ 160 $ 105 ----------------------------------------------------------------------------------------
M-12 The Marathon Group leases a wide variety of facilities and equipment under operating leases, including land and building space, office equipment, production facilities and transportation equipment. Most long-term leases include renewal options and, in certain leases, purchase options. In the event of a change in control of USX, as defined in the agreements, or certain other circumstances, operating lease obligations totaling $104 million may be declared immediately due and payable. - -------------------------------------------------------------------------------- 12. Long-Term Debt The Marathon Group's portion of USX's consolidated long-term debt is as follows:
Marathon Group Consolidated USX/(a)/ ---------------------- ---------------------- (In millions) December 31 1999 1998 1999 1998 -------------------------------------------------------------------------------------------------- Specifically attributed debt/(b)/: Receivables facility $ - $ - $ 350 $ - Sale-leaseback financing and capital leases 15 - 107 95 Indexed debt less unamortized discount - - - 68 Other 1 - 1 - ------ ------ ------ ------ Total 16 - 458 163 Less amount due within one year 1 - 7 5 ------ ------ ------ ------ Total specifically attributed long-term debt $ 15 $ - $ 451 $ 158 -------------------------------------------------------------------------------------------------- Debt attributed to groups/(c)/ $3,375 $3,537 $3,852 $3,853 Less unamortized discount 23 22 27 25 Less amount due within one year 47 59 54 66 ------ ------ ------ ------ Total long-term debt attributed to groups $3,305 $3,456 $3,771 $3,762 -------------------------------------------------------------------------------------------------- Total long-term debt due within one year $ 48 $ 59 $ 61 $ 71 Total long-term debt due after one year 3,320 3,456 4,222 3,920 --------------------------------------------------------------------------------------------------
/(a)/ See Note 16, to the USX consolidated financial statements for details of interest rates, maturities and other terms of long-term debt. /(b)/ As described in Note 4, certain financial activities are specifically attributed only to the Marathon Group and the U. S. Steel Group. /(c)/ Most long-term debt activities of USX Corporation and its wholly owned subsidiaries are attributed to all groups (in total, but not with respect to specific debt issues) based on their respective cash flows (Notes 4, 9 and 13).
- -------------------------------------------------------------------------------------------------------------------------- 13. Supplemental Cash Flow Information (In millions) 1999 1998 1997 ------------------------------------------------------------------------------------------------------------ Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $ (289) $ (260) $ (257) Income taxes paid, including settlements with other groups (101) (154) (178) ------------------------------------------------------------------------------------------------------------ USX debt attributed to all groups - net: Commercial paper - issued $ 6,282 $ - $ - - repayments (6,117) - - Credit agreements - borrowings 5,529 17,486 10,454 - repayments (5,980) (16,817) (10,449) Other credit arrangements - net (95) 55 36 Other debt - borrowings 319 671 10 - repayments (87) (1,053) (741) -------- -------- ------- Total $ (149) $ 342 $ (690) ------------------------------------------------------------------------------------------------------------ Marathon Group activity $ (296) $ 329 $ 97 U. S. Steel Group activity 147 13 (561) Delhi Group activity - - (226) -------- -------- ------- Total $ (149) $ 342 $ (690) ------------------------------------------------------------------------------------------------------------ Noncash investing and financing activities: Marathon Stock issued for dividend reinvestment and employee stock plans $ 4 $ 3 $ 5 Marathon Stock issued for Exchangeable Shares 7 11 - Affiliate preferred stock received in conversion of affiliate loan 142 - - Disposal of assets: Notes received 19 - - Liabilities assumed by buyers - - 5 Business combinations: Acquisition of Tarragon: Exchangeable Shares issued - 29 - Liabilities assumed - 433 - Acquisition of Ashland RM&T net assets: 38% interest in MAP - 1,900 - Liabilities assumed - 1,038 - Other acquisitions - liabilities assumed 16 - - ------------------------------------------------------------------------------------------------------------
M-13 - -------------------------------------------------------------------------------- 14. Pensions and Other Postretirement Benefits The Marathon Group has noncontributory defined benefit pension plans covering substantially all employees. Benefits under these plans are based primarily upon years of service and final average pensionable earnings. Certain subsidiaries provide benefits for employees covered by other plans based primarily upon employees' service and career earnings. The Marathon Group also has defined benefit retiree health and life insurance plans (other benefits) covering most employees upon their retirement. Health benefits are provided through comprehensive hospital, surgical and major medical benefit provisions or through health maintenance organizations, both subject to various cost sharing features. Life insurance benefits are provided to certain nonunion and most union represented retiree beneficiaries primarily based on employees' annual base salary at retirement. Other benefits have not been prefunded.
Pension Benefits Other Benefits ---------------------------------- --------------------------- (In millions) 1999 1998 1999 1998 ----------------------------------------------------------------------------------------------------------------------- Change in benefit obligations Benefit obligations at January 1 $ 1,080 $ 771 $ 597 $ 381 Service cost 65 48 17 12 Interest cost 67 57 36 31 Plan amendments 18 6 (44) (20) Actuarial (gains) losses (197) 121 (108) 112 Plan merger and acquisition 14 145 4 98 Settlements, curtailments and termination benefits (122) - - - Benefits paid (57) (68) (24) (17) ------------ ------------ ----------- -------------- Benefit obligations at December 31 $ 868 $ 1,080 $ 478 $ 597 ----------------------------------------------------------------------------------------------------------------------- Change in plan assets Fair value of plan assets at January 1 $ 1,331 $ 1,150 Actual return on plan assets 136 199 Plan merger and acquisition 12 55 Employer contributions 2 8 Trustee distributions/(a)/ (16) (14) Settlements paid (99) - Benefits paid from plan assets (56) (67) ------------ ------------ Fair value of plan assets at December 31 $ 1,310 $ 1,331 ----------------------------------------------------------------------------------------------------------------------- Funded status of plans at December 31 $ 442 /(b)/ $ 251 /(b)/ $ (478) $ (597) Unrecognized net gain from transition (26) (35) - - Unrecognized prior service costs (credits) 63 48 (72) (35) Unrecognized actuarial (gains) losses (306) (88) 68 182 Additional minimum liability/(c)/ (8) (18) - - ------------ ------------ ----------- -------------- Prepaid (accrued) benefit cost $ 165 $ 158 $ (482) $ (450) -----------------------------------------------------------------------------------------------------------------------
/(a)/ Represents transfers of excess pension assets to fund retiree health care benefits accounts under Section 420 of the Internal Revenue Code. /(b)/ Includes several plans that have accumulated benefit obligations in excess of plan assets: Aggregate accumulated benefit obligations $(24) $(36) Aggregate projected benefit obligations (37) (52) Aggregate plan assets - - /(c)/ Additional minimum liability recorded was offset by the following: Intangible asset $ 3 $ 2 ---- ---- Accumulated other comprehensive income (losses): Beginning of year $ (10) $ (7) Change during year (net of tax) 7 (3) ---- ---- Balance at end of year $ (3) $(10) -------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits ------------------------------ --------------------------- (In millions) 1999 1998 1997 1999 1998 1997 ----------------------------------------------------------------------------------------------------------------- Components of net periodic benefit cost (credit) Service cost $ 65 $ 48 $ 31 $ 17 $ 12 $ 6 Interest cost 67 57 45 36 31 22 Expected return on plan assets (114) (107) (85) - - - Amortization - net transition gain (5) (5) (5) - - - - prior service costs 4 3 1 (8) (3) (3) (credits) - actuarial losses 1 - 1 7 3 - Other plans 5 5 4 - - - Settlement and termination gain (7) /(a)/ - - - - - ----- ----- ----- ----- ----- ----- Net periodic benefit cost (credit) $ 16 $ 1 $ (8) $ 52 $ 43 $ 25 ---------------------------------------------------------------------------------------------------------------
/(a)/ Includes 1999 voluntary early retirement program. M-14
Pension Benefits Other Benefits ------------------ ---------------- 1999 1998 1999 1998 ------------------------------------------------------------------------------ Weighted average actuarial assumptions at December 31: Discount rate 8.0% 6.5% 8.0% 6.5% Expected annual return on plan assets 9.5% 9.5% 9.5% 9.5% Increase in compensation rate 5.0% 5.0% 5.0% 5.0% ------------------------------------------------------------------------------
For measurement purposes, an 8% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2000. The rate was assumed to decrease gradually to 5% for 2006 and remain at that level thereafter. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage- (In millions) Point Increase Point Decrease ------------------------------------------------------------------------------------------ Effect on total of service and interest cost components $ 8 $ (6) Effect on other postretirement benefit obligations 58 (48) ------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 15. Dividends In accordance with the USX Restated Certificate of Incorporation, dividends on the Marathon Stock and Steel Stock are limited to the legally available funds of USX. Net losses of either Group, as well as dividends and distributions on any class of USX Common Stock or series of preferred stock and repurchases of any class of USX Common Stock or series of preferred stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on both classes of Common Stock. Subject to this limitation, the Board of Directors intends to declare and pay dividends on the Marathon Stock based on the financial condition and results of operations of the Marathon Group, although it has no obligation under Delaware law to do so. In making its dividend decisions with respect to Marathon Stock, the Board of Directors considers among other things, the long-term earnings and cash flow capabilities of the Marathon Group as well as the dividend policies of similar publicly traded energy companies. - -------------------------------------------------------------------------------- 16. Property, Plant and Equipment
(In millions) December 31 1999 1998 -------------------------------------------------------------------------------------------------- Production $14,568 $14,707 Refining 2,439 2,251 Marketing 2,197 2,103 Transportation 1,374 1,402 Other 282 265 ------- ------- Total 20,860 20,728 Less accumulated depreciation, depletion and amortization 10,567 10,299 ------- ------- Net $10,293 $10,429 --------------------------------------------------------------------------------------------------
Property, plant and equipment at December 31, 1999, includes gross assets acquired under capital leases of $20 million with no related amounts in accumulated depreciation, depletion and amortization. - -------------------------------------------------------------------------------- 17. Common Stockholders' Equity
(In millions, except per share data) 1999 1998 1997 --------------------------------------------------------------------------------- Balance at beginning of year $4,312 $3,618 $3,340 Net income 654 310 456 Marathon Stock issued 96 617 39 Exchangeable Shares: Issued - 29 - Exchanged for Marathon Stock (7) (12) - Dividends on Marathon Stock (per share: $.84 in 1999 and 1998 and $.76 in 1997) (261) (248) (219) Deferred compensation - 2 1 Accumulated other comprehensive income (loss)/(a)/: Foreign currency translation adjustments (1) 2 - Minimum pension liability adjustments (Note 14) 7 (3) (2) Unrealized holding gains (losses) on investments - (3) 3 ------ ------ ------ Balance at end of year $4,800 $4,312 $3,618 ---------------------------------------------------------------------------------
/(a)/ See page U-7 of the USX consolidated financial statements relative to the annual activity of these adjustments and gains (losses). Total comprehensive income for the Marathon Group for the years 1999, 1998 and 1997 was $660 million, $306 million and $457 million, respectively. M-15 18. Income Taxes Income tax provisions and related assets and liabilities attributed to the Marathon Group are determined in accordance with the USX group tax allocation policy (Note 4). Provisions (credits) for estimated income taxes were:
1999 1998 1997 -------------------------- -------------------------- --------------------------- (In millions) Current Deferred Total Current Deferred Total Current Deferred Total ------------------------------------------------------------------------------------------------------------ Federal $191 $ 158 $349 $ 83 $ 19 $ 102 $ 171 $ (5) $ 166 State and local 3 (7) (4) 30 9 39 3 7 10 Foreign 25 (46) (21) 3 (2) 1 12 28 40 ---- ----- ---- ---- ----- ----- ------ ----- ------ Total $219 $ 105 $324 $116 $ 26 $ 142 $ 186 $ 30 $ 216 ------------------------------------------------------------------------------------------------------------ A reconciliation of federal statutory tax rate (35%) to total provisions follows: (In millions) 1999 1998 1997 ------------------------------------------------------------------------------------------------------------ Statutory rate applied to income before income taxes $ 342 $ 158 $ 235 Effects of foreign operations, including foreign tax credits (18) (26) (8) State and local income taxes after federal income tax effects (3) 25 6 Credits other than foreign tax credits (7) (9) (9) Effects of partially owned companies (5) (4) (6) Dispositions of subsidiary investments 7 - - Adjustment of prior years' federal income taxes 4 (5) (4) Adjustment of valuation allowances - - (4) Other 4 3 6 ----- ------ ------ Total provisions $ 324 $ 142 $ 216 ------------------------------------------------------------------------------------------------------------ Deferred tax assets and liabilities resulted from the following: (In millions) December 31 1999 1998 ------------------------------------------------------------------------------------------------------------ Deferred tax assets: Minimum tax credit carryforwards $ - $ 15 State tax loss carryforwards (expiring in 2000 through 2018) 57 54 Foreign tax loss carryforwards (portion of which expire in 2000 through 2014) 382 414 Employee benefits 206 201 Receivables, payables, and debt 14 13 Expected federal benefit for: Crediting certain foreign deferred income taxes 530 528 Deducting state and other foreign deferred income taxes 36 51 Contingency and other accruals 150 140 Investments in foreign subsidiaries 52 52 Investments in subsidiaries and affiliates 20 22 Other 34 38 Valuation allowances: Federal (30) (30) State (11) (8) Foreign (282) (260) -------- ------- Total deferred tax assets/(a)/ 1,158 1,230 -------- ------- Deferred tax liabilities: Property, plant and equipment 2,065 2,158 Inventory 324 170 Prepaid pensions 127 125 Other 111 150 -------- ------- Total deferred tax liabilities 2,627 2,603 -------- ------- Net deferred tax liabilities $ 1,469 $ 1,373 ------------------------------------------------------------------------------------------------------------
/(a)/ USX expects to generate sufficient future taxable income to realize the benefit of the Marathon Group's deferred tax assets. In addition, the ability to realize the benefit of foreign tax credits is based upon certain assumptions concerning future operating conditions (particularly as related to prevailing oil prices), income generated from foreign sources and USX's tax profile in the years that such credits may be claimed. The consolidated tax returns of USX for the years 1990 through 1997 are under various stages of audit and administrative review by the IRS. USX believes it has made adequate provision for income taxes and interest which may become payable for years not yet settled. Pretax income (loss) included $66 million, $(75) million and $250 million attributable to foreign sources in 1999, 1998 and 1997, respectively. Undistributed earnings of certain consolidated foreign subsidiaries at December 31, 1999, amounted to $150 million. No provision for deferred U.S. income taxes has been made for these subsidiaries because the Marathon Group intends to permanently reinvest such earnings in those foreign operations. If such earnings were not permanently reinvested, a deferred tax liability of $53 million would have been required. M-16 - -------------------------------------------------------------------------------- 19. Investments and Long-Term Receivables
(In millions) December 31 1999 1998 ------------------------------------------------------------------------------------------------------- Equity method investments $ 658 $ 498 Other investments 32 33 Receivables due after one year 56 46 Deposits of restricted cash 20 21 Other 6 5 ------ ------ Total $ 772 $ 603 -------------------------------------------------------------------------------------------------------
Summarized financial information of affiliates accounted for by the equity method of accounting follows:
(In millions) 1999 1998 1997 ------------------------------------------------------------------------------------------------------- Income data - year: Revenues $ 422 $ 347 $ 562 Operating income 152 132 114 Net income 119 79 52 ------------------------------------------------------------------------------------------------------- Balance sheet data - December 31: Current assets $ 387 $ 262 Noncurrent assets 2,606 2,233 Current liabilities 300 243 Noncurrent liabilities 1,066 1,254 -------------------------------------------------------------------------------------------------------
Dividends and partnership distributions received from equity affiliates were $44 million in 1999, $23 million in 1998 and $21 million in 1997. Marathon Group purchases from equity affiliates totaled $50 million, $64 million and $37 million in 1999, 1998 and 1997, respectively. Marathon Group sales to USX equity affiliates were $22 million in 1999 and 1998 and $36 million in 1997. - -------------------------------------------------------------------------------- 20. Inventories
(In millions) December 31 1999 1998 ------------------------------------------------------------------------------------------------------- Crude oil and natural gas liquids $ 729 $ 731 Refined products and merchandise 1,046 1,023 Supplies and sundry items 109 107 ------ ------ Total (at cost) 1,884 1,861 Less inventory market valuation reserve - 551 ------ ------ Net inventory carrying value $1,884 $1,310 -------------------------------------------------------------------------------------------------------
Inventories of crude oil and refined products are valued by the LIFO method. The LIFO method accounted for 90% and 88% of total inventory value at December 31, 1999 and 1998, respectively. Current acquisition costs were estimated to exceed the above inventory values at December 31, 1999, by approximately $200 million. The inventory market valuation reserve reflects the extent that the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. The reserve is decreased to reflect increases in market prices and inventory turnover and increased to reflect decreases in market prices. Changes in the inventory market valuation reserve result in noncash charges or credits to costs and expenses. - -------------------------------------------------------------------------------- 21. Stock-Based Compensation Plans and Stockholder Rights Plan USX Stock-Based Compensation Plans and Stockholder Rights Plan are discussed in Note 19, and Note 21, respectively, to the USX consolidated financial statements. The Marathon Group's actual stock-based compensation expense (credit) was $(4) million in 1999, $(3) million in 1998 and $20 million in 1997. Incremental compensation expense, as determined under a fair value model, was not material ($.02 or less per share for all years presented). Therefore, pro forma net income and earnings per share data have been omitted. M-17 - -------------------------------------------------------------------------------- 22. Income Per Common Share The method of calculating net income per share for the Marathon Stock, the Steel Stock and, prior to November 1, 1997, the Delhi Stock reflects the USX Board of Directors' intent that the separately reported earnings and surplus of the Marathon Group, the U. S. Steel Group and the Delhi Group, as determined consistent with the USX Restated Certificate of Incorporation, are available for payment of dividends to the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. Basic net income per share is based on the weighted average number of common shares outstanding. Diluted net income per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options, provided in each case, the effect is not antidilutive.
1999 1998 1997 ------------------- -------------------- -------------------- Computation of Income Per Share Basic Diluted Basic Diluted Basic Diluted ------------------------------- ----- ------- ----- ------- ----- ------ Net income (millions): Net income $ 654 $ 654 $ 310 $ 310 $ 456 $ 456 Dilutive effect of convertible debentures - - - - - 3 -------- -------- -------- -------- -------- -------- Net income assuming conversions $ 654 $ 654 $ 310 $ 310 $ 456 $ 459 ======== ======== ======== ======== ======== ======== Shares of common stock outstanding (thousands): Average number of common shares outstanding 309,696 309,696 292,876 292,876 288,038 288,038 Effect of dilutive securities: Convertible debentures - - - - - 1,936 Stock options - 314 - 559 - 546 -------- -------- -------- -------- -------- -------- Average common shares and dilutive effect 309,696 310,010 292,876 293,435 288,038 290,520 ======== ======== ======== ======== ======== ======== Net income per share $ 2.11 $ 2.11 $ 1.06 $ 1.05 $ 1.59 $ 1.58 ======== ======== ======== ======== ======== ========
- -------------------------------------------------------------------------------- 23. Intergroup Transactions Sales and purchases - Marathon Group sales to other groups totaled $41 million, $21 million and $105 million in 1999, 1998 and 1997, respectively. Marathon Group purchases from other groups totaled $17 million in 1999, $2 million in 1998 and $18 million in 1997. At December 31, 1999 and 1998, Marathon Group receivables included $5 million and $3 million, respectively, related to transactions with the U.S. Steel Group. These transactions were conducted under terms comparable to those with unrelated parties. Since October 31, 1997, transactions with the Delhi Companies are third-party transactions. Income taxes receivable from/payable to the U. S. Steel Group -At December 31, 1999 and 1998, amounts receivable or payable for income taxes were included in the balance sheet as follows:
(In millions) December 31 1999 1998 ------------------------------------------------------------------------------------------------------------ Current: Receivables $ 1 $ 2 Income taxes payable 97 - Noncurrent: Deferred credits and other liabilities 97 97 ------------------------------------------------------------------------------------------------------------
These amounts have been determined in accordance with the tax allocation policy described in Note 4. Amounts classified as current are settled in cash in the year succeeding that in which such amounts are accrued. Noncurrent amounts represent estimates of intergroup tax effects of certain issues for years that are still under various stages of audit and administrative review. Such tax effects are not settled between the groups until the audit of those respective tax years is closed. The amounts ultimately settled for open tax years will be different than recorded noncurrent amounts based on the final resolution of all of the audit issues for those years. - -------------------------------------------------------------------------------- 24. Derivative Instruments The Marathon Group remains at risk for possible changes in the market value of the derivative instrument; however, such risk should be mitigated by price changes in the underlying hedged item. The Marathon Group is also exposed to credit risk in the event of nonperformance by counterparties. The credit worthiness of counterparties is subject to continuing review, including the use of master netting agreements to the extent practical, and full performance is anticipated. The following table sets forth quantitative information by class of derivative instrument: M-18
Recognized Fair Carrying Trading Recorded Value Amount Gain or Deferred Aggregate Assets Assets (Loss) for Gain or Contract (In millions) (Liabilities)/(a)(b)/ (Liabilities) the Year (Loss) Values/(c) - --------------------------------------------------------------------------------------------------------------------------- December 31, 1999: Exchange-traded commodity futures: Trading $ - $ - $ 4 $ - $ 8 Other than trading - - - 28 344 Exchange-traded commodity options: Trading - - 4 - 179 Other than trading (6) /(d)/ (6) - (10) 1,262 OTC commodity swaps/(e)/: Trading - - - - - Other than trading 3 /(f)/ 3 - 2 156 OTC commodity options: Trading - - - - - Other than trading 4 /(g)/ 4 - 5 238 -------- --------- -------- ------- -------- Total commodities $ 1 $ 1 $ 8 $ 25 $ 2,187 ======== ========= ======== ======= ======== Forward exchange contracts/(h)/: - receivable $ 52 $ 52 $ - $ - $ 51 - --------------------------------------------------------------------------------------------------------------------------- December 31, 1998: Exchange-traded commodity futures $ - $ - $ (2) $ 104 Exchange-traded commodity options 3 /(d)/ 2 3 776 OTC commodity swaps (2) /(f)/ (2) - 243 OTC commodity options 3 /(g)/ 3 3 147 -------- -------- ------- -------- Total commodities $ 4 $ 3 $ 4 $ 1,270 ======== ======== ======= ======== Forward exchange contracts: - receivable $ 36 $ 36 $ - $ 36
- -------------------------------------------------------------------------------- /(a)/ The fair value amounts for OTC positions are based on various indices or dealer quotes. The fair value amounts for currency contracts are based on dealer quotes of forward prices covering the remaining duration of the forward exchange contract. The exchange-traded futures contracts and certain option contracts do not have a corresponding fair value since changes in the market prices are settled on a daily basis. /(b)/ The aggregate average fair value of all trading activities for the period ending December 31, 1999, was $3 million. Detail by class of instrument was not available. /(c)/ Contract or notional amounts do not quantify risk exposure, but are used in the calculation of cash settlements under the contracts. The contract or notional amounts do not reflect the extent to which positions may offset one another. /(d)/ Includes fair values as of December 31, 1999 and 1998, for assets of $11 million and $23 million and for liabilities of $(17) million and $(20) million, respectively. /(e)/ The OTC swap arrangements vary in duration with certain contracts extending into 2008. /(f)/ Includes fair values as of December 31, 1999 and 1998, for assets of $8 million and $29 million and for liabilities of $(5) million and $(31) million, respectively. /(g)/ Includes fair values as of December 31, 1999 and 1998, for assets of $5 million and for liabilities of $(1) million and $(2) million, respectively. /(h)/ The forward exchange contracts relating to USX's foreign operations have various maturities ending in December 2000. - -------------------------------------------------------------------------------- 25. Fair Value of Financial Instruments Fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. The following table summarizes financial instruments, excluding derivative financial instruments disclosed in Note 24, by individual balance sheet account. As described in Note 4, the Marathon Group's specifically attributed financial instruments and the Marathon Group's portion of USX's financial instruments attributed to all groups are as follows:
1999 1998 ----------------- ------------------- Fair Carrying Fair Carrying (In millions) December 31 Value Amount Value Amount ------------------------------------------------------------------------------------------------------------- Financial assets: Cash and cash equivalents $ 111 $ 111 $ 137 $ 137 Receivables 1,866 1,866 1,277 1,277 Investments and long-term receivables 166 109 157 101 ------ ------ ------ ------ Total financial assets $2,143 $2,086 $1,571 $1,515 ------------------------------------------------------------------------------------------------------------- Financial liabilities: Notes payable $ - $ - $ 132 $ 132 Accounts payable (including intergroup payables) 2,756 2,756 1,940 1,940 Distribution payable to minority shareholder of MAP - - 103 103 Accrued interest 92 92 87 87 Long-term debt (including amounts due within one year) 3,443 3,353 3,797 3,515 Preferred stock of subsidiary 176 184 183 184 ------ ------ ------ ------ Total financial liabilities $6,467 $6,385 $6,242 $5,961 -------------------------------------------------------------------------------------------------------------
M-19 Fair value of financial instruments classified as current assets or liabilities approximates carrying value due to the short-term maturity of the instruments. Fair value of investments and long-term receivables was based on discounted cash flows or other specific instrument analysis. Fair value of preferred stock of subsidiary was based on market prices. Fair value of long-term debt instruments was based on market prices where available or current borrowing rates available for financings with similar terms and maturities. The Marathon Group's unrecognized financial instruments consist of financial guarantees. It is not practicable to estimate the fair value of these forms of financial instrument obligations because there are no quoted market prices for transactions which are similar in nature. For details relating to financial guarantees, see Note 26. - -------------------------------------------------------------------------------- 26. Contingencies and Commitments USX is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Marathon Group involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Marathon Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Marathon Group. Environmental matters - The Marathon Group is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At December 31, 1999 and 1998, accrued liabilities for remediation totaled $69 million and $48 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in cleanup efforts related to underground storage tanks at retail marketing outlets, were $52 million at December 31, 1999, and $41 million at December 31, 1998. For a number of years, the Marathon Group has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In 1999 and 1998, such capital expenditures totaled $46 million and $83 million, respectively. The Marathon Group anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. At December 31, 1999 and 1998, accrued liabilities for platform abandonment and dismantlement totaled $152 million and $141 million, respectively. Guarantees - Guarantees by USX and its consolidated subsidiaries of the liabilities of affiliated entities of the Marathon Group totaled $131 million at December 31, 1999 and 1998. As of December 31, 1999, the largest guarantee for a single affiliate was $131 million. At December 31, 1999 and 1998, the Marathon Group's pro rata share of obligations of LOOP LLC and various pipeline affiliates secured by throughput and deficiency agreements totaled $146 million and $164 million, respectively. Under the agreements, the Marathon Group is required to advance funds if the affiliates are unable to service debt. Any such advances are prepayments of future transportation charges. Commitments - At December 31, 1999 and 1998, the Marathon Group's contract commitments to acquire property, plant and equipment and long-term investments totaled $485 million and $624 million, respectively. The Marathon Group is a party to a 15-year transportation services agreement with a natural gas transmission company. The contract requires the Marathon Group to pay a minimum annual demand charge of approximately $5 million starting in the year 2000 and concluding in the year 2014. The payments are required even if the transportation facility is not utilized. M-20 Selected Quarterly Financial Data (Unaudited)
1999 1998 ------------------------------------------------------ ---------------------------- (In millions, except per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. - ----------------------------------------------------------------------------------------------------------------------------------- Revenues $ 7,505 $ 6,490 $ 5,481 $ 4,851 $ 5,339 /(a)/ $ 5,597 /(a)/ Income (loss) from operations 350 561 399 403 (132) 215 Includes: Inventory market valuation charges (credits) - (136) (66) (349) 245 50 Gain on ownership change in MAP (6) (11) - - - 1 Net income (loss) 171 230 134 119 (86) 51 - ----------------------------------------------------------------------------------------------------------------------------------- Marathon Stock data: - ------------------- Net income (loss) per share: Basic $ .55 $ .74 $ .43 $ .38 $ (.29) $ .18 Diluted .55 .74 .43 .38 (.29) .17 Dividends paid per share .21 .21 .21 .21 .21 .21 Price range of Marathon Stock/(b)/: - Low 23- 5/8 28- 1/2 25- 13/16 19- 5/8 26- 11/16 25 - High 30- 5/8 33- 7/8 32- 3/4 31- 3/8 38- 1/8 37- 1/8 - ----------------------------------------------------------------------------------------------------------------------------------- 1998 -------------------------------- (In millions, except per share data) 2nd Qtr. 1st Qtr. Revenues $ 5,530 /(a)/ $ 5,511 /(a)/ Income (loss) from operations 453 402 Includes: Inventory market valuation charges (credits) (3) (25) Gain on ownership change in MAP 2 (248) Net income (loss) 162 183 - ------------------------------------------------------------------------------------ Marathon Stock data: - ------------------- Net income (loss) per share: Basic $ .56 $ .63 Diluted .56 .63 Dividends paid per share .21 .21 Price range of Marathon Stock/(b)/: - Low 32- 3/16 31 - High 38- 7/8 40- 1/2 - ------------------------------------------------------------------------------------
/(a)/ Reclassified to conform to 1999 classifications. /(b)/ Composite tape. Principal Unconsolidated Affiliates (Unaudited)
December 31, 1999 Company Country Ownership Activity - ----------------------------------------------------------------------------------------------------------------------------------- CLAM Petroleum B.V. Netherlands 50% Oil & Gas Production Kenai LNG Corporation United States 30% Natural Gas Liquification LOCAP, Inc. United States 50% /(a)/ Pipeline & Storage Facilities LOOP LLC United States 47% /(a)/ Offshore Oil Port Manta Ray Offshore Gathering Company, LLC United States 24% Natural Gas Transmission Minnesota Pipe Line Company United States 33% /(a)/ Pipeline Facility Nautilus Pipeline Company, LLC United States 24% Natural Gas Transmission Odyssey Pipeline LLC United States 29% Pipeline Facility Poseidon Oil Pipeline Company, LLC United States 28% Crude Oil Transportation Sakhalin Energy Investment Company Ltd. Russia 38% Oil & Gas Development - -----------------------------------------------------------------------------------------------------------------------------------
/(a)/ Represents the ownership of MAP. Supplementary Information on Oil and Gas Producing Activities (Unaudited) See the USX consolidated financial statements for Supplementary Information on Oil and Gas Producing Activities relating to the Marathon Group, pages U-30 through U-34. M-21 EX-99.3 6 U.S. STEEL GROUP FINANCIAL STATEMENTS Exhibit 99.3 U. S. Steel Group Index to 1999 Financial Statements and Supplementary Data
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
U.S. Steel Group Explanatory Note Regarding Financial Information 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 does not affect legal title to such assets and responsibility for such liabilities. Holders of USX - U. S. Steel Group Common Stock and USX - Marathon Group Common Stock are holders of common stock of USX and continue to be subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts arising from one Group that affect the overall cost of USX's capital could affect the results of operations and financial condition of the other Group. In addition, net losses of either Group, as well as dividends or distributions on any class of USX Common Stock or series of Preferred Stock and repurchases of any class of USX Common Stock or series of Preferred Stock, 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 U. S. Steel Group financial information. Management's Report The accompanying financial statements of the U. S. Steel Group are the responsibility of and have been prepared by USX Corporation (USX) in conformity with accounting principles generally accepted in the United States. They necessarily include some amounts that are based on best judgments and estimates. The U. S. Steel Group financial information displayed in other sections of this report is consistent with these financial statements. USX seeks to assure the objectivity and integrity of its financial records by careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communications programs aimed at assuring that its policies and methods are understood throughout the organization. USX has a comprehensive formalized system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that financial records are reliable. Appropriate management monitors the system for compliance, and the internal auditors independently measure its effectiveness and recommend possible improvements thereto. In addition, as part of their audit of the financial statements, USX's independent accountants, who are elected by the stockholders, review and test the internal accounting controls selectively to establish a basis of reliance thereon in determining the nature, extent and timing of audit tests to be applied. The Board of Directors pursues its oversight role in the area of financial reporting and internal accounting control through its Audit Committee. This Committee, composed solely of nonmanagement directors, regularly meets (jointly and separately) with the independent accountants, management and internal auditors to monitor the proper discharge by each of its responsibilities relative to internal accounting controls and the consolidated and group financial statements. Thomas J. Usher Robert M. Hernandez Kenneth L. Matheny Chairman, Board of Directors Vice Chairman Vice President & Chief Executive Officer & Chief Financial Officer & Comptroller
Report of Independent Accountants To the Stockholders of USX Corporation: In our opinion, the accompanying financial statements appearing on pages S-2 through S-20 present fairly, in all material respects, the financial position of the U. S. Steel Group at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of USX's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The U. S. Steel Group is a business unit of USX Corporation (as described in Note 1, page S-5); accordingly, the financial statements of the U. S. Steel Group should be read in connection with the consolidated financial statements of USX Corporation. PricewaterhouseCoopers LLP 600 Grant Street, Pittsburgh, Pennsylvania 15219-2794 February 8, 2000 S-1 Statement of Operations
(Dollars in millions) 1999 1998 1997 ------------------------------------------------------------------------------------------------------------ Revenues: Sales $5,380 $6,184 $6,814 Income (loss) from affiliates (89) 46 69 Net gains on disposal of assets 21 54 57 Other income (loss) 2 (1) 1 ------ ------ ------ Total revenues 5,314 6,283 6,941 ------ ------ ------ Costs and expenses: Cost of sales (excludes items shown below) 4,928 5,410 5,762 Selling, general and administrative expenses (credits) (Note 11) (283) (201) (137) Depreciation, depletion and amortization 304 283 303 Taxes other than income taxes 215 212 240 ------ ------ ------ Total costs and expenses 5,164 5,704 6,168 ------ ------ ------ Income from operations 150 579 773 Net interest and other financial costs (Note 6) 74 42 87 ------ ------ ------ Income before income taxes and extraordinary losses 76 537 686 Provision for estimated income taxes (Note 14) 25 173 234 ------ ------ ------ Income before extraordinary losses 51 364 452 Extraordinary losses (Note 5) 7 - - ------ ------ ------ Net income 44 364 452 Noncash credit from exchange of preferred stock (Note 18) - - 10 Dividends on preferred stock (9) (9) (13) ------ ------ ------ Net income applicable to Steel Stock $ 35 $ 355 $ 449 ------------------------------------------------------------------------------------------------------------
Income Per Common Share Applicable to Steel Stock
1999 1998 1997 ------------------------------------------------------------------------------------------------------------ Basic: Income before extraordinary losses $ .48 $ 4.05 $ 5.24 Extraordinary losses .08 - - ------ ------ ------ Net income $ .40 $ 4.05 $ 5.24 Diluted: Income before extraordinary losses $ .48 $ 3.92 $ 4.88 Extraordinary losses .08 - - ------ ------ ------ Net income $ .40 $ 3.92 $ 4.88 ------------------------------------------------------------------------------------------------------------
See Note 21, for a description and computation of income per common share. The accompanying notes are an integral part of these financial statements. S-2 Balance Sheet
(Dollars in millions) December 31 1999 1998 ------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 22 $ 9 Receivables, less allowance for doubtful accounts of $10 and $9 838 392 Income taxes receivable (Note 12) 97 - Inventories (Note 13) 743 698 Deferred income tax benefits (Note 14) 281 176 ------ ------ Total current assets 1,981 1,275 Investments and long-term receivables, less reserves of $3 and $10 (Notes 12 and 15) 572 743 Property, plant and equipment - net (Note 17) 2,516 2,500 Prepaid pensions (Note 11) 2,404 2,172 Other noncurrent assets 52 59 ------ ------ Total assets $7,525 $6,749 ------------------------------------------------------------------------------------------------------------- Liabilities Current liabilities: Notes payable $ - $ 13 Accounts payable 739 501 Payroll and benefits payable 322 330 Accrued taxes 177 150 Accrued interest 15 10 Long-term debt due within one year (Note 10) 13 12 ------ ------ Total current liabilities 1,266 1,016 Long-term debt (Note 10) 902 464 Deferred income taxes (Note 14) 348 129 Employee benefits (Note 11) 2,245 2,315 Deferred credits and other liabilities 459 484 Preferred stock of subsidiary (Note 9) 66 66 USX obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely junior subordinated convertible debentures of USX (Note 18) 183 182 Stockholders' Equity (Note 19) Preferred stock 3 3 Common stockholders' equity 2,053 2,090 ------ ------ Total stockholders' equity 2,056 2,093 ------ ------ Total liabilities and stockholders' equity $7,525 $6,749 -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. S-3 Statement of Cash Flows
(Dollars in millions) 1999 1998 1997 ------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in cash and cash equivalents Operating activities: Net income $ 44 $ 364 $ 452 Adjustments to reconcile to net cash provided from (used in) operating activities: Extraordinary losses 7 - - Depreciation, depletion and amortization 304 283 303 Pensions and other postretirement benefits (256) (215) (349) Deferred income taxes 107 158 193 Net gains on disposal of assets (21) (54) (57) Changes in: Current receivables - sold (320) (30) - - operating turnover (242) 232 (24) Inventories (14) 7 (57) Current accounts payable and accrued expenses 239 (285) 61 All other - net 72 (80) (46) ----- ----- ----- Net cash provided from (used in) operating activities (80) 380 476 ----- ----- ----- Investing activities: Capital expenditures (287) (310) (261) Disposal of assets 10 21 420 Restricted cash - withdrawals 15 35 - - deposits (17) (35) - Affiliates - investments (15) (73) (26) - loans and advances - (1) - - repayments of loans and advances - - 2 All other - net - 14 (1) ----- ----- ----- Net cash provided from (used in) investing activities (294) (349) 134 ----- ----- ----- Financing activities (Note 9): Increase (decrease) in U. S. Steel Group's portion of USX consolidated debt 147 13 (561) Specifically attributed debt: Borrowings 350 - - Repayments (11) (4) (6) Steel Stock issued - 55 48 Preferred stock repurchased (2) (8) - Dividends paid (97) (96) (96) ----- ----- ----- Net cash provided from (used in) financing activities 387 (40) (615) ----- ----- ----- Net increase (decrease) in cash and cash equivalents 13 (9) (5) Cash and cash equivalents at beginning of year 9 18 23 ----- ----- ----- Cash and cash equivalents at end of year $ 22 $ 9 $ 18 ------------------------------------------------------------------------------------------------------------------------
See Note 8, for supplemental cash flow information. The accompanying notes are an integral part of these financial statements. S-4 Notes to Financial Statements 1. Basis of Presentation After the redemption of the USX - Delhi Group stock on January 26, 1998, USX Corporation (USX) has two classes of common stock: USX - U. S. Steel Group Common Stock (Steel Stock) and USX - Marathon Group Common Stock (Marathon Stock), which are intended to reflect the performance of the U. S. Steel Group and the Marathon Group, respectively. The financial statements of the U. S. Steel Group include the financial position, results of operations and cash flows for all businesses of USX other than the businesses, assets and liabilities included in the Marathon Group, and a portion of the corporate assets and liabilities and related transactions which are not separately identified with ongoing operating units of USX. The U. S. Steel Group financial statements are prepared using the amounts included in the USX consolidated financial statements. For a description of the U. S. Steel Group's operating segment, see Note 7. Although the financial statements of the U. S. Steel Group and the Marathon Group separately report the assets, liabilities (including contingent liabilities) and stockholders' equity of USX attributed to each such Group, such attribution of assets, liabilities (including contingent liabilities) and stockholders' equity between the U. S. Steel Group and the Marathon Group for the purpose of preparing their respective financial statements does not affect legal title to such assets or responsibility for such liabilities. Holders of Steel Stock and Marathon Stock are holders of common stock of USX, and continue to be subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts arising from one Group that affect the overall cost of USX's capital could affect the results of operations and financial condition of the other Group. In addition, net losses of either Group, as well as dividends and distributions on any class of USX Common Stock or series of preferred stock and repurchases of any class of USX Common Stock or series of preferred stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on both classes of Common Stock. Accordingly, the USX consolidated financial information should be read in connection with the U. S. Steel Group financial information. - ------------------------------------------------------------------------------- 2. Summary of Principal Accounting Policies Principles applied in consolidation - These financial statements include the accounts of the U. S. Steel Group. The U. S. Steel Group and the Marathon Group financial statements, taken together, comprise all of the accounts included in the USX consolidated financial statements. Investments in entities over which the U. S. Steel Group has significant influence are accounted for using the equity method of accounting and are carried at the U. S. Steel Group's share of net assets plus loans and advances. Investments in companies whose stock is publicly traded are carried at market value. The difference between the cost of these investments and market value is recorded in other comprehensive income (net of tax). Investments in companies whose stock has no readily determinable fair value are carried at cost. Use of estimates - Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at year-end and the reported amounts of revenues and expenses during the year. Significant items subject to such estimates and assumptions include the carrying value of long-lived assets; valuation allowances for receivables, inventories and deferred income tax assets; environmental liabilities; liabilities for potential tax deficiencies and potential litigation claims and settlements; and assets and obligations related to employee benefits. Additionally, certain estimated liabilities are recorded when management commits to a plan to close an operating facility or to exit a business activity. Actual results could differ from the estimates and assumptions used. Revenue recognition - Revenues principally include sales, dividend and affiliate income, gains or losses on the disposal of assets and gains or losses from changes in ownership interests. Sales are recognized when products are shipped or services are provided to customers. Income from affiliates includes the U. S. Steel Group's proportionate share of income from equity method investments. When long-lived assets depreciated on an individual basis are sold or otherwise disposed of, any gains or losses are reflected in income. Gains on disposal of long-lived assets are recognized when earned, which is generally at the time of closing. If a loss on disposal is expected, such losses are recognized when long-lived assets are reclassified as assets held for sale. Proceeds from disposal of long-lived assets depreciated on a group basis are credited to accumulated depreciation, depletion and amortization with no immediate effect on income. Gains or losses from a change in ownership of an unconsolidated affiliate are recognized in revenues in the period of change. S-5 Cash and cash equivalents - Cash and cash equivalents include cash on hand and on deposit and highly liquid debt instruments with maturities generally of three months or less. Inventories - Inventories are carried at lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method. Derivative instruments - The U. S. Steel Group uses commodity- based derivative instruments to manage its exposure to price risk. Management is authorized to use futures, forwards, swaps and options related to the purchase of natural gas, refined products and nonferrous metals used in steel operations. For transactions that qualify for hedge accounting, the resulting gains or losses are deferred and subsequently recognized in income from operations, as a component of sales or cost of sales, in the same period as the underlying physical transaction. To qualify for hedge accounting, derivative positions cannot remain open if the underlying physical market risk has been removed. Recorded deferred gains or losses are reflected within other current and noncurrent assets or accounts payable and deferred credits and other liabilities, as appropriate. Long-lived assets - Depreciation is generally computed using a modified straight-line method based upon estimated lives of assets and production levels. The modification factors range from a minimum of 85% at a production level below 81% of capability, to a maximum of 105% for a 100% production level. No modification is made at the 95% production level, considered the normal long-range level. Depletion of mineral properties is based on rates which are expected to amortize cost over the estimated tonnage of minerals to be removed. U. S. Steel Group evaluates impairment of its long-lived assets on an individual asset basis or by logical groupings of assets. Assets deemed to be impaired are written down to their fair value, including any related goodwill, using discounted future cash flows and, if available, comparable market values. Environmental remediation - The U. S. Steel Group provides for remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. Generally, the timing of remediation accruals coincides with completion of a feasibility study or the commitment to a formal plan of action. Remediation liabilities are accrued based on estimates of known environmental exposure and are discounted in certain instances. Postemployment benefits - The U. S. Steel Group recognizes an obligation to provide postemployment benefits, primarily for disability-related claims covering indemnity and medical payments. The obligation for these claims and the related periodic costs are measured using actuarial techniques and assumptions, including an appropriate discount rate, analogous to the required methodology for measuring pension and other postretirement benefit obligations. Actuarial gains and losses are deferred and amortized over future periods. Insurance - The U. S. Steel Group is insured for catastrophic casualty and certain property and business interruption exposures, as well as those risks required to be insured by law or contract. Costs resulting from noninsured losses are charged against income upon occurrence. Reclassifications - Certain reclassifications of prior years' data have been made to conform to 1999 classifications. S-6 - ------------------------------------------------------------------------------ 3. New Accounting Standards Effective January 1, 1997, USX adopted American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" (SOP 96-1), which provides additional interpretation of existing accounting standards related to recognition, measurement and disclosure of environmental remediation liabilities. As a result of adopting SOP 96-1, the U. S. Steel Group identified additional environmental remediation liabilities of $35 million, of which $28 million was discounted to a present value of $13 million and $7 million was not discounted. Assumptions used in the calculation of the present value amount included an inflation factor of 2% and an interest rate of 7% over a range of 22 to 30 years. The net unfavorable effect of adoption on the U. S. Steel Group's income from operations at January 1, 1997, was $20 million. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). This new Standard requires recognition of all derivatives as either assets or liabilities at fair value. SFAS No. 133 may result in additional volatility in both current period earnings and other comprehensive income as a result of recording recognized and unrecognized gains and losses resulting from changes in the fair value of derivative instruments. The transition adjustment resulting from adoption of SFAS No. 133 will be reported as a cumulative effect of a change in accounting principle. Under the new Standard, USX may elect not to designate certain derivative instruments as hedges even if the strategy qualifies for hedge accounting treatment. This approach would eliminate the administrative effort needed to measure effectiveness and monitor such instruments; however, this approach also may result in additional volatility in current period earnings. USX cannot reasonably estimate the effect of adoption on either the financial position or results of operations. It is not possible to estimate what effect this Statement will have on future results of operations, although greater period-to-period volatility is likely. USX plans to adopt the Standard effective January 1, 2001. - -------------------------------------------------------------------------------- 4. Corporate Activities Financial activities - As a matter of policy, USX manages most financial activities on a centralized, consolidated basis. Such financial activities include the investment of surplus cash; the issuance, repayment and repurchase of short-term and long-term debt; the issuance, repurchase and redemption of preferred stock; and the issuance and repurchase of common stock. Transactions related primarily to invested cash, short-term and long-term debt (including convertible debt), related net interest and other financial costs, and preferred stock and related dividends are attributed to the U. S. Steel Group, the Marathon Group and, prior to November 1, 1997, the Delhi Group based upon the cash flows of each group for the periods presented and the initial capital structure of each group. Most financing transactions are attributed to and reflected in the financial statements of the groups. See Note 9, for the U. S. Steel Group's portion of USX's financial activities attributed to the groups. However, transactions such as leases, certain collateralized financings, certain indexed debt instruments, financial activities of consolidated entities which are less than wholly owned by USX and transactions related to securities convertible solely into any one class of common stock are or will be specifically attributed to and reflected in their entirety in the financial statements of the group to which they relate. Corporate general and administrative costs - Corporate general and administrative costs are allocated to the U. S. Steel Group, the Marathon Group and, prior to November 1, 1997, the Delhi Group based upon utilization or other methods management believes to be reasonable and which consider certain measures of business activities, such as employment, investments and sales. The costs allocated to the U. S. Steel Group were $17 million in 1999, $24 million in 1998 and $33 million in 1997, and primarily consist of employment costs including pension effects, professional services, facilities and other related costs associated with corporate activities. Income taxes - All members of the USX affiliated group are included in the consolidated United States federal income tax return filed by USX. Accordingly, the provision for federal income taxes and the related payments or refunds of tax are determined on a consolidated basis. The consolidated provision and the related tax payments or refunds have been reflected in the U. S. Steel Group, the Marathon Group and, prior to November 1, 1997, the Delhi Group financial statements in accordance S-7 with USX's tax allocation policy. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated among the U. S. Steel Group, Marathon Group and, prior to November 1, 1997, the Delhi Group, for group financial statement purposes, based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to the respective groups. For tax provision and settlement purposes, tax benefits resulting from attributes (principally net operating losses and various tax credits), which cannot be utilized by one of the groups on a separate return basis but which can be utilized on a consolidated basis in that year or in a carryback year, are allocated to the group that generated the attributes. To the extent that one of the groups is allocated a consolidated tax attribute which, as a result of expiration or otherwise, is not ultimately utilized on the consolidated tax return, the prior years' allocation of such attribute is adjusted such that the effect of the expiration is borne by the group that generated the attribute. Also, if a tax attribute cannot be utilized on a consolidated basis in the year generated or in a carryback year, the prior years' allocation of such consolidated tax effects is adjusted in a subsequent year to the extent necessary to allocate the tax benefits to the group that would have realized the tax benefits on a separate return basis. As a result, the allocated group amounts of taxes payable or refundable are not necessarily comparable to those that would have resulted if the groups had filed separate tax returns. - ------------------------------------------------------------------------------- 5. Extraordinary Losses In 1999, USX irrevocably deposited with a trustee the entire 5.5 million common shares it owned in RTI International Metals, Inc. (RTI). The deposit of the shares resulted in the satisfaction of USX's obligation under its 6 3/4/% Exchangeable Notes (indexed debt) due February 1, 2000. Under the terms of the indenture, the trustee exchanged one RTI share for each note at maturity. All shares were required for satisfaction of the indexed debt; therefore, none reverted back to USX. As a result of the above transaction, USX recorded in 1999 an extraordinary loss of $5 million, net of a $3 million income tax benefit, representing prepaid interest expense and the write- off of unamortized debt issue costs, and a pretax charge of $22 million, representing the difference between the carrying value of the investment in RTI and the carrying value of the indexed debt, which is included in net gains on disposal of assets. In December 1996, USX had issued $117 million of notes indexed to the common share price of RTI. At maturity, USX would have been required to exchange the notes for shares of RTI common stock, or redeem the notes for the equivalent amount of cash. Since USX's investment in RTI was attributed to the U. S. Steel Group, the indexed debt was also attributed to the U. S. Steel Group. USX had a 26% investment in RTI and accounted for its investment using the equity method of accounting. Republic Technologies International, LLC, an equity method affiliate of USX, recorded in 1999 an extraordinary loss related to the early extinguishment of debt. As a result, the U. S. Steel Group recorded an extraordinary loss of $2 million, net of a $1 million income tax benefit, representing its share of the extraordinary loss. - -------------------------------------------------------------------------------- 6. Net Interest and Other Financial Costs
(In millions) 1999 1998 1997 ---------------------------------------------------------------------------------------- Interest and other financial income/(a)/- Interest income $ 1 $ 5 $ 4 ----- ----- ----- Interest and other financial costs/(a)/: Interest incurred 45 40 57 Less interest capitalized 6 6 7 ----- ----- ----- Net interest 39 34 50 Interest on tax issues 15 16 13 Financial costs on trust preferred securities 13 13 10 Financial costs on preferred stock of subsidiary 5 5 5 Amortization of discounts 1 2 2 Expenses on sales of accounts receivable 15 21 21 Adjustment to settlement value of indexed debt (13) (44) (10) ----- ----- ----- Total 75 47 91 ----- ----- ----- Net interest and other financial costs/(a)/ $ 74 $ 42 $ 87 ----------------------------------------------------------------------------------------
/(a)/ See Note 4, for discussion of USX net interest and other financial costs attributable to the U. S. Steel Group. S-8 - -------------------------------------------------------------------------------- 7. Segment Information The U. S. Steel Group consists of one operating segment, U. S. Steel. U. S. Steel is engaged in the production and sale of steel mill products, coke and taconite pellets. U. S. Steel also engages in the following related business activities: the management of mineral resources, domestic coal mining, engineering and consulting services, and real estate development and management. Segment income represents income from operations allocable to U. S. Steel and does not include net interest and other financial costs and provisions for estimated income taxes. Additionally, the following items are not allocated to operating segments: . Pension credits associated with pension plan assets and liabilities allocated to pre-1987 retirees and former businesses . Certain costs related to former U. S. Steel Group business activities . USX corporate general and administrative costs. These costs primarily consist of employment costs including pension effects, professional services, facilities and other related costs associated with corporate activities. . Certain other items not allocated to operating segments for business performance reporting purposes (see reconcilement schedule below) The following table represents the operations of U. S. Steel:
(In millions) 1999 1998 1997 -------------------------------------------------------------------------------------------- Revenues: Customer $5,363 $6,180 $6,812 Intergroup/(a)/ 17 2 2 Equity in earnings (losses) of unconsolidated affiliates (43) 46 69 Other 46 55 58 ------ ------ ------ Total revenues $5,383 $6,283 $6,941 ====== ====== ====== Segment income (loss) $ (128) $ 330 $ 618 Significant noncash items included in segment income: Depreciation, depletion and amortization 304 283 303 Pension expenses/(b)/ 219 187 169 Capital expenditures/(c)/ 286 305 256 Affiliates - investments/(c)/ 15 71 26 --------------------------------------------------------------------------------------------
/(a)/ Intergroup sales and transfers were conducted under terms comparable to those with unrelated parties. /(b)/ Differences between segment total and group total represent unallocated pension credits and amounts included in administrative expenses. /(c)/ Differences between segment total and group total represent amounts related to corporate administrative activities. The following schedule reconciles segment revenues and income to amounts reported in the U. S. Steel Group's financial statements:
(In millions) 1999 1998 1997 -------------------------------------------------------------------------------------------- Revenues: Revenues of reportable segment $5,383 $6,283 $6,941 Items not allocated to segment: Impairment and other costs related to an investment in an equity affiliate (47) - - Loss on investment in RTI stock used to satisfy indexed debt obligations (22) - - ------ ------ ------ Total Group revenues $5,314 $6,283 $6,941 ====== ====== ====== Income: Income (loss) for reportable segment $ (128) $ 330 $ 618 Items not allocated to segment: Impairment and other costs related to an investment in an equity affiliate (47) - - Loss on investment in RTI stock used to satisfy indexed debt obligations (22) - - Administrative expenses (17) (24) (33) Pension credits 447 373 313 Costs related to former businesses activities (83) (100) (125) ------ ------ ------ Total Group income from operations $ 150 $ 579 $ 773 --------------------------------------------------------------------------------------------
S-9 Geographic Area: The information below summarizes the operations in different geographic areas.
Revenues ------------------------------- Within Between Geographic Geographic (In millions) Year Areas Areas Total Assets/(a)/ - -------------------------------------------------------------------------------- United States 1999 $5,296 $ - $ $5,296 $2,889 1998 6,266 - 6,266 3,043 1997 6,926 - 6,926 3,023 Foreign Countries 1999 18 - 18 63 1998 17 - 17 69 1997 15 - 15 1 Total 1999 $5,314 $ - $5,314 $2,952 1998 6,283 - 6,283 3,112 1997 6,941 - 6,941 3,024 - --------------------------------------------------------------------------------
/(a)/ Includes property, plant and equipment and investments in affiliates. Sales by Product: (In millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Sheet and semi-finished steel products $3,345 $3,501 $3,820 Tubular, plate and tin mill products 1,118 1,513 1,754 Raw materials (coal, coke and iron ore) 505 679 724 Other/(a)/ 414 490 517 - -------------------------------------------------------------------------------- /(a)/ Includes revenue from the sale of steel production by-products, engineering and consulting services, real estate development and resource management. - -------------------------------------------------------------------------------- 8. Supplemental Cash Flow Information
(In millions) 1999 1998 1997 ----------------------------------------------------------------------------------------------------------- Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $ (77) $ (76) $ (99) Income taxes (paid) refunded, including settlements with other groups 3 (29) (48) ----------------------------------------------------------------------------------------------------------- USX debt attributed to all groups - net: Commercial paper: Issued $ 6,282 $ - $ - Repayments (6,117) - - Credit agreements: Borrowings 5,529 17,486 10,454 Repayments (5,980) (16,817) (10,449) Other credit arrangements - net (95) 55 36 Other debt: Borrowings 319 671 10 Repayments (87) (1,053) (741) ------- -------- -------- Total $ (149) $ 342 $ (690) ----------------------------------------------------------------------------------------------------------- U. S. Steel Group activity $ 147 $ 13 $ (561) Marathon Group activity (296) 329 97 Delhi Group activity - - (226) ------- -------- -------- Total $ (149) $ 342 $ (690) ----------------------------------------------------------------------------------------------------------- Noncash investing and financing activities: Steel Stock issued for dividend reinvestment and employee stock plans $ 2 $ 2 $ 5 Trust preferred securities exchanged for preferred stock - - 182 Disposal of assets: Deposit of RTI common shares in satisfaction of indexed debt 56 - - Interest in USS/Kobe contributed to Republic 40 - - Other disposals of assets - notes or common stock received 1 2 - Business combinations: Liabilities assumed 26 - - Affiliate liabilities consolidated in step acquisition 26 - - -----------------------------------------------------------------------------------------------------------
S-10 - -------------------------------------------------------------------------------- 9. Financial Activities Attributed to Groups The following is the portion of USX financial activities attributed to the U. S. Steel Group. These amounts exclude amounts specifically attributed to the U. S. Steel Group.
U. S. Steel Group Consolidated USX/(a)/ -------------------- ---------------------- (In millions) December 31 1999 1998 1999 1998 --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 1 $ - $ 9 $ 4 Other noncurrent assets 1 1 8 8 ----- ----- ----- ------ Total assets $ 2 $ 1 $ 17 $ 12 ------------------------------------------------------------------------------------------------------------- Notes payable $ - $ 13 $ - $ 145 Accrued interest 13 8 95 88 Long-term debt due within one year (Note 10) 7 7 54 66 Long-term debt (Note 10) 466 306 3,771 3,762 Preferred stock of subsidiary 66 66 250 250 ----- ----- ------ ------ Total liabilities $ 552 $ 400 $4,170 $4,311 -------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------- U. S. Steel Group/(b)/ Consolidated USX ------------------------- --------------------------- (In millions) 1999 1998 1997 1999 1998 1997 ---------------------------------------------------------------------------------------------------------------- Net interest and other financial costs (Note 6) $ 39 $ 29 $ 46 $ 334 $ 324 $ 309 ----------------------------------------------------------------------------------------------------------------
/(a)/ For details of USX long-term debt and preferred stock of subsidiary, see Notes 16 and 23, respectively, to the USX consolidated financial statements. /(b)/ The U. S. Steel Group's net interest and other financial costs reflect weighted average effects of all financial activities attributed to all groups. - -------------------------------------------------------------------------------- 10. Long-Term Debt The U. S. Steel Group's portion of USX's consolidated long-term debt is as follows:
U. S. Steel Group Consolidated USX/(a)/ ----------------- -------------------- (In millions) December 31 1999 1998 1999 1998 ------------------------------------------------------------------------------------------------------------- Specifically attributed debt/(b)/: Receivables facility $ 350 $ - $ 350 $ - Sale-leaseback financing and capital leases 92 95 107 95 Indexed debt less unamortized discount - 68 - 68 Other - - 1 - ----- ----- ------ ------ Total 442 163 458 163 Less amount due within one year 6 5 7 5 ----- ----- ------ ------ Total specifically attributed long-term debt $ 436 $ 158 $ 451 $ 158 ------------------------------------------------------------------------------------------------------------- Debt attributed to groups/(c)/ $ 477 $ 316 $3,852 $3,853 Less unamortized discount 4 3 27 25 Less amount due within one year 7 7 54 66 ----- ----- ------ ------ Total long-term debt attributed to groups $ 466 $ 306 $3,771 $3,762 ------------------------------------------------------------------------------------------------------------- Total long-term debt due within one year $ 13 $ 12 $ 61 $ 71 Total long-term debt due after one year 902 464 4,222 3,920 -------------------------------------------------------------------------------------------------------------
/(a)/ See Note 16, to the USX consolidated financial statements for details of interest rates, maturities and other terms of long-term debt. /(b)/ As described in Note 4, certain financial activities are specifically attributed only to the U. S. Steel Group and the Marathon Group. /(c)/ Most long-term debt activities of USX Corporation and its wholly owned subsidiaries are attributed to all groups (in total, but not with respect to specific debt issues) based on their respective cash flows (Notes 4, 8 and 9). S-11 - -------------------------------------------------------------------------------- 11. Pensions and Other Postretirement Benefits The U. S. Steel Group has noncontributory defined benefit pension plans covering substantially all employees. Benefits under these plans are based upon years of service and final average pensionable earnings, or a minimum benefit based upon years of service, whichever is greater. In addition, pension benefits are also provided to most salaried employees based upon a percent of total career pensionable earnings. Certain of these plans provide benefits to USX corporate employees, and the related costs or credits for such employees are allocated to all groups (Note 4). The U. S. Steel Group also participates in multiemployer plans, most of which are defined benefit plans associated with coal operations. The U. S. Steel Group also has defined benefit retiree health and life insurance plans (other benefits) covering most employees upon their retirement. Health benefits are provided through comprehensive hospital, surgical and major medical benefit provisions or through health maintenance organizations, both subject to various cost sharing features. Life insurance benefits are provided to nonunion retiree beneficiaries primarily based on employees' annual base salary at retirement. These plans provide benefits to USX corporate employees, and the related costs for such employees are allocated to all groups (Note 4). For union retirees, benefits are provided for the most part based on fixed amounts negotiated in labor contracts with the appropriate unions. Except for certain life insurance benefits paid from reserves held by insurance carriers and benefits required to be funded by union contracts, most other benefits have not been prefunded.
Pension Benefits Other Benefits --------------------- ---------------------- (In millions) 1999 1998 1999 1998 ------------------------------------------------------------------------------------------------------------------ Change in benefit obligations Benefit obligations at January 1 $ 7,549 $ 7,314 $ 2,113 $ 2,070 Service cost 87 71 15 15 Interest cost 473 487 133 141 Plan amendments 381 /(a)/ 8 14 - Actuarial (gains) losses (822) 516 (225) 23 Plan merger and acquisition 42 - 7 - Settlements, curtailments and termination benefits (207) 10 - 7 Benefits paid (787) (857) (161) (143) -------- -------- ------- -------- Benefit obligations at December 31 $ 6,716 $ 7,549 $ 1,896 $ 2,113 ------------------------------------------------------------------------------------------------------------------ Change in plan assets Fair value of plan assets at January 1 $ 10,243 $ 9,775 $ 265 $ 258 Actual return on plan assets 729 1,308 20 31 Acquisition 26 - 1 - Employer contributions - - 34 - Trustee distributions/(b)/ (14) - - - Settlements paid (207) - - - Benefits paid from plan assets (782) (840) (39) (24) -------- -------- ------- -------- Fair value of plan assets at December 31 $ 9,995 $ 10,243 $ 281 $ 265 ------------------------------------------------------------------------------------------------------------------ Funded status of plans at December 31 $ 3,279 /(c)/ $ 2,694 /(c)/ $(1,615) $ (1,848) Unrecognized net gain from transition (69) (140) - - Unrecognized prior service cost 817 518 19 7 Unrecognized actuarial gains (1,639) (905) (526) (292) Additional minimum liability/(d)/ (16) (57) - - -------- -------- ------- -------- Prepaid (accrued) benefit cost $ 2,372 $ 2,110 $ (2,122) $ (2,133) ------------------------------------------------------------------------------------------------------------------ /(a)/ Results primarily from a new five-year labor contract with the United Steelworkers of America ratified in August 1999. /(b)/ Represents transfers of excess pension assets to fund retiree health care benefits accounts under Section 420 of the Internal Revenue Code. /(c)/ Includes several plans that have accumulated benefit obligations in excess of plan assets: Aggregate accumulated benefit obligations $ (29) $ (62) Aggregate projected benefit obligations (39) (68) Aggregate plan assets - - /(d)/ Additional minimum liability recorded was offset by the following: Intangible asset $ 6 $ 16 -------- -------- Accumulated other comprehensive income (losses): Beginning of year $ (27) $ (25) Change during year (net of tax) 20 (2) -------- -------- Balance at end of year $ (7) $ (27) ------------------------------------------------------------------------------------------------------------------
S-12
Pension Benefits Other Benefits ----------------------------------- ----------------------------------- (In millions) 1999 1998 1997 1999 1998 1997 ------------------------------------------------------------------------------------------------------------------- Components of net periodic benefit cost (credit) Service cost $ 87 $ 71 $ 65 $ 15 $ 15 $ 15 Interest cost 473 487 517 133 141 153 Expected return on plan assets (781) (769) (743) (21) (21) (11) Amortization - net transition gain (67) (69) (69) - - - - prior service costs 83 72 72 4 4 4 - actuarial (gains) losses 6 6 3 (12) (16) (13) Multiemployer and other plans - 1 2 7/(a)/ 13/(a)/ 15/(a)/ Settlement and termination (gains) losses (35)/(b)/ 10/(b)/ 4 - - - ----- ----- ----- ------ ------ ----- Net periodic benefit cost (credit) $(234) $(191) $(149) $ 126 $ 136 $ 163 --------------------------------------------------------------------------------------------------------------------
/(a)/ Represents payments to a multiemployer health care benefit plan created by the Coal Industry Retiree Health Benefit Act of 1992 based on assigned beneficiaries receiving benefits. The present value of this unrecognized obligation is broadly estimated to be $90 million, including the effects of future medical inflation, and this amount could increase if additional beneficiaries are assigned. /(b)/ Relates primarily to the 1998 voluntary early retirement program.
Pension Benefits Other Benefits ---------------------- -------------------- (In millions) 1999 1998 1999 1998 -------------------------------------------------------------------------------------------------------------- Weighted average actuarial assumptions at December 31: Discount rate 8.0% 6.5% 8.0% 6.5% Expected annual return on plan assets 8.5% 9.0% 8.5% 9.0% Increase in compensation rate 4.0% 4.0% 4.0% 4.0% --------------------------------------------------------------------------------------------------------------
For measurement purposes, a 7.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2000. The rate was assumed to decrease gradually to 5% for 2005 and remain at that level thereafter. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage- (In millions) Point Increase Point Decrease -------------------------------------------------------------------------------------------------------------- Effect on total of service and interest cost components $ 14 $ (12) Effect on other postretirement benefit obligations 149 (127) --------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 12. Intergroup Transactions Sales and purchases - U. S. Steel Group sales to the Marathon Group totaled $17 million in 1999 and $2 million in 1998. U. S. Steel Group purchases from the Marathon Group totaled $41 million, $21 million and $29 million in 1999, 1998 and 1997, respectively. At December 31, 1999 and 1998, U. S. Steel Group accounts payable included $5 million and $3 million, respectively, related to transactions with the Marathon Group. These transactions were conducted under terms comparable to those with unrelated parties. Income taxes receivable from/payable to the Marathon Group - At December 31, 1999 and 1998, amounts receivable or payable for income taxes were included in the balance sheet as follows:
(In millions) December 31 1999 1998 --------------------------------------------------------------------------------------- Current: Income tax receivable $ 97 $ - Accounts payable 1 2 Noncurrent: Investments and long-term receivables 97 97 ---------------------------------------------------------------------------------------
These amounts have been determined in accordance with the tax allocation policy described in Note 4. Amounts classified as current are settled in cash in the year succeeding that in which such amounts are accrued. Noncurrent amounts represent estimates of intergroup tax effects of certain issues for years that are still under various stages of audit and administrative review. Such tax effects are not settled between the groups until the audit of those respective tax years is closed. The amounts ultimately settled for open tax years will be different than recorded noncurrent amounts based on the final resolution of all of the audit issues for those years. S-13 - -------------------------------------------------------------------------------- 13. Inventories
(In millions) December 31 1999 1998 ---------------------------------------------------------------------------------------- Raw materials $ 101 $ 185 Semi-finished products 392 282 Finished products 193 182 Supplies and sundry items 57 49 ----- ----- Total $ 743 $ 698 ----------------------------------------------------------------------------------------
At December 31, 1999 and 1998, respectively, the LIFO method accounted for 93% and 94% of total inventory value. Current acquisition costs were estimated to exceed the above inventory values at December 31 by approximately $370 million and $310 million in 1999 and 1998, respectively. - -------------------------------------------------------------------------------- 14. Income Taxes Income tax provisions and related assets and liabilities attributed to the U. S. Steel Group are determined in accordance with the USX group tax allocation policy (Note 4). Provisions (credits) for estimated income taxes were:
1999 1998 1997 ----------------------------- ---------------------------- ----------------------------- (In millions) Current Deferred Total Current Deferred Total Current Deferred Total -------------------------------------------------------------------------------------------------------------------- Federal $(84) $ 99 $15 $19 $ 149 $ 168 $ 37 $ 168 $ 205 State and local 1 8 9 3 9 12 4 25 29 Foreign 1 - 1 (7) - (7) - - - ---- ----- --- --- ----- ----- ----- ----- ----- Total $(82) $ 107 $25 $15 $ 158 $ 173 $ 41 $ 193 $ 234 --------------------------------------------------------------------------------------------------------------------
A reconciliation of federal statutory tax rate (35%) to total provisions follows:
(In millions) 1999 1998 1997 ------------------------------------------------------------------------------------------------------------ Statutory rate applied to income before income taxes $ 27 $ 188 $ 240 Excess percentage depletion (7) (11) (10) Effects of foreign operations, including foreign tax credits (2) (11) (3) State and local income taxes after federal income tax effects 6 8 19 Credits other than foreign tax credits (3) (3) (15) Effects of partially owned companies - - (3) Adjustment of prior years' federal income taxes - - 6 Adjustment of valuation allowances - - (1) Other 4 2 1 ----- ------ ------ Total provisions $ 25 $ 173 $ 234 ------------------------------------------------------------------------------------------------------------
Deferred tax assets and liabilities resulted from the following:
(In millions) December 31 1999 1998 ----------------------------------------------------------------------------------------------------------- Deferred tax assets: Minimum tax credit carryforwards $ 131 $ 185 State tax loss carryforwards (expiring in 2000 through 2019) 65 64 Employee benefits 998 969 Receivables, payables and debt 68 52 Contingency and other accruals 52 48 Other 11 12 Valuation allowances - state (41) (44) ------ ------- Total deferred tax assets/(a)/ 1,284 1,286 ------ ------- Deferred tax liabilities: Property, plant and equipment 274 272 Prepaid pensions 921 792 Inventory 16 16 Investments in subsidiaries and affiliates 96 116 Federal effect of state deferred tax assets - 3 Other 44 40 ------ ------- Total deferred tax liabilities 1,351 1,239 ------ ------- Net deferred tax assets (liabilities) $ (67) $ 47 -----------------------------------------------------------------------------------------------------------
/(a)/ USX expects to generate sufficient future taxable income to realize the benefit of the U. S. Steel Group's deferred tax assets. The consolidated tax returns of USX for the years 1990 through 1997 are under various stages of audit and administrative review by the IRS. USX believes it has made adequate provision for income taxes and interest which may become payable for years not yet settled. S-14 - -------------------------------------------------------------------------------- 15. Investments and Long-Term Receivables
(In millions) December 31 1999 1998 ----------------------------------------------------------------------------------------------------------- Equity method investments $ 397 $ 564 Other investments 39 48 Receivables due after one year 11 10 Income taxes receivable 97 97 Deposits of restricted cash 2 - Other 26 24 ------ ------ Total $ 572 $ 743 -----------------------------------------------------------------------------------------------------------
Summarized financial information of affiliates accounted for by the equity method of accounting follows:
(In millions) 1999 1998 1997 ---------------------------------------------------------------------------------------------------------- Income data - year: Revenues $3,027 $3,163 $3,143 Operating income (loss) (57) 193 228 Net income (loss) (193) 97 139 ---------------------------------------------------------------------------------------------------------- Balance sheet data - December 31: Current assets $ 995 $1,028 Noncurrent assets 2,402 2,149 Current liabilities 1,181 631 Noncurrent liabilities 1,251 883 ----------------------------------------------------------------------------------------------------------
In 1999, USX and Kobe Steel, Ltd. (Kobe Steel) completed a transaction that combined the steelmaking and bar producing assets of USS/Kobe Steel Company (USS/Kobe) with companies controlled by Blackstone Capital Partners II. The combined entity was named Republic Technologies International, LLC (Republic). In addition, USX made a $15 million equity investment in Republic. USX owned 50% of USS/Kobe and now owns 16% of Republic. USX accounts for its investment in Republic under the equity method of accounting. Income (loss) from affiliates in 1999 includes $47 million in charges related to the impairment of the carrying value of USX's investment in USS/Kobe and costs related to the formation of Republic. The seamless pipe business of USS/Kobe was excluded from this transaction. That business, now known as Lorain Tubular Company, LLC, became a wholly owned subsidiary of USX at the close of business on December 31, 1999. Dividends and partnership distributions received from equity affiliates were $2 million in 1999, $19 million in 1998 and $13 million in 1997. U. S. Steel Group purchases of transportation services and semi-finished steel from equity affiliates totaled $361 million, $331 million and $424 million in 1999, 1998 and 1997, respectively. At December 31, 1999 and 1998, U. S. Steel Group payables to these affiliates totaled $22 million and $15 million, respectively. U. S. Steel Group sales of steel and raw materials to equity affiliates totaled $831 million, $725 million and $802 million in 1999, 1998 and 1997, respectively. At December 31, 1999 and 1998, U. S. Steel Group receivables from these affiliates were $177 million. Generally, these transactions were conducted under long-term, market-based contractual arrangements. - -------------------------------------------------------------------------------- 16. Leases Future minimum commitments for capital leases (including sale- leasebacks accounted for as financings) and for operating leases having remaining noncancelable lease terms in excess of one year are as follows:
Capital Operating (In millions) Leases Leases ---------------------------------------------------------------------------------- 2000 $ 11 $104 2001 11 122 2002 11 51 2003 11 36 2004 11 32 Later years 105 80 Sublease rentals - (69) ---- ---- Total minimum lease payments 160 $356 ---- ==== Less imputed interest costs (68) ---- Present value of net minimum lease payments included in long-term debt $ 92 ----------------------------------------------------------------------------------
S-15
Operating lease rental expense: (In millions) 1999 1998 1997 -------------------------------------------------------------------- Minimum rental $ 124 $ 131 $ 130 Contingent rental 18 19 15 Sublease rentals (6) (7) (7) ----- ----- ----- Net rental expense $ 136 $ 143 $ 138 --------------------------------------------------------------------
The U. S. Steel Group leases a wide variety of facilities and equipment under operating leases, including land and building space, office equipment, production facilities and transportation equipment. Most long-term leases include renewal options and, in certain leases, purchase options. In the event of a change in control of USX, as defined in the agreements, or certain other circumstances, lease obligations totaling $1 million may be declared immediately due and payable. - ------------------------------------------------------------------------------- 17. Property, Plant and Equipment
(In millions) December 31 1999 1998 -------------------------------------------------------------------------------------------------- Land and depletable property $ 152 $ 151 Buildings 484 469 Machinery and equipment 8,007 7,711 Leased assets 105 108 ------ ----------- Total 8,748 8,439 Less accumulated depreciation, depletion and amortization 6,232 5,939 ------ ----------- Net $2,516 $2,500 --------------------------------------------------------------------------------------------------
Amounts in accumulated depreciation, depletion and amortization for assets acquired under capital leases (including sale-leasebacks accounted for as financings) were $81 million and $77 million at December 31, 1999 and 1998, respectively. - ------------------------------------------------------------------------------- 18. Trust Preferred Securities In 1997, USX exchanged approximately 3.9 million 6.75% Convertible Quarterly Income Preferred Securities (Trust Preferred Securities) of USX Capital Trust I, a Delaware statutory business trust (Trust), for an equivalent number of shares of its 6.50% Cumulative Convertible Preferred Stock (6.50% Preferred Stock) (Exchange). The Exchange resulted in the recording of Trust Preferred Securities at a fair value of $182 million and a noncash credit to Retained Earnings of $10 million. USX owns all of the common securities of the Trust, which was formed for the purpose of the Exchange. (The Trust Common Securities and the Trust Preferred Securities are together referred to as the Trust Securities.) The Trust Securities represent undivided beneficial ownership interests in the assets of the Trust, which consist solely of USX 6.75% Convertible Junior Subordinated Debentures maturing March 31, 2037 (Debentures), having an aggregate principal amount equal to the aggregate initial liquidation amount ($50.00 per security and $203 million in total) of the Trust Securities issued by the Trust. Interest and principal payments on the Debentures will be used to make quarterly distributions and to pay redemption and liquidation amounts on the Trust Preferred Securities. The quarterly distributions, which accumulate at the rate of 6.75% per annum on the Trust Preferred Securities and the accretion from fair value to the initial liquidation amount, are charged to income and included in net interest and other financial costs. Under the terms of the Debentures, USX has the right to defer payment of interest for up to 20 consecutive quarters and, as a consequence, monthly distributions on the Trust Preferred Securities will be deferred during such period. If USX exercises this right, then, subject to limited exceptions, it may not pay any dividend or make any distribution with respect to any shares of its capital stock. S-16 The Trust Preferred Securities are convertible at any time prior to the close of business on March 31, 2037 (unless such right is terminated earlier under certain circumstances) at the option of the holder, into shares of Steel Stock at a conversion price of $46.25 per share of Steel Stock (equivalent to a conversion ratio of 1.081 shares of Steel Stock for each Trust Preferred Security), subject to adjustment in certain circumstances. The Trust Preferred Securities may be redeemed at any time at the option of USX, at a premium of 102.60% of the initial liquidation amount through March 31, 2000, and thereafter, declining annually to the initial liquidation amount on April 1, 2003, and thereafter. They are mandatorily redeemable at March 31, 2037, or earlier under certain circumstances. Payments related to quarterly distributions and to the payment of redemption and liquidation amounts on the Trust Preferred Securities by the Trust are guaranteed by USX on a subordinated basis. In addition, USX unconditionally guarantees the Trust's Debentures. The obligations of USX under the Debentures, and the related indenture, trust agreement and guarantee constitute a full and unconditional guarantee by USX of the Trust's obligations under the Trust Preferred Securities. - -------------------------------------------------------------------------------- 19. Stockholders' Equity
(In millions, except per share data) 1999 1998 1997 -------------------------------------------------------------------------------------------------- Preferred stock: Balance at beginning of year $ 3 $ 3 $ 7 Exchanged for trust preferred securities - - (4) ------ ------ ------ Balance at end of year $ 3 $ 3 $ 3 -------------------------------------------------------------------------------------------------- Common stockholders' equity: Balance at beginning of year $2,090 $1,779 $1,559 Net income 44 364 452 6.50% preferred stock: Repurchased (2) (8) - Exchanged for trust preferred securities (Note 18) - - (188) Steel Stock issued 2 59 53 Dividends on preferred stock (9) (9) (13) Dividends on Steel Stock (per share $1.00) (88) (88) (86) Deferred compensation 1 - - Accumulated other comprehensive income (loss)/(a)/: Foreign currency translation adjustments (5) (5) - Minimum pension liability adjustments (Note 11) 20 (2) (8) Other - - 10 ------ ------ ------ Balance at end of year $2,053 $2,090 $1,779 -------------------------------------------------------------------------------------------------- Total stockholders' equity $2,056 $2,093 $1,782 --------------------------------------------------------------------------------------------------
/(a)/ See page U-7 of the USX consolidated financial statements relative to the annual activity of these adjustments. Total comprehensive income for the U. S. Steel Group for the years 1999, 1998 and 1997 was $59 million, $357 million and $444 million, respectively. - -------------------------------------------------------------------------------- 20. Dividends In accordance with the USX Restated Certificate of Incorporation, dividends on the Steel Stock and Marathon Stock are limited to the legally available funds of USX. Net losses of either Group, as well as dividends and distributions on any class of USX Common Stock or series of preferred stock and repurchases of any class of USX Common Stock or series of preferred stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on both classes of Common Stock. Subject to this limitation, the Board of Directors intends to declare and pay dividends on the Steel Stock based on the financial condition and results of operations of the U. S. Steel Group, although it has no obligation under Delaware law to do so. In making its dividend decisions with respect to Steel Stock, the Board of Directors considers, among other things, the long- term earnings and cash flow capabilities of the U. S. Steel Group as well as the dividend policies of similar publicly traded steel companies. Dividends on the Steel Stock are further limited to the Available Steel Dividend Amount. At December 31, 1999, the Available Steel Dividend Amount was at least $3,300 million. The Available Steel Dividend Amount will be increased or decreased, as appropriate, to reflect U. S. Steel Group net income, dividends, repurchases or issuances with respect to the Steel Stock and preferred stock attributed to the U. S. Steel Group and certain other items. S-17 - -------------------------------------------------------------------------------- 21. Income Per Common Share The method of calculating net income per share for the Steel Stock, the Marathon Stock and, prior to November 1, 1997, the Delhi Stock reflects the USX Board of Directors' intent that the separately reported earnings and surplus of the U. S. Steel Group, the Marathon Group and the Delhi Group, as determined consistent with the USX Restated Certificate of Incorporation, are available for payment of dividends to the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. Basic net income per share is calculated by adjusting net income for dividend requirements of preferred stock and, in 1997, the noncash credit on exchange of preferred stock and is based on the weighted average number of common shares outstanding. Diluted net income per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options, provided in each case, the effect is not antidilutive.
1999 1998 1997 ------------------ ----------------- ----------------- Basic Diluted Basic Diluted Basic Diluted -------- -------- -------- ------- -------- ------- Computation of Income Per Share ------------------------------- Net income (millions): Income before extraordinary losses $ 51 $ 51 $ 364 $ 364 $ 452 $ 452 Dividends on preferred stock (9) (9) (9) - (13) - Noncash credit from exchange of preferred stock - - - - 10 - Extraordinary losses (7) (7) - - - - ------- ------- ------- ------- ------- ------- Net income applicable to Steel Stock 35 35 355 364 449 452 Effect of dilutive securities: Trust preferred securities - - - 8 - 6 Convertible debentures - - - - - 2 ------- ------- ------- ------- ------- ------- Net income assuming conversions $ 35 $ 35 $ 355 $ 372 $ 449 $ 460 ======= ======= ======= ======= ======= ======= Shares of common stock outstanding (thousands): Average number of common shares outstanding 88,392 88,392 87,508 87,508 85,672 85,672 Effect of dilutive securities: Trust preferred securities - - - 4,256 - 2,660 Preferred stock - - - 3,143 - 4,811 Convertible debentures - - - - - 1,025 Stock options - 4 - 36 - 35 ------- ------- ------- ------- ------- ------- Average common shares and dilutive effect 88,392 88,396 87,508 94,943 85,672 94,203 ======= ======= ======= ======= ======= ======= Per share: Income before extraordinary losses $ .48 $ .48 $ 4.05 $ 3.92 $ 5.24 $ 4.88 Extraordinary losses .08 .08 - - - - ------- ------- ------- ------- ------- ------- Net income $ .40 $ .40 $ 4.05 $ 3.92 $ 5.24 $ 4.88 ======= ======= ======= ======= ======= =======
- -------------------------------------------------------------------------------- 22. Stock-Based Compensation Plans and Stockholder Rights Plan USX Stock-Based Compensation Plans and Stockholder Rights Plan are discussed in Note 19, and Note 21, respectively, to the USX consolidated financial statements. The U. S. Steel Group's actual stock-based compensation expense was $1 million in 1999, none in 1998 and $8 million in 1997. Incremental compensation expense, as determined under a fair value model, was not material ($.02 or less per share for all years presented). Therefore, pro forma net income and earnings per share data have been omitted. S-18 - -------------------------------------------------------------------------------- 23. Derivative Instruments The U. S. Steel Group remains at risk for possible changes in the market value of the derivative instrument; however, such risk should be mitigated by price changes in the underlying hedged item. The U. S. Steel Group is also exposed to credit risk in the event of nonperformance by counterparties. The credit worthiness of counterparties is subject to continuing review, including the use of master netting agreements to the extent practical, and full performance is anticipated. The following table sets forth quantitative information by class of derivative instrument:
Fair Carrying Recorded Value Amount Deferred Aggregate Assets Assets Gain or Contract (In millions) (Liabilities)/(a)/ (Liabilities) (Loss) Values /(b)/ ---------------------------------------------------------------------------------------------------------------- December 31, 1999: OTC commodity swaps - other than trading/(c)/ $ 3 $ 3 $ 3 $ 37 ---------------------------------------------------------------------------------------------------------------- December 31, 1998: OTC commodity swaps - other than trading $(7) $(7) $(7) $ 54 ----------------------------------------------------------------------------------------------------------------
/(a)/ The fair value amounts are based on exchange-traded index prices and dealer quotes. /(b)/ Contract or notional amounts do not quantify risk exposure, but are used in the calculation of cash settlements under the contracts. /(c)/ The OTC swap arrangements vary in duration with certain contracts extending into 2000. - -------------------------------------------------------------------------------- 24. Fair Value of Financial Instruments Fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. The following table summarizes financial instruments, excluding derivative financial instruments disclosed in Note 23, by individual balance sheet account. As described in Note 4, the U. S. Steel Group's specifically attributed financial instruments and the U. S. Steel Group's portion of USX's financial instruments attributed to all groups are as follows:
1999 1998 ----------------- ----------------- Fair Carrying Fair Carrying (In millions) December 31 Value Amount Value Amount ------------------------------------------------------------------------------------------------------------------ Financial assets: Cash and cash equivalents $ 22 $ 22 $ 9 $ 9 Receivables (including intergroup receivables) 935 935 392 392 Investments and long-term receivables 122 122 120 120 ------ ------ ------ -------- Total financial assets $1,079 $1,079 $ 521 $ 521 ------------------------------------------------------------------------------------------------------------------ Financial liabilities: Notes payable $ - $ - $ 13 $ 13 Accounts payable 739 739 501 501 Accrued interest 15 15 10 10 Long-term debt (including amounts due within one year) 835 823 406 381 Preferred stock of subsidiary and trust preferred securities 232 249 231 248 ------ ------ ------ -------- Total financial liabilities $1,821 $1,826 $1,161 $1,153 ------------------------------------------------------------------------------------------------------------------
Fair value of financial instruments classified as current assets or liabilities approximates carrying value due to the short-term maturity of the instruments. Fair value of investments and long-term receivables was based on discounted cash flows or other specific instrument analysis. Fair value of preferred stock of subsidiary and trust preferred securities was based on market prices. Fair value of long-term debt instruments was based on market prices where available or current borrowing rates available for financings with similar terms and maturities. The U. S. Steel Group's unrecognized financial instruments consist of receivables sold in 1998 and financial guarantees. It is not practicable to estimate the fair value of these forms of financial instrument obligations because there are no quoted market prices for transactions which are similar in nature. For details relating to financial guarantees, see Note 25. S-19 - -------------------------------------------------------------------------------- 25. Contingencies and Commitments USX is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments relating to the U. S. Steel Group involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the U. S. Steel Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the U. S. Steel Group. Environmental matters - The U. S. Steel Group is subject to federal, state, and local laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. Accrued liabilities for remediation totaled $101 million and $97 million at December 31, 1999 and 1998, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. For a number of years, the U. S. Steel Group has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In 1999 and 1998, such capital expenditures totaled $32 million and $49 million, respectively. The U. S. Steel Group anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. Guarantees - Guarantees by USX of the liabilities of affiliated entities of the U. S. Steel Group totaled $88 million at December 31, 1999, and $81 million at December 31, 1998. In the event that any defaults of guaranteed liabilities occur, USX has access to its interest in the assets of the affiliates to reduce potential U. S. Steel Group losses resulting from these guarantees. As of December 31, 1999, the largest guarantee for a single affiliate was $61 million. Commitments - At December 31, 1999 and 1998, the U. S. Steel Group's contract commitments to acquire property, plant and equipment totaled $83 million and $188 million, respectively. USX entered into a 15-year take-or-pay arrangement in 1993, which requires the U. S. Steel Group to accept pulverized coal each month or pay a minimum monthly charge of approximately $1 million. Charges for deliveries of pulverized coal totaled $23 million in both 1999 and 1998. If USX elects to terminate the contract early, a maximum termination payment of $102 million, which declines over the duration of the agreement, may be required. S-20 Selected Quarterly Financial Data (Unaudited)
1999 ------------------------------------------------------------- (In millions, except per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. - -------------------------------------------------------------------------------------------------------------------- Revenues $1,462 $ 1,337 /(a)/ $1,304 $1,211 Income (loss) from operations 75 (26) /(a)/ 103 (2) Income (loss) before extraordinary losses 34 (29) /(a)/ 55 (9) Net income (loss) 34 (31) 55 (14) - -------------------------------------------------------------------------------------------------------------------- Steel Stock data: - ---------------- Income (loss) before extraordinary losses applicable to Steel Stock $ 32 $ (31) /(a)/ $ 52 $ (11) - Per share: basic .35 (.35) /(a)/ .60 (.13) diluted .35 (.35) /(a)/ .59 (.13) Dividends paid per share .25 .25 .25 .25 Price range of Steel Stock/(b)/: - Low 21-/3/4/ 24-/9/16/ 23-/1/2/ 22-/1/4/ - High 33 30-/1/16/ 34-/1/4/ 29-/1/8/ - -------------------------------------------------------------------------------------------------------------------- 1998 ------------------------------------------------------------- (In millions, except per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. - -------------------------------------------------------------------------------------------------------------------- Revenues $1,357 $1,497 $1,733 $1,696 Income (loss) from operations 95 105 217 162 Income (loss) before extraordinary losses 76 65 136 87 Net income (loss) 76 65 136 87 - -------------------------------------------------------------------------------------------------------------------- Steel Stock data: - ---------------- Income (loss) before extraordinary losses applicable to Steel Stock $ 74 $ 63 $ 133 $ 85 - Per share: basic .83 .72 1.53 .98 diluted .81 .71 1.46 .95 Dividends paid per share .25 .25 .25 .25 Price range of Steel Stock/(b)/: - Low 21-/5/8/ 20-/7/16/ 31 28-/7/16/ - High 27-/3/4/ 33-/1/2/ 43-/1/16/ 42-/1/8/ - --------------------------------------------------------------------------------------------------------------------
/(a)/ Restated to reflect current classifications. /(b)/ Composite tape. S-21 Principal Unconsolidated Affiliates (Unaudited)
December 31, 1999 Company Country Ownership Activity - ----------------------------------------------------------------------------------------------------------- Clairton 1314B Partnership, L.P. United States 10% Coke & Coke By-Products Double Eagle Steel Coating Company United States 50% Steel Processing PRO-TEC Coating Company United States 50% Steel Processing Republic Technologies International, LLC United States 16% Steel Products Transtar, Inc. United States 46% Transportation USS-POSCO Industries United States 50% Steel Processing VSZ U. S. Steel, s. r.o. Slovak Republic 50% Tin Mill Products Worthington Specialty Processing United States 50% Steel Processing - -----------------------------------------------------------------------------------------------------------
Supplementary Information on Mineral Reserves (Unaudited) See the USX consolidated financial statements for Supplementary Information on Mineral Reserves relating to the U. S. Steel Group, page U-30. S-22 -----END PRIVACY-ENHANCED MESSAGE-----