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UNITED STATES STEEL CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[October 29, 2014]

UNITED STATES STEEL CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


(Edgar Glimpses Via Acquire Media NewsEdge) Certain sections of Management's Discussion and Analysis include forward-looking statements concerning trends or events potentially affecting the businesses of United States Steel Corporation (U. S. Steel). These statements typically contain words such as "anticipates," "believes," "estimates," "expects," "intends" or similar words indicating that future outcomes are not known with certainty and are subject to risk factors that could cause these outcomes to differ significantly from those projected. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors that could cause future outcomes to differ materially from those set forth in forward-looking statements. For discussion of risk factors affecting the businesses of U. S. Steel, see Item 1A.



Risk Factors and "Supplementary Data - Disclosures About Forward-Looking Statements" in U. S. Steel's Annual Report on Form 10-K for the year ended December 31, 2013, and Item 1A. Risk Factors in this Form 10-Q. References in this Quarterly Report on Form 10-Q to "U. S. Steel," "the Company," "we," "us" and "our" refer to U. S. Steel and its consolidated subsidiaries unless otherwise indicated by the context.

RESULTS OF OPERATIONS On September 16, 2014, U. S. Steel Canada Inc. (USSC), a wholly owned subsidiary of USS, applied for relief from its creditors pursuant to Canada's Companies' Creditors Arrangement Act (CCAA). As a result of USSC filing for protection under the CCAA (CCAA filing), U. S. Steel determined that USSC and its subsidiaries would be deconsolidated from U. S. Steel's financial statements on a prospective basis effective as of the date of the filing. We recorded a total non-cash charge of $413 million in the third quarter of 2014 related to the deconsolidation of USSC and other charges.


The Flat-rolled segment information subsequent to September 16, 2014 does not include USSC. After the deconsolidation of USSC, transactions between U. S.

Steel and USSC are considered related party transactions.

In order to provide a better understanding of the Flat-rolled segment results, we include the following non-GAAP financial measures to show USSC results for the three and nine months ended September 30, 2014 and 2013 before the elimination of transactions with U. S. Steel, presenting USSC as if on a stand-alone basis: (Dollars in millions except average realized price Three Months Ended Nine Months Ended amounts) September 30, September 30, 2014 (a) 2013 2014 (a) 2013 USSC results: Loss from operations (b) (57 ) (783 ) (200 ) (1,123 ) Shipments (b)(c) 632 213 2,207 1,174 Raw steel production (c) 542 - 1,744 549 Raw steel capability utilization 99 % - % 95 % 15 % Average realized price ($/net ton) (b) 824 774 805 715 (a) 2014 periods reflect information through September 15, 2014.

(b) Includes transactions with U. S. Steel.

(c) Thousands of net tons.

-35- --------------------------------------------------------------------------------Net sales by segment for the three and nine months ended September 30, 2014 and 2013 are set forth in the following table: Three Months Ended Nine Months Ended September 30, September 30, (Dollars in millions, excluding % % intersegment sales) 2014 2013 Change 2014 2013 Change Flat-rolled Products (Flat-rolled) $ 3,125 $ 2,731 14 % $ 9,089 $ 8,710 4 % U. S. Steel Europe (USSE) 687 643 7 % 2,203 2,204 - % Tubular Products (Tubular) 700 731 (4 )% 2,030 2,126 (5 )% Total sales from reportable segments 4,512 4,105 10 % 13,322 13,040 2 % Other Businesses 75 26 188 % 113 115 (2 )% Net sales $ 4,587 $ 4,131 11 % $ 13,435 $ 13,155 2 % Management's analysis of the percentage change in net sales for U. S. Steel's reportable business segments for the three months ended September 30, 2014 versus the three months ended September 30, 2013 is set forth in the following table: Three Months Ended September 30, 2014 versus Three Months Ended September 30, 2013 Steel Products (a) Coke & Net Volume Price Mix FX (b) Other Change Flat-rolled 5 % 4 % 1 % - % 4 % 14 % USSE 14 % (5 )% (1 )% - % (1 )% 7 % Tubular (6 )% 2 % - % - % - % (4 )% (a) Excludes intersegment sales (b) Foreign currency translation effects Net sales were $4,587 million in the three months ended September 30, 2014, compared with $4,131 million in the same period last year. The increase in sales for the Flat-rolled segment primarily reflected an increase in average realized prices (increase of $25 per net ton) and an increase in shipments (increase of 264 thousand net tons). The increase in sales for the USSE segment was primarily due to higher shipments (increase of 126 thousand net tons) partially offset by lower average realized euro-based prices (decrease of €32 per net ton). The decrease in sales for the Tubular segment primarily reflected lower shipments (decrease of 31 thousand net tons) primarily as a result of continued high import levels and the indefinite idling of the McKeesport and Bellville tubular facilities partially offset by higher average realized prices (increase of $24 per net ton).

Management's analysis of the percentage change in net sales for U. S. Steel's reportable business segments for the nine months ended September 30, 2014 versus the nine months ended September 30, 2013 is set forth in the following table: Nine Months Ended September 30, 2014 versus Nine Months Ended September 30, 2013 Steel Products (a) Coke & Net Volume Price Mix FX (b) Other Change Flat-rolled (3 )% 5 % 1 % (1 )% 2 % 4 % USSE 3 % (5 )% - % 2 % - % - % Tubular (4 )% - % (1 )% - % - % (5 )% (a) Excludes intersegment sales (b) Foreign currency translation effects -36- -------------------------------------------------------------------------------- Net sales were $13,435 million in the nine months ended September 30, 2014, compared with $13,155 million in the same period last year. The increase in sales for the Flat-rolled segment primarily reflected higher average realized prices (increase of $40 per net ton) partially offset by a decrease in shipments (decrease of 281 thousand net tons). Sales for the USSE segment were comparable year over year as lower average realized euro-based prices (decrease of €30 per net ton) were offset by higher shipments (increase of 100 thousand net tons) and the strengthening of the U.S. dollar versus the euro. The decrease in sales for the Tubular segment is primarily related to lower shipments (decrease of 47 thousand net tons) primarily as a result of continued high import levels and the indefinite idling of the McKeesport and Bellville tubular facilities.

Pension and other benefits costs Pension and other benefit costs are reflected in our cost of sales and selling, general and administrative expense line items in the consolidated statements of operations.

Defined benefit and multiemployer pension plan costs totaled $88 million and $257 million in the three and nine months ended September 30, 2014, respectively, compared to $100 million and $291 million in the comparable periods in 2013. The $12 million and $34 million decrease is primarily due to a higher discount rate, which is reducing the total amount of unrecognized actuarial losses being amortized.

Costs related to defined contribution plans totaled $11 million and $35 million in the three and nine months ended September 30, 2014, respectively, compared to $11 million and $33 million in the comparable periods in 2013.

Other benefit costs totaled $(3) million and $(15) million in the three and nine months ended September 30, 2014, respectively, compared to $14 million and $42 million in the comparable periods in 2013. The $17 million and $57 million decrease is primarily due to a one-time $19 million curtailment gain related to the elimination of non-union retiree medical coverage after 2017.

Net periodic pension cost, including multiemployer plans, is expected to total approximately $335 million in 2014. Total other benefits costs in 2014 are expected to total approximately $(5) million, excluding the $19 million curtailment gain recorded in the second quarter.

A sensitivity analysis of the projected incremental effect of a hypothetical one percentage point change in the significant inputs used in the calculation of pension and other benefits net periodic benefit costs is provided in the following table: Hypothetical Rate Increase (Decrease) (Dollars in millions) 1% (1)% Expected return on plan assets Incremental (decrease) increase in: Net periodic pension cost $ (74 ) $ 74 Discount rate Incremental (decrease) increase in: Net periodic pension & other benefits costs $ (30 ) $ 47 Health care cost escalation trend rates Incremental increase (decrease) in: Service and interest cost components for 2014 $ 5 $ (4 ) Selling, general and administrative expenses Selling, general and administrative expenses were $125 million and $406 million in the three and nine months ended September 30, 2014, respectively, compared to $153 million and $449 million in the three and nine months ended September 30, 2013. The decrease is primarily related to lower pension and other benefits costs as discussed above.

Restructuring and Other Charges During the three months ended September 30, 2014, the Company recorded charges of $199 million and $37 million, which were reported in restructuring and other charges in the consolidated statement of operations, related to the impairment of carbon alloy facilities and the write-off of pre-engineering costs from the Keetac expansion, respectively, -37- -------------------------------------------------------------------------------- within our Flat-rolled segment. The Company also recorded severance related charges of $1 million during the three months ended September 30, 2014, which were reported in restructuring and other charges in the consolidated statement of operations, for additional headcount reductions related to our USSK operations. Cash payments were made related to severance and exit costs of $3 million. Favorable adjustments for changes in estimates on and the removal of restructuring reserves as a result of the deconsolidation of USSC were made for $6 million. There were no such items for the three months ended September 30, 2013.

During the nine months ended September 30, 2014, the Company recorded severance related charges of $15 million, which were reported in restructuring and other charges in the consolidated statement of operations, for additional headcount reductions related to our Canadian operations, within our Flat-rolled segment; certain of our Tubular operations in Bellville, Texas and McKeesport, Pennsylvania, within our Tubular segment; and our USSK operations as well as headcount reductions principally at the Company's corporate headquarters in conjunction with the Carnegie Way transformation efforts. The Company also recorded charges of $199 million and $37 million, related to the impairment of carbon alloy facilities and the write-off of pre-engineering costs from the Keetac expansion, respectively, within our Flat-rolled segment. Additionally, an asset impairment charge of $14 million was taken for certain of the Company's non-strategic assets that were designated as held for sale. Cash payments were made related to severance and exit costs of $8 million. Favorable adjustments for changes in estimates on and the removal of restructuring reserves as a result of the deconsolidation of USSC were made for $16 million. There were no such items for the nine months ended September 30, 2013.

During the fourth quarter of 2013, the Company implemented certain headcount reductions and production facility closures related to our iron and steelmaking facilities at Hamilton Works in Canada, barge operations related to Warrior and Gulf Navigation (WGN) in Alabama and administrative headcount reductions at our Hamilton Works and Lake Erie Works also in Canada. We closed our iron and steelmaking facilities at Hamilton Works effective December 31, 2013.

Charges for restructuring and ongoing cost reduction initiatives are recorded in the period the Company commits to a restructuring or cost reduction plan, or executes specific actions contemplated by the plan and all criteria for liability recognition have been met.

Management believes its actions with regard to the Company's operations will have a positive impact on the Company's annual cash flows of approximately $20 million over the course of subsequent periods as a result of decreased payroll and benefits costs and other idle facility costs. Additionally, management does not believe there will be any significant impacts related to the Company's revenues as a result of these actions.

Loss on deconsolidation of U. S. Steel Canada U. S. Steel Canada Inc. (USSC), an indirect wholly owned subsidiary of U. S.

Steel, with unanimous approval from its Board of Directors applied for relief from its creditors pursuant to CCAA on September 16, 2014. The CCAA filing was approved by the Ontario Superior Court of Justice (the Court) on September 16, 2014 and grants USSC creditor protection while it formulates a plan of restructuring. To assist USSC with its plan of restructuring, the Court confirmed the engagement by USSC of a chief restructuring officer, the appointment of a monitor and certain other financial advisors. As of the date of the CCAA filing, any proceedings pending against USSC or currently underway affecting USSC's business operations or property, have been stayed pending further order by the Court.

As a result of the CCAA proceedings, U. S. Steel no longer has a controlling financial interest over USSC, as defined under ASC 810, Consolidation, and therefore has deconsolidated USSC's financial position as of the end of the day on September 15, 2014. This has resulted in a pretax loss on deconsolidation and other charges of $413 million, which includes approximately $20 million of professional fees. The pretax loss on deconsolidation includes the derecognition of the carrying amounts of USSC's assets and liabilities and accumulated other comprehensive loss that were previously consolidated in U. S. Steel's consolidated balance sheet and the impact of recording the retained interest in USSC. Subsequent to the deconsolidation, U. S. Steel will account for USSC using the cost method of accounting, which has been reflected as zero in U. S. Steel's consolidated balance sheet as of September 30, 2014, due to the negative equity associated with USSC's underlying financial position.

Prior to the deconsolidation, U. S. Steel made loans to USSC for the purpose of funding its operations and had net trade accounts receivable in the ordinary course of business. The loans, the corresponding interest and the net trade accounts receivable were considered intercompany transactions and were eliminated in the consolidated U. S. Steel financial statements. As of the deconsolidation date, the loans, associated interest and net trade accounts receivable are now considered third party transactions and have been recognized in U. S. Steel's consolidated financial statements based upon the recoverability of their carrying amounts and whether or not the amounts are secured or unsecured.

-38- -------------------------------------------------------------------------------- U. S. Steel has estimated a recovery rate based upon the fair value of the net assets of USSC available for distribution to its creditors in relation to the secured and unsecured creditor claims in the CCAA filing.

The CCAA filing on September 16, 2014 is an event of default under the terms of the Province Note loan agreement between USSC and the Province of Ontario. The failure of USSC to pay the Province Note would constitute an event of default under the indenture for the 2019 Senior Convertible Notes (2019 Notes) that enables the holders of the 2019 Notes to declare them immediately due and payable. It is U. S. Steel's intent to settle the 2019 Notes in cash if the holders exercise their options to call the notes. In addition to the CCAA filing, the 2019 Notes have met certain conversion options based on the Company's stock price, which made the 2019 Notes eligible for immediate conversion by the holders at September 30, 2014. As a result of these events, the 2019 Notes have been reclassified from long-term to short-term in our consolidated balance sheet as of September 30, 2014.

In conjunction with the CCAA filing, U. S. Steel agreed to provide a debtor-in-possession (DIP) credit facility to USSC, that was approved by the Court on October 8, 2014, and provides for borrowings under the facility of a maximum commitment of C$185 million (approximately $165 million). The DIP facility will be primarily used for USSC's working capital needs as well as to provide support for any guarantees, letters of credit and other forms of credit support related to USSC's operations and contains certain covenants governing the terms and provisions of the DIP facility.

-39- --------------------------------------------------------------------------------Income (loss) from operations by segment for the three and nine months ended September 30, 2014 and 2013 is set forth in the following table: Three Months Ended Nine Months Ended September 30, % September 30, % (Dollars in millions) 2014 2013 Change 2014 2013 Change Flat-rolled $ 347 $ 82 323 % $ 462 $ 18 2,467 % USSE 29 (32 ) NM 99 16 519 % Tubular 69 49 41 % 140 158 (11 )% Total income from reportable segments 445 99 349 % 701 192 265 % Other Businesses 34 14 143 % 64 62 3 % Segment income from operations 479 113 324 % 765 254 201 % Items not allocated to segments: Postretirement benefit expense (26 ) (55 ) (53 )% (90 ) (165 ) (45 )% Other items not allocated to segments: Loss on deconsolidation of U. S.

Steel Canada and other charges (413 ) - 100 % (413 ) - 100 % Impairment of carbon alloy facilities (199 ) - 100 % (199 ) - 100 % Write-off of pre-engineering costs (37 ) - 100 % (37 ) - 100 % Gain on sale of real estate assets 55 - 100 % 55 - 100 % Litigation reserves - - 100 % (70 ) - 100 % Loss on assets held for sale - - 100 % (14 ) - 100 % Curtailment gain - - 100 % 19 - 100 % Goodwill impairment - (1,783 ) 100 % - (1,783 ) 100 % Supplier contract dispute settlement - 23 100 % - 23 100 % Total income (loss) from operations $ (141 ) $ (1,702 ) NM $ 16 $ (1,671 ) NM Segment results for Flat-rolled Three Months Ended Nine Months Ended September 30, % September 30, 2014 2013 Change 2014 2013 % Change Income from operations ($ millions) $ 347 $ 82 323 % $ 462 $ 18 2,467 % Gross margin 15 % 10 % 5 % 10 % 7 % 3 % Raw steel production (mnt) 4,675 4,261 10 % 13,298 13,393 (1 )% Capability utilization(a) 86 % 70 % 16 % 81 % 74 % 7 % Steel shipments (mnt) 3,692 3,428 8 % 10,893 11,174 (3 )% Average realized steel price $ 771 per ton $ 777 $ 752 3 % $ 731 5 % (a) Prior to the permanent shut down of the iron and steelmaking facilities at Hamilton Works on December 31, 2013, annual raw steel production capability for Flat-rolled was 24.3 million net tons. Subsequent to the CCAA filing and deconsolidation of USSC, annual raw steel production capability for Flat-rolled is 19.4 million net tons and the quarter and nine months ended September 30, 2014 shipments and raw steel production amounts for Flat-rolled do not include USSC after September 15, 2014.

The increase in Flat-rolled results in the three months ended September 30, 2014 compared to the same period in 2013 resulted from lower raw materials costs (approximately $125 million), lower repairs and maintenance and other operating costs (approximately $120 million), increased prices (approximately $65 million) and an increase in shipment volumes (approximately $30 million). These changes were partially offset by higher costs for profit based payments (approximately $65 million).

-40- -------------------------------------------------------------------------------- The increase in Flat-rolled results in the nine months ended September 30, 2014 compared to the same period in 2013 resulted from increased prices (approximately $395 million), lower raw materials costs (approximately $185 million), lower repairs and maintenance and other operating costs (approximately $75 million) and higher steel substrate sales to our Tubular segment (approximately $10 million). These changes were partially offset by increased energy costs, primarily due to higher natural gas costs (approximately $100 million), higher costs for profit based payments (approximately $90 million) and a decrease in shipment volumes (approximately $30 million).

During the second quarter of 2013, U. S. Steel and our partner decided to dissolve Double Eagle Steel Coating Company (DESCO), our 50-50 joint venture.

DESCO operates an electrogalvanizing facility located in Dearborn, Michigan. The dissolution could take up to two years as the joint venture will continue to service customers during that period. We do not expect a significant financial impact as a result of the dissolution. The joint venture will accelerate depreciation of the fixed assets, which will reduce our investment in the joint venture, over the remaining useful life of the fixed assets.

Segment results for USSE Three Months Ended Nine Months Ended September 30, % September 30, 2014 2013 Change 2014 2013 % Change Income from operations ($ millions) $ 29 $ (32 ) NM $ 99 $ 16 519 % Gross margin 10 % 2 % 8 % 10 % 7 % 3 % Raw steel production (mnt) 1,111 1,032 8 % 3,475 3,393 2 % Capability utilization 88 % 82 % 6 % 93 % 91 % 2 % Steel shipments (mnt) 987 861 15 % 3,071 2,971 3 % Average realized steel price $ 691 per ton $ 671 $ 714 (6 )% $ 711 (3 )% The increase in USSE results in the three months ended September 30, 2014 compared to the same period in 2013 was primarily due to lower raw materials costs (approximately $60 million) and decreased repairs and maintenance and other operating costs (approximately $25 million). These changes were partially offset by lower average realized prices (approximately $30 million).

The increase in USSE results in the nine months ended September 30, 2014 compared to the same period in 2013 was primarily due to lower raw materials costs (approximately $110 million), decreased repairs and maintenance and other operating costs (approximately $30 million), favorable effects of transactions to sell and swap a portion of our emissions allowances (approximately $20 million) and the strengthening of the U.S. dollar versus the euro in the nine months ended September 30, 2014 as compared to the same period in 2013 (approximately $20 million). These changes were partially offset by lower average realized prices (approximately $100 million).

Segment results for Tubular Three Months Ended Nine Months Ended September 30, % September 30, 2014 2013 Change 2014 2013 % Change Income from operations ($ millions) $ 69 $ 49 41 % $ 140 $ 158 (11 )% Gross margin 14 % 11 % 3 % 11 % 12 % (1 )% Steel shipments (mnt) 428 459 (7 )% 1,296 1,343 (3 )% Average realized steel price $ 1,508 per ton $ 1,567 $ 1,543 2 % $ 1,536 (2 )% The increase in Tubular results for the three months ended September 30, 2014 as compared to the same period in 2013 was primarily due to decreased repairs and maintenance and other operating costs (approximately $30 million)and an increase in average realized prices (approximately $10 million). These changes were partially offset by decreased shipment volumes (approximately $10 million).

The decrease in Tubular results in the nine months ended September 30, 2014 as compared to the same period in 2013 resulted mainly from decreased average realized prices (approximately $30 million), decreased shipping volumes (approximately $25 million) primarily due to continuing high import levels and higher costs for profit based payments -41- -------------------------------------------------------------------------------- (approximately $20 million), partially offset by decreased repairs and maintenance and other operating costs (approximately $50 million).

Results for Other Businesses Other Businesses had income of $34 million and $64 million in the three and nine months ended September 30, 2014, compared to income of $14 million and $62 million in the three and nine months ended September 30, 2013. The 2013 results included a gain of approximately $30 million from a real estate sale in the second quarter of 2013.

Items not allocated to segments The decrease in postretirement benefit expense in the three and nine months ended September 30, 2014 as compared to the same period in 2013 resulted from lower pension and retiree medical expenses as a result of a higher discount rate and better claims cost experience.

We recorded $413 million of non-cash, pretax loss on the deconsolidation of USSC and other charges during the three months ended September 30, 2014 after its CCAA filing. See Note 4.

We recorded a $199 million pretax carbon alloy facilities impairment charge during the three months ended September 30, 2014.

We recorded a $55 million gain on the sale of real estate assets during the three months ended September 30, 2014 consisting of surface rights and mineral royalty revenue streams in the state of Alabama.

We recorded a $37 million pretax charge during the three months ended September 30, 2014 to write-off pre-engineering costs since we have decided not to pursue an expansion of our Keetac iron ore pellet operations.

We recorded a $14 million pretax loss on assets held for sale during the nine months ended September 30, 2014 related to the write-down of non-strategic Corporate assets.

We recorded a pretax gain of $19 million related to curtailments in pension and other benefit plans in the nine months ended September 30, 2014 associated with the elimination of non-union retiree medical coverage after 2017.

We recorded a pretax loss of $70 million related to litigation reserves during the nine months ended September 30, 2014 for the Company's ongoing litigation matters.

We recorded a $1,783 million pretax goodwill impairment charge during the three and nine months ended September 30, 2013. See further disclosure included in Note 5.

We recorded a $23 million pretax gain on a supplier contract dispute settlement during the three and nine months ended September 30, 2013.

Net interest and other financial costs Three Months Ended Nine Months Ended September 30, % September 30, % (Dollars in millions) 2014 2013 Change 2014 2013 Change Interest expense $ 57 $ 61 (7 )% $ 178 $ 204 (13 )% Interest income (2 ) - NM (4 ) (2 ) 100 % Other financial costs 5 24 (79 )% 19 55 (65 )% Total net interest and other financial costs $ 60 $ 85 (29 )% $ 193 $ 257 (25 )% The decrease in net interest and other financial costs in the three months ended September 30, 2014 as compared to the same period last year is primarily related to a charge of $22 million related to a guarantee of an unconsolidated equity investment in the three months ended September 30, 2013.

The decrease in net interest and other financial costs in the nine months ended September 30, 2014 as compared to the same period last year is primarily due to the absence of a $34 million charge that was recorded in 2013 related to the repurchases of a portion of the 2014 Senior Convertible Notes. The remaining principal amount on the 2014 Senior -42- -------------------------------------------------------------------------------- Convertible Notes was redeemed in May 2014 which also reduced interest expense for the nine months ended September 30, 2014.

The income tax provision was $6 million in the three months ended September 30, 2014 and the income tax benefit was $4 million in the nine months ended September 30, 2014 compared to a provision of $4 million and $14 million in the three and nine months ended September 30, 2013. Included in the tax benefit in the first nine months of 2014 is a discrete benefit of $30 million related to the loss on the deconsolidation of USSC, as well as a discrete benefit related to the antitrust settlement discussed in Note 4 and Note 21, respectively. The tax provision reflects a benefit for percentage depletion in excess of cost depletion for iron ore that we produce and consume or sell. The tax provision does not reflect any tax benefit for pretax losses in Canada, prior to the deconsolidation on September 16, 2014, which is a jurisdiction where we had recorded a full valuation allowance on deferred tax assets.

The tax benefit for the nine months ended September 30, 2014 is based on an estimated annual effective rate, which requires management to make its best estimate of annual pretax income or loss. During the year, management regularly updates forecasted annual pretax results for the various countries in which we operate based on changes in factors such as prices, shipments, product mix, operating performance and cost estimates. To the extent that actual 2014 pretax results for U.S. and foreign income or loss vary from estimates used herein at the end of the most recent interim period, the actual tax provision or benefit recognized in 2014 could be materially different from the forecasted amount used to estimate the tax provision for the nine months ended September 30, 2014.

The net domestic deferred tax asset was $95 million at September 30, 2014 compared to $115 million at December 31, 2013. A substantial amount of U. S.

Steel's domestic deferred tax assets relates to employee benefits that will become deductible for tax purposes over an extended period of time as cash contributions are made to employee benefit plans and retiree benefits are paid in the future. We continue to believe it is more likely than not that the net domestic deferred tax asset will be realized.

At September 30, 2014, the net foreign deferred tax asset was $42 million, net of established valuation allowances of $5 million. At December 31, 2013, the net foreign deferred tax asset was $59 million, net of established valuation allowances of $1,028 million. The net foreign deferred tax asset will fluctuate as the value of the U.S. dollar changes with respect to the euro. At December 31, 2013, a full valuation allowance was recorded for the net Canadian deferred tax asset primarily due to cumulative losses in Canada. The Canadian deferred tax asset and the related valuation allowance were deconsolidated from U. S. Steel's balance sheet as of the end of the day on September 15, 2014.

For further information on income taxes see Note 9 to the Consolidated Financial Statements.

Net loss attributable to United States Steel Corporation was $207 million and $173 million in the three and nine months ended September 30, 2014. Net loss attributable to United States Steel Corporation was $1,791 million and $1,942 million in the three and nine months ended September 30, 2013. The changes between the 2014 and 2013 periods primarily reflect the factors discussed above.

BALANCE SHEET Accounts receivable increased by $83 million from year-end 2013. Sales in the latter part of a quarter typically represent the majority of the receivables as of the end of the quarter. The increase in receivables primarily reflected increased average realized prices partially offset by the deconsolidation of USSC.

Inventories decreased by $489 million from year-end 2013 primarily due to the deconsolidation of USSC.

Income tax receivable decreased by $171 million primarily due to the receipt of a federal income tax refund related to the carryback of our 2013 net operating loss to prior years.

Property, plant and equipment decreased by $1,352 million from year-end 2013 primarily due to the deconsolidation of USSC and the impairment of carbon alloy facilities.

Long-term receivables from related parties at September 30, 2014 represents amounts due from USSC subsequent to the deconsolidation.

Intangibles decreased by $66 million from year-end 2013 primarily due to the deconsolidation of USSC.

Deferred income tax benefits decreased by $44 million from year-end 2013 primarily due to net operating losses expected to be used in 2014, offset by an increase in other deferred tax benefits related to the 2013 tax restructuring.

-43- -------------------------------------------------------------------------------- Other noncurrent assets decreased by $102 million from year-end 2013 primarily due to the write-off of pre-engineering costs and the use of restricted cash for projects.

Accounts payable and other accrued liabilities increased by $318 million from year-end 2013 primarily as a result of implementing extended vendor payment terms partially offset by the deconsolidation of USSC.

Short-term debt and current maturities of long-term debt remained consistent as the decrease from the redemption of the remaining principal amount of our 2014 Senior Convertible Notes was partially offset by the reclassification of the 2019 Senior Convertible Notes (2019 Notes) from long-term to short-term as a result of the CCAA filing and after meeting certain conversion options based on the Company's stock price. See Note 14.

Employee benefits decreased by $1,510 million from year-end 2013 primarily due to the deconsolidation of USSC and U. S. Steel's $140 million voluntary pension contribution to its main defined benefit pension plan as well as benefit payments made in excess of the net periodic benefit expense recognized in the first nine months of 2014.

CASH FLOW Net cash provided by operating activities was $1,247 million for the nine months ended September 30, 2014 compared to $421 million in the same period last year.

The increase is primarily due to improved financial results, excluding the non-cash loss on deconsolidation and other charges of $413 million and restructuring and other charges of $254 million recognized during 2014 and a goodwill impairment charge of $1,783 million recognized during 2013, changes in working capital period over period, and the receipt of the federal income tax refund discussed above partially offset by higher employee benefit payments.

Changes in working capital can vary significantly depending on factors such as the timing of inventory production and purchases, which is affected by the length of our business cycles as well as our captive raw materials position, customer payments of accounts receivable and payments to vendors in the regular course of business. We improved cash provided by operating activities by extending vendor payment terms consistent with industry standards.

Our key working capital components include accounts receivable and inventory.

The accounts receivable and inventory turnover ratios for the three months and twelve months ended September 30, 2014 and 2013 are as follows: Three Months Ended Twelve Months Ended September 30, September 30, 2014 2013 2014 2013 Accounts Receivable Turnover 2.2 2.0 8.8 8.0 Inventory Turnover 1.7 1.6 6.8 6.5 Capital expenditures, for the nine months ended September 30, 2014, were $282 million, compared with $328 million in the same period in 2013. Flat-rolled capital expenditures were $158 million and included spending for the ongoing implementation of an enterprise resource planning (ERP) system, the Granite City Works Steel Shop Tap and Charging Emission Control System, a blast furnace reline at Mon Valley Works, blast furnace maintenance at Granite City and Great Lakes Works and various other infrastructure, environmental and strategic projects. Tubular capital expenditures of $60 million related to an upgrade to the Lorain No. 4 Seamless Hot Mill, the Offshore Operations Houston Test Lab and various other infrastructure and strategic capital projects. USSE capital expenditures of $58 million consisted of spending for infrastructure and environmental projects.

U. S. Steel's contractual commitments to acquire property, plant and equipment at September 30, 2014, totaled $218 million.

Capital expenditures for 2014 are expected to total approximately $500 million and remain focused largely on strategic, infrastructure and environmental projects. In recent years, we have completed or neared completion on several key projects of strategic importance. We have made significant progress to improve our coke self-sufficiency and reduce our reliance on purchased coke for the steelmaking process through the application of advanced technologies, upgrades to our existing coke facilities and increased use of natural gas and pulverized coal in our operations. We have completed the construction of a technologically and environmentally advanced battery at the Mon Valley Works' Clairton Plant with a capacity of 960,000 tons per year. Initial start-up of the battery began in November 2012 and the battery has reached full production capacity.

-44- -------------------------------------------------------------------------------- We are continuing our efforts to implement an ERP system to replace our existing information technology systems, which will enable us to operate more efficiently. The completion of the ERP project is expected to provide further opportunities to streamline, standardize and centralize business processes in order to maximize cost effectiveness, efficiency and control across our global operations. We are also currently developing additional projects within our Flat-rolled and Tubular segments, such as facility enhancements, advanced high strength steels and additional premium connections that will further improve our ability to support our customers' evolving needs.

With reduced pricing for iron-ore, management is considering its options with respect to the Company's iron-ore position in the United States and to exploit opportunities related to the availability of reasonably priced natural gas as an alternative to coke in the iron reduction process to improve our cost competitiveness, while reducing our dependence on coal and coke. We are examining alternative iron and steelmaking technologies such as gas-based, direct-reduced iron (DRI) and electric arc furnace (EAF) steelmaking. We are currently in the permitting process for the installation of an EAF at our Fairfield Works in Alabama. We submitted air and water permit applications to the Jefferson County Department of Health and the Alabama Department of Environmental Management, respectively, in February 2014.

The DRI process requires iron ore pellets with a lower silica content than blast furnace pellets. We have verified that our iron ore reserves are suitable for direct reduced (DR) grade pellet production and are examining the capital and engineering design process requirements to produce DR grade pellets at our Minntac operations for use internally by the Company if we were to construct a DRI facility or for sale to external third parties with DRI facilities.

Our capital investments in the future may reflect such strategies, although we expect that iron and steelmaking through the blast furnace and basic oxygen furnace manufacturing processes will remain our primary processing technology for the long term.

The foregoing statements regarding expected 2014 capital expenditures, capital projects, emissions reductions and expected benefits from the implementation of the ERP project are forward-looking statements. Factors that may affect our capital spending and the associated projects include: (i) levels of cash flow from operations; (ii) changes in tax laws; (iii) general economic conditions; (iv) steel industry conditions; (v) cost and availability of capital; (vi) receipt of necessary permits; (vii) unforeseen hazards such as contractor performance, material shortages, weather conditions, explosions or fires; (viii) our ability to implement these projects; and (ix) the requirements of applicable laws and regulations. There is also a risk that the completed projects will not produce at the expected levels and within the costs currently projected.

Predictions regarding benefits resulting from the implementation of the ERP project are subject to uncertainties. Actual results could differ materially from those expressed in these forward-looking statements.

Disposal of assets in the first nine months of 2014 primarily reflects cash proceeds from transactions to sell and swap a portion of the emissions allowances at USSK.

Restricted cash in the first nine months of 2014 primarily reflects a reduction due to the use of restricted cash for projects. Restricted cash in the first nine months of 2013 primarily reflects a reduction in the use of cash collateralized letters of credit, which were replaced with surety bonds.

Issuance of long-term debt, net of financing costs in the first nine months of 2013 reflects the issuance of $316 million of 2.75% Senior Convertible Notes due 2019 and $275 million of 6.875% Senior Notes due April 2021. U. S. Steel received net proceeds of $578 million after fees related to the underwriting discounts and third party expenses.

Repayment of long-term debt in the first nine months of 2014 reflects the redemption of the remaining $322 million principal amount of our 2014 Senior Convertible Notes. The aggregate price, including accrued and unpaid interest, for the 2014 Senior Convertible Notes redeemed was approximately $327 million and the redemptions were paid with cash. Repayment of long-term debt in the first nine months of 2013 reflects the repurchase of $542 million aggregate principal amount of our 2014 Senior Convertible Notes.

-45- -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES The following table summarizes U. S. Steel's liquidity as of September 30, 2014: (Dollars in millions) Cash and cash equivalents (a) $ 1,257 Amount available under $875 Million Credit Facility 875 Amount available under Receivables Purchase Agreement 575 Amount available under USSK credit facilities 289 Total estimated liquidity $ 2,996 (a) As a result of the deconsolidation of USSC as of the end of the day on September 15, 2014, $80 million of cash and cash equivalents has been removed.

As of September 30, 2014, $353 million of the total cash and cash equivalents was held by our foreign subsidiaries. A significant portion of the liquidity attributable to our foreign subsidiaries can be accessed without the imposition of income taxes. Additionally, as part of our Carnegie Way initiative to remain competitive and drive world class growth, we are implementing extended vendor payment terms to be better aligned with other large industrial companies and our peers in the metals and mining sector.

As of September 30, 2014, there were no amounts drawn under our $875 million credit facility agreement (Amended Credit Agreement) and inventory values calculated in accordance with the Amended Credit Agreement supported the full $875 million of the facility. Under the Amended Credit Agreement, U. S. Steel must maintain a fixed charge coverage ratio (as further defined in the Amended Credit Agreement) of at least 1.00 to 1.00 for the most recent four consecutive quarters when availability under the Amended Credit Agreement is less than the greater of 10% of the total aggregate commitments and $87.5 million. Since availability was greater than $87.5 million, compliance with the fixed charge coverage ratio covenant was not applicable.

On July 23, 2014, the Company amended its Amended Credit Agreement to designate USSC and each subsidiary of USSC formed under the laws of Canada or any province thereof as an excluded subsidiary and to waive any event of default that may occur as a result of the Company's 2019 Senior Notes being accelerated or caused to be accelerated as a result of specified actions of USSC.

U. S. Steel has a Receivables Purchase Agreement (RPA) that provides liquidity and letters of credit depending upon the number of eligible domestic receivables generated by U. S. Steel. Domestic trade accounts receivables are sold, on a daily basis, without recourse, to U. S. Steel Receivables, LLC (USSR), a consolidated wholly owned special purpose entity used only for the securitization program. As U. S. Steel accesses this facility, USSR sells senior undivided interests in the receivables to a third-party and a third-party commercial paper conduit, while maintaining a subordinated undivided interest in a portion of the receivables. The third-parties issue commercial paper to finance the purchase of their interest in the receivables and if any of them are unable to fund such purchases, two banks are committed to do so. U. S. Steel has agreed to continue servicing the sold receivables at market rates.

The RPA may be terminated on the occurrence and failure to cure certain events, including, among others, failure by U. S. Steel to make payments under our material debt obligations and any failure to maintain certain ratios related to the collectability of the receivables. The maximum amount of receivables eligible for sale is $625 million and the facility expires in July 2016. As of September 30, 2014, eligible accounts receivable supported $625 million of availability under the RPA, and there were no receivables sold to third-party conduits under this facility. The subordinated retained interest at September 30, 2014 was $625 million with availability of $575 million due to approximately $50 million of letters of credit outstanding.

On July 23, 2014, the RPA was amended to (a) modify a termination event so that if USSC and any of its subsidiaries organized in Canada failed to pay any principal of or premium or interest on any of its debt that is outstanding in a principal amount of at least $100 million, and (b) waive any termination event occurring as a result of the acceleration by the holders of the Company's 2019 Senior Notes due to the acceleration of any debt of USSC or any of its subsidiaries but only if the notes are promptly paid in full.

At September 30, 2014, USSK had no borrowings under its €200 million (approximately $252 million) unsecured revolving credit facility (the Credit Agreement). The Credit Agreement contains certain USSK financial covenants (as further defined in the Credit Agreement), including maximum Leverage, maximum Net Debt to Tangible Net Worth, and minimum Interest Cover ratios. The covenants are measured semi-annually for the period covering the last twelve -46- -------------------------------------------------------------------------------- calendar months. USSK may not draw on the Credit Agreement if it does not comply with any of the financial covenants until the next measurement date. The Credit Agreement expires in July 2016.

At September 30, 2014, USSK had no borrowings under its €20 million and €10 million unsecured credit facilities (collectively approximately $38 million) and the availability was approximately $37 million due to approximately $1 million of outstanding customs and other guarantees.

The CCAA filing on September 16, 2014 is an event of default under the terms of the Province Note loan agreement between USSC and the Province of Ontario. The failure of USSC to pay the Province Note would constitute an event of default under the indenture for the 2019 Senior Convertible Notes (2019 Notes) that enables the holders of the 2019 Notes to declare them immediately due and payable. It is U. S. Steel's intent to settle the 2019 Notes in cash if the holders exercise their options to call the notes. In addition to the CCAA filing, the 2019 Notes have met certain conversion options based on the Company's stock price, which made the 2019 Notes callable by the holders at September 30, 2014.

In conjunction with the filing for CCAA protection, on September 16, 2014, U. S.

Steel entered into a Debtor-in-Possession (DIP) credit facility with USSC, that was approved by the Court on October 8, 2014, and provides for borrowings under the facility of a maximum commitment of C$185 million (approximately $165 million). The DIP facility will be primarily used for USSC's working capital needs as well as provide support for any guarantees, letters of credit and other forms of credit support related to USSC's operations and contains certain covenants governing terms and provisions of the DIP facility.

We may from time to time seek to retire or purchase our outstanding long-term debt in open market purchases, privately negotiated transactions, exchange transactions or otherwise. Such purchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors and may be commenced or suspended at any time.

The amounts involved may be material.

We use surety bonds, trusts and letters of credit to provide financial assurance for certain transactions and business activities. The use of some forms of financial assurance and cash collateral have a negative impact on liquidity.

U. S. Steel has committed $165 million of liquidity sources for financial assurance purposes as of September 30, 2014. Increases in these commitments which use collateral are reflected in restricted cash on the consolidated statement of cash flows.

If there is a change in control of U. S. Steel, the following may occur: (a) debt obligations totaling $2,891 million as of September 30, 2014 (including the Senior Notes and Senior Convertible Notes) may be declared immediately due and payable; (b) the Amended Credit Agreement, the RPA and USSK's €200 million revolving credit agreement may be terminated and any amounts outstanding declared immediately due and payable; and (c) U. S. Steel may be required to either repurchase the leased Fairfield slab caster for $37 million or provide a cash collateralized letter of credit to secure the remaining obligation.

The maximum guarantees of the indebtedness of unconsolidated entities of U. S.

Steel totaled $29 million at September 30, 2014, which includes a $24 million current liability related to a guarantee of debt of an unconsolidated equity investment for which payment by U. S. Steel is probable. The $24 million is the maximum amount U. S. Steel would be obligated to pay as the guarantor and represents the fair value of the obligation at September 30, 2014. If any default related to the guaranteed indebtedness occurs, U. S. Steel has access to its interest in the assets of the investees to reduce its potential losses under the guarantees.

Our major cash requirements in 2014 are expected to be for capital expenditures, employee benefits, and operating costs, including purchases of raw materials. We finished the third quarter of 2014 with $1,257 million of cash and cash equivalents and $3.0 billion of total liquidity. Available cash is left on deposit with financial institutions or invested in highly liquid securities with parties we believe to be creditworthy.

U. S. Steel management believes that U. S. Steel's liquidity will be adequate to satisfy our obligations for the foreseeable future, including obligations to complete currently authorized capital spending programs. Future requirements for U. S. Steel's business needs, including the funding of acquisitions and capital expenditures, scheduled debt maturities, contributions to employee benefit plans, and any amounts that may ultimately be paid in connection with contingencies, are expected to be financed by a combination of internally generated funds (including asset sales), proceeds from the sale of stock, borrowings, refinancings and other external financing sources.

-47- -------------------------------------------------------------------------------- Our opinion regarding liquidity is a forward-looking statement based upon currently available information. To the extent that operating cash flow is materially lower than recent levels or external financing sources are not available on terms competitive with those currently available, future liquidity may be adversely affected.

CRITICAL ACCOUNTING ESTIMATES The following critical accounting estimate should be read in conjunction with those included in our Annual Report on Form 10-K for the year ended December 31, 2013.

Long-term receivables from related parties - As disclosed in Note 4 to the Consolidated Financial Statements, U. S. Steel Canada, Inc. (USSC), an indirect wholly owned subsidiary of U. S. Steel, with unanimous approval from its Board of Directors applied for relief from its creditors pursuant to CCAA on September 16, 2014. As a result, U. S. Steel deconsolidated the USSC balances from its consolidated balance sheet as of the end of the day on September 15, 2014. Prior to the deconsolidation date, the loans, associated interest and net trade accounts receivable from USSC were considered intercompany transactions and were eliminated in consolidation, but are now third party transactions and have been recognized in the financial statements based upon the recoverability of their carrying amounts and whether or not the amounts are secured or unsecured. U. S.

Steel has estimated a recovery rate based upon the fair value of the net assets of USSC available for distribution to its creditors in relation to the secured and unsecured creditor claims in the CCAA filing.

Fair values of the Hamilton Works finishing operations, Hamilton Works coke operations and Lake Erie Works (the USSC Businesses) were used to determine the recoverability of the loans, accrued interest receivable and the net trade accounts receivable using various valuation approaches depending on the type of assets being valued and the highest and best use of those assets.

The fair value of the Hamilton Works coke operations and Lake Erie Works is sensitive to input assumptions from USSC budgets, cash flow forecasts and discount rates. Further, estimates of the perpetual growth rate and terminal value are additional key factors used to determine fair value under the discounted cash flow or income approach used for the valuation of Hamilton Works coke operations and Lake Erie Works.

The estimated fair value for the Hamilton Works finishing operations was calculated by using an orderly liquidation valuation. The inputs used for the liquidation valuation included replacement cost estimates for certain assets based on the assumptions market participants would use from recent market transactions of similar assets.

Changes in any of the assumptions used in the valuations could result in management reaching a different conclusion regarding the recoverability of the loans, associated interest and net trade accounts receivable from USSC, any of which could be material. U. S. Steel's recoverability evaluations involve uncertainties from economic and other events, including changes from the progress of the CCAA proceedings, beyond the control of U. S. Steel that could positively or negatively impact the anticipated future operating results for the USSC Businesses and the actual recovery rate could differ materially from our estimated rate used to determine fair value at September 30, 2014.

Off-balance Sheet Arrangements U. S. Steel did not enter into any new material off-balance sheet arrangements during the third quarter of 2014.

-48- -------------------------------------------------------------------------------- Environmental Matters, Litigation and Contingencies U. S. Steel has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. In recent years, these expenditures have been mainly for process changes in order to meet Clean Air Act (CAA) obligations and similar obligations in Europe and Canada, although ongoing compliance costs have also been significant. To the extent that these expenditures, as with all costs, are not ultimately reflected in the prices of our products and services, operating results will be reduced. U. S. Steel believes that our major North American and many European integrated steel competitors are confronted by substantially similar conditions and thus does not believe that our relative position with regard to such competitors is materially affected by the impact of environmental laws and regulations. However, the costs and operating restrictions necessary for compliance with environmental laws and regulations may have an adverse effect on our competitive position with regard to domestic mini-mills, some foreign steel producers (particularly in developing economies such as China, Russia, Ukraine and India) and producers of materials which compete with steel, all of which may not be required to incur equivalent costs in their operations. The specific impact on each competitor may vary depending on several things such as the age and location of their operating facilities and production methods.

Some of U. S. Steel's facilities were in operation before 1900. Although management believes that U. S. Steel's environmental practices have either led the industry or at least been consistent with prevailing industry practices, hazardous materials may have been released at current or former operating sites or delivered to sites operated by third parties. This means U. S. Steel is responsible for remediation costs associated with the disposal of such materials and many of our competitors do not have similar historical liabilities.

Our U.S. facilities are subject to the U.S. environmental standards, including the CAA, the Clean Water Act (CWA), the Resource Conservation and Recovery Act (RCRA) and the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), as well as state and local laws and regulations.

U. S. Steel Canada (USSC) is subject to the environmental laws of Canada, which are comparable to environmental standards in the United States. Environmental regulation in Canada is an area of shared responsibility between the federal government and the provincial governments, which in turn delegate certain matters to municipal governments. Federal environmental statutes include the federal Canadian Environmental Protection Act, 1999 and the Fisheries Act.

Various provincial statutes regulate environmental matters such as the release and remediation of hazardous substances; waste storage; treatment and disposal; and releases to air and water. As in the United States, Canadian environmental laws (federal, provincial and local) are undergoing revision and becoming more stringent.

USSK is subject to the environmental laws of Slovakia and the European Union (EU). A related law of the EU commonly known as Registration, Evaluation, Authorization and Restriction of Chemicals, Regulation 1907/2006 (REACH) requires the registration of certain substances that are produced in the EU or imported into the EU. Although USSK is currently compliant with REACH, the scope of this regulation is becoming increasingly stringent and, to the extent alternative substances must be employed, continuing efforts to remain compliant could increase operational costs. We cannot reliably estimate the potential cost of complying with these evolving measures at this time. Slovakia is also currently considering a law implementing an EU Waste Framework Directive that would more strictly regulate waste disposal and increase fees for waste disposed of in landfills, including privately owned landfills. The intent of the waste directive is to encourage recycling and because Slovakia has not adopted implementing legislation, we cannot estimate the full financial impact of this prospective legislation at this time.

The EU's Industry Emission Directive will require implementation of EU determined best available techniques (BAT) to reduce environmental impacts as well as compliance with BAT associated emission levels. This directive includes operational requirements for air emissions, wastewater discharges, solid waste disposal and energy conservation, and dictates certain operating practices and imposes stricter emission limits. Producers will be required to be in compliance with the iron and steel BAT by March 8, 2016, unless specific extensions are granted by the Slovak environmental authority. We are currently evaluating the costs of complying with BAT, but our most recent broad estimate of likely capital expenditures is $200 million to $250 million over the 2014 to 2016 period. We also believe there will be increased operating costs, such as increased energy and maintenance costs, but we are currently unable to reliably estimate them.

We are currently investigating the possibility of obtaining EU grants to fund a portion of these capital expenditures. The EU has various programs under which funds are allocated to member states to implement broad public policies. These are being implemented in two campaigns, Operational Program 1 which covered the years 2007 - 2013 (OP1) and Operational Program 2 which will cover the years 2014 - 2020 (OP2). Each member state legislates its own framework for implementing the operational programs and administers its allocation of funds under the operational -49- -------------------------------------------------------------------------------- programs by offering these funds to government units and private entities for qualifying projects. USSK submitted two BAT projects under the last call of OP1.

Both projects were approved for funding by the Ministry of Environment of the Slovak Republic in May in an amount not to exceed approximately €9 million (approximately $11 million). The actual amount of the grant funding received will be based on 35% of the identified eligible costs as defined in OP1 actually incurred on the projects.

We plan to submit several additional BAT projects for EU grants as well.

However, all future projects will be submitted under calls governed by OP2. The specific legislation governing OP2 has not yet been finalized by the Slovak Republic, so we are not able to accurately estimate at this time the amount of additional grant funding that we may receive, if any.

Due to other EU legislation, we will be required to make changes to the boilers at our steam and power generation plant in order to comply with stricter air emission limits for large combustion plants. In January of 2014, the operation of USSK's boilers was approved by the European Commission (EC) as part of Slovakia's Transitional National Plan (TNP) for bringing all boilers in Slovakia into compliance no later than 2020. The TNP establishes parameters for determining the date by which specific boilers are required to reach compliance with the new air standards, which has been determined to be October 2017 for our boilers. This gives us the flexibility of delaying the completion of the project to upgrade our boilers to no later than that date, although we may choose to accelerate the implementation of this project in order to qualify for supplementary support payments as part of Slovakia's renewable energy program.

The project should result in reduced electricity, operating, maintenance and waste disposal costs once completed. The current projected cost to reconstruct one existing boiler and build one new boiler to achieve compliance is broadly estimated at $170 million.

A Memorandum of Understanding (MOU) was signed in March of 2013 between U. S.

Steel and the government of Slovakia. The MOU outlines areas in which the government and U. S. Steel will work together to help create a more competitive environment and conditions for USSK. Some of the incentives the government of Slovakia agreed to provide include potential participation in a renewable energy program that provides the opportunity to reduce electricity costs as well as the potential for government grants and other support concerning investments in environmental control technology that may be required under the recently implemented BAT requirements. There are many conditions and uncertainties regarding the grants, including matters controlled by the EU, but the value as stated in the MOU could be as much as €75 million. In return, U. S. Steel agreed to achieve employment level reduction goals at USSK only through the use of natural attrition, except in cases of extreme economic conditions, as outlined in USSK's current collective labor agreement. U. S. Steel also agreed to pay the government of Slovakia specified declining amounts should U. S. Steel sell USSK within five years of signing the MOU.

Since the signing of the MOU, USSK has received cooperation from the government of Slovakia in fulfilling the terms of the MOU. Broad legislative changes were made to extend the scope of support for renewable sources of energy, which have the effect of allowing USSK to participate in the renewable energy program once the upgrade to our boilers is completed. The government of Slovakia also provided general guidance as we prepared two applications for EU grants under the last call of OP1. Both projects were approved in May for EU funding grants.

We will continue to work closely with the government of Slovakia to achieve the incentives described in the MOU.

In the future, compliance with carbon dioxide (CO2) emission requirements may include substantial costs for emission allowances, restriction of production and higher prices for coking coal, natural gas and electricity generated by carbon based systems. Since it is difficult to predict what requirements will ultimately be imposed in Europe, it is difficult to estimate the likely impact on U. S. Steel, but it could be substantial. However, if the final requirements do not recognize the fact that the integrated steel process involves a series of chemical reactions involving carbon that create fixed and irreducible CO2 emissions, our competitive position relative to mini mills will be adversely impacted. Our competitive position compared to producers in developing nations, such as China, Russia, Ukraine and India, will be harmed unless such nations require commensurate reductions in CO2 emissions. Competing materials such as plastics may not be similarly impacted. The specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities and its production methods. U. S. Steel is also responsible for remediation costs related to former and present operating locations and disposal of environmentally sensitive materials. Many of our competitors, including North American producers, or their successors, that have been the subject of bankruptcy relief have no or substantially lower liabilities for such matters.

Greenhouse Gas Emissions Regulation The current and potential regulation of greenhouse gas (GHG) emissions remains a significant issue for the steel industry, particularly for integrated steel producers such as U. S. Steel. The regulation of greenhouse gases such as -50- -------------------------------------------------------------------------------- CO2 emissions has either become law or is being considered by legislative bodies of many nations, including countries where we have operating facilities. In the United States, the Environmental Protection Agency (EPA) has published rules for regulating GHG emissions for certain facilities and has implemented various reporting requirements as further described below.

In Utility Air Regulatory Group v. EPA, No. 11-1037 (consolidating various challenges); and Texas v. EPA, No. 10-1425, the U.S. Court of Appeals for the District of Columbia issued an opinion essentially upholding the EPA's authority to regulate GHGs. The court rejected challenges to the endangerment finding, giving the EPA authority to regulate GHGs under the CAA on the basis that they pose a risk to human health. The court also rejected arguments by petitioners to dismiss inclusion of GHG emissions under the tailpipe rule, giving the EPA the authority to regulate GHG emissions from mobile sources and triggering regulation for stationary sources. The court dismissed challenges to the timing and tailoring rules citing that it lacked jurisdiction to decide the case on its merits since none of the petitioners had legal standing to challenge the timing and tailoring rules. Finally, the court declined to decide challenges to other State Implementation Plan (SIP) related rules issued by the EPA regarding GHGs, stating that it also lacked jurisdiction over these SIP related rules. This decision was ultimately argued in Utility Air Regulatory Group v. EPA, No.

12-1146 in the Supreme Court on February 24, 2014. A decision on the case that will significantly affect how the EPA implements any GHG permits was issued on June 23, 2014 . We are currently evaluating the practical implications of the decision. Any financial impacts on U. S. Steel are unknown at this time.

The EPA re-proposed it's New Source Performance Standards (NSPS) for GHG emissions from Power Plants in September 2013 after missing the original April 2013 deadline to publish the first rule it had proposed a year earlier. The re-proposed NSPS imposes separate intensity based greenhouse gas limits for new coal fired and new natural gas fired power plants. Although the September 2013 proposal would only affect new electric generating units, the potential impacts of the rule's issuance extends beyond these sources, because the agency is obligated under Section 111(d) of the CAA to promulgate guidelines for existing sources within a category when it promulgates GHG standards for new sources.

Accordingly, the EPA proposed guidance for regulating GHGs from existing sources on June 2, 2014. The guidance imposes a two-part goal structure for existing power generation in each state. The structure is composed of an interim goal for states to meet on average over the ten-year period from 2020-2029, and a final goal that a state must meet at the end of that period in 2030 and thereafter.

The final goal is to achieve a 30 percent reduction of greenhouse gases by 2030 from 2005 levels. The EPA proposal lists state-specific carbon intensity rates from its power sector that are necessary to meet a state's final goal. The carbon intensity goal is defined as the total CO2 emissions from fossil fuel-fired power plants in pounds for a given time period divided by a state's total electricity generation in megawatt hours for the same period. States are said to be given flexibility in terms of how to achieve their goal, and what measures to implement. State plans must be submitted by no later than June 30, 2016. The impact these rules will have on the supply and cost of electricity to industrial consumers, especially the energy intensive industries, is being evaluated. We believe there will be increased operating costs, such as increased energy and maintenance costs, but we are currently unable to reliably estimate them.

The EU has established GHG regulations for the EU member states. International negotiations to supplement and eventually replace the 1997 Kyoto Protocol are ongoing. The final round of negotiations will take place in 2015 in Paris, France.

The EPA has classified GHGs, such as CO2, as harmful gases. Under this premise, it has implemented a GHG emission monitoring and reporting requirement for all facilities emitting 25,000 metric tons or more per year of CO2, methane and nitrous oxide in CO2 equivalent quantities. In accordance with EPA GHG emissions reporting requirements, reports for the year 2013 were completed and submitted for all required facilities by the March 31, 2014 deadline. Consistent with prior year's reporting, fourteen U. S. Steel facilities submitted reports including Gary Works, East Chicago Tin, Midwest Plant, Clairton Plant, Edgar Thomson Plant, Irvin Plant, Fairless Plant, Fairfield Sheet, Fairfield Tubular, Granite City Works, Great Lakes Works, Lorain Tubular, Minntac and Keetac. The Texas Operations is the only significant operation not required to report because its emissions were well below the 25,000 ton reporting threshold.

New requirements were adopted in 2011 related to monitoring and reporting of GHG emissions for vacuum degassing (decarburization), and methane emissions from on-site landfills. Facilities for which GHG emissions from decarburization were determined and reported included Gary Works, Great Lakes Works, and the Edgar Thomson Plant. Calculation of landfill methane emissions from U. S. Steel facilities were also completed this year. New provisions for incorporating electronic reporting of on-site landfill methane emissions were added in 2012 enabling those subject to the rule to report GHG emissions from on-site landfills starting in 2011.

In 2013, the EPA significantly expanded its reporting requirements to include inputs to the calculations that had previously been deferred. This meant that in addition to the 2012 reports, the 2010 and 2011 reports also had to be -51- -------------------------------------------------------------------------------- re-submitted for many of our facilities. New requirements were also imposed for the monitoring and reporting of GHG emissions from industrial landfills, including reporting specific categories and historical quantities of materials sent to our on-site landfills.

As with previous year's reports, the EPA intends to make this information publicly available from all facilities.

Effective January 1, 2014, the EPA revised the Global Warming Potentials (GWPs) of certain GHGs used in its monitoring and reporting program. The new GWPs agree with the most recent report by the Intergovernmental Panel on Climate Change.

The revisions to the GWPs will change not only the amount of CO2 equivalent emissions reported but also potentially increase the number of facilities that are subject to the rule. As a result, some facilities that were exempted from reporting previously may now meet the 25,000 CO2 equivalent ton threshold and be required to report. U. S. Steel is currently determining what impact if any this would have on our own reporting requirements.

The EC has created an Emissions Trading System (ETS) and starting in 2013, the ETS began to employ centralized allocation, rather than national allocation plans, that are more stringent than the previous requirements. The ETS also includes a cap designed to achieve an overall reduction of GHGs for the ETS sectors of 21% in 2020 compared to 2005 emissions and auctioning as the basic principle for allocating emissions allowances, with some transitional free allocation provided on the basis of benchmarks for manufacturing industries under risk of transferring their production to other countries with lesser constraints on greenhouse gas emissions, or what is more commonly referred to as carbon leakage. Manufacturing of sinter, coke oven products, basic iron and steel, ferro-alloys and cast iron tubes have all been recognized as exposing companies to a significant risk of carbon leakage, but the ETS is still expected to lead to additional costs for steel companies in Europe. The EU has imposed limitations under the ETS for the period 2013-2020 (Phase III) that are more stringent than those in the 2008-2012 period (NAP II), reducing the number of free allowances granted to companies to cover their CO2 emissions.

In September of 2013, the EC issued EU wide legislation further reducing the expected free allocation for Phase III by an average of approximately 12% for the Phase III period. USSK's final allocation for the 2013-2020 period (Phase III) that was approved by the EC in January 2014 is approximately 48 million allowances. Based on 2013 emission intensity levels and projected future production levels and as a result of carryover allowances from the 2008-2012 period (NAP II), we do not currently anticipate the need to purchase credits until 2019, and we currently estimate a shortfall of 14 million allowances for the Phase III period. However, due to a number of variable factors such as the future market value of allowances, future production levels and future emission intensity levels, we cannot reliably estimate the full cost of complying with the ETS regulations at this time.

U. S. Steel entered into transactions to sell and swap a portion of our emissions allowances and recognized a gain of $17 million during the nine months ended September 30, 2014. There were no such similar transactions for the nine months ended September 30, 2013.

Environmental Remediation In the United States, U. S. Steel has been notified that we are a potentially responsible party (PRP) at 18 sites under CERCLA as of September 30, 2014. In addition, there are 7 sites related to U. S. Steel where we have received information requests or other indications that we may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability or make any judgment as to the amount thereof. There are also 36 additional sites related to U. S. Steel where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. At many of these sites, U. S. Steel is one of a number of parties involved, and the total cost of remediation, as well as U. S. Steel's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. U. S. Steel accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution, or as additional remediation obligations arise, charges in excess of those previously accrued may be required. See Note 21 to the Consolidated Financial Statements.

For discussion of relevant environmental items, see "Part II. Other Information-Item 1. Legal Proceedings-Environmental Proceedings." During the first nine months of 2014, U. S. Steel recorded a net decrease of $15 million to our accrual balance for environmental matters for U.S. and international facilities. The total accrual for such liabilities at September 30, 2014 was $218 million. These amounts exclude liabilities related to asset retirement obligations, disclosed in Note 15 to the Consolidated Financial Statements.

-52- -------------------------------------------------------------------------------- U. S. Steel is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the financial statements. However, management believes that U. S. Steel will remain a viable and competitive enterprise even though it is possible these contingencies could be resolved unfavorably.

-53- --------------------------------------------------------------------------------OUTLOOK Our Carnegie Way progress so far has exceeded our expectations in this multi-year journey. We expect to continue to see increasing benefits from our Carnegie Way transformation which focuses on building stockholder value. We expect fourth quarter segment income from operations to decrease compared to the third quarter primarily due to significantly lower results for our Flat-rolled segment. Results for our European and Tubular segments are expected to improve slightly compared to the third quarter.

Fourth quarter results for our Flat-rolled segment are expected to decrease significantly compared to the third quarter but are expected to exceed $100 million. Overall, repairs and maintenance costs are expected to increase by approximately $150 million as compared to the third quarter due primarily to a reline of a blast furnace at Mon Valley Works and planned blast furnace maintenance projects at Granite City and Great Lakes, which will result in lower operating levels. Shipments, which no longer include U. S. Steel Canada, are expected to decline by as much as 10% from the 3.2 million net tons shipped by our U.S. plants in the third quarter and average realized prices are also expected to decrease from the third quarter as a result of weaker spot market conditions and lower shipments to end users around the holiday season.

We expect fourth quarter results for our European segment to increase slightly compared to the third quarter primarily due to higher shipments and lower facility repairs and maintenance costs as scheduled maintenance was completed in the third quarter. A shift in product mix is expected to result in lower average realized euro-based prices.

Fourth quarter results for our Tubular segment are expected to increase slightly compared to the third quarter. We expect average realized prices to increase compared to the third quarter due to continued improved pricing, including the positive impact of the OCTG case decision, and an improved mix as a result of a reduction in our exposure to welded line pipe. Shipments are projected to decrease slightly due to the indefinite idling of the McKeesport and Bellville facilities.

INTERNATIONAL TRADE U. S. Steel remains active in its efforts to ensure that competitors are not engaging in unfair trade practices. In recent years, a significant number of steel imports have been found to violate United States or Canadian trade laws.

Under these laws, antidumping duties (AD) can be imposed against dumped products, which are products sold at a price that is less than fair value.

Countervailing duties (CVD) can be imposed against products that have benefited from foreign government assistance for the production, manufacture, or exportation of the product. For many years, U. S. Steel, other producers, customers and the United Steelworkers have sought the imposition of duties and in many cases have been successful.

As in the past, U. S. Steel continues to monitor unfairly traded imports and is prepared to seek appropriate remedies against such importing countries. On July 2, 2013, U. S. Steel and eight other domestic producers filed AD and CVD petitions against imports of oil country tubular goods (OCTG) from India and Turkey, along with AD petitions against imports of OCTG from the Philippines, Saudi Arabia, South Korea, Taiwan, Thailand, Ukraine, and Vietnam. These petitions allege that unfairly-traded imports from the subject countries are both a cause and a threat of material injury to United States producers of OCTG.

On July 11, 2014, the U.S. Department of Commerce (DOC) announced its final determinations in both the CVD investigations of OCTG from India and Turkey and the AD investigations of India, South Korea, Philippines, Saudi Arabia, Taiwan, Thailand, Turkey, Ukraine and Vietnam. The DOC made an affirmative determination that exporters and producers in all nine countries, including South Korea, were importing OCTG into the United States at less than fair value. The DOC calculated AD margins for all nine countries and CVD margins against India and Turkey. However, on August 11, 2014, the DOC entered an amended final determination in the Saudi Arabia investigation and revised the margin for Saudi Arabia to be less than 2% ad valorem. As a result of the final and amended final determinations, the DOC will "suspend liquidation" and require cash deposits of AD and/or CVD duties for imports of OCTG from those producers and exporters with dumping margins and/or subsidy rates equal to or greater than 2% ad valorem. On August 22, 2014, the U.S. International Trade Commission (ITC) voted that imports from India, South Korea, Taiwan, Turkey, Ukraine, and Vietnam caused injury to the domestic industry, but did not find injury with regards to imports from the Phillipines or Thailand. On September 10, 2014, the DOC issued AD orders against India, South Korea, Taiwan, Turkey, Ukraine, and Vietnam and CVD orders against India and Turkey. While the duties mentioned above cover 90% of the unfairly traded imports entering the U.S. markets in 2013, U. S. Steel will continue its efforts to ensure that all OCTG imports are fairly traded. As such, U. S. Steel filed an appeal to the Court of International Trade regarding the DOC's de minimis determination on Saudi Arabian OCTG imports, as well -54- -------------------------------------------------------------------------------- as appeals to the ITC's negligibility finding for Thailand and the Phillippines.

Additionally, Korea, India, Vietnam, and Turkey filed appeals to the Court of International Trade in the OCTG case. While U. S. Steel strongly believes that all of the imports in question were traded unfairly, and that relief is fully justified under United States law, the outcome of the appeals remains uncertain.

AD and CVD orders are generally subject to "sunset" reviews every five years and U. S. Steel actively participates in such review proceedings. In May 2014, the United States government completed the five-year sunset review of the AD and CVD orders on welded line pipe from China. The United States government decided to keep the welded line pipe from China AD and CVD orders in place. In January 2014, the United States government completed five-year sunset reviews of: (i) AD orders on hot-rolled steel from China, Taiwan, and Ukraine; and (ii) AD and CVD orders on hot-rolled steel from India, Indonesia and Thailand. In each of those reviews, the United States government decided to keep the orders in place.

U. S. Steel continues to actively pursue the termination of unfair suspension agreements that allow foreign nations to import steel at less than fair value.

On October 17, 2014, the DOC notified the Russian Economy Ministry that the United States shall terminate the 1999 Hot-rolled Steel Suspension Agreement in 60 days. An estimated 900,000 tons of Russian imported hot rolled steel at average unit values significantly below steel produced in the United States is expected to flow into the United States market this year. On December 16, 2014, duties of 73.59% for Severstal and 184.56% for all other Russian producers and exporters will take effect.

Steel sheet imports to the United States accounted for an estimated 15 percent of the steel sheet market in the United States in 2013, 14 percent in 2012 and 13 percent in 2011. Increases in future levels of imported steel could reduce future market prices and demand levels for steel produced in our North American facilities.

Imports of flat-rolled steel to Canada accounted for an estimated 35 percent of the Canadian market for flat-rolled steel products in 2013, 34 percent in 2012 and 35 percent in 2011.

Total imports of flat-rolled carbon steel products (excluding quarto plates and wide flats) to the 28 countries currently comprising the EU were 14 percent of the EU market in 2013, 13 percent in 2012 and 17 percent in 2011. Increases in future levels of imported steel could reduce market prices and demand levels for steel produced by USSE.

Energy related tubular products imported into the United States accounted for an estimated 49 percent of the U.S. domestic market in 2013, 52 percent in 2012 and 47 percent in 2011.

U. S. Steel expects to continue to experience competition from imports and will continue to closely monitor imports of products in which U. S. Steel has an interest. Additional complaints may be filed if unfairly-traded imports adversely impact, or threaten to adversely impact, U. S. Steel's financial results.

Demand for flat-rolled products is influenced by a wide variety of factors, including but not limited to macro-economic drivers, the supply-demand balance, inventories, imports and exports, currency fluctuations, and the demand from flat-rolled consuming markets. The largest drivers of North American consumption have historically been the automotive and construction markets, which make up at least 50 percent of total sheet consumption. Other sheet consuming industries include appliance, converter, container, tin, energy, electrical equipment, agricultural, domestic and commercial equipment and industrial machinery.

USSE conducts business primarily in Europe. Like our domestic operations, USSE is affected by the cyclical nature of demand for steel products and the sensitivity of that demand to worldwide general economic conditions. Sovereign debt issues and the resulting economic uncertainties also adversely affect markets in the EU. USSE is subject to market conditions in those areas, which are influenced by many of the same factors that affect United States markets, as well as matters specific to international markets such as quotas, tariffs and other protectionist measures.

Demand for energy related tubular products depends on several factors, most notably the number of oil and natural gas wells being drilled, completed and re-worked, the depth and drilling conditions of these wells and the drilling techniques utilized. The level of these activities depends primarily on the demand for natural gas and oil and expectations about future prices for these commodities. Demand for our tubular products is also affected by the continuing development of shale oil and gas resources, the level of production by domestic manufacturers, inventories maintained by manufacturers, distributors, end users and by the level of new capacity and imports in the markets U. S. Steel serves.

-55- -------------------------------------------------------------------------------- NEW ACCOUNTING STANDARDS See Note 2 to the Consolidated Financial Statements in Part I Item 1 of this Form 10-Q.

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