1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ------------ to ------------
USX CORPORATION
- --------------------------------------------------------------------------------
----
(Exact name of registrant as specified in its charter)
Delaware 1-5153 25-0996816
--------------- ------------ -------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
600 Grant Street, Pittsburgh, PA 15219-4776
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(412) 433-1121
------------------------------
(Registrant's telephone number,
including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes..X..No.....
Common stock outstanding at July 31, 1996 follows:
USX-Marathon Group - 287,479,053 shares
USX-U. S. Steel Group - 84,394,574 shares
USX-Delhi Group - 9,448,269 shares
2
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED JUNE 30, 1996
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INDEX Page
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PART I - FINANCIAL INFORMATION
A. Consolidated Corporation
Item 1. Financial Statements:
Consolidated Statement of Operations 4
Consolidated Balance Sheet 6
Consolidated Statement of Cash Flows 8
Selected Notes to Consolidated
Financial Statements 9
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends and Ratio of
Earnings to Fixed Charges 14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 15
Financial Statistics 20
B. Marathon Group
Item 1. Financial Statements:
Marathon Group Statement of Operations 21
Marathon Group Balance Sheet 22
Marathon Group Statement of Cash Flows 23
Selected Notes to Financial Statements 24
Item 2. Marathon Group Management's Discussion and
Analysis of Financial Condition and
Results of Operations 28
Supplemental Statistics 34
3
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED JUNE 30, 1996
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INDEX Page
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PART I - FINANCIAL INFORMATION (Continued)
C. U. S. Steel Group
Item 1. Financial Statements:
U. S. Steel Group Statement of Operations 35
U. S. Steel Group Balance Sheet 36
U. S. Steel Group Statement of Cash Flows 37
Selected Notes to Financial Statements 38
Item 2. U. S. Steel Group Management's Discussion
and Analysis of Financial Condition
and Results of Operations 43
Supplemental Statistics 48
D. Delhi Group
Item 1. Financial Statements:
Delhi Group Statement of Operations 49
Delhi Group Balance Sheet 50
Delhi Group Statement of Cash Flows 51
Selected Notes to Financial Statements 52
Item 2. Delhi Group Management's Discussion and
Analysis of Financial Condition
and Results of Operations 56
Supplemental Statistics 60
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 61
Item 5. Other Information 62
Item 6. Exhibits and Reports on Form 8-K 63
4
Part I - Financial Information
A. Consolidated Corporation
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
------------------------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1996 1995* 1996 1995*
- --------------------------------------------------------------------------------
REVENUES $5,841 $5,285 $11,310 $10,327
OPERATING COSTS:
Cost of sales (excludes items shown below) 4,396 3,736 8,468 7,394
Inventory market valuation charges (credits) 72 2 (83) (86)
Selling, general and administrative expenses 50 53 94 95
Depreciation, depletion and amortization 255 300 522 590
Taxes other than income taxes 806 783 1,548 1,539
Exploration expenses 23 27 56 53
Restructuring credits - (6) - (6)
------ ------ ------ ------
Total operating costs 5,602 4,895 10,605 9,579
------ ------ ------ ------
OPERATING INCOME 239 390 705 748
Gain on affiliate stock offering 53 - 53 -
Other income 15 30 49 50
Interest and other financial income 7 13 12 17
Interest and other financial costs (111) (132) (231) (265)
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 203 301 588 550
Less provision for estimated income taxes 49 111 169 206
------ ------ ------ ------
NET INCOME 154 190 419 344
Dividends on preferred stock (5) (8) (11) (16)
------ ------ ------ ------
NET INCOME APPLICABLE TO COMMON STOCKS $149 $182 $408 $328
====== ====== ====== ======
<FN>
*Certain amounts have been reclassified to conform to 1996 classifications.
Selected notes to financial statements appear on pages 9-13.
5
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Continued) (Unaudited)
INCOME PER COMMON SHARE
------------------------------------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions, except per share amounts) 1996 1995 1996 1995
- --------------------------------------------------------------------------------
APPLICABLE TO MARATHON STOCK:
Net income $124 $107 $340 $182
- Per share - primary .43 .37 1.18 .63
- fully diluted .43 .37 1.17 .63
Dividends paid per share .17 .17 .34 .34
Weighted average shares, in thousands
- Primary 287,604 287,246 287,532 287,217
- Fully diluted 293,582 293,504 296,565 287,225
APPLICABLE TO STEEL STOCK:
Net income $27 $74 $67 $142
- Per share - primary .32 .99 .80 1.87
- fully diluted .32 .95 .80 1.80
Dividends paid per share .25 .25 .50 .50
Weighted average shares, in thousands
- Primary 83,653 76,562 83,425 76,373
- Fully diluted 83,653 87,484 84,619 87,293
APPLICABLE TO OUTSTANDING DELHI STOCK:
Net income (loss) $(1) $1 $1 $4
- Per share - primary and fully diluted (.12) .12 .13 .42
Dividends paid per share .05 .05 .10 .10
Weighted average shares, in thousands
- Primary and fully diluted 9,450 9,438 9,449 9,438
<FN>
Selected notes to financial statements appear on pages 9-13.
6
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Unaudited)
----------------------------------------
ASSETS
June 30 December 31
(Dollars in millions) 1996 1995
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $100 $131
Receivables, less allowance for doubtful
accounts of $20 and $22 1,088 1,203
Inventories 1,852 1,764
Deferred income tax benefits 57 76
Other current assets 59 66
------ ------
Total current assets 3,156 3,240
Long-term receivables and other investments,
less reserves of $25 and $23 748 836
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$15,412 and $15,233 10,367 10,535
Prepaid pensions 1,922 1,820
Other noncurrent assets 302 312
------ ------
Total assets $16,495 $16,743
====== ======
<FN>
Selected notes to financial statements appear on pages 9-13.
7
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Continued) (Unaudited)
--------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30 December 31
(Dollars in millions) 1996 1995
- --------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Notes payable $217 $40
Accounts payable 1,936 2,157
Payroll and benefits payable 477 473
Accrued taxes 254 263
Accrued interest 119 122
Long-term debt due within one year 283 465
------ ------
Total current liabilities 3,286 3,520
Long-term debt, less unamortized discount 4,064 4,472
Long-term deferred income taxes 999 898
Employee benefits 2,779 2,772
Deferred credits and other liabilities 486 503
Preferred stock of subsidiary 250 250
------ ------
Total liabilities 11,864 12,415
------ ------
STOCKHOLDERS' EQUITY
Preferred stock -
6.50% Cumulative Convertible issued - 6,900,000 shares
($345 liquidation preference) 7 7
Common stocks:
Marathon Stock issued - 287,478,771 shares and
287,398,342 shares 288 287
Steel Stock issued - 84,098,600 shares and
83,042,305 shares 84 83
Delhi Stock issued - 9,448,269 shares and
9,446,769 shares 9 9
Additional paid-in capital 3,975 4,094
Retained earnings (deficit) 303 (116)
Other equity adjustments (35) (36)
------ ------
Total stockholders' equity 4,631 4,328
------ ------
Total liabilities and stockholders' equity $16,495 $16,743
====== ======
<FN>
Selected notes to financial statements appear on pages 9-13.
8
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------------------
Six Months Ended
June 30
(Dollars in millions) 1996 1995
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $419 $344
Adjustments to reconcile to net cash provided
from operating activities:
Depreciation, depletion and amortization 522 590
Exploratory dry well costs 23 17
Inventory market valuation credits (83) (86)
Pensions (90) (78)
Postretirement benefits other than pensions 15 (8)
Deferred income taxes 120 78
Gain on disposal of assets (31) (11)
Gain on affiliate stock offering (53) -
Restructuring credits - (6)
Changes in:
Current receivables - sold - (10)
- operating turnover 31 5
Inventories (5) (29)
Current accounts payable and accrued expenses (197) (58)
All other items - net (10) 20
------ ------
Net cash provided from operating activities 661 768
------ ------
INVESTING ACTIVITIES:
Capital expenditures (450) (413)
Disposal of assets 258 68
All other items - net (5) 13
------ ------
Net cash used in investing activities (197) (332)
------ ------
FINANCING ACTIVITIES:
Commercial paper and revolving credit arrangements-net (3) (238)
Other debt - repayments (376) (18)
Common stock issued 34 22
Dividends paid (150) (149)
------ ------
Net cash used in financing activities (495) (383)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (31) 53
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 131 48
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $100 $101
===== =====
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(240) $(237)
Income taxes paid (61) (92)
<FN>
Selected notes to financial statements appear on pages 9-13.
9
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited but,
in the opinion of management, reflects all adjustments necessary for a fair
presentation of the results for the periods covered. All such adjustments
are of a normal recurring nature unless disclosed otherwise. These
financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Additional information is contained in the USX Annual Report
on Form 10-K for the year ended December 31, 1995.
In 1996, USX will adopt Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123), which
establishes a fair value based method of accounting for employee stock-
based compensation plans. The Standard permits companies to continue to
apply the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, provided certain pro forma
disclosures are made. USX intends to comply with SFAS No. 123 by
disclosure only in its 1996 annual financial statements.
2. The method of calculating net income (loss) per share for the Marathon
Stock, Steel Stock and Delhi Stock reflects the USX Board of Directors'
intent that the separately reported earnings and surplus of the Marathon
Group, the U. S. Steel Group and the Delhi Group, as determined consistent
with the USX Certificate of Incorporation, are available for payment of
dividends on the respective classes of stock, although legally available
funds and liquidation preferences of these classes of stock do not
necessarily correspond with these amounts. The financial statements of the
Marathon Group, the U. S. Steel Group and the Delhi Group, taken together,
include all accounts which comprise the corresponding consolidated
financial statements of USX.
Primary net income (loss) per share is calculated by adjusting net income
for dividend requirements of preferred stock and, in the case of Delhi
Stock, for the income applicable to the Retained Interest prior to June 15,
1995, the date USX eliminated the Marathon Group's Retained Interest in the
Delhi Group; and is based on the weighted average number of common shares
outstanding plus common stock equivalents, provided they are not
antidilutive. Common stock equivalents result from assumed exercise of
stock options, where applicable.
Fully diluted net income (loss) 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.
3. The items below are included in both revenues and operating costs,
resulting in no effect on income.
(In millions)
-------------------------------
Second Qtr. Six Months
Ended Ended
June 30 June 30
1996 1995 1996 1995
---- ---- ---- ----
Consumer excise taxes on petroleum
products and merchandise $700 $681 $1,333 $1,328
Matching crude oil and refined product
buy/sell transactions settled in cash 723 491 1,322 1,052
10
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. Operating income includes net periodic pension credits of $78 million and
$72 million in the first six months of 1996 and 1995, respectively, ($41
million and $36 million in the second quarter of 1996 and 1995,
respectively). These pension credits are primarily noncash and for the
most part are included in selling, general and administrative expenses.
The expected long-term rate of return on plan assets, which is reflected in
the calculation of net periodic pension credits, is 10% for both 1996 and
1995.
5. In 1994, restructuring charges totaling $40 million were reported for the
write-down of assets to estimated net realizable value related to the
planned disposition of certain nonstrategic gas gathering and processing
assets and other investments. In the second quarter of 1995, disposition
of these assets was completed at higher than anticipated sales proceeds,
resulting in restructuring credits of $11 million ($6 million included in
operating income and $5 million included in other income).
6. On May 2, 1996, an aggregate of 6.9 million shares of RMI Titanium Company
(RMI) common stock was sold in a public offering at a price of $18.50 per
share and total net proceeds of $121 million. Included in the offering
were 2.3 million shares sold by USX for net proceeds of $40 million. USX
recognized a total pretax gain in the second quarter of 1996 of $53
million, of which $34 million was attributable to the shares sold by USX
and $19 million was attributable to the increase in value of USX's
investment as a result of the shares sold by RMI. The income tax effect
related to the total gain was $19 million. As a result of this
transaction, USX's ownership in RMI decreased from approximately 50% to
27%. USX continues to account for its investment in RMI under the equity
method of accounting.
7. The provision for estimated income taxes for the periods reported is based
on tax rates and amounts which recognize management's best estimate of
current and deferred tax assets and liabilities.
8. Inventories are carried at lower of cost or market. Cost of inventories is
determined primarily under the last-in, first-out (LIFO) method.
(In millions)
----------------------
June 30 December 31
1996 1995
-------- -----------
Raw materials $585 $609
Semi-finished products 308 300
Finished products 933 901
Supplies and sundry items 152 163
------ ------
Total (at cost) 1,978 1,973
Less inventory market valuation reserve 126 209
------ ------
Net inventory carrying value $1,852 $1,764
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11
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
8. (Continued)
The inventory market valuation reserve reflects the extent that the
recorded cost 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.
9. At June 30, 1996, USX had no borrowings against its $2,325 million long-
term revolving credit agreement. At June 30, 1996, $14 million of
commercial paper is supported by the $2,325 million in unused and available
credit and, accordingly, is classified as long-term debt.
USX had $60 million of borrowings at June 30, 1996, against its short-term
lines of credit totaling $200 million, which require maintenance of
compensating balances of 3%. In addition, USX had other outstanding short-
term borrowings of $157 million.
In the event of a change in control of USX, debt obligations totaling
$3,402 million at June 30, 1996, may be declared immediately due and
payable.
10. USX has agreements (the programs) to sell an undivided interest in certain
accounts receivable subject to limited recourse. Payments are collected
from the sold accounts receivable; the collections are reinvested in new
accounts receivable for the buyers; and a yield, based on defined short-
term market rates, is transferred to the buyers. At June 30, 1996, the
amount sold under the programs that had not been collected was $740
million, which will be forwarded to the buyers at the end of the
agreements, or in the event of earlier contract termination. If USX does
not have a sufficient quantity of eligible accounts receivable to reinvest
in for the buyers, the size of the programs will be reduced accordingly.
The buyers have rights to a pool of receivables that must be maintained at
a level of 110% to 115% of the programs' size. In the event of a change in
control of USX, as defined in one of the agreements, USX may be required to
forward to the buyers, payments collected on sold accounts receivable of
$350 million.
Prior to 1993, USX Credit, a division of USX, sold certain of its loans
receivable subject to limited recourse. USX Credit continues to collect
payments from the loans and transfer to the buyers principal collected plus
yield based on defined short-term market rates. At June 30, 1996, the
balance of sold loans receivable subject to recourse was $59 million. USX
Credit is not actively seeking new loans at this time. In the event of a
change in control of USX, as defined in the agreement, USX may be required
to provide cash collateral in the amount of the uncollected loans
receivable to assure compliance with the limited recourse provisions.
11. USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments involving a variety of
matters, including laws and regulations relating to the environment.
Certain of these matters are discussed below. The ultimate resolution of
these contingencies could, individually or in the aggregate, be material to
the consolidated financial statements. However, management believes that
USX will remain a viable and competitive enterprise even though it is
possible that these contingencies could be resolved unfavorably. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
12
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
11. (Continued)
In 1990, USX and two former officials of the United Steelworkers of America
(USWA) were convicted of violating Section 302 of the Taft-Hartley Act by
reason of USX's grant of retroactive leaves of absence to union officials,
which qualified them to receive pensions from USX. In addition, USX was
convicted of mail fraud in the same proceedings. The U.S. District Court
imposed a $4.1 million fine on USX and ordered USX to make restitution to
the United States Steel and Carnegie Pension Fund of approximately
$300,000. The verdict was affirmed on appeal and, in 1995, the fine and
restitution were paid. In a separate proceeding, a former executive
officer of USX pleaded guilty to a related misdemeanor. A related civil
class action was commenced against USX and the USWA in 1989 (Cox, et al. v.
USX, et al.) and was dismissed by the trial court by entry of summary
judgment in favor of USX and USWA in 1991. The summary judgment was
reversed by the U.S. Court of Appeals for the 11th Circuit in 1994, and the
matter reinstated and returned to the trial court. In that civil class
action, the plaintiffs' complaint asserts five causes of action arising out
of conduct that was the subject of USX's 1990 criminal conviction and that
allegedly relates to the negotiation of a 1983 local labor agreement, which
resulted in the reopening of USX's Fairfield Works in 1984. The causes of
action include claims asserted under the Racketeer Influenced and Corrupt
Organization Act (RICO) and the Employee Retirement Income Security Act
(ERISA), specifically alleging that USX granted leaves of absence and
pensions to union officials with intent to influence their approval,
implementation and interpretation of the 1983 Fairfield Agreement.
Plaintiffs' claims seek damages in excess of $276 million, which may be
subject to trebling. USX and USWA have denied any liability to the
plaintiffs and are vigorously defending these claims. A jury trial is
currently scheduled to begin on September 30, 1996, in the U.S. District
Court for the Northern District of Alabama.
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 June 30, 1996, and December 31, 1995,
accrued liabilities for remediation totaled $146 million and $153 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 $23 million at June 30,
1996, and $22 million at December 31, 1995.
For a number of years, USX has made substantial capital expenditures to
bring existing facilities into compliance with various laws relating to the
environment. In the first six months of 1996 and for the years 1995 and
1994, such capital expenditures totaled $59 million, $111 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.
13
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
11. (Continued)
At June 30, 1996, and December 31, 1995, accrued liabilities for platform
abandonment and dismantlement totaled $132 million and $128 million,
respectively.
Guarantees by USX of the liabilities of affiliated entities totaled
$46 million at June 30, 1996. In the event that any defaults of guaranteed
liabilities occur, USX has access to its interest in the assets of most of
the affiliates to reduce losses resulting from these guarantees. As of
June 30, 1996, the largest guarantee for a single affiliate was $21
million.
At June 30, 1996, USX's pro rata share of obligations of LOOP INC. and
various pipeline affiliates secured by throughput and deficiency agreements
totaled $186 million. Under the agreements, USX is required to advance
funds if the affiliates are unable to service debt. Any such advances are
prepayments of future transportation charges.
Contract commitments for capital expenditures for property, plant and
equipment at June 30, 1996, totaled $416 million compared with $299 million
at December 31, 1995.
14
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS - (Unaudited)
----------------------------------------------------------
Six Months Ended
June 30 Year Ended December 31
- -------------------- -------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
3.15 2.69 1.50 1.92 (a) (a) (a)
==== ==== ==== ==== ==== ==== ====
<FN>
(a) Earnings did not cover combined fixed charges and preferred stock
dividends by $325 million for 1993, by $211 million for 1992 and by $696
million for 1991.
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS - (Unaudited)
-------------------------------------------------
Six Months Ended
June 30 Year Ended December 31
- --------------------- -------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
3.37 2.92 1.63 2.08 (a) (a) (a)
==== ==== ==== ==== ==== ==== ====
<FN>
(a) Earnings did not cover fixed charges by $281 million for 1993, by $197
million for 1992 and by $681 million for 1991.
15
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The following discussion should be read in conjunction with the second
quarter 1996 USX consolidated financial statements and selected notes. For
income per common share amounts applicable to each of USX's three classes of
common stock (Marathon Stock, Steel Stock and Delhi Stock), see Consolidated
Statement of Operations - Income per Common Share. For Group results, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Marathon Group, the U. S. Steel Group and the Delhi Group.
For operating statistics, see Supplemental Statistics following Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
respective Groups.
Results of Operations
- ---------------------
Revenues increased by $556 million, or 11%, in the second quarter of 1996
as compared with the second quarter of 1995. The improvement reflected
increases of 12% for the Marathon Group (excluding matching buy/sell
transactions and consumer excise taxes which are included in both revenues and
operating costs, resulting in no effect on operating income) due mainly to
higher average refined product, worldwide liquid hydrocarbon and domestic
natural gas prices, and 52% for the Delhi Group due mainly to higher natural gas
prices and increased trading volumes, partially offset by a decline of 3% for
the U. S. Steel Group.
Revenues increased by $983 million, or 10%, in the first six months of 1996
as compared with the first six months of 1995. The improvement reflected
increases of 12% for the Marathon Group (excluding matching buy/sell
transactions and consumer excise taxes) due mainly to higher average refined
product, worldwide liquid hydrocarbon and domestic natural gas prices, and 75%
for the Delhi Group due mainly to higher natural gas prices and increased
trading volumes. These increases were partially offset by a decline of 1% for
the U. S. Steel Group.
Operating income declined by $151 million, or 39%, in the second quarter of
1996 as compared with the second quarter of 1995. Operating income in the
second quarter of 1996 included pretax charges of $39 million for repair costs
on the Gary (Ind.) Works No. 13 blast furnace (which was damaged during a hearth
break-out on April 2, 1996), unrelated legal accruals of $20 million and an
unfavorable effect of $72 million resulting from an increase in the inventory
market valuation reserve. This reserve reflects the extent to which the
recorded costs of crude oil and refined product inventories exceed net
realizable value. Operating income in the second quarter of 1995 included
charges of $29 million related to the Pickering v. USX litigation and $27
million for repair of the Gary Works No. 8 blast furnace (which was damaged by
an explosion on April 5, 1995) and an unfavorable effect of $2 million resulting
from an increase in the inventory market valuation reserve. These factors were
partially offset by a favorable adjustment of $6 million related to completion
of the planned disposition of certain nonstrategic gas gathering and processing
assets. Excluding the effects of these items, operating income decreased by
$72 million, or 16%, in the second quarter of 1996 as compared with the second
quarter of 1995, due primarily to a decline of $129 million for the U. S. Steel
Group, partially offset by an increase of $53 million for the Marathon Group.
The decline for the U. S. Steel Group mainly reflected lower steel prices, and
cost inefficiencies and reduced shipments related to the No. 13 blast furnace
outage, partially offset by an improved product mix. The increase for the
Marathon Group primarily reflected increases in worldwide liquid hydrocarbon and
domestic natural gas prices, partially offset by lower refined product margins.
16
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Operating income decreased by $43 million in the first six months of 1996
as compared with the first six months of 1995. Operating income in the first
six months of 1996 included a favorable effect of $83 million resulting from a
decrease in the inventory market valuation reserve, partially offset by expenses
of $39 million for repair of the Gary Works No. 13 blast furnace and unrelated
legal accruals of $20 million. Operating income in the first six months of 1995
included a favorable effect of $86 million resulting from a decrease in the
inventory market valuation reserve and a favorable adjustment of $6 million
related to completion of the planned disposition of certain nonstrategic gas
gathering and processing assets, partially offset by charges of $29 million
related to the Pickering v. USX litigation and $27 million for repair of the
Gary Works No. 8 blast furnace. Excluding the effects of these items, operating
income decreased by $31 million, or 4%, in the first six months of 1996 as
compared with the first six months of 1995, due primarily to a decline of $185
million for the U. S. Steel Group, partially offset by an increase of $151
million for the Marathon Group.
Gain on affiliate stock offering totaled $53 million for the second quarter
and first six months of 1996. For further details, see Note 6 to the
Consolidated Financial Statements.
Other income was $49 million in the first six months of 1996, compared with
$50 million in the first six months of 1995. Other income in the first six
months of 1996 included gains of $21 million on disposal of assets, mainly
related to the sale of the Marathon Group's equity interest in a domestic
pipeline company. Excluding these gains, other income declined by $22 million,
primarily due to lower income from affiliates.
Net interest and other financial costs decreased by $29 million in the
first six months of 1996 as compared with the first six months of 1995,
primarily due to lower average debt levels.
Net income decreased by $36 million, or 19%, in the second quarter of 1996
as compared with the second quarter of 1995, and increased by $75 million, or
22%, in the first six months of 1996 as compared with the first six months of
1995.
Outlook
- -------
The Gary Works No. 13 blast furnace, which represents about one-half of
Gary Works iron producing capacity and roughly one-fourth of U.S. Steel's iron
capacity, was damaged April 2 in a hearth break-out. In addition to direct
repair costs, operating results were adversely affected by production
inefficiencies at Gary (as well as other U. S. Steel plants), reduced shipments
and higher costs for purchased iron and semifinished steel. The total effect of
the No. 13 blast furnace outage on operating income in the second quarter and
first six months is estimated to be more than $100 million. The No. 13 blast
furnace has been operating since May 30 but some lingering impacts of the outage
will continue beyond the second quarter. USX maintains physical damage and
business interruption insurance coverage for events of this nature, subject to a
$50 million deductible for recoverable items. However, an estimate of the
amount or timing of potential recoveries cannot be made at this time.
See Environmental Matters, Contingencies and Commitments, below, for a
discussion of matters relating to litigation (particularly Cox v. USX).
17
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Dividends to Stockholders
- -------------------------
On July 30, 1996, the USX Board of Directors (the "Board") declared
dividends of 17 cents per share on Marathon Stock, 25 cents per share on Steel
Stock and five cents per share on Delhi Stock, all payable September 10, 1996,
to stockholders of record at the close of business on August 21, 1996.
The Board also declared a dividend of $0.8125 per share on USX
Corporation's 6.50% Cumulative Convertible Preferred Stock, payable September
30, 1996, to stockholders of record at the close of business on September 3,
1996.
Cash Flows
- ----------
At June 30, 1996, cash and cash equivalents totaled $100 million, compared
with $131 million at December 31, 1995.
Net cash provided from operating activities totaled $661 million in the
first six months of 1996, compared with $768 million in the first six months of
1995. The 1996 period reflected payments of $39 million related to certain
state tax issues and $28 million for final payment of the Pickering v. USX
litigation. Excluding the effects of these items, net cash provided from
operating activities decreased by $40 million mainly due to unfavorable working
capital changes.
In July 1996, USX made a payment of $59 million to the Internal Revenue
Service("IRS") for certain agreed and unagreed adjustments relating to the tax
year 1990. USX believes that it has made adequate provision for income taxes
and related interest which may become payable for all years not settled with the
IRS.
Cash from the disposal of assets was $258 million in the first six months
of 1996, compared with $68 million in the first six months of 1995. The 1996
proceeds primarily reflected the sale of the U. S. Steel Group's investment in
National- Oilwell (an oil field service joint venture); the sale of shares of
RMI Common Stock; sales of the Marathon Group's interests in oil and gas
production properties in Indonesia and Tunisia and the sale of the Marathon
Group's equity interest in a domestic pipeline company. The 1995 proceeds
primarily reflected property sales.
Capital expenditures for property, plant and equipment in the first six
months of 1996 were $450 million, compared with $413 million in the first six
months of 1995. For further details, see USX Corporation - Financial
Statistics, following Management's Discussion and Analysis of Financial
Condition and Results of Operations.
For the year 1996, capital expenditures are expected to total approximately
$1,160 million. For details, see discussion of Capital Expenditures for the
Marathon Group, the U. S. Steel Group and the Delhi Group. Contract commitments
for capital expenditures were $416 million at June 30, 1996, compared with $299
million at December 31, 1995.
At June 30, 1996, USX's total long-term debt, preferred stock of subsidiary
and notes payable, was $4,814 million, down $413 million from December 31, 1995,
primarily due to the redemption of $161 million of Marathon 9-3/4% Guaranteed
Notes due 1999, retirement of $174 million of Swiss Franc Bonds due 1996 and
related
18
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
obligations, and decreases of $119 million in commercial paper. At June 30,
1996, USX had no outstanding borrowings against its long-term revolving credit
facility, leaving $2,325 million of availability. In August 1996, USX completed
a transaction amending this credit facility to extend the maturity by two years
(from August 18, 1999 to August 18, 2001), reduce pricing to current market
levels, and increase the size of the facility by $25 million to $2,350 million.
At June 30, 1996, USX had $60 million of outstanding borrowings against its
short-term lines of credit totaling $200 million which require maintenance of
compensating balances of 3%, and no outstanding borrowings against its short-
term credit agreements of $175 million which require commitment fees. USX had
other outstanding short-term borrowings of $157 million of uncommitted credit
lines.
Liquidity
- ---------
USX management believes that its short-term and long-term liquidity is
adequate to satisfy its obligations as of June 30, 1996, and to complete
currently authorized capital spending programs. Future requirements for USX's
business needs, including the funding of capital expenditures, debt maturities
for the balance of 1996 and years 1997 and 1998, and any amounts that may
ultimately be paid in connection with contingencies (which are discussed in Note
11 to the Consolidated Financial Statements), are expected to be financed by a
combination of internally generated funds, proceeds from the sale of stock,
borrowings and other external financing sources.
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
USX has incurred and will continue to incur substantial capital, operating
and maintenance, and remediation expenditures as a result of environmental laws
and regulations. To the extent these expenditures, as with all costs, are not
ultimately reflected in the prices of USX's products and services, operating
results will be adversely affected. USX believes that domestic competitors of
the U. S. Steel Group and substantially all the competitors of the Marathon
Group and the Delhi Group are subject to similar environmental laws and
regulations. However, the specific impact on each competitor may vary depending
on a number of factors, including the age and location of its operating
facilities, marketing areas, production processes and the specific products and
services it provides.
USX has been notified that it is a potentially responsible party ("PRP") at
41 waste sites under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") as of June 30, 1996. In addition, there are 33 sites
where USX has received information requests or other indications that USX may be
a PRP under CERCLA but where sufficient information is not presently available
to confirm the existence of liability. There are also 103 additional sites,
excluding retail marketing outlets, where remediation is being sought under
other environmental statutes, both federal and state. At many of these sites,
USX is one of a number of parties involved and the total cost of remediation, as
well as USX's share thereof, is frequently dependent upon the outcome of
investigations and remedial studies. USX accrues for environmental remediation
activities when the responsibility to remediate is probable and the amount of
associated costs is reasonably determinable. As environmental remediation
matters proceed toward ultimate resolution or as additional remediation
obligations arise, charges in excess of those previously accrued may be
required. See Note 11 to the Consolidated Financial Statements.
19
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments involving a variety of matters,
including laws and regulations relating to the environment, certain of which are
discussed in Note 11 to the Consolidated Financial Statements. Included among
these actions is a jury trial in a civil class action (Cox, et al. v. USX, et
al.) related to the Fairfield Agreement Litigation which is currently scheduled
to begin on September 30, 1996, in the U.S. District Court for the Northern
District of Alabama. Plaintiffs' claims seek damages in excess of $276 million,
which may be subject to trebling.
The ultimate resolution of these contingencies could, individually or in
the aggregate, be material to the consolidated financial statements. However,
management believes that USX will remain a viable and competitive enterprise
even though it is possible that these contingencies could be resolved
unfavorably. See discussion of Cash Flows and Liquidity herein.
20
USX CORPORATION
FINANCIAL STATISTICS
--------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
-------------- --------------
(Dollars in millions) 1996 1995 1996 1995
- --------------------------------------------------------------------------------
REVENUES
Marathon Group $4,071 $3,530 $7,698 $6,868
U. S. Steel Group 1,580 1,627 3,171 3,207
Delhi Group 212 140 485 277
Eliminations (22) (12) (44) (25)
------- ------- ------- -------
Total $5,841 $5,285 $11,310 $10,327
OPERATING INCOME
Marathon Group $234 $251 $611 $463
U. S. Steel Group 1 133 82 270
Delhi Group 4 6 12 15
------ ------ ------ ------
Total $239 $390 $705 $748
CAPITAL EXPENDITURES
Marathon Group $150 $161 $250 $258
U. S. Steel Group 102 86 158 142
Delhi Group 20 7 42 13
------ ------ ------ ------
Total $272 $254 $450 $413
21
Part I - Financial Information (Continued):
B. Marathon Group
MARATHON GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions, except per share amounts) 1996 1995* 1996 1995*
- --------------------------------------------------------------------------------
REVENUES $4,071 $3,530 $7,698 $6,868
OPERATING COSTS:
Cost of sales (excludes items shown below) 2,742 2,230 5,172 4,439
Inventory market valuation charges (credits) 72 2 (83) (86)
Selling, general and administrative expenses 82 79 160 152
Depreciation, depletion and amortization 173 209 355 416
Taxes other than income taxes 745 732 1,427 1,431
Exploration expenses 23 27 56 53
------ ------ ------ ------
Total operating costs 3,837 3,279 7,087 6,405
------ ------ ------ ------
OPERATING INCOME 234 251 611 463
Other income 3 6 28 10
Interest and other financial income 5 10 9 13
Interest and other financial costs (77) (94) (163) (185)
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 165 173 485 301
Less provision for estimated income taxes 41 65 145 116
------ ------ ------ ------
NET INCOME 124 108 340 185
Dividends on preferred stock - (1) - (3)
------ ------ ------ ------
NET INCOME APPLICABLE TO MARATHON STOCK $124 $107 $340 $182
====== ====== ====== ======
MARATHON STOCK DATA:
Net income per share
- Primary $.43 $.37 $1.18 $.63
- Fully diluted .43 .37 1.17 .63
Dividends paid per share .17 .17 .34 .34
Weighted average shares, in thousands
- Primary 287,604 287,246 287,532 287,217
- Fully diluted 293,582 293,504 296,565 287,225
<FN>
*Certain amounts have been reclassified to conform to 1996 classifications.
Selected notes to financial statements appear on pages 24-27.
22
MARATHON GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
---------------------------------
June 30 December 31
(Dollars in millions) 1996 1995
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $79 $77
Receivables, less allowance for doubtful
accounts of $2 and $3 516 541
Receivable from other groups - 11
Inventories 1,216 1,152
Other current assets 100 107
------ ------
Total current assets 1,911 1,888
Long-term receivables and other investments 207 215
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$8,970 and $8,890 7,320 7,521
Prepaid pensions 283 274
Other noncurrent assets 206 211
------ ------
Total assets $9,927 $10,109
====== ======
LIABILITIES
Current liabilities:
Notes payable $162 $31
Accounts payable 1,104 1,210
Payable to other groups 66 35
Payroll and benefits payable 80 80
Accrued taxes 29 68
Deferred income taxes 175 154
Accrued interest 87 94
Long-term debt due within one year 218 353
------ ------
Total current liabilities 1,921 2,025
Long-term debt, less unamortized discount 2,974 3,367
Long-term deferred income taxes 1,130 1,072
Employee benefits 348 338
Deferred credits and other liabilities 257 253
Preferred stock of subsidiary 182 182
------ ------
Total liabilities 6,812 7,237
STOCKHOLDERS' EQUITY 3,115 2,872
------ ------
Total liabilities and stockholders' equity $9,927 $10,109
====== ======
<FN>
Selected notes to financial statements appear on pages 24-27.
23
MARATHON GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
Six Months Ended
June 30
(Dollars in millions) 1996 1995
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $340 $185
Adjustments to reconcile to net cash provided from
operating activities:
Depreciation, depletion and amortization 355 416
Exploratory dry well costs 23 17
Inventory market valuation credits (83) (86)
Pensions (7) (12)
Postretirement benefits other than pensions 8 5
Deferred income taxes 70 34
Gain on disposal of assets (25) (3)
Changes in:
Current receivables - sold - 8
- operating turnover (25) (46)
Inventories 19 11
Current accounts payable and accrued expenses (89) (197)
All other items - net 19 80
------ ------
Net cash provided from operating activities 605 412
------ ------
INVESTING ACTIVITIES:
Capital expenditures (250) (258)
Disposal of assets 115 13
Elimination of Retained Interest in Delhi Group - 58
All other items - net (2) 3
------ ------
Net cash used in investing activities (137) (184)
------ ------
FINANCING ACTIVITIES:
Change in Marathon Group's share of USX
consolidated debt (369) (83)
Marathon Stock issued 1 -
Dividends paid (98) (101)
------ ------
Net cash used in financing activities (466) (184)
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2 44
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 77 28
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $79 $72
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(185) $(164)
Income taxes paid, including settlements with other
groups (41) (96)
<FN>
Selected notes to financial statements appear on pages 24-27.
24
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited but,
in the opinion of management, reflects all adjustments necessary for a fair
presentation of the results for the periods covered. All such adjustments
are of a normal recurring nature unless disclosed otherwise. These
financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Additional information is contained in the USX Annual Report
on Form 10-K for the year ended December 31, 1995.
2. The financial statements of the Marathon Group include the financial
position, results of operations and cash flows for the businesses of
Marathon Oil Company and certain other subsidiaries of USX, and a portion
of the corporate assets and liabilities and related transactions which are
not separately identified with ongoing operating units of USX. These
financial statements are prepared using the amounts included in the USX
consolidated financial statements. Corporate amounts reflected in these
financial statements are determined based upon methods which management
believes to be reasonable. The accounting policies applicable to the
preparation of the financial statements of the Marathon Group may be
modified or rescinded in the sole discretion of the Board of Directors of
USX (Board), although the Board has no present intention to do so. The
Board may also adopt additional policies depending on the circumstances.
Although the financial statements of the Marathon Group, the U. S. Steel
Group and the Delhi Group separately report the assets, liabilities
(including contingent liabilities) and stockholders' equity of USX
attributed to each such group, such attribution of assets, liabilities
(including contingent liabilities) and stockholders' equity among the
Marathon Group, the U. S. Steel Group and the Delhi Group for the purpose
of preparing their respective financial statements does not affect legal
title to such assets and responsibility for such liabilities. Holders of
USX-Marathon Group Common Stock (Marathon Stock), USX-U. S. Steel Group
Common Stock (Steel Stock) and USX-Delhi Group Common Stock (Delhi 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 other groups. In addition, net losses of any Group,
as well as dividends or distributions on any class of USX Common Stock or
series of Preferred Stock and repurchases of any class of USX Common Stock
or 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. Accordingly, the USX consolidated financial
information should be read in connection with the Marathon Group financial
information.
25
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
3. The method of calculating net income (loss) per share for the Marathon
Stock, Steel Stock and Delhi Stock reflects the Board's intent that the
separately reported earnings and surplus of the Marathon Group, the
U. S. Steel Group and the Delhi Group, as determined consistent with the
USX Certificate of Incorporation, are available for payment of dividends on
the respective classes of stock, although legally available funds and
liquidation preferences of these classes of stock do not necessarily
correspond with these amounts.
Primary net income per share is calculated by adjusting net income for
dividend requirements of preferred stock and is based on the weighted
average number of common shares outstanding plus common stock equivalents,
provided they are not antidilutive. Common stock equivalents result from
assumed exercise of stock options, where applicable.
Fully 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.
4. The items below are included in both revenues and operating costs,
resulting in no effect on income.
(In millions)
-------------------------------
Second Qtr. Six Months
Ended Ended
June 30 June 30
1996 1995 1996 1995
---- ---- ---- ----
Consumer excise taxes on petroleum
products and merchandise $700 $681 $1,333 $1,328
Matching crude oil and refined product
buy/sell transactions settled in cash 723 491 1,322 1,052
5. Other income in the first six months of 1996 included a gain of
$20 million, primarily related to the sale of an equity interest in a
domestic pipeline company.
6. The financial statement provision for estimated income taxes and related
tax payments or refunds have been reflected in the Marathon Group, the U.
S. Steel Group and the Delhi Group financial statements in accordance with
USX's tax allocation policy for such groups. In general, such policy
provides that the consolidated tax provision and related tax payments or
refunds are allocated among the Marathon Group, the U. S. Steel Group and
the Delhi Group for group financial statement purposes, based principally
upon the financial income, taxable income, credits, preferences and other
amounts directly related to the respective groups.
The provision for estimated income taxes for the Marathon Group is based on
tax rates and amounts which recognize management's best estimate of current
and deferred tax assets and liabilities. Differences between the combined
interim tax provisions of the Marathon, U. S. Steel and Delhi Groups and
USX consolidated are allocated to each group based on the relationship of
the individual group provisions to the combined interim provisions.
The second quarter 1996 provision for estimated income taxes included an
$8 million tax benefit related to the sale of stock of certain subsidiaries
involved in international production activities.
26
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. Inventories are carried at the lower of cost or market. Cost of
inventories of crude oil and refined products is determined under the last-
in, first-out (LIFO) method.
(In millions)
----------------------
June 30 December 31
1996 1995
-------- -----------
Crude oil and natural gas liquids $486 $510
Refined products and merchandise 776 758
Supplies and sundry items 80 93
------ ------
Total (at cost) 1,342 1,361
Less inventory market valuation reserve 126 209
------ ------
Net inventory carrying value $1,216 $1,152
====== ======
The inventory market valuation reserve reflects the extent that the
recorded cost 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.
8. The Marathon Group participates in an agreement (the program) to sell an
undivided interest in certain accounts receivable subject to limited
recourse. Payments are collected from the sold accounts receivable; the
collections are reinvested in new accounts receivable for the buyers; and a
yield, based on defined short-term market rates, is transferred to the
buyers. At June 30, 1996, the amount sold under the program that had not
been collected was $340 million, which will be forwarded to the buyers at
the end of the agreement, or in the event of earlier contract termination.
If the Marathon Group does not have a sufficient quantity of eligible
accounts receivable to reinvest in for the buyers, the size of the program
will be reduced accordingly. The buyers have rights to a pool of
receivables that must be maintained at a level of 110% of the program size.
9. On June 15, 1995, USX eliminated the Marathon Group's Retained Interest in
the Delhi Group (equivalent to 4,564,814 shares of Delhi Stock). This was
accomplished through a reallocation of assets and a corresponding
adjustment to debt and equity attributed to the Marathon and Delhi Groups.
The transfer was made at a price of $12.75 per equivalent share of Delhi
Stock, or an aggregate of $58 million, resulting in a corresponding
reduction of the Marathon Group debt. The Retained Interest represented
the Marathon Group's interest in the earnings and equity of the Delhi
Group.
10. USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the Marathon Group
involving a variety of matters, including laws and regulations relating to
the environment. Certain of these matters are discussed below. The
ultimate resolution of these contingencies could, individually or in the
aggregate, be material to the Marathon Group financial statements.
However, management believes that USX will remain a viable and competitive
enterprise even though it is possible that these contingencies could be
resolved unfavorably to the Marathon Group. See discussion of Liquidity in
USX Consolidated Management's Discussion and Analysis of Financial
Condition and Results of Operations.
27
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
10. (Continued)
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 June 30, 1996, and December
31, 1995, accrued liabilities for remediation totaled $38 million and $37
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 $23
million at June 30, 1996, and $22 million at December 31, 1995.
For a number of years, the Marathon Group has made substantial capital
expenditures to bring existing facilities into compliance with various laws
relating to the environment. In the first six months of 1996 and for the
years 1995 and 1994, such capital expenditures totaled $23 million, $50
million and $70 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 June 30, 1996, and December 31, 1995, accrued liabilities for
platform abandonment and dismantlement totaled $132 million and $128
million, respectively.
Guarantees by USX of the liabilities of affiliated entities of the Marathon
Group totaled $7 million at June 30, 1996.
At June 30, 1996, the Marathon Group's pro rata share of obligations of
LOOP INC. and various pipeline affiliates secured by throughput and
deficiency agreements totaled $186 million. Under the agreements, the
Marathon Group is required to advance funds if the affiliates are unable to
service debt. Any such advances are prepayments of future transportation
charges.
At June 30, 1996, contract commitments for the Marathon Group's capital
expenditures for property, plant and equipment totaled $204 million
compared with $112 million at December 31, 1995.
28
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The Marathon Group includes Marathon Oil Company ("Marathon") and certain
other subsidiaries of USX Corporation ("USX") which are engaged in worldwide
exploration, production, transportation and marketing of crude oil and natural
gas; and domestic refining, marketing and transportation of petroleum products.
Management's Discussion and Analysis should be read in conjunction with the
second quarter 1996 USX consolidated financial information and the Marathon
Group financial statements and selected notes. The discussion of Results of
Operations should be read in conjunction with the Supplemental Statistics
provided on page 34.
Results of Operations
- ---------------------
Revenues (excluding matching buy/sell transactions and excise taxes)
increased by 12% in both the second quarter and first six months of 1996 from
the comparable prior-year periods, primarily reflecting higher average refined
product, worldwide liquid hydrocarbon and domestic natural gas prices. Revenues
for the second quarter and first six months of 1996 and 1995 are summarized in
the following table:
Second Qtr. Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1996 1995 1996 1995
----- ----- ----- -----
Refined Products and Merchandise $2,047 $1,883 $3,803 $3,479
Crude Oil and Natural Gas Liquids 278 190 548 418
Natural Gas 273 233 592 486
Transportation and Other 50 52 100 105
------ ------ ------ ------
Subtotal $2,648 $2,358 $5,043 $4,488
Matching Buy/Sell Transactions (a) 723 491 1,322 1,052
Excise Taxes (a) 700 681 1,333 1,328
------ ------ ------ ------
Total Revenues $4,071 $3,530 $7,698 $6,868
====== ====== ====== ======
- --------
<FN>
(a)Included in both revenues and operating costs, resulting in no effect on
income.
Operating income was $234 million in the second quarter of 1996, compared
with $251 million in the second quarter of 1995. Second quarter operating
income for 1996 and 1995 included unfavorable noncash effects of $72 million and
$2 million, respectively, reflecting increases in the inventory market valuation
reserve. This reserve reflects the extent to which the recorded costs of crude
oil and refined product inventories exceed net realizable value. The amounts of
increases or decreases in the reserve in future periods are dependent on changes
in future crude oil and refined product price levels, and inventory turnover.
Excluding the effects of adjustments to the inventory market valuation
reserve, operating income in the second quarter of 1996 increased by $53 million
from the second quarter of 1995, due primarily to increases in worldwide liquid
hydrocarbon and domestic natural gas prices, partially offset by lower refined
product margins.
29
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Operating income from worldwide exploration and production ("upstream") was
$212 million in the second quarter of 1996, up $85 million from the second
quarter of 1995, reflecting improved domestic and international results.
Operating income from domestic exploration and production was $141 million in
the second quarter of 1996, compared with $84 million in the second quarter of
1995. The improvement was primarily due to higher average liquid hydrocarbon
and natural gas prices and reduced depreciation, depletion and amortization
("DD&A") expense resulting, in part, from the fourth quarter 1995 adoption of
Statement of Financial Accounting Standards No. 121 - Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("SFAS No. 121"). These favorable changes were partially offset by lower liquid
hydrocarbon volumes, due mainly to the 1995 sale of Illinois Basin production
properties.
Operating income from international exploration and production was $71
million in the second quarter of 1996, compared with $43 million in the second
quarter of 1995. The improvement was primarily due to increased natural gas
volumes in the United Kingdom, higher liquid hydrocarbon prices and reduced DD&A
expense resulting, in part, from the adoption of SFAS No. 121, partially offset
by lower liquid hydrocarbon liftings. The increase in U.K. natural gas volumes
mainly reflected Brae-Area gas sales through the Scottish Area Gas Evacuation
("SAGE") pipeline system. These volumes averaged 151 net million cubic feet per
day ("mmcfd") during the second quarter of 1996, compared with 94 net mmcfd in
the second quarter of 1995. The decrease in liquid hydrocarbon volumes was
primarily due to the sales of production properties in Indonesia and Tunisia.
Operating income from refining, marketing and transportation ("downstream")
operations was $126 million in the second quarter of 1996, compared with $149
million in the second quarter of 1995. The lower results mainly reflected lower
margins from refining and wholesale marketing as increases in crude oil
acquisition costs were not completely recovered from increases in refined
product prices.
On April 10, 1996, Marathon experienced a fire at its 70,000-barrel-per-day
Detroit refinery which damaged the crude vacuum unit. Even though the crude
unit was down for 16 days, other refinery units continued operating with
inventoried and purchased feedstocks, and product sales were filled from
available inventories. In addition, Marathon's refined products pipeline that
runs from its 255,000-barrel-per-day Garyville refinery to its terminal in
Zachary, both in Louisiana, ruptured on May 23-24, 1996 and spilled about 11,300
barrels of lead-free gasoline into a swamp area near Gramercy, Louisiana.
Although the pipeline transports approximately 70% of Garyville's gasoline and
distillate production, the refinery continued to operate normally, and no supply
disruptions occurred since available storage facilities and alternative shipping
arrangements were utilized. Neither of these events had a material financial
impact on downstream operating results.
Administrative expenses were $34 million in the second quarter of 1996,
compared with $23 million in the same period of 1995. Effective with the first
quarter of 1996, Marathon changed its procedures for distributing the costs of
certain administrative services to its operating components in order to optimize
the utilization of these services. Under the new approach, upstream and
downstream operating components are billed for direct services; unbilled
services are included in "Administrative" (see the Supplemental Statistics). As
a result, second quarter 1996 administrative expenses included an estimated $12
million of costs that were allocated to other operating components in 1995.
30
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Marathon Group operating income in the first six months of 1996 was $611
million, compared with $463 million in the first six months of 1995. Operating
income for the first six months of 1996 and 1995 included favorable noncash
effects of $83 million and $86 million, respectively, reflecting decreases in
the inventory market valuation reserve. Excluding the effects of these
adjustments, operating income in the first six months of 1996 increased by $151
million from the first six months of 1995. The increase mainly reflected higher
average prices for worldwide liquid hydrocarbons and domestic natural gas and
favorable DD&A effects resulting from the adoption of SFAS No. 121 and property
sales, partially offset by decreased worldwide liquid hydrocarbon volumes. In
addition, operating results for the first six months of 1996 included $10
million of charges associated with the withdrawal from the Marine Preservation
Association ("MPA"), a non-profit oil spill response group. Marathon withdrew
from the MPA due to the existence of more economical and equally effective
alternatives for responding to possible oil spill situations.
Other income of $28 million in the first six months of 1996 increased by
$18 million from the comparable prior-year period, due mainly to a gain on the
sale of an equity interest in a domestic pipeline company.
Net interest and other financial costs in the first six months of 1996
decreased by $18 million from the first six months of 1995, primarily reflecting
the favorable effects of lower average debt levels.
The provision for estimated income taxes for the second quarter of 1996
included an $8 million tax benefit related to the sale of stock of certain
subsidiaries involved in international upstream activities.
Net income for the Marathon Group totaled $124 million, or $.43 per share,
in the second quarter of 1996, compared with $108 million, or $.37 per share, in
the second quarter of 1995. Net income totaled $340 million, or $1.18 per
share, in the first six months of 1996, compared with $185 million, or $.63 per
share, in the first six months of 1995. The increases in net income mainly
reflect the factors discussed above.
Outlook
- -------
The outlook regarding prices and costs for the Marathon Group's principal
products is largely dependent upon world market developments for crude oil and
refined products. These developments tend to be cyclical as well as subject to
a wide range of global political events. For example, in addition to industry
supply and demand conditions, changes in production policy by the Organization
of Petroleum Exporting Countries, as well as ongoing structural changes in
European gas markets, could affect energy prices in the future.
In May 1996, Marathon and its co-venturers approved the development plan
for the Green Canyon 244 ("Troika") field, which consists of four blocks (Green
Canyon Blocks 200, 201, 244 and 245) located in the Central Gulf of Mexico.
First production is expected in late 1997 with gross production rates forecasted
to be 80,000 barrels per day ("bpd") of oil and 140 mmcfd of gas. Marathon
holds a 33.3% working interest in this four-block unit.
In July, Marathon and its co-venturer approved the development of the
Viosca Knoll Block 786 project, located in the Gulf of Mexico. Production is
expected to begin during the first quarter of 1999 from this 80-100 million
gross barrels of oil equivalent discovery. Marathon holds a 50% working
interest in this block.
31
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In July, Marathon announced a discovery on Ewing Bank Block 963 in the Gulf
of Mexico which tested at rates of 8,700 bpd of oil and 6.4 mmcfd of gas.
Further appraisal drilling will be undertaken before year-end. Marathon owns a
62.5% working interest in this discovery.
Also in July, Marathon signed an exploration and production sharing
contract with the Republic of Gabon. The contract covers the 636,000-acre
Akoumba Marin Permit located approximately 30 miles offshore the central portion
of the nation, which is an established hydrocarbon producing area. Marathon has
a 100% working interest in this permit through its wholly owned subsidiary,
Marathon Petroleum Akoumba Limited.
The Marathon Group holds a 30% interest in Sakhalin Energy Investment
Company Ltd. ("Sakhalin Energy"), an incorporated joint venture company
responsible for the overall management of the Sakhalin II Project. The Sakhalin
II Production Sharing Contract ("PSC") was signed in June 1994 for the
development of the Piltun-Astokhskoye ("PA") oil field and the Lunskoye gas
field located offshore Sakhalin Island in the Russian Far East Region. In June
1996, Russian authorities confirmed a Commencement Date of June 15, 1996 for
Sakhalin Energy's PSC with the Russian Federation. As a result of this
confirmation, Sakhalin Energy will proceed with appraisal work with the goal of
submitting development plans to the Russian authorities for approval. In July
1996, Sakhalin Energy obtained the support of Russian authorities to initiate a
plan for the first phase of a development of the PA oil field. The plan now
requires formal technical approvals from Russian regulatory authorities and
further progress towards legal stabilization. Assuming timely approvals and
continued progress on stabilization, first production of oil could occur by
1999.
In July 1996, Marathon announced its participation in two Gulf of Mexico
pipeline systems designed to transport crude oil and natural gas to shore from
the growing development activities in the deepwater and subsalt areas of the
Central Gulf. The first system, named "Nautilus," when constructed, will
consist of a new natural gas pipeline and expansion of an existing gas gathering
system. The new gas pipeline will have a capacity of around 600 mmcfd, and
Marathon anticipates that it will be operated under the jurisdiction of the
Federal Energy Regulatory Commission. The system is expected to be ready for
service in the third quarter of 1997, pending negotiation and execution of
definitive documents and receipt of necessary government approvals. With
respect to the second system, Marathon acquired a 28% interest in Poseidon Oil
Pipeline Company L.L.C. ("Poseidon"), a joint venture company which is
constructing and operating a crude oil pipeline system. Concurrent with
becoming an owner, Marathon contributed to Poseidon its interest in the assets
of Block 873 Pipeline Company, which serves the Marathon-operated Ewing Bank 873
platform. When completed, Poseidon will consist of approximately 250 miles of
pipeline capable of delivering up to 400,000 bpd of crude oil to multiple
distribution outlets located onshore Louisiana.
Cash Flows
- ----------
Net cash provided from operating activities was $605 million in the first
six months of 1996, compared with $412 million in the first six months of 1995.
The improvement mainly reflected favorable working capital changes and increased
profitability, partially offset by $39 million of payments related to certain
state tax issues.
32
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Capital expenditures for property, plant and equipment in the second
quarter and first six months of 1996 were $150 million and $250 million,
respectively, compared with $161 million and $258 million in the comparable 1995
periods. Expenditures in these periods were primarily for upstream projects.
Capital expenditures for the year 1996 are expected to total approximately $755
million and will be primarily for domestic projects. Contract commitments for
capital expenditures were $204 million at June 30, 1996, compared with $112
million at year-end 1995.
Cash from the disposal of assets was $115 million in the first six months
of 1996, compared with $13 million in the first six months of 1995. Proceeds in
1996 primarily reflect the sales of interests in oil and gas production
properties in Indonesia and Tunisia and the sale of an equity interest in a
domestic pipeline company.
Financial obligations decreased by $369 million in the first six months of
1996 as net cash provided from operating activities and asset sales exceeded
cash used for capital expenditures and dividend payments. Financial obligations
consist of the Marathon Group's portion of USX debt and preferred stock of a
subsidiary attributed to all three groups, as well as debt specifically
attributed to the Marathon Group.
Liquidity
- ---------
For discussion of USX's liquidity and capital resources, see USX
Consolidated Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
The Marathon Group has incurred and will continue to incur substantial
capital, operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. To the extent these expenditures, as with
all costs, are not ultimately reflected in the prices of the Marathon Group's
products and services, operating results will be adversely affected. The
Marathon Group believes that substantially all of its competitors are subject to
similar environmental laws and regulations. However, the specific impact on
each competitor may vary depending on a number of factors, including the age and
location of its operating facilities, marketing areas, production processes and
whether or not it is engaged in the petrochemical business or the marine
transportation of crude oil and refined products.
USX has been notified that it is a potentially responsible party ("PRP") at
17 waste sites related to the Marathon Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of June 30,
1996. In addition, there are 11 sites related to the Marathon Group where USX
has received information requests or other indications that USX may be a PRP
under CERCLA but where sufficient information is not presently available to
confirm the existence of liability. There are also 65 additional sites,
excluding retail marketing outlets, related to the Marathon Group where
remediation is being sought under other environmental statutes, both federal and
state. At many of these sites, USX is one of a number of parties involved and
the total cost of remediation, as well as USX's share thereof, is frequently
dependent upon the outcome of investigations and
33
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
remedial studies. The Marathon Group accrues for environmental remediation
activities when the responsibility to remediate is probable and the amount of
associated costs is reasonably determinable. As environmental remediation
matters proceed toward ultimate resolution or as additional remediation
obligations arise, charges in excess of those previously accrued may be
required.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the Marathon Group
involving a variety of matters, including laws and regulations relating to the
environment (see Note 10 to the Marathon Group financial statements for a
discussion of certain of these matters). The ultimate resolution of these
contingencies could, individually or in the aggregate, be material to the
Marathon Group financial statements. However, management believes that USX will
remain a viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the Marathon Group. See
discussion of Cash Flows and Liquidity in USX Consolidated Management's
Discussion and Analysis of Financial Condition and Results of Operations.
34
MARATHON GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS
---------------------------------
Second Quarter Six Months
Ended June 30 Ended June 30
-------------- --------------
(Dollars in millions) 1996 1995 1996 1995
- --------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
Exploration & Production
Domestic $141 $84 $261 $170
International 71 43 168 105
Refining, Marketing & Transportation. 126 149 160 144
Gas Gathering & Processing 2 - 5 -
Administrative (a) (34) (23) (66) (42)
------ ------- ------ ------
$306 $253 $528 $377
Inventory Market Val. Res. Adjustment (72) (2) 83 86
------ ------- ------ -------
Total Marathon Group $234 $251 $611 $463
CAPITAL EXPENDITURES $150 $161 $250 $258
OPERATING STATISTICS
Net Liquid Hydrocarbon Production (b):
Domestic 122.7 132.6 124.3 130.9
International 60.6 66.3 63.0 71.0
------ ------- ------ ------
Worldwide 183.3 198.9 187.3 201.9
Net Natural Gas Production (c):
Domestic 651.4 649.1 670.6 651.1
International - Equity 455.1 449.4 526.0 468.4
International - Other (d) 31.9 15.3 33.5 34.5
--------------- ------- -------
Worldwide 1,138.4 1,113.8 1,230.1 1,154.0
Average Equity Sales Prices:
Liquid Hydrocarbons (per Bbl)
Domestic $18.11 $15.36 $17.13 $14.94
International 19.28 17.67 18.91 17.20
Natural Gas (per Mcf)
Domestic $2.01 $1.61 $2.02 $1.65
International 1.90 1.91 1.88 1.87
Natural Gas Sales (c) (e):
Domestic 972.7 989.0 1,031.7 992.9
International 487.0 464.7 559.5 502.9
------- ------- ------- -------
Worldwide 1,459.7 1,453.7 1,591.2 1,495.8
Crude Oil Refined (b) 523.4 532.5 506.6 505.8
Refined Products Sold (b) 784.4 720.2 754.8 724.9
- ---------------
<FN>
(a) Second quarter and first six months of 1996 include an estimated $12
million and $26 million, respectively, in expenses which were allocated
to operating components in 1995.
(b) Thousands of barrels per day
(c) Millions of cubic feet per day
(d) Represents gas acquired for injection and subsequent resale
(e) Represents equity, royalty and trading volumes
35
Part I - Financial Information (Continued):
C. U. S. Steel Group
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
------------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions, except per share amounts) 1996 1995* 1996 1995*
- --------------------------------------------------------------------------------
REVENUES $1,580 $1,627 $3,171 $3,207
OPERATING COSTS:
Cost of sales (excludes items shown below) 1,484 1,393 2,899 2,741
Selling, general and administrative
expenses (credits) (39) (32) (80) (69)
Depreciation, depletion and amortization 75 84 153 161
Taxes other than income taxes 59 49 117 104
------ ------ ------ ------
Total operating costs 1,579 1,494 3,089 2,937
------ ------ ------ ------
OPERATING INCOME 1 133 82 270
Gain on affiliate stock offering 53 - 53 -
Other income 13 22 21 38
Interest and other financial income 2 3 3 5
Interest and other financial costs (29) (36) (58) (75)
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 40 122 101 238
Less provision for estimated income taxes 8 41 23 83
------ ------ ------ ------
NET INCOME 32 81 78 155
Dividends on preferred stock (5) (7) (11) (13)
------ ------ ------ ------
NET INCOME APPLICABLE TO STEEL STOCK $27 $74 $67 $142
====== ====== ====== ======
STEEL STOCK DATA:
Net income per share
- Primary $.32 $.99 $.80 $1.87
- Fully diluted .32 .95 .80 1.80
Dividends paid per share .25 .25 .50 .50
Weighted average shares, in thousands
- Primary 83,653 76,562 83,425 76,373
- Fully diluted 83,653 87,484 84,619 87,293
<FN>
*Certain amounts have been reclassified to conform to 1996 classifications.
Selected notes to financial statements appear on pages 38-42.
36
U. S. STEEL GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
------------------------------------
June 30 December 31
(Dollars in millions) 1996 1995
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $20 $52
Receivables, less allowance for doubtful
accounts of $17 and $18 524 579
Receivable from other groups 65 35
Inventories 630 601
Deferred income tax benefits 174 177
------ ------
Total current assets 1,413 1,444
Long-term receivables and other investments,
less reserves of $25 and $23 535 613
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$5,999 and $5,909 2,516 2,512
Long-term deferred income tax benefits 322 362
Prepaid pensions 1,639 1,546
Other noncurrent assets 42 44
------ ------
Total assets $6,467 $6,521
====== ======
LIABILITIES
Current liabilities:
Notes payable $45 $8
Accounts payable 720 815
Payable to other groups - 11
Payroll and benefits payable 393 389
Accrued taxes 204 180
Accrued interest 27 23
Long-term debt due within one year 54 93
------ ------
Total current liabilities 1,443 1,519
Long-term debt, less unamortized discount 905 923
Employee benefits 2,420 2,424
Deferred credits and other liabilities 231 247
Preferred stock of subsidiary 64 64
------ ------
Total liabilities 5,063 5,177
------ ------
STOCKHOLDERS' EQUITY
Preferred stock 7 7
Common stockholders' equity 1,397 1,337
------ ------
Total stockholders' equity 1,404 1,344
------ ------
Total liabilities and stockholders' equity $6,467 $6,521
====== ======
<FN>
Selected notes to financial statements appear on pages 38-42.
37
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------
Six Months Ended
June 30
(Dollars in millions) 1996 1995
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $78 $155
Adjustments to reconcile to net cash provided
from operating activities:
Depreciation, depletion and amortization 153 161
Pensions (84) (67)
Postretirement benefits other than pensions 7 (13)
Deferred income taxes 49 42
Gain on disposal of assets (5) (8)
Gain on affiliate stock offering (53) -
Changes in:
Current receivables 5 26
Inventories (29) (41)
Current accounts payable and accrued expenses (72) 151
All other items - net (29) (60)
------ ------
Net cash provided from operating activities 20 346
------ ------
INVESTING ACTIVITIES:
Capital expenditures (158) (142)
Disposal of assets 142 42
All other items - net (3) 7
------ ------
Net cash used in investing activities (19) (93)
------ ------
FINANCING ACTIVITIES:
Change in U. S. Steel Group's share of USX
consolidated debt (12) (219)
Specifically attributed debt - repayments (3) (1)
Steel Stock issued 33 23
Dividends paid (51) (47)
------ ------
Net cash used in financing activities (33) (244)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (32) 9
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 52 20
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $20 $29
====== ======
Cash provided from (used in) operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(45) $(70)
Income taxes (paid) refunded, including settlements
with other groups (20) 7
<FN>
Selected notes to financial statements appear on pages 38-42.
38
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited but,
in the opinion of management, reflects all adjustments necessary for a fair
presentation of the results for the periods covered. All such adjustments
are of a normal recurring nature unless disclosed otherwise. These
financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Additional information is contained in the USX Annual Report
on Form 10-K for the year ended December 31, 1995.
2. 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 or the Delhi Group, and a portion of the corporate assets and
liabilities and related transactions which are not separately identified
with ongoing operating units of USX. These financial statements are
prepared using the amounts included in the USX consolidated financial
statements. Corporate amounts reflected in these financial statements are
determined based upon methods which management believes to be reasonable.
The accounting policies applicable to the preparation of the financial
statements of the U. S. Steel Group may be modified or rescinded in the
sole discretion of the Board of Directors of USX (Board), although the
Board has no present intention to do so. The Board may also adopt
additional policies depending on the circumstances.
Although the financial statements of the U. S. Steel Group, the Marathon
Group and the Delhi Group separately report the assets, liabilities
(including contingent liabilities) and stockholders' equity of USX
attributed to each such group, such attribution of assets, liabilities
(including contingent liabilities) and stockholders' equity among the U. S.
Steel Group, the Marathon Group and the Delhi Group for purposes of
preparing their respective financial statements does not affect legal title
to such assets and responsibility for such liabilities. Holders of USX-
U. S. Steel Group Common Stock (Steel Stock), USX-Marathon Group Common
Stock (Marathon Stock) and USX-Delhi Group Common Stock (Delhi 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 other groups. In addition, net losses of any Group,
as well as dividends or distributions on any class of USX Common Stock or
series of Preferred Stock and repurchases of any class of USX Common Stock
or 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. Accordingly, the USX consolidated financial
information should be read in connection with the U. S. Steel Group
financial information.
39
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
3. The method of calculating net income (loss) per share for the Steel Stock,
Marathon Stock and Delhi Stock reflects the Board's intent that the
separately reported earnings and surplus of the U. S. Steel Group, the
Marathon Group and the Delhi Group, as determined consistent with the USX
Certificate of Incorporation, are available for payment of dividends on the
respective classes of stock, although legally available funds and
liquidation preferences of these classes of stock do not necessarily
correspond with these amounts.
Primary net income per share is calculated by adjusting net income for
dividend requirements of preferred stock and is based on the weighted
average number of common shares outstanding plus common stock equivalents,
provided they are not antidilutive. Common stock equivalents result from
assumed exercise of stock options, where applicable.
Fully 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.
4. Operating income includes net periodic pension credits of $81 million and
$67 million in the first six months of 1996 and 1995, respectively,
($41 million and $34 million in the second quarter of 1996 and 1995,
respectively). These pension credits are primarily noncash and for the
most part are included in selling, general and administrative expenses. The
expected long-term rate of return on plan assets, which is reflected in the
calculation of net periodic pension credits, is 10% for both 1996 and 1995.
5. On May 2, 1996, an aggregate of 6.9 million shares of RMI Titanium Company
(RMI) common stock was sold in a public offering at a price of $18.50 per
share and total net proceeds of $121 million. Included in the offering
were 2.3 million shares sold by USX for net proceeds of $40 million. The
U. S. Steel Group recognized a total pretax gain in the second quarter of
1996 of $53 million, of which $34 million was attributable to the shares
sold by USX and $19 million was attributable to the increase in value of
its investment as a result of the shares sold by RMI. The income tax
effect related to the total gain was $19 million. As a result of this
transaction, USX's ownership in RMI decreased from approximately 50% to
27%. The U.S. Steel Group continues to account for its investment in RMI
under the equity method of accounting.
6. The financial statement provision for estimated income taxes and related
tax payments or refunds have been reflected in the U. S. Steel Group, the
Marathon Group and the Delhi Group financial statements in accordance with
USX's tax allocation policy for such groups. In general, such policy
provides that the consolidated tax provision and related tax payments or
refunds are allocated among the U. S. Steel Group, the Marathon Group and
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.
40
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
6. (Continued)
The provision for estimated income taxes for the U. S. Steel Group is based
on tax rates and amounts which recognize management's best estimate of
current and deferred tax assets and liabilities. Differences between the
combined interim tax provisions of the U. S. Steel, Marathon and Delhi
Groups and USX consolidated are allocated to each group based on the
relationship of the individual group provisions to the combined interim
provisions.
7. Inventories are carried at the lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
(In millions)
-----------------------
June 30 December 31
1996 1995
-------- -----------
Raw materials $93 $89
Semi-finished products 308 300
Finished products 157 143
Supplies and sundry items 72 69
---- ----
Total $630 $601
==== ====
8. The U. S. Steel Group participates in an agreement (the program) to sell an
undivided interest in certain accounts receivable subject to limited
recourse. Payments are collected from the sold accounts receivable; the
collections are reinvested in new accounts receivable for the buyers; and a
yield, based on defined short-term market rates, is transferred to the
buyers. At June 30, 1996, the amount sold under the program that had not
been collected was $350 million, which will be forwarded to the buyers at
the end of the agreement, or in the event of earlier contract termination.
If the U. S. Steel Group does not have a sufficient quantity of eligible
accounts receivable to reinvest in for the buyers, the size of the program
will be reduced accordingly. The buyers have rights to a pool of
receivables that must be maintained at a level of 115% of the program size.
In the event of a change in control of USX, as defined in the agreement,
the U. S. Steel Group may be required to forward payments collected on sold
accounts receivable to the buyers.
Prior to 1993, USX Credit, a division of USX, sold certain of its loans
receivable subject to limited recourse. USX Credit continues to collect
payments from the loans and transfer to the buyers principal collected plus
yield based on defined short-term market rates. At June 30, 1996, the
balance of sold loans receivable subject to recourse was $59 million.
USX Credit is not actively seeking new loans at this time. In the event of
a change in control of USX, as defined in the agreement, the U. S. Steel
Group may be required to provide cash collateral in the amount of the
uncollected loans receivable to assure compliance with the limited recourse
provisions.
41
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
9. USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the U. S. Steel
Group involving a variety of matters including laws and regulations
relating to the environment. Certain of these matters are discussed below.
The ultimate resolution of these contingencies could, individually or in
the aggregate, be material to the U. S. Steel Group financial statements.
However, management believes that USX will remain a viable and competitive
enterprise even though it is possible that these contingencies could be
resolved unfavorably to the U. S. Steel Group. See discussion of Liquidity
in USX Consolidated Management's Discussion and Analysis of Financial
Condition and Results of Operations.
In 1990, USX and two former officials of the United Steelworkers of America
(USWA) were convicted of violating Section 302 of the Taft-Hartley Act by
reason of USX's grant of retroactive leaves of absence to union officials,
which qualified them to receive pensions from USX. In addition, USX was
convicted of mail fraud in the same proceedings. The U.S. District Court
imposed a $4.1 million fine on USX and ordered USX to make restitution to
the United States Steel and Carnegie Pension Fund of approximately
$300,000. The verdict was affirmed on appeal and, in 1995, the fine and
restitution were paid. In a separate proceeding, a former executive
officer of USX pleaded guilty to a related misdemeanor. A related civil
class action was commenced against USX and the USWA in 1989 (Cox, et al. v.
USX, et al.) and was dismissed by the trial court by entry of summary
judgment in favor of USX and USWA in 1991. The summary judgment was
reversed by the U.S. Court of Appeals for the 11th Circuit in 1994, and the
matter reinstated and returned to the trial court. In that civil class
action, the plaintiffs' complaint asserts five causes of action arising out
of conduct that was the subject of USX's 1990 criminal conviction and that
allegedly relates to the negotiation of a 1983 local labor agreement, which
resulted in the reopening of USX's Fairfield Works in 1984. The causes of
action include claims asserted under the Racketeer Influenced and Corrupt
Organization Act (RICO) and the Employee Retirement Income Security Act
(ERISA), specifically alleging that USX granted leaves of absence and
pensions to union officials with intent to influence their approval,
implementation and interpretation of the 1983 Fairfield Agreement.
Plaintiffs' claims seek damages in excess of $276 million, which may be
subject to trebling. USX and USWA have denied any liability to the
plaintiffs and are vigorously defending these claims. A jury trial is
currently scheduled to begin on September 30, 1996, in the U.S. District
Court for the Northern District of Alabama.
The U. S. Steel Group is subject to federal, state and local laws and
regulations relating to the environment. These laws generally provide for
control of pollutants released into the environment and require responsible
parties to undertake remediation of hazardous waste disposal sites.
Penalties may be imposed for noncompliance. At June 30, 1996, and December
31, 1995, accrued liabilities for remediation totaled $108 million and $116
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.
42
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
9. (Continued)
For a number of years, the U. S. Steel Group has made substantial capital
expenditures to bring existing facilities into compliance with various laws
relating to the environment. In the first six months of 1996 and for the
years 1995 and 1994, such capital expenditures totaled $31 million, $55
million and $57 million, respectively. The U. S. Steel Group anticipates
making additional such expenditures in the future; however, the exact
amounts and timing of such expenditures are uncertain because of the
continuing evolution of specific regulatory requirements.
Guarantees by USX of the liabilities of affiliated entities of the U. S.
Steel Group totaled $39 million at June 30, 1996. In the event that any
defaults of guaranteed liabilities occur, USX has access to its interest in
the assets of the affiliates to reduce U. S. Steel Group losses resulting
from these guarantees. As of June 30, 1996, the largest guarantee for a
single affiliate was $21 million.
At June 30, 1996, contract commitments for the U. S. Steel Group's capital
expenditures for property, plant and equipment totaled $206 million
compared with $178 million at December 31, 1995.
43
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The U. S. Steel Group includes U. S. Steel, which is primarily engaged in
the production and sale of steel mill products, coke and taconite pellets. The
U. S. Steel Group also includes the management of mineral resources, domestic
coal mining, engineering and consulting services and technology licensing
(together with U. S. Steel, the "Steel and Related Businesses"). Other
businesses that are part of the U. S. Steel Group include real estate
development and management, and leasing and financing activities. Management's
Discussion and Analysis should be read in conjunction with the second quarter
1996 USX consolidated financial information and the U. S. Steel Group financial
statements and selected notes. The discussion of Results of Operations should
be read in conjunction with the Supplemental Statistics provided on page 48.
Results of Operations
- ---------------------
Revenues for the U. S. Steel Group decreased $47 million and $36 million in
the second quarter and first six months of 1996, respectively, compared with the
same periods in 1995. The decreases primarily resulted from lower steel prices.
Operating income for the U. S. Steel Group totaled $1 million in the second
quarter of 1996, compared with $133 million in the same quarter of 1995. The
$132 million decrease was due to lower results from Steel and Related
Businesses.
Steel and Related Businesses reported an operating loss of $46 million in
the second quarter of 1996, compared with operating income of $105 million in
the same quarter of 1995. Results in the second quarter of 1996 included $39
million of charges related to repair costs on the Gary (Ind.) Works No. 13 blast
furnace which was idled by a hearth break-out on April 2, 1996, and $16 million
of charges for unrelated legal accruals. The second quarter 1995 operating
income included $29 million of charges related to the Pickering v. USX
litigation and $27 million of charges for the repair of the Gary Works No. 8
blast furnace which was damaged by an explosion on April 5, 1995. Excluding
these charges, second quarter 1996 operating income decreased $152 million from
the second quarter 1995. The decline was mainly due to lower steel prices and
cost inefficiencies and reduced shipments related to the No. 13 blast furnace
outage, partially offset by an improved product mix.
The Gary Works No. 13 blast furnace, which represents about half of Gary
Works iron producing capacity and roughly one-fourth of U.S. Steel's iron
capacity, was damaged April 2 in a hearth break-out. In addition to direct
repair costs, operating results were adversely affected by production
inefficiencies at Gary, as well as other U. S. Steel plants, reduced shipments
and higher costs for purchased iron and semifinished steel. The total effect of
the No. 13 blast furnace outage on the second quarter and first six months
operating income is estimated to be more than $100 million. The No. 13 blast
furnace has been operating since May 30 but some lingering impacts of the outage
will continue beyond the second quarter. USX maintains physical damage and
business interruption insurance coverage for events of this nature, subject to a
$50 million deductible for recoverable items. However, an estimate of the
amount or timing of potential recoveries cannot be made at this time.
Administrative and Other Businesses includes the portion of pension
credits, postretirement benefit costs and certain other expenses principally
attributable to the former businesses of the U. S. Steel Group as well as USX
corporate general and administrative costs allocated to the U. S. Steel Group.
Operating income for
44
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Administrative and Other Businesses in the second quarter of 1996 increased $19
million over the same quarter of 1995 primarily due to higher pension credits
and higher income from USX Credit, partially offset by $4 million for legal
accruals.
Operating income for the U. S. Steel Group totaled $82 million for the
first six months of 1996, compared with $270 million in the same period of 1995.
The $188 million decrease was due to lower results from Steel and Related
Businesses.
Steel and Related Businesses reported an operating loss of $13 million in
the first six months of 1996, compared with operating income of $205 million in
the same period of 1995. Operating income in the first six months of 1996
included $55 million of charges previously discussed. Results for the first six
months of 1995 included $56 million of charges previously discussed. Excluding
these charges, operating income for the first six months of 1996 decreased $219
million over the same period in 1995. The decrease was mainly due to lower
steel prices and cost inefficiencies related to the No. 13 blast furnace outage,
partially offset by higher steel shipment volumes and an improved product mix.
Operating income for Administrative and Other Businesses increased $30
million in the first six months of 1996 compared with the same period in 1995
primarily due to higher pension credits and higher income from USX Credit.
The pension credits referred to above, combined with pension costs for
ongoing operating units of the U. S. Steel Group, resulted in net periodic
pension credits (which are primarily noncash) of $41 million and $81 million for
the second quarter and first six months of 1996, respectively, compared with $34
million and $67 million for the second quarter and first six months of 1995,
respectively.
Gain on affiliate stock offering totaled $53 million for the second quarter
and first six months of 1996. For further details, see Note 5 to the U. S.
Steel Group Financial Statements.
Other income for the first six months of 1996 decreased $17 million over
the same period in 1995 due to lower income from affiliates.
Net income for the U. S. Steel Group totaled $32 million, or $.32 per
share, in the second quarter of 1996, compared with net income of $81 million,
or $.99 per share, in the same quarter of 1995. Net income for the U. S. Steel
Group totaled $78 million, or $.80 per share, in the first six months of 1996,
compared with net income of $155 million, or $1.87 per share, in the same period
of 1995.
Second quarter 1996 steel shipments of 2.7 million tons and raw steel
production of 2.5 million tons decreased 4% and 16%, respectively, from the same
quarter of 1995. First half 1996 steel shipments of 5.6 million tons increased
1% from the first six months of 1995. First half 1996 raw steel production of
5.7 million tons decreased 4% from the first six months of 1995. Steel
shipments for
45
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
the second quarter and first six months of 1996 included export shipments of 0.1
million tons and 0.3 million tons, respectively, compared with 0.3 million tons
and 0.4 million tons, respectively, in the same periods in 1995. Raw steel
capability utilization in the second quarter of 1996 averaged approximately 80%
versus 97% of capability in the second quarter of 1995. Raw steel capability
utilization in the first six months of 1996 averaged approximately 90% versus
96% of capability in the first six months of 1995. As a result of improvements
in operating efficiencies, U. S. Steel increased its stated annual raw steel
production capability by 0.3 million tons to 12.8 million tons for 1996.
Outlook
- -------
The U. S. Steel Group expects a continued strong order book for the third
quarter of 1996. Shipments and operating rates in the third quarter are
expected to be higher than the second quarter, as a result of the No. 13 blast
furnace resuming operations. Third quarter transaction prices are expected to
increase for some products based on announced price increases effective July 1;
however, product mix is expected to be less favorable than the second quarter of
1996. Additionally, U. S. Steel has informed its sheet customers of planned
price increases to be effective on September 29 and on January 1, 1997.
The U. S. Steel Group has two planned blast furnace outages scheduled for
the third quarter. A reline of the blast furnace at Fairfield Works began in
mid-July and the furnace will be out of operation until late September. The
second outage, for planned maintenance and a partial reline at the Gary Works
No. 4 blast furnace, will last approximately 40 days during the third quarter.
Within the next year, the anticipated availability of flat-rolled steel
from several new domestic plants, scheduled to begin production, may ultimately
have an adverse effect on product prices and shipment levels as companies
attempt to gain or retain market share. In addition, labor contract
negotiations with the major U.S. auto makers are ongoing, and any associated
work stoppage could have a negative impact on U. S. Steel's shipments and
results of operations.
See Environmental Matters, Contingencies and Commitments, below, for a
discussion of matters relating to litigation (particularly Cox v. USX).
Steel imports to the United States accounted for an estimated 20% of the
domestic steel market in the first five months of 1996, and 21%, 25% and 19% of
the domestic steel market in the years 1995, 1994 and 1993, respectively. The
domestic steel industry has, in the past, been adversely affected by unfairly
traded imports, and higher levels of imported steel may ultimately have an
adverse effect on product prices and shipment levels.
USX's labor agreement with the United Steelworkers of America ("USWA")
provides, at either party's request, for reopener negotiations of specific
payroll items to commence no later than October 1, 1996. If full settlement on
all items properly reopened is not achieved, the unresolved issues will be
submitted for binding arbitration with any changes becoming effective during the
first quarter of 1997.
Cash Flows
- ----------
Net cash provided from operating activities was $20 million in the first
six months of 1996, compared with $346 million in the same period of 1995. The
first
46
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
six months of 1996 included a payment of $28 million related to the Pickering
litigation. Excluding this item, net cash from operating activities decreased
by $298 million due to unfavorable working capital changes and decreased
profitability.
In July 1996, USX made a payment of $59 million to the Internal Revenue
Service ("IRS") for certain agreed and unagreed adjustments relating to the tax
year 1990. Based upon an analysis of the issues in dispute, this payment will
be allocated entirely to the U. S. Steel Group. USX believes that it has made
adequate provision for income taxes and related interest which may become
payable for all years not settled with the IRS.
Cash from the disposal of assets increased $100 million in the first six
months of 1996 compared with the same period of 1995. The 1996 proceeds
reflected the sale of National-Oilwell and RMI Common Stock. The 1995 proceeds
mainly reflected property sales.
Capital expenditures for property, plant and equipment in the second
quarter and first six months of 1996 were $102 million and $158 million,
respectively, compared with $86 million and $142 million, respectively, in the
same periods in 1995.
For the year 1996, capital expenditures were originally expected to total
approximately $320 million, compared with $324 million in 1995. The
expenditures for 1996 are now expected to increase to approximately $330 million
to incorporate certain spending related to the Gary Works No. 13 blast furnace.
Capital expenditures for 1996 will include spending on a blast furnace reline
and continued spending on a new galvanizing line at Fairfield Works and
additional environmental expenditures primarily at Gary Works, as originally
expected. Contract commitments for capital expenditures at June 30, 1996 were
$206 million, compared with $178 million at year-end 1995.
Financial obligations decreased $15 million in first six months of 1996
primarily due to net effects of other financing activities and a reduction in
cash and cash equivalents. These financial obligations consist of the U. S.
Steel Group's portion of USX debt and preferred stock of a subsidiary attributed
to all three groups, as well as debt and financing agreements specifically
attributed to the U. S. Steel Group.
Liquidity
- ---------
For discussion of USX's liquidity and capital resources, see USX
Consolidated Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
The U. S. Steel Group has incurred and will continue to incur substantial
capital, operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. In recent years, these expenditures have
been mainly for process changes in order to meet Clean Air Act obligations,
although ongoing compliance costs have also been significant. To the extent
these expenditures, as with all costs, are not ultimately reflected in the
prices of the U. S. Steel Group's products and services, operating results will
be adversely
47
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
affected. The U. S. Steel Group believes that all of its domestic competitors
are subject to similar environmental laws and regulations. However, the
specific impact on each competitor may vary depending on a number of factors,
including the age and location of its operating facilities and its production
methods.
USX has been notified that it is a potentially responsible party ("PRP") at
24 waste sites related to the U. S. Steel Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of June 30,
1996. In addition, there are 22 sites related to the U. S. Steel Group where
USX has received information requests or other indications that USX may be a PRP
under CERCLA but where sufficient information is not presently available to
confirm the existence of liability or make any judgment as to the amount
thereof. There are also 38 additional sites related to the U. S. Steel Group
where remediation is being sought under other environmental statutes, both
federal and state, or where private parties are seeking remediation through
discussions or litigation. At many of these sites, USX is one of a number of
parties involved and the total cost of remediation, as well as USX's share
thereof, is frequently dependent upon the outcome of investigations and remedial
studies. The U. S. Steel Group accrues for environmental remediation activities
when the responsibility to remediate is probable and the amount of associated
costs is reasonably determinable. As environmental remediation matters proceed
toward ultimate resolution or as additional remediation obligations arise,
charges in excess of those previously accrued may be required.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the U. S. Steel Group
involving a variety of matters, including laws and regulations relating to the
environment, certain of which are discussed in Note 9 to the U. S. Steel Group
Financial Statements. Included among these actions is a jury trial in a civil
class action (Cox, et al. v. USX, et al.) related to the Fairfield Agreement
Litigation which is currently scheduled to begin on September 30, 1996, in the
U.S. District Court for the Northern District of Alabama. Plaintiffs' claims
seek damages in excess of $276 million, which may be subject to trebling.
The ultimate resolution of these contingencies could, individually or in
the aggregate, be material to the U. S. Steel Group financial statements.
However, management believes that USX will remain a viable and competitive
enterprise even though it is possible that these contingencies could be resolved
unfavorably to the U. S. Steel Group. See discussion of Liquidity and Capital
Resources in USX Consolidated Management's Discussion and Analysis of Financial
Condition and Results of Operations.
48
U. S. STEEL GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS
------------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
-------------- --------------
(Dollars in millions) 1996 1995 1996 1995
- --------------------------------------------------------------------------------
REVENUES
Steel and Related Businesses (a) $1,559 $1,613 $3,143 $3,162
Other 21 14 28 45
------ ------ ------ ------
Total U. S. Steel Group $1,580 $1,627 $3,171 $3,207
OPERATING INCOME
Steel and Related Businesses (a) $(46) $105 $(13) $205
Administrative and Other (b) 47 28 95 65
------ ------ ------ ------
Total U. S. Steel Group $1 $133 $82 $270
CAPITAL EXPENDITURES $102 $86 $158 $142
OPERATING STATISTICS
Public & Affiliated Steel Shipments (c) 2,658 2,757 5,556 5,479
Raw Steel-Production (c) 2,541 3,018 5,695 5,963
Raw Steel-Capability Utilization (d) 79.8% 96.8% 89.5% 96.2%
- ------------
<FN>
(a) Includes the production and sale of steel products, coke and taconite
pellets; domestic coal mining; the management of mineral resources; and
engineering and consulting services and technology licensing.
(b) Includes pension credits, other postretirement benefit costs and certain
other expenses principally attributable to former business units of the
U. S. Steel Group. Also includes results of real estate development and
management, and leasing and financing activities.
(c) Thousands of net tons.
(d) Based on annual raw steel production capability of 12.8 million tons for
1996 and 12.5 million tons for 1995.
49
Part I - Financial Information (Continued):
D. Delhi Group
DELHI GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions, except per share amounts) 1996 1995* 1996 1995*
- --------------------------------------------------------------------------------
REVENUES $212.0 $139.4 $484.5 $276.8
OPERATING COSTS:
Cost of sales (excludes items shown below) 192.6 126.7 441.0 239.8
Selling, general and administrative expenses 7.2 5.8 13.9 12.2
Depreciation, depletion and amortization 6.8 6.3 13.7 12.6
Taxes other than income taxes 2.0 1.9 4.0 3.9
Restructuring credits - (6.2) - (6.2)
------ ------ ------ ------
Total operating costs 208.6 134.5 472.6 262.3
------ ------ ------ ------
OPERATING INCOME 3.4 4.9 11.9 14.5
Other income - 5.1 .2 5.2
Interest and other financial costs (5.2) (3.3) (10.2) (6.6)
------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES (1.8) 6.7 1.9 13.1
Less provision (credit) for estimated
income taxes (.6) 4.4 .7 6.6
------ ------ ------ ------
NET INCOME (LOSS) (1.2) 2.3 1.2 6.5
Dividends on preferred stock - (.1) - (.1)
Net income applicable to Retained Interest - (1.0) - (2.4)
------ ------ ------ ------
NET INCOME (LOSS) APPLICABLE TO OUTSTANDING
DELHI STOCK $(1.2) $1.2 $1.2 $4.0
====== ====== ====== ======
DELHI STOCK DATA:
Net income (loss) per share
- Primary and fully diluted $(.12) $.12 $.13 $.42
Dividends paid per share .05 .05 .10 .10
Weighted average shares, in thousands
- Primary and fully diluted 9,450 9,438 9,449 9,438
<FN>
*Certain amounts have been reclassified to conform to 1996 classifications.
Selected notes to financial statements appear on pages 52-55.
50
DELHI GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
------------------------------
June 30 December 31
(Dollars in millions) 1996 1995
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $.6 $1.9
Receivables, less allowance for doubtful
accounts of $.8 and $.8 65.5 93.2
Receivable from other groups .8 .3
Inventories 6.8 10.7
Other current assets 3.8 3.2
------ ------
Total current assets 77.5 109.3
Long-term receivables and other investments 6.3 8.3
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$442.1 and $433.9 530.3 502.3
Other noncurrent assets 2.9 4.4
------ ------
Total assets $617.0 $624.3
====== ======
LIABILITIES
Current liabilities:
Notes payable $9.8 $1.6
Accounts payable 124.7 137.7
Payable to other groups - .1
Payroll and benefits payable 3.9 3.8
Accrued taxes 7.7 7.0
Accrued interest 5.3 4.9
Long-term debt due within one year 10.7 18.8
------ ------
Total current liabilities 162.1 173.9
Long-term debt, less unamortized discount 185.5 182.0
Long-term deferred income taxes 136.1 135.9
Deferred credits and other liabilities 17.0 16.5
Preferred stock of subsidiary 3.8 3.8
------ ------
Total liabilities 504.5 512.1
STOCKHOLDERS' EQUITY 112.5 112.2
------ ------
Total liabilities and stockholders' equity $617.0 $624.3
====== ======
<FN>
Selected notes to financial statements appear on pages 52-55.
51
DELHI GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
Six Months Ended
June 30
(Dollars in millions) 1996 1995
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $1.2 $6.5
Adjustments to reconcile to net cash provided from
operating activities:
Depreciation, depletion and amortization 13.7 12.6
Pensions 1.2 .9
Deferred income taxes .2 1.8
Gain on disposal of assets (.4) (.5)
Restructuring credits - (6.2)
Changes in:
Current receivables - sold - (18.3)
- operating turnover 24.2 (2.5)
Inventories 3.9 1.3
Current accounts payable and accrued expenses (10.3) 17.0
All other items - net 2.3 (2.9)
------ ------
Net cash provided from operating activities 36.0 9.7
------ ------
INVESTING ACTIVITIES:
Capital expenditures (41.9) (12.7)
Disposal of assets .6 12.6
All other items - net - 3.0
------ ------
Net cash provided from (used in)
investing activities (41.3) 2.9
------ ------
FINANCING ACTIVITIES:
Change in Delhi Group's share of USX consolidated debt 4.9 47.1
Elimination of Marathon Group Retained Interest - (58.2)
Dividends paid (.9) (1.0)
Payment attributed to Retained Interest - (.5)
------ ------
Net cash provided from (used in)
financing activities 4.0 (12.6)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1.3) -
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1.9 .1
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $.6 $.1
====== ======
Cash used in operating activities included:
Interest and other financial costs paid $(9.5) $(5.2)
Income taxes paid, including settlements with
other groups (.2) (3.4)
<FN>
Selected notes to financial statements appear on pages 52-55.
52
DELHI GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited but,
in the opinion of management, reflects all adjustments necessary for a fair
presentation of the results for the periods covered. All such adjustments
are of a normal recurring nature unless disclosed otherwise. These
financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Additional information is contained in the USX Annual Report
on Form 10-K for the year ended December 31, 1995.
2. The financial statements of the Delhi Group include the financial position,
results of operations and cash flows for the businesses of Delhi Gas
Pipeline Corporation and certain other subsidiaries of USX, and a portion
of the corporate assets and liabilities and related transactions which are
not separately identified with ongoing operating units of USX. These
financial statements are prepared using amounts included in the USX
consolidated financial statements. Corporate amounts reflected in these
financial statements are determined based upon methods which management
believes to be reasonable. The accounting policies applicable to the
preparation of the financial statements of the Delhi Group may be modified
or rescinded in the sole discretion of the Board of Directors of USX
(Board), although the Board has no present intention to do so. The Board
may also adopt additional policies depending on the circumstances.
On June 15, 1995, USX eliminated the Marathon Group's Retained Interest in
the Delhi Group (equivalent to 4,564,814 shares of USX-Delhi Group Common
Stock (Delhi Stock)). This was accomplished through a reallocation of
assets and a corresponding adjustment to debt and equity attributed to the
Delhi and Marathon Groups. The transfer was made at a price of $12.75 per
equivalent share of Delhi Stock, or an aggregate of $58.2 million. The
Retained Interest represented the Marathon Group's interest in the earnings
and equity of the Delhi Group. Prior to the elimination, the Retained
Interest was approximately 33%, based on the 14,003,205 shares of Delhi
Stock designated by the Board to represent 100% of the common stockholders'
equity value of USX attributable to the Delhi Group.
Although the financial statements of the Delhi Group, the Marathon Group
and the U. S. Steel Group separately report the assets, liabilities
(including contingent liabilities) and stockholders' equity of USX
attributed to each such group, such attribution of assets, liabilities
(including contingent liabilities) and stockholders' equity among the Delhi
Group, the Marathon Group and the U. S. Steel Group for the purpose of
preparing their respective financial statements does not affect legal title
to such assets and responsibility for such liabilities. Holders of Delhi
Stock, USX-Marathon Group Common Stock (Marathon Stock) and USX-U. S. Steel
Group Common Stock (Steel Stock) are holders of common stock of USX, and
continue to be subject to all the risks associated with an investment in
USX and all of its
53
DELHI GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
2. (Continued)
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 other groups. In addition, net
losses of any Group, as well as dividends and distributions on any class of
USX Common Stock or series of Preferred Stock and repurchases of any class
of USX Common Stock or series of Preferred Stock at prices in excess of par
or stated value, will reduce the funds of USX legally available for payment
of dividends on all classes of Common Stock. Accordingly, the USX
consolidated financial information should be read in connection with the
Delhi Group financial information.
3. The method of calculating net income (loss) per share for the Delhi Stock,
Marathon Stock and Steel Stock reflects the Board's intent that the
separately reported earnings and surplus of the Delhi Group, the Marathon
Group and the U. S. Steel Group, as determined consistent with the USX
Certificate of Incorporation, are available for payment of dividends on the
respective classes of stock, although legally available funds and
liquidation preferences of these classes of stock do not necessarily
correspond with these amounts.
Primary net income (loss) per share is calculated by adjusting net income
for dividend requirements of preferred stock and income that was applicable
to the Retained Interest and is based on the weighted average number of
common shares outstanding plus common stock equivalents, provided they are
not antidilutive. Common stock equivalents result from assumed exercise of
stock options, where applicable.
Fully diluted net income (loss) per share assumes exercise of stock
options, provided the effect is not antidilutive.
4. In 1994, restructuring charges totaling $39.9 million were reported for the
write-down of assets to estimated net realizable value related to the
planned disposition of certain nonstrategic gas gathering and processing
assets and other investments. In the second quarter of 1995, disposition
of these assets was completed at higher than anticipated sales proceeds,
resulting in restructuring credits of $11.2 million ($6.2 million included
in operating income and $5.0 million included in other income).
5. The financial statement provision for estimated income taxes and related
tax payments or refunds have been reflected in the Delhi Group, the
Marathon Group and the U. S. Steel Group financial statements in accordance
with USX's tax allocation policy for such groups. In general, such policy
provides that the consolidated tax provision and related tax payments or
refunds are allocated among the Delhi Group, the Marathon Group and the U.
S. Steel 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.
54
DELHI GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (Continued)
The provision (credit) for estimated income taxes for the Delhi Group is
based on tax rates and amounts which recognize management's best estimate
of current and deferred tax assets and liabilities. Differences between
the combined interim tax provisions of the Delhi, the Marathon and the U.
S. Steel Groups and USX consolidated are allocated to each group based on
the relationship of the individual group provisions to the combined interim
provisions.
6. Inventories are carried at lower of average cost or market.
(In millions)
----------------------
June 30 December 31
1996 1995
-------- -----------
Natural gas in storage $5.5 $9.4
Natural gas liquids (NGLs) in storage .1 .2
Materials and supplies 1.2 1.1
---- ----
Total $6.8 $10.7
==== ====
7. The Delhi Group participates in an agreement (the program) to sell an
undivided interest in certain accounts receivable subject to limited
recourse. Payments are collected from the sold accounts receivable; the
collections are reinvested in new accounts receivable for the buyers; and a
yield, based on defined short-term market rates, is transferred to the
buyers. At June 30, 1996, the amount sold under the program that had not
been collected was $50.0 million, which will be forwarded to the buyers at
the end of the agreement, or in the event of earlier contract termination.
If the Delhi Group does not have a sufficient quantity of eligible accounts
receivable to reinvest in for the buyers, the size of the program will be
reduced accordingly. The buyers have rights to a pool of receivables that
must be maintained at a level of 110% of the program size.
8. USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the Delhi 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 Delhi 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 Delhi Group. See discussion of Liquidity in
USX Consolidated Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The Delhi 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. Expenditures for remediation and penalties have
not been material.
55
DELHI GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. (Continued)
For a number of years, the Delhi Group has made capital expenditures to
bring existing facilities into compliance with various laws relating to the
environment. In the first six months of 1996 and for the years 1995 and
1994, such capital expenditures totaled $4.5 million, $5.5 million and $4.6
million, respectively. The Delhi 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 June 30, 1996, contract commitments for the Delhi Group's capital
expenditures for property, plant and equipment totaled $5.6 million
compared with $9.3 million at December 31, 1995.
56
DELHI GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The Delhi Group includes Delhi Gas Pipeline Corporation ("DGP") and certain
other subsidiaries of USX Corporation ("USX") which are engaged in the
purchasing, gathering, processing, transporting and marketing of natural gas.
The following discussion should be read in conjunction with the second quarter
1996 USX consolidated financial information and the Delhi Group financial
statements and selected notes. In addition, the discussion of Results of
Operations should be read in conjunction with the Supplemental Statistics
provided on page 60.
Results of Operations
- ---------------------
Revenues in the second quarter and first six months of 1996 totaled
$212.0 million and $484.5 million, respectively, reflecting increases of
$72.6 million and $207.7 million, respectively, from comparable periods in 1995,
as summarized in the following table:
Second Quarter Six Months
Ended June 30 Ended June 30
-------------- -------------
(Dollars in millions) 1996 1995 1996 1995
- --------------------------------------------------------------------------------
Gas Sales and Trading $184.8 $ 118.4 $432.4 $235.7
Transportation 4.6 2.9 8.5 5.3
Gas Processing 20.7 18.1 39.8 35.3
Other 1.9 - 3.8 .5
------ ------ ------ ------
Total Revenues $212.0 $139.4 $484.5 $276.8
====== ====== ====== ======
The increases were primarily due to higher natural gas prices and increased
trading volumes, partially offset by lower natural gas and natural gas liquids
("NGLs") sales volumes.
Operating income of $3.4 million in the second quarter of 1996 declined by
$1.5 million as compared with the second quarter of 1995. Operating income of
$11.9 million in the first six months of 1996 declined by $2.6 million as
compared with the first six months of 1995. Operating income in the second
quarter and first six months of 1995 included a $6.2 million favorable pretax
effect related to completion of a 1994 nonstrategic asset disposition plan.
Excluding this effect, operating income in the second quarter and first six
months of 1996 increased by $4.7 million and $3.6 million, respectively, from
the comparable prior-year periods. These increases were due primarily to
improved gas sales and trading unit margins and increased transportation
volumes, partially offset by decreases in natural gas and NGLs sales volumes,
and higher natural gas processing feedstock costs.
Gas sales and trading unit margins in the second quarter of 1996 benefited
from higher gas prices and increased margins received on short-term
interruptible ("spot") market sales, as compared with the second quarter of
1995. Gas sales and trading margins in the first quarter and first six months
of 1996 reflected an estimated $2.9 million unfavorable effect of a previously
disclosed market anomaly caused by extreme winter weather in the eastern United
States and the inability to move Texas gas to that market due to transportation
constraints. Gas sales volumes declined by 14% and 7%, respectively, in the
second quarter and first six months
57
DELHI GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
of 1996, from the comparable prior-year periods, as some gas sales volumes were
converted to transportation volumes.
The natural gas trading business involves the purchase of natural gas from
sources other than wells directly connected to the Delhi Group's systems and the
subsequent sale of like volumes. Gross unit margins earned in the trading
business are usually significantly less than those earned on system sales.
Natural gas volumes from trading sales in the second quarter and first six
months of 1996 averaged 473.5 million cubic feet per day ("mmcfd") and 549.1
mmcfd, respectively, reflecting increases of 46% and 106%, respectively, from
the comparable prior-year periods.
The transportation business involves the transport of natural gas on
Delhi's systems for third parties at negotiated fees. Transportation margin in
the second quarter and first six months of 1996 increased by $1.7 million, or
59%, and $3.2 million, or 60%, respectively, from the comparable prior-year
periods, due primarily to increases in transportation volumes resulting from new
transportation agreements and conversion of some gas sales volumes to
transportation volumes.
Natural gas processing involves extraction of NGLs such as ethane, propane,
isobutane, normal butane and natural gasoline from the natural gas stream. Gas
processing margin in the second quarter and first six months of 1996, decreased
by $0.5 million, or 8%, and $2.3 million, or 18%, from the comparable 1995
periods, mainly due to declines in NGLs sales volumes and higher natural gas
processing feedstock costs.
Other income in the first six months of 1996 decreased by $5.0 million from
the comparable prior-year period, primarily reflecting a $5.0 million favorable
adjustment recorded in 1995 on the sale of the Delhi Group's interest in Ozark
Gas Transmission System ("Ozark") (see Note 4 to the Delhi Group financial
statements for details).
Interest and other financial costs were $10.2 million in the first six
months of 1996, compared with $6.6 million in the first six months of 1995. The
increase was due to increased debt levels that primarily resulted from the
second quarter 1995 elimination of the Marathon Group's Retained Interest (see
Note 2 to the Delhi Group financial statements for details), and capital
spending in excess of cash provided from operating activities.
The provision (credit) for estimated income taxes for the second quarter
of 1995 included an unfavorable effect associated with the sale of the Delhi
Group's interest in Ozark.
A Net loss of $1.2 million, or $.12 per share, was recorded in the second
quarter of 1996, compared with net income of $2.3 million, or $.12 per share, in
the second quarter of 1995. Net income totaled $1.2 million, or $.13 per share,
in the first six months of 1996, compared with $6.5 million, or $.42 per share,
in the first six months of 1995. The changes in net income primarily reflect
the factors discussed above.
58
DELHI GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Outlook
- -------
The Delhi Group continues to increase its natural gas pipeline systems and
treating and processing facilities through acquisitions and expansions of
existing facilities. The Delhi Group is currently involved in significant
projects, the largest being the expansion in the Pinnacle Reef gas play area of
East Texas, as well as projects in West Texas. Management anticipates gas
throughput could increase by 100 - 200 mmcfd over last year as these projects
are completed and integrated into the existing systems.
The Delhi Group's operating results from gas sales are affected by
fluctuations in natural gas prices and demand levels in the markets that it
serves. The levels of gas sales and trading margins for future periods are
difficult to project accurately because of fluctuations in customer demand for
premium services, competition in attracting new premium customers and the
volatility of natural gas prices. The Delhi Group attempts to sell all of the
natural gas available on its system each month. Natural gas volumes not sold to
its premium markets are typically sold in the spot market, generally at lower
average unit margins than those realized from premium sales. Because the
strongest demand for gas and the highest gas sales unit margins generally occur
during the winter heating season, the
Delhi Group has historically recognized the greatest portion of income from its
gas sales business during the first and fourth quarters of the year.
Since the adoption of Federal Energy Regulatory Commission ("FERC") Order
No. 636 in 1992, competition has increased significantly, and the domestic gas
industry is expected to remain highly competitive in the future. On the supply
side, gas producers now have easier access to end-user sales markets, which, at
times, has resulted in the conversion of their gas sales contracts with
midstream gathering and distribution companies, like DGP, to transportation
agreements. On the sales side, securing new premium service agreements has
become increasingly difficult. However, management believes that its increased
focus on core operating areas, an emphasis on sour gas gathering and treating
services and its ability to maintain a long-term dedicated reserve base and to
provide reliable sales service will enable the Delhi Group to remain a
competitive entity in the markets that it serves.
The Delhi Group monitors the economics of removing NGLs from the gas stream
for processing on an ongoing basis to determine the appropriate level of each
gas plant's operation. The levels of gas processing margin for future periods
are difficult to project, due to fluctuations in the price and demand for NGLs
and the volatility of natural gas processing feedstock costs. However,
management can reduce the volume of NGLs extracted and sold during periods of
unfavorable economics by curtailing the extraction of certain NGLs.
Cash Flows
- ----------
Net cash provided from operating activities was $36.0 million in the first
six months of 1996, compared with $9.7 million in the first six months of 1995.
The improvement reflected increased gross margins in the first six months of
1996, while the first six months of 1995 included the unfavorable effect of a
change in the sale of receivables program.
59
DELHI GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Capital expenditures for property, plant and equipment in the second
quarter and first six months of 1996 were $19.3 million and $41.9 million,
respectively, compared with $7.1 million and $12.7 million in the respective
1995 periods. Expenditures in the first six months of 1996 were primarily for
the Pinnacle Reef expansion project in East Texas and the acquisition of
pipeline and processing assets in West Texas. Capital expenditures for the year
1996 are expected to approximate $75 million. The Delhi Group will continue to
target additional expenditures to add new dedicated gas reserves, expand
existing facilities and acquire new facilities as opportunities arise in its
core operating areas. Contract commitments for capital expenditures were $5.6
million at June 30, 1996, compared with $9.3 million at year-end 1995.
Cash from the disposal of assets was $0.6 million in the first six months
of 1996, compared with $12.6 million in the first six months of 1995. The 1995
proceeds mainly reflected the sales of remaining assets in the 1994 asset
disposition plan.
Financial obligations increased by $4.9 million in the first six months of
1996 as cash used for capital expenditures exceeded net cash provided from
operating activities. Financial obligations consist of the Delhi Group's
portion of USX debt and preferred stock of a subsidiary attributed to all three
groups.
Liquidity
- ---------
For discussion of USX's liquidity and capital resources, see USX
Consolidated Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
The Delhi Group has incurred and will continue to incur capital and
operating and maintenance expenditures as a result of environmental laws and
regulations. To the extent these expenditures, as with all costs, are not
ultimately reflected in the prices of the Delhi Group's products and services,
operating results will be adversely affected. The Delhi Group believes that
substantially all of its competitors are subject to similar environmental laws
and regulations. However, the specific impact on each competitor may vary
depending on a number of factors, including the age and location of its
operating facilities and its production processes.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the Delhi Group
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 Delhi 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 Delhi Group. See discussion of Financial Condition in USX
Consolidated Management's Discussion and Analysis of Financial Condition and
Results of Operations.
60
DELHI GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS
------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
-------------- -------------
(Dollars in millions) 1996 1995 1996 1995
- --------------------------------------------------------------------------------
GROSS MARGIN
Gas Sales and Trading Margin $13.4 $9.3 $32.8 $29.9
Transportation Margin 4.6 2.9 8.5 5.3
------ ------ ------ ------
Systems and Trading Margin 18.0 12.2 41.3 35.2
Gas Processing Margin 5.9 6.4 10.8 13.1
------ ------ ------ ------
Total Gross Margin $23.9 $18.6 $52.1 $48.3
OPERATING INCOME (LOSS) $3.4 $4.9 $11.9 $14.5
CAPITAL EXPENDITURES $19.3 $7.1 $41.9 $12.7
OPERATING STATISTICS
Natural Gas Volumes (a)
Natural Gas Sales 457.6 531.8 541.2 581.2
Transportation 482.7 317.8 452.5 274.7
------ ------ ------ ------
Systems Throughput 940.3 849.6 993.7 855.9
Trading Sales 473.5 324.1 549.1 266.2
Partnership - equity share (b) - 7.0 - 10.5
------- ------- ------- -------
Total Sales Volumes 1,413.8 1,180.7 1,542.8 1,132.6
Natural Gas Liquids Sales (c) 762.5 823.6 745.1 817.1
- ---------------
<FN>
(a) Millions of cubic feet per day
(b) Related to an investment which was sold in the second quarter of 1995.
(c) Thousands of gallons per day
61
Part II - Other Information
- ----------------------------
Item 1. LEGAL PROCEEDINGS
U. S. Steel Group
(a) B&LE Litigation
A trial in a lawsuit (Pacific Great Lakes Corporation v. B&LE) related to
the B&LE litigation filed under the Ohio Valentine Act in Cuyahoga County
(Ohio) Court of Common Pleas in September 1995 was concluded in February
1996 with a jury verdict finding no injury to the Plaintiffs. On May 24,
1996, the Court denied plaintiff's Motion for Judgment Notwithstanding
the Verdict and/or for a New Trial. A Notice of Appeal to the Cuyahoga
County Court of Appeals has been filed by the Plaintiffs.
(b) Aloha Stadium Litigation
On June 24, 1996, the Supreme Court of Hawaii reversed the order of the
trial court granting U. S. Steel's motion to dismiss the plaintiffs'
negligent misrepresentation claim and also held the trial court's jury
instructions on the state's unfair and deceptive trade practices claim to
be erroneous. The Supreme Court vacated the jury verdict and remanded
the case to the trial court for further proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held April 30, 1996. In connection
with the meeting, proxies were solicited pursuant to the Securities
Exchange Act. The following are the voting results on proposals
considered and voted upon at the meeting, all of which were described
in the proxy statement.
1. All nominees for director listed in the proxy statement were elected.
The following is a tabulation of votes with respect to each nominee
for director:
Votes For Votes Withheld
Jeanette G. Brown 375,318,070 7,094,436
Charles A. Corry 374,265,924 8,146,582
Paul E. Lego 374,492,719 7,919,787
Seth E. Schofield 375,129,758 7,282,748
Douglas C. Yearley 375,493,753 6,918,753
2. Price Waterhouse LLP was elected as the independent accountants for
1996. (For, 379,324,908; against, 1,444,810; abstained 1,643,311)
62
Part II - Other Information (Continued):
- ---------------------------
Item 5. OTHER INFORMATION
SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION OF MARATHON OIL COMPANY
Supplementary Data
---------------------------------------------------------------------
(Unaudited)
The following summarized consolidated financial information of Marathon Oil
Company, a wholly owned subsidiary of USX, is included in this Form 10-Q in
satisfaction of the reporting obligation of Marathon which has debt securities
registered under the Securities Exchange Act. All such securities are
guaranteed by USX.
(In millions)
-------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
1996 1995 1996 1995
---- ---- ---- ----
INCOME DATA:
Revenues $4,061 $3,511* $7,673 $6,830*
Operating income 240 258* 622 476*
Net income 107 98 315 157
<FN>
*Reclassified to conform to 1996 classifications.
(In millions)
-----------------------
June 30 December 31
1996 1995
-------- -----------
BALANCE SHEET DATA:
Assets:
Current assets $2,781 $2,656
Noncurrent assets 7,886 8,088
------ ------
Total assets $10,667 $10,744
====== ======
Liabilities and Stockholder's Equity:
Current liabilities $1,689 $1,659
Noncurrent liabilities 7,420 7,842
Stockholder's equity 1,558 1,243
------- -------
Total liabilities and stockholder's equity $10,667 $10,744
======= =======
63
Part II - Other Information (Continued):
- ----------------------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3. Articles of Incorporation and By-Laws
(a)USX's By-Laws, effective as of July 30, 1996
4. Instruments Defining the Right of Security Holders, Including
Indentures
(a)Amended and Restated Credit Agreement, dated as of August 7,
1996
12.1 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
12.2 Computation of Ratio of Earnings to Fixed Charges
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned chief accounting officer thereunto duly authorized.
USX CORPORATION
By /s/ Lewis B. Jones
Lewis B. Jones
Vice President &
Comptroller
August 13, 1996