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 March 31, 1997
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 or 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 April 30, 1997 follows:
USX-Marathon Group - 287,745,235 shares
USX-U. S. Steel Group - 85,616,168 shares
USX-Delhi Group - 9,451,269 shares
2
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED March 31, 1997
---------------------------
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 13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14
Financial Statistics 21
B. Marathon Group
Item 1. Financial Statements:
Marathon Group Statement of Operations 22
Marathon Group Balance Sheet 23
Marathon Group Statement of Cash Flows 24
Selected Notes to Financial Statements 25
Item 2. Marathon Group Management's Discussion and
Analysis of Financial Condition and
Results of Operations 29
Supplemental Statistics 35
3
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED March 31, 1997
---------------------------
INDEX Page
----- ----
PART I - FINANCIAL INFORMATION (Continued)
C. U. S. Steel Group
Item 1. Financial Statements:
U. S. Steel Group Statement of Operations 36
U. S. Steel Group Balance Sheet 37
U. S. Steel Group Statement of Cash Flows 38
Selected Notes to Financial Statements 39
Item 2. U. S. Steel Group Management's Discussion
and Analysis of Financial Condition
and Results of Operations 43
Supplemental Statistics 47
D. Delhi Group
Item 1. Financial Statements:
Delhi Group Statement of Operations 48
Delhi Group Balance Sheet 49
Delhi Group Statement of Cash Flows 50
Selected Notes to Financial Statements 51
Item 2. Delhi Group Management's Discussion and
Analysis of Financial Condition
and Results of Operations 55
Supplemental Statistics 59
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 60
Item 5. Other Information 60
Item 6. Exhibits and Reports on Form 8-K 70
4
Part I - Financial Information
A. Consolidated Corporation
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
------------------------------------------------
First Quarter Ended
March 31
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
REVENUES $5,997 $5,473
OPERATING COSTS:
Cost of sales (excludes items shown below) 4,432 4,076
Inventory market valuation charges (credits) 114 (155)
Selling, general and administrative expenses 54 44
Depreciation, depletion and amortization 253 267
Taxes other than income taxes 769 742
Exploration expenses 33 33
------ ------
Total operating costs 5,655 5,007
------ ------
OPERATING INCOME 342 466
Other income 27 34
Interest and other financial income 3 5
Interest and other financial costs (85) (120)
------ ------
INCOME BEFORE INCOME TAXES 287 385
Less provision for estimated income taxes 91 120
------ ------
NET INCOME 196 265
Dividends on preferred stock (6) (6)
------ ------
NET INCOME APPLICABLE TO COMMON STOCKS $190 $259
====== ======
<FN>
Selected notes to financial statements appear on pages 9-12.
5
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Continued) (Unaudited)
INCOME PER COMMON SHARE
------------------------------------------------------------
First Quarter Ended
March 31
(Dollars in millions, except per share amounts) 1997 1996
- --------------------------------------------------------------------------------
APPLICABLE TO MARATHON STOCK:
Net income $108 $216
- Per share - primary .37 .75
- fully diluted .37 .74
Dividends paid per share .19 .17
Weighted average shares, in thousands
- Primary 287,987 287,460
- Fully diluted 294,661 297,251
APPLICABLE TO STEEL STOCK:
Net income $81 $40
- Per share - primary .96 .49
- fully diluted .93 .48
Dividends paid per share .25 .25
Weighted average shares, in thousands
- Primary 85,006 83,197
- Fully diluted 94,581 85,030
APPLICABLE TO DELHI STOCK:
Net income $1 $2
- Per share - primary and fully diluted .15 .25
Dividends paid per share .05 .05
Weighted average shares, in thousands
- Primary 9,466 9,447
- Fully diluted 9,467 9,447
<FN>
Selected notes to financial statements appear on pages 9-12.
6
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Unaudited)
----------------------------------------
ASSETS
March 31 December 31
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $78 $55
Receivables, less allowance for doubtful
accounts of $8 and $26 1,019 1,270
Inventories 1,855 1,939
Deferred income tax benefits 57 57
Other current assets 84 81
------ ------
Total current assets 3,093 3,402
Investments and long-term receivables,
less reserves of $17 and $17 931 854
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$15,426 and $15,280 10,323 10,404
Prepaid pensions 2,064 2,014
Other noncurrent assets 308 306
------ ------
Total assets $16,719 $16,980
====== ======
<FN>
Selected notes to financial statements appear on pages 9-12.
7
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Continued) (Unaudited)
--------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31 December 31
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Notes payable $103 $81
Accounts payable 1,862 2,204
Payroll and benefits payable 514 475
Accrued taxes 306 304
Accrued interest 63 102
Long-term debt due within one year 521 353
------ ------
Total current liabilities 3,369 3,519
Long-term debt, less unamortized discount 3,535 3,859
Long-term deferred income taxes 1,147 1,097
Employee benefits 2,797 2,797
Deferred credits and other liabilities 469 436
Preferred stock of subsidiary 250 250
------ ------
Total liabilities 11,567 11,958
------ ------
STOCKHOLDERS' EQUITY
Preferred stock -
6.50% Cumulative Convertible issued - 6,900,000 shares
($345 liquidation preference) 7 7
Common stocks:
Marathon Stock issued - 287,686,738 shares and
287,525,213 shares 288 288
Steel Stock issued - 85,281,513 shares and
84,885,473 shares 85 85
Delhi Stock issued - 9,451,269 shares and
9,448,269 shares 9 9
Additional paid-in capital 4,166 4,150
Retained earnings 631 517
Other equity adjustments (34) (34)
------ ------
Total stockholders' equity 5,152 5,022
------ ------
Total liabilities and stockholders' equity $16,719 $16,980
====== ======
<FN>
Selected notes to financial statements appear on pages 9-12.
8
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------------------
First Quarter Ended
March 31
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $196 $265
Adjustments to reconcile to net cash provided
from operating activities:
Depreciation, depletion and amortization 253 267
Exploratory dry well costs 14 14
Inventory market valuation charges (credits) 114 (155)
Pensions (47) (46)
Postretirement benefits other than pensions 9 6
Deferred income taxes 39 74
Gain on disposal of assets (14) (25)
Changes in:
Current receivables 239 (20)
Inventories (30) 21
Current accounts payable and accrued expenses (331) (130)
All other - net (23) (6)
------ ------
Net cash provided from operating activities 419 265
------ ------
INVESTING ACTIVITIES:
Capital expenditures (185) (178)
Disposal of assets 19 175
Investments in equity affiliates - net (56) 5
All other - net 5 (7)
------ ------
Net cash used in investing activities (217) (5)
------ ------
FINANCING ACTIVITIES:
Commercial paper and revolving credit arrangements - net 22 60
Other debt repayments (134) (263)
Common stock issued 14 7
Dividends paid (81) (75)
------ ------
Net cash used in financing activities (179) (271)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 23 (11)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 55 131
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $78 $120
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(132) $(170)
Income taxes paid (44) (23)
<FN>
Selected notes to financial statements appear on pages 9-12.
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, 1996.
Effective January 1, 1997, USX adopted American Institute of Certified
Public Accountants Statement of Position No. 96-1, "Environmental
Remediation Liabilities" (SOP 96-1), which provides additional
interpretation of existing accounting standards related to recognition,
measurement and disclosure of environmental remediation liabilities. As a
result of adopting SOP 96-1, USX identified additional environmental
remediation liabilities of $46 million, of which $28 million was discounted
to a present value of $13 million and $18 million was not discounted.
Assumptions used in the calculation of the present value amount included an
inflation factor of 2% and an interest rate of 7% over a range of 22 to 30
years. Estimated receivables for recoverable costs related to adoption of
SOP 96-1 were $4 million. The net unfavorable effect on first quarter 1997
operating income was $27 million.
2. The method of calculating net income 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 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.
10
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
3. The items below are included in both revenues and operating costs,
resulting in no effect on income.
(In millions)
-------------------
First Quarter Ended
March 31
1997 1996
---- ----
Matching crude oil and refined product buy/sell
transactions settled in cash $755 $599
Consumer excise taxes on petroleum products and
merchandise 655 633
4. Operating income includes net periodic pension credits of $38 million and
$37 million in the first quarter of 1997 and 1996, respectively. These
pension credits are primarily noncash and for the most part are included in
selling, general and administrative expenses.
5. 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.
6. 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)
----------------------
March 31 December 31
1997 1996
-------- -----------
Raw materials $532 $594
Semi-finished products 317 309
Finished products 993 908
Supplies and sundry items 127 128
------ ------
Total (at cost) 1,969 1,939
Less inventory market valuation reserve 114 -
------ ------
Net inventory carrying value $1,855 $1,939
====== ======
The inventory market valuation reserve reflects the extent that the
recorded LIFO cost basis of crude oil and refined products inventories
exceeds net realizable value. The reserve is decreased to reflect
increases in market prices and inventory turnover and increased to
reflect decreases in market prices. Changes in the inventory market
valuation reserve result in noncash charges or credits to operating
income. For additional information, see Outlook in the Marathon Group's
Management's Discussion and Analysis of Financial Condition and Results
of Operations.
11
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
7. At March 31, 1997, USX had no borrowings against its $2,350 million long-
term revolving credit agreement.
USX had $30 million in outstanding borrowings at March 31, 1997, 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 $73 million.
In the event of a change in control of USX, debt obligations totaling
$3,212 million at March 31, 1997, may be declared immediately due and
payable.
8. During the first quarter of 1997, USX called for redemption on April 4,
1997 and April 15, 1997, respectively, Zero Coupon Convertible Senior
Debentures Due 2005 with a carrying value of $41 million and the aggregate
principal amount of $227 million 7% Convertible Subordinated Debentures Due
2017. Also during the quarter, USX redeemed $120 million aggregate
principal amount of 8.50% Sinking Fund Debentures Due November 1, 2006.
9. 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 March 31, 1997, 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 under an agreement that expires in
1997. 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 March 31, 1997, the balance of sold loans receivable
subject to recourse was $35 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.
10. 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)
10. (Continued)
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 March 31, 1997, and December 31, 1996,
accrued liabilities for remediation totaled $171 million and $144 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 $42 million at March 31,
1997, and $23 million at December 31, 1996.
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 quarter of 1997 and for the years 1996 and 1995,
such capital expenditures totaled $31 million, $165 million and $111
million, respectively. USX anticipates making additional such expenditures
in the future; however, the exact amounts and timing of such expenditures
are uncertain because of the continuing evolution of specific regulatory
requirements.
At March 31, 1997, and December 31, 1996, accrued liabilities for platform
abandonment and dismantlement totaled $122 million and $118 million,
respectively.
Guarantees by USX of the liabilities of affiliated entities totaled
$70 million at March 31, 1997. In the event that any defaults of
guaranteed liabilities occur, USX has access to its interest in the assets
of most of the affiliates to reduce losses resulting from these guarantees.
As of March 31, 1997, the largest guarantee for a single affiliate was $28
million.
At March 31, 1997, USX's pro rata share of obligations of LOOP LLC and
various pipeline affiliates secured by throughput and deficiency agreements
totaled $176 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 March 31, 1997, totaled $596 million compared with $526
million at December 31, 1996.
13
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS - (Unaudited)
----------------------------------------------------------
First Quarter Ended
March 31 Year Ended December 31
- --------------------- -------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
3.31 3.78 3.55 1.50 1.92 (a) (a)
==== ==== ==== ==== ==== ==== ====
<FN>
(a) Earnings did not cover combined fixed charges and preferred stock
dividends by $325 million for 1993 and by $211 million for 1992.
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS - (Unaudited)
-------------------------------------------------
First Quarter Ended
March 31 Year Ended December 31
- --------------------- -------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
3.57 4.04 3.81 1.63 2.08 (a) (a)
==== ==== ==== ==== ==== ==== ====
<FN>
(a) Earnings did not cover fixed charges by $281 million for 1993 and by
$197 million for 1992.
PAGE> 14
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
USX Corporation ("USX") is a diversified company engaged primarily in the
energy business through its Marathon Group, in the steel business through its
U. S. Steel Group and in the gas gathering and processing business through its
Delhi Group. The following discussion should be read in conjunction with the
first quarter 1997 USX consolidated financial statements and selected notes. For
income per common share amounts applicable to each of USX's three classes of
common stock, USX-Marathon Group Common Stock ("Marathon Stock"), USX-U. S.
Steel Group Common Stock ("Steel Stock") and USX-Delhi Group Common Stock
("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.
Certain sections of the discussion include forward-looking statements
concerning trends or events potentially affecting USX. These statements
typically contain words such as "anticipates", "believes", "estimates",
"expects" or similar words indicating that future outcomes are uncertain. In
accordance with "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995, these statements are accompanied by cautionary language
identifying important factors, though not necessarily all such factors, that
could cause future outcomes to differ materially from those set forth in
forward-looking statements. For additional cautionary language related to
USX, see Item 5. herein.
Results of Operations
- ---------------------
Revenues for the first quarter of 1997 and 1996 are set forth in the
following table:
First Quarter Ended
March 31
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
Revenues
Marathon Group $4,082 $3,627
U. S. Steel Group 1,620 1,591
Delhi Group 339 278
Eliminations (44) (23)
------ ------
Total USX Corporation Revenues 5,997 5,473
Less:
Matching crude oil and refined product buy/sell
transactions settled in cash (a) 755 599
Consumer excise taxes on petroleum products
and merchandise (a) 655 633
------ ------
Revenues adjusted to exclude above items $4,587 $4,241
====== ======
<FN>
(a) Included in both revenues and operating costs for the Marathon Group and
USX Consolidated.
15
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Adjusted revenues increased by $346 million, or 8%, in the first quarter of
1997 as compared with the first quarter of 1996. The improvement reflected
increases of 12% for the Marathon Group, 22% for the Delhi Group and 2% for the
U. S. Steel Group. The increase for the Marathon Group was due primarily to
higher average refined product prices and higher average worldwide natural gas
and liquid hydrocarbon prices, partially offset by reduced worldwide liquid
hydrocarbon volumes. The increase for the Delhi Group was due primarily to
higher average sales prices for natural gas and natural gas liquids, partially
offset by lower natural gas sales volumes. The increase for the U. S. Steel
Group was due primarily to higher average realized prices.
Operating income and certain items included in operating income for the
first quarter of 1997 and 1996 are set forth in the following table:
First Quarter Ended
March 31
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
Operating income $342 $466
Less: certain favorable (unfavorable) items for
Marathon Group
Inventory market valuation reserve adjustment (a) (114) 155
Charges for withdrawal from MPA (b) - (10)
U. S. Steel Group
Effect of adoption of SOP 96-1 (c) (20) -
Other environmental accrual adjustments - net 11 -
---- ----
Subtotal (123) 145
---- ----
Operating income adjusted to exclude above items $465 $321
==== ====
<FN>
(a) The inventory market valuation reserve reflects the extent to which the
recorded LIFO cost basis of crude oil and refined product inventories exceeds
net realizable value. For additional discussion of this noncash adjustment, see
Outlook in Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Marathon Group.
(b) Marine Preservation Association ("MPA") is a non-profit oil spill response
group.
(c) American Institute of Certified Public Accountants Statement of Position
No. 96-1, "Environmental Remediation Liabilities" ("SOP 96-1") provides
additional guidance on recognition, measurement and disclosure of remediation
liabilities.
Adjusted operating income increased by $144 million, or 45%, in the first
quarter of 1997 as compared with the first quarter of 1996, reflecting increases
of $96 million for the Marathon Group and $48 million for the U. S. Steel Group.
The increase for the Marathon Group was due primarily to higher average
worldwide natural gas and liquid hydrocarbon prices and higher average refined
product margins, partially offset by reduced worldwide liquid hydrocarbon
volumes. The increase for the U. S. Steel Group was due primarily to higher
average realized prices, a partial recovery of insurance proceeds related to the
April 1996 break-out at the Gary Works' No. 13 blast furnace and an improved
product mix, partially offset by higher natural gas costs.
16
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Other income for the first quarter of 1997 and 1996 is set forth in the
following table:
First Quarter Ended
March 31
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
Income from affiliates - equity method $15 $12
Gain on sale of investments (a) 11 21
Other income 1 1
------ ------
Total other income $27 $34
====== ======
- ------
<FN>
(a) Amounts in 1997 and 1996 primarily reflect gains on the sale of the
Marathon Group's interests in certain domestic pipeline companies.
Net interest and other financial costs for the first quarter of 1997 and
1996 are set forth in the following table:
First Quarter Ended
March 31
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
Interest and other financial income $3 $5
Interest and other financial costs (85) (120)
------ ------
Net interest and other financial costs (82) (115)
Less:
Favorable adjustment to carrying value
of indexed debt(a) 16 -
------ ------
Net interest and other financial costs
adjusted to exclude above item $(98) $(115)
====== ======
<FN>
(a) In December 1996, USX issued $117 million in aggregate principal amount of
6-3/4% Notes Due February 1, 2000 ("indexed debt"), mandatorily exchangeable
at maturity for common stock of RMI Titanium Company ("RMI") (or for the
equivalent amount of cash, at USX's option). The carrying value of indexed
debt is adjusted quarterly to settlement value based on changes in the value
of RMI common stock. Any resulting adjustment is charged or credited to
income and included in interest and other financial costs. USX's 27% interest
in RMI continues to be accounted for under the equity method.
Excluding the adjustment to the carrying value of indexed debt, net
interest and other financial costs decreased by $17 million in the first quarter
of 1997 as compared with the first quarter of 1996, due primarily to lower
average debt levels.
Provision for estimated income taxes of $91 million and $120 million for
the first quarter of 1997 and 1996 were based on tax rates and amounts that
recognize management's best estimate of current and deferred tax assets and
liabilities.
Net income was $196 million in the first quarter of 1997, a decrease of
$69 million, or 26%, from the first quarter of 1996, mainly reflecting the items
discussed above.
17
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Dividends to Stockholders
- -------------------------
On April 29, 1997, the USX Board of Directors (the "Board") declared
dividends of 19 cents per share on Marathon Stock, 25 cents per share on Steel
Stock and 5 cents per share on Delhi Stock, all payable June 10, 1997, to
stockholders of record at the close of business on May 21, 1997. The Board also
declared a dividend of $0.8125 per share on USX's 6.5% Cumulative Convertible
Preferred Stock, payable June 30, 1997, to stockholders of record at the close
of business on June 2, 1997.
Cash Flows
- ----------
Cash and cash equivalents totaled $78 million at March 31, 1997, compared
with $55 million at December 31, 1996.
Net cash provided from operating activities totaled $419 million in the
first quarter of 1997, compared with $265 million in the first quarter of 1996.
The 1996 period included payments of $39 million related to certain state tax
issues and $28 million for final settlement of the Pickering v. USX litigation.
Excluding the effects of these items, net cash provided from operating
activities increased by $87 million in the first quarter of 1997, due primarily
to improved operating results (mainly reflecting higher worldwide natural gas
and liquid hydrocarbon prices, higher average refined product margins and higher
average realized steel prices), partially offset by unfavorable working capital
changes.
Cash from the disposal of assets was $19 million in the first quarter of
1997, compared with $175 million in the first quarter of 1996. The 1997 proceeds
primarily reflected sale of the Marathon Group's interest in a domestic pipeline
company and certain other investments. The 1996 proceeds primarily reflected the
sale of the U. S. Steel Group's investment in National-Oilwell (an oil field
service joint venture); sales of the Marathon Group's interests in oil and gas
production properties in Indonesia and the sale of the Marathon Group's interest
in a domestic pipeline company.
Capital expenditures for property, plant and equipment in the first quarter
of 1997 were $185 million, compared with $178 million in the first quarter of
1996. For further details, see USX Corporation - Financial Statistics, following
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Contract commitments for capital expenditures were $596 million at March
31, 1997, compared with $526 million at December 31, 1996.
Investments in equity affiliates of $56 million in the first quarter of
1997 reflect spending on capital projects by equity affiliates, primarily the
Nautilus natural gas pipeline system in the Gulf of Mexico and the Sakhalin II
project in Russia, and an investment in a power generation project in Ecuador.
USX's total long-term debt, preferred stock of subsidiary and notes
payable, was $4.4 billion at March 31, 1997, down $134 million from December 31,
1996, mainly reflecting cash provided from operating activities and asset sales
during 1997, in excess of cash used for capital expenditures, dividend payments
and investments in equity affiliates. Redemptions of long-term debt consisted of
$120 million of 8-1/2% Sinking Fund Debentures due 2006.
18
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Liquidity
- ---------
At March 31, 1997, USX had no borrowings against its $2,350 million long-
term revolving credit agreement. At March 31, 1997, USX had no borrowings
against its short-term credit agreements totaling $175 million. These agreements
are with two banks, with interest based on their prime rate or London Interbank
Offered Rate, and carry a facility fee of .15%. Certain other banks provide
short-term lines of credit totaling $200 million which generally require
maintenance of compensating balances of 3%. At March 31, 1997, USX had $30
million borrowed against these lines of credit, leaving $170 million available
in short-term lines of credit. In addition, USX had other outstanding short-term
borrowings of $73 million.
USX management believes that its short-term and long-term liquidity is
adequate to satisfy its obligations as of March 31, 1997, 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 1997 and years 1998 and 1999, and any amounts that may
ultimately be paid in connection with contingencies (which are discussed in Note
10 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.
USX's ability to avail itself in the future of the above mentioned
financing options is affected by the performance of each of its Groups (as
measured by various factors including cash provided from operating activities),
the state of worldwide debt and equity markets, investor perceptions and
expectations of past and future performance and actions, the overall U.S.
financial climate, and, in particular, with respect to borrowings, by levels of
USX's outstanding debt and credit ratings by investor services.
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.
19
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
USX has been notified that it is a potentially responsible party ("PRP") at
46 waste sites under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") as of March 31, 1997. In addition, there are 24 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 109 additional sites,
excluding retail marketing outlets, 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. 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.
Effective January 1, 1997, USX adopted SOP 96-1. First quarter 1997
operating income for USX included charges of $27 million (net of expected
recoveries) related to such adoption, primarily accruals of post-closure
monitoring costs, study costs and administrative costs. See Note 1 to the
Consolidated Financial Statements for additional discussion.
First quarter 1997 operating income also included net favorable effects of
$15 million related to other environmental accrual adjustments.
Accrued liabilities for remediation totaled $171 million at
March 31, 1997, an increase of $27 million from December 31, 1996, due
primarily to accrual adjustments for the adoption of SOP 96-1 and accruals
related to retail marketing outlets, partially offset by other net accrual
adjustments related to U. S. Steel Group. Receivables for expected recoveries
totaled $42 million at March 31, 1997, an increase of $19 million from
December 31, 1996, due primarily to accrual adjustments reflecting an
increase in the estimated portion of costs that are ultimately recoverable,
and accruals for recoveries associated with adoption of SOP 96-1. See Note 10
to the Consolidated Financial Statements.
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 (see Note 10 to the
Consolidated 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 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 herein.
Outlook
- -------
In March 1997, USX called for redemption in April 1997, Zero Coupon
Convertible Senior Debentures Due 2005 with a carrying value of $41 million
($24 million in original proceeds and $17 million of amortized discount) and
7% Convertible Subordinated Debentures due 2017 with a carrying value of
$227 million. The effects of these redemptions will be reflected in USX's second
quarter 1997 financial statements.
For additional discussion, see Outlook in 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.
20
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Accounting Standard
- -------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"), which changes the computation and presentation of earnings per share
("EPS"). USX will adopt SFAS No. 128 in the fourth quarter of 1997, as required.
While restatement of prior-period EPS is required by the standard, EPS presented
for each class of USX Common Stock for the first quarter of 1997 and for the
years 1996 and 1995 will not change upon adoption.
21
USX CORPORATION
FINANCIAL STATISTICS (Unaudited)
--------------------------------
First Quarter
Ended
March 31
----------------
(Dollars in Millions) 1997 1996
- --------------------------------------------------------------------------------
REVENUES
Marathon Group $4,082 $3,627
U. S. Steel Group 1,620 1,591
Delhi Group 339 278
Eliminations (44) (23)
------- -------
Total $5,997 $5,473
OPERATING INCOME
Marathon Group $214 $377
U. S. Steel Group 120 81
Delhi Group 8 8
----- -----
Total $342 $466
CAPITAL EXPENDITURES
Marathon Group $118 $100
U. S. Steel Group 50 56
Delhi Group 17 22
----- -----
Total $185 $178
22
Part I - Financial Information (Continued):
B. Marathon Group
MARATHON GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
First Quarter Ended
March 31
(Dollars in millions, except per share amounts) 1997 1996
- --------------------------------------------------------------------------------
REVENUES $4,082 $3,627
OPERATING COSTS:
Cost of sales (excludes items shown below) 2,758 2,430
Inventory market valuation charges (credits) 114 (155)
Selling, general and administrative expenses 84 78
Depreciation, depletion and amortization 171 182
Taxes other than income taxes 708 682
Exploration expenses 33 33
------ ------
Total operating costs 3,868 3,250
------ ------
OPERATING INCOME 214 377
Other income 16 25
Interest and other financial income 2 4
Interest and other financial costs (67) (86)
------ ------
INCOME BEFORE INCOME TAXES 165 320
Less provision for estimated income taxes 57 104
------ ------
NET INCOME $108 $216
====== ======
MARATHON STOCK DATA:
Net income per share - primary $.37 $.75
- fully diluted .37 .74
Dividends paid per share .19 .17
Weighted average shares, in thousands
- Primary 287,987 287,460
- Fully diluted 294,661 297,251
<FN>
Selected notes to financial statements appear on pages 25-28.
23
MARATHON GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
---------------------------------
March 31 December 31
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $62 $32
Receivables, less allowance for doubtful
accounts of $2 and $2 494 613
Inventories 1,182 1,282
Other current assets 124 119
------ ------
Total current assets 1,862 2,046
Investments and long-term receivables 384 311
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$9,182 and $9,031 7,232 7,298
Prepaid pensions 285 280
Other noncurrent assets 212 216
------ ------
Total assets $9,975 $10,151
====== ======
LIABILITIES
Current liabilities:
Notes payable $77 $59
Accounts payable 1,087 1,385
Payroll and benefits payable 113 106
Accrued taxes 95 98
Deferred income taxes 146 155
Accrued interest 47 75
Long-term debt due within one year 399 264
------ ------
Total current liabilities 1,964 2,142
Long-term debt, less unamortized discount 2,522 2,642
Long-term deferred income taxes 1,203 1,178
Employee benefits 361 356
Deferred credits and other liabilities 346 311
Preferred stock of subsidiary 182 182
------ ------
Total liabilities 6,578 6,811
STOCKHOLDERS' EQUITY 3,397 3,340
------ ------
Total liabilities and stockholders' equity $9,975 $10,151
====== ======
<FN>
Selected notes to financial statements appear on pages 25-28.
24
MARATHON GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
First Quarter Ended
March 31
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $108 $216
Adjustments to reconcile to net cash provided from
operating activities:
Depreciation, depletion and amortization 171 182
Exploratory dry well costs 14 14
Inventory market valuation charges (credits) 114 (155)
Pensions (5) (5)
Postretirement benefits other than pensions 3 4
Deferred income taxes 16 57
Gain on disposal of assets (12) (21)
Changes in:
Current receivables 119 (24)
Inventories (14) 41
Current accounts payable and accrued expenses (323) (57)
All other - net 13 10
------ ------
Net cash provided from operating activities 204 262
------ ------
INVESTING ACTIVITIES:
Capital expenditures (118) (100)
Disposal of assets 13 85
Investments in equity affiliates - net (57) 2
All other - net 1 -
------ ------
Net cash used in investing activities (161) (13)
------ ------
FINANCING ACTIVITIES:
Increase (decrease) in Marathon Group's share
of USX consolidated debt 39 (188)
Marathon Stock issued 3 -
Dividends paid (55) (49)
------ ------
Net cash used in financing activities (13) (237)
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 30 12
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 32 77
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $62 $89
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(92) $(133)
Income taxes paid, including settlements with other
groups (71) (5)
<FN>
Selected notes to financial statements appear on pages 25-28.
25
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, 1996.
Effective January 1, 1997, USX adopted American Institute of Certified
Public Accountants Statement of Position No. 96-1, "Environmental
Remediation Liabilities" (SOP 96-1), which provides additional
interpretation of existing accounting standards related to recognition,
measurement and disclosure of environmental remediation liabilities. As a
result of adopting SOP 96-1, the Marathon Group recognized additional
environmental remediation liabilities of $11 million. Estimated
receivables for recoverable costs related to adoption of SOP 96-1 were $4
million. The net unfavorable effect on Marathon Group first quarter 1997
operating income was $7 million.
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
26
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
2. (Continued)
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.
3. The method of calculating net income 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 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)
-------------------
First Quarter Ended
March 31
1997 1996
---- ----
Matching crude oil and refined product buy/sell
transactions settled in cash $755 $599
Consumer excise taxes on petroleum products and
merchandise 655 633
27
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. 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.
6. 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)
----------------------
March 31 December 31
1997 1996
-------- -----------
Crude oil and natural gas liquids $414 $463
Refined products and merchandise 811 746
Supplies and sundry items 71 73
------ ------
Total (at cost) 1,296 1,282
Less inventory market valuation reserve 114 -
------ ------
Net inventory carrying value $1,182 $1,282
====== ======
The inventory market valuation reserve reflects the extent that the
recorded LIFO cost basis of crude oil and refined products inventories
exceeds net realizable value. The reserve is decreased to reflect increases
in market prices and inventory turnover and increased to reflect decreases
in market prices. Changes in the inventory market valuation
reserve result in noncash charges or credits to operating income. For
additional information, see Outlook in the Marathon Group's
Management's Discussion and Analysis of Financial Condition and Results
of Operations.
7. 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 March 31, 1997, 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.
28
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. 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.
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 March 31, 1997, and
December 31, 1996, accrued liabilities for remediation totaled $58 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 $42
million at March 31, 1997, and $23 million at December 31, 1996.
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 quarter of 1997 and for the
years 1996 and 1995, such capital expenditures totaled $12 million, $66
million and $50 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 March 31, 1997, and December 31, 1996, accrued liabilities for
platform abandonment and dismantlement totaled $122 million and $118
million, respectively.
Guarantees by USX of the liabilities of affiliated entities of the Marathon
Group totaled $34 million at March 31, 1997. As of March 31, 1997, the
largest guarantee for a single affiliate was $28 million.
At March 31, 1997, the Marathon Group's pro rata share of obligations of
LOOP LLC and various pipeline affiliates secured by throughput and
deficiency agreements totaled $176 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 March 31, 1997, contract commitments for the Marathon Group's capital
expenditures for property, plant and equipment totaled $473 million
compared with $388 million at December 31, 1996.
29
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 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
first quarter 1997 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 35.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting the
businesses of the Marathon Group. These statements typically contain words such
as "believes", "estimates", "expects" or similar words indicating that future
outcomes are uncertain. In accordance with "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, these statements are
accompanied by cautionary language identifying important factors, though not
necessarily all such factors, that could cause future outcomes to differ
materially from those set forth in forward-looking statements. For additional
cautionary language related to the Marathon Group, see Item 5. herein.
Results of Operations
- ---------------------
Revenues for the first quarter of 1997 and 1996 are summarized in the
following table:
First Quarter Ended
March 31
-------------------
(Dollars in millions) 1997 1996
----- -----
Refined products $1,686 $1,529
Merchandise 238 227
Liquid hydrocarbons 266 270
Natural gas 438 319
Transportation and other 44 50
------ ------
Subtotal 2,672 2,395
Matching crude oil and refined product buy/sell
transactions settled in cash (a) 755 599
Consumer excise taxes on petroleum products and
merchandise (a) 655 633
------ ------
Total revenues $4,082 $3,627
====== ======
<FN>
- --------
(a)Included in both revenues and operating costs.
Revenues (excluding matching buy/sell transactions and excise taxes)
increased by $277 million, or 12%, in the first quarter of 1997 from the
comparable prior-year period. The increase primarily reflected higher average
refined product prices and worldwide natural gas and liquid hydrocarbon prices,
partly offset by reduced volumes of worldwide liquid hydrocarbons.
30
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Operating income and certain items included in operating income for the
first quarter of 1997 and 1996 are summarized in the following table:
First Quarter Ended
March 31
-------------------
(Dollars in millions) 1997 1996
----- -----
Operating income $214 $377
Less: Certain favorable (unfavorable) items
Inventory market valuation reserve adjustment (a) (114) 155
Charges for withdrawal from MPA (b) - (10)
------ ------
Subtotal (114) 145
------ ------
Operating income adjusted to exclude above items $328 $232
====== ======
- --------
<FN>
(a)The inventory market valuation reserve reflects the extent to which the
recorded LIFO cost basis of crude oil and refined products inventories
exceeds net realizable value. For additional discussion of this noncash
adjustment, see Outlook herein.
(b)Marine Preservation Association ("MPA") is a non-profit oil spill response
group.
Adjusted operating income in the first quarter of 1997 improved by $96
million from last year's first quarter, due primarily to increased worldwide
natural gas and liquid hydrocarbon prices and higher average refined product
margins, partially offset by reduced volumes of worldwide liquid hydrocarbons.
First quarter operating income for domestic exploration and production
("upstream") increased by $63 million in 1997 from 1996. The improvement was
mainly due to higher average natural gas and liquid hydrocarbon prices and
increased natural gas production, partially offset by lower liquid hydrocarbon
volumes. The increase in gas volumes was mainly attributable to the Cotton
Valley Pinnacle Reef play in east Texas, while the lower liquid hydrocarbon
volumes were mostly due to the fourth quarter 1996 disposal of oil producing
properties in Alaska.
International upstream operations recorded a $4 million improvement in
first quarter operating income in 1997 from 1996 as favorable effects of higher
average natural gas and liquid hydrocarbon prices were predominantly offset by
lower liquid hydrocarbon liftings, primarily in the U.K. North Sea, and lower
natural gas volumes, primarily in Ireland.
First quarter operating income for refining, marketing and transportation
("downstream") operations increased by $48 million in 1997 from 1996. First
quarter 1996 results included a $10 million charge for Marathon's withdrawal
from the MPA. Excluding this item, downstream results improved by over 85% from
the prior-year quarter, primarily reflecting higher wholesale margins on refined
products, despite higher crude oil and other feedstock acquisition costs.
Administrative expense for the first quarter increased by $9 million in
1997 from 1996, mainly reflecting an increase in accruals for stock appreciation
rights and Marathon's performance-based variable pay plan.
31
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Other income in the first quarter of 1997 and 1996 included gains of $11
million and $20 million, respectively, on the sales of interests in certain
domestic pipeline companies and other investments.
Net interest and other financial costs in the first quarter of 1997
decreased by $17 million from the first quarter of 1996, mainly due to lower
average debt levels.
Net income for the first quarter decreased by $108 million in 1997 from
1996. Excluding the after-tax effects of the inventory market valuation
adjustment and other special items, first quarter financial results increased by
61% to $180 million in 1997 from $112 million in 1996, primarily reflecting the
factors discussed above.
Cash Flows
- ----------
Net cash provided from operating activities was $204 million in the first
quarter of 1997, compared with $262 million in the first quarter of 1996.
Excluding first quarter 1996 payments of $39 million related to certain state
tax issues, net cash from operating activities decreased by $97 million, mainly
reflecting unfavorable working capital changes, including increased income tax
payments, partially offset by the favorable effects of improved profitability.
Cash from the disposal of assets was $13 million in the first quarter of
1997, compared with $85 million in the first quarter of 1996. Proceeds in 1996
were mainly from the sales of interests in certain international production
properties and a domestic pipeline company.
Capital expenditures in the first quarter of 1997 totaled $118 million,
compared with $100 million in the first quarter of 1996. Expenditures in both
periods were primarily for upstream projects. Contract commitments for capital
expenditures were $473 million at March 31, 1997, compared with $388 million at
year-end 1996.
Investments in equity affiliates of $57 million in the first quarter of
1997 reflect spending on capital projects by equity affiliates, primarily the
Nautilus natural gas pipeline system in the Gulf of Mexico and the Sakhalin II
project in Russia. In addition, in March 1997, Marathon purchased a 50%
interest in an Ecuadorian power generation company, Power Services Ecuador
Ecuapower Compania Limitada ("Ecuapower"). Ecuapower's major assets include a
96 megawatt power plant at Santa Domingo and a 34 megawatt power plant at Santa
Elena.
Financial obligations increased by $39 million in the first quarter of 1997
as cash used for capital expenditures, investments in equity affiliates and
dividend payments exceeded net cash provided from operating activities and asset
disposals. 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.
Dividends paid in the first quarter of 1997 increased by $6 million from
the first quarter of 1996 reflecting the two-cents-per-share increase in the
quarterly USX-Marathon Group Common Stock dividend rate, initially declared in
October 1996.
32
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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
20 waste sites related to the Marathon Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of March
31, 1997. In addition, there are 9 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 68 additional sites,
excluding retail marketing outlets, related to the Marathon Group where
remediation is being sought under other environmental statutes, both federal and
state, or where private parties are seeking remediation through discussions or
litigation. At many of these sites, USX is one of a number of parties involved
and the total cost of remediation, as well as USX's share thereof, is frequently
dependent upon the outcome of investigations and remedial studies. The Marathon
Group accrues for environmental remediation activities when the responsibility
to remediate is probable and the amount of associated costs is reasonably
determinable. As environmental remediation matters proceed toward ultimate
resolution or as additional remediation obligations arise, charges in excess of
those previously accrued may be required.
Effective January 1, 1997, USX adopted the American Institute of Certified
Public Accountants Statement of Position No. 96-1, "Environmental Remediation
Liabilities" ("SOP 96-1"). First quarter 1997 operating income for the Marathon
Group included charges of $7 million (net of expected recoveries) related to
such adoption, primarily for accruals of post-closure monitoring costs, study
costs and administrative costs. See Note 1 to the Marathon Group Financial
Statements for additional discussion.
First quarter 1997 operating income also included net favorable effects of
$4 million related to other environmental accrual adjustments.
Accrued liabilities for remediation totaled $58 million at March 31, 1997,
an increase of $21 million from December 31, 1996, due primarily to accrual
adjustments for adoption of SOP 96-1 and accruals related to retail marketing
outlets. Receivables for expected recoveries totaled $42 million at
March 31, 1997, an increase of $19 million from December 31, 1996, due
primarily to accrual adjustments reflecting an increase in the estimated
portion of costs that are ultimately recoverable, and accruals for recoveries
associated with the adoption of SOP 96-1. See Note 8 to the Marathon Group
Financial Statements.
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 8 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.
33
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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.
Outlook
- -------
In April 1997, Marathon acquired an additional 7.5% interest in Sakhalin
Energy Investment Company Ltd. ("Sakhalin Energy"), increasing its ownership to
37.5%. Sakhalin Energy, an incorporated joint venture company, holds the
licenses to the Piltun-Astokhskoye and Lunskoye fields, located offshore
Sakhalin Island in the Russian Far East Region.
The outlook regarding the Marathon Group's revenues, margins and income is
largely dependent upon future prices and volumes of crude oil, natural gas and
refined products. Prices have historically been volatile and have frequently
been driven by unpredictable changes in supply and demand resulting from
fluctuations in economic activity and political developments in the world's
major oil and gas producing areas, including OPEC member countries. Any
substantial decline in such prices could have a material adverse effect on the
Marathon Group's results of operations. A prolonged decline in such prices
could also adversely affect the quantity of crude oil and natural gas reserves
that can be economically produced and the amount of capital available for
exploration and development.
Relative to the changing levels of commodity prices, when U.S. Steel
Corporation acquired Marathon Oil Company in March 1982, crude oil and refined
product prices were at historically high levels. In applying the purchase
method of accounting, Marathon's crude oil and refined product inventories were
revalued by reference to current prices at the time of acquisition. This became
the new LIFO cost basis of the inventories, which has been maintained since
the 1982 acquisition. Generally accepted accounting principles require that
inventories be valued at lower of cost or market. Accordingly, Marathon
has established an inventory market valuation ("IMV") reserve to reduce the LIFO
cost basis, to the extent necessary, to current market value. Adjustments to
the IMV reserve result in noncash charges or credits to operating income. These
adjustments affect the comparability of financial results from period
to period as well as comparisons with other energy companies, which may not
have such adjustments. The IMV reserve adjustments have been separately
reported, on a consistent basis, as a component of operating results and
separately identified in management's discussion of operations.
Commodity prices have fluctuated widely and, since 1986, have generally
remained below prices that existed at the time of the 1982 acquisition,
resulting in periodic adjustments to the LIFO cost basis of the inventories. At
December 31, 1996, market prices exceeded LIFO cost, and no IMV reserve was
required. At March 31, 1997, LIFO cost exceeded market prices by $114 million,
resulting in a corresponding charge to operating income. During the first
quarter of 1996, favorable market price movements resulted in a $155 million
credit to operating income. This $269 million variance in operating income
affects the comparability of reported financial results. In management's
opinion, the Marathon Group's operating performance should be evaluated
exclusive of the IMV reserve adjustments, which management believes provides a
more indicative view of the profit and cash flow performance of the Group.
34
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
As commodity prices continue to fluctuate, future quarterly IMV reserve
adjustments can be reasonably expected. In addition to
reported financial results, management believes that the Marathon Group's
future operating performance should be evaluated exclusive of the impact of
these adjustments, whether favorable or unfavorable.
Accounting Standard
- -------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"), which changes the computation and presentation of earnings per share
("EPS"). USX will adopt SFAS No. 128 in the fourth quarter of 1997, as
required. While restatement of prior-period EPS is required by the standard,
EPS presented for USX-Marathon Group Common Stock for the first quarter of 1997
and for the years 1996 and 1995 will not change upon adoption.
35
MARATHON GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
-----------------------------------
($ in Millions)
First Quarter
Ended March 31
--------------
1997 1996
---- ----
OPERATING INCOME (LOSS)
Exploration & Production
Domestic $183 $120
International 101 97
Refining, Marketing & Transportation 82 34
Gas Gathering and Processing 3 3
Administrative (41) (32)
------ ------
$328 $222
Inventory Market Val. Res. Adjustment (114) 155
------ ------
Total Marathon Group $214 $377
CAPITAL EXPENDITURES $118 $100
OPERATING STATISTICS
Net Liquid Hydrocarbon Production (a):
Domestic 114.8 125.9
International 53.6 65.3
------ ------
Worldwide 168.4 191.2
Net Natural Gas Production (b):
Domestic 758.5 689.8
International - Equity 537.1 596.7
International - Other (c) 37.9 35.2
------- -------
Total Consolidated 1,333.5 1,321.7
Equity Affiliate 54.9 62.2
------- -------
Worldwide 1,388.4 1,383.9
Average Equity Sales Prices (d):
Liquid Hydrocarbons (per Bbl)
Domestic $19.26 $16.17
International 21.30 18.57
Natural Gas (per Mcf)
Domestic $2.53 $2.02
International 2.18 1.87
Natural Gas Sales (b) (e):
Domestic 1,245.5 1,090.8
International 575.0 631.9
------- -------
Total Consolidated 1,820.5 1,722.7
Equity Affiliate 54.9 62.2
------- -------
Worldwide 1,875.4 1,784.9
Crude Oil Refined (a) 476.1 489.8
Refined Products Sold (a) 724.0 725.3
- ------------
<FN>
(a) Thousands of barrels per day
(b) Millions of cubic feet per day
(c) Represents gas acquired for injection and subsequent resale
(d) Prices exclude gains and losses from hedging activities
(e) Represents equity, royalty and resale volumes
36
Part I - Financial Information (Continued):
C. U. S. Steel Group
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
------------------------------------
First Quarter Ended
March 31
(Dollars in millions, except per share amounts) 1997 1996
- --------------------------------------------------------------------------------
REVENUES $1,620 $1,591
OPERATING COSTS:
Cost of sales (excludes items shown below) 1,404 1,415
Selling, general and administrative expenses (credits) (37) (41)
Depreciation, depletion and amortization 74 78
Taxes other than income taxes 59 58
------ ------
Total operating costs 1,500 1,510
------ ------
OPERATING INCOME 120 81
Other income 11 8
Interest and other financial income 1 1
Interest and other financial costs (12) (29)
------ ------
INCOME BEFORE INCOME TAXES 120 61
Less provision for estimated income taxes 33 15
------ ------
NET INCOME 87 46
Dividends on preferred stock (6) (6)
------ ------
NET INCOME APPLICABLE TO STEEL STOCK $81 $40
====== ======
STEEL STOCK DATA:
Net income per share - primary $.96 $.49
- fully diluted .93 .48
Dividends paid per share .25 .25
Weighted average shares, in thousands
- Primary 85,006 83,197
- Fully diluted 94,581 85,030
<FN>
Selected notes to financial statements appear on pages 39-42.
37
U. S. STEEL GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
------------------------------------
March 31 December 31
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $16 $23
Receivables, less allowance for doubtful
accounts of $5 and $23 472 580
Inventories 667 648
Deferred income tax benefits 179 177
------ ------
Total current assets 1,334 1,428
Investments and long-term receivables,
less reserves of $17 and $17 625 621
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$5,792 and $5,796 2,527 2,551
Long-term deferred income tax benefits 199 217
Prepaid pensions 1,779 1,734
Other noncurrent assets 40 29
------ ------
Total assets $6,504 $6,580
====== ======
LIABILITIES
Current liabilities:
Notes payable $20 $18
Accounts payable 661 667
Payroll and benefits payable 397 365
Accrued taxes 171 154
Accrued interest 13 22
Long-term debt due within one year 94 73
------ ------
Total current liabilities 1,356 1,299
Long-term debt, less unamortized discount 810 1,014
Employee benefits 2,423 2,430
Deferred credits and other liabilities 213 207
Preferred stock of subsidiary 64 64
------ ------
Total liabilities 4,866 5,014
------ ------
STOCKHOLDERS' EQUITY
Preferred stock 7 7
Common stockholders' equity 1,631 1,559
------ ------
Total stockholders' equity 1,638 1,566
------ ------
Total liabilities and stockholders' equity $6,504 $6,580
====== ======
<FN>
Selected notes to financial statements appear on pages 39-42.
38
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------
First Quarter Ended
March 31
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $87 $46
Adjustments to reconcile to net cash provided
from (used in) operating activities:
Depreciation, depletion and amortization 74 78
Pensions (42) (42)
Postretirement benefits other than pensions 6 2
Deferred income taxes 21 16
Gain on disposal of assets (1) (3)
Changes in:
Current receivables 96 (1)
Inventories (19) (24)
Current accounts payable and accrued expenses 31 (66)
All other - net (40) (19)
------ ------
Net cash provided from (used in)
operating activities 213 (13)
------ ------
INVESTING ACTIVITIES:
Capital expenditures (50) (56)
Disposal of assets 5 89
Investments in equity affiliates - net 1 3
All other - net 4 (6)
------ ------
Net cash provided from (used in)
investing activities (40) 30
------ ------
FINANCING ACTIVITIES:
Decrease in U. S. Steel Group's share of USX
consolidated debt (163) (20)
Specifically attributed debt repayments (2) (1)
Steel Stock issued 11 7
Dividends paid (26) (26)
------ ------
Net cash used in financing activities (180) (40)
------ ------
NET DECREASE IN CASH AND CASH EQUIVALENTS (7) (23)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 23 52
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $16 $29
====== ======
Cash provided from (used in) operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(33) $(31)
Income taxes refunded (paid), including settlements
with other groups 27 (18)
<FN>
Selected notes to financial statements appear on pages 39-42.
39
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, 1996.
Effective January 1, 1997, USX adopted American Institute of Certified
Public Accountants Statement of Position No. 96-1, "Environmental
Remediation Liabilities" (SOP 96-1), which provides additional
interpretation of existing accounting standards related to recognition,
measurement and disclosure of environmental remediation liabilities. As a
result of adopting SOP 96-1, the U. S. Steel Group identified additional
environmental remediation liabilities of $35 million, of which $28 million
was discounted to a present value of $13 million and $7 million was not
discounted. Assumptions used in the calculation of the present value
amount included an inflation factor of 2% and an interest rate of 7% over a
range of 22 to 30 years. The unfavorable effect on first quarter 1997
operating income was $20 million.
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
40
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
2. (Continued)
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.
3. The method of calculating net income 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 $38 million and
$40 million in the first quarter of 1997 and 1996, respectively. These
pension credits are primarily noncash and for the most part are included in
selling, general and administrative expenses.
5. 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.
41
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (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.
6. 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)
-----------------------
March 31 December 31
1997 1996
-------- -----------
Raw materials $114 $124
Semi-finished products 317 309
Finished products 182 162
Supplies and sundry items 54 53
---- ----
Total $667 $648
==== ====
7. 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 March 31, 1997, 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 under an agreement that expires in
1997. 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 March 31, 1997, the balance of sold loans receivable
subject to recourse was $35 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.
42
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. 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.
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 March 31, 1997, and
December 31, 1996, accrued liabilities for remediation totaled $113 million
and $107 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.
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 quarter of 1997 and for the
years 1996 and 1995, such capital expenditures totaled $16 million, $90
million and $55 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 $36 million at March 31, 1997. In the event that any
defaults of guaranteed liabilities occur, USX has access to its interest in
the assets of the affiliates to reduce U. S. Steel Group losses resulting
from these guarantees. As of March 31, 1997, the largest guarantee for a
single affiliate was $14 million.
At March 31, 1997, contract commitments for the U. S. Steel Group's capital
expenditures for property, plant and equipment totaled $117 million
compared with $134 million at December 31, 1996.
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 first quarter
1997 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 47.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting the
businesses of the U. S. Steel Group. These statements typically contain words
such as "anticipates," "believes," "estimates," "expects" or similar words
indicating that future outcomes are not known with certainty and subject to risk
factors that could cause these outcomes to differ significantly from those
projected. In accordance with "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, these statements are accompanied by
cautionary language identifying important factors, though not necessarily all
such factors, that could cause future outcomes to differ materially from those
set forth in forward-looking statements. For additional cautionary language
related to the U. S. Steel Group, see Item 5. herein.
Results of Operations
- ---------------------
Revenues for the U. S. Steel Group increased $29 million in the first
quarter of 1997 compared with the first quarter of 1996. The increase primarily
reflected higher average realized prices.
Operating income for the U. S. Steel Group increased $39 million in the
first quarter of 1997, compared with the same quarter of 1996. First quarter
1997 included charges of $20 million related to the adoption of the American
Institute of Certified Public Accountants Statement of Position No. 96-1,
"Environmental Remediation Liabilities" ("SOP 96-1"). These charges were
partially offset by a net reduction of $11 million in other unrelated
environmental accruals. For additional discussion on SOP 96-1, see Note 1 to
the U. S. Steel Group Financial Statements.
Operating income for Steel and Related Businesses increased $54 million in
the first quarter of 1997, compared with the same quarter of 1996. The increase
was primarily due to higher average realized prices, a partial recovery of
insurance proceeds related to the April, 1996 breakout of the Gary Works' No. 13
blast furnace and an improved product mix. This improvement was partially
offset by higher natural gas costs.
U. S. Steel entered into a five and one-half year contract with the United
Steelworkers of America ("USWA"), effective February 1, 1994, covering
approximately 15,000 employees. The contract provided for reopener negotiations
of specific payroll items. These negotiations have now been resolved by
following the settlements reached by other major integrated producers (including
the timing of a final lump-sum bonus payment in July, 1999). All revised
contract terms became effective as of February 1, 1997.
44
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Operating income for Administrative and Other Businesses in the first
quarter of 1997 included charges of $9 million related to environmental accruals
and the adoption of SOP 96-1. Excluding these charges, first quarter 1997
operating income decreased $6 million from the first quarter 1996 primarily due
to lower pension credits. 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.
The pension credits referred to in Administrative and Other Businesses,
combined with pension costs for ongoing operating units of the U. S. Steel
Group, resulted in net pension credits (which are primarily noncash) of $38
million and $40 million in the first quarters of 1997 and 1996, respectively.
The amounts of these credits fluctuate over time primarily reflecting changes in
the expected long-term rate of return on plan assets and assumed discount rate
on the outstanding pension obligation. To the extent that these credits decline
in the future, operating income would be adversely affected.
Other income in the first quarter of 1997 increased $3 million compared
with first quarter 1996 due to higher income from affiliates.
Interest and other financial costs decreased $17 million, compared with
first quarter 1996. Interest and other financial costs in first quarter 1997
was reduced $16 million as a result of the quarterly adjustment to the carrying
value of USX's indexed debt (as set forth in the following paragraph).
In December 1996, USX issued $117 million in aggregate principal amount of
6-3/4% Notes Due February 1, 2000 ("indexed debt"), mandatorily exchangeable at
maturity for common stock of RMI Titanium Company ("RMI") (or for the equivalent
amount of cash, at USX's option). The carrying value of indexed debt is
adjusted quarterly to settlement value based on changes in the value of RMI
common stock. Any resulting adjustment is charged or credited to income and
included in interest and other financial costs. USX's 27% interest in RMI
continues to be accounted for under the equity method.
Net income increased $41 million, or 89%, in the first quarter of 1997 as
compared with first quarter of 1996. The increase mainly reflects the factors
discussed above.
First quarter 1997 steel shipments of 2.9 million tons remained
approximately at first quarter 1996 levels. Raw steel production in the first
quarter of 1997 totaled 3.1 million tons, a decrease of 3% over first quarter
1996. Raw steel production in the first quarter of 1997 averaged 97% of
capability versus 99% in the first quarter of 1996.
Cash Flows
- ------------
Net cash provided from operating activities was $213 million in the first
quarter of 1997, compared with net cash used in operating activities of $13
million in the same period of 1996. The first quarter of 1996 included a
payment of $28 million related to the Pickering litigation. Excluding this
item, net cash from operating activities increased by $198 million due to
favorable working capital changes and increased profitability.
45
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Cash from the disposal of assets decreased $84 million in the first quarter
of 1997 compared with the same quarter of 1996. The 1996 proceeds mainly
reflected the sale of U. S. Steel Group's investment in National-Oilwell.
Capital expenditures for property, plant and equipment in first quarter
1997 totaled $50 million, compared with $56 million in the same period in 1996.
Capital expenditures for the year 1997 are expected to total approximately $290
million, compared with $337 million in 1996. Capital expenditures for 1997
include a blast furnace reline at the Mon Valley Works, a new heat treat line
for plates at the Gary Works and additional environmental expenditures primarily
at the Gary Works. Contract commitments for capital expenditures at March 31,
1997 were $117 million, compared with $134 million at year-end 1996.
Financial obligations decreased $165 million in the first quarter of 1997
primarily reflecting the net effects of cash from operating, investing and
other financing activities. 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 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. To the extent that competitors are not required to
undertake equivalent costs in their operations, the competitive position of the
U. S. Steel Group could be adversely affected.
USX has been notified that it is a potentially responsible party ("PRP") at
26 waste sites related to the U. S. Steel Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of March
31, 1997. In addition, there are 15 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 41 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
46
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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 8 to the U. S. Steel Group
Financial Statements. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the U. S. Steel Group Financial
Statements. However, management believes that USX will remain a viable and
competitive enterprise even though it is possible that these contingencies could
be resolved unfavorably to the U. S. Steel Group. See discussion of Cash Flows
and Liquidity in USX Consolidated Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Outlook
- -------
The U. S. Steel Group anticipates that steel demand will remain relatively
strong in the second quarter as long as the domestic economy continues its
pattern of modest growth and the favorable pattern of demand for capital goods
and consumer durables continues. During the second and third quarter of 1997,
raw steel production will be reduced by a planned reline of the Mon Valley
Works' No. 1 blast furnace, which provides approximately 10 percent of U. S.
Steel's total iron capacity. The reline, which is scheduled to begin in mid-
June, is expected to last 86 days.
The world steel industry is characterized by excess production capacity
which has restricted price increases during periods of economic growth and led
to price decreases during economic contractions. Within the next year, the
anticipated increased availability of flat-rolled steel could have an adverse
effect on U. S. Steel's product prices and shipment levels as companies attempt
to gain or retain market share.
Steel imports to the United States accounted for an estimated 26% of the
domestic steel market in the first two months of 1997, and 23%, 21% and 25% for
the years 1996, 1995 and 1994, 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.
Accounting Standard
- -------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"),
which changes the computation and presentation of earnings per share ("EPS").
USX will adopt SFAS No. 128 in the fourth quarter of 1997, as required. While
restatement of prior-period EPS is required by the standard, EPS presented for
the USX-U. S. Steel Group Common Stock for the first quarter of 1997 and for the
years 1996 and 1995 will not change upon adoption.
47
U. S. STEEL GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
------------------------------------
First Quarter
Ended March 31
--------------
(Dollars in Millions) 1997 1996
- --------------------------------------------------------------------------------
REVENUES
Steel and Related Businesses (a) $1,608 $1,584
Other 12 7
------ ------
Total U. S. Steel Group $1,620 $1,591
OPERATING INCOME
Steel and Related Businesses (a) $87 $33
Administrative and Other Businesses (b) 33 48
---- -----
Total U. S. Steel Group $120 $81
CAPITAL EXPENDITURES $50 $56
OPERATING STATISTICS
Public & Affiliated Steel Shipments (c) 2,866 2,898
Raw Steel-Production (c) 3,071 3,154
Raw Steel-Capability Utilization (d) 97.3% 99.1%
- ------------
<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.
48
Part I - Financial Information (Continued):
D. Delhi Group
DELHI GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
First Quarter Ended
March 31
(Dollars in millions, except per share amounts) 1997 1996
- --------------------------------------------------------------------------------
REVENUES $338.7 $277.6
OPERATING COSTS:
Cost of sales (excludes items shown below) 313.8 253.5
Selling, general and administrative expenses 7.4 6.7
Depreciation, depletion and amortization 7.8 6.9
Taxes other than income taxes 2.1 2.0
------ ------
Total operating costs 331.1 269.1
------ ------
OPERATING INCOME 7.6 8.5
Other income .1 .2
Interest and other financial costs (5.5) (5.0)
------ ------
INCOME BEFORE INCOME TAXES 2.2 3.7
Less provision for estimated income taxes .8 1.3
------ ------
NET INCOME $1.4 $2.4
====== ======
DELHI STOCK DATA:
Net income per share - primary and fully diluted $.15 $.25
Dividends paid per share .05 .05
Weighted average shares, in thousands
- Primary 9,466 9,447
- Fully diluted 9,467 9,447
<FN>
Selected notes to financial statements appear on pages 51-54.
49
DELHI GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
------------------------------
March 31 December 31
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $.4 $.4
Receivables, less allowance for doubtful
accounts of $.8 and $.8 72.7 131.3
Inventories 5.8 8.6
Other current assets 3.9 5.4
------ ------
Total current assets 82.8 145.7
Long-term receivables and investments 5.7 5.8
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$451.2 and $452.6 564.4 555.3
Other noncurrent assets 6.1 7.8
------ ------
Total assets $659.0 $714.6
====== ======
LIABILITIES
Current liabilities:
Notes payable $6.0 $4.3
Accounts payable 130.1 196.3
Payroll and benefits payable 3.9 4.2
Accrued taxes 3.8 5.4
Accrued interest 3.3 5.3
Long-term debt due within one year 27.8 16.5
------ ------
Total current liabilities 174.9 232.0
Long-term debt, less unamortized discount 203.5 202.7
Long-term deferred income taxes 141.7 139.7
Deferred credits and other liabilities 17.9 20.2
Preferred stock of subsidiary 3.8 3.8
------ ------
Total liabilities 541.8 598.4
STOCKHOLDERS' EQUITY 117.2 116.2
------ ------
Total liabilities and stockholders' equity $659.0 $714.6
====== ======
<FN>
Selected notes to financial statements appear on pages 51-54.
50
DELHI GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
First Quarter Ended
March 31
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $1.4 $2.4
Adjustments to reconcile to net cash provided from
operating activities:
Depreciation, depletion and amortization 7.8 6.9
Pensions .5 .7
Deferred income taxes 1.9 .5
Gain on disposal of assets (.6) (.4)
Changes in:
Current receivables 58.6 (2.7)
Inventories 2.8 4.4
Current accounts payable and accrued expenses (70.0) 1.6
All other - net .2 2.1
------ ------
Net cash provided from operating activities 2.6 15.5
------ ------
INVESTING ACTIVITIES:
Capital expenditures (17.1) (22.6)
Disposal of assets .9 .6
------ ------
Net cash used in investing activities (16.2) (22.0)
------ ------
FINANCING ACTIVITIES:
Increase in Delhi Group's share of USX
consolidated debt 14.1 7.4
Dividends paid (.5) (.5)
------ ------
Net cash provided from financing activities 13.6 6.9
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS - .4
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .4 1.9
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $.4 $2.3
====== ======
Cash provided from (used in) operating activities included:
Interest and other financial costs paid $(7.3) $(6.3)
Income taxes (paid) refunded, including settlements
with other groups (.5) .2
<FN>
Selected notes to financial statements appear on pages 51-54.
51
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, 1996.
Effective January 1, 1997, USX adopted American Institute of Certified
Public Accountants Statement of Position No. 96-1, "Environmental
Remediation Liabilities" (SOP 96-1), which provides additional
interpretation of existing accounting standards related to recognition,
measurement and disclosure of environmental remediation liabilities.
Adoption of SOP 96-1 had no effect on Delhi Group results of operations or
financial condition.
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.
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 USX-
Delhi Group Common Stock (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
52
DELHI GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
2. (Continued)
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 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 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 per share is calculated 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 exercise of stock options,
provided the effect is not antidilutive.
4. 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.
The provision for estimated U.S. 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.
53
DELHI GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. Inventories are carried at lower of average cost or market.
(In millions)
----------------------
March 31 December 31
1997 1996
-------- -----------
Natural gas in storage $4.0 $6.4
Natural gas liquids in storage .3 .1
Materials and supplies 1.5 2.1
---- ----
Total $5.8 $8.6
==== ====
6. 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 March 31, 1997, 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.
7. 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.
54
DELHI GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. (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 quarter of 1997 and for the years 1996 and 1995,
such capital expenditures totaled $2.8 million, $9.0 million and $5.5
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 March 31, 1997, contract commitments for the Delhi Group's capital
expenditures for property, plant and equipment totaled $5.9 million
compared with $4.4 million at December 31, 1996.
55
DELHI GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The Delhi Group ("Delhi") includes Delhi Gas Pipeline Corporation ("DGP")
and certain other subsidiaries of USX which are engaged in the purchasing,
gathering, processing, treating, transporting and marketing of natural gas. The
following discussion should be read in conjunction with the first quarter 1997
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 59.
Certain sections of the discussion include forward-looking statements
concerning trends or events potentially affecting the Delhi Group. These
statements typically contain words such as "anticipates", "believes",
"estimates", or "expects", or similar words indicating that future outcomes are
uncertain. In accordance with "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, these statements are accompanied by
cautionary language identifying important factors, though not necessarily all
such factors, that could cause future outcomes to differ materially from those
set forth in forward-looking statements. For additional cautionary language
related to the Delhi Group, see Item 5. herein.
Results of Operations
- ---------------------
Revenues for the first quarter of 1997 and 1996 are summarized in the
following table:
First Quarter Ended
March 31
-------------------
(Dollars in millions) 1997 1996
----- -----
Gas sales and trading $295.2 $247.6
Transportation 4.2 3.9
Gas processing 28.3 19.1
Gathering service fees 8.5 5.1
Other 2.5 1.9
------ ------
Total revenues $338.7 $277.6
====== ======
The increase was primarily due to higher sales prices for natural gas and
natural gas liquids ("NGLs"), partially offset by lower natural gas sales
volumes.
Operating income in the first quarter of 1997 decreased by $0.9 million as
compared with the first quarter of 1996. This decrease was due primarily to
lower gas sales and trading unit margins, lower gas sales volumes and increased
operating costs, partially offset by increased gas processing unit margins and
volumes, gathering service fees and transportation volumes.
Gas sales and trading gross margins decreased $5.8 million as compared to
the first quarter 1996. Gas sales and trading unit margins decreased 20% from
first quarter 1996 levels due to unfavorable intra-month price fluctuations in
January and February, as relatively warm winter weather in Delhi's prime service
areas resulted in reduced demand and falling prices. Reduced demand by Delhi's
major customers resulted in a shift in the sales mix to lower margin spot market
sales. Overall, average daily gas sales volumes decreased 12% as compared to
the first quarter 1996.
56
DELHI GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Transportation gross margin in the first quarter of 1997 increased by $0.3
million from the comparable prior-year period, primarily due to a 24% increase
in average daily transportation volumes in Texas, and a 17% increase in
Oklahoma. These additional volumes are primarily the result of the expansion
programs in the Cotton Valley Pinnacle Reef play in east Texas and the Carter
Knox field in Oklahoma. Overall, average daily transportation volumes increased
21% as compared to the first quarter of 1996. The benefits from the increased
volumes were partially offset by an 11% decrease in average transportation rates
as compared to the first quarter of 1996.
Natural gas processing involves extraction of NGLs such as ethane, propane,
isobutane, normal butane and natural gasoline from the natural gas stream. Gas
processing gross margin in the first quarter of 1997 increased by $3.8 million,
or 78%, as compared with the first quarter of 1996, primarily as the result of
higher NGLs sales prices and increased average daily sales volumes.
Gathering service fees from treating, dehydration, compression and other
services, for the first quarter of 1997, increased $3.4 million, or 67%, as
compared to first quarter 1996. The primary reason for this increase was higher
natural gas sales prices, as most fees are determined as a percentage of sales
price.
Operating costs, excluding gas purchase costs, increased $2.7 million in
the first quarter of 1997 as compared with the first quarter of 1996. The
increase was primarily due to higher field operating expenses, increased
depreciation, depletion and amortization resulting from the acquisitions and
expansions completed since the first quarter of 1996, increased USX
corporate general and administrative costs associated with the Delhi Group, and
compensation charges.
Interest and other financial costs increased $0.5 million in the first
quarter of 1997 as compared with the first quarter of 1996, primarily due to
increased debt levels reflecting Delhi's increased capital spending program.
Net income of $1.4 million in the first quarter of 1997, compares with net
income of $2.4 million in the first quarter of 1996. The changes in net income
primarily reflect the decrease in operating income, and the increase in interest
and other financial costs, discussed above.
Cash Flows
- ----------
Net cash provided from operating activities decreased $12.9 million in the
first quarter of 1997, compared with the first quarter of 1996. The decrease is
primarily the result of negative working capital changes caused by a decrease in
payables, that was only partially offset by a decrease in receivables, due to
the decline in natural gas and NGLs prices during the first quarter of 1997.
Capital expenditures for property, plant and equipment in the first quarter
of 1997 were $17.1 million, compared with $22.6 million in the first quarter of
1996. Expenditures in the first quarter of 1997 were primarily for completion
of the second phase of the Pinnacle Reef expansion project in east Texas and the
expansion of pipeline and processing assets in west Texas. Capital expenditures
for the year 1997 are expected to approximate $75 million. Contract commitments
for capital expenditures were $5.9 million at March 31, 1997, compared with $4.4
million at year-end 1996.
57
DELHI GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Financial obligations increased by $14.1 million in the first quarter of
1997 as 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 Cash Flows and Liquidity in
USX Consolidated Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Outlook
- -------
The Delhi Group continues to expand 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 in east and west Texas, the largest being the expansion in the Cotton
Valley Pinnacle Reef ("Pinnacle Reef") gas play area of east Texas. Phase Two
of the Pinnacle Reef expansion program has been completed, increasing Delhi's
capacity in this area to more than 300 million cubic feet per day ("mmcfd").
Pinnacle Reef volumes purchased or transported by Delhi averaged 186 mmcfd in
March 1997, up from a December 1996 average of 133 mmcfd. Management
anticipates that Delhi's average monthly volumes could approach 300 mmcfd by
year-end, and is considering a possible Phase Three expansion as new production
warrants. The realization of these additional volumes could be affected by many
factors, including but not limited to, the success of drilling by the producers
in the Pinnacle Reef gas play area, the level of drilling in this area, and
other areas of the United States, levels of imported gas, storage levels, and
changes in the price and demand for natural gas. In west Texas, first quarter
1997 volumes averaged 236 mmcfd, up from an average of 190 mmcfd in 1996, as the
result of expansions and upgrades of the facilities.
58
DELHI GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Accounting Standard
- -------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"), which changes the computation and presentation of earnings per share
("EPS"). USX will adopt SFAS No. 128 in the fourth quarter of 1997, as
required. While restatement of prior-period EPS data is required by the
standard, EPS presented for USX-Delhi Group Common Stock for the first quarter
of 1997 and for the years 1996 and 1995 will not change upon adoption.
59
DELHI GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
-----------------------------------
First Quarter
Ended March 31
--------------
(Dollars in Millions) 1997 1996
- --------------------------------------------------------------------------------
GROSS MARGIN
Gas Sales and Trading Margin $13.6 $19.4
Transportation Margin 4.2 3.9
------ ------
Systems and Trading Margin 17.8 23.3
Gas Processing Margin 8.7 4.9
Gathering Service Fees Margin (a) 8.5 5.1
------ ------
Total Gross Margin $35.0 $33.3
OPERATING INCOME $7.6 $8.5
CAPITAL EXPENDITURES $17.1 $22.6
OPERATING STATISTICS
Natural Gas Volumes (b)
Natural Gas Sales 549.5 624.8
Transportation 511.6 422.4
------- ------
Systems Throughput 1,061.1 1,047.2
Trading Sales 624.2 624.6
------- ------
Total Sales Volumes 1,685.3 1,671.8
Natural Gas Liquids Sales (c) 810.8 727.8
- ------------
<FN>
(a) Prior to the fourth quarter of 1996, Delhi reported natural gas treating,
dehydration, compression and other service fees as a reduction to cost of
sales. Beginning with the fourth quarter of 1996, these fees are
reported as revenue; accordingly, amounts for prior quarters have been
reclassified.
(b) Millions of cubic feet per day
(c) Thousands of gallons per day
60
Part II - Other Information
- ----------------------------
Item 1. - LEGAL PROCEEDINGS
U. S. Steel Group
In August 1996, the Jefferson County, Alabama, Board of Health informed
U. S. Steel Mining Company, L.L.C. (USM) of its intent to initiate
enforcement action because of alleged violations of air pollution
control requirements at USM's Concord Coal Preparation Plant in
Hueytown, Ala. On January 31, 1997, USM and the County reached an
agreement requiring USM to pay a cash penalty of $100,000 and to
implement plant improvements estimated to cost $800,000. This
agreement was submitted to the Circuit Court of Jefferson County for
approval on February 13, 1997 and was approved by the court on
February 18, 1997. USM paid the $100,000 penalty on April 8, 1997.
Item 5. - OTHER INFORMATION
(a) Forward-looking statements concerning trends, market forces,
commitments, material events and other contingencies potentially
affecting the USX Corporation ("USX"), or the businesses of its
Marathon Group, U. S. Steel Group or Delhi Group, may be provided in
reports filed with the Securities and Exchange Commission, external
documents and oral presentations. In order to take advantage of "safe
harbor" provisions of the Private Securities Litigation Reform Act of
1995, USX is filing the following cautionary language identifying
important factors (though not necessarily all such factors) that could
cause actual outcomes to differ materially from information set forth
in forward-looking statements made by, or on behalf of, USX, its
representatives and its individual Groups.
Cautionary Language Concerning Forward-Looking Statements
---------------------------------------------------------
I. USX
---
Forward-looking statements with respect to USX may include, but are
not limited to, comments about general business strategies, financing
decisions or corporate structure. The following discussion is intended
to identify important factors (though not necessarily all such
factors) that could cause future outcomes to differ materially from
those set forth in forward-looking statements.
Liquidity Factors
-----------------
USX's ability to finance its future business requirements through
internally generated funds, proceeds from the sale of stock,
borrowings and other external financing sources is affected by the
performance of each of its Groups (as measured by various factors,
including cash provided from operating activities), the state of
worldwide debt and equity markets, investor perceptions and
expectations of past and future performance and actions, the overall
U.S. financial climate, and, in particular, with respect to
borrowings, by USX's outstanding debt and credit ratings by investor
services.
61
Part II - OTHER INFORMATION (continued)
- ---------------------------------------
Other Factors
-------------
Holders of USX-Marathon Group Common Stock, USX-U. S. Steel Group Common
Stock and USX-Delhi Group Common Stock are holders of common stock of
USX and are subject to all the risks associated with an investment in
USX and all of its businesses and liabilities. Financial impacts,
arising from any of the groups, which affect the overall cost of USX's
capital could affect the results of operations and financial condition
of all groups.
For further discussion of certain of the factors described herein,
see Item 1. Business, Item 5. Market For Registrant's Common Equity
and Related Stockholder Matters, and Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations in the USX Corporation Form 10-K for the fiscal year
ended December 31, 1996, and Management's Discussion and Analysis
of Financial Condition and Results of Operations herein.
II. USX-Marathon Group
------------------
Forward-looking statements with respect to the Marathon Group may
include, but are not limited to, levels of revenues, gross margins,
operating income, net income or earnings per share; levels of
capital, exploration, environmental or maintenance expenditures;
the success or timing of completion of ongoing or anticipated
capital, exploration or maintenance projects; volumes of
production, sales, throughput or shipments of liquid hydrocarbons,
natural gas and refined products; levels of reserves, proved or
otherwise, of liquid hydrocarbons or natural gas; the acquisition
or divestiture of assets; the effect of restructuring or
reorganization of business components; the potential effect of
judicial proceedings on the business and financial condition;
and the anticipated effects of actions of third parties
such as competitors, or federal, state or local regulatory
authorities.
Forward-looking statements typically contain words such as
"anticipates", "believes", "estimates", "expects", "forecasts",
"predicts" or "projects" or variations of these words, suggesting
that future outcomes are uncertain. The following discussion
is intended to identify important factors (though not necessarily
all such factors) that could cause future outcomes to differ
materially from those set forth in forward-looking statements with
respect to the Marathon Group.
The oil and gas industry is characterized by a large number of companies,
none of which is dominant within the industry, but a number of which
have greater resources than Marathon. Marathon must compete with these
companies for the rights to explore for oil and gas. Marathon's
expectations as to revenues, margins and income are based upon
assumptions as to future prices and volumes of liquid hydrocarbons,
natural gas and refined products. Prices have historically been
volatile and have frequently been driven by unpredictable changes
in supply and demand resulting from fluctuations in economic
activity and political developments in the world's major oil and
gas producing areas, including OPEC member countries. Any
substantial decline in such prices could have a material adverse
effect on Marathon's results of operations. A decline in such
prices could also adversely affect the quantity of liquid
hydrocarbons and natural gas that can be economically produced and
the amount of capital available for exploration and development.
62
Part II - OTHER INFORMATION (continued)
- ---------------------------------------
The Marathon Group uses commodity-based derivative instruments such
as exchange-traded futures contracts and options and over-the-counter
commodity swaps and options to manage exposure to market price risk.
The Marathon Group's strategic approach is to limit the use of these
instruments principally to hedging activities. Accordingly, gains and
losses on futures contracts and swaps generally offset the effects of
price changes in the underlying commodity. While commodity-based
derivative instruments are generally used to reduce risks from
unfavorable commodity price movements, they also may limit the
opportunity to benefit from favorable movements. Levels of hedging
activity vary among oil industry competitors and could affect the
Marathon Group's competitive position with respect to those
competitors.
Factors Affecting Exploration and Production Operations
-------------------------------------------------------
Projected production levels for liquid hydrocarbons and natural gas
are based on a number of assumptions, including (among others)
prices, supply and demand, regulatory constraints, reserve
estimates, production decline rates for mature fields, reserve
replacement rates, and geological and operating considerations.
These assumptions may prove to be inaccurate. Exploration and
production operations are subject to various hazards, including
explosions, fires and uncontrollable flows of oil and gas.
Offshore production and marine operations in areas
such as the Gulf of Mexico and the North Sea are also subject to
severe weather conditions such as hurricanes or violent storms or
other hazards. Development of new production properties in countries
outside the United States may require protracted negotiations with
host governments and are frequently subject to political
considerations, such as tax regulations, which could adversely affect
the economics of projects. With respect to the Sakhalin II project in
Russia, development plans need to be finalized prior to final
commitment by the shareholders of Sakhalin Energy. In addition,
Sakhalin Energy continues to seek to have certain Russian laws and
normative acts at the Russian Federation and local levels brought into
compliance with the existing Production Sharing Agreement Law.
Factors Affecting Refining, Marketing and Transportation Operations
-------------------------------------------------------------------
Marathon conducts refining, marketing and transportation operations
primarily in the Midwest and Southeast. The profitability of these
operations depends largely on the margin between the cost of crude oil
and other feedstocks refined and the selling prices of refined products.
Marathon is a net purchaser of crude oil in order to satisfy a
substantial portion of its refinery throughput requirements. As a
result, its overall profitability could be adversely affected by rising
crude oil and other feedstock prices which are not recovered in the
marketplace. Refined product margins have been historically volatile and
vary with the level of economic activity in the various marketing areas,
the regulatory climate and the available supply of refined products.
Gross margins on merchandise sold at retail outlets tend to moderate the
volatility experienced in the retail sale of refined products.
Environmental regulations, particularly the 1990 Amendments to the Clean
Air Act, have imposed (and are expected to continue to impose)
increasingly stringent and costly requirements on refining and marketing
operations which may have an adverse effect on margins. Refining,
marketing and transportation operations are subject to business
interruptions due to unforeseen events such as explosions, fires, crude
oil or refined product spills, inclement weather, or labor disputes.
63
Part II - Other Information (continued)
- ---------------------------------------
Technology Factors
------------------
Longer-term projections of corporate strategy, including the viability,
timing or expenditures required for capital projects, can be affected
by changes in technology, especially innovations in processes used in
the exploration, production or refining of hydrocarbons. While
specific future changes are difficult to project, recent innovations
affecting the oil industry include the development of three-
dimensional seismic imaging and deep-water and horizontal drilling
capabilities.
Other Factors
-------------
Holders of USX-Marathon Group Common Stock are holders of common stock of
USX and are subject to all the risks associated with an investment in
USX and all of its businesses and liabilities. Financial impacts,
arising from any of the groups, which affect the overall cost of USX's
capital could affect the results of operations and financial condition
of all groups.
For further discussion of certain of the factors described herein, and
their potential effects on the businesses of the Marathon Group, see
Item 1. Business, and Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations in the USX Corporation
Form 10-K for the fiscal year ended December 31, 1996, and
Management's Discussion and Analysis of Financial Condition and
Results of Operations herein.
III. USX-U. S. Steel Group
---------------------
Forward-looking statements with respect to the U. S. Steel Group may
include, but are not limited to, projections of levels of revenues,
operating income or operating income per ton, net income or earnings
per share; levels of capital, environmental or maintenance
expenditures; the success or timing of completion of ongoing or
anticipated capital or maintenance projects; levels of raw steel
production capability, prices, production, shipments, or labor and raw
material costs; the acquisition, idling, shutdown or divestiture of
assets or businesses; the effect of restructuring or reorganization of
business components; the effect of potential judicial proceedings on
the business and financial condition; and the effects of actions of
third parties such as competitors, or federal, state or local
regulatory authorities.
Forward-looking statements typically contain words such as "anticipates",
"believes", "estimates", "expects", "forecasts", "predicts" or
"projects", or variations of these words, suggesting that future
outcomes are uncertain. The following discussion is intended to
identify important factors (though not necessarily all such factors)
that could cause future outcomes to differ materially from those set
forth in forward-looking statements with respect to the U. S. Steel
Group.
Market Factors
--------------
The U.S. Steel Group's expectations as to levels of production and
revenues, gross margins, operating income and operating income per ton
are based upon assumptions as to future product prices and mix, and
levels of raw steel production capability, production and shipments.
These assumptions may prove to be inaccurate.
64
Part II - Other Information (continued)
- ---------------------------------------
The steel industry is characterized by excess world supply which has
restricted the ability of U. S. Steel and the industry to raise prices
during periods of economic growth and resist price decreases during
economic contraction. Over the next several years, construction of
additional flat-rolled steel production facilities could result in
increased domestic capacity of up to 14 million tons over 1996 levels.
Several of the additional facilities are minimills which are less expensive
to build than integrated facilities, and are typically staffed by non-
unionized work forces with lower base labor costs and more flexible
work rules. Through the use of thin slab casting technology, minimill
competitors are increasingly able to compete directly with integrated
producers of higher value-added products. Such competition could
adversely affect the U.S. Steel Group's future product prices and
shipment levels.
The domestic steel industry has, in the past, been adversely affected by
unfairly traded imports. Steel imports to the United States accounted
for an estimated 23%, 21% and 25% of the domestic steel market in
1996, 1995 and 1994, respectively, and for an estimated 26% in the
first two months of 1997. Foreign competitors typically have lower
labor costs, and are often owned, controlled or subsidized by their
governments, allowing their production and pricing decisions to be
influenced by political and economic policy considerations as well as
prevailing market conditions. Increases in levels of imported steel
could adversely affect future market prices and demand levels for
domestic steel.
The U. S. Steel Group also competes in many markets with producers of
substitutes for steel products, including aluminum, cement,
composites, glass, plastics and wood. The emergence of additional
substitutes for steel products could adversely affect future prices
and demand for steel products.
The businesses of the U. S. Steel Group are aligned with cyclical
industries such as the automotive, appliance, containers, construction
and energy industries. As a result, future downturns in the U.S.
economy could adversely affect the profitability of the U. S. Steel
Group.
Operating and Cost Factors
--------------------------
The operations of the U. S. Steel Group are subject to planned and
unplanned outages due to maintenance, equipment malfunctions or work
stoppages; and various hazards, including explosions, fires and severe
weather conditions, which could disrupt operations or the availability
of raw materials, resulting in reduced production volumes and
increased production costs.
Labor costs for the U. S. Steel Group are affected by collective bargaining
agreements. U. S. Steel entered into a five and one-half year
contract with the United Steel Workers of America, effective February
1, 1994, covering approximately 15,000 employees. The contract
provided for reopener negotiations of specific payroll items. These
negotiations have now been resolved by following the settlements
reached by other major integrated producers (including the timing of a
final lump-sum bonus payment in July, 1999). All revised contract
terms became effective as of February 1, 1997. To the extent that
increased costs associated with any renegotiated issues are not
recoverable through the sales prices of products, future operating
income would be adversely affected.
65
Part II - Other Information (continued)
- ---------------------------------------
Operating income for the U. S. Steel Group includes net periodic pension
credits (which are primarily noncash) mainly reflecting the excess of
expected return on plan assets over the cost of benefits earned and
interest on the projected benefit obligation. These credits totaled
$159 million, $132 million and $120 million in 1996, 1995 and 1994,
respectively, and $38 million in the first quarter of 1997. The
amounts of these credits fluctuate over time primarily reflecting
changes in the expected long-term rate of return on plan assets and
the assumed discount rate on the outstanding pension obligation. To
the extent that these credits decline in the future, operating income
would be adversely affected.
The U. S. Steel Group provides health care and life insurance benefits to
most employees upon retirement. Most of these benefits have not been
prefunded. The accrued liability for such benefits as of December 31,
1996, was $2,249 million. To the extent that competitors do not
provide similar benefits, or have been relieved of obligations to
provide such benefits following bankruptcy reorganization, the
competitive position of the U. S. Steel Group may be adversely
affected, depending on future costs of health care.
Legal and Environmental Factors
-------------------------------
The profitability of the U. S. Steel Group's operations could be affected
by a number of contingencies, including legal actions. The ultimate
resolution of these contingencies could, individually or in the
aggregate, be material to the U. S. Steel Group financial statements.
The businesses of the U. S. Steel Group are subject to numerous
environmental laws. Certain current and former U. S. Steel Group
operating facilities, including Gary Works, have been in operation for
many years, and could require significant future accruals and
expenditures to meet existing and future requirements under these
laws. To the extent that competitors are not required to undertake
equivalent costs in their operations, the competitive position of the
U. S. Steel Group could be adversely affected.
Other Factors
-------------
Holders of USX-U. S. Steel Group Common Stock are holders of common stock
of USX and are subject to all the risks associated with an investment
in USX and all of its businesses and liabilities. Financial impacts,
arising from any of the groups, which affect the overall cost of USX's
capital could affect the results of operations and financial condition
of all groups.
For further discussion of certain of the factors described herein, and
their potential effects on the businesses of the U.S. Steel Group, see
Item 1. Business, and Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations in the USX Corporation
Form 10-K for the fiscal year ended December 31, 1996, and
Management's Discussion and Analysis of Financial Condition and
Results of Operations herein.
66
Part II - Other Information (continued)
- ---------------------------------------
IV. USX-Delhi Group
---------------
Forward-looking statements with respect to the Delhi Group may include, but
are not limited to, projections of levels of revenues, gross margins,
operating income, net income or earnings per share; levels of capital,
environmental or maintenance expenditures; the success or timing of
completion of ongoing or anticipated capital or maintenance projects;
volumes of sales, throughput or shipments of natural gas or natural
gas liquids ("NGLs"); levels of, or changes in, dedicated reserves of
natural gas; the acquisition or divestiture of assets; the effect of
restructuring or reorganization of business components or entry into
new lines of business; the effect of potential judicial proceedings on
the business and financial condition; and the effects of actions of
third parties such as competitors, or federal, state or local
regulatory authorities.
Forward-looking statements typically contain words such as "anticipates",
"believes", "estimates", "expects", "forecasts", "predicts" or
"projects", or variations of these words, suggesting that future
outcomes are uncertain. The following discussion is intended to
identify important factors (though not necessarily all such factors)
that could cause future outcomes to differ materially from those set
forth in forward-looking statements with respect to the Delhi Group.
Market Factors
--------------
The adoption in 1992 of Federal Energy Regulatory Commission ("FERC") Order
No. 636, has resulted in a fundamental "unbundling" of the services
provided in the natural gas industry, affording natural gas producers
easier access to end-user sales markets, and reducing market demand
for the premium services traditionally provided by the Delhi Group.
To the extent that producers convert their natural gas sales contracts
with the Delhi Group to lower margin, fixed-fee transportation
agreements, or that customers reduce their demand for gas under
premium service agreements, the Delhi Group's future operating income
will be adversely affected.
The Delhi Group faces intense competition in all of its businesses,
including obtaining additional dedicated natural gas reserves, and in
the purchasing, gathering, processing, transporting and marketing of
natural gas. The Delhi Group competes with major integrated oil and
gas companies; more than 100 major intrastate and interstate pipeline
companies; and national and local gas gatherers, brokers, marketers,
processors and distributors of varying size, financial resources and
experience. Certain of these competitors, including major integrated
oil and gas companies and some intrastate and interstate pipeline
companies, have greater financial resources and control larger natural
gas supplies or storage capacity than the Delhi Group.
67
Part II - Other Information (continued)
- ---------------------------------------
The Delhi Group's expectations as to levels of revenues, gross margins and
operating income, and its return on investment in capital projects are
based upon assumptions as to future market prices and market supply
and demand for natural gas, NGLs, and competing fuels and feedstocks,
and as to levels of third-party drilling success in Delhi's current or
anticipated core operating areas of Oklahoma and Texas. These
assumptions may prove to be inaccurate.
The Delhi Group generally buys natural gas at prices based on a market
index, and sells natural gas under sales contracts (typically for
periods of one year or less) and in the spot market. Pricing
mechanisms under natural gas sales contracts result in gas sales
primarily at market sensitive prices with the unit gross margin
fluctuating based on the sales price and the cost of natural gas.
Accordingly, Delhi's gross margin (and operating results) are affected
by fluctuations in natural gas prices and demand levels, and by basis
differentials (differences between natural gas prices in various
locations).
The Delhi Group uses commodity-based derivative instruments such as
exchange-traded futures contracts and options and over-the-counter
commodity swaps and options to manage its exposure to market risk.
The Delhi Group uses these instruments as a hedging mechanism to
protect margins. As a result, changes in the fair value of derivative
instruments are generally offset by price changes in the underlying
natural gas transaction. While commodity-based derivative instruments
are generally used to reduce risks from unfavorable commodity price
movements, they also may limit the opportunity to benefit from
favorable movements. Levels of hedging activity vary among
competitors and could affect the Delhi Group's competitive position
with respect to those competitors.
The Delhi Group obtains natural gas supplies from various sources,
including major oil and gas companies, other pipeline companies and
independent producers, marketers and brokers. Certain of these
supplies are subject to natural declines in production from wells
connected to the Delhi Group's systems. The Delhi Group's ability to
contract for additional dedicated natural gas reserves to offset such
declines depends, in part, on the level and success of drilling by
producers in areas in which the Delhi Group operates. Levels of
hydrocarbon drilling in these areas, and other areas of the United
States, typically fluctuate based on the market price of natural gas
and constraints of environmental regulation, among other factors.
Market demand for natural gas is influenced by the seasonal requirements of
purchasers using gas for space heating and generation of electricity
for air conditioning, levels of imported natural gas, particularly
from Canada, and the prices of competing fuels.
The Delhi Group processes natural gas (extracts NGLs from the gas stream)
in plants connected to its pipeline systems, and, in some cases, has
its natural gas processed by third parties. Gross margins on gas
processing vary with fluctuations in the market price of NGLs (which
tend to parallel fluctuations in market prices for crude oil), the
demand for NGLs and the price volatility, availability and quality of
natural gas. Gross margins on gas processing accounted for 23%, 23%
and 14% of total Delhi Group gross margins for the years 1996, 1995
and 1994, respectively, and 25% for the first quarter of 1997.
68
Part II - Other Information (continued)
- ---------------------------------------
Operational Factors
-------------------
The Delhi Group's natural gas purchasing, gathering, processing, treating,
transportation and marketing operations are subject to business
interruption, liability and other risks of unforeseen events such as
explosions, fires, natural disasters, leaks and uncontrollable flows
of natural gas or NGLs.
The viability and timing of growth strategies through capital development
projects, acquisition, or joint ventures can be affected by external
factors such as legal or regulatory delays, competing bids or
competitor development activity.
Contingency Factors
-------------------
Future operating results could be affected by litigation settlements,
judgments, or other contingencies, and by changes in federal, state
and local laws and regulations, including environmental regulations
and FERC regulations.
Other Factors
-------------
Holders of USX-Delhi Group Common Stock are holders of common stock of USX
and are subject to all the risks associated with an investment in USX
and all of its businesses and liabilities. Financial impacts, arising
from any of the groups, which affect the overall cost of USX's capital
could affect the results of operations and financial condition of all
groups.
For further discussion of certain of the factors described herein, and
their potential effects on the businesses of the Delhi Group, see Item
1. Business, and Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations in the USX Corporation
Form 10-K for the fiscal year ended December 31, 1996, and
Management's Discussion and Analysis of Financial Condition and
Results of Operations herein.
69
Part II - Other Information (continued)
- --------------------------------------
Item 5. OTHER INFORMATION
(b) 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)
-------------------
First Quarter Ended
March 31
1997 1996
---- ----
INCOME DATA:
Revenues $4,076 $3,612
Operating income 222 382
Net income 98 208
(In millions)
----------------------
March 31 December 31
1997 1996
-------- -----------
BALANCE SHEET DATA:
Assets:
Current assets $3,366 $3,271
Noncurrent assets 7,978 7,977
------ ------
Total assets $11,344 $11,248
====== ======
Liabilities and Stockholder's Equity:
Current liabilities $1,825 $2,197
Noncurrent liabilities 7,569 7,199
Stockholder's equity 1,950 1,852
------ ------
Total liabilities and stockholder's equity $11,344 $11,248
====== ======
70
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 Restated Certificate of Incorporation dated September 1,
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/ Kenneth L. Matheny
Kenneth L. Matheny
Vice President &
Comptroller
May 12, 1997