EXHIBIT 99.2
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Marathon Group
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Index to Financial Statements, Supplementary Data,
Management's Discussion and Analysis and Quantitative and
Qualitative Disclosures About Market Risk
Page
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Management's Report........................................... M-1
Audited Financial Statements:
Report of Independent Accountants........................... M-1
Statement of Operations..................................... M-2
Balance Sheet............................................... M-3
Statement of Cash Flows..................................... M-4
Notes to Financial Statements............................... M-5
Selected Quarterly Financial Data............................ M-21
Principal Unconsolidated Affiliates.......................... M-21
Supplementary Information.................................... M-21
Five-Year Operating Summary.................................. M-22
Five-Year Financial Summary.................................. M-24
Management's Discussion and Analysis......................... M-25
Quantitative and Qualitative Disclosures About Market Risks.. M-35
Management's Report
The accompanying financial statements of the Marathon Group are
the responsibility of and have been prepared by USX Corporation
(USX) in conformity with generally accepted accounting principles.
They necessarily include some amounts that are based on best
judgments and estimates. The Marathon Group financial information
displayed in other sections of this report is consistent with these
financial statements.
USX seeks to assure the objectivity and integrity of its
financial records by careful selection of its managers, by
organizational arrangements that provide an appropriate division of
responsibility and by communications programs aimed at assuring
that its policies and methods are understood throughout the
organization.
USX has a comprehensive formalized system of internal
accounting controls designed to provide reasonable assurance that
assets are safeguarded and that financial records are reliable.
Appropriate management monitors the system for compliance, and the
internal auditors independently measure its effectiveness and
recommend possible improvements thereto. In addition, as part of
their audit of the financial statements, USX's independent
accountants, who are elected by the stockholders, review and test
the internal accounting controls selectively to establish a basis
of reliance thereon in determining the nature, extent and timing of
audit tests to be applied.
The Board of Directors pursues its oversight role in the
area of financial reporting and internal accounting control through
its Audit Committee. This Committee, composed solely of
nonmanagement directors, regularly meets (jointly and separately)
with the independent accountants, management and internal auditors
to monitor the proper discharge by each of its responsibilities
relative to internal accounting controls and the consolidated and
group financial statements.
Thomas J. Usher Robert M. Hernandez Kenneth L. Matheny
Chairman, Board of Directors Vice Chairman Vice President
& Chief Executive Officer & Chief Financial Officer & Comptroller
Report of Independent Accountants
To the Stockholders of USX Corporation:
In our opinion, the accompanying financial statements appearing
on pages M-2 through M-20 present fairly, in all material respects,
the financial position of the Marathon Group at December 31, 1997
and 1996, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These
financial statements are the responsibility of USX's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 7, page M-9, in 1995 USX adopted a new
accounting standard for the impairment of long-lived assets.
The Marathon Group is a business unit of USX Corporation (as
described in Note 1, page M-5); accordingly, the financial
statements of the Marathon Group should be read in connection with
the consolidated financial statements of USX Corporation.
Price Waterhouse LLP
600 Grant Street, Pittsburgh, Pennsylvania 15219-2794
February 10, 1998
M-1
Statement of Operations
(Dollars in millions) 1997 1996 1995
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REVENUES:
Sales (Note 5) $15,668 $16,297 $13,871
Dividend and affiliate income 36 33 23
Gain on disposal of assets 37 55 8
Other income 13 9 11
-------- -------- --------
Total revenues 15,754 16,394 13,913
-------- -------- --------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 10,392 11,188 9,011
Selling, general and administrative expenses 355 309 297
Depreciation, depletion and amortization 664 693 817
Taxes other than income taxes 2,938 2,971 2,903
Exploration expenses 189 146 149
Inventory market valuation charges (credits) (Note 20) 284 (209) (70)
Impairment of long-lived assets (Note 7) -- -- 659
-------- -------- --------
Total costs and expenses 14,822 15,098 13,766
-------- -------- --------
INCOME FROM OPERATIONS 932 1,296 147
Net interest and other financial costs (Note 6) 260 305 337
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 672 991 (190)
Provision (credit) for estimated income taxes (Note 18) 216 320 (107)
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 456 671 (83)
Extraordinary loss (Note 8) -- 7 5
-------- -------- --------
NET INCOME (LOSS) 456 664 (88)
Dividends on preferred stock -- -- 4
-------- -------- --------
NET INCOME (LOSS) APPLICABLE TO MARATHON STOCK $ 456 $ 664 $ (92)
-------------------------------------------------------------------------------------------
Income Per Common Share Applicable to Marathon Stock
1997 1996 1995
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BASIC:
Income (loss) before extraordinary loss $ 1.59 $ 2.33 $ (.31)
Extraordinary loss - (.02) (.02)
------- -------- --------
Net income (loss) $ 1.59 $ 2.31 $ (.33)
DILUTED:
Income (loss) before extraordinary loss $ 1.58 $ 2.31 $ (.31)
Extraordinary loss - (.02) (.02)
------- -------- --------
Net income (loss) $ 1.58 $ 2.29 $ (.33)
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See Note 24, for a description and computation of income per common
share.
The accompanying notes are an integral part of these financial
statements.
M-2
Balance Sheet
(Dollars in millions) December 31 1997 1996
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ASSETS
Current assets:
Cash and cash equivalents $ 36 $ 32
Receivables, less allowance for doubtful accounts
of $2 and $2 (Note 23) 856 613
Inventories (Note 20) 980 1,282
Other current assets 146 119
------- -------
Total current assets 2,018 2,046
Investments and long-term receivables (Note 19) 455 311
Property, plant and equipment - net (Note 17) 7,566 7,298
Prepaid pensions (Note 15) 290 280
Other noncurrent assets 236 216
------- -------
Total assets $10,565 $10,151
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LIABILITIES
Current liabilities:
Notes payable $ 108 $ 59
Accounts payable 1,348 1,385
Payroll and benefits payable 142 106
Accrued taxes 102 98
Deferred income taxes (Note 18) 61 155
Accrued interest 84 75
Long-term debt due within one year (Note 11) 417 264
------- -------
Total current liabilities 2,262 2,142
Long-term debt (Note 11) 2,476 2,642
Long-term deferred income taxes (Note 18) 1,318 1,178
Employee benefits (Note 16) 375 356
Deferred credits and other liabilities 332 311
Preferred stock of subsidiary (Note 9) 184 182
STOCKHOLDERS' EQUITY (Note 22) 3,618 3,340
------- -------
Total liabilities and stockholders' equity $10,565 $10,151
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The accompanying notes are an integral part of these financial
statements.
M-3
Statement of Cash Flows
(Dollars in millions) 1997 1996 1995
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income (loss) $ 456 $ 664 $ (88)
Adjustments to reconcile to net cash provided
from operating activities:
Extraordinary loss - 7 5
Depreciation, depletion and amortization 664 693 817
Exploratory dry well costs 78 54 64
Inventory market valuation charges (credits) 284 (209) (70)
Pensions (4) (3) (16)
Postretirement benefits other than pensions 10 15 12
Deferred income taxes 30 104 (204)
Gain on disposal of assets (37) (55) (8)
Payment of amortized discount on zero coupon debentures (13) - (96)
Impairment of long-lived assets - - 659
Changes in: Current receivables - sold (340) - 8
- operating turnover 97 (119) (120)
Inventories 18 72 55
Current accounts payable and accrued expenses 11 211 (27)
All other - net (8) 69 53
------- ------ ------
Net cash provided from operating activities 1,246 1,503 1,044
------- ------ ------
INVESTING ACTIVITIES:
Capital expenditures (1,038) (751) (642)
Disposal of assets 60 282 77
Elimination of Retained Interest in Delhi Group - - 58
Withdrawal (deposit) - property exchange trusts 98 (98) -
Investments in equity affiliates (233) (13) (4)
------- ------ ------
Net cash used in investing activities (1,113) (580) (511)
------- ------ ------
FINANCING ACTIVITIES (Note 4):
Increase (decrease) in Marathon Group's portion of
USX consolidated debt 97 (769) (204)
Specifically attributed debt - repayments (39) (1) (2)
Preferred stock redeemed - - (78)
Marathon Stock repurchased - - (1)
Marathon Stock issued 34 2 -
Dividends paid (219) (201) (199)
------- ------ ------
Net cash used in financing activities (127) (969) (484)
------- ------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2) 1 -
------- ------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4 (45) 49
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 32 77 28
------- ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 36 $ 32 $ 77
- --------------------------------------------------------------------------------------------------
See Note 12, for supplemental cash flow information.
The accompanying notes are an integral part of these financial statements.
M-4
Notes to Financial Statements
1. BASIS OF PRESENTATION
After the redemption of the USX - Delhi Group stock on January
26, 1998, USX Corporation (USX) has two classes of common stock:
USX - Marathon Group Common Stock (Marathon Stock) and USX - U. S.
Steel Group Common Stock (Steel Stock), which are intended to
reflect the performance of the Marathon Group and the U. S. Steel
Group, respectively.
The financial statements of the Marathon Group include the
financial position, results of operations and cash flows for the
businesses of Marathon Oil Company and certain other subsidiaries
of USX, and a portion of the corporate assets and liabilities and
related transactions which are not separately identified with
ongoing operating units of USX. The Marathon Group is involved in
worldwide exploration, production, transportation and marketing of
crude oil and natural gas; domestic refining, marketing and
transportation of petroleum products; and power generation. The
Marathon Group financial statements are prepared using the amounts
included in the USX consolidated financial statements.
Although the financial statements of the Marathon Group and the
U. S. Steel Group separately report the assets, liabilities
(including contingent liabilities) and stockholders' equity of USX
attributed to each such group, such attribution of assets,
liabilities (including contingent liabilities) and stockholders'
equity among the Marathon Group and the U. S. Steel Group for the
purpose of preparing their respective financial statements does not
affect legal title to such assets or responsibility for such
liabilities. Holders of Marathon Stock and Steel Stock are holders
of common stock of USX and continue to be subject to all the risks
associated with an investment in USX and all of its businesses and
liabilities. Financial impacts arising from one Group that affect
the overall cost of USX's capital could affect the results of
operations and financial condition of the other Group. In addition,
net losses of either Group, as well as dividends and distributions
on any class of USX Common Stock or series of preferred stock and
repurchases of any class of USX Common Stock or series of preferred
stock at prices in excess of par or stated value, will reduce the
funds of USX legally available for payment of dividends on both
classes of Common Stock. Accordingly, the USX consolidated
financial information should be read in connection with the
Marathon Group financial information.
- --------------------------------------------------------------------------------
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
PRINCIPLES APPLIED IN CONSOLIDATION - These financial statements
include the accounts of the businesses comprising the Marathon
Group. The Marathon Group and the U. S. Steel Group financial
statements, taken together, comprise all of the accounts included
in the USX consolidated financial statements.
Investments in unincorporated oil and gas joint ventures,
undivided interest pipelines and jointly-owned gas processing
plants are consolidated on a pro rata basis.
Investments in other entities over which the Marathon Group has
significant influence are accounted for using the equity method of
accounting and are carried at the Marathon Group's share of net
assets plus advances. The proportionate share of income from these
equity method investments is included in revenues.
Investments in other companies whose stock is publicly traded
are carried at market value. The difference between the cost of
these investments and market value is recorded as a direct
adjustment to stockholders' equity (net of tax). Investments in
companies whose stock has no readily determinable fair value are
carried at cost. Dividends from these investments are recognized in
revenues.
Gains or losses from a change in ownership interest of a
consolidated subsidiary or an unconsolidated affiliate are
recognized in revenues in the period of change.
The proportionate share of income represented by the Retained
Interest (Note 4) in the Delhi Group prior to June 15, 1995, is
included in revenues. In November 1997, USX sold its stock in Delhi
Gas Pipeline Corporation and other subsidiaries of USX that
comprise all of the Delhi Group (Delhi Companies).
USE OF ESTIMATES - Generally accepted accounting principles
require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at year-end and the reported
amounts of revenues and expenses during the year.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include
cash on hand and on deposit and highly liquid debt instruments with
maturities generally of three months or less.
INVENTORIES - Inventories are carried at lower of cost or market.
Cost of inventories is determined primarily under the last-in,
first-out (LIFO) method.
M-5
DERIVATIVE INSTRUMENTS - The Marathon Group engages in commodity
and currency risk management activities within the normal course of
its business as an end-user of derivative instruments (Note 25).
Management is authorized to manage exposure to price fluctuations
related to the purchase, production or sale of crude oil, natural
gas, refined products and electricity through the use of a variety
of derivative financial and nonfinancial instruments. Derivative
financial instruments require settlement in cash and include such
instruments as over-the-counter (OTC) commodity swap agreements and
OTC commodity options. Derivative nonfinancial instruments require
or permit settlement by delivery of commodities and include
exchange-traded commodity futures contracts and options. At times,
derivative positions are closed, prior to maturity, simultaneous
with the underlying physical transaction and the effects are
recognized in income accordingly. The Marathon Group's practice
does not permit derivative positions to remain open if the
underlying physical market risk has been removed. Derivative
instruments relating to fixed price sales of equity production are
marked-to-market in the current period and the related income
effects are included within income from operations. All other
changes in the market value of derivative instruments are deferred,
including both closed and open positions, and are subsequently
recognized in income, as sales or cost of sales, in the same period
as the underlying transaction. Premiums on all commodity-based
option contracts are initially recorded based on the amount paid or
received; the options' market value is subsequently recorded as a
receivable or payable, as appropriate. The margin receivable
accounts required for open commodity contracts reflect changes in
the market prices of the underlying commodity and are settled on a
daily basis.
Forward currency contracts are used to manage currency risks
related to anticipated revenues and operating costs, firm
commitments for capital expenditures and existing assets or
liabilities denominated in a foreign currency. Gains or losses
related to firm commitments are deferred and included with the
underlying transaction; all other gains or losses are recognized in
income in the current period as sales, cost of sales, interest
income or expense, or other income, as appropriate. Net contract
values are included in receivables or payables, as appropriate.
Recorded deferred gains or losses are reflected within other
noncurrent assets or deferred credits and other liabilities. Cash
flows from the use of derivative instruments are reported in the
same category as the hedged item in the statement of cash flows.
EXPLORATION AND DEVELOPMENT - The Marathon Group follows the
successful efforts method of accounting for oil and gas exploration
and development.
GAS BALANCING - The Marathon Group follows the sales method of
accounting for gas production imbalances.
LONG-LIVED ASSETS - Depreciation and depletion of oil and gas
producing properties are computed using predetermined rates based
upon estimated proved oil and gas reserves applied on a units-of-
production method. Other items of property, plant and equipment are
depreciated principally by the straight-line method.
When an entire property, major facility or facilities
depreciated on an individual basis are sold or otherwise disposed
of, any gain or loss is reflected in income. Proceeds from disposal
of other facilities depreciated on a group basis are credited to
the depreciation reserve with no immediate effect on income.
The Marathon Group evaluates impairment of its oil and gas
assets primarily on a field-by-field basis. Other assets are
evaluated on an individual asset basis or by logical groupings of
assets. Assets deemed to be impaired are written down to their fair
value, including any related goodwill, using discounted future cash
flows and, if available, comparable market values.
ENVIRONMENTAL LIABILITIES - The Marathon Group provides for
remediation costs and penalties when the responsibility to
remediate is probable and the amount of associated costs is
reasonably determinable. Generally, the timing of remediation
accruals coincides with completion of a feasibility study or the
commitment to a formal plan of action. Remediation liabilities are
accrued based on estimates of known environmental exposure and
could be discounted in certain instances. If recoveries of
remediation costs from third parties are probable, a receivable is
recorded. Estimated abandonment and dismantlement costs of offshore
production platforms are accrued based upon estimated proved oil
and gas reserves on a units-of-production method.
INSURANCE - The Marathon Group is insured for catastrophic casualty
and certain property and business interruption exposures, as well
as those risks required to be insured by law or contract. Costs
resulting from noninsured losses are charged against income upon
occurrence.
RECLASSIFICATIONS - Certain reclassifications of prior years'
data have been made to conform to 1997 classifications.
M-6
- --------------------------------------------------------------------------------
3. NEW ACCOUNTING STANDARDS
The following accounting standards were adopted by USX during
1997:
Environmental remediation liabilities - Effective January 1,
1997, USX adopted American Institute of Certified Public
Accountants Statement of Position No. 96-1, "Environmental
Remediation Liabilities" (SOP 96-1), which provides additional
interpretation of existing accounting standards related to
recognition, measurement and disclosure of environmental
remediation liabilities. As a result of adopting SOP 96-1, the
Marathon Group identified additional environmental remediation
liabilities of $11 million. Estimated receivables for
recoverable costs related to adoption of SOP 96-1 were $4
million. The net unfavorable effect of adoption on the Marathon
Group's income from operations at January 1, 1997, was $7
million.
Earnings per share USX adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No.
128). This Statement establishes standards for computing and
presenting earnings per share (EPS). SFAS No. 128 requires dual
presentation of basic and diluted EPS. Basic EPS excludes
dilution and is computed by dividing net income available to
common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if stock options or
convertible securities were exercised or converted into common
stock. The adoption of SFAS No. 128 did not materially change
current and prior years' EPS of the Marathon Group.
- --------------------------------------------------------------------------------
4. CORPORATE ACTIVITIES
FINANCIAL ACTIVITIES - As a matter of policy, USX manages most
financial activities on a centralized, consolidated basis. Such
financial activities include the investment of surplus cash; the
issuance, repayment and repurchase of short-term and long-term
debt; the issuance, repurchase and redemption of preferred stock;
and the issuance and repurchase of common stock. Transactions
related primarily to invested cash, short-term and long-term debt
(including convertible debt), related net interest and other
financial costs, and preferred stock and related dividends are
attributed to the Marathon Group, the U. S. Steel Group and, prior
to November 1, 1997, the Delhi Group based upon the cash flows of
each group for the periods presented and the initial capital
structure of each group. Most financing transactions are attributed
to and reflected in the financial statements of all groups. See
Note 9, for the Marathon Group's portion of USX's financial
activities attributed to all groups. However, transactions such as
leases, certain collaterized financings, certain indexed debt
instruments, financial activities of consolidated entities which
are less than wholly owned by USX and transactions related to
securities convertible solely into any one class of common stock
are or will be specifically attributed to and reflected in their
entirety in the financial statements of the group to which they
relate.
CORPORATE GENERAL AND ADMINISTRATIVE COSTS - Corporate general and
administrative costs are allocated to the Marathon Group, the U. S.
Steel Group and, prior to November 1, 1997, the Delhi Group based
upon utilization or other methods management believes to be
reasonable and which consider certain measures of business
activities, such as employment, investments and sales. The costs
allocated to the Marathon Group were $37 million in 1997 and $30
million in 1996 and 1995, and primarily consist of employment costs
including pension effects, professional services, facilities and
other related costs associated with corporate activities.
COMMON STOCK TRANSACTIONS - The USX Board of Directors, prior to
June 15, 1995, had designated 14,003,205 shares of USX - Delhi
Group Common Stock (Delhi Stock) to represent 100% of the common
stockholders' equity value of USX attributable to the Delhi Group.
The Delhi Fraction was the percentage interest in the Delhi Group
represented by the shares of Delhi Stock that were outstanding at
any particular time and, based on 9,438,391 outstanding shares at
June 14, 1995, was approximately 67%. The Marathon Group financial
statements reflected a percentage interest in the Delhi Group of
approximately 33% (Retained Interest) through June 14, 1995. The
financial position, results of operations and cash flows of the
Delhi Group were reflected in the financial statements of the
Marathon Group only to the extent of the Retained Interest. The
shares deemed to represent the Retained Interest were not
outstanding shares of Delhi Stock and could not be voted by the
Marathon Group. As additional shares of Delhi Stock deemed to
represent the Retained Interest were sold, the Retained Interest
decreased. When a dividend was paid in respect to the outstanding
Delhi Stock, the Marathon Group financial statements were credited,
and the Delhi Group financial statements were charged, with the
aggregate transaction amount times the quotient of the Retained
Interest divided by the Delhi Fraction.
On June 15, 1995, USX eliminated the Marathon Group's Retained
Interest in the Delhi Group (equivalent to 4,564,814 shares of
Delhi Stock). This was accomplished through a reallocation of
assets and a corresponding adjustment to debt and equity attributed
to the Marathon and Delhi Groups. The reallocation was made at a
price of $12.75 per equivalent share of Delhi Stock, or an
aggregate of $58 million, resulting in a corresponding reduction of
the Marathon Group debt.
M-7
INCOME TAXES - All members of the USX affiliated group are
included in the consolidated United States federal income tax
return filed by USX. Accordingly, the provision for federal income
taxes and the related payments or refunds of tax are determined on
a consolidated basis. The consolidated provision and the related
tax payments or refunds have been reflected in the Marathon Group,
the U. S. Steel Group and, prior to November 1, 1997, the Delhi
Group financial statements in accordance with USX's tax allocation
policy. In general, such policy provides that the consolidated tax
provision and related tax payments or refunds are allocated among
the Marathon Group, the U. S. Steel Group and, prior to November 1,
1997, the Delhi Group, for group financial statement purposes,
based principally upon the financial income, taxable income,
credits, preferences and other amounts directly related to the
respective groups.
For tax provision and settlement purposes, tax benefits
resulting from attributes (principally net operating losses and
various tax credits), which cannot be utilized by one of the groups
on a separate return basis but which can be utilized on a
consolidated basis in that year or in a carryback year, are
allocated to the group that generated the attributes. To the extent
that one of the groups is allocated a consolidated tax attribute
which, as a result of expiration or otherwise, is not ultimately
utilized on the consolidated tax return, the prior years'
allocation of such attribute is adjusted such that the effect of
the expiration is borne by the group that generated the attribute.
Also, if a tax attribute cannot be utilized on a consolidated basis
in the year generated or in a carryback year, the prior years'
allocation of such consolidated tax effects is adjusted in a
subsequent year to the extent necessary to allocate the tax
benefits to the group that would have realized the tax benefits on
a separate return basis. As a result, the allocated group amounts
of taxes payable or refundable are not necessarily comparable to
those that would have resulted if the groups had filed separate tax
returns.
- --------------------------------------------------------------------------------
5. REVENUES
The items below are included in revenues and costs and expenses,
with no effect on income.
(In millions) 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------
Consumer excise taxes on petroleum products and merchandise $2,736 $2,768 $2,708
Matching crude oil and refined product
buy/sell transactions settled in cash 2,436 2,912 2,067
-----------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
6. OTHER ITEMS
(In millions) 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------
NET INTEREST AND OTHER FINANCIAL COSTS
INTEREST AND OTHER FINANCIAL INCOME/(a)/:
Interest income $ 7 $ 4 $ 9
Other (6) (1) 3
------ ------ ------
Total 1 3 12
------ ------ ------
INTEREST AND OTHER FINANCIAL COSTS/(a)/:
Interest incurred 232 260 297
Less interest capitalized 24 3 8
------ ------ ------
Net interest 208 257 289
Interest on tax issues 7 4 (5) /(b)/
Financial costs on preferred stock of subsidiary 16 16 16
Amortization of discounts 4 7 21
Expenses on sales of accounts receivable (Note 23) 19 20 24
Other 7 4 4
------ ------ ------
Total 261 308 349
------ ------ ------
NET INTEREST AND OTHER FINANCIAL COSTS/(a)/ $ 260 $ 305 $ 337
-----------------------------------------------------------------------------------------------------------------
/(a)/ See Note 4, for discussion of USX net interest and other
financial costs attributable to the Marathon Group.
/(b)/ Includes a $17 million benefit related to refundable
federal income taxes paid in prior years.
----------------------------------------------------------------
FOREIGN CURRENCY TRANSACTIONS
For 1997, 1996 and 1995, the aggregate foreign currency
transaction gains (losses) included in determining net income
were $4 million, $(24) million and $3 million, respectively.
M-8
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7. IMPAIRMENT OF LONG-LIVED ASSETS
In 1995, USX adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" (SFAS No. 121). SFAS No.
121 requires that long-lived assets, including related goodwill, be
reviewed for impairment and written down to fair value whenever
events or changes in circumstances indicate that the carrying value
may not be recoverable.
Adoption of SFAS No. 121 resulted in an impairment charge
included in 1995 costs and expenses of $659 million. The impaired
assets primarily included certain domestic and international oil
and gas properties, an idled refinery and related goodwill.
The Marathon Group assessed impairment of its oil and gas
properties based primarily on a field-by-field approach. The
predominant method used to determine fair value was a discounted
cash flow approach and where available, comparable market values
were used. The impairment provision reduced capitalized costs of
oil and gas properties by $533 million.
In addition, the Indianapolis, Indiana refinery, which
was temporarily idled in October 1993, was impaired by $126
million, including related goodwill. The impairment was based on a
discounted cash flow approach and comparable market values.
- -------------------------------------------------------------------------------
8. EXTRAORDINARY LOSS
On December 30, 1996, USX irrevocably called for redemption on
January 30, 1997, $120 million of debt, resulting in a 1996
extraordinary loss to the Marathon Group of $7 million, net of a $4
million income tax benefit. In 1995, USX extinguished $553 million
of debt prior to maturity, which resulted in an extraordinary loss
to the Marathon Group of $5 million, net of a $3 million income tax
benefit.
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9. FINANCIAL ACTIVITIES ATTRIBUTED TO GROUPS
The following is the portion of USX financial activities attributed
to the Marathon Group. These amounts exclude debt amounts
specifically attributed to the Marathon Group.
Marathon Group Consolidated USX/(a)/
----------------------- -----------------------
(In millions) December 31 1997 1996 1997 1996
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 5 $ 6 $ 6 $ 8
Receivables/(b)/ 9 - 10 -
Long-term receivables/(b)/ - 12 - 16
Other noncurrent assets/(b)/ 7 5 8 8
------ ------ ------ ----------
Total assets $ 21 $ 23 $ 24 $ 32
-----------------------------------------------------------------------------------------------------------------
Notes payable $ 108 $ 58 $ 121 $ 80
Accounts payable 1 2 1 2
Accrued interest 79 71 89 98
Long-term debt due within one year (Note 11) 416 224 466 309
Long-term debt (Note 11) 2,452 2,618 2,704 3,615
Preferred stock of subsidiary 184 182 250 250
------ ------ ------ ----------
Total liabilities $3,240 $3,155 $ 3,631 $4,354
-----------------------------------------------------------------------------------------------------------------
Marathon Group/(c)/ Consolidated USX
----------------------- ----------------------
(In millions) 1997 1996 1995 1997 1996 1995
----------------------------------------------------------------------------------------------------------
Net interest and other financial
costs (Note 6) $ 246 $ 277 $ 329 $ 309 $ 376 $ 439
----------------------------------------------------------------------------------------------------------
/(a)/ For details of USX long-term debt and preferred stock of
subsidiary, see Notes 16 and 25, respectively, to the USX
consolidated financial statements.
/(b)/ Primarily reflects forward currency contracts used to manage
currency risks related to USX debt and interest denominated
in a foreign currency.
/(c)/ The Marathon Group's net interest and other financial costs
reflect weighted average effects of all financial activities
attributed to all groups.
M-9
- -------------------------------------------------------------------------------
10. LEASES
Future minimum commitments for capital leases and for operating
leases having remaining noncancelable lease terms in excess of one
year are as follows:
Capital Operating
(In millions) Leases Leases
-----------------------------------------------------------------------
1998 $ 2 $ 106
1999 2 80
2000 2 157
2001 2 57
2002 2 55
Later years 27 140
Sublease rentals - (29)
----- ---------
Total minimum lease payments 37 $ 566
=========
Less imputed interest costs 13
-----
Present value of net minimum lease payments
included in long-term debt $ 24
---------------------------------------------------------------------------------------
Operating lease rental expense:
(In millions) 1997 1996 1995
---------------------------------------------------------------------------------------
Minimum rental $ 102 $ 96 $ 97
Contingent rental 10 10 10
Sublease rentals (7) (6) (5)
----- ----- ---------
Net rental expense $ 105 $ 100 $ 102
---------------------------------------------------------------------------------------
The Marathon Group leases a wide variety of facilities and
equipment under operating leases, including land and building
space, office equipment, production facilities and transportation
equipment. Most long-term leases include renewal options and, in
certain leases, purchase options. In the event of a change in
control of USX, as defined in the agreements, or certain other
circumstances, operating lease obligations totaling $109 million
may be declared immediately due and payable.
- --------------------------------------------------------------------------------
11. LONG-TERM DEBT
The Marathon Group's portion of USX's consolidated long-term
debt is as follows:
Marathon Group Consolidated USX/(a)/
---------------------- ----------------------
(In millions) December 31 1997 1996 1997 1996
----------------------------------------------------------------------------------------------------
Specifically attributed debt/(b)/:
Sale-leaseback financing and capital leases $ 24 $ 24 $ 123 $ 129
Indexed debt less unamortized discount - - 110 119
Seller-provided financing - 40 - 40
------ ------ ------ ----------
Total 24 64 233 288
Less amount due within one year - 40 5 44
------ ------ ------ ----------
Total specifically attributed long-term debt $ 24 $ 24 $ 228 $ 244
--------------------------------------------------------------------------------------------------
Debt attributed to groups/(c)/ $2,889 $2,860 $3,194 $3,949
Less unamortized discount 21 18 24 25
Less amount due within one year 416 224 466 309
------ ------ ------ ----------
Total long-term debt attributed to groups $2,452 $2,618 $2,704 $3,615
--------------------------------------------------------------------------------------------------
Total long-term debt due within one year $ 416 $ 264 $ 471 $ 353
Total long-term debt due after one year 2,476 2,642 2,932 3,859
--------------------------------------------------------------------------------------------------
/(a)/ See Note 16, to the USX consolidated financial statements
for details of interest rates, maturities and other terms of
long-term debt.
/(b)/ As described in Note 4, certain financial activities are
specifically attributed only to the Marathon Group and the U.
S. Steel Group.
/(c)/ Most long-term debt activities of USX Corporation and its
wholly owned subsidiaries are attributed to all groups (in
total, but not with respect to specific debt issues) based on
their respective cash flows (Notes 4, 9 and 12).
M-10
- -------------------------------------------------------------------------------
12. SUPPLEMENTAL CASH FLOW INFORMATION
(In millions) 1997 1996 1995
----------------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES INCLUDED:
Interest and other financial costs paid (net of amount capitalized) $ (257) $ (339) $ (431)
Income taxes paid, including settlements with other groups (178) (74) (163)
----------------------------------------------------------------------------------------------------------
USX DEBT ATTRIBUTED TO ALL GROUPS - NET:
Commercial paper:
Issued $ - $ 1,422 $ 2,434
Repayments - (1,555) (2,651)
Credit agreements:
Borrowings 10,454 10,356 4,719
Repayments (10,449) (10,340) (4,659)
Other credit arrangements - net 36 (36) 40
Other debt:
Borrowings 10 78 52
Repayments (741) (705) (440)
-------- -------- -------
Total $ (690) $ (780) $ (505)
--------------------------------------------------------------------------------------------------------
Marathon Group activity $ 97 $ (769) $ (204)
U. S. Steel Group activity (561) (31) (399)
Delhi Group activity (226) 20 98
-------- -------- -------
Total $ (690) $ (780) $ (505)
--------------------------------------------------------------------------------------------------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Marathon Stock issued for employee stock plans $ 5 $ 2 $ 5
Disposal of assets - common stock received - - 5
- liabilities assumed by buyers 5 25 -
----------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
13. DIVIDENDS
In accordance with the USX Certificate of Incorporation,
dividends on the Marathon Stock and Steel Stock are limited to the
legally available funds of USX. Net losses of either Group, as well
as dividends and distributions on any class of USX Common Stock or
series of preferred stock and repurchases of any class of USX
Common Stock or series of preferred stock at prices in excess of
par or stated value, will reduce the funds of USX legally available
for payment of dividends on both classes of Common Stock. Subject
to this limitation, the Board of Directors intends to declare and
pay dividends on the Marathon Stock based on the financial
condition and results of operation of the Marathon Group, although
it has no obligation under Delaware law to do so. In making its
dividend decisions with respect to Marathon Stock, the Board of
Directors considers among other things, the long-term earnings and
cash flow capabilities of the Marathon Group as well as the
dividend policies of similar publicly traded energy companies.
- --------------------------------------------------------------------------------
14. STOCK-BASED COMPENSATION PLANS AND STOCKHOLDER RIGHTS PLAN
USX Stock-Based Compensation Plans and Stockholder Rights Plan
are discussed in Note 21, and Note 23, respectively, to the USX
consolidated financial statements.
In 1996, USX adopted SFAS No. 123, Accounting for Stock-
Based Compensation and elected to continue to follow the accounting
provisions of APB No. 25, as discussed in Note 2, to the USX
consolidated financial statements. The Marathon Group's actual
stock-based compensation expense was $20 million in 1997, $6
million in 1996 and $2 million in 1995. Incremental compensation
expense, as determined under SFAS No. 123, was not material ($.02
or less per share for all years presented). Therefore, pro forma
net income and earnings per share data have been omitted.
M-11
- --------------------------------------------------------------------------------
15. PENSIONS
The Marathon Group has noncontributory defined benefit plans
covering substantially all employees. Benefits under these plans
are based primarily upon years of service and the highest three
years earnings during the last ten years before retirement. Certain
subsidiaries provide benefits for employees covered by other plans
based primarily upon employees' service and career earnings. The
funding policy for all plans provides that payments to the pension
trusts shall be equal to the minimum funding requirements of ERISA
plus such additional amounts as may be approved.
PENSION COST (CREDIT) - The defined benefit cost for major plans
for 1997, 1996 and 1995 was determined assuming an expected long-
term rate of return on plan assets of 9.5%, 10% and 10%,
respectively, and was as follows:
(In millions) 1997 1996 1995
--------------------------------------------------------------------------------------
Major plans:
Cost of benefits earned during the period $ 31 $ 35 $ 26
Interest cost on projected benefit obligation
(7.5% for 1997; 7% for 1996; and 8% for 1995) 45 45 41
Return on assets - actual return (217) (139) (197)
- deferred gain 132 55 116
Net amortization of unrecognized gains (3) (3) (4)
------- ------- -------
Total major plans (12) (7) (18)
Other plans 4 4 4
------- ------- -------
Total periodic pension credit (8) (3) (14)
Curtailment losses - - 2
------- ------- -------
Total pension credit $ (8) $ (3) $ (12)
--------------------------------------------------------------------------------------
FUNDS' STATUS - The assumed discount rate used to measure the
benefit obligations of major plans was 7% at December 31, 1997, and
7.5% at December 31, 1996. The assumed rate of future increases in
compensation levels was 5% at both year-ends. The following table
sets forth the plans' funded status and the amounts reported in the
Marathon Group's balance sheet:
(In millions) December 31 1997 1996
-------------------------------------------------------------------------------------------
Reconciliation of funds' status to reported amounts:
Projected benefit obligation (PBO)/(a)/ $ (771) $ (627)
Plan assets at fair market value/(b)/ 1,150 989
-------- --------
Assets in excess of PBO/(c)/ 379 362
Unrecognized net gain from transition (40) (45)
Unrecognized prior service cost 45 8
Unrecognized net gain (115) (65)
Additional minimum liability/(d)/ (14) (11)
-------- --------
Net pension asset included in balance sheet $ 255 $ 249
--------------------------------------------------------------------------------------------
/(a)/ PBO includes:
Accumulated benefit obligation (ABO) $ (562) $ (479)
Vested benefit obligation (496) (424)
/(b)/ Types of assets held:
Stocks of other corporations 70% 70%
U.S. Government securities 9% 10%
Corporate debt instruments and other 21% 20%
/(c)/ Includes several small plans that have ABOs in excess of
plan assets:
PBO $ (82) $ (68)
Plan assets 24 18
-------- --------
PBO in excess of plan assets $ (58) $ (50)
/(d)/ Additional minimum liability recorded was offset by the
following:
Intangible asset $ 3 $ 3
Stockholders' equity adjustment - net of deferred income tax 7 5
--------------------------------------------------------------------------------------------
M-12
- --------------------------------------------------------------------------------
16. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Marathon Group has defined benefit retiree health and life
insurance plans covering most employees upon their retirement.
Health benefits are provided, for the most part, through
comprehensive hospital, surgical and major medical benefit
provisions subject to various cost sharing features. Life insurance
benefits are provided to nonunion and most union represented
retiree beneficiaries primarily based on employees' annual base
salary at retirement. Benefits have not been prefunded.
POSTRETIREMENT BENEFIT COST - Postretirement benefit cost for
defined benefit plans for 1997, 1996 and 1995 was determined
assuming discount rates of 7.5%, 7% and 8%, respectively, and was
as follows:
(In millions) 1997 1996 1995
-----------------------------------------------------------------------------------------
Cost of benefits earned during the period $ 6 $ 8 $ 7
Interest on accumulated postretirement benefit obligation (APBO) 22 23 22
Amortization of unrecognized gains (3) (3) (3)
----- ----- -----
Total postretirement benefit cost $ 25 $ 28 $ 26
-----------------------------------------------------------------------------------------
OBLIGATIONS - The following table sets forth the plans' obligations
and the amounts reported in the Marathon Group's balance sheet:
(In millions) December 31 1997 1996
-------------------------------------------------------------------------------------
Reconciliation of APBO to reported amounts:
APBO attributable to:
Retirees $ 196 $ 162
Fully eligible plan participants 72 53
Other active plan participants 113 84
----- -----
Total APBO 381 299
Unrecognized net loss (73) (4)
Unrecognized prior service cost 18 21
----- -----
Accrued liability included in balance sheet $ 326 $ 316
-------------------------------------------------------------------------------------
The assumed discount rate used to measure the APBO was 7% and
7.5% at December 31, 1997, and December 31, 1996, respectively. The
assumed rate of future increases in compensation levels was 5% at
both year-ends. The weighted average health care cost trend rate in
1998 is approximately 8%, gradually declining to an ultimate rate
in 2004 of approximately 5%. A one percentage point increase in the
assumed health care cost trend rates for each future year would
have increased the aggregate of the service and interest cost
components of the 1997 net periodic postretirement benefit cost by
$5 million and would have increased the APBO as of December 31,
1997, by $56 million.
- --------------------------------------------------------------------------------
17. PROPERTY, PLANT AND EQUIPMENT
(In millions) December 31 1997 1996
--------------------------------------------------------------------------------------------------
Production $13,219 $12,605
Refining 1,703 1,633
Marketing 1,442 1,350
Transportation 626 515
Other 243 226
------- -------
Total 17,233 16,329
Less accumulated depreciation, depletion and amortization 9,667 9,031
------- -------
Net $ 7,566 $ 7,298
--------------------------------------------------------------------------------------------------
Property, plant and equipment includes gross assets acquired
under capital leases of $24 million at December 31, 1997 and 1996;
the related amounts for the years 1997 and 1996 in accumulated
depreciation, depletion and amortization were $24 million.
M-13
- --------------------------------------------------------------------------------
18. INCOME TAXES
Income tax provisions and related assets and liabilities attributed
to the Marathon Group are determined in accordance with the USX
group tax allocation policy (Note 4).
Provisions (credits) for estimated income taxes were:
1997 1996 1995
------------------------------ --------------------------- ---------------------------
(In millions) Current Deferred Total Current Deferred Total Current Deferred Total
---------------------------------------------------------------------------------------------------------------------
Federal $171 $ (5) $166 $193 $ 13 $ 206 $ 72 $(221) $(149)
State and local 3 7 10 12 9 21 10 (14) (4)
Foreign 12 28 40 11 82 93 15 31 46
---- ----- ---- ---- ----- ----- ----- ----- -----
Total $186 $ 30 $216 $216 $ 104 $ 320 $ 97 $(204) $(107)
---------------------------------------------------------------------------------------------------------------------
A reconciliation of federal statutory tax rate (35%) to total
provisions (credits) follows:
(In millions) 1997 1996 1995
--------------------------------------------------------------------------------------------------------------------
Statutory rate applied to income (loss) before income taxes $ 235 $ 347 $ (67)
State and local income taxes after federal income tax effects 6 14 (3)
Effects of foreign operations, including foreign tax credits (8) (14) (36)/(a)/
Effects of partially-owned companies (6) (10) (7)
Dispositions of subsidiary investments - (8) (6)
Credits other than foreign tax credits (9) (8) (1)
Nondeductible business and amortization expenses 3 3 10
Adjustment of prior years' income taxes (4) (6) (1)
Adjustment of valuation allowances (4) - 4
Other 3 2 -
----- ----- -----
Total provisions (credits) $ 216 $ 320 $(107)
--------------------------------------------------------------------------------------------------------------------
/(a)/ Includes incremental tax benefits of $44 million resulting
from USX's election to credit, rather than deduct, certain
foreign income taxes for federal income tax purposes.
Deferred tax assets and liabilities resulted from the
following:
(In millions) December 31 1997 1996
----------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Minimum tax credit carryforwards $ 42 $ 110
State tax loss carryforwards (expiring in 1998 through 2012) 52 40
Foreign tax loss carryforwards (portion of which expire in 1998 through 2012) 483 519
Employee benefits 172 158
Expected federal benefit for:
Crediting certain foreign deferred income taxes 249 216
Deducting state and other foreign deferred
income taxes 53 51
Contingency and other accruals 148 116
Other 54 56
Valuation allowances (311) (325)
------ ------
Total deferred tax assets/(a)/ 942 941
------ ------
Deferred tax liabilities:
Property, plant and equipment 1,820 1,685
Inventory 199 306
Prepaid pensions 129 121
Other 114 118
------ -----
Total deferred tax liabilities 2,262 2,230
------ -----
Net deferred tax liabilities $1,320 $1,289
----------------------------------------------------------------------------------------------------------------------
/(a)/ USX expects to generate sufficient future taxable income to
realize the benefit of the Marathon Group's deferred tax
assets. In addition, the ability to realize the benefit of
foreign tax credits is based upon certain assumptions
concerning future operating conditions (particularly as
related to prevailing oil prices), income generated from
foreign sources and USX's tax profile in the years that such
credits may be claimed.
The consolidated tax returns of USX for the years 1990
through 1994 are under various stages of audit and administrative
review by the IRS. USX believes it has made adequate provision for
income taxes and interest which may become payable for years not
yet settled.
Pretax income (loss) included $250 million, $341 million
and $(50) million attributable to foreign sources in 1997, 1996 and
1995, respectively.
Undistributed earnings of consolidated foreign
subsidiaries at December 31, 1997, amounted to $108 million. No
provision for deferred U.S. income taxes has been made because the
Marathon Group intends to permanently reinvest such earnings in its
foreign operations. If such earnings were not permanently
reinvested, a deferred tax liability of $38 million would have been
required.
M-14
- --------------------------------------------------------------------------------
19. INVESTMENTS AND LONG-TERM RECEIVABLES
(In millions) December 31 1997 1996
----------------------------------------------------------------------------
Equity method investments $ 366 $ 135
Other investments 32 31
Deposit in property exchange trusts - 98
Receivables due after one year 49 34
Forward currency contracts - 12
Other 8 1
----- -----
Total $ 455 $ 311
----------------------------------------------------------------------------
The following represents summarized financial information of
affiliates accounted for by the equity method of accounting, except
for the Retained Interest in the Delhi Group:
(In millions) 1997 1996 1995
---------------------------------------------------------------
Income data - year:
Revenues $ 562 $ 405 $ 255
Operating income 114 95 77
Net income 52 53 24
---------------------------------------------------------------
Balance sheet data - December 31:
Current assets $ 170 $ 146
Noncurrent assets 1,470 1,150
Current liabilities 236 198
Noncurrent liabilities 721 737
---------------------------------------------------------------
Dividends and partnership distributions received from equity
affiliates were $21 million in 1997, $24 million in 1996 and $14
million in 1995.
Marathon Group purchases from equity affiliates totaled
$37 million, $49 million and $52 million in 1997, 1996 and 1995,
respectively. Marathon Group sales to equity affiliates were $10
million in 1997, $6 million in 1996 and immaterial in 1995.
Summarized financial information of the Delhi Group, which
was accounted for by the equity method of accounting follows:
(In millions) 1995/(a)/
------------------------------------------------------
Income data for the period:
Revenues $ 276
Operating income 14
Net income 7
-----------------------------------------------------
/(a)/ Retained Interest in the Delhi Group was eliminated on June
15, 1995.
20. INVENTORIES
(In millions) December 31 1997 1996
-------------------------------------------------------------------------------
Crude oil and natural gas liquids $ 452 $ 463
Refined products and merchandise 735 746
Supplies and sundry items 77 73
------ ------
Total (at cost) 1,264 1,282
Less inventory market valuation reserve 284 -
------ ------
Net inventory carrying value $ 980 $1,282
--------------------------------------------------------------------------------
Inventories of crude oil and refined products are valued by
the LIFO method. The LIFO method accounted for 91% and 94% of total
inventory value at December 31, 1997, and December 31, 1996,
respectively.
The inventory market valuation reserve reflects the extent
that the recorded LIFO cost basis of crude oil and refined products
inventories exceeds net realizable value. The reserve is decreased
to reflect increases in market prices and inventory turnover and
increased to reflect decreases in market prices. Changes in the
inventory market valuation reserve result in noncash charges or
credits to costs and expenses.
M-15
- --------------------------------------------------------------------------------
21. INTERGROUP TRANSACTIONS
SALES AND PURCHASES - Marathon Group sales to other groups totaled
$105 million, $87 million and $54 million in 1997, 1996 and 1995,
respectively. Marathon Group purchases from the Delhi Group totaled
$18 million in 1997, $9 million in 1996 and $6 million in 1995. At
December 31, 1997 and 1996, Marathon Group receivables included $3
million and $19 million, respectively, related to transactions with
other groups. Marathon Group accounts payable included none at
December 31, 1997, and $2 million at December 31, 1996, related to
transactions with the Delhi Group. These transactions were conducted
on an arm's-length basis. After October 31, 1997, transactions with
the Delhi Companies were treated as third-party transactions.
INCOME TAXES RECEIVABLE FROM/PAYABLE TO OTHER GROUPS - At December 31,
1997 and 1996, amounts receivable from/payable to other groups for
income taxes were included in the balance sheet as follows:
(In millions) December 31 1997 1996
------------------------------------------------------------------------------------------
Current:
Receivables $ 2 $ 1
Accounts payable 22 30
Noncurrent:
Deferred credits and other liabilities 97 83
------------------------------------------------------------------------------------------
These amounts have been determined in accordance with the tax
allocation policy described in Note 4. Amounts classified as current
are settled in cash in the year succeeding that in which such amounts
are accrued. Noncurrent amounts represent estimates of intergroup tax
effects of certain issues for years that are still under various
stages of audit and administrative review. Such tax effects are not
settled among the groups until the audit of those respective tax years
is closed. The amounts ultimately settled for open tax years will be
different than recorded noncurrent amounts based on the final
resolution of all of the audit issues for those years.
- --------------------------------------------------------------------------------
22. STOCKHOLDERS' EQUITY
(In millions, except per share data) 1997 1996 1995
------------------------------------------------------------------------------------------
PREFERRED STOCK:
Balance at beginning of year $ - $ - $ 78
Redeemed - - (78)
------ ------ ------
Balance at end of year $ - $ - $ -
------------------------------------------------------------------------------------------
COMMON STOCKHOLDERS' EQUITY (Note 4):
Balance at beginning of year $3,340 $2,872 $3,163
Net income (loss) 456 664 (88)
Marathon Stock issued 39 4 5
Marathon Stock repurchased - - (1)
Dividends on preferred stock - - (4)
Dividends on Marathon Stock
(per share: $.76 in 1997, $.70 in 1996 and $.68 in 1995) (219) (201) (195)
Foreign currency translation adjustments - - 1
Deferred compensation adjustments 1 - (3)
Minimum pension liability adjustments (Note 15) (2) 1 (6)
Unrealized holding gains on investments 3 - -
------- ------- -------
Balance at end of year $3,618 $3,340 $2,872
------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $3,618 $3,340 $2,872
------------------------------------------------------------------------------------------
M-16
- --------------------------------------------------------------------------------
23. SALES OF RECEIVABLES
The Marathon Group, prior to December 1997, participated in an
agreement (the program) to sell an undivided interest in certain
accounts receivable. At December 31, 1997, the amount sold under the
program that had not been collected was zero, since the program was
terminated in December 1997. The amount sold under the program
averaged $314 million in 1997, $340 million in 1996 and $361 million
in 1995.
- --------------------------------------------------------------------------------
24. INCOME PER COMMON SHARE
The method of calculating net income per share for the Marathon Stock,
the Steel Stock and, prior to November 1, 1997, the Delhi Stock
reflects the USX Board of Directors' intent that the separately
reported earnings and surplus of the Marathon Group, the U. S. Steel
Group and the Delhi Group, as determined consistent with the USX
Certificate of Incorporation, are available for payment of dividends
to the respective classes of stock, although legally available funds
and liquidation preferences of these classes of stock do not
necessarily correspond with these amounts.
Basic net income (loss) per share is calculated by adjusting net
income (loss) for dividend requirements of preferred stock and is
based on the weighted average number of common shares outstanding.
Diluted net income (loss) per share assumes conversion of
convertible securities for the applicable periods outstanding and
assumes exercise of stock options, provided in each case, the effect
is not antidilutive.
1997 1996 1995
------------------ -------------------- --------------------
COMPUTATION OF INCOME PER SHARE BASIC DILUTED Basic Diluted Basic Diluted
------------------------------- -------- -------- --------- --------- --------- ---------
Net income (loss) (millions):
Income (loss) before extraordinary loss $ 456 $ 456 $ 671 $ 671 $ (83) $ (83)
Dividends on preferred stock - - - - (4) (4)
Extraordinary loss - - (7) (7) (5) (5)
-------- -------- -------- -------- -------- --------
Net income (loss) applicable to Marathon Stock 456 456 664 664 (92) (92)
Effect of dilutive securities -
Convertible debentures - 3 - 14 - -
-------- -------- -------- -------- -------- --------
Net income (loss) assuming conversions $ 456 $ 459 $ 664 $ 678 $ (92) $ (92)
======== ======== ======== ======== ======== ========
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 288,038 288,038 287,460 287,460 287,271 287,271
Effect of dilutive securities:
Convertible debentures - 1,936 - 8,975 - -
Stock options - 546 - 133 - -
-------- -------- -------- -------- -------- --------
Average common shares and dilutive effect 288,038 290,520 287,460 296,568 287,271 287,271
-------- -------- -------- -------- -------- --------
Per share:
Income (loss) before extraordinary loss $ 1.59 $ 1.58 $ 2.33 $ 2.31 $ (.31) $ (.31)
Extraordinary loss - - (.02) (.02) (.02) (.02)
-------- -------- -------- -------- -------- --------
Net income (loss) $ 1.59 $ 1.58 $ 2.31 $ 2.29 $ (.33) $ (.33)
======== ======== ======== ======== ======== ========
- --------------------------------------------------------------------------------
25. DERIVATIVE INSTRUMENTS
The Marathon Group uses commodity-based derivative instruments to
manage exposure to price fluctuations related to the anticipated
purchase or production and sale of crude oil, natural gas, refined
products and electricity. The derivative instruments used, as a part
of an overall risk management program, include exchange-traded futures
contracts and options, and instruments which require settlement in
cash such as OTC commodity swaps and OTC options. While risk
management activities generally reduce market risk exposure due to
unfavorable commodity price changes for raw material purchases and
products sold, such activities can also encompass strategies which
assume certain price risk in isolated transactions.
USX has used forward currency contracts to hedge foreign
denominated debt, a portion of which has been attributed to the
Marathon Group.
The Marathon Group remains at risk for possible changes in the
market value of the derivative instrument; however, such risk should
be mitigated by price changes in the underlying hedged item. The
Marathon Group is also exposed to credit risk in the event of
nonperformance by counterparties. The credit worthiness of
counterparties is subject to continuing review, including the use of
master netting agreements to the extent practical, and full
performance is anticipated.
M-17
The following table sets forth quantitative information by class
of derivative instrument:
FAIR CARRYING RECORDED
VALUE AMOUNT DEFERRED AGGREGATE
ASSETS ASSETS GAIN OR CONTRACT
(In millions) (LIABILITIES) /(A)/ (LIABILITIES) (LOSS) VALUES /(B)/
-----------------------------------------------------------------------------------------------------
DECEMBER 31, 1997:
Exchange-traded commodity futures $ - $ - $ - $ 30
Exchange-traded commodity options 1 /(c)/ 1 2 129
OTC commodity swaps /(d)/ (2) /(e)/ (2) (3) 30
OTC commodity options - - - 6
------ ------- ------ --------
Total commodities $ (1) $ (1) $ (1) $ 195
------ ------- ------ --------
Forward currency contract /(f)/:
- receivable $ 10 $ 9 $ - $ 52
- payable (1) (1) (1) 5
------ ------- ------ --------
Total currencies $ 9 $ 8 $ (1) $ 57
-----------------------------------------------------------------------------------------------------
December 31, 1996:
Exchange-traded commodity futures $ - $ - $ (2) $ 38
Exchange-traded commodity options (1) /(c)/ (1) (2) 251
OTC commodity swaps (3) /(e)/ (2) - 32
OTC commodity options (7) (7) (1) 80
------ ------- ------ --------
Total commodities $ (11) $ (10) $ (5) $ 401
------ ------- ------ --------
Forward currency contract:
- receivable $ 14 $ 12 $ - $ 43
- payable (1) (1) (1) 7
------ ------- ------ --------
Total currencies $ 13 $ 11 $ (1) $ 50
-----------------------------------------------------------------------------------------------------
/(a)/ The fair value amounts for OTC positions are based on various
indices or dealer quotes. The fair value amounts for currency
contracts are based on dealer quotes of forward prices covering
the remaining duration of the foreign exchange contract. The
exchange-traded futures contracts and certain option contracts
do not have a corresponding fair value since changes in the
market prices are settled on a daily basis.
/(b)/ Contract or notional amounts do not quantify risk exposure, but
are used in the calculation of cash settlements under the
contracts. The contract or notional amounts do not reflect the
extent to which positions may offset one another.
/(c)/ Includes fair values as of December 31, 1997 and 1996, for
assets of $3 million and $1 million and liabilities of $(2)
million and $(2) million, respectively.
/(d)/ The OTC swap arrangements vary in duration with certain
contracts extending into mid 2000.
/(e)/ Includes fair values as of December 31, 1997 and 1996, for
assets of $1 million and $1 million and liabilities of $(3)
million and $(4) million, respectively.
/(f)/ The forward currency contract matures in 1998.
- --------------------------------------------------------------------------------
26. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value of the financial instruments disclosed herein is not
necessarily representative of the amount that could be realized or
settled, nor does the fair value amount consider the tax consequences
of realization or settlement. The following table summarizes financial
instruments, excluding derivative financial instruments disclosed in
Note 25, by individual balance sheet account. As described in Note 4,
the Marathon Group's specifically attributed financial instruments and
the Marathon Group's portion of USX's financial instruments attributed
to all groups are as follows:
1997 1996
------------------------ ----------------------
FAIR CARRYING Fair Carrying
(In millions) December 31 VALUE AMOUNT Value Amount
----------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and cash equivalents $ 36 $ 36 $ 32 $ 32
Receivables 856 856 613 613
Investments and long-term receivables 143 86 204 163
------ ------ ------ ------
Total financial assets $1,035 $ 978 $ 849 $ 808
----------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Notes payable $ 108 $ 108 $ 59 $ 59
Accounts payable 1,348 1,348 1,385 1,385
Accrued interest 84 84 75 75
Long-term debt (including amounts due within one year) 3,198 2,869 3,062 2,882
Preferred stock of subsidiary 187 184 185 182
------ ------ ------ ------
Total financial liabilities $4,925 $4,593 $4,766 $4,583
----------------------------------------------------------------------------------------------------------
M-18
Fair value of financial instruments classified as current assets
or liabilities approximates carrying value due to the short-term
maturity of the instruments. Fair value of investments and long-term
receivables was based on discounted cash flows or other specific
instrument analysis. Fair value of preferred stock of subsidiary was
based on market prices. Fair value of long-term debt instruments was
based on market prices where available or current borrowing rates
available for financings with similar terms and maturities.
The Marathon Group's unrecognized financial instruments consist
of accounts receivables sold and financial guarantees. It is not
practicable to estimate the fair value of these forms of financial
instrument obligations because there are no quoted market prices for
transactions which are similar in nature. For details relating to
sales of receivables see Note 23, and for details relating to
financial guarantees see Note 27.
- --------------------------------------------------------------------------------
27. CONTINGENCIES AND COMMITMENTS
USX is the subject of, or party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the Marathon
Group involving a variety of matters, including laws and regulations
relating to the environment. Certain of these matters are discussed
below. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the Marathon Group
financial statements. However, management believes that USX will
remain a viable and competitive enterprise even though it is possible
that these contingencies could be resolved unfavorably to the Marathon
Group.
ENVIRONMENTAL MATTERS -
The Marathon Group is subject to federal, state, local and
foreign laws and regulations relating to the environment. These laws
generally provide for control of pollutants released into the
environment and require responsible parties to undertake remediation
of hazardous waste disposal sites. Penalties may be imposed for
noncompliance. At December 31, 1997, and December 31, 1996, accrued
liabilities for remediation totaled $52 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 December 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 1997 and 1996, such
capital expenditures totaled $81 million and $66 million,
respectively. The Marathon Group anticipates making additional such
expenditures in the future; however, the exact amounts and timing of
such expenditures are uncertain because of the continuing evolution of
specific regulatory requirements.
At December 31, 1997, and December 31, 1996, accrued liabilities
for platform abandonment and dismantlement totaled $128 million and
$118 million, respectively.
GUARANTEES -
Guarantees by USX and its consolidated subsidiaries of the
liabilities of affiliated entities of the Marathon Group totaled $23
million and $46 million at December 31, 1997, and December 31, 1996,
respectively. As of December 31, 1997, the largest guarantee for a
single affiliate was $23 million.
At December 31, 1997, and December 31, 1996, the Marathon Group's
pro rata share of obligations of LOOP LLC and various pipeline
affiliates secured by throughput and deficiency agreements totaled
$165 million and $176 million, respectively. Under the agreements, the
Marathon Group is required to advance funds if the affiliates are
unable to service debt. Any such advances are prepayments of future
transportation charges.
COMMITMENTS -
At December 31, 1997, and December 31, 1996, contract commitments
for the Marathon Group's capital expenditures for property, plant and
equipment totaled $268 million and $388 million, respectively.
M-19
- --------------------------------------------------------------------------------
28. SUBSEQUENT EVENT - BUSINESS COMBINATIONS
On December 12, 1997, the Marathon Group and Ashland Inc.
(Ashland) signed definitive agreements to combine the major elements
of their refining, marketing and transportation (RM&T) operations.
Pursuant to those agreements, on January 1, 1998, the Marathon Group
transferred certain RM&T net assets to a new consolidated subsidiary,
which was named Marathon Ashland Petroleum LLC (MAP). Also on January
1, 1998, the Marathon Group acquired certain RM&T net assets from
Ashland in exchange for a 38% interest in MAP. The acquisition will be
accounted for under the purchase method of accounting. The purchase
price was determined to be $1.9 billion, based upon an external
valuation. The change in the Marathon Group's ownership interest in
MAP resulted in a change in interest gain which will be recognized in
the first quarter 1998.
In connection with the formation of MAP, the Marathon Group and
Ashland entered into a Limited Liability Company Agreement dated
January 1, 1998 (the LLC Agreement). The LLC Agreement provides for an
initial term of MAP expiring on December 31, 2022 (25 years from its
formation). The term will automatically be extended for ten-year
periods, unless a termination notice is given by either party.
Also in connection with the formation of MAP, the parties entered
into a Put/Call, Registration Rights and Standstill Agreement (the
Put/Call Agreement). The Put/Call Agreement provides that at any time
after December 31, 2004, Ashland will have the right to sell to the
Marathon Group all of Ashland's ownership interest in MAP, for an
amount in cash and/or the Marathon Oil Company or USX debt or equity
securities equal to the product of 85% (90% if equity securities are
used) of the fair market value of MAP at that time, multiplied by
Ashland's percentage interest in MAP. Payment could be made at
closing, or at the Marathon Group's option, in three equal annual
installments, the first of which would be payable at closing. At any
time after December 31, 2004, the Marathon Group will have the right
to purchase all of Ashland's ownership interests in MAP, for an amount
in cash equal to the product of 115% of the fair market value of MAP
at that time, multiplied by Ashland's percentage interest in MAP.
The following unaudited pro forma data for the Marathon Group
includes the results of operations for the Ashland RM&T net assets,
giving effect to the acquisition as if it had been consummated at the
beginning of the year presented. The pro forma data is based on
historical information and does not necessarily reflect the actual
results that would have occurred nor is it necessarily indicative of
future results of operations.
(In millions, except per share amounts) 1997 /(a)/
----------------------------------------------------------------------
Revenues $22,454
Net income 455
Net income per common share:
Basic 1.58
Diluted 1.57
----------------------------------------------------------------------
/(a)/ The Marathon Group data is based on a calendar year. Ashland data
is based on a twelve-month period ended September 30, 1997.
/(b)/ Excluding the pro forma inventory market valuation adjustment,
pro forma net income would have been $618 million. Reported net
income, excluding the reported inventory market valuation
adjustment, would have been $635 million.
M-20
Selected Quarterly Financial Data (Unaudited)
1997
--------------------------------------------------------------
(In millions, except per share data) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR.
- ------------------------------------------------------------------------------------------------------
Revenues $ 3,920 $ 3,944/(a)/ $ 3,787/(a)/ $ 4,103/(a)/
Income from operations 94 360/(a)/ 243/(a)/ 235/(a)/
Costs and expenses include:
Inventory market valuation
charges (credits) 147 (41) 64 114
Income before
extraordinary loss 38 192 118 108
Net income 38 192 118 108
- ------------------------------------------------------------------------------------------------------
MARATHON STOCK DATA:
- -------------------
Income before extraordinary
loss applicable to
Marathon Stock $ 38 $ 192 $ 118 $ 108
-Per share: basic .14 .66 .41 .37
diluted .13 .66 .41 .37
Dividends paid per share .19 .19 .19 .19
Price range of Marathon Stock (b):
-Low 29 28-5/16 25-5/8 23-3/4
-High 38-7/8 38-3/16 31-1/8 28-1/2
- ------------------------------------------------------------------------------------------------------
1996
--------------------------------------------------------------
(In millions, except per share data) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR.
- ------------------------------------------------------------------------------------------------------
Revenues $ 4,457/(a)/ $ 4,202/(a)/ $ 4,078/(a)/ $ 3,657/(a)
Income from operations 323/(a)/ 325/(a)/ 241/(a)/ 407/(a)
Costs and expenses include:
Inventory market valuation
charges (credits) (30) (96) 72 (155)
Income before
extraordinary loss 167 164 124 216
Net income 160 164 124 216
- ------------------------------------------------------------------------------------------------------
MARATHON STOCK DATA:
- -------------------
Income before extraordinary
loss applicable to
Marathon Stock $ 167 $ 164 $ 124 $ 216
-Per share: basic .58 .57 .43 .75
diluted .57 .57 .43 .74
Dividends paid per share .19 .17 .17 .17
Price range of Marathon Stock /(b)/:
-Low 21-1/8 20 19-1/8 17-1/4
-High 25-1/2 22-1/8 22-7/8 20-1/2
- ------------------------------------------------------------------------------------------------------
/(a)/ Reclassified to conform to current classifications.
/(b)/ Composite tape.
Principal Unconsolidated Affiliates (Unaudited)
DECEMBER 31, 1997
COMPANY COUNTRY OWNERSHIP ACTIVITY
- -------------------------------------------------------------------------------------------------------------------------------
CLAM Petroleum BV Netherlands 50% Oil & Gas Production
Kenai LNG Corporation United States 30% Natural Gas Liquification
LOCAP, Inc. United States 37% Pipeline & Storage Facilities
LOOP LLC United States 32% Offshore Oil Port
Nautilus Pipeline Company, LLC United States 24% Natural Gas Transmission
Sakhalin Energy Investment Company Ltd. Russia 38% Oil & Gas Development
- -------------------------------------------------------------------------------------------------------------------------------
Supplementary Information on Oil and Gas Producing Activities (Unaudited)
See the USX consolidated financial statements for Supplementary Information on
Oil and Gas Producing Activities relating to the Marathon Group, pages U-30
through U-34.
M-21
Five-Year Operating Summary
1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------------------------------------------
NET LIQUID HYDROCARBON PRODUCTION (thousands of barrels per day)
United States (by region)
Alaska - 8 9 9 9
Gulf Coast 29 30 33 12 10
Southern 8 9 11 12 12
Central 5 4 8 9 9
Mid-Continent - Yates 25 25 24 23 22
Mid-Continent - Other 21 20 19 18 18
Rocky Mountain 27 26 28 27 31
------------------------------------------------
Total United States 115 122 132 110 111
------------------------------------------------
International
Abu Dhabi - - - 1 2
Egypt 8 8 5 7 6
Indonesia - - 10 3 3
Norway 2 3 2 2 2
Tunisia - - 2 3 8
United Kingdom 39 48 54 46 24
------------------------------------------------
Total International 49 59 73 62 45
------------------------------------------------
Total 164 181 205 172 156
Natural gas liquids included in above 17 17 17 15 14
-----------------------------------------------------------------------------------------------------------------------
NET NATURAL GAS PRODUCTION (millions of cubic feet per day)
United States (by region)
Alaska 151 145 133 123 116
Gulf Coast 78 88 94 79 98
Southern 189 161 142 134 94
Central 119 109 105 110 107
Mid-Continent 125 122 112 89 78
Rocky Mountain 60 51 48 39 36
------------------------------------------------
Total United States 722 676 634 574 529
International ------------------------------------------------
Egypt 11 13 15 17 17
Ireland 228 259 269 263 258
Norway 54 87 81 81 75
United Kingdom - equity 130 140 98 39 23
- other/(a)/ 32 32 35 - -
------------------------------------------------
Total International 455 531 498 400 373
------------------------------------------------
Consolidated 1,177 1,207 1,132 974 902
Equity affiliate/(b)/ 42 45 44 40 35
------------------------------------------------
Total 1,219 1,252 1,176 1,014 937
-----------------------------------------------------------------------------------------------------------------------
AVERAGE SALES PRICES
Liquid Hydrocarbons (dollars per barrel)/(c)/
United States $16.88 $18.58 $14.59 $13.53 $14.54
International 18.77 20.34 16.66 15.61 16.22
Natural Gas (dollars per thousand cubic feet)/(c)/
United States $ 2.20 $ 2.09 $ 1.63 $ 1.94 $ 1.94
International 2.00 1.97 1.80 1.58 1.52
-----------------------------------------------------------------------------------------------------------------------
NET PROVED RESERVES AT YEAR-END (developed and undeveloped)
Liquid Hydrocarbons (millions of barrels)
United States 609 589 558 553 573
International 187 203 206 242 269
------------------------------------------------
Consolidated 796 792 764 795 842
Equity affiliate/(d)/ 82 - - - -
------------------------------------------------
Total 878 792 764 795 842
Developed reserves as % of total net reserves 75% 78% 88% 90% 88%
-----------------------------------------------------------------------------------------------------------------------
Natural Gas (billions of cubic feet)
United States 2,220 2,239 2,210 2,127 2,045
International 1,071 1,199 1,379 1,527 1,703
------------------------------------------------
Consolidated 3,291 3,438 3,589 3,654 3,748
Equity affiliate/(b)/ 111 132 131 153 153
------------------------------------------------
Total 3,402 3,570 3,720 3,807 3,901
Developed reserves as % of total net reserves 83% 83% 80% 79% 80%
-----------------------------------------------------------------------------------------------------------------------
/(a)/ Represents gas acquired for injection and subsequent
resale.
/(b)/ Represents Marathon's equity interest in CLAM Petroleum
B.V.
/(c)/ Prices exclude gains/losses from hedging activities.
/(d)/ Represents Marathon's equity interest in Sakhalin Energy
Investment Company Ltd.
M-22
Five-Year Operating Summary CONTINUED
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
U.S. REFINERY OPERATIONS (thousands of barrels per day)
In-use crude oil capacity at year-end 575 570 570 570 570
Refinery runs - crude oil refined 525 511 503 491 549
- other charge and blend stocks 99 96 94 107 102
In-use crude oil capacity utilization rate 92% 90% 88% 86% 90%
- --------------------------------------------------------------------------------------------------------------------------
SOURCE OF CRUDE PROCESSED (thousands of barrels per day)
United States 202 229 254 218 299
Europe 10 12 6 31 3
Middle East and Africa 241 193 183 171 173
Other International 72 79 58 70 75
----------------------------------------------------
Total 525 513 501 490 550
- --------------------------------------------------------------------------------------------------------------------------
REFINED PRODUCT YIELDS (thousands of barrels per day)
Gasoline 353 345 339 340 369
Distillates 154 155 146 146 157
Propane 13 13 12 13 15
Feedstocks and special products 36 35 38 33 33
Heavy fuel oil 35 30 31 38 39
Asphalt 39 36 36 30 38
----------------------------------------------------
Total 630 614 602 600 651
- --------------------------------------------------------------------------------------------------------------------------
REFINED PRODUCTS YIELDS (% breakdown)
Gasoline 56% 56% 57% 57% 57%
Distillates 24 25 24 24 24
Other products 20 19 19 19 19
----------------------------------------------------
Total 100% 100% 100% 100% 100%
- --------------------------------------------------------------------------------------------------------------------------
U.S. REFINED PRODUCT SALES (thousands of barrels per day)
Gasoline 452 468 445 443 420
Distillates 198 192 180 183 179
Propane 12 12 12 16 18
Feedstocks and special products 40 37 44 32 32
Heavy fuel oil 34 31 31 38 39
Asphalt 39 35 35 31 38
----------------------------------------------------
Total 775 775 747 743 726
Matching buy/sell volumes included in above 51 71 47 73 47
- --------------------------------------------------------------------------------------------------------------------------
REFINED PRODUCTS SALES BY CLASS OF TRADE (as a % of total sales)
Wholesale - independent private-brand
marketers and consumers 61% 62% 61% 62% 63%
Retail - Marathon brand outlets 13 13 13 13 13
- Emro Marketing Company outlets 26 25 26 25 24
----------------------------------------------------
Total 100% 100% 100% 100% 100%
- --------------------------------------------------------------------------------------------------------------------------
REFINED PRODUCTS (dollars per barrel)
Average sales price $ 26.38 $ 27.43 $ 23.80 $ 22.75 $ 23.42
Average cost of crude oil throughput 19.00 21.94 18.09 16.59 17.05
- --------------------------------------------------------------------------------------------------------------------------
PETROLEUM INVENTORIES AT YEAR-END (thousands of barrels)
Crude oil and natural gas liquids 18,660 19,325 21,598 21,892 21,689
Refined products 20,598 21,283 22,102 23,657 23,136
- --------------------------------------------------------------------------------------------------------------------------
U.S. REFINED PRODUCT MARKETING OUTLETS AT YEAR-END
Marathon operated terminals 51 51 51 51 51
Retail - Marathon brand 2,465 2,392 2,380 2,356 2,331
- Emro Marketing Company 1,544 1,592 1,627 1,659 1,571
- --------------------------------------------------------------------------------------------------------------------------
PIPELINES (miles of common carrier pipelines, including affiliates)
Crude Oil - gathering lines 1,003 1,052 1,115 1,115 1,130
- trunklines 2,552 2,552 2,553 2,559 2,581
Products - trunklines 1,493 1,493 1,494 1,494 1,495
----------------------------------------------------
Total 5,048 5,097 5,162 5,168 5,206
- --------------------------------------------------------------------------------------------------------------------------
PIPELINE BARRELS HANDLED (millions)
Crude Oil - gathering lines 43.9 43.2 43.8 43.4 43.8
- trunklines 369.6 378.7 371.3 353.0 382.4
Products - trunklines 262.4 274.8 252.3 282.2 295.6
----------------------------------------------------
Total 675.9 696.7 667.4 678.6 721.8
- --------------------------------------------------------------------------------------------------------------------------
CARNEGIE NATURAL GAS COMPANY STATISTICS
Miles of pipeline 1,794 1,787 1,800 1,799 1,810
Reserves dedicated to gathering operations -- owned
(proved developed -- billions of cubic feet) 39.8 42.8 44.3 43.8 46.7
Natural gas throughput (billions of cubic feet) 31.8 34.1 34.1 27.9 37.2
- --------------------------------------------------------------------------------------------------------------------------
M-23
Five-Year Financial Summary
(Dollars in millions, except as noted) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
REVENUES
Refined products $ 7,012 $ 7,132 $ 6,127 $ 5,622 $ 5,769
Merchandise 1,045 1,000 941 869 792
Liquid hydrocarbons 941 1,111 881 800 627
Natural gas 1,331 1,194 950 670 607
Crude oil and refined products
matching buy/sell transactions/(a)/ 2,436 2,912 2,067 2,071 2,018
Excise taxes/(a)/ 2,736 2,768 2,708 2,542 1,927
Gain on sale of assets 37 55 8 172 33
All other 216 222 231 203 248
-----------------------------------------------------------------------------
Total revenues $15,754 $16,394/(b)/ $13,913/(b)/ $12,949/(b)/ $12,021/(b)/
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS
U.S. production $ 626 $ 627 $ 376 $ 258 $ 179
U.S. exploration expense (126) (97) (70) (84) (60)
International production 336 423 257 138 55
International exploration expense (63) (49) (79) (73) (85)
Refining, marketing and transportation 563 239 274 423 413
Other energy related businesses 48 77 60 34 37
Administrative (168) (133) (82) (80) (70)
Inventory market valuation
(charges) credits (284) 209 70 160 (241)
Impairment of long-lived assets - - (659) - -
-----------------------------------------------------------------------------
Total income from operations 932 1,296/(b)/ 147/(b)/ 776/(b)/ 228/(b)/
Net interest and other financial costs 260 305 337 300 283
Provision (credit) for income taxes 216 320 (107) 155 (49)
-----------------------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS
AND CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES $ 456 $ 671 $ (83) $ 321 $ (6)
Per common share - basic (in dollars) 1.59 2.33 (.31) 1.10 (.04)
- diluted (in dollars) 1.58 2.31 (.31) 1.10 (.04)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 456 $ 664 $ (88) $ 321 $ (29)
Per common share - basic (in dollars) 1.59 2.31 (.33) 1.10 (.12)
- diluted (in dollars) 1.58 2.29 (.33) 1.10 (.12)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET POSITION AT YEAR-END
Current assets $ 2,018 $ 2,046 $ 1,888 $ 1,737 $ 1,572
Net property, plant and equipment 7,566 7,298 7,521 8,471 8,536
Total assets 10,565 10,151 10,109 10,951 10,822
Short-term debt 525 323 384 56 24
Other current liabilities 1,737 1,819 1,641 1,656 1,619
Long-term debt 2,476 2,642 3,367 3,983 4,274
Common stockholders' equity 3,618 3,340 2,872 3,163 3,032
Per share (in dollars) 12.53 11.62 9.99 11.01 10.58
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOW DATA
Net cash from operating activities $ 1,246 $ 1,503 $ 1,044 $ 720 $ 830
Net cash from operating activities
before working capital changes 1,460 1,339 1,128 944 910
Capital expenditures 1,038 751 642 753 910
Disposal of assets 60 282 77 263 174
Dividends paid 219 201 199 201 201
- -----------------------------------------------------------------------------------------------------------------------------------
EMPLOYEE DATA
Marathon Group:
Total employment costs $ 854 $ 790 $ 781 $ 856 $ 845
Average number of employees 20,695 20,461 21,015 21,005 21,963
Number of pensioners at year-end 3,099 3,203 3,378 3,495 3,572
Emro Marketing Company:
(Included in Marathon Group totals)
Total employment costs $ 263 $ 241 $ 229 $ 221 $ 211
Average number of employees 12,816 12,474 12,087 11,669 11,550
Number of pensioners at year-end 215 207 206 199 187
- -----------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDER DATA AT YEAR-END
Number of common shares
outstanding (in millions) 288.8 287.5 287.4 287.2 286.6
Registered shareholders (in thousands) 84.0 92.1 101.2 110.4 118.5
Market price of common stock $33.750 $23.875 $19.500 $16.375 $16.500
- -----------------------------------------------------------------------------------------------------------------------------------
/(a)/ These items are included in both revenues and costs and expenses,
resulting in no effect on income.
/(b)/ Reclassified to conform to 1997 classifications.
M-24
Management's Discussion and Analysis
The Marathon Group includes Marathon Oil Company ("Marathon")
and certain other subsidiaries of USX Corporation ("USX"), which
are engaged in worldwide exploration, production, transportation
and marketing of crude oil and natural gas; domestic refining,
marketing and transportation of petroleum products; and power
generation. Effective January 1, 1998, the USX - Marathon Group
and Ashland Inc. formed a new refining, marketing and
transportation company, Marathon Ashland Petroleum LLC ("MAP").
For further discussion of MAP, see Note 28 to the Marathon Group
Financial Statements and Management's Discussion and Analysis of
Operations - Outlook herein. Management's Discussion and Analysis
should be read in conjunction with the Marathon Group's Financial
Statements and Notes to Financial Statements.
During 1997, the Marathon Group's financial performance was
primarily led by strong refined product margins, which
significantly offset the unfavorable effects of lower worldwide
liquid hydrocarbon prices and volumes. In addition, Marathon
increased its 1997 capital and investment expenditures by $507
million, or 66%, from 1996 levels, substantially funding its
spending with cash provided by operating activities.
Certain sections of Management's Discussion and Analysis
include forward-looking statements concerning trends or events
potentially affecting the businesses of the Marathon Group. These
statements typically contain words such as "anticipates",
"believes", "estimates", "expects" or similar words indicating
that future outcomes are uncertain. In accordance with "safe
harbor" provisions of the Private Securities Litigation Reform
Act of 1995, these statements are accompanied by cautionary
language identifying important factors, though not necessarily
all such factors, that could cause future outcomes to differ
materially from those set forth in forward-looking statements.
For additional risk factors affecting the businesses of the
Marathon Group, see Supplementary Data - Disclosures About
Forward-Looking Statements in USX's 1997 Form 10-K.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INCOME
REVENUES for each of the last three years are summarized in
the following table:
(Dollars in millions) 1997 1996 1995
-----------------------------------------------------------------------------------
Refined products $ 7,012 $ 7,132 $ 6,127
Merchandise 1,045 1,000 941
Liquid hydrocarbons 941 1,111 881
Natural gas 1,331 1,194 950
Transportation and other/(a)/(c)/ 253 277 239
-------- -------- --------
Subtotal 10,582 10,714 9,138
-------- -------- --------
Matching buy/sell transactions/(b)/ 2,436 2,912 2,067
Excise taxes/(b)/ 2,736 2,768 2,708
-------- -------- --------
Total revenues/(c)/ $ 15,754 $ 16,394 $ 13,913
-----------------------------------------------------------------------------------
/(a)/ Includes dividend and affiliate income, net gains on
disposal of assets and other income.
/(b)/ Included in both revenues and operating costs, resulting in
no effect on income.
/(c)/ Amounts in 1996 and 1995 were reclassified in 1997 to
include dividend and affiliate income and other income, and
to conform to other 1997 classifications.
Revenues (excluding matching buy/sell transactions and excise
taxes) decreased by $132 million in 1997 from 1996 and increased
by $1,576 million in 1996 from 1995. The decrease in 1997 mainly
reflected lower average refined product prices and lower
worldwide liquid hydrocarbon prices and volumes, partly offset by
increased volumes of refined products and higher domestic natural
gas volumes and prices. The increase in 1996 primarily resulted
from higher average refined product, worldwide liquid hydrocarbon
and natural gas prices, partially offset by lower worldwide
liquid hydrocarbon volumes.
M-25
Management's Discussion and Analysis CONTINUED
INCOME FROM OPERATIONS and certain items included in income
from operations for each of the last three years are summarized
in the following table:
(Dollars in millions) 1997 1996 1995
--------------------------------------------------------------------------------------------------
Income from operations/(a)/ $ 932 $ 1,296 $ 147
Less: Certain favorable (unfavorable) items
IMV reserve adjustment/(b)/ (284) 209 70
Net gains on certain asset sales/(c)/ - 35 -
Charges for withdrawal from MPA/(d)/ - (10) -
Certain state tax adjustments/(e)/ - (11) -
Impairment of long-lived assets/(f)/ - - (659)
Expected environmental remediation recoveries/(g)/ - - 15
------- ------- -------
Subtotal (284) 223 (574)
------- ------- -------
Income from operations excluding above items $ 1,216 $ 1,073 $ 721
--------------------------------------------------------------------------------------------------
/(a)/ Consists of operating income, dividend and affiliate
income, net gains on disposal of investments and other
income. Amounts for 1996 and 1995 were reclassified in 1997
to include dividend and affiliate income and other income,
and to conform to other 1997 classifications. See Note 9 to
the Consolidated Financial Statements for a discussion of
operating income.
/(b)/ The inventory market valuation ("IMV") reserve reflects the
extent to which the recorded LIFO cost basis of crude oil
and refined products inventories exceeds net realizable
value. For additional details of this noncash adjustment,
see discussion below.
/(c)/ Includes net gains on sales of interests in a domestic
pipeline company and certain production properties.
/(d)/ Marine Preservation Association ("MPA") is a non-profit oil
spill response group.
/(e)/ Accrual of domestic production taxes for prior years.
/(f)/ Related to adoption of Statement of Financial Accounting
Standards No. 121 - "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of "
("SFAS No. 121").
/(g)/ Expected recoveries from state governments of expenditures
related to underground storage tanks at retail marketing
outlets.
Adjusted income from operations increased by $143 million in
1997 from 1996 and by $352 million in 1996 from 1995. The
improvement in 1997 was primarily due to higher average refined
product margins and higher worldwide natural gas prices,
partially offset by reduced worldwide liquid hydrocarbon
production and prices, higher worldwide exploration expense and
increased administrative expenses. The improvement in 1996 from
1995 was primarily due to higher worldwide liquid hydrocarbon and
natural gas prices, reduced depreciation, depletion and
amortization ("DD&A") expense, resulting mainly from the fourth
quarter 1995 adoption of SFAS No. 121 and property sales, and
increased worldwide volumes of natural gas. These favorable
effects were partially offset by lower worldwide liquid
hydrocarbon volumes, net losses on production hedging activities
(primarily occurring in the fourth quarter of 1996) and lower
refined product margins. For additional details, see Management's
Discussion and Analysis of Operations.
With respect to the IMV reserve adjustment, when U. S. Steel
Corporation acquired Marathon Oil Company in March 1982, crude
oil and refined product prices were at historically high levels.
In applying the purchase method of accounting, 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 IMV reserve to
reduce the LIFO cost basis of these inventories on a quarterly
basis, to the extent necessary, to current market value.
Adjustments to the IMV reserve result in noncash charges or
credits to income from operations. 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, 1997, LIFO
cost exceeded market prices by $284 million, resulting in a
corresponding charge to income from operations for total year
1997. During 1996 and 1995, favorable market price movements
resulted in credits to income from operations of $209 million
M-26
Management's Discussion and Analysis CONTINUED
and $70 million, respectively. The $493 million variance in
income from operations between 1997 and 1996 for the IMV reserve
adjustments (and $139 million variance between 1996 and 1995)
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.
NET INTEREST AND OTHER FINANCIAL COSTS decreased by $45
million in 1997 from 1996, following a decrease of $32 million in
1996 from 1995. The decrease in both periods was mainly due to
lower average debt levels, while 1997 also reflected an increase
in capitalized interest on worldwide exploration and production
projects. For additional details, see Note 6 to the Marathon
Group Financial Statements.
The CREDIT FOR ESTIMATED INCOME TAXES in 1995 included
incremental tax benefits of $44 million resulting from USX's
election to credit, rather than deduct, foreign income taxes for
U.S. federal income tax purposes. For reconciliation of the
federal statutory tax rate to total provisions (credits), see
Note 18 to the Marathon Group Financial Statements.
An EXTRAORDINARY LOSS on extinguishment of debt of $7
million in 1996 and $5 million in 1995 represents the portion of
the loss on early extinguishment of USX debt attributed to the
Marathon Group. For additional information, see Note 8 to the
Marathon Group Financial Statements.
NET INCOME decreased by $208 million in 1997 from 1996,
following an increase of $752 million in 1996 from 1995.
Excluding the aftertax effects of the IMV reserve adjustment and
other special items, financial results increased by $106 million
in 1997 from 1996 and by $300 million in 1996 from 1995,
primarily reflecting the factors discussed above.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, CASH FLOWS AND
LIQUIDITY
CURRENT ASSETS declined $28 million from year-end 1996,
primarily due to a decrease in inventories, offset by an increase
in receivables. The reduced inventory values were due mainly to
lower year-end refined product prices, which resulted in an IMV
reserve of $284 million. The increase in receivables was
primarily due to the termination of the accounts receivable sales
program (see Note 23 to the Marathon Group Financial Statements),
partly offset by a reduction in trade receivables from lower
year-end commodity prices.
CURRENT LIABILITIES increased $120 million from year-end
1996, primarily due to an increase in long-term debt due within
one year.
NET PROPERTY, PLANT AND EQUIPMENT increased by $268 million
from year-end 1996, primarily reflecting property additions in
excess of DD&A and dry well write-offs. Net property, plant and
equipment for each of the last three years is summarized in the
following table:
(Dollars in millions) 1997 1996 1995
---------------------------------------------------------------------------
Exploration and production
United States $ 3,452 $ 3,172 $ 3,220
International 2,165 2,197 2,419
Refining 751 758 766
Marketing 834 802 753
Transportation 271 285 276
Other 93 84 87
------- ------- -------
Total $ 7,566 $ 7,298 $ 7,521
---------------------------------------------------------------------------
TOTAL LONG-TERM DEBT AND NOTES PAYABLE at December 31, 1997
was $3.0 billion, essentially unchanged from year-end 1996,
mainly reflecting that cash required for Marathon's expanded
capital and investment expenditure program and for dividend
payments was substantially provided by cash from operating
activities, trust withdrawals and asset disposals. Virtually all
of the debt is a direct obligation of, or is guaranteed by, USX.
Net cash provided from operating activities totaled $1,246
million in 1997, compared with $1,503 million in 1996 and $1,044
million in 1995. Cash provided from operating activities in 1997
included the impact of terminating Marathon's participation in an
accounts receivable sales program, resulting in a cash outflow of
$340 million. Operating cash flow in 1996 included payments of
$39 million related to certain state tax issues, while 1995
included payments of $96 million
M-27
Management's Discussion and Analysis CONTINUED
representing the Marathon Group's share of the amortized discount
on USX's zero coupon debentures. Excluding the effects of these
items, net cash from operating activities increased by $44
million in 1997 from 1996 and by $402 million in 1996 from 1995.
The increase in 1997 mainly reflected improved net income
(excluding the IMV reserve adjustment and other noncash items),
partially offset by increased income tax payments. The increase
in 1996 was primarily due to favorable working capital changes
and improved net income (excluding the IMV reserve adjustment and
other noncash items).
CAPITAL EXPENDITURES for each of the last three years are
summarized in the following table:
(Dollars in millions) 1997 1996 1995
------------------------------------------------------------------------------------------------
Exploration and production ("Upstream")
United States $ 647 $ 424 $ 322
International 163 80 141
------- ------- -------
Total exploration and production 810 504 463
Refining, marketing and transportation ("Downstream") 216 222 169
Other 12 25 10
------- ------- -------
Total $ 1,038 $ 751 $ 642
------------------------------------------------------------------------------------------------
During 1997, domestic upstream capital spending mainly
included development of Gulf of Mexico properties, including
Viosca Knoll 786 (Petronius), Green Canyon 244 (Troika), Ewing
Bank 963 (Arnold) and Ewing Bank 917 (Oyster). International
upstream spending included development of the West Brae field in
the U.K. North Sea and projects in Egypt and offshore Gabon.
Downstream spending in 1997 mainly consisted of upgrading and
expanding Emro Marketing Company's network of retail outlets, and
refinery modification projects. Contract commitments for capital
expenditures at year-end 1997 were $268 million, compared with
$388 million at year-end 1996.
Capital expenditures in 1998 are expected to increase to
approximately $1.3 billion, with the increase from 1997 levels
mainly due to the inclusion of 100% of the capital requirements
for MAP, which commenced operations on January 1, 1998. Domestic
upstream projects planned for 1998 include continuing development
of Petronius and Green Canyon 112/113 (Stellaria) in the Gulf of
Mexico, while international upstream projects include development
of the Tchatamba South field, offshore Gabon. Downstream spending
by MAP will primarily consist of upgrades and expansions of
retail marketing outlets and refinery modifications.
INVESTMENTS IN EQUITY AFFILIATES of $233 million in 1997
mainly reflected funding of equity affiliates' capital projects,
primarily the Sakhalin II project in the Russian Far East Region
and the Nautilus natural gas pipeline system in the Gulf of
Mexico. Also included were Marathon's acquisition of an
additional 7.5% interest in Sakhalin Energy Investment Company
Ltd. ("Sakhalin Energy"), bringing its total interest to 37.5%,
investment in the Odyssey crude oil pipeline system in the Gulf
of Mexico (with a 29% interest) and acquisition of a 50%
ownership in a power generation company in Ecuador.
In 1998, investments in equity affiliates are expected to be
approximately $150 million, primarily reflecting additional
funding of Sakhalin Energy's spending on the Sakhalin II project
and funding of power generation projects. Although project
expenditures for the Sakhalin II project remain high, third-party
financing arranged by Sakhalin Energy is expected to reduce the
need for direct investment by Marathon in 1998.
The above statements with respect to future capital
expenditures and investments are forward-looking statements,
reflecting management's best estimates, based on information
currently available. To the extent this information proves to be
inaccurate, the timing and levels of future spending could differ
materially from those included in the forward-looking statements.
Factors that could cause future capital expenditures and
investments to differ materially from present expectations
include industry supply and demand factors, general economic
conditions, levels of cash flow from operations, available
business opportunities, unforeseen hazards such as weather
conditions, and/or by delays in obtaining government or partner
approval. In addition, levels of investments may be affected by
the ability of equity affiliates to obtain third-party financing.
Cash from disposal of assets was $60 million in 1997,
compared with $282 million in 1996 and $77 million in 1995.
Proceeds in 1997 were mainly from the sales of interests in
various domestic upstream properties, certain cost-basis
investments and an interest in a domestic pipeline company.
Proceeds in 1996 primarily reflected the sales of interests in
certain domestic and international oil
M-28
Management's Discussion and Analysis CONTINUED
and gas production properties and the sale of an equity interest
in a domestic pipeline company. Proceeds in 1995 were mainly from
the sales of certain domestic oil and gas production properties.
WITHDRAWAL FROM PROPERTY EXCHANGE TRUSTS of $98 million in
1997 mainly represented cash withdrawn from an interest-bearing
escrow account that was established in 1996 in connection with
the disposal of oil production properties in Alaska.
FINANCIAL OBLIGATIONS increased $58 million in 1997 as net
cash provided from operating activities, trust withdrawals and
asset sales was slightly exceeded by cash used for capital
expenditures, investments in equity affiliates and dividend
payments. Financial obligations consist of the Marathon Group's
portion of USX debt and preferred stock of a subsidiary
attributed to both groups, as well as debt specifically
attributed to the Marathon Group. For discussion of USX financing
activities attributed to both groups, see Management's Discussion
and Analysis of USX Consolidated Financial Condition, Cash Flows
and Liquidity.
DIVIDENDS PAID in 1997 increased by $18 million from 1996,
mainly due to a two-cents-per-share increase in the quarterly
USX - Marathon Group Common Stock dividend rate, initially
declared in October 1996.
In January 1998, the USX Board of Directors declared a
fourth quarter dividend on the USX - Marathon Group Common Stock
of 21 cents per share, an increase of two cents per share over
the previous quarterly dividend. Total dividends paid on the USX
Marathon Group Common Stock in the first quarter of 1998 will
increase by approximately $6 million as a result of this
increase.
DERIVATIVE INSTRUMENTS
See Quantitative and Qualitative Disclosures About Market
Risk for a discussion of derivative instruments and associated
market risk.
LIQUIDITY
For discussion of USX's liquidity and capital resources, see
Management's Discussion and Analysis of USX Consolidated
Financial Condition, Cash Flows and Liquidity.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF ENVIRONMENTAL MATTERS, LITIGATION AND
CONTINGENCIES
The Marathon Group has incurred and will continue to incur
substantial capital, operating and maintenance, and remediation
expenditures as a result of environmental laws and regulations.
To the extent these expenditures, as with all costs, are not
ultimately reflected in the prices of the Marathon Group's
products and services, operating results will be adversely
affected. The Marathon Group believes that substantially all of
its competitors are subject to similar environmental laws and
regulations. However, the specific impact on each competitor may
vary depending on a number of factors, including the age and
location of its operating facilities, marketing areas, production
processes and whether or not it is engaged in the petrochemical
or power business or the marine transportation of crude oil and
refined products.
Marathon Group environmental expenditures for each of the
last three years were/(a)/:
(Dollars in millions) 1997 1996 1995
----------------------------------------------------------------------
Capital $ 81 $ 66 $ 50
Compliance
Operating & maintenance 84 75 102
Remediation/(b)/ 19 26 37
------ ------ ------
Total $ 184 $ 167 $ 189
----------------------------------------------------------------------
/(a)/ Amounts are based on American Petroleum Institute survey
guidelines.
/(b)/ These amounts do not include noncash provisions recorded
for environmental remediation, but include spending charged
against such reserves, net of recoveries, where
permissible.
The Marathon Group's environmental capital expenditures
accounted for 8% of total capital expenditures in 1997 and 1995
and 9% in 1996.
During 1995 through 1997, compliance expenditures
represented 1% of the Marathon Group's total operating costs.
Remediation spending during this period was primarily related to
retail
M-29
Management's Discussion and Analysis CONTINUED
marketing outlets which incur ongoing clean-up costs for soil and
groundwater contamination associated with underground storage
tanks and piping.
USX has been notified that it is a potentially responsible
party ("PRP") at 20 waste sites related to the Marathon Group
under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") as of December 31, 1997. In addition,
there are 11 sites related to the Marathon Group where USX has
received information requests or other indications that USX may
be a PRP under CERCLA but where sufficient information is not
presently available to confirm the existence of liability. There
are also 71 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. See Note 27 to the Marathon Group Financial
Statements.
Effective January 1, 1997, USX adopted the American
Institute of Certified Public Accountants Statement of Position
No. 96-1 - "Environmental Remediation Liabilities" - which
requires that companies include direct costs in accruals for
remediation liabilities. Income from operations in 1997 included
first quarter charges of $7 million (net of expected recoveries)
related to such adoption, primarily for accruals of post-closure
monitoring costs, study costs and administrative costs. See Note
3 to the Marathon Group Financial Statements for additional
discussion.
New or expanded environmental requirements, which could
increase the Marathon Group's environmental costs, may arise in
the future. USX intends to comply with all legal requirements
regarding the environment, but since many of them are not fixed
or presently determinable (even under existing legislation) and
may be affected by future legislation, it is not possible to
predict accurately the ultimate cost of compliance, including
remediation costs which may be incurred and penalties which may
be imposed. However, based on presently available information,
and existing laws and regulations as currently implemented, the
Marathon Group does not anticipate that environmental compliance
expenditures (including operating and maintenance and
remediation) will materially increase in 1998. The Marathon
Group's capital expenditures for environmental controls are
expected to be approximately $100 million in 1998. Predictions
beyond 1998 can only be broad-based estimates which have varied,
and will continue to vary, due to the ongoing evolution of
specific regulatory requirements, the possible imposition of more
stringent requirements and the availability of new technologies,
among other matters. Based upon currently identified projects,
the Marathon Group anticipates that environmental capital
expenditures will be approximately $70 million in 1999; however,
actual expenditures may vary as the number and scope of
environmental projects are revised as a result of improved
technology or changes in regulatory requirements and could
increase if additional projects are identified or additional
requirements are imposed.
USX is the subject of, or party to, a number of pending or
threatened legal actions, contingencies and commitments relating
to the Marathon Group involving a variety of matters, including
laws and regulations relating to the environment, certain of
which are discussed in Note 27 to the Marathon Group Financial
Statements. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the Marathon
Group financial statements. However, management believes that USX
will remain a viable and competitive enterprise even though it is
possible that these contingencies could be resolved unfavorably
to the Marathon Group. See Management's Discussion and Analysis
of USX Consolidated Financial Condition, Cash Flows and
Liquidity.
M-30
Management's Discussion and Analysis CONTINUED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
The Marathon Group's income from operations and average
volumes and selling prices for each of the last three years were
as follows:
INCOME FROM OPERATIONS/(a)/
(Dollars in millions) 1997 1996 1995
-------------------------------------------------------------------------------------------------
Exploration and production (Upstream)
Domestic $ 500 $ 530 $ 306
International 273 374 178
------- ------- ------
Total exploration and production 773 904 484
Refining, marketing and transportation (Downstream) 563 239 274
Other energy related businesses/(b)/ 48 77 60
Administrative/(c)/ (168) (133) (82)
------- ------- ------
1,216 1,087 736
Impairment of long-lived assets/(d)/ - - (659)
IMV reserve adjustment (284) 209 70
------- ------- ------
Total $ 932 $ 1,296 $ 147
-------------------------------------------------------------------------------------------------
/(a)/ Consists of operating income, dividend and affiliate
income, net gains on disposal of investments and other
income. Amounts for 1996 and 1995 were reclassified in 1997
to include dividend and affiliate income and other income,
and to conform to other 1997 classifications. See Note 9 to
the Consolidated Financial Statements for a discussion of
operating income.
/(b)/ Includes marketing and transportation of domestic natural
gas and crude oil, and power generation.
/(c)/ Includes the portion of the Marathon Group's administrative
costs not allocated to the operating components and the
portion of USX corporate general and administrative costs
allocated to the Marathon Group.
/(d)/ Reflects adoption of SFAS No. 121, effective October 1,
1995. Consists of $(343) million related to Domestic
upstream, $(190) million related to International upstream,
and $(126) million related to Downstream.
AVERAGE VOLUMES AND SELLING PRICES
1997 1996 1995
------------------------------------------------------------------------------------------------------
(thousands of barrels per day)
Net liquids production/(a)/ - U.S. 115 122 132
- International/(b)/ 49 59 73
------- ------- -------
- Worldwide 164 181 205
(millions of cubic feet per day)
Net natural gas production - U.S. 722 676 634
- International - equity 423 499 463
- International - other/(c)/ 32 32 35
------- ------- -------
- Total Consolidated 1,177 1,207 1,132
- Equity affiliate 42 45 44
------- ------- -------
- Worldwide 1,219 1,252 1,176
------------------------------------------------------------------------------------------------------
(dollars per barrel)
Liquid hydrocarbons/(a)(d)/ - U.S. $ 16.88 $ 18.58 $ 14.59
- International 18.77 20.34 16.66
(dollars per mcf)
Natural gas/(d)/ - U.S. $ 2.20 $ 2.09 $ 1.63
- International - equity 2.00 1.97 1.80
------------------------------------------------------------------------------------------------------
(thousands of barrels per day)
Refined products sold 775 775 747
Matching buy/sell volumes included in above 51 71 47
------------------------------------------------------------------------------------------------------
/(a)/ Includes crude oil, condensate and natural gas liquids.
/(b)/ Represents equity tanker liftings, truck deliveries and
direct deliveries.
/(c)/ Represents gas acquired for injection and subsequent
resale.
/(d)/ Prices exclude gains/losses from hedging activities.
M-31
Management's Discussion and Analysis CONTINUED
DOMESTIC UPSTREAM income from operations decreased by $30
million in 1997 from 1996 following an increase of $224 million
in 1996 from 1995. The decrease in 1997 was primarily due to
lower liquid hydrocarbon prices and production and higher
exploration expense, partially offset by increased natural gas
production and prices. In addition, results in 1996 included net
losses of $38 million on production hedging activities (see
Quantitative and Qualitative Disclosures About Market Risk for
the Marathon Group for additional details). The lower liquid
hydrocarbon volumes were mostly due to the fourth quarter 1996
disposal of oil producing properties in Alaska, while the
increase in natural gas volumes was mainly attributable to
properties in east Texas, Oklahoma and Wyoming.
The increase in 1996 from 1995 was primarily due to higher
average liquid hydrocarbon and natural gas prices, reduced DD&A
expense resulting, in part, from the fourth quarter 1995 adoption
of SFAS No. 121, and increased natural gas volumes, partially
offset by lower liquid hydrocarbon volumes, net losses on hedging
activities, higher exploration expense and an unfavorable
production tax adjustment for prior years.
INTERNATIONAL UPSTREAM income from operations decreased by
$101 million in 1997 following an increase of $196 million in
1996. The decrease in 1997 was mainly due to lower liquid
hydrocarbon liftings, lower natural gas volumes and lower liquid
hydrocarbon prices. These items were partially offset by reduced
pipeline and terminal expenses and reduced DD&A expenses, due
largely to the lower volumes. The lower liquid hydrocarbon
liftings primarily reflected lower production in the U.K. North
Sea, while the lower natural gas volumes were mainly due to
natural field declines in Ireland and Norway.
The increase in 1996 from 1995 primarily reflected higher
average liquid hydrocarbon and natural gas prices, reduced DD&A
expense resulting, mainly, from property sales and the adoption
of SFAS No. 121, lower exploration expense and increased natural
gas volumes, partially offset by lower liquid hydrocarbon
liftings. Income from operations in 1996 also included a gain on
the sale of certain production properties in the U.K. North Sea.
DOWNSTREAM income from operations increased by $324 million
in 1997 following a decrease of $35 million in 1996. The increase
in 1997 was predominantly due to an improvement in refined
product margins as favorable effects of reduced crude oil and
other feedstock costs more than offset a decrease in refined
product sales prices.
The decrease in 1996 from 1995 was mainly due to lower
refined product margins as increases in wholesale and retail
prices were unable to keep up with the increased costs of
acquiring crude oil and other feedstocks. In addition, 1996
results included a $10 million charge for the withdrawal from the
MPA, a non-profit oil response group, while 1995 results included
a $15 million favorable noncash adjustment for expected
environmental remediation recoveries.
OTHER ENERGY RELATED BUSINESSES income from operations
decreased by $29 million in 1997 following an increase of $17
million in 1996. The decrease in 1997 and the increase in 1996
were mainly due to a 1996 gain on the sale of an equity interest
in a domestic pipeline company.
In the fourth quarter of 1997, the Marathon Group began
reporting "Other energy related businesses" as an operating
category. This category includes income from operations of
Carnegie Natural Gas Company (formerly reported as "Gas Gathering
and Processing"), Marathon Power Company, Ltd. and certain
activities that were excluded from MAP (such as Marathon's
natural gas and crude oil marketing operations and interests in
various pipeline companies).
ADMINISTRATIVE expenses increased by $35 million in 1997
following an increase of $51 million in 1996 from 1995. The
increase in 1997 mainly reflected higher accruals for stock
appreciation rights and increased accruals for other employee
benefit and compensation plans, including Marathon's performance-
based variable pay plan. The increase in 1996 from 1995 primarily
resulted from a change in the methodology for distributing costs
of certain administrative services to other operating components.
M-32
Management's Discussion and Analysis CONTINUED
OUTLOOK
The outlook regarding the Marathon Group's sales levels,
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.
With respect to Marathon's upstream operations, worldwide
liquid hydrocarbon volumes are expected to increase by twenty-
five percent in 1998, with most of the increase anticipated in
the second half of the year. This primarily reflects projected
new production from fields in the Gulf of Mexico (such as Green
Canyon 244 and Ewing Bank Blocks 963 and 917), the Tchatamba
Marine field in Gabon and the West Brae field in the U.K. North
Sea, partially offset by natural production declines of mature
fields. Marathon's worldwide natural gas volumes in 1998 are
expected to remain consistent with 1997 volumes at around 1.2
billion cubic feet per day, as natural declines in mature
international fields, primarily in Ireland and Norway, are
anticipated to be offset by increases in domestic production
(mainly in the Austin Chalk area in Texas, Green Canyon 244 and
the Vermillion Basin in Wyoming). These projections are based on
known discoveries and do not include any additions from
acquisitions or future exploratory drilling.
Other major upstream projects, which are currently underway
or under evaluation and are expected to improve future income
streams, include Viosca Knoll Block 786 and Green Canyon Blocks
112 and 113 in the Gulf of Mexico, the Tchatamba South field,
located offshore Gabon, and the Sakhalin II project in Russia
(discussed below).
The Marathon Group holds a 37.5% interest in Sakhalin
Energy, an incorporated joint venture company responsible for the
overall management of the Sakhalin II project. This project
includes development of the Piltun-Astokhskoye ("P-A") oil field
and the Lunskoye gas field located offshore Sakhalin Island in
the Russian Far East Region. During 1997, authorized
representatives of the Russian Government approved the
Development Plan for the P-A License Area, Phase 1: Astokh
Feature. Appraisal work for the remainder of the P-A field was
also authorized. The P-A full field development plan is scheduled
to be completed and submitted to the Russian Government by June
1999. First production of oil from the Astokh Feature, which will
be developed using an arctic-class drilling vessel called the
Molikpaq, remains on target for the summer of 1999. Late in 1997,
the Sakhalin Energy consortium arranged for a limited recourse
project financing facility of $348 million with a group of
international financial institutions. Subject to various
conditions, initial borrowings by Sakhalin Energy under this
facility are anticipated in 1998 to partially fund Phase 1
expenditure requirements.
Looking at downstream operations, Marathon and Ashland Inc.
officially formed MAP, which commenced operations on January 1,
1998. Major elements of both firms' refining, marketing and
transportation operations were combined, with Marathon having a
62% ownership interest in MAP and Ashland holding a 38% interest.
MAP has seven refineries with a combined capacity of 935,000
barrels per day ("bpd"), 84 light products and asphalt terminals
in the Midwest and Southeast United States, about 5,400 retail
marketing outlets in 20 states and significant pipeline holdings.
Potential efficiencies derived by MAP have been broadly estimated
to be in excess of $200 million annually on a pretax basis. While
a modest part of these efficiencies will be achieved in mid- to
late 1998, full realization of efficiencies should occur over the
next few years as MAP's integration plans are implemented. In
conjunction with the formation of MAP, the Marathon Group is
expected to recognize an estimated $250 million one-time, pretax
change in interest gain in the first quarter of 1998. For
additional details of the agreements and the one-time financial
gain, see Note 28 to the Marathon Group Financial Statements.
MAP's refined product sales volumes for 1998 are expected to
increase slightly from 1997 levels of Marathon's and Ashland's
separate downstream operations, which were a combined volume of
approximately 1.2 million bpd. A major maintenance shutdown
("turnaround") was completed at the Garyville (La.) refinery in
early 1998, and major turnarounds are planned for the Canton
(Ohio) refinery in the fourth quarter of 1998, the Catlettsburg
(Ky.) refinery in the first quarter of 1999 and the Detroit
(Mich.) refinery in the fourth quarter of 1999. Each turnaround
is expected to last about one month.
M-33
Management's Discussion and Analysis CONTINUED
The above forward-looking statements of projects, expected
production and sales levels, and dates of initial production 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.
In addition, development of new production properties in
countries outside the United States may require protracted
negotiations with host governments and is frequently subject to
political considerations, such as tax regulations, which could
adversely affect the economics of projects. With respect to the
Sakhalin II project in Russia, 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. To the extent these
assumptions prove inaccurate and/or negotiations, legal
developments and other considerations are not satisfactorily
resolved, actual results could be materially different than
present expectations.
The above discussion also contains forward-looking
statements with respect to the amount and timing of efficiencies
to be realized by MAP. Some factors that could potentially cause
actual results to differ materially from present expectations
include unanticipated costs to implement shared technology,
difficulties in integrating corporate structures, delays in
leveraging volume procurement advantages or delays in personnel
rationalization.
YEAR 2000
The Marathon Group continues to identify, analyze, modify
and/or replace non-compliant systems, equipment and other devices
that utilize date/time-oriented software or computer chips.
Marathon has contacted all of its vendors from which systems have
been purchased and has requested that appropriate corrections be
provided by mid-1998. Modifications to internally developed
systems are being handled in-house. In addition, during 1997,
Marathon began including Year 2000 provisions in a variety of its
contracts. In management's opinion, the incremental costs
associated with these efforts will not be material to the
operating results of the Marathon Group.
This discussion of Marathon's efforts and management's
expectations relating to the effect of Year 2000 compliance on
operating results are forward-looking statements. Actual results
could be materially different because Marathon's ability to
achieve Year 2000 compliance and the level of incremental costs
associated therewith could be adversely affected by unanticipated
problems identified in the ongoing compliance review. In
addition, Marathon has limited or no control over comparable
corrective actions by proprietary software vendors and other
entities with which it interacts. Therefore, Year 2000 compliance
problems experienced by these entities could adversely affect the
operating results of the Marathon Group.
ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board
issued two new accounting standards: Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
requires that companies report all recognized changes in assets
and liabilities that are not the result of transactions with
owners, including those that are not reported in net income. USX
plans to adopt the standard, effective with its 1998 financial
statements, as required.
Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" introduces a "management approach" for identifying
reportable industry segments of an enterprise. USX plans to adopt
the standard, effective with its 1998 financial statements, as
required.
M-34
The Marathon Group
Quantitative and Qualitative Disclosures About Market Risk
MANAGEMENT OPINION CONCERNING DERIVATIVE INSTRUMENTS
USX employs a strategic approach of limiting its use of
derivative instruments principally to hedging activities, whereby
gains and losses are generally offset by price changes in the
underlying commodity. Based on this approach, combined with risk
assessment procedures and internal controls, management believes
that its use of derivative instruments does not expose the Marathon
Group to material risk. The Marathon Group's use of derivative
instruments for hedging activities could materially affect the
Marathon Group's results of operations in particular quarterly or
annual periods. This is primarily because use of such instruments
may limit the company's ability to benefit from favorable price
movements. However, management believes that use of these
instruments will not have a material adverse effect on financial
position or liquidity. For a summary of accounting policies related
to derivative instruments, see Note 2 to the Marathon Group
Financial Statements.
COMMODITY PRICE RISK AND RELATED RISKS
In the normal course of its business, the Marathon Group is
exposed to market risk, or price fluctuations related to the
purchase, production or sale of crude oil, natural gas and refined
products. To a lesser extent, the Marathon Group is exposed to the
risk of price fluctuations on natural gas liquids, electricity, and
petroleum feedstocks used as raw materials. The Marathon Group is
also exposed to effects of price fluctuations on the value of its
commodity inventories.
The Marathon Group's market risk strategy has generally been to
obtain competitive prices for its products and services and allow
operating results to reflect market price movements dictated by
supply and demand. However, the Marathon Group uses fixed-price
contracts and derivative commodity instruments to manage a
relatively small portion of its commodity price risk. The Marathon
Group uses fixed-price contracts to manage market risk exposure
related to the sale of portions of its natural gas production. In
addition, the Marathon Group uses derivative commodity instruments
such as exchange-traded futures contracts and options, and over-
the-counter ("OTC") commodity swaps and options to manage exposure
related to the purchase, production or sale of crude oil, natural
gas, refined products and electricity. The Marathon Group's
strategic approach is to limit the use of these instruments
principally to hedging activities. Accordingly, gains and losses on
derivative commodity instruments are generally offset by the
effects of price changes in the underlying commodity. However,
certain derivative commodity instruments have the effect of
restoring the equity portion of fixed-price sales of natural gas to
variable market-based prices. These instruments are used as part of
Marathon's overall risk management programs.
M-35
Quantitative and Qualitative Disclosures
About Market Risk CONTINUED
Sensitivity analyses of the incremental effects on pretax income
of hypothetical 10% and 25% changes in commodity prices for open
derivative commodity instruments for the Marathon Group as of
December 31, 1997, are provided in the following table:/(a)/
(Dollars in millions)
--------------------------------------------------------------------------------
INCREMENTAL DECREASE IN
PRETAX INCOME ASSUMING A
HYPOTHETICAL PRICE CHANGE OF/(a)/
Derivative Commodity Instruments 10% 25%
--------------------------------------------------------------------------------
Crude oil (price increase)/(b)/ $2.7 $ 8.6
Natural gas (price decrease)/(b)/ 2.9 7.1
Refined products (price decrease)/(b)/ .4 1.1
---- -----
Total $6.0 $16.8
--------------------------------------------------------------------------------
/(a)/ Gains and losses on derivative commodity instruments are
generally offset by price changes in the underlying
commodity. Effects of these offsets are not reflected in the
sensitivity analyses. Amounts reflect the estimated
incremental effect on pretax income of hypothetical 10% and
25% changes in closing commodity prices for each open
contract position at December 31, 1997. The Marathon Group
evaluates its portfolio of derivative commodity instruments
on an ongoing basis and adds or revises strategies to reflect
anticipated market conditions and changes in risk profiles.
Changes to the size or composition of the portfolio
subsequent to December 31, 1997, would cause future pretax
income effects to differ from those presented in the table.
The number of net open contracts varied throughout 1997, from
a low of 637 contracts at December 31, to a high of 9,307
contracts at June 11, and averaged 5,400 for the year. The
derivative commodity instruments used and hedging positions
taken also varied throughout 1997, and will continue to vary
in the future. Because of these variations in the composition
of the portfolio over time, the number of open contracts, by
itself, cannot be used to predict future income effects.
During 1998, the size of the portfolio is expected to
increase above average 1997 levels as a result of increased
volumes for Marathon Ashland Petroleum LLC, on a basis
consistent with guidelines established in previously existing
downstream hedging programs.
The calculation of sensitivity amounts for basis swaps
assumes that the physical and paper indices are perfectly
correlated. Gains and losses on options are based on the
difference between the strike price and the underlying
commodity price.
/(b)/ The direction of the price change used in calculating the
sensitivity amount for each commodity reflects that which
would result in the largest incremental decrease in pretax
income when applied to the derivative commodity instruments
used to hedge that commodity.
While derivative commodity instruments are generally used to
reduce risks from unfavorable commodity price movements, they also
may limit the opportunity to benefit from favorable movements.
During the fourth quarter of 1996, certain hedging strategies
matured which limited the Marathon Group's ability to benefit from
favorable market price increases on the sales of equity crude oil
and natural gas production, resulting in pretax hedging losses of
$33 million. In total, Marathon's upstream operations recorded
pretax hedging losses of $3 million in 1997, compared with net
losses of $38 million in 1996, and net gains of $10 million in
1995.
Marathon's downstream operations generally use derivative
commodity instruments to lock-in costs of certain raw material
purchases, to protect carrying values of inventories and to protect
margins on fixed-price sales of refined products. In total,
downstream operations recorded net pretax hedging gains of $29
million in 1997, compared with net losses of $22 million in 1996
and $4 million in 1995. Essentially, all of these upstream and
downstream gains and losses were offset by changes in the prices of
the underlying hedged commodities, with the net effect
approximating the targeted results of the hedging strategies. For
additional information relating to derivative commodity
instruments, including aggregate contract values, and fair values,
where appropriate, see Note 25 to the Marathon Group Financial
Statements.
The Marathon Group is subject to basis risk, caused by
factors that affect the relationship between commodity futures
prices reflected in derivative commodity instruments and the cash
market price of the underlying commodity. Natural gas transaction
prices are frequently based on industry reference prices that may
vary from prices experienced in local markets. For example, New
York Mercantile Exchange ("NYMEX") contracts for natural gas are
priced at Louisiana's Henry Hub, while the underlying quantities of
natural gas may be produced and sold in the Western United States
at prices that do not move in strict correlation with NYMEX prices.
To the extent that commodity price changes
M-36
Quantitative and Qualitative Disclosures
About Market Risk CONTINUED
in one region are not reflected in other regions, derivative
commodity instruments may no longer provide the expected hedge,
resulting in increased exposure to basis risk. These regional price
differences could yield favorable or unfavorable results. OTC
transactions are being used to manage exposure to most of the basis
risk.
The Marathon Group is subject to liquidity risk, caused by
timing delays in liquidating contract positions due to a potential
inability to identify a counterparty willing to accept an
offsetting position. Due to the large number of active
participants, exposure to liquidity risk is relatively low for
exchange-traded transactions.
INTEREST RATE RISK
USX is subject to the effects of interest rate fluctuations on
certain of its non-derivative financial instruments. A sensitivity
analysis of the projected incremental effect of a hypothetical 10%
decrease in year-end 1997 interest rates on the fair value of the
Marathon Group's specifically attributed non-derivative financial
instruments and the Marathon Group's portion of USX's non-
derivative financial instruments attributed to all groups, is
provided in the following table:
(Dollars in millions)
---------------------------------------------------------------------------------------------------------
Incremental
Increase in
Carrying Fair Fair
Non-Derivative Financial Instruments/(a)/ Value /(b)/ Value /(b)/ Value /(c)/
---------------------------------------------------------------------------------------------------------
Financial assets:
Investments and long-term receivables/(d)/ $ 86 $ 143 $ --
---------------------------------------------------------------------------------------------------------
Financial liabilities:
Long-term debt (including amounts due within one year)/(e)/ $2,869 $3,198 $ 106
Preferred stock of subsidiary/(f)/ 184 187 18
----- ----- -------
Total $3,053 $3,385 $ 124
---------------------------------------------------------------------------------------------------------
/(a)/ Fair values of cash and cash equivalents, receivables, notes
payable, accounts payable and accrued interest, approximate
carrying value and are relatively insensitive to changes in
interest rates due to the short-term maturity of the
instruments. Accordingly, these instruments are excluded from
the table.
/(b)/ At December 31, 1997. For further discussion, see Note 26 to
the Marathon Group Financial Statements.
/(c)/ Reflects, by class of financial instrument, the estimated
incremental effect of a hypothetical 10% decrease in interest
rates at December 31, 1997, on the fair value of non-
derivative financial instruments. For financial liabilities
this assumes a 10% decrease in the weighted average yield to
maturity of USX's long-term debt at December 31, 1997.
/(d)/ For additional information, see Note 19 to the Marathon
Group Financial Statements.
/(e)/ Fair value was based on market prices where available, or
current borrowing rates for financings with similar terms
and maturities. For additional information, see Note 11 to
the Marathon Group Financial Statements.
/(f)/ In 1994, USX Capital LLC, a wholly owned subsidiary of USX,
sold 10,000,000 shares of 8-3/4% Cumulative Monthly Income
Preferred Shares. For further discussion, see Note 25 to
the Consolidated Financial Statements.
At December 31, 1997, USX's portfolio of long-term debt was
comprised primarily of fixed-rate instruments. Therefore, the fair
value of the portfolio is relatively sensitive to effects of
interest rate fluctuations. This sensitivity is illustrated by the
$106 million increase in the fair value of long-term debt assuming a
hypothetical 10% decrease in interest rates. However, USX's
sensitivity to interest rate declines and corresponding increases in
the fair value of its debt portfolio would unfavorably affect USX's
results and cash flows only to the extent that USX elected to
repurchase or otherwise retire all or a portion of its fixed-rate
debt portfolio at prices above carrying value.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Marathon Group is subject to the risk of price
fluctuations related to anticipated revenues and operating costs,
firm commitments for capital expenditures and existing assets or
liabilities denominated in currencies other than U.S. dollars. USX
has not generally used derivative instruments to manage this risk.
However, USX has made limited use of forward currency contracts to
manage exposure to certain currency price fluctuations. At December
31, 1997, a forward currency contract with a fair value of $10
million was outstanding. The Marathon Group's attributed portion of
the contract was $9 million. This contract hedges exposure to
currency price fluctuations relating to a Swiss franc debt
obligation with a fair value of $69 million at December 31, 1997.
The debt obligation and forward contract mature in 1998.
M-37
Quantitative and Qualitative Disclosures
About Market Risk CONTINUED
EQUITY PRICE RISK
The Marathon Group holds investments in common stock and
warrants of certain third parties. The fair value of these
investments ($17 million at December 31, 1997) has not been
material.
SAFE HARBOR
The Marathon Group's quantitative and qualitative disclosures
about market risk include forward-looking statements as defined in
the Private Securities Litigation Reform Act of 1995. These
statements are accompanied by cautionary language identifying
important factors (particularly the underlying assumptions and
limitations disclosed in footnotes to the tables), though not
necessarily all such factors, that could cause future outcomes to
differ materially from those projected.
Forward-looking statements with respect to management's opinion
about risks associated with USX's use of derivative instruments,
and projected increases in the size of the Marathon Group's hedge
portfolio are based on certain assumptions with respect to market
prices and industry supply of and demand for crude oil, refined
products and certain raw materials. To the extent that these
assumptions prove to be inaccurate, future outcomes with respect to
the Marathon Group's hedging programs may differ materially from
those discussed in the forward-looking statements.
M-38