-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DTtZbuIz3WnNJHoetWlP7lUECG3qnYMufDGju62n5CYLbULWSlkexW5HTWsaOqJ5 3xaYElroZWOK/TElMA+H/w== 0000101778-96-000013.txt : 19961113 0000101778-96-000013.hdr.sgml : 19961113 ACCESSION NUMBER: 0000101778-96-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961112 SROS: CSX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: USX CORP CENTRAL INDEX KEY: 0000101778 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 250996816 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05153 FILM NUMBER: 96657835 BUSINESS ADDRESS: STREET 1: 600 GRANT ST CITY: PITTSBURGH STATE: PA ZIP: 15219-4776 BUSINESS PHONE: 4124331121 FORMER COMPANY: FORMER CONFORMED NAME: UNITED STATES STEEL CORP/DE DATE OF NAME CHANGE: 19860714 10-Q 1 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ------------ to ------------ USX CORPORATION - -------------------------------------------------------------------------------- ---- (Exact name of registrant as specified in its charter) Delaware 1-5153 25-0996816 --------------- ------------ ------------------- (State or other (Commission (IRS Employer jurisdiction of File Number) Identification No.) incorporation) 600 Grant Street, Pittsburgh, PA 15219-4776 - --------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (412) 433-1121 ------------------------------ (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes..X..No..... Common stock outstanding at October 31, 1996 follows: USX-Marathon Group - 287,504,043 shares USX-U. S. Steel Group - 84,775,093 shares USX-Delhi Group - 9,448,269 shares 2 USX CORPORATION SEC FORM 10-Q QUARTER ENDED SEPTEMBER 30, 1996 -------------------------------- INDEX Page ----- ---- PART I - FINANCIAL INFORMATION A. Consolidated Corporation Item 1. Financial Statements: Consolidated Statement of Operations 4 Consolidated Balance Sheet 6 Consolidated Statement of Cash Flows 8 Selected Notes to Consolidated Financial Statements 9 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends and Ratio of Earnings to Fixed Charges 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Financial Statistics 21 B. Marathon Group Item 1. Financial Statements: Marathon Group Statement of Operations 22 Marathon Group Balance Sheet 23 Marathon Group Statement of Cash Flows 24 Selected Notes to Financial Statements 25 Item 2. Marathon Group Management's Discussion and Analysis of Financial Condition and Results of Operations 29 Supplemental Statistics 36 3 USX CORPORATION SEC FORM 10-Q QUARTER ENDED SEPTEMBER 30, 1996 -------------------------------- INDEX Page ----- ---- PART I - FINANCIAL INFORMATION (Continued) C. U. S. Steel Group Item 1. Financial Statements: U. S. Steel Group Statement of Operations 37 U. S. Steel Group Balance Sheet 38 U. S. Steel Group Statement of Cash Flows 39 Selected Notes to Financial Statements 40 Item 2. U. S. Steel Group Management's Discussion and Analysis of Financial Condition and Results of Operations 44 Supplemental Statistics 50 D. Delhi Group Item 1. Financial Statements: Delhi Group Statement of Operations 51 Delhi Group Balance Sheet 52 Delhi Group Statement of Cash Flows 53 Selected Notes to Financial Statements 54 Item 2. Delhi Group Management's Discussion and Analysis of Financial Condition and Results of Operations 58 Supplemental Statistics 63 PART II - OTHER INFORMATION Item 1. Legal Proceedings 64 Item 5. Other Information 65 Item 6. Exhibits and Reports on Form 8-K 66 4 Part I - Financial Information A. Consolidated Corporation USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) ------------------------------------------------
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 1996 1995* 1996 1995* - -------------------------------------------------------------------------------- REVENUES $6,023 $5,249 $17,333 $15,576 OPERATING COSTS: Cost of sales (excludes items shown below) 4,516 3,682 12,984 11,076 Inventory market valuation charges (credits) (96) 51 (179) (35) Selling, general and administrative expenses 43 46 137 141 Depreciation, depletion and amortization 243 292 765 882 Taxes other than income taxes 863 824 2,411 2,363 Exploration expenses 30 39 86 92 Restructuring credits - - - (6) ------ ------ ------ ------ Total operating costs 5,599 4,934 16,204 14,513 ------ ------ ------ ------ OPERATING INCOME 424 315 1,129 1,063 Gain on affiliate stock offering - - 53 - Other income 21 25 70 75 Interest and other financial income 7 10 19 27 Interest and other financial costs (110) (110) (341) (375) ------ ------ ------ ------ INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 342 240 930 790 Less provision for estimated income taxes 109 61 278 267 ------ ------ ------ ------ INCOME BEFORE EXTRAORDINARY LOSS 233 179 652 523 Extraordinary loss, net of income tax - (5) - (5) ------ ------ ------ ------ NET INCOME 233 174 652 518 Dividends on preferred stock (6) (7) (17) (23) ------ ------ ------ ------ NET INCOME APPLICABLE TO COMMON STOCKS $227 $167 $635 $495 ====== ====== ====== ====== *Certain amounts have been reclassified to conform to 1996 classifications.
Selected notes to financial statements appear on pages 9-13. 5 USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF OPERATIONS (Continued) (Unaudited) INCOME PER COMMON SHARE ------------------------------------------------------------
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions, except per share data) 1996 1995 1996 1995 - -------------------------------------------------------------------------------- APPLICABLE TO MARATHON STOCK: Income before extraordinary loss $164 $96 $504 $278 - Per share - primary .57 .33 1.75 .97 - fully diluted .57 .33 1.74 .97 Extraordinary loss, net of income tax - (4) - (4) - Per share - primary and fully diluted - (.01) - (.01) Net income 164 92 504 274 - Per share - primary .57 .32 1.75 .96 - fully diluted .57 .32 1.74 .96 Dividends paid per share .17 .17 .51 .51 Weighted average shares, in thousands - Primary 287,608 287,408 287,557 287,281 - Fully diluted 296,640 287,423 296,590 287,292 APPLICABLE TO STEEL STOCK: Income before extraordinary loss $64 $80 $131 $222 - Per share - primary .76 .99 1.56 2.86 - fully diluted .75 .95 1.55 2.77 Extraordinary loss, net of income tax - (1) - (1) - Per share - primary and fully diluted - (.01) - (.01) Net income 64 79 131 221 - Per share - primary .76 .98 1.56 2.85 - fully diluted .75 .94 1.55 2.76 Dividends paid per share .25 .25 .75 .75 Weighted average shares, in thousands - Primary 84,487 80,700 83,781 77,831 - Fully diluted 86,422 90,008 85,588 87,139 APPLICABLE TO OUTSTANDING DELHI STOCK: Income (loss) before extraordinary loss $(1.2) $(4.2) $- $(.2) - Per share - primary and fully diluted (.14) (.44) - (.02) Extraordinary loss, net of income tax - (.2) - (.2) - Per share - primary and fully diluted - (.02) - (.02) Net income (loss) (1.2) (4.4) - (.4) - Per share - primary and fully diluted (.14) (.46) - (.04) Dividends paid per share .05 .05 .15 .15 Weighted average shares, in thousands - Primary and fully diluted 9,448 9,443 9,448 9,440 Selected notes to financial statements appear on pages 9-13.
6 USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET (Unaudited) ----------------------------------------
ASSETS September 30 December 31 (Dollars in millions) 1996 1995 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $72 $131 Receivables, less allowance for doubtful accounts of $21 and $22 1,169 1,203 Inventories 2,055 1,764 Deferred income tax benefits 60 76 Other current assets 76 66 ------ ------ Total current assets 3,432 3,240 Long-term receivables and other investments, less reserves of $25 and $23 753 836 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $15,580 and $15,233 10,383 10,535 Prepaid pensions 1,977 1,820 Other noncurrent assets 306 312 ------ ------ Total assets $16,851 $16,743 ====== ====== Selected notes to financial statements appear on pages 9-13.
7 USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET (Continued) (Unaudited) --------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY September 30 December 31 (Dollars in millions) 1996 1995 - -------------------------------------------------------------------------------- LIABILITIES Current liabilities: Notes payable $290 $40 Accounts payable 1,998 2,157 Payroll and benefits payable 426 473 Accrued taxes 292 263 Accrued interest 69 122 Long-term debt due within one year 234 465 ------ ------ Total current liabilities 3,309 3,520 Long-term debt, less unamortized discount 4,157 4,472 Long-term deferred income taxes 1,031 898 Employee benefits 2,816 2,772 Deferred credits and other liabilities 482 503 Preferred stock of subsidiary 250 250 ------ ------ Total liabilities 12,045 12,415 ------ ------ STOCKHOLDERS' EQUITY Preferred stock - 6.50% Cumulative Convertible issued - 6,900,000 shares ($345 liquidation preference) 7 7 Common stocks: Marathon Stock issued - 287,493,869 shares and 287,398,342 shares 288 287 Steel Stock issued - 84,711,924 shares and 83,042,305 shares 85 83 Delhi Stock issued - 9,448,269 shares and 9,446,769 shares 9 9 Additional paid-in capital 3,916 4,094 Retained earnings (deficit) 536 (116) Other equity adjustments (35) (36) ------ ------ Total stockholders' equity 4,806 4,328 ------ ------ Total liabilities and stockholders' equity $16,851 $16,743 ====== ====== Selected notes to financial statements appear on pages 9-13.
8 USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) ------------------------------------------------
Nine Months Ended September 30 (Dollars in millions) 1996 1995 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income $652 $518 Adjustments to reconcile to net cash provided from operating activities: Extraordinary loss - 5 Depreciation, depletion and amortization 765 882 Exploratory dry well costs 38 37 Inventory market valuation credits (179) (35) Pensions (157) (312) Postretirement benefits other than pensions 25 2 Deferred income taxes 192 170 Gain on disposal of assets (39) (25) Gain on affiliate stock offering (53) - Payment of amortized discount on zero coupon debentures - (129) Restructuring credits - (6) Changes in: Current receivables - sold - (10) - operating turnover (61) (2) Inventories (112) (30) Current accounts payable and accrued expenses (226) (168) All other items - net (2) (45) ------ ------ Net cash provided from operating activities 843 852 ------ ------ INVESTING ACTIVITIES: Capital expenditures (730) (658) Disposal of assets 271 88 All other items - net (1) 10 ------ ------ Net cash used in investing activities (460) (560) ------ ------ FINANCING ACTIVITIES: Commercial paper and revolving credit arrangements- net 331 316 Other debt - repayments (595) (410) Preferred stock redeemed - (105) Common stock - issued 48 206 - repurchased - (1) Dividends paid (226) (223) ------ ------ Net cash used in financing activities (442) (217) ------ ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (59) 75 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 131 48 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $72 $123 ====== ====== Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $(418) $(529) Income taxes paid (99) (165) Selected notes to financial statements appear on pages 9-13.
9 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------------------------------------------- (Unaudited) 1. The information furnished in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. Additional information is contained in the USX Annual Report on Form 10-K for the year ended December 31, 1995. Effective January 1, 1996, USX adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), which establishes a fair value based method of accounting for employee stock-based compensation plans. The Standard permits companies to continue to apply the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," provided certain pro forma disclosures are made. USX will comply with SFAS No. 123 by disclosure only in its 1996 annual financial statements. 2. The method of calculating net income (loss) per share for the Marathon Stock, Steel Stock and Delhi Stock reflects the USX Board of Directors' intent that the separately reported earnings and surplus of the Marathon Group, the U. S. Steel Group and the Delhi Group, as determined consistent with the USX Certificate of Incorporation, are available for payment of dividends on the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. The financial statements of the Marathon Group, the U. S. Steel Group and the Delhi Group, taken together, include all accounts which comprise the corresponding consolidated financial statements of USX. Primary net income (loss) per share is calculated by adjusting net income for dividend requirements of preferred stock and, in the case of Delhi Stock, for the income applicable to the Retained Interest prior to June 15, 1995, the date USX eliminated the Marathon Group's Retained Interest in the Delhi Group; and is based on the weighted average number of common shares outstanding plus common stock equivalents, provided they are not antidilutive. Common stock equivalents result from assumed exercise of stock options, where applicable. Fully diluted net income (loss) per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options, provided in each case, the effect is not antidilutive. 3. The items below are included in both revenues and operating costs, resulting in no effect on income.
(In millions) ------------------------------- Third Qtr. Nine Months Ended Ended September 30 September 30 1996 1995 1996 1995 ---- ---- ---- ---- Consumer excise taxes on petroleum products and merchandise $757 $718 $2,090 $2,046 Matching crude oil and refined product buy/sell transactions settled in cash 706 447 2,028 1,499
10 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 4. Operating income includes net periodic pension credits of $119 million and $107 million in the first nine months of 1996 and 1995, respectively, ($41 million and $35 million in the third quarter of 1996 and 1995, respectively). These pension credits are primarily noncash and for the most part are included in selling, general and administrative expenses. The expected long-term rate of return on plan assets, which is reflected in the calculation of net periodic pension credits, is 10% for both 1996 and 1995. 5. In 1994, restructuring charges totaling $40 million were reported for the write-down of assets to estimated net realizable value related to the planned disposition of certain nonstrategic gas gathering and processing assets and other investments. In the second quarter of 1995, disposition of these assets was completed at higher than anticipated sales proceeds, resulting in restructuring credits of $11 million ($6 million included in operating income and $5 million included in other income). 6. On May 2, 1996, an aggregate of 6.9 million shares of RMI Titanium Company (RMI) common stock was sold in a public offering at a price of $18.50 per share and total net proceeds of $121 million. Included in the offering were 2.3 million shares sold by USX for net proceeds of $40 million. USX recognized a total pretax gain in the second quarter of 1996 of $53 million, of which $34 million was attributable to the shares sold by USX and $19 million was attributable to the increase in value of USX's investment as a result of the shares sold by RMI. The income tax effect related to the total gain was $19 million. As a result of this transaction, USX's ownership in RMI decreased from approximately 50% to 27%. USX continues to account for its investment in RMI under the equity method of accounting. 7. The provision for estimated income taxes for the periods reported is based on tax rates and amounts which recognize management's best estimate of current and deferred tax assets and liabilities. The income tax provisions for the third quarter and first nine months of 1995 include a credit of $23 million related to recognition of incremental federal income tax benefits for foreign income tax payments. This benefit resulted from USX's election to credit, rather than deduct, certain foreign income taxes for federal income tax purposes in 1995 and certain prior years. In addition, interest and other financial costs for the third quarter and first nine months of 1995 include a credit of $20 million for interest on refundable federal income taxes paid in prior years. 8. In the third quarter of 1995, USX extinguished $467 million of debt prior to maturity, primarily consisting of Zero Coupon Convertible Senior Debentures, with a carrying value of $393 million, and $56 million of 8- 1/2% Sinking Fund Debentures, which resulted in an extraordinary loss of $5 million, net of a $3 million income tax benefit. 11 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 9. Inventories are carried at lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method.
(In millions) ------------------------ September 30 December 31 1996 1995 ------------ ----------- Raw materials $631 $609 Semi-finished products 329 300 Finished products 981 901 Supplies and sundry items 144 163 ------ ------ Total (at cost) 2,085 1,973 Less inventory market valuation reserve 30 209 ------ ------ Net inventory carrying value $2,055 $1,764 ====== ======
The inventory market valuation reserve reflects the extent that the recorded cost of crude oil and refined products inventories exceeds net realizable value. The reserve is decreased to reflect increases in market prices and inventory turnover and increased to reflect decreases in market prices. Changes in the inventory market reserve result in charges or credits to operating income. 10. At September 30, 1996, USX had no borrowings against its $2,350 million long-term revolving credit agreement. During the third quarter of 1996, the long-term revolving credit agreement was amended, increasing the facility by $25 million and extending its maturity by two years to August 18, 2001. At September 30, 1996, $275 million of commercial paper is supported by the $2,350 million in unused and available credit and, accordingly, is classified as long-term debt. USX had $50 million of borrowings at September 30, 1996, against its short- term lines of credit totaling $200 million, which require maintenance of compensating balances of 3%. In addition, USX had other outstanding short- term borrowings of $240 million. In the event of a change in control of USX, debt obligations totaling $3,230 million at September 30, 1996, may be declared immediately due and payable. 11. USX has agreements (the programs) to sell an undivided interest in certain accounts receivable subject to limited recourse. Payments are collected from the sold accounts receivable; the collections are reinvested in new accounts receivable for the buyers; and a yield, based on defined short- term market rates, is transferred to the buyers. At September 30, 1996, the amount sold under the programs that had not been collected was $740 million, which will be forwarded to the buyers at the end of the agreements, or in the event of earlier contract termination. If USX does not have a sufficient quantity of eligible accounts receivable to reinvest in for the buyers, the size of the programs will be reduced accordingly. The buyers have rights to a pool of receivables that must be maintained at a level of 110% to 115% of the programs' size. In the event of a change in control of USX, as defined in one of the agreements, USX may be required to forward to the buyers, payments collected on sold accounts receivable of $350 million. 12 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 11. (Continued) Prior to 1993, USX Credit, a division of USX, sold certain of its loans receivable subject to limited recourse. USX Credit continues to collect payments from the loans and transfer to the buyers principal collected plus yield based on defined short-term market rates. At September 30, 1996, the balance of sold loans receivable subject to recourse was $58 million. USX Credit is not actively seeking new loans at this time. In the event of a change in control of USX, as defined in the agreement, USX may be required to provide cash collateral in the amount of the uncollected loans receivable to assure compliance with the limited recourse provisions. 12. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the consolidated financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. USX is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At September 30, 1996, and December 31, 1995, accrued liabilities for remediation totaled $150 million and $153 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in cleanup efforts related to underground storage tanks at retail marketing outlets, were $23 million at September 30, 1996, and $22 million at December 31, 1995. For a number of years, USX has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the first nine months of 1996 and for the years 1995 and 1994, such capital expenditures totaled $104 million, $111 million and $132 million, respectively. USX anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. At September 30, 1996, and December 31, 1995, accrued liabilities for platform abandonment and dismantlement totaled $136 million and $128 million, respectively. 13 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 12. (Continued) Guarantees by USX of the liabilities of affiliated entities totaled $51 million at September 30, 1996. In the event that any defaults of guaranteed liabilities occur, USX has access to its interest in the assets of most of the affiliates to reduce losses resulting from these guarantees. As of September 30, 1996, the largest guarantee for a single affiliate was $18 million. At September 30, 1996, USX's pro rata share of obligations of LOOP INC. and various pipeline affiliates secured by throughput and deficiency agreements totaled $176 million. Under the agreements, USX is required to advance funds if the affiliates are unable to service debt. Any such advances are prepayments of future transportation charges. Contract commitments for capital expenditures for property, plant and equipment at September 30, 1996, totaled $442 million compared with $299 million at December 31, 1995. 14 USX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS TOTAL ENTERPRISE BASIS - (Unaudited) ----------------------------------------------------------
Nine Months Ended September 30 Year Ended December 31 - -------------------- ------------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- ---- 3.29 2.65 1.50 1.92 (a) (a) (a) ==== ==== ==== ==== ==== ==== ==== (a) Earnings did not cover combined fixed charges and preferred stock dividends by $325 million for 1993, by $211 million for 1992 and by $696 million for 1991.
USX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES TOTAL ENTERPRISE BASIS - (Unaudited) -------------------------------------------------
Nine Months Ended September 30 Year Ended December 31 - --------------------- ------------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- ---- 3.53 2.88 1.63 2.08 (a) (a) (a) ==== ==== ==== ==== ==== ==== ==== (a) Earnings did not cover fixed charges by $281 million for 1993, by $197 million for 1992 and by $681 million for 1991.
15 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The following discussion should be read in conjunction with the third quarter 1996 USX consolidated financial statements and selected notes. For income per common share amounts applicable to each of USX's three classes of common stock (Marathon Stock, Steel Stock and Delhi Stock), see Consolidated Statement of Operations - Income per Common Share. For Group results, see Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group, the U. S. Steel Group and the Delhi Group. For operating statistics, see Supplemental Statistics following Management's Discussion and Analysis of Financial Condition and Results of Operations for the respective Groups. Certain sections of the discussion include forward-looking statements concerning trends or events potentially affecting USX. These statements typically contain words such as "anticipates", "believes", "estimates", "expects" or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in forward-looking statements. USX included in Forms 8-K dated September 24, 1996 (for the Marathon Group) and October 23, 1996 (for USX and each of its Groups), cautionary language identifying important factors with respect to written forward-looking statements in USX external documents, and oral forward-looking statements made by, or on behalf of USX, its representatives and its individual Groups. Results of Operations - --------------------- Revenues increased by $774 million, or 15%, in the third quarter of 1996 as compared with the third quarter of 1995. The improvement reflected increases of 17% for the Marathon Group (excluding matching buy/sell transactions and consumer excise taxes which are included in both revenues and operating costs, resulting in no effect on operating income) due mainly to higher average prices for refined products, worldwide liquid hydrocarbons and natural gas, and 62% for the Delhi Group due mainly to higher natural gas prices, and increased trading volumes (which usually provide substantially lower gross margins than those provided by the Delhi Group's merchant gas business). These factors were partially offset by a decline of 1% for the U. S. Steel Group. Revenues increased by $1,757 million, or 11%, in the first nine months of 1996 as compared with the first nine months of 1995, due primarily to the factors described above. The improvement reflected increases of 14% for the Marathon Group and 71% for the Delhi Group, partially offset by a decline of 1% for the U. S. Steel Group. Operating income increased by $109 million, or 35%, in the third quarter of 1996 as compared with the third quarter of 1995 and by $66 million, or 6%, in the first nine months of 1996 as compared with the first nine months of 1995. 16 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Operating income and certain items included in operating income for the third quarter and first nine months of 1996 and 1995 are set forth in the following table:
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 1996 1995 1996 1995 - -------------------------------------------------------------------------------- Operating Income $424 $315 $1,129 $1,063 Less: Certain Favorable (Unfavorable) Items Inventory Market Valuation Reserve Adj. (a) 96 (51) 179 35 Environmental Remediation Recoveries - 15 - 15 Charges for withdrawal from MPA (b) - - (10) - Effects related to a Disposition Plan (c) - - - 6 Gary Works No. 13 Blast Furnace Repairs (d) - - (39) - Gary Works No. 8 Blast Furnace Repairs (e) - (6) - (33) Adjustments for Certain Employee Related Costs - 13 - 13 Certain Legal Accruals - - (20) (29) ------ ------ ------ ------ Subtotal 96 (29) 110 7 Adjusted Operating Income $328 $344 $1,019 $1,056 ====== ====== ====== ====== (a) The inventory market valuation reserve reflects the extent to which the recorded costs of crude oil and refined product inventories exceed net realizable value. (b) Marine Preservation Association ("MPA") is a non-profit oil spill response group. (c) Related to the planned disposition of certain nonstrategic gas gathering and processing assets. (d) Reflects repair of damages incurred during a hearth break-out on April 2, 1996; excludes effects of business interruption. (e) Reflects repair of damages incurred in an explosion on April 5, 1995; excludes effects of business interruption.
Excluding effects of items detailed in the table above, operating income decreased by $16 million, or 5%, in the third quarter of 1996 as compared with the third quarter of 1995, due primarily to a decline of $35 million for the U. S. Steel Group, partially offset by increases of $13 million for the Marathon Group and $6 million for the Delhi Group. The decline for the U. S. Steel Group mainly reflected cost effects and inefficiencies related to planned and unplanned blast furnace outages, reduced shipment volumes, and lower steel prices, partially offset by improved product mix. The increase for the Marathon Group primarily reflected higher prices for worldwide liquid hydrocarbons and natural gas, partially offset by lower refined product margins and decreased volumes for worldwide liquid hydrocarbons. Excluding effects of items detailed in the table above, operating income decreased by $37 million, or 3%, in the first nine months of 1996 as compared with the first nine months of 1995, due primarily to a decline of $220 million for the U. S. Steel Group, partially offset by increases of $174 million for the Marathon Group and $9 million for the Delhi Group. Gain on affiliate stock offering totaled $53 million for the first nine months of 1996. For further details, see Note 6 to the Consolidated Financial Statements. 17 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Other income in the first nine months of 1996 included gains of $22 million on disposal of assets, mainly related to the sale of the Marathon Group's equity interest in a domestic pipeline company. Other income in the third quarter and first nine months of 1995 included gains of $2 million on disposal of assets. Excluding these gains, other income declined by $25 million, primarily due to lower income from affiliates. Net interest and other financial costs decreased by $26 million in the first nine months of 1996 as compared with the first nine months of 1995. Net financial costs in the first nine months of 1995 were reduced by $20 million for interest on refundable federal income taxes paid in prior years. Excluding the effect of this item, net interest and other financial costs decreased by $46 million, primarily due to lower average debt levels. Provision for estimated income taxes of $61 million and $267 million for the third quarter and first nine months of 1995 included a $23 million credit related to recognition of incremental U.S. federal income tax benefits for foreign income tax payments in 1995 and certain prior years. Net income increased by $59 million, or 34%, in the third quarter of 1996 as compared with the third quarter of 1995, and by $134 million, or 26%, in the first nine months of 1996 as compared with the first nine months of 1995. Outlook - ------- See Outlook in Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group, the U. S. Steel Group and the Delhi Group. Dividends to Stockholders - ------------------------- On October 29, 1996, the USX Board of Directors (the "Board") declared dividends of 19 cents per share on Marathon Stock (an increase of two cents per share over the previous quarterly dividend), 25 cents per share on Steel Stock and five cents per share on Delhi Stock, all payable, December 10, 1996, to stockholders of record at the close of business on November 20, 1996. The Board also declared a dividend of $0.8125 per share on USX Corporation's 6.5% Cumulative Convertible Preferred Stock, payable December 31, 1996, to stockholders of record at the close of business on December 2, 1996. Cash Flows - ---------- Cash and cash equivalents totaled $72 million at September 30, 1996, compared with $131 million at December 31, 1995. Net cash provided from operating activities totaled $843 million in the first nine months of 1996, compared with $852 million in the first nine months of 1995. The 1996 period included payments of $59 million to the Internal Revenue Service for certain agreed and unagreed adjustments relating to the 1990 tax year, $39 million related to certain state tax issues and $28 million for final settlement of the Pickering v. USX litigation. The 1995 period included payments of $169 million to fund the U. S. Steel Group's principal pension plan for the 1994 and a portion of the 1995 plan years, $129 million representing the amortized discount portion of zero 18 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- coupon bond debentures extinguished, and $20 million for partial settlement of the Pickering v. USX litigation. Excluding the effects of these items, net cash provided from operating activities decreased by $201 million mainly due to other working capital changes, cost inefficiencies related to planned and unplanned blast furnace outages and lower steel prices and volumes, partially offset by improved steel product mix, higher average prices for worldwide liquid hydrocarbons and domestic natural gas, increased volumes for worldwide natural gas, and lower interest payments. Cash from the disposal of assets was $271 million in the first nine months of 1996, compared with $88 million in the first nine months of 1995. The 1996 proceeds primarily reflected the sale of the U. S. Steel Group's investment in National- Oilwell (an oil field service joint venture); the sale of shares of RMI Titanium Company Common Stock; sales of the Marathon Group's interests in oil and gas production properties in Indonesia and Tunisia and the sale of the Marathon Group's equity interest in a domestic pipeline company. The 1995 proceeds primarily reflected property sales. Capital expenditures for property, plant and equipment in the first nine months of 1996 were $730 million, compared with $658 million in the first nine months of 1995. For further details, see USX Corporation - Financial Statistics, following Management's Discussion and Analysis of Financial Condition and Results of Operations. Capital expenditures for the year 1996 are expected to total approximately $1,150 million. Future capital expenditures can be affected by industry supply and demand factors, levels of cash flow from operations for each of the Groups, and by unforeseen hazards such as weather conditions, explosions or fires, or by delays in obtaining government or partner approval, which could affect the timing of completion of particular capital projects. For details, see discussion of Capital Expenditures for the Marathon Group, the U. S. Steel Group and the Delhi Group. Contract commitments for capital expenditures were $442 million at September 30, 1996, compared with $299 million at December 31, 1995. USX's total long-term debt, preferred stock of subsidiary and notes payable, was $4,931 million at September 30, 1996, down $296 million from December 31, 1995, mainly reflecting cash flows provided from operations and asset sales, and the reduction in cash and cash equivalents discussed above. Long-term maturities and redemptions included Swiss Franc Bonds due 1996 and related obligations, Marathon 9-3/4% Guaranteed Notes due 1999, Series B Medium- Term Notes and Private Placement Senior Notes. At September 30, 1996, USX had no outstanding borrowings against its $2,350 million long-term revolving credit agreement. During the third quarter of 1996, this agreement was amended, increasing the facility by $25 million and extending the maturity by two years to August 18, 2001. At September 30, 1996, USX had $50 million of outstanding borrowings against its short-term lines of credit totaling $200 million which require maintenance of compensating balances of 3%, and no outstanding borrowings against its short-term credit agreements of $175 million which require facility fees. USX had other outstanding short-term borrowings of $240 million of uncommitted credit lines. 19 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Liquidity - --------- USX management believes that its short-term and long-term liquidity is adequate to satisfy its obligations as of September 30, 1996, and to complete currently authorized capital spending programs. Future requirements for USX's business needs, including the funding of capital expenditures, debt maturities for the balance of 1996 and years 1997 and 1998, and any amounts that may ultimately be paid in connection with contingencies (which are discussed in Note 12 to the Consolidated Financial Statements), are expected to be financed by a combination of internally generated funds, proceeds from the sale of stock, borrowings and other external financing sources. USX's ability to avail itself of these financing options in the future is affected by the performance of each of its Groups, and with respect to borrowings, by the levels of outstanding debt, credit ratings by investor services and the overall U. S. financial climate. Environmental Matters, Contingencies and Commitments - ---------------------------------------------------- USX has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of USX's products and services, operating results will be adversely affected. USX believes that domestic competitors of the U. S. Steel Group and substantially all the competitors of the Marathon Group and the Delhi Group are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and the specific products and services it provides. USX has been notified that it is a potentially responsible party ("PRP") at 45 waste sites under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of September 30, 1996. In addition, there are 29 sites where USX has received information requests or other indications that USX may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability. There are also 106 additional sites, excluding retail marketing outlets, where remediation is being sought under other environmental statutes, both federal and state. At many of these sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. USX accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. See Note 12 to the Consolidated Financial Statements. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment (see Note 12 to the Consolidated Financial Statements for a discussion of certain of these matters). In the U.S. District Court for the Northern District of Alabama, in a civil class action, Cox, et al. v. USX, the United Steel Workers of America and United States Steel and Carnegie Pension Fund (defendants), a jury on October 29, 1996, returned verdicts favorable to the defendants on all counts, finding no liability and no damages. Plaintiffs have indicated an intent to appeal these verdicts. 20 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the consolidated financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably. See discussion of Cash Flows and Liquidity herein. 21 USX CORPORATION FINANCIAL STATISTICS --------------------
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 1996 1995 1996 1995 - -------------------------------------------------------------------------------- SALES Marathon Group $4,195 $3,494 $11,893 $10,362 U. S. Steel Group 1,611 1,620 4,782 4,827 Delhi Group 242 149 727 426 Eliminations (25) (14) (69) (39) ------ ------ ------- ------- Total $6,023 $5,249 $17,333 $15,576 OPERATING INCOME Marathon Group $318 $173 $929 $636 U. S. Steel Group 103 145 185 415 Delhi Group 3 (3) 15 12 ------ ------ ------ ------ Total $424 $315 $1,129 $1,063 CAPITAL EXPENDITURES Marathon Group $176 $151 $426 $409 U. S. Steel Group 91 82 249 224 Delhi Group 13 12 55 25 ------ ------ ------ ------ Total $280 $245 $730 $658
22 Part I - Financial Information (Continued): B. Marathon Group MARATHON GROUP OF USX CORPORATION STATEMENT OF OPERATIONS (Unaudited) -----------------------------------
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions, except per share data) 1996 1995* 1996 1995* - -------------------------------------------------------------------------------- REVENUES $4,195 $3,494 $11,893 $10,362 OPERATING COSTS: Cost of sales (excludes items shown below) 2,895 2,185 8,067 6,624 Inventory market valuation charges (credits) (96) 51 (179) (35) Selling, general and administrative expenses 77 74 237 226 Depreciation, depletion and amortization 167 207 522 623 Taxes other than income taxes 804 765 2,231 2,196 Exploration expenses 30 39 86 92 ------ ------ ------ ------ Total operating costs 3,877 3,321 10,964 9,726 ------ ------ ------ ------ OPERATING INCOME 318 173 929 636 Other income 1 1 29 11 Interest and other financial income 7 11 16 24 Interest and other financial costs (75) (73) (238) (258) ------ ------ ------ ------ INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 251 112 736 413 Less provision for estimated income taxes 87 15 232 131 ------ ------ ------ ------ INCOME BEFORE EXTRAORDINARY LOSS 164 97 504 282 Extraordinary loss, net of income tax - (4) - (4) ------ ------ ------ ------ NET INCOME 164 93 504 278 Dividends on preferred stock - (1) - (4) ------ ------ ------ ------ NET INCOME APPLICABLE TO MARATHON STOCK $164 $92 $504 $274 ====== ====== ====== ====== MARATHON STOCK DATA: Income per share: Income before extraordinary loss - Primary $.57 $.33 $1.75 $.97 - Fully diluted .57 .33 1.74 .97 Extraordinary loss - primary and fully diluted - (.01) - (.01) Net income - Primary .57 .32 1.75 .96 - Fully diluted .57 .32 1.74 .96 Dividends paid per share .17 .17 .51 .51 Weighted average shares, in thousands - Primary 287,608 287,408 287,557 287,281 - Fully diluted 296,640 287,423 296,590 287,292 *Certain amounts have been reclassified to conform to 1996 classifications. Selected notes to financial statements appear on pages 25-28.
23 MARATHON GROUP OF USX CORPORATION BALANCE SHEET (Unaudited) ---------------------------------
September 30 December 31 (Dollars in millions) 1996 1995 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $51 $77 Receivables, less allowance for doubtful accounts of $2 and $3 603 541 Receivable from other groups - 11 Inventories 1,321 1,152 Other current assets 116 107 ------ ------ Total current assets 2,091 1,888 Long-term receivables and other investments 206 215 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $9,086 and $8,890 7,309 7,521 Prepaid pensions 286 274 Other noncurrent assets 211 211 ------ ------ Total assets $10,103 $10,109 ====== ====== LIABILITIES Current liabilities: Notes payable $206 $31 Accounts payable 1,191 1,210 Payable to other groups 41 35 Payroll and benefits payable 83 80 Accrued taxes 90 68 Deferred income taxes 207 154 Accrued interest 49 94 Long-term debt due within one year 175 353 ------ ------ Total current liabilities 2,042 2,025 Long-term debt, less unamortized discount 2,883 3,367 Long-term deferred income taxes 1,161 1,072 Employee benefits 353 338 Deferred credits and other liabilities 250 253 Preferred stock of subsidiary 182 182 ------ ------ Total liabilities 6,871 7,237 STOCKHOLDERS' EQUITY 3,232 2,872 ------ ------ Total liabilities and stockholders' equity $10,103 $10,109 ====== ====== Selected notes to financial statements appear on pages 25-28.
24 MARATHON GROUP OF USX CORPORATION STATEMENT OF CASH FLOWS (Unaudited) -----------------------------------
Nine Months Ended September 30 (Dollars in millions) 1996 1995 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income $504 $278 Adjustments to reconcile to net cash provided from operating activities: Extraordinary loss - 4 Depreciation, depletion and amortization 522 623 Exploratory dry well costs 38 37 Inventory market valuation credits (179) (35) Pensions (12) (24) Postretirement benefits other than pensions 11 8 Deferred income taxes 134 18 Payment of amortized discount on zero coupon debentures - (96) Gain on disposal of assets (31) (5) Changes in: Current receivables - sold - 8 - operating turnover (112) (72) Inventories 10 26 Current accounts payable and accrued expenses 3 (253) All other items - net 2 60 ------ ------ Net cash provided from operating activities 890 577 ------ ------ INVESTING ACTIVITIES: Capital expenditures (426) (409) Disposal of assets 126 18 Elimination of Retained Interest in Delhi Group - 58 All other items - net (11) (4) ------ ------ Net cash used in investing activities (311) (337) ------ ------ FINANCING ACTIVITIES: Increase (decrease)in Marathon Group's share of USX consolidated debt (459) 23 Preferred stock redeemed - (78) Marathon Stock issued 1 - Common stock repurchased - (1) Dividends paid (147) (151) ------ ------ Net cash used in financing activities (605) (207) ------ ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (26) 33 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 77 28 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $51 $61 ====== ====== Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $(295) $(380) Income taxes paid, including settlements with other groups (44) (158) Selected notes to financial statements appear on pages 25-28.
25 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS -------------------------------------- (Unaudited) 1. The information furnished in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. Additional information is contained in the USX Annual Report on Form 10-K for the year ended December 31, 1995. 2. The financial statements of the Marathon Group include the financial position, results of operations and cash flows for the businesses of Marathon Oil Company and certain other subsidiaries of USX, and a portion of the corporate assets and liabilities and related transactions which are not separately identified with ongoing operating units of USX. These financial statements are prepared using the amounts included in the USX consolidated financial statements. Corporate amounts reflected in these financial statements are determined based upon methods which management believes to be reasonable. The accounting policies applicable to the preparation of the financial statements of the Marathon Group may be modified or rescinded in the sole discretion of the Board of Directors of USX (Board), although the Board has no present intention to do so. The Board may also adopt additional policies depending on the circumstances. Although the financial statements of the Marathon Group, the U. S. Steel Group and the Delhi Group separately report the assets, liabilities (including contingent liabilities) and stockholders' equity of USX attributed to each such group, such attribution of assets, liabilities (including contingent liabilities) and stockholders' equity among the Marathon Group, the U. S. Steel Group and the Delhi Group for the purpose of preparing their respective financial statements does not affect legal title to such assets and responsibility for such liabilities. Holders of USX-Marathon Group Common Stock (Marathon Stock), USX-U. S. Steel Group Common Stock (Steel Stock) and USX-Delhi Group Common Stock (Delhi Stock) are holders of common stock of USX and continue to be subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts arising from one Group that affect the overall cost of USX's capital could affect the results of operations and financial condition of other groups. In addition, net losses of any Group, as well as dividends or distributions on any class of USX Common Stock or series of Preferred Stock and repurchases of any class of USX Common Stock or series of Preferred Stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on all classes of Common Stock. Accordingly, the USX consolidated financial information should be read in connection with the Marathon Group financial information. 26 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 3. The method of calculating net income (loss) per share for the Marathon Stock, Steel Stock and Delhi Stock reflects the Board's intent that the separately reported earnings and surplus of the Marathon Group, the U. S. Steel Group and the Delhi Group, as determined consistent with the USX Certificate of Incorporation, are available for payment of dividends on the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. Primary net income per share is calculated by adjusting net income for dividend requirements of preferred stock and is based on the weighted average number of common shares outstanding plus common stock equivalents, provided they are not antidilutive. Common stock equivalents result from assumed exercise of stock options, where applicable. Fully diluted net income per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options provided, in each case, the effect is not antidilutive. 4. The items below are included in both revenues and operating costs, resulting in no effect on income.
(In millions) ------------------------------- Third Qtr. Nine Months Ended Ended September 30 September 30 1996 1995 1996 1995 ---- ---- ---- ---- Consumer excise taxes on petroleum products and merchandise $757 $718 $2,090 $2,046 Matching crude oil and refined product buy/sell transactions settled in cash 706 447 2,028 1,499
5. Other income in the first nine months of 1996 included a gain of $20 million, primarily related to the sale of an equity interest in a domestic pipeline company. 6. The financial statement provision for estimated income taxes and related tax payments or refunds have been reflected in the Marathon Group, the U. S. Steel Group and the Delhi Group financial statements in accordance with USX's tax allocation policy for such groups. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated among the Marathon Group, the U. S. Steel Group and the Delhi Group for group financial statement purposes, based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to the respective groups. The provision for estimated income taxes for the Marathon Group is based on tax rates and amounts which recognize management's best estimate of current and deferred tax assets and liabilities. Differences between the combined interim tax provisions of the Marathon, U. S. Steel and Delhi Groups and USX consolidated are allocated to each group based on the relationship of the individual group provisions to the combined interim provisions. The first nine months of 1996 provision for estimated income taxes included an $8 million tax benefit related to the sale of stock of certain subsidiaries involved in international production activities. 27 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 6. (Continued) The income tax provisions for the third quarter and first nine months of 1995 include a credit of $29 million related to recognition of incremental federal income tax benefits for foreign income tax payments. This benefit resulted from USX's election to credit, rather than deduct, certain foreign income taxes for federal income tax purposes in 1995 and certain prior years. In addition, interest and other financial costs for the third quarter and first nine months of 1995 include a credit of $17 million for interest on refundable federal income taxes paid in prior years. 7. In the third quarter of 1995, USX extinguished $467 million of debt prior to maturity, resulting in an extraordinary loss to the Marathon Group of $4 million, net of a $2 million income tax benefit. 8. Inventories are carried at the lower of cost or market. Cost of inventories of crude oil and refined products is determined under the last- in, first-out (LIFO) method.
(In millions) ------------------------ September 30 December 31 1996 1995 ------------ ----------- Crude oil and natural gas liquids $472 $510 Refined products and merchandise 800 758 Supplies and sundry items 79 93 ------ ------ Total (at cost) 1,351 1,361 Less inventory market valuation reserve 30 209 ------ ------ Net inventory carrying value $1,321 $1,152 ====== ======
The inventory market valuation reserve reflects the extent that the recorded cost of crude oil and refined products inventories exceeds net realizable value. The reserve is decreased to reflect increases in market prices and inventory turnover and increased to reflect decreases in market prices. Changes in the inventory market valuation reserve result in charges or credits to operating income. 9. The Marathon Group participates in an agreement (the program) to sell an undivided interest in certain accounts receivable subject to limited recourse. Payments are collected from the sold accounts receivable; the collections are reinvested in new accounts receivable for the buyers; and a yield, based on defined short-term market rates, is transferred to the buyers. At September 30, 1996, the amount sold under the program that had not been collected was $340 million, which will be forwarded to the buyers at the end of the agreement, or in the event of earlier contract termination. If the Marathon Group does not have a sufficient quantity of eligible accounts receivable to reinvest in for the buyers, the size of the program will be reduced accordingly. The buyers have rights to a pool of receivables that must be maintained at a level of 110% of the program size. 28 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 10. On June 15, 1995, USX eliminated the Marathon Group's Retained Interest in the Delhi Group (equivalent to 4,564,814 shares of Delhi Stock). This was accomplished through a reallocation of assets and a corresponding adjustment to debt and equity attributed to the Marathon and Delhi Groups. The transfer was made at a price of $12.75 per equivalent share of Delhi Stock, or an aggregate of $58 million, resulting in a corresponding reduction of the Marathon Group debt. The Retained Interest represented the Marathon Group's interest in the earnings and equity of the Delhi Group. 11. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Marathon Group involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Marathon Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Marathon Group. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. The Marathon Group is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At September 30, 1996, and December 31, 1995, accrued liabilities for remediation totaled $40 million and $37 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in cleanup efforts related to underground storage tanks at retail marketing outlets, were $23 million at September 30, 1996, and $22 million at December 31, 1995. For a number of years, the Marathon Group has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the first nine months of 1996 and for the years 1995 and 1994, such capital expenditures totaled $39 million, $50 million and $70 million, respectively. The Marathon Group anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. At September 30, 1996, and December 31, 1995, accrued liabilities for platform abandonment and dismantlement totaled $136 million and $128 million, respectively. Guarantees by USX of the liabilities of affiliated entities of the Marathon Group totaled $14 million at September 30, 1996. At September 30, 1996, the Marathon Group's pro rata share of obligations of LOOP INC. and various pipeline affiliates secured by throughput and deficiency agreements totaled $176 million. Under the agreements, the Marathon Group is required to advance funds if the affiliates are unable to service debt. Any such advances are prepayments of future transportation charges. At September 30, 1996, contract commitments for the Marathon Group's capital expenditures for property, plant and equipment totaled $268 million compared with $112 million at December 31, 1995. 29 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The Marathon Group includes Marathon Oil Company ("Marathon") and certain other subsidiaries of USX Corporation ("USX") which are engaged in worldwide exploration, production, transportation and marketing of crude oil and natural gas; and domestic refining, marketing and transportation of petroleum products. Management's Discussion and Analysis should be read in conjunction with the third quarter 1996 USX consolidated financial information and the Marathon Group financial statements and selected notes. The discussion of Results of Operations should be read in conjunction with the Supplemental Statistics provided on page 36. 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. USX included in Forms 8-K dated September 24, 1996 (for the Marathon Group) and October 23, 1996 (for USX and each of its Groups), cautionary language identifying important factors with respect to written forward-looking statements in USX external documents, and oral forward-looking statements made by, or on behalf of USX, its representatives and its individual Groups. Results of Operations - --------------------- Revenues (excluding matching buy/sell transactions and excise taxes) increased by 17% in the third quarter and 14% in the first nine months of 1996 from the comparable prior-year periods, primarily reflecting higher average refined product, worldwide liquid hydrocarbon and natural gas prices. Revenues for the third quarter and first nine months of 1996 and 1995 are summarized in the following table:
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 1996 1995 1996 1995 - -------------------------------------------------------------------------------- Refined Products and Merchandise $2,063 $1,829 $5,866 $5,308 Crude Oil and Natural Gas Liquids 346 220 894 638 Natural Gas 275 220 867 706 Transportation and Other 48 60 148 165 ------ ------ ------ ------ Subtotal $2,732 $2,329 $7,775 $6,817 Matching Buy/Sell Transactions (a) 706 447 2,028 1,499 Excise Taxes (a) 757 718 2,090 2,046 ------ ------ ------ ------ Total Revenues $4,195 $3,494 $11,893 $10,362 ====== ====== ====== ====== (a)Included in both revenues and operating costs, resulting in no effect on income.
30 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Operating income for the 1996 third quarter included a $96 million favorable noncash effect of a decrease in the inventory market valuation reserve, while the 1995 third quarter included a $51 million unfavorable effect of an increase in the reserve. This reserve reflects the extent to which the recorded costs of crude oil and refined product inventories exceed net realizable value. The amounts of increases or decreases in the reserve in future periods are dependent on changes in future crude oil and refined product price levels, and inventory turnover. Third quarter 1995 operating income also included a $15 million favorable adjustment for expected environmental remediation recoveries. Excluding the effects of these items, third quarter operating income increased by $13 million. The improvement primarily resulted from higher worldwide liquid hydrocarbon and natural gas prices, partially offset by lower refined product margins and worldwide liquid hydrocarbon volumes. Operating income from worldwide exploration and production ("upstream") was $222 million in the third quarter of 1996, up $119 million from the third quarter of last year, reflecting improved domestic and international results. Operating income from domestic exploration and production was $136 million in the third quarter of 1996, compared with $72 million in the third quarter of 1995. The improvement was primarily due to higher average liquid hydrocarbon and natural gas prices and reduced depreciation, depletion and amortization ("DD&A") expense resulting, in part, from the fourth quarter 1995 adoption of Statement of Financial Accounting Standards No. 121 - Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS No. 121"). These favorable effects were partially offset by lower liquid hydrocarbon volumes at Ewing Bank Block 873 in the Gulf of Mexico and from the 1995 sale of Illinois Basin production properties. Operating income from international exploration and production was $86 million in the third quarter of 1996, compared with $31 million in the third quarter of 1995. The improvement was primarily due to higher average liquid hydrocarbon and natural gas prices, lower dry well expense and reduced DD&A expense, resulting mainly from property sales and the adoption of SFAS No. 121. These favorable changes were partially offset by lower liquid hydrocarbon liftings which were due primarily to the sales of production properties in Indonesia and Tunisia and lower liftings in the United Kingdom ("U.K."). Operating income from refining, marketing and transportation ("downstream") operations was $35 million in the third quarter of 1996, compared with $141 million in last year's third quarter. Third quarter 1995 results included a $15 million favorable adjustment for expected environmental remediation recoveries. Excluding this item, downstream's third quarter results decreased by $91 million. The lower results mainly reflected lower refined product margins as increases in refined product prices lagged increases in crude oil acquisition costs. Refining margins were also constrained by a planned maintenance shutdown in September at Marathon's 175,000-barrel-per-day refinery in Robinson, Illinois. Administrative expenses were $35 million in the third quarter of 1996, compared with $20 million in the same period of 1995. Effective with the first quarter of 1996, Marathon changed its procedures for distributing the costs of certain administrative services to its operating components in order to optimize the utilization of these services. Under the new approach, upstream and downstream operating components are billed for direct services; unbilled services are included in "Administrative" (see the Supplemental Statistics). As a result, third quarter 1996 administrative expenses included an estimated $12 million of costs that were allocated to other operating components in 1995. 31 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Marathon Group operating income in the first nine months of 1996 and 1995 included favorable noncash effects of $179 million and $35 million, respectively, reflecting decreases in the inventory market valuation reserve. Operating results for the first nine months of 1996 also included $10 million of charges associated with the withdrawal from the Marine Preservation Association, a non-profit oil spill response group, while the first nine months of 1995 included the $15 million favorable adjustment for expected environmental remediation recoveries. Excluding the effects of these items, operating income in the first nine months of 1996 increased by $174 million from the first nine months of 1995. The increase mainly reflected higher average prices for worldwide liquid hydrocarbons and domestic natural gas, reduced DD&A, resulting mainly from the adoption of SFAS No. 121 and property sales, and increased worldwide natural gas volumes, partially offset by lower refined product margins and decreased worldwide liquid hydrocarbon volumes. Other income in the first nine months of 1996 increased by $18 million from the comparable prior-year period, due mainly to a gain on the sale of an equity interest in a domestic pipeline company. Net interest and other financial costs in the first nine months of 1996 decreased by $12 million from the first nine months of 1995. Third quarter 1995 interest and other financial costs included a $17 million favorable adjustment for interest on refunds of federal income taxes claimed for prior years. Excluding this item, net interest and other financial costs decreased by $29 million from the first nine months of 1995, primarily reflecting lower average debt levels. While the provision for estimated income taxes for the third quarter of 1996 included no significant items, the third quarter of 1995 included a $29 million credit related to the recognition of U.S. income tax benefits for foreign income tax payments in 1995 and certain prior years. The provision for the first nine months of 1996 included an $8 million tax benefit related to the sale of stock of certain subsidiaries involved in international upstream activities. Net income increased by $71 million in the third quarter of 1996 as compared with the third quarter of 1995, and by $226 million in the first nine months of 1996 as compared with the first nine months of 1995. The increases mainly reflect the factors discussed above. 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. The Marathon Group uses commodity-based derivative instruments to manage exposure to market risk. While these instruments are generally used to reduce risks from unfavorable commodity price movements, they also may limit the opportunity to benefit from favorable price movements. During the fourth quarter of 1996, certain 32 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- hedging strategies will mature which limit the Marathon Group's ability to benefit from favorable price changes above $20.00 per barrel on approximately 5.5 million barrels, or about 35%, of expected fourth quarter worldwide liquid hydrocarbon production. During the third quarter of 1996, Marathon's exploration success in the Cotton Valley Reef trend in East Texas continued as three new natural gas discoveries were announced - the Riley Trust No. 2, Sherrod No. 1 and Noey No. 1 wells. Marathon is the operator of these discoveries, with a 75% working interest in the Riley Trust well and a 100% working interest in the Sherrod and Noey wells. These wells add approximately 40 net million cubic feet per day to Marathon's domestic natural gas production capability. Marathon continues an active exploration program in this play where it has over 40,000 acres of leasehold interests. Marathon and its co-venturer are moving ahead with design and construction of "Petronius," a $400 million deepwater Gulf of Mexico drilling and production project on Viosca Knoll Block 786. Marathon has a 50% interest in this project. Production is expected to begin in early 1999 from this discovery, which has estimated reserves of 80-100 million gross barrels of oil equivalent. In September 1996, Marathon and its partner completed a successful delineation well on the Tchatamba discovery, offshore Gabon. Oil production is expected to start in late 1997 and peak at 15,000 gross barrels per day ("bpd") at this field, where Marathon is the operator with a 75% interest. In October, government approval was given to Marathon and its co-venturers for development of the West Brae field in the U.K. North Sea. West Brae, estimated to contain reserves of 30 million gross barrels of oil, will be a subsea development tied back to the nearby Marathon-operated Brae `A' platform. Production should begin in late 1997, and the field is expected to produce at 25,000 barrels per day in 1998. Marathon is the operator and holds a 38% interest. The Marathon Group holds a 30% interest in Sakhalin Energy Investment Company Ltd. ("Sakhalin Energy"), an incorporated joint venture company responsible for the overall management of the Sakhalin II Project. The Sakhalin II Production Sharing Contract ("PSC") was signed in June 1994 for the development of the Piltun-Astokhskoye ("PA") oil field and the Lunskoye gas field located offshore Sakhalin Island in the Russian Far East Region. In July 1996, Sakhalin Energy obtained the support of Russian authorities to initiate a plan for the first phase of a development of the PA oil field. Sakhalin Energy is now awaiting the Russian Duma's passage of "enabling" legislation that ties the terms of the PSC to Russian tax law before committing to the project. Assuming timely approvals and continued progress on stabilization, first production of oil could occur in mid-1999, with sales from the PA field forecast to average 45,000 gross bpd annually. This is based on six months of offshore loading operations during the ice-free weather window at an estimated production rate of 90,000 gross bpd during the sales season. In September 1996, the Marathon Group announced forecasts of production levels for full-year 1996 as well as some projections for future years. Worldwide liquid hydrocarbon production is expected to be about 180,000 bpd for full-year 1996. The projection for 1997 is around 175,000 bpd, increasing to about 221,000 bpd in 1999. For this same time period, worldwide natural gas volumes are expected to remain in the range of 1.2 to 1.3 billion cubic feet per day. These projections are based on known discoveries and do not include any additions from acquisitions or future 33 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- exploratory drilling. Production increases primarily reflect development of three projects in the Gulf of Mexico (Green Canyon 244, Viosca Knoll 786 and the recent discovery on Ewing Bank 963), the West Brae field in the U.K. North Sea and the Tchatamba discovery in Gabon along with initial production from Marathon's 30% equity interest in Sakhalin Energy. The above discussions of projects, expected production levels, reserves 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 are frequently subject to political considerations, such as tax regulations, which could adversely affect the economics of projects. With respect to the Sakhalin II project in Russia, certain Russian laws and normative acts at the Russian Federation and local levels need to be brought into compliance with the existing Production Sharing Agreement Law, and development plans need to be finalized prior to final commitment by the shareholders of Sakhalin Energy. To the extent these assumptions prove inaccurate, actual results could be materially different than present expectations. Cash Flows - ---------- Net cash provided from operating activities was $890 million in the first nine months of 1996, compared with $577 million in the first nine months of 1995. The 1996 period included payments of $39 million related to certain state tax issues, while the 1995 period included payments of $96 million representing the Marathon Group's share of the amortized discount on USX's zero coupon debentures. Excluding the effects of these items, net cash provided from operating activities increased by $256 million, mainly reflecting favorable working capital changes and increased profitability. Capital expenditures for property, plant and equipment in the third quarter and first nine months of 1996 were $176 million and $426 million, respectively, compared with $151 million and $409 million in the comparable 1995 periods. Expenditures during 1996 have mainly been for domestic upstream projects, relating to development of properties in the Gulf of Mexico. Capital expenditures for the year 1996 are expected to total approximately $755 million. Contract commitments for capital expenditures were $268 million at September 30, 1996, compared with $112 million at year-end 1995. In September 1996, the Marathon Group announced that capital, investment and exploration expenditures are expected to average between $1 billion and $1.1 billion annually over the 1997-1999 period. Capital and investment spending will include upstream projects previously mentioned in the "Outlook" section and certain downstream projects, including retail marketing expansion and investment in the Nautilus natural gas pipeline system. During this period, exploration activities will be concentrated in existing core areas, primarily in the Gulf of Mexico where a dozen or more wildcat wells are expected to be drilled annually. International areas such as the U.K. and Irish Continental Shelf, West Africa and Egypt will also continue to be explored. Since the Marathon Group follows the successful efforts method of accounting for oil and gas exploration and development, any successful exploration activities will be capitalized. 34 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Cash from the disposal of assets was $126 million in the first nine months of 1996, compared with $18 million in the first nine months of 1995. Proceeds in 1996 primarily reflect the sales of interests in oil and gas production properties in Indonesia and Tunisia and the sale of an equity interest in a domestic pipeline company. Financial obligations decreased by $459 million in the first nine months of 1996 as net cash provided from operating activities and asset sales exceeded cash used for capital expenditures and dividend payments. Financial obligations consist of the Marathon Group's portion of USX debt and preferred stock of a subsidiary attributed to all three groups, as well as debt specifically attributed to the Marathon Group. In October 1996, the USX Board of Directors declared a third quarter dividend on the USX-Marathon Group Common Stock of 19 cents per share, an increase of two cents per share over the previous quarterly dividend. The dividend is payable on December 10, 1996 to stockholders of record at the close of business November 20, 1996. Total dividends paid on the USX-Marathon Group Common Stock in the fourth quarter of 1996 will increase by approximately $6 million as a result of this dividend increase. Liquidity - --------- For discussion of USX's liquidity and capital resources, see USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. Environmental Matters, Contingencies and Commitments - ---------------------------------------------------- The Marathon Group has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the Marathon Group's products and services, operating results will be adversely affected. The Marathon Group believes that substantially all of its competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and whether or not it is engaged in the petrochemical business or the marine transportation of crude oil and refined products. USX has been notified that it is a potentially responsible party ("PRP") at 17 waste sites related to the Marathon Group under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of September 30, 1996. In addition, there are 12 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 70 additional sites, excluding retail marketing outlets, related to the Marathon Group where remediation is being sought under other environmental statutes, both federal and state. At many of these sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. The Marathon Group accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of 35 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Marathon Group involving a variety of matters, including laws and regulations relating to the environment (see Note 11 to the Marathon Group financial statements for a discussion of certain of these matters). The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Marathon Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Marathon Group. See discussion of Cash Flows and Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. 36
MARATHON GROUP OF USX CORPORATION SUPPLEMENTAL STATISTICS --------------------------------- Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 1996 1995 1996 1995 - -------------------------------------------------------------------------------- OPERATING INCOME (LOSS) Exploration & Production Domestic $136 $72 $397 $242 International 86 31 254 136 Refining, Marketing & Transportation. 35 141 195 285 Gas Gathering & Processing - - 5 - Administrative (a) (35) (20) (101) (62) ------ ------ ------ ------ $222 $224 $750 $601 Inventory Market Val. Res. Adjustment 96 (51) 179 35 ------ ------- ------ ------- Total Marathon Group $318 $173 $929 $636 CAPITAL EXPENDITURES $176 $151 $426 $409 OPERATING STATISTICS Net Liquid Hydrocarbon Production (b): Domestic 119.2 134.8 122.6 132.2 International 55.0 77.9 60.3 73.3 ------ ------- ------ ------ Worldwide 174.2 212.7 182.9 205.5 Net Natural Gas Production (c): Domestic 648.4 601.1 663.1 634.2 International - Equity 437.2 411.7 496.1 449.3 International - Other (d) 31.6 23.9 32.9 30.9 ------- ------- ------- ------- Worldwide 1,117.2 1,036.7 1,192.1 1,114.4 Average Equity Sales Prices: Liquid Hydrocarbons (per Bbl) Domestic $18.90 $14.13 $17.71 $14.66 International 20.37 15.82 19.36 16.70 Natural Gas (per Mcf) Domestic $2.05 $1.59 $2.03 $1.63 International 1.93 1.74 1.90 1.83 Natural Gas Sales (c) (e): Domestic 952.6 961.2 1,005.2 982.2 International 468.8 435.6 529.0 480.2 ------- ------- ------- ------- Worldwide 1,421.4 1,396.8 1,534.2 1,462.4 Crude Oil Refined (b) 520.5 524.5 511.2 512.1 Refined Products Sold (b) 789.1 747.9 766.3 732.7 - --------------- (a) Third quarter and first nine months of 1996 include an estimated $12 million and $38 million, respectively, in expenses which were allocated to operating components in 1995. (b) Thousands of barrels per day (c) Millions of cubic feet per day (d) Represents gas acquired for injection and subsequent resale (e) Represents equity, royalty and trading volumes
37 Part I - Financial Information (Continued): C. U. S. Steel Group
U. S. STEEL GROUP OF USX CORPORATION STATEMENT OF OPERATIONS (Unaudited) ------------------------------------ Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions, except per share data) 1996 1995* 1996 1995* - -------------------------------------------------------------------------------- REVENUES $1,611 $1,620 $4,782 $4,827 OPERATING COSTS: Cost of sales (excludes items shown below) 1,423 1,372 4,322 4,113 Selling, general and administrative expenses (credits) (41) (34) (121) (103) Depreciation, depletion and amortization 69 80 222 241 Taxes other than income taxes 57 57 174 161 ------ ------ ------ ------ Total operating costs 1,508 1,475 4,597 4,412 ------ ------ ------ ------ OPERATING INCOME 103 145 185 415 Gain on affiliate stock offering - - 53 - Other income 20 22 41 60 Interest and other financial income - - 3 5 Interest and other financial costs (30) (32) (88) (107) ------ ------ ------ ------ INCOME BEFORE INCOME TAXES 93 135 194 373 Less provision for estimated income taxes 23 49 46 132 ------ ------ ------ ------ INCOME BEFORE EXTRAORDINARY LOSS 70 86 148 241 Extraordinary loss, net of income tax - (1) - (1) ------ ------ ------ ------ NET INCOME 70 85 148 240 Dividends on preferred stock (6) (6) (17) (19) ------ ------ ------ ------ NET INCOME APPLICABLE TO STEEL STOCK $64 $79 $131 $221 ====== ====== ====== ====== STEEL STOCK DATA: Income per share: Income before extraordinary loss - Primary $.76 $.99 $1.56 $2.86 - Fully diluted .75 .95 1.55 2.77 Extraordinary loss - primary and fully diluted - (.01) - (.01) Net income - Primary $.76 $.98 $1.56 $2.85 - Fully diluted .75 .94 1.55 2.76 Dividends paid per share .25 .25 .75 .75 Weighted average shares, in thousands - Primary 84,487 80,700 83,781 77,831 - Fully diluted 86,422 90,008 85,588 87,139 *Certain amounts have been reclassified to conform to 1996 classifications. Selected notes to financial statements appear on pages 40-43.
38 U. S. STEEL GROUP OF USX CORPORATION BALANCE SHEET (Unaudited) ------------------------------------
September 30 December 31 (Dollars in millions) 1996 1995 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $20 $52 Receivables, less allowance for doubtful accounts of $18 and $18 513 579 Receivable from other groups 40 35 Inventories 724 601 Deferred income tax benefits 168 177 ------ ------ Total current assets 1,465 1,444 Long-term receivables and other investments, less reserves of $25 and $23 541 613 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $6,044 and $5,909 2,537 2,512 Long-term deferred income tax benefits 321 362 Prepaid pensions 1,691 1,546 Other noncurrent assets 40 44 ------ ------ Total assets $6,595 $6,521 ====== ====== LIABILITIES Current liabilities: Notes payable $70 $8 Accounts payable 695 815 Payable to other groups - 11 Payroll and benefits payable 339 389 Accrued taxes 138 180 Accrued interest 17 23 Long-term debt due within one year 50 93 ------ ------ Total current liabilities 1,309 1,519 Long-term debt, less unamortized discount 1,070 923 Employee benefits 2,452 2,424 Deferred credits and other liabilities 237 247 Preferred stock of subsidiary 64 64 ------ ------ Total liabilities 5,132 5,177 ------ ------ STOCKHOLDERS' EQUITY Preferred stock 7 7 Common stockholders' equity 1,456 1,337 ------ ------ Total stockholders' equity 1,463 1,344 ------ ------ Total liabilities and stockholders' equity $6,595 $6,521 ====== ====== Selected notes to financial statements appear on pages 40-43.
39 U. S. STEEL GROUP OF USX CORPORATION STATEMENT OF CASH FLOWS (Unaudited) ------------------------------------
Nine Months Ended September 30 (Dollars in millions) 1996 1995 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income $148 $240 Adjustments to reconcile to net cash provided from (used in) operating activities: Extraordinary loss - 1 Depreciation, depletion and amortization 222 241 Pensions (146) (288) Postretirement benefits other than pensions 14 (6) Deferred income taxes 58 151 Gain on disposal of assets (8) (20) Gain on affiliate stock offering (53) - Payment of amortized discount on zero coupon debentures - (28) Changes in: Current receivables 30 38 Inventories (123) (57) Current accounts payable and accrued expenses (215) 115 All other items - net (5) (103) ------ ------ Net cash provided from (used in) operating activities (78) 284 ------ ------ INVESTING ACTIVITIES: Capital expenditures (249) (224) Disposal of assets 144 57 All other items - net 10 11 ------ ------ Net cash used in investing activities (95) (156) ------ ------ FINANCING ACTIVITIES: Increase (decrease) in U. S. Steel Group's share of USX consolidated debt 175 (192) Specifically attributed debt - repayments (4) (4) Preferred stock redeemed - (25) Steel Stock issued 47 205 Dividends paid (77) (70) ------ ------ Net cash provided from (used in) financing activities 141 (86) ------ ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (32) 42 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 52 20 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $20 $62 ====== ====== Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $(107) $(136) Income taxes paid, including settlements with other groups (55) (3) Selected notes to financial statements appear on pages 40-43.
40 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS -------------------------------------- (Unaudited) 1. The information furnished in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. Additional information is contained in the USX Annual Report on Form 10-K for the year ended December 31, 1995. 2. The financial statements of the U. S. Steel Group include the financial position, results of operations and cash flows for all businesses of USX other than the businesses, assets and liabilities included in the Marathon Group or the Delhi Group, and a portion of the corporate assets and liabilities and related transactions which are not separately identified with ongoing operating units of USX. These financial statements are prepared using the amounts included in the USX consolidated financial statements. Corporate amounts reflected in these financial statements are determined based upon methods which management believes to be reasonable. The accounting policies applicable to the preparation of the financial statements of the U. S. Steel Group may be modified or rescinded in the sole discretion of the Board of Directors of USX (Board), although the Board has no present intention to do so. The Board may also adopt additional policies depending on the circumstances. Although the financial statements of the U. S. Steel Group, the Marathon Group and the Delhi Group separately report the assets, liabilities (including contingent liabilities) and stockholders' equity of USX attributed to each such group, such attribution of assets, liabilities (including contingent liabilities) and stockholders' equity among the U. S. Steel Group, the Marathon Group and the Delhi Group for purposes of preparing their respective financial statements does not affect legal title to such assets and responsibility for such liabilities. Holders of USX- U. S. Steel Group Common Stock (Steel Stock), USX-Marathon Group Common Stock (Marathon Stock) and USX-Delhi Group Common Stock (Delhi Stock) are holders of common stock of USX and continue to be subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts arising from one Group that affect the overall cost of USX's capital could affect the results of operations and financial condition of other groups. In addition, net losses of any Group, as well as dividends or distributions on any class of USX Common Stock or series of Preferred Stock and repurchases of any class of USX Common Stock or series of Preferred Stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on all classes of Common Stock. Accordingly, the USX consolidated financial information should be read in connection with the U. S. Steel Group financial information. 41 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 3. The method of calculating net income (loss) per share for the Steel Stock, Marathon Stock and Delhi Stock reflects the Board's intent that the separately reported earnings and surplus of the U. S. Steel Group, the Marathon Group and the Delhi Group, as determined consistent with the USX Certificate of Incorporation, are available for payment of dividends on the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. Primary net income per share is calculated by adjusting net income for dividend requirements of preferred stock and is based on the weighted average number of common shares outstanding plus common stock equivalents, provided they are not antidilutive. Common stock equivalents result from assumed exercise of stock options, where applicable. Fully diluted net income per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options, provided in each case, the effect is not antidilutive. 4. Operating income includes net periodic pension credits of $123 million and $99 million in the first nine months of 1996 and 1995, respectively, ($42 million and $32 million in the third quarter of 1996 and 1995, respectively). These pension credits are primarily noncash and for the most part are included in selling, general and administrative expenses. The expected long-term rate of return on plan assets, which is reflected in the calculation of net periodic pension credits, is 10% for both 1996 and 1995. 5. On May 2, 1996, an aggregate of 6.9 million shares of RMI Titanium Company (RMI) common stock was sold in a public offering at a price of $18.50 per share and total net proceeds of $121 million. Included in the offering were 2.3 million shares sold by USX for net proceeds of $40 million. The U. S. Steel Group recognized a total pretax gain in the second quarter of 1996 of $53 million, of which $34 million was attributable to the shares sold by USX and $19 million was attributable to the increase in value of its investment as a result of the shares sold by RMI. The income tax effect related to the total gain was $19 million. As a result of this transaction, USX's ownership in RMI decreased from approximately 50% to 27%. The U. S. Steel Group continues to account for its investment in RMI under the equity method of accounting. 6. The financial statement provision for estimated income taxes and related tax payments or refunds have been reflected in the U. S. Steel Group, the Marathon Group and the Delhi Group financial statements in accordance with USX's tax allocation policy for such groups. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated among the U. S. Steel Group, the Marathon Group and the Delhi Group for group financial statement purposes, based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to the respective groups. 42 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 6. (Continued) The provision for estimated income taxes for the U. S. Steel Group is based on tax rates and amounts which recognize management's best estimate of current and deferred tax assets and liabilities. Differences between the combined interim tax provisions of the U. S. Steel, Marathon and Delhi Groups and USX consolidated are allocated to each group based on the relationship of the individual group provisions to the combined interim provisions. 7. In the third quarter of 1995, USX extinguished $467 million of debt prior to maturity, resulting in an extraordinary loss to the U. S. Steel Group of $1 million, net of a $1 million income tax benefit. 8. Inventories are carried at the lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method.
(In millions) ------------------------- September 30 December 31 1996 1995 ------------ ----------- Raw materials $153 $89 Semi-finished products 329 300 Finished products 181 143 Supplies and sundry items 61 69 ---- ---- Total $724 $601 ==== ====
9. The U. S. Steel Group participates in an agreement (the program) to sell an undivided interest in certain accounts receivable subject to limited recourse. Payments are collected from the sold accounts receivable; the collections are reinvested in new accounts receivable for the buyers; and a yield, based on defined short-term market rates, is transferred to the buyers. At September 30, 1996, the amount sold under the program that had not been collected was $350 million, which will be forwarded to the buyers at the end of the agreement, or in the event of earlier contract termination. If the U. S. Steel Group does not have a sufficient quantity of eligible accounts receivable to reinvest in for the buyers, the size of the program will be reduced accordingly. The buyers have rights to a pool of receivables that must be maintained at a level of 115% of the program size. In the event of a change in control of USX, as defined in the agreement, the U. S. Steel Group may be required to forward payments collected on sold accounts receivable to the buyers. Prior to 1993, USX Credit, a division of USX, sold certain of its loans receivable subject to limited recourse. USX Credit continues to collect payments from the loans and transfer to the buyers principal collected plus yield based on defined short-term market rates. At September 30, 1996, the balance of sold loans receivable subject to recourse was $58 million. USX Credit is not actively seeking new loans at this time. In the event of a change in control of USX, as defined in the agreement, the U. S. Steel Group may be required to provide cash collateral in the amount of the uncollected loans receivable to assure compliance with the limited recourse provisions. 43 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 10. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the U. S. Steel Group involving a variety of matters including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the U. S. Steel Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the U. S. Steel Group. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. The U. S. Steel Group is subject to federal, state and local laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At September 30, 1996, and December 31, 1995, accrued liabilities for remediation totaled $110 million and $116 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. For a number of years, the U. S. Steel Group has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the first nine months of 1996 and for the years 1995 and 1994, such capital expenditures totaled $59 million, $55 million and $57 million, respectively. The U. S. Steel Group anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. Guarantees by USX of the liabilities of affiliated entities of the U. S. Steel Group totaled $37 million at September 30, 1996. In the event that any defaults of guaranteed liabilities occur, USX has access to its interest in the assets of the affiliates to reduce U. S. Steel Group losses resulting from these guarantees. As of September 30, 1996, the largest guarantee for a single affiliate was $18 million. At September 30, 1996, contract commitments for the U. S. Steel Group's capital expenditures for property, plant and equipment totaled $168 million compared with $178 million at December 31, 1995. 44 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The U. S. Steel Group includes U. S. Steel, which is primarily engaged in the production and sale of steel mill products, coke and taconite pellets. The U. S. Steel Group also includes the management of mineral resources, domestic coal mining, engineering and consulting services and technology licensing (together with U. S. Steel, the "Steel and Related Businesses"). Other businesses that are part of the U. S. Steel Group include real estate development and management, and leasing and financing activities. Management's Discussion and Analysis should be read in conjunction with the third quarter 1996 USX consolidated financial information and the U. S. Steel Group financial statements and selected notes. The discussion of Results of Operations should be read in conjunction with the Supplemental Statistics provided on page 50. Certain sections of Management's Discussion and Analysis include forward- looking statements concerning trends or events potentially affecting the businesses of the U. S. Steel Group. These statements typically contain words such as "anticipates", "believes", "estimates", "expects" or similar words indicating that future outcomes are 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. USX included in a Form 8-K dated October 23, 1996, cautionary language identifying important factors with respect to written forward-looking statements in USX external documents, and oral forward-looking statements made by, or on behalf of USX, its representatives and its individual Groups. Results of Operations - --------------------- Revenues for the U. S. Steel Group decreased $9 million and $45 million in the third quarter and first nine months of 1996, respectively, compared with the same periods in 1995. The decreases primarily resulted from reduced steel shipment volumes and lower steel prices, partially offset by an improved product mix. Operating income for Steel and Related Businesses decreased $66 million in the third quarter of 1996, compared with the same quarter of 1995. The third quarter 1995 operating income included a $13 million favorable accrual adjustment for certain employee-related costs and a $6 million charge related to repairs of the Gary Works No. 8 blast furnace. Excluding these items, third quarter 1996 operating income decreased $59 million from the third quarter 1995. The decline was mainly due to cost effects and inefficiencies related to planned and unplanned blast furnace outages, reduced steel shipment volumes and lower steel prices, partially offset by an improved product mix. Costs and shipments were affected by a 70-day scheduled outage for a full reline of the blast furnace at Fairfield Works, a 45-day scheduled outage for a partial reline of the No. 4 blast furnace at Gary Works and the lingering effects of an unplanned outage at the Gary Works No. 13 blast furnace, which occurred in the second quarter. The Gary Works No. 13 blast furnace, which represents about half of Gary Works iron producing capacity and roughly one-fourth of U.S. Steel's iron capacity, was damaged April 2 in a hearth break-out. In addition to direct repair costs, 45 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- operating results were adversely affected by production inefficiencies at Gary, as well as other U. S. Steel plants, reduced shipments and higher costs for purchased iron and semifinished steel. The total effect of the No. 13 blast furnace outage on the first nine months operating income is estimated to be more than $100 million. USX maintains physical damage and business interruption insurance coverage for events such as the No. 13 blast furnace breakout and the 1995 Gary Works No. 8 blast furnace explosion, subject to a $50 million deductible for recoverable items. However, an estimate of the amount or timing of recoveries for the No. 13 blast furnace outage cannot be made at this time. On October 4, 1996, USX filed a suit in Lake County, Indiana, Superior Court against its insurers related to the No. 8 blast furnace explosion. The timing of the resolution of this litigation and the outcome cannot be predicted at this time. Administrative and Other Businesses includes the portion of pension credits, postretirement benefit costs and certain other expenses principally attributable to the former businesses of the U. S. Steel Group as well as USX corporate general and administrative costs allocated to the U. S. Steel Group. Operating income for Administrative and Other Businesses in the third quarter of 1996 increased $24 million over the same quarter of 1995 primarily due to higher pension credits, lower environmental accruals and higher income from USX Credit. Operating income for Steel and Related Businesses decreased $284 million in the first nine months of 1996, compared with the same period of 1995. Results included $39 million of charges related to repair costs on the Gary (Ind.) Works No. 13 blast furnace, and $16 million of charges for unrelated legal accruals. Results for the first nine months of 1995 included $33 million of charges for the repair of the Gary Works No. 8 blast furnace, $29 million of charges related to the Pickering v. USX litigation, and a $13 million favorable accrual adjustment for certain employee-related costs. Excluding these charges, operating income for the first nine months of 1996 decreased $278 million from the same period in 1995. The decrease was mainly due to cost inefficiencies related to the planned and unplanned blast furnace outages, lower steel prices and steel shipment volumes, partially offset by an improved product mix. Operating income for Administrative and Other Businesses increased $54 million in the first nine months of 1996 compared with the same period in 1995 primarily due to higher pension credits, higher income from USX Credit and lower environmental accruals. The pension credits referred to above, combined with pension costs for ongoing operating units of the U. S. Steel Group, resulted in net periodic pension credits (which are primarily noncash) of $42 million and $123 million for the third quarter and first nine months of 1996, respectively, compared with $32 million and $99 million for the third quarter and first nine months of 1995, respectively. The amounts of these credits fluctuate over time primarily reflecting changes in the expected long-term rate of return on plan assets and the assumed discount rate on the outstanding pension obligation. To the extent that these credits decline in the future, operating income would be adversely affected. 46 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Gain on affiliate stock offering totaled $53 million for the first nine months of 1996. For further details, see Note 5 to the U. S. Steel Group Financial Statements. Other income for the first nine months of 1996 decreased $19 million over the same period in 1995 due to lower income from affiliates. Net income decreased by $15 million, or 18%, in the third quarter of 1996 as compared with the third quarter of 1995, and by $92 million, or 38%, in the first nine months of 1996 as compared with the first nine months of 1995. The decreases mainly reflect the factors discussed above. Third quarter 1996 steel shipments of 2.7 million tons and raw steel production of 2.5 million tons decreased 5% and 16%, respectively, from the same quarter of 1995. Steel shipments and raw steel production in the first nine months of 1996 totaled 8.3 million tons and 8.2 million tons, respectively. These represented decreases of 1% and 8%, respectively. Steel shipments for the third quarter and first nine months of 1996 included export shipments of 0.1 million tons and 0.4 million tons, respectively, compared with 0.6 million tons and 1.0 million tons, respectively, in the same periods in 1995. Raw steel capability utilization in the third quarter of 1996 averaged approximately 79% versus 96% of capability in the third quarter of 1995. Raw steel capability utilization in the first nine months of 1996 averaged approximately 86% versus 96% of capability in the first nine months of 1995. The decreases in raw steel capability utilization were due to planned and unplanned blast furnace outages. As a result of improvements in operating efficiencies, U. S. Steel increased its stated annual raw steel production capability by 0.3 million tons to 12.8 million tons for 1996. Outlook - ------- The U. S. Steel Group expects a continued strong order book for the fourth quarter of 1996. Shipments and operating rates in the fourth quarter are expected to be higher than the third quarter as a result of the completion of the two scheduled blast furnace outages. Fourth quarter transaction prices are expected to increase for some products based on announced price increases effective September 29; however, product mix is expected to be less favorable than the third quarter of 1996. Additionally, U. S. Steel has informed its customers of price increases for most products effective in January 1997. The steel industry is characterized by excess world supply which has restricted the ability of U. S. Steel and the industry to raise prices during periods of economic growth and resist price decreases during economic contraction. Within the next year, the anticipated availability of flat-rolled steel from several new domestic plants scheduled to begin production may ultimately have an adverse effect on product prices and shipment levels as companies attempt to gain or retain market share. Steel imports to the United States accounted for an estimated 22% of the domestic steel market in the first eight months of 1996, and 21%, 25% and 19% of the domestic steel market in the years 1995, 1994 and 1993, respectively. During July and August of 1996, steel imports increased sharply and accounted for an estimated 25% and 27%, respectively, of the domestic steel market. The domestic 47 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- steel industry has, in the past, been adversely affected by unfairly traded imports, and higher levels of imported steel may ultimately have an adverse effect on product prices, shipment levels and results of operations. USX's labor agreement with the United Steelworkers of America ("USWA") provides for reopener negotiations of specific payroll items with the contingency for binding interest arbitration if agreement concerning such items is not reached. Settlement on such items has not yet been achieved. Any changes resulting from a negotiated settlement or interest arbitration will become effective during the first quarter of 1997. The U. S. Steel Group's expectations as to levels of sales are based on assumptions as to levels of economic activity, future product prices, product mix and shipments. In addition, the operations of the U. S. Steel Group are subject to planned and unplanned outages due to maintenance, equipment malfunctions or work stoppages; and various hazards, including explosions, fires and severe weather conditions, which could disrupt operations or the availability of raw materials, resulting in reduced production volumes, increased production costs and lower income. In the event these assumptions prove inaccurate, actual results could be materially different than present expectations. Cash Flows - ---------- Net cash used in operating activities was $78 million in the first nine months of 1996, compared with net cash provided from operating activities of $284 million in the same period of 1995. The first nine months of 1996 included a payment of $59 million to the Internal Revenue Service ("IRS") for certain agreed and unagreed adjustments relating to the tax year 1990. In addition, net cash used in operating activities included a payment of $28 million related to the Pickering litigation. The first nine months of 1995 included payments of $169 million to fund the U. S. Steel Group's principal pension plan, $28 million representing U. S. Steel's share of the amortized discount of USX's zero coupon debentures and $20 million as partial settlement in the Pickering litigation. Excluding these items, net cash from operating activities decreased by $492 million due to unfavorable working capital changes and decreased profitability. In accordance with USX's long-term funding practice, which is designed to maintain an appropriate funded status, USX expects to contribute approximately $45 million in 1997 to fund the U. S. Steel Group's principal pension plan for the 1996 plan year. This amount, which is based on a recently completed long term funding study, is less than the previously disclosed funding projections of approximately $100 million annually. Cash from the disposal of assets increased $87 million in the first nine months of 1996 compared with the same period of 1995. The 1996 proceeds reflected the sale of the U. S. Steel Group's investment in National-Oilwell and RMI Titanium Company Common Stock. The 1995 proceeds mainly reflected property sales. Capital expenditures for property, plant and equipment in the third quarter and first nine months of 1996 were $91 million and $249 million, respectively, 48 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- compared with $82 million and $224 million, respectively, in the same periods in 1995. For the year 1996, capital expenditures are expected to total approximately $320 million, compared with $324 million in 1995. Capital expenditures for 1996 include the blast furnace reline and new galvanizing line at Fairfield Works, additional environmental expenditures primarily at Gary Works, and certain spending related to the Gary Works No. 13 blast furnace. Contract commitments for capital expenditures at September 30, 1996 were $168 million, compared with $178 million at year-end 1995. Future capital expenditures can be affected by levels of cash flow from operations, and by unforeseen hazards such as weather conditions, or explosions or fires, which could delay the timing of completion of particular capital projects. Financial obligations increased $171 million in first nine months of 1996 primarily reflecting net cash used in operating and investing activities. These financial obligations consist of the U. S. Steel Group's portion of USX debt and preferred stock of a subsidiary attributed to all three groups, as well as debt and financing agreements specifically attributed to the U. S. Steel Group. Liquidity - --------- For discussion of USX's liquidity and capital resources, see USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. Environmental Matters, Contingencies and Commitments - ---------------------------------------------------- The U. S. Steel Group has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. In recent years, these expenditures have been mainly for process changes in order to meet Clean Air Act obligations, although ongoing compliance costs have also been significant. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the U. S. Steel Group's products and services, operating results will be adversely affected. The U. S. Steel Group believes that all of its domestic competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities and its production methods. USX has been notified that it is a potentially responsible party ("PRP") at 28 waste sites related to the U. S. Steel Group under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of September 30, 1996. In addition, there are 17 sites related to the U. S. Steel Group where USX has received information requests or other indications that USX may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of 49 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- liability or make any judgment as to the amount thereof. There are also 36 additional sites related to the U. S. Steel Group where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. At many of these sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. Certain current and former U. S. Steel Group operating facilities have been in operation for many years, and could require significant expenditures to meet existing and future requirements under these laws. The U. S. Steel Group accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the U. S. Steel Group involving a variety of matters, including laws and regulations relating to the environment (see Note 10 to the U. S. Steel Group Financial Statements for a discussion of certain of these matters). In the U.S. District Court for the Northern District of Alabama, in a civil class action, Cox, et al. v. USX, the United Steel Workers of America and United States Steel and Carnegie Pension Fund (defendants), a jury on October 29, 1996, returned verdicts favorable to the defendants on all counts, finding no liability and no damages. Plaintiffs have indicated an intent to appeal these verdicts. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the U. S. Steel Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the U. S. Steel Group. See discussion of Cash Flows and Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. 50 U. S. STEEL GROUP OF USX CORPORATION SUPPLEMENTAL STATISTICS ------------------------------------
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 1996 1995 1996 1995 - -------------------------------------------------------------------------------- REVENUES Steel and Related Businesses (a) $1,595 $1,607 $4,738 $4,769 Other 16 13 44 58 ------ ------- ------ ------- Total U. S. Steel Group $1,611 $1,620 $4,782 $4,827 OPERATING INCOME Steel and Related Businesses (a) $58 $124 $45 $329 Administrative and Other Businesses(b) 45 21 140 86 ------ ------ ------ ------ Total U. S. Steel Group $103 $145 $185 $415 CAPITAL EXPENDITURES $91 $82 $249 $224 OPERATING STATISTICS Public & Affiliated Steel Shipments (c) 2,699 2,851 8,255 8,330 Raw Steel-Production (c) 2,550 3,036 8,245 8,999 Raw Steel-Capability Utilization (d) 79.2% 96.4% 86% 96.3% (a) Includes the production and sale of steel products, coke and taconite pellets; domestic coal mining; the management of mineral resources; and engineering and consulting services and technology licensing. (b) Includes pension credits, other postretirement benefit costs and certain other expenses principally attributable to former business units of the U. S. Steel Group. Also includes results of real estate development and management, and leasing and financing activities. (c) Thousands of net tons. (d) Based on annual raw steel production capability of 12.8 million tons for 1996 and 12.5 million tons for 1995.
51 Part I - Financial Information (Continued): D. Delhi Group DELHI GROUP OF USX CORPORATION STATEMENT OF OPERATIONS (Unaudited) -----------------------------------
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions, except per share data) 1996 1995* 1996 1995* - -------------------------------------------------------------------------------- REVENUES $242.0 $149.0 $726.5 $425.8 OPERATING COSTS: Cost of sales (excludes items shown below) 222.9 136.9 663.9 376.7 Selling, general and administrative expenses 7.0 6.1 20.9 18.3 Depreciation, depletion and amortization 7.0 6.2 20.7 18.8 Taxes other than income taxes 1.9 1.8 5.9 5.7 Restructuring credits - - - (6.2) ------ ------ ------ ------ Total operating costs 238.8 151.0 711.4 413.3 ------ ------ ------ ------ OPERATING INCOME (LOSS) 3.2 (2.0) 15.1 12.5 Other income - - .2 5.2 Interest and other financial costs (5.1) (4.3) (15.3) (10.9) ------ ------ ------ ------ INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS (1.9) (6.3) - 6.8 Less provision (credit) for estimated income taxes (.7) (2.2) - 4.4 ------ ------ ------ ------ INCOME (LOSS) BEFORE EXTRAORDINARY LOSS (1.2) (4.1) - 2.4 Extraordinary loss, net of income tax - (.2) - (.2) ------ ------ ------ ------ NET INCOME (LOSS) (1.2) (4.3) - 2.2 Dividends on preferred stock - (.1) - (.2) Net income applicable to Retained Interest - - - (2.4) ------ ------ ------ ------ NET INCOME (LOSS) APPLICABLE TO OUTSTANDING DELHI STOCK $(1.2) $(4.4) $- $(.4) ====== ====== ====== ====== DELHI STOCK DATA: Net income (loss) per share - Primary and fully diluted: Income (loss) before extraordinary loss $(.14) $(.44) $- $(.02) Extraordinary loss - (.02) - (.02) Net income (loss) (.14) (.46) - (.04) Dividends paid per share .05 .05 .15 .15 Weighted average shares, in thousands - Primary and fully diluted 9,448 9,443 9,448 9,440 *Certain amounts have been reclassified to conform to 1996 classifications. Selected notes to financial statements appear on pages 54-57.
52 DELHI GROUP OF USX CORPORATION BALANCE SHEET (Unaudited) ------------------------------
September 30 December 31 (Dollars in millions) 1996 1995 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $.5 $1.9 Receivables, less allowance for doubtful accounts of $.8 and $.8 71.4 93.2 Receivable from other groups .7 .3 Inventories 10.2 10.7 Other current assets 3.6 3.2 ------ ------ Total current assets 86.4 109.3 Long-term receivables and other investments 6.3 8.3 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $448.1 and $433.9 536.9 502.3 Other noncurrent assets 5.1 4.4 ------ ------ Total assets $634.7 $624.3 ====== ====== LIABILITIES Current liabilities: Notes payable $14.1 $1.6 Accounts payable 124.9 137.7 Payable to other groups - .1 Payroll and benefits payable 3.9 3.8 Accrued taxes 8.3 7.0 Accrued interest 3.3 4.9 Long-term debt due within one year 9.1 18.8 ------ ------ Total current liabilities 163.6 173.9 Long-term debt, less unamortized discount 204.0 182.0 Long-term deferred income taxes 135.9 135.9 Deferred credits and other liabilities 16.6 16.5 Preferred stock of subsidiary 3.8 3.8 ------ ------ Total liabilities 523.9 512.1 STOCKHOLDERS' EQUITY 110.8 112.2 ------ ------ Total liabilities and stockholders' equity $634.7 $624.3 ====== ====== Selected notes to financial statements appear on pages 54-57.
53 DELHI GROUP OF USX CORPORATION STATEMENT OF CASH FLOWS (Unaudited) -----------------------------------
Nine Months Ended September 30 (Dollars in millions) 1996 1995 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income $- $2.2 Adjustments to reconcile to net cash provided from (used in) operating activities: Extraordinary loss - .2 Depreciation, depletion and amortization 20.7 18.8 Pensions .7 .4 Deferred income taxes - .7 Gain on disposal of assets (.5) (.5) Payment of amortized discount on zero coupon debentures - (4.4) Restructuring credits - (6.2) Changes in: Current receivables - sold - (18.3) - operating turnover 18.4 (10.5) Inventories .5 1.2 Current accounts payable and accrued expenses (11.5) 12.3 All other items - net 2.2 (3.7) ------ ------ Net cash provided from (used in) operating activities 30.5 (7.8) ------ ------ INVESTING ACTIVITIES: Capital expenditures (55.4) (24.9) Disposal of assets .6 12.7 All other items - net - 3.5 ------ ------ Net cash used in investing activities (54.8) (8.7) ------ ------ FINANCING ACTIVITIES: Increase in Delhi Group's share of USX consolidated debt 24.3 79.2 Elimination of Marathon Group Retained Interest - (58.2) Preferred stock redeemed - (2.5) Dividends paid (1.4) (1.5) Payment attributed to Retained Interest - (.5) ------ ------ Net cash provided from financing activities 22.9 16.5 ------ ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1.4) - CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1.9 .1 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $.5 $.1 ====== ====== Cash used in operating activities included: Interest and other financial costs paid $(16.6) $(14.9) Income taxes paid, including settlements with other groups (.2) (4.1) Selected notes to financial statements appear on pages 54-57.
54 DELHI GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS -------------------------------------- (Unaudited) 1. The information furnished in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. Additional information is contained in the USX Annual Report on Form 10-K for the year ended December 31, 1995. 2. The financial statements of the Delhi Group include the financial position, results of operations and cash flows for the businesses of Delhi Gas Pipeline Corporation and certain other subsidiaries of USX, and a portion of the corporate assets and liabilities and related transactions which are not separately identified with ongoing operating units of USX. These financial statements are prepared using amounts included in the USX consolidated financial statements. Corporate amounts reflected in these financial statements are determined based upon methods which management believes to be reasonable. The accounting policies applicable to the preparation of the financial statements of the Delhi Group may be modified or rescinded in the sole discretion of the Board of Directors of USX (Board), although the Board has no present intention to do so. The Board may also adopt additional policies depending on the circumstances. On June 15, 1995, USX eliminated the Marathon Group's Retained Interest in the Delhi Group (equivalent to 4,564,814 shares of USX-Delhi Group Common Stock (Delhi Stock)). This was accomplished through a reallocation of assets and a corresponding adjustment to debt and equity attributed to the Delhi and Marathon Groups. The transfer was made at a price of $12.75 per equivalent share of Delhi Stock, or an aggregate of $58.2 million. The Retained Interest represented the Marathon Group's interest in the earnings and equity of the Delhi Group. Prior to the elimination, the Retained Interest was approximately 33%, based on the 14,003,205 shares of Delhi Stock designated by the Board to represent 100% of the common stockholders' equity value of USX attributable to the Delhi Group. Although the financial statements of the Delhi Group, the Marathon Group and the U. S. Steel Group separately report the assets, liabilities (including contingent liabilities) and stockholders' equity of USX attributed to each such group, such attribution of assets, liabilities (including contingent liabilities) and stockholders' equity among the Delhi Group, the Marathon Group and the U. S. Steel Group for the purpose of preparing their respective financial statements does not affect legal title to such assets and responsibility for such liabilities. Holders of Delhi Stock, USX-Marathon Group Common Stock (Marathon Stock) and USX-U. S. Steel Group Common Stock (Steel Stock) are holders of common stock of USX, and continue to be subject to all the risks associated with an investment in USX and all of its 55 DELHI GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 2. (Continued) businesses and liabilities. Financial impacts arising from one Group that affect the overall cost of USX's capital could affect the results of operations and financial condition of other groups. In addition, net losses of any Group, as well as dividends and distributions on any class of USX Common Stock or series of Preferred Stock and repurchases of any class of USX Common Stock or series of Preferred Stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on all classes of Common Stock. Accordingly, the USX consolidated financial information should be read in connection with the Delhi Group financial information. 3. The method of calculating net income (loss) per share for the Delhi Stock, Marathon Stock and Steel Stock reflects the Board's intent that the separately reported earnings and surplus of the Delhi Group, the Marathon Group and the U. S. Steel Group, as determined consistent with the USX Certificate of Incorporation, are available for payment of dividends on the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. Primary net income (loss) per share is calculated by adjusting net income for dividend requirements of preferred stock and income that was applicable to the Retained Interest and is based on the weighted average number of common shares outstanding plus common stock equivalents, provided they are not antidilutive. Common stock equivalents result from assumed exercise of stock options, where applicable. Fully diluted net income (loss) per share assumes exercise of stock options, provided the effect is not antidilutive. 4. In 1994, restructuring charges totaling $39.9 million were reported for the write-down of assets to estimated net realizable value related to the planned disposition of certain nonstrategic gas gathering and processing assets and other investments. In the second quarter of 1995, disposition of these assets was completed at higher than anticipated sales proceeds, resulting in restructuring credits of $11.2 million ($6.2 million included in operating income and $5.0 million included in other income). 5. The financial statement provision for estimated income taxes and related tax payments or refunds have been reflected in the Delhi Group, the Marathon Group and the U. S. Steel Group financial statements in accordance with USX's tax allocation policy for such groups. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated among the Delhi Group, the Marathon Group and the U. S. Steel Group for group financial statement purposes, based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to the respective groups. 56 DELHI GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 5. (Continued) The provision (credit) for estimated income taxes for the Delhi Group is based on tax rates and amounts which recognize management's best estimate of current and deferred tax assets and liabilities. Differences between the combined interim tax provisions of the Delhi, the Marathon and the U. S. Steel Groups and USX consolidated are allocated to each group based on the relationship of the individual group provisions to the combined interim provisions. 6. In the third quarter of 1995, USX extinguished $467 million of debt prior to maturity, resulting in an extraordinary loss to the Delhi Group of $.2 million, net of a $.1 million income tax benefit. 7. Inventories are carried at lower of average cost or market.
(In millions) ------------------------ September 30 December 31 1996 1995 ------------ ----------- Natural gas in storage $5.9 $9.4 Natural gas liquids (NGLs) in storage .4 .2 Materials and supplies 3.9 1.1 ---- ---- Total $10.2 $10.7 ===== =====
8. The Delhi Group participates in an agreement (the program) to sell an undivided interest in certain accounts receivable subject to limited recourse. Payments are collected from the sold accounts receivable; the collections are reinvested in new accounts receivable for the buyers; and a yield, based on defined short-term market rates, is transferred to the buyers. At September 30, 1996, the amount sold under the program that had not been collected was $50.0 million, which will be forwarded to the buyers at the end of the agreement, or in the event of earlier contract termination. If the Delhi Group does not have a sufficient quantity of eligible accounts receivable to reinvest in for the buyers, the size of the program will be reduced accordingly. The buyers have rights to a pool of receivables that must be maintained at a level of 110% of the program size. 9. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Delhi Group involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Delhi Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Delhi Group. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. The Delhi Group is subject to federal, state and local laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. Expenditures for remediation and penalties have not been material. 57 DELHI GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 9. (Continued) For a number of years, the Delhi Group has made capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the first nine months of 1996 and for the years 1995 and 1994, such capital expenditures totaled $5.7 million, $5.5 million and $4.6 million, respectively. The Delhi Group anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. At September 30, 1996, contract commitments for the Delhi Group's capital expenditures for property, plant and equipment totaled $5.5 million compared with $9.3 million at December 31, 1995. 58 DELHI GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The Delhi Group includes Delhi Gas Pipeline Corporation ("DGP") and certain other subsidiaries of USX Corporation ("USX") which are engaged in the purchasing, gathering, processing, transporting and marketing of natural gas. The following discussion should be read in conjunction with the third quarter 1996 USX consolidated financial information and the Delhi Group financial statements and selected notes. In addition, the discussion of Results of Operations should be read in conjunction with the Supplemental Statistics provided on page 63. Certain sections of the discussion include forward-looking statements concerning trends or events potentially affecting the businesses of the Delhi Group. These statements typically contain words such as "anticipates", "believes", "estimates", or "expects", or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in forward-looking statements. USX included in a Form 8-K dated October 23, 1996, cautionary language identifying important factors with respect to written forward-looking statements in USX external documents, and oral forward-looking statements made by, or on behalf of USX, its representative and its individual Groups. Results of Operations - --------------------- Revenues in the third quarter and first nine months of 1996 increased $93.0 million and $300.7 million, respectively, from comparable periods in 1995, as summarized in the following table:
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 1996 1995 1996 1995 - -------------------------------------------------------------------------------- Gas Sales and Trading $212.9 $ 128.9 $645.3 $364.5 Transportation 4.0 3.1 12.5 8.5 Gas Processing 23.9 17.0 63.7 52.3 Other 1.2 - 5.0 .5 ------ ------ ------ ------ Total Revenues $242.0 $149.0 $726.5 $425.8 ====== ====== ====== ======
The increases were primarily due to higher natural gas prices and increased trading volumes, partially offset by lower natural gas sales volumes. Operating income in the third quarter of 1996 increased by $5.2 million as compared with the third quarter of 1995. Operating income in the first nine months of 1996 increased by $2.6 million as compared with the first nine months of 1995. The first nine months of 1995 included a $6.2 million favorable pretax effect related to completion of a 1994 nonstrategic asset disposition plan. Excluding this effect, operating income in the first nine months of 1996 increased by $8.8 million from the comparable prior-year period. This increase was due primarily to improved gas sales and trading unit margins and increased transportation volumes, partially offset by decreases in natural gas and NGLs sales volumes, and higher natural gas processing feedstock costs. 59 DELHI GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Gas sales and trading gross margins benefited from higher gas sales prices which resulted in increased unit margins in the third quarter of 1996, as compared with the third quarter of 1995. Gas sales and trading gross margin in the first quarter and first nine months of 1996 reflected an estimated $2.9 million unfavorable effect of a previously disclosed market anomaly caused by extreme winter weather in the eastern United States and the inability to move Texas gas to that market due to transportation constraints. Gas sales volumes declined by 3% and 6%, respectively in the third quarter and first nine months of 1996, from the comparable prior-year periods, as some gas sales volumes were converted to transportation volumes. Natural gas trading involves the purchase of natural gas from sources other than wells directly connected to the Delhi Group's systems and the subsequent sale of like volumes. The cost of natural gas acquired through trading is typically higher than the cost of natural gas acquired from wells directly connected to the Delhi Group's systems. Natural gas trading volumes in the third quarter and first nine months of 1996 increased 24% and 67%, respectively, from the comparable prior-year periods. The transportation business involves the transport of natural gas on Delhi's systems for third parties at negotiated fees. Transportation gross margin in the third quarter and first nine months of 1996 increased by $0.8 million, or 25%, and $4.0 million, or 47%, respectively, from the comparable prior-year periods, due primarily to increases in transportation volumes resulting from new transportation agreements and conversion of some gas sales volumes to transportation volumes. Natural gas processing involves extraction of NGLs such as ethane, propane, isobutane, normal butane and natural gasoline from the natural gas stream. Gas processing gross margin in the third quarter of 1996 increased by $1.1 million, or 16%, as compared with the third quarter of 1995, primarily as the result of higher NGLs sales prices. Gas processing gross margin in the first nine months of 1996 decreased by $1.2 million, or 6%, from the comparable 1995 period, mainly due to higher natural gas processing feedstock costs and decreased NGLs sales volumes. Other income in the first nine months of 1996 decreased by $5.0 million from the comparable prior-year period, primarily reflecting a $5.0 million favorable adjustment recorded in 1995 on the sale of the Delhi Group's interest in Ozark Gas Transmission System ("Ozark") (see Note 4 to the Delhi Group financial statements for details). Interest and other financial costs increased $4.4 million in the first nine months of 1996 as compared with the first nine months of 1995. This was due to increased debt levels that primarily resulted from the second quarter 1995 elimination of the Marathon Group's Retained Interest (see Note 2 to the Delhi Group financial statements for details), and capital spending in excess of cash provided from operating activities. The provision (credit) for estimated income taxes for the first nine months of 1995 included an unfavorable effect associated with the sale of the Delhi Group's interest in Ozark. A Net loss of $1.2 million, or $.14 per share, was recorded in the third quarter of 1996, compared with a net loss of $4.3 million, or $.46 per share, in the third quarter of 1995. Net income was at break-even the first nine months of 1996, compared with $2.2 million in the first nine months of 1995. The changes in net income primarily reflect the improvements in operating income discussed above, offset by the increased interest and other financial costs related to the 60 DELHI GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- elimination of the Marathon Group's Retained Interest and the increased levels of capital spending. Outlook - ------- The Delhi Group continues to expand its natural gas pipeline systems and treating and processing facilities through acquisitions and expansions of existing facilities. The Delhi Group is currently involved in significant projects in East and West Texas, the largest being the expansion in the Pinnacle Reef gas play area of East Texas. Management anticipates fourth quarter peak rates will reach 130 to 140 mmcfd, primarily representing transportation throughput volumes, as these projects are completed and integrated into the existing systems. A significant portion of this additional transportation throughput volume is related to long-term transportation agreements, at prevailing market rates, between the Delhi Group and the Marathon Group. The realization of these additional volumes could be affected by many factors, including but not limited to, the success of drilling by the producers in the Pinnacle Reef gas play area, the level of drilling in this area, and other areas of the United States, levels of imported gas, storage levels, and changes in the price and demand for natural gas. The Delhi Group's operating results from gas sales are affected by fluctuations in natural gas prices and demand levels in the markets that it serves. The levels of gas sales and trading gross margins for future periods are affected by fluctuations in customer demand for premium services, competition in attracting new premium customers and the volatility of natural gas prices. The Delhi Group attempts to sell all of the natural gas available on its system each month. Natural gas volumes not sold to its premium markets are typically sold in the spot market, generally at lower average unit margins than those realized from premium sales. Because the strongest demand for gas and the highest gas sales unit margins generally occur during the winter heating season, the Delhi Group has historically recognized the greatest portion of income from its gas sales business during the first and fourth quarters of the year. Since the adoption of Federal Energy Regulatory Commission ("FERC") Order No. 636 in 1992, competition in the domestic gas industry has increased significantly. On the supply side, gas producers now have easier access to end- user sales markets, which, at times, has resulted in the conversion of their gas sales contracts with midstream gathering and distribution companies, like DGP, to lower gross margin, fixed-fee transportation agreements. On the sales side, securing new premium service agreements has become increasingly difficult. However, management believes that its increased focus on core operating areas, a continued emphasis on sour gas gathering and treating services and its ability to maintain a long-term dedicated reserve base and to provide reliable sales service will enable the Delhi Group to remain a competitive entity in the markets that it serves. The Delhi Group monitors the economics of removing NGLs from the gas stream for processing on an ongoing basis to determine the appropriate level of each gas plant's operation. The levels of gas processing margin for future periods are affected by fluctuations in the price and demand for NGLs and the volatility of natural gas processing feedstock costs. In the third quarter of 1996, Delhi began hedging NGLs sales and their related feedstock costs. Approximately 85% of anticipated fourth quarter NGLs volumes have been hedged. 61 DELHI GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Cash Flows - ---------- Net cash provided from operating activities increased $38.3 million in the first nine months of 1996, compared with the first nine months of 1995. Cash flows in 1995 included a $4.4 million payment, representing the Delhi Group's share of the amortized discount on USX's zero coupon bond debentures which were extinguished in the third quarter. The improvement primarily reflected positive changes in working capital and increased gross margins in the first nine months of 1996, while the first nine months of 1995 included an $18.3 million unfavorable effect of a change in the sale of receivables program. Capital expenditures for property, plant and equipment in the third quarter and first nine months of 1996 were $13.5 million and $55.4 million, respectively, compared with $12.2 million and $24.9 million in the respective 1995 periods. Expenditures in the first nine months of 1996 were primarily for the Pinnacle Reef expansion project in East Texas and the acquisition of pipeline and processing assets in West Texas. Capital expenditures for the year 1996 are expected to approximate $75 million. The Delhi Group will continue to target additional expenditures to add new dedicated gas reserves, expand existing facilities and acquire new facilities as opportunities arise in its core operating areas. Future capital expenditures can be affected by changes in the price and demand for natural gas, levels of cash flow from operations, the success and level of drilling activity by producers, severe weather or natural disasters, or unforeseen operating difficulties, which could delay the timing of completion of particular capital projects. Contract commitments for capital expenditures were $5.5 million at September 30, 1996, compared with $9.3 million at year-end 1995. Cash from the disposal of assets decreased $12.1 million in the first nine months of 1996, compared with the first nine months of 1995. The 1995 proceeds mainly reflected the sales of remaining assets in the 1994 asset disposition plan. Financial obligations increased by $24.3 million in the first nine months of 1996 as capital expenditures exceeded net cash provided from operating activities. Financial obligations consist of the Delhi Group's portion of USX debt and preferred stock of a subsidiary attributed to all three groups. Liquidity - --------- For discussion of USX's liquidity and capital resources, see USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. Environmental Matters, Contingencies and Commitments - ---------------------------------------------------- The Delhi Group has incurred and will continue to incur capital and operating and maintenance expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the Delhi Group's products and services, operating results will be adversely affected. The Delhi Group believes that substantially all of its competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities and its production processes. 62 DELHI GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Delhi Group involving a variety of matters, including laws and regulations relating to the environment. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Delhi Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Delhi Group. See discussion of Cash Flows and Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. 63 DELHI GROUP OF USX CORPORATION SUPPLEMENTAL STATISTICS ------------------------------
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 1996 1995 1996 1995 - -------------------------------------------------------------------------------- GROSS MARGIN Gas Sales and Trading Margin $11.5 $8.1 $44.3 $38.0 Transportation Margin 4.0 3.2 12.5 8.5 ------ ------ ------ ------ Systems and Trading Margin 15.5 11.3 56.8 46.5 Gas Processing Margin 7.8 6.7 18.6 19.8 ------ ------ ------ ------ Total Gross Margin $23.3 $18.0 $75.4 $66.3 OPERATING INCOME (LOSS) $3.2 $(2.0) $15.1 $12.5 CAPITAL EXPENDITURES $13.5 $12.2 $55.4 $24.9 OPERATING STATISTICS Natural Gas Volumes (a) Natural Gas Sales 516.4 531.1 532.9 564.3 Transportation 464.3 316.3 456.5 288.7 ------ ------ ------ ------ Systems Throughput 980.7 847.4 989.4 853.0 Trading Sales 589.7 474.6 562.7 336.4 Partnership - equity share (b) - - - 6.9 ------- ------- ------- ------- Total Sales Volumes 1,570.4 1,322.0 1,552.1 1,196.3 Natural Gas Liquids Sales (c) 801.3 767.8 764.0 800.5 (a) Millions of cubic feet per day (b) Related to an investment which was sold in the second quarter of 1995. (c) Thousands of gallons per day
64 Part II - Other Information - ---------------------------- Item 1. LEGAL PROCEEDINGS U. S. Steel Group (a) Fairfield Agreement Litigation A civil class action was commenced against USX, the United Steelworkers of America and United States Steel and Carnegie Pension Fund in 1989 (Cox, et al. v. USX, et al.) that allegedly related to the negotiation of a 1983 local labor agreement, which resulted in the reopening of USX's Fairfield Works in 1984. The causes of action included claims asserted under the Racketeer Influenced and Corrupt Organization Act (RICO) and the Employee Retirement Income Security Act (ERISA), specifically alleging that USX granted leaves of absence and pensions to union officials with intent to influence their approval, implementation and interpretation of the 1983 Fairfield Agreement. The defendants denied any liability to the plaintiffs and vigorously defended these claims. On October 29, 1996, a jury returned verdicts favorable to the defendants on all counts finding no liability and no damages. Plaintiffs have indicated an intent to appeal these verdicts. Other Reference is made to the USX Form 10-Q for the periods ended March 31 and June 30, 1996, for discussion of legal proceedings relating to the Marathon Group (Environmental Proceedings) and the U. S. Steel Group (B&LE Litigation, Environmental Proceedings-Gary Works, and the Aloha Stadium Litigation). 65 Part II - Other Information (Continued): - ---------------------------- Item 5. OTHER INFORMATION SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION OF MARATHON OIL COMPANY Supplementary Data --------------------------------------------------------------------- (Unaudited) The following summarized consolidated financial information of Marathon Oil Company, a wholly owned subsidiary of USX, is included in this Form 10-Q in satisfaction of the reporting obligation of Marathon which has debt securities registered under the Securities Exchange Act. All such securities are guaranteed by USX.
(In millions) ------------------------------- Third Quarter Nine Months Ended Ended September 30 September 30 1996 1995 1996 1995 ---- ---- ---- ---- INCOME DATA: Revenues $4,186 $3,477* $11,859 $10,307* Operating income 323 181* 945 657* Income before extraordinary loss - 78 - 235 Net income 156 75 471 232 *Reclassified to conform to 1996 classifications.
(In millions) ------------------------- September 30 December 31 1996 1995 ------------ ----------- BALANCE SHEET DATA: Assets: Current assets $3,143 $2,656 Noncurrent assets 7,883 8,088 ------ ------ Total assets $11,026 $10,744 ====== ====== Liabilities and Stockholder's Equity: Current liabilities $1,836 $1,659 Noncurrent liabilities 7,476 7,842 Stockholder's equity 1,714 1,243 ------- ------- Total liabilities and stockholder's equity $11,026 $10,744 ======= =======
66 Part II - Other Information (Continued): - ---------------------------- Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 12.1 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 12.2 Computation of Ratio of Earnings to Fixed Charges 27. Financial Data Schedule (b) REPORTS ON FORM 8-K Form 8-K dated September 24, 1996, reporting under Item 5, Other Events, applicability of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, to USX Corporation - Marathon Group. Form 8-K dated October 23, 1996, reporting under Item 5, Other Events, applicability of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, to USX Corporation, the Marathon Group, the U. S. Steel Group and the Delhi Group. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned chief accounting officer thereunto duly authorized. USX CORPORATION By /s/ Lewis B. Jones ------------------ Lewis B. Jones Vice President & Comptroller November 12, 1996 EX-12.1 2
Exhibit 12.1 USX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS TOTAL ENTERPRISE BASIS - (Unaudited) ---------------------------------------------------------- (Dollars in Millions) Nine Months Ended Year Ended December 31 September 30 -------------------------------- 1996 1995 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- ---- Portion of rentals representing interest $60 $60 $78 $85 $84 $87 $91 Capitalized interest 9 10 13 58 105 78 63 Other interest and fixed charges 302 362 464 464 372 408 474 Pretax earnings which would be required to cover preferred stock dividend requirements of parent 27 37 46 49 44 14 15 ---- ---- ---- ---- ---- ---- ---- Combined fixed charges and preferred stock dividends (A) $398 $469 $601 $656 $605 $587 $643 ==== ==== ==== ==== ==== ==== ==== Earnings-pretax income (loss) with applicable adjustments (B) $1310 $1245 $902 $1263 $280 $376 $(53) ==== ==== ==== ==== ==== ==== ==== Ratio of (B) to (A) 3.29 2.65 1.50 1.92 (a) (a) (a) ==== ==== ==== ==== ==== ==== ==== (a) Earnings did not cover combined fixed charges and preferred stock dividends by $325 million for 1993, by $211 million for 1992 and by $696 million for 1991.
EX-12.2 3
Exhibit 12.2 USX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES TOTAL ENTERPRISE BASIS - (Unaudited) ------------------------------------------------- (Dollars in Millions) Nine Months Ended Year Ended December 31 September 30 -------------------------------- 1996 1995 1995 1994 1993 1992 1991 ---- ---- ----- ---- ---- ---- ---- Portion of rentals representing interest $60 $60 $78 $85 $84 $87 $91 Capitalized interest 9 10 13 58 105 78 63 Other interest and fixed charges 302 362 464 464 372 408 474 ---- ---- ---- ----- ---- ---- ---- Total fixed charges (A) $371 $432 $555 $607 $561 $573 $628 ==== ==== ==== ==== ==== ==== ==== Earnings-pretax income (loss) with applicable adjustments (B) $1310 $1245 $902 $1263 $280 $376 $(53) ==== ==== ==== ==== ==== ==== ==== Ratio of (B) to (A) 3.53 2.88 1.63 2.08 (a) (a) (a) ==== ==== ==== ==== ==== ==== ==== (a) Earnings did not cover fixed charges by $281 million for 1993, by $197 million for 1992 and by $681 million for 1991.
EX-27 4
5 9-MOS DEC-31-1996 SEP-30-1996 72 0 1190 21 2055 3432 25963 15580 16851 3309 0 0 7 382 4417 16851 17333 17333 16204 16204 0 0 341 930 278 652 0 0 0 652 0 0 Consists of Marathon Stock issued, $288; Steel Stock issued, $85; Delhi Stock issued, $9. Primary earnings per share applicable to Marathon Stock, $1.75; Steel Stock, $1.56; Delhi Stock, $-. Fully diluted earnings per share applicable to Marathon Stock, $1.74; Steel Stock, $1.55; Delhi Stock, $-.
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