-----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, V4l+xuWVs6G7khL4I0/NQ+3NqYxbSYmzkL6JXf6Ho4ShChueTCjLA+RF93gYiRoB nEwur/85HFORh1M2qJtxLw== 0000101778-97-000012.txt : 19970813 0000101778-97-000012.hdr.sgml : 19970813 ACCESSION NUMBER: 0000101778-97-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970812 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: USX CORP CENTRAL INDEX KEY: 0000101778 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] 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: 97657018 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 June 30, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ------------ to ------------ USX CORPORATION - -------------------------------------------------------------------------------- ---- (Exact name of registrant as specified in its charter) Delaware 1-5153 25-0996816 --------------- ------------ ------------------- (State or other (Commission (IRS Employer jurisdiction of File Number) Identification No.) incorporation) 600 Grant Street, Pittsburgh, PA 15219-4776 - --------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (412) 433-1121 ------------------------------ (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- 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 July 31, 1997 follows: USX-Marathon Group - 288,041,929 shares USX-U. S. Steel Group - 85,715,426 shares USX-Delhi Group - 9,451,588 shares 2 USX CORPORATION SEC FORM 10-Q QUARTER ENDED June 30, 1997 --------------------------- 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 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Financial Statistics 24 B. Marathon Group Item 1. Financial Statements: Marathon Group Statement of Operations 25 Marathon Group Balance Sheet 26 Marathon Group Statement of Cash Flows 27 Selected Notes to Financial Statements 28 Item 2. Marathon Group Management's Discussion and Analysis of Financial Condition and Results of Operations 32 Supplemental Statistics 40 3 USX CORPORATION SEC FORM 10-Q QUARTER ENDED June 30, 1997 --------------------------- INDEX Page ----- ---- PART I - FINANCIAL INFORMATION (Continued) C. U. S. Steel Group Item 1. Financial Statements: U. S. Steel Group Statement of Operations 41 U. S. Steel Group Balance Sheet 42 U. S. Steel Group Statement of Cash Flows 43 Selected Notes to Financial Statements 44 Item 2. U. S. Steel Group Management's Discussion and Analysis of Financial Condition and Results of Operations 50 Supplemental Statistics 56 D. Delhi Group Item 1. Financial Statements: Delhi Group Statement of Operations 57 Delhi Group Balance Sheet 58 Delhi Group Statement of Cash Flows 59 Selected Notes to Financial Statements 60 Item 2. Delhi Group Management's Discussion and Analysis of Financial Condition and Results of Operations 64 Supplemental Statistics 69 PART II - OTHER INFORMATION Item 1. Legal Proceedings 70 Item 4. Submission of Matters to a Vote of Security Holders 70 Item 5. Other Information 71 Item 6. Exhibits and Reports on Form 8-K 72 4 Part I - Financial Information A. Consolidated Corporation USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) ------------------------------------------------
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 1997 1996 1997 1996 - -------------------------------------------------------------------------------- REVENUES $5,737 $5,846 $11,734 $11,319 OPERATING COSTS: Cost of sales (excludes items shown below) 4,141 4,401 8,573 8,477 Selling, general and administrative expenses 58 50 112 94 Depreciation, depletion and amortization 246 255 499 522 Taxes other than income taxes 776 806 1,545 1,548 Exploration expenses 41 23 74 56 Inventory market valuation charges (credits) 64 72 178 (83) ------ ------ ------ ------ Total operating costs 5,326 5,607 10,981 10,614 ------ ------ ------ ------ OPERATING INCOME 411 239 753 705 Gain on affiliate stock offering - 53 - 53 Other income 24 15 51 49 Interest and other financial income 6 7 9 12 Interest and other financial costs (112) (111) (197) (231) ------ ------ ------ ------ INCOME BEFORE INCOME TAXES 329 203 616 588 Less provision for estimated income taxes 115 49 206 169 ------ ------ ------ ------ NET INCOME 214 154 410 419 Noncash credit from exchange of preferred stock 10 - 10 - Dividends on preferred stock (2) (5) (8) (11) ------ ------ ------ ------ NET INCOME APPLICABLE TO COMMON STOCKS $222 $149 $412 $408 ====== ====== ====== ====== Selected notes to financial statements appear on pages 9-14.
5 USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF OPERATIONS (Continued) (Unaudited) INCOME PER COMMON SHARE ------------------------------------------------------------
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions, except per share amounts) 1997 1996 1997 1996 - -------------------------------------------------------------------------------- APPLICABLE TO MARATHON STOCK: Net income $118 $124 $226 $340 - Per share - primary .41 .43 .78 1.18 - fully diluted .41 .43 .78 1.17 Dividends paid per share .19 .17 .38 .34 Weighted average shares, in thousands - Primary 288,290 287,604 288,140 287,532 - Fully diluted 288,308 293,582 288,169 296,565 APPLICABLE TO STEEL STOCK: Net income $105 $27 $186 $67 - Per share - primary 1.23 .32 2.19 .80 - fully diluted 1.06 .32 2.00 .80 Dividends paid per share .25 .25 .50 .50 Weighted average shares, in thousands - Primary 85,635 83,653 85,322 83,425 - Fully diluted 93,749 83,653 93,435 84,619 APPLICABLE TO DELHI STOCK: Net income (loss) $(1.5) $(1.2) $(.1) $1.2 - Per share - primary and fully diluted (.16) (.12) (.01) .13 Dividends paid per share .05 .05 .10 .10 Weighted average shares, in thousands - Primary and fully diluted 9,451 9,450 9,450 9,449 Selected notes to financial statements appear on pages 9-14.
6 USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET (Unaudited) ----------------------------------------
ASSETS June 30 December 31 (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $106 $55 Receivables, less allowance for doubtful accounts of $8 and $26 1,055 1,270 Inventories 1,888 1,939 Deferred income tax benefits 57 57 Other current assets 82 81 ------ ------ Total current assets 3,188 3,402 Investments and long-term receivables, less reserves of $17 and $17 943 854 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $15,600 and $15,280 10,396 10,404 Prepaid pensions 2,113 2,014 Other noncurrent assets 315 306 ------ ------ Total assets $16,955 $16,980 ====== ====== Selected notes to financial statements appear on pages 9-14.
7 USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET (Continued) (Unaudited) --------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY June 30 December 31 (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- LIABILITIES Current liabilities: Notes payable $88 $81 Accounts payable 1,938 2,204 Payroll and benefits payable 525 475 Accrued taxes 213 304 Accrued interest 106 102 Long-term debt due within one year 214 353 ------ ------ Total current liabilities 3,084 3,519 Long-term debt, less unamortized discount 3,538 3,859 Long-term deferred income taxes 1,191 1,097 Employee benefits 2,793 2,797 Deferred credits and other liabilities 791 436 Preferred stock of subsidiary 250 250 USX obligated mandatorily redeemable convertible preferred securities of a subsidiary trust 182 - STOCKHOLDERS' EQUITY Preferred stock - 6.50% Cumulative Convertible issued - 2,962,037 shares and 6,900,000 shares ($148 and $345 liquidation preference, respectively) 3 7 Common stocks: Marathon Stock issued - 287,962,562 shares and 287,525,213 shares 288 288 Steel Stock issued - 85,692,036 shares and 84,885,473 shares 86 85 Delhi Stock issued - 9,451,588 shares and 9,448,269 shares 9 9 Additional paid-in capital 3,997 4,150 Retained earnings 776 517 Other equity adjustments (33) (34) ------ ------ Total stockholders' equity 5,126 5,022 ------ ------ Total liabilities and stockholders' equity $16,955 $16,980 ====== ====== Selected notes to financial statements appear on pages 9-14.
8 USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) ------------------------------------------------
Six Months Ended June 30 (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income $410 $419 Adjustments to reconcile to net cash provided from operating activities: Depreciation, depletion and amortization 499 522 Exploratory dry well costs 30 23 Inventory market valuation charges (credits) 178 (83) Pensions (90) (90) Postretirement benefits other than pensions 4 15 Deferred income taxes 58 120 Gain on disposal of assets (26) (31) Gain on affiliate stock offering - (53) Payment of amortized discount on zero coupon debentures(17) - Changes in: Current receivables 200 31 Inventories (127) (5) Current accounts payable and accrued expenses (284) (197) All other - net (31) (10) ------ ------ Net cash provided from operating activities 804 661 ------ ------ INVESTING ACTIVITIES: Capital expenditures (544) (450) Disposal of assets 397 258 Withdrawal from property exchange trusts - net 94 - Investments in equity affiliates - net (152) 3 All other - net 8 (8) ------ ------ Net cash used in investing activities (197) (197) ------ ------ FINANCING ACTIVITIES: Commercial paper and revolving credit arrangements - net 7 (3) Other debt repayments (433) (376) Common stock issued 30 34 Dividends paid (159) (150) ------ ------ Net cash used in financing activities (555) (495) ------ ------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (1) - ------ ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 51 (31) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 55 131 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $106 $100 ====== ====== Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $(201) $(240) Income taxes paid (197) (61) NONCASH TRANSACTION - mandatorily redeemable securities exchanged for preferred stock 182 - Selected notes to financial statements appear on pages 9-14.
9 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------------------------------------------- (Unaudited) 1. The information furnished in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. Additional information is contained in the USX Annual Report on Form 10-K for the year ended December 31, 1996. Effective January 1, 1997, USX adopted American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" (SOP 96-1), which provides additional interpretation of existing accounting standards related to recognition, measurement and disclosure of environmental remediation liabilities. As a result of adopting SOP 96-1 in the first quarter, USX identified additional environmental remediation liabilities of $46 million, of which $28 million was discounted to a present value of $13 million and $18 million was not discounted. Assumptions used in the calculation of the present value amount included an inflation factor of 2% and an interest rate of 7% over a range of 22 to 30 years. Estimated receivables for recoverable costs related to adoption of SOP 96-1 were $4 million. The net unfavorable effect on first quarter 1997 operating income was $27 million. 2. The method of calculating net income (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 the noncash credit on exchange 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 (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. In the second quarter of 1997, the Delhi Group revised the estimated economic lives of its depreciable assets. Depreciation expense for 1997 has been revised based on this increase in the estimated economic lives. The favorable effect on net income in the second quarter and first six months of 1997 was $2.1 million, or $.22 per share of Delhi Stock. 10 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 4. The items below are included in both revenues and operating costs, resulting in no effect on income.
(In millions) ------------------------------- Second Qtr. Six Months Ended Ended June 30 June 30 1997 1996 1997 1996 ---- ---- ---- ---- Consumer excise taxes on petroleum products and merchandise $664 $700 $1,319 $1,333 Matching crude oil and refined product buy/sell transactions settled in cash 551 723 1,306 1,322
5. Operating income includes net periodic pension credits of $75 million and $78 million in the first six months of 1997 and 1996, respectively, ($37 million and $41 million in the second quarter of 1997 and 1996, respectively). These pension credits are primarily noncash and for the most part are included in selling, general and administrative expenses. 6. On May 2, 1996, an aggregate of 6.9 million shares of RMI Titanium Company (RMI) common stock was sold in a public offering at a price of $18.50 per share and total net proceeds of $121 million. Included in the offering were 2.3 million shares sold by USX for net proceeds of $40 million. USX recognized a total pretax gain in the second quarter of 1996 of $53 million, of which $34 million was attributable to the shares sold by USX and $19 million was attributable to the increase in value of USX's investment as a result of the shares sold by RMI. The income tax effect related to the total gain was $19 million. As a result of this transaction, USX's ownership in RMI decreased from approximately 50% to 27%. USX continues to account for its investment in RMI under the equity method of accounting. 7. The provision for estimated income taxes for the periods reported is based on tax rates and amounts which recognize management's best estimate of current and deferred tax assets and liabilities. 8. Inventories are carried at lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method.
(In millions) ---------------------- June 30 December 31 1997 1996 -------- ----------- Raw materials $598 $594 Semi-finished products 354 309 Finished products 984 908 Supplies and sundry items 130 128 ------ ------ Total (at cost) 2,066 1,939 Less inventory market valuation reserve 178 - ------ ------ Net inventory carrying value $1,888 $1,939 ====== ======
11 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 8. (Continued) The inventory market valuation reserve reflects the extent that the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. The reserve is decreased to reflect increases in market prices and inventory turnover and increased to reflect decreases in market prices. Changes in the inventory market valuation reserve result in noncash charges or credits to operating income. For additional information, see Outlook in the Marathon Group's Management's Discussion and Analysis of Financial Condition and Results of Operations. 9. At June 30, 1997, USX had no borrowings against its $2,350 million long- term revolving credit agreement. USX had no borrowings at June 30, 1997, against its short-term lines of credit totaling $200 million, which require a 1/8% fee or maintenance of compensating balances of 3%. USX had other outstanding short-term borrowings of $88 million. In the event of a change in control of USX, debt obligations totaling $3,170 million at June 30, 1997, may be declared immediately due and payable. 10. During the first six months of 1997, USX redeemed: Zero Coupon Convertible Senior Debentures Due 2005 with a carrying value of $41 million; the aggregate principal amount of $227 million 7% Convertible Subordinated Debentures Due 2017; and $120 million aggregate principal amount of 8.50% Sinking Fund Debentures Due November 1, 2006. 11. In December 1996, USX issued $117 million of debt (notes) indexed to the price of RMI common stock. At maturity in February 2000, USX must exchange these notes for shares of RMI common stock, or redeem the notes for the equivalent amount of cash. Interest and other financial costs included adjustments to the carrying value of the indexed debt of $10 million unfavorable for the second quarter of 1997 and $6 million favorable for the first six months of 1997. 12. In the second quarter of 1997, USX exchanged approximately 3.9 million 6.75% Convertible Quarterly Income Preferred Securities (Trust Preferred Securities) of USX Capital Trust I, a Delaware statutory business trust (Trust), for an equivalent number of shares of its 6.50% Cumulative Convertible Preferred Stock (6.50% Preferred Stock) (Exchange). The Exchange resulted in the recording of Trust Preferred Securities at a fair value of $182 million and a noncash credit to Retained Earnings of $10 million. 12 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 12. (Continued) USX owns all of the common securities of the Trust, which was formed for the purpose of the Exchange. (The Trust Common Securities and the Trust Preferred Securities are together referred to as the Trust Securities.) The Trust Securities represent undivided beneficial ownership interests in the assets of the Trust, which consist solely of USX 6.75% Convertible Junior Subordinated Debentures maturing March 31, 2037 (Debentures), having an aggregate principal amount equal to the aggregate initial liquidation amount ($50.00 per security and $203 million in total) of the Trust Securities issued by the Trust. Interest and principal payments on the Debentures will be used to make quarterly distributions and to pay redemption and liquidation amounts on the Trust Preferred Securities. The quarterly distributions, which accumulate at the rate of 6.75% per annum on the Trust Preferred Securities and the accretion from fair value to the initial liquidation amount, are charged to income and included in interest and other financial costs. Under the terms of the Debentures, USX has the right to defer payment of interest for up to 20 consecutive quarters and, as a consequence, monthly distributions on the Trust Preferred Securities will be deferred during such period. If USX exercises this right, then, subject to limited exceptions, it may not pay any dividend or make any distribution with respect to any shares of its capital stock. The Trust Preferred Securities are convertible at any time prior to the close of business on March 31, 2037, (unless such right is terminated earlier under certain circumstances) at the option of the holder, into shares of USX-U. S. Steel Group Common Stock (Steel Stock) at a conversion price of $46.25 per share of Steel Stock (equivalent to a conversion ratio of 1.081 shares of Steel Stock for each Trust Preferred Security), subject to adjustment in certain circumstances. The Trust Preferred Securities may be redeemed at any time at the option of USX, initially at a premium of 103.90% of the initial liquidation amount through March 31, 1998, and thereafter, declining annually to the initial liquidation amount on April 1, 2003 and thereafter. They are mandatorily redeemable at March 31, 2037, or earlier under certain circumstances. Payments related to quarterly distributions and to the payment of redemption and liquidation amounts on the Trust Preferred Securities by the Trust are guaranteed by USX on a subordinated basis. 13. USX has agreements (the programs) to sell an undivided interest in certain accounts receivable subject to limited recourse. Payments are collected from the sold accounts receivable; the collections are reinvested in new accounts receivable for the buyers; and a yield, based on defined short- term market rates, is transferred to the buyers. At June 30, 1997, the amount sold under the programs that had not been collected was $740 million, which will be forwarded to the buyers at the end of the agreements, or in the event of earlier contract termination. If USX does not have a sufficient quantity of eligible accounts receivable to reinvest in for the buyers, the size of the 13 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 13. (Continued) programs will be reduced accordingly. The buyers have rights to a pool of receivables that must be maintained at a level of 110% to 115% of the programs' size. In the event of a change in control of USX, as defined in one of the agreements, USX may be required to forward to the buyers, payments collected on sold accounts receivable of $350 million. Prior to 1993, USX Credit, a division of USX, sold certain of its loans receivable subject to limited recourse under an agreement that expires in December 1997. USX Credit continues to collect payments from the loans and transfer to the buyers principal collected plus yield based on defined short-term market rates. At June 30, 1997, the balance of sold loans receivable subject to recourse was $19 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. 14. Effective June 1, 1997, USX entered into a strategic partnership with two limited partners to acquire an interest in three coke batteries at its U. S. Steel Group's Clairton (Pa.) Works and to operate and sell coke and byproducts from those facilities. USX is the general partner and is responsible for purchasing, operations and products marketing. Proceeds to USX as a result of the transaction were $361 million, and deferred gains of $262 million at June 30, 1997 (included in deferred credits and other liabilities) will be recognized over the life of the partnership's assets. USX's partnership interest will be accounted for under the equity method of accounting. 15. 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 June 30, 1997, and December 31, 1996, accrued liabilities for remediation totaled $165 million and $144 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in cleanup efforts related to underground storage tanks at retail marketing outlets, were $41 million at June 30, 1997, and $23 million at December 31, 1996. 14 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 15. (Continued) For a number of years, USX has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the first six months of 1997 and for the years 1996 and 1995, such capital expenditures totaled $64 million, $165 million and $111 million, respectively. USX anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. At June 30, 1997, and December 31, 1996, accrued liabilities for platform abandonment and dismantlement totaled $122 million and $118 million, respectively. Guarantees by USX of the liabilities of affiliated entities totaled $84 million at June 30, 1997. In the event that any defaults of guaranteed liabilities occur, USX has access to its interest in the assets of most of the affiliates to reduce losses resulting from these guarantees. As of June 30, 1997, the largest guarantee for a single affiliate was $41 million. At June 30, 1997, USX's pro rata share of obligations of LOOP LLC and various pipeline affiliates secured by throughput and deficiency agreements totaled $175 million. Under the agreements, USX is required to advance funds if the affiliates are unable to service debt. Any such advances are prepayments of future transportation charges. Contract commitments for capital expenditures for property, plant and equipment at June 30, 1997, totaled $588 million compared with $526 million at December 31, 1996. 15 USX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS TOTAL ENTERPRISE BASIS - (Unaudited) ----------------------------------------------------------
Six Months Ended June 30 Year Ended December 31 - -------------------- ------------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- ---- 3.47 3.15 3.55 1.50 1.92 (a) (a) ==== ==== ==== ==== ==== ==== ==== (a) Earnings did not cover combined fixed charges and preferred stock dividends by $325 million for 1993 and by $211 million for 1992.
USX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES TOTAL ENTERPRISE BASIS - (Unaudited) -------------------------------------------------
Six Months Ended June 30 Year Ended December 31 - --------------------- ------------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- ---- 3.67 3.37 3.81 1.63 2.08 (a) (a) ==== ==== ==== ==== ==== ==== ==== (a) Earnings did not cover fixed charges by $281 million for 1993 and by $197 million for 1992.
16 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- USX Corporation ("USX") is a diversified company engaged primarily in the energy business through its Marathon Group, in the steel business through its U. S. Steel Group and in the gas gathering and processing, natural gas liquids trading and electric power marketing businesses through its Delhi Group. The following discussion should be read in conjunction with the second quarter 1997 USX Consolidated Financial Statements and selected notes. For net income per common share amounts applicable to each of USX's three classes of common stock, USX-Marathon Group Common Stock ("Marathon Stock"), USX-U. S. Steel Group Common Stock ("Steel Stock") and USX-Delhi Group Common Stock ("Delhi Stock"), see Consolidated Statement of Operations - Income per Common Share. For Group results, see Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group, the U. S. Steel Group and the Delhi Group. For operating statistics, see Supplemental Statistics following Management's Discussion and Analysis of Financial Condition and Results of Operations for the respective Groups. Certain sections of the discussion include forward-looking statements concerning trends or events potentially affecting USX. These statements typically contain words such as "anticipates", "believes", "estimates", "expects" or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in forward-looking statements. For additional cautionary language related to USX and each of its Groups, see Item 5. in USX's Form 10-Q for the quarterly period ended March 31, 1997. Results of Operations - --------------------- Revenues for the second quarter and first six months of 1997 and 1996 are set forth in the following table:
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 1997 1996 1997 1996 ------ ------ ------ ------ Revenues Marathon Group $3,775 $4,071 $7,857 $7,698 U. S. Steel Group 1,721 1,580 3,341 3,171 Delhi Group 268 217 607 495 Eliminations (27) (22) (71) (45) ------ ------ ------- ------- Total USX Corporation revenues $5,737 $5,846 $11,734 $11,319 Less: Matching crude oil and refined product buy/sell transactions settled in cash (a) 551 723 1,306 1,322 Consumer excise taxes on petroleum products and merchandise (a) 664 700 1,319 1,333 ------ ------ ------ ------ Revenues adjusted to exclude above items $4,522 $4,423 $9,109 $8,664 ====== ====== ====== ====== - ------ (a) Included in both revenues and operating costs for the Marathon Group and USX Consolidated, resulting in no effect on income.
17 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Adjusted revenues increased by $99 million, or 2%, in the second quarter of 1997 as compared with the second quarter of 1996. The improvement reflected increases of $141 million for the U. S. Steel Group and $51 million for the Delhi Group, partially offset by a decline of $88 million for the Marathon Group. The increase for the U. S. Steel Group was due primarily to higher average realized steel prices and increased steel shipments. The increase for the Delhi Group was due primarily to increased volumes for natural gas and natural gas liquids trading and electric power marketing, and increased natural gas sales volumes, partially offset by lower average sales prices for natural gas and natural gas liquids. The decline for the Marathon Group was due primarily to lower average prices for refined products and lower average prices and decreased volumes for worldwide liquid hydrocarbons, partially offset by increased volumes of refined products. Operating income and certain items included in operating income for the second quarter and first six months of 1997 and 1996 are set forth in the following table:
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 1997 1996 1997 1996 ------ ------ ------ ------ Operating income $411 $239 $753 $705 Less: certain favorable (unfavorable) items for Marathon Group Inventory market valuation reserve adjustment (a) (64) (72) (178) 83 Charges for withdrawal from MPA (b) - - - (10) U. S. Steel Group Effect of adoption of SOP 96-1 (c) - - (20) - Certain other environmental accrual adj. - net - - 11 - Gary Works No. 13 blast furnace repairs (d) - (39) - (39) Certain legal accruals - (20) - (20) Delhi Group Depreciation adjustment (e) 2 - - - ----- ----- ----- ----- Subtotal (62) (131) (187) 14 ----- ----- ----- ----- Operating income adjusted to exclude above items $473 $370 $940 $691 ===== ===== ===== ===== (a) The inventory market valuation reserve reflects the extent to which the recorded LIFO cost basis of crude oil and refined product inventories exceeds net realizable value. For additional discussion of this noncash adjustment, see Outlook in Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group. (b) Marine Preservation Association ("MPA") is a non-profit oil spill response group. (c) American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" ("SOP 96-1") provides additional guidance on recognition, measurement and disclosure of remediation liabilities. (d) Reflects repair of damages incurred during a break-out on April 2, 1996; excludes effects of business interruption. 18 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- (e) During the second quarter of 1997, the Delhi Group recorded a $3 million favorable pretax depreciation expense adjustment relating to the first six months of 1997. The $2 million portion of the adjustment relating to the first quarter of 1997 is a special item for purposes of comparing the second quarter of 1997 with the second quarter of 1996. The adjustment resulted from revisions in the estimated economic lives of the Delhi Group's pipeline systems and gas processing plants. These revisions will also favorably affect future periods.
Adjusted operating income increased by $103 million, or 28%, in the second quarter of 1997 as compared with the second quarter of 1996, reflecting an increase of $117 million for the U. S. Steel Group, partially offset by declines of $11 million and $3 million for the Marathon Group and Delhi Group, respectively. The increase for the U. S. Steel Group was due primarily to higher steel shipments, higher average realized steel prices, lower operating costs, and operating efficiencies. Operating results in 1996 were unfavorably affected by a breakout on the No. 13 blast furnace in April 1996, that resulted in production inefficiencies at the Gary Works, as well as other U. S. Steel plants, reduced shipments and higher costs for purchased iron and semifinished steel. The decline for the Marathon Group was due primarily to decreased volumes and lower average prices for worldwide liquid hydrocarbons, and increased administrative expenses, partially offset by higher average margins on refined products. The decline for the Delhi Group was due primarily to increased operating expenses and lower gross margins, partially offset by decreased depreciation expense. Adjusted operating income increased by $249 million, or 36%, in the first six months of 1997 as compared with the first six months of 1996, reflecting increases of $165 million for the U. S. Steel Group and $85 million for the Marathon Group, partially offset by a decline of $1 million for the Delhi Group. The increase for the U. S. Steel Group was due primarily to higher average realized steel prices, higher steel shipments, lower operating costs, and operating efficiencies. The increase for the Marathon Group was due primarily to higher average refined product margins and higher average prices for worldwide natural gas and liquid hydrocarbons, partially offset by reduced Marathon Group worldwide liquid hydrocarbon production. Gain on affiliate stock offering was $53 million in the second quarter and first six months of 1996. See Note 6 to the Consolidated Financial Statements for additional discussion. Other income for the second quarter and first six months of 1997 and 1996 is set forth in the following table:
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 1997 1996 1997 1996 ------ ------ ------ ------ Income from affiliates - equity method $23 $14 $38 $26 Gain on sale of investments (a) - - 11 21 Other income 1 1 2 2 ---- ---- ---- ---- Total other income $24 $15 $51 $49 ==== ==== ==== ==== (a) Amounts primarily reflect gains on the sale of the Marathon Group's interests in certain domestic pipeline companies.
19 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Net interest and other financial costs for the second quarter and first six months of 1997 and 1996 are set forth in the following table:
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 1997 1996 1997 1996 ------ ------ ------ ------ Interest and other financial income $6 $7 $9 $12 Interest and other financial costs (112) (111) (197) (231) ----- ------ ------ ------ Net interest and other financial costs (106) (104) (188) (219) Less: Favorable (unfavorable) adjustment to carrying value of indexed debt(a) (10) - 6 - ----- ------ ------ ------ Net interest and other financial costs adjusted to exclude above item $(96) $(104) $(194) $(219) ===== ====== ====== ====== (a) In December 1996, USX issued $117 million in aggregate principal amount of 6.75% Notes Due February 1, 2000 ("indexed debt"), mandatorily exchangeable at maturity for common stock of RMI Titanium Company ("RMI") (or for the equivalent amount of cash, at USX's option). The carrying value of indexed debt is adjusted quarterly to settlement value, based on changes in the value of RMI common stock. Any resulting adjustment is charged or credited to income and included in interest and other financial costs. USX's 27% interest in RMI continues to be accounted for under the equity method. Excluding the adjustment to the carrying value of indexed debt, net interest and other financial costs decreased by $25 million in the first six months of 1997 as compared with the first six months of 1996, due primarily to lower average debt levels. Provision for estimated income taxes in the second quarter and first six months of 1997 included adjustments relating to the 1997 tax year reflecting a reduction in estimated tax credits and an increase in estimated state income tax expense. A significant portion of these adjustments resulted from USX's entry into a strategic partnership to acquire an interest in three coke batteries at its U. S. Steel Group's Clairton (Pa.) Works. The six month effect of these adjustments was recorded in the second quarter. See Note 14 to the Consolidated Financial Statements for additional discussion. Net income was $214 million in the second quarter of 1997, an increase of $60 million from the second quarter of 1996. Net income was $410 million in the first six months of 1997, a decrease of $9 million from the first six months of 1996. 20 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Noncash credit from exchange of preferred stock was $10 million, or 12 cents per share of Steel Stock, in the second quarter and first six months of 1997. In May 1997, USX exchanged approximately 3.9 million 6.75% Convertible Quarterly Income Preferred Securities ("Trust Preferred Securities") of USX Capital Trust I for an equivalent number of shares of its outstanding 6.50% Cumulative Convertible Preferred Stock. The $10 million noncash credit reflects the difference between the carrying value of the preferred stock and the fair value of the Trust Preferred Securities at the date of the exchange. See Note 12 to the Consolidated Financial Statements for additional discussion. Dividends to Stockholders - ------------------------- On July 29, 1997, the USX Board of Directors (the "Board") declared dividends of 19 cents per share on Marathon Stock, 25 cents per share on Steel Stock and 5 cents per share on Delhi Stock, all payable September 10, 1997, to stockholders of record at the close of business on August 20, 1997. The Board also declared a dividend of $0.8125 per share on USX's 6.50% Cumulative Convertible Preferred Stock, payable September 30, 1997, to stockholders of record at the close of business on September 2, 1997. Cash Flows - ---------- Cash and cash equivalents totaled $106 million at June 30, 1997, compared with $55 million at December 31, 1996. Net cash provided from operating activities totaled $804 million in the first six months of 1997, compared with $661 million in the first six months of 1996. The 1996 period included payments of $39 million related to certain state tax issues and $28 million for final settlement of the Pickering v. USX litigation. Excluding the effects of these items, net cash provided from operating activities increased by $76 million in the first six months of 1997, due primarily to higher average refined product margins, higher average realized steel prices, higher average prices for worldwide natural gas and liquid hydrocarbons and increased steel shipments, partially offset by an increase in income taxes paid and decreased volumes of worldwide liquid hydrocarbons. In addition, net cash provided from operating activities in the first six months of 1996 was adversely affected by production inefficiencies following a breakout on the Gary Works No. 13 blast furnace. Cash from the disposal of assets was $397 million in the first six months of 1997, compared with $258 million in the first six months of 1996. The 1997 proceeds included $361 million resulting from USX's entry into a strategic partnership with two limited partners to acquire an interest in three coke batteries at its U. S. Steel Group's Clairton Works. The 1996 proceeds primarily reflected the sale of the U. S. Steel Group's investment in National-Oilwell (an oil field service joint venture); sale of shares of RMI common stock; sales of the Marathon Group's interests in oil and gas production properties in Indonesia and Tunisia and the sale of the Marathon Group's interest in a domestic pipeline company. The net withdrawal from property exchange trusts of $94 million in the first six months of 1997 mainly represents cash withdrawn from an interest- bearing escrow account that was established in the fourth quarter of 1996 in connection with the disposal of Marathon Group oil production properties in Alaska. 21 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Capital expenditures for property, plant and equipment in the first six months of 1997 were $544 million, compared with $450 million in the first six months of 1996. For further details, see USX Corporation - Financial Statistics, following Management's Discussion and Analysis of Financial Condition and Results of Operations. Contract commitments for capital expenditures were $588 million at June 30, 1997, compared with $526 million at December 31, 1996. Net investments in equity affiliates of $152 million in the first six months of 1997 mainly reflected funding of Marathon Group equity affiliates' capital projects (including the Nautilus natural gas pipeline system in the Gulf of Mexico and the Sakhalin II project in Russia), and the Marathon Group's acquisition of an additional 7.5% interest in Sakhalin Energy Investment Company Ltd. ("Sakhalin Energy"), which brings the Marathon Group's interest to 37.5%. Sakhalin Energy is the incorporated joint venture company responsible for the Sakhalin II project. USX's total long-term debt, preferred stock of subsidiary, USX obligated preferred securities of a subsidiary trust and notes payable was $4.3 billion at June 30, 1997, down $271 million from December 31, 1996, mainly reflecting cash provided from operating activities and asset sales during 1997, in excess of cash used for capital expenditures, dividend payments and investments in equity affiliates. Redemptions of long-term debt during the first six months of 1997 included $227 million of 7% Convertible Subordinated Debentures Due 2017, $120 million of 8.5% Sinking Fund Debentures Due 2006 and $41 million of Zero Coupon Convertible Senior Debentures Due 2005. In May 1997, USX exchanged approximately 3.9 million 6.75% Trust Preferred Securities of USX Capital Trust I for an equivalent number of shares of its outstanding 6.50% Cumulative Convertible Preferred Stock. The exchange resulted in the recording of $182 million of Trust Preferred Securities and a $10 million noncash credit to Retained Earnings. See Note 12 to the Consolidated Financial Statements for additional discussion. Liquidity - --------- At June 30, 1997, USX had available its long-term revolving credit agreement of $2,350 million, short-term lines of credit of $200 million, and short-term credit agreements of $175 million, against which it had no outstanding borrowings. USX had outstanding short-term borrowings of $88 million against uncommitted lines of credit. USX's short-term lines of credit require a 1/8% fee or maintenance of compensating balances of 3%. USX management believes that its short-term and long-term liquidity is adequate to satisfy its obligations as of June 30, 1997, and to complete currently authorized capital spending programs. Future requirements for USX's business needs, including the funding of capital expenditures, debt maturities for the balance of 1997 and years 1998 and 1999, and any amounts that may ultimately be paid in connection with contingencies (which are discussed in Note 15 to the Consolidated Financial Statements), are expected to be financed by a combination of internally generated funds, proceeds from the sale of stock, borrowings or other external financing sources. 22 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- USX management's opinion concerning liquidity and USX's ability to avail itself in the future of the financing options mentioned in the above forward- looking statements are affected by various factors including the performance of each Group (as indicated by levels of cash provided from operating activities, and other measures) the state of worldwide debt and equity markets, investor perceptions and expectations of past and future performance and actions, the overall U.S. financial climate, and, in particular, with respect to borrowings, by levels of USX's outstanding debt and credit ratings by investor services. To the extent that management's assumptions concerning these factors prove to be inaccurate, USX's liquidity position could be adversely affected. 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 43 waste sites under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of June 30, 1997. In addition, there are 25 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 108 additional sites, excluding retail marketing outlets, where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. At many of these sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. USX accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. Effective January 1, 1997, USX adopted SOP 96-1. USX operating income in the first quarter and first six months of 1997 included charges of $27 million (net of expected recoveries) related to adoption, primarily accruals of post- closure monitoring costs, study costs and administrative costs. See Note 1 to the Consolidated Financial Statements for additional discussion. Operating income in the first six months of 1997 also included net favorable effects of $16 million related to other environmental accrual adjustments. 23 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment (see Note 15 to the Consolidated Financial Statements for a discussion of certain of these matters). The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Consolidated Financial Statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably. See discussion of Liquidity herein. Outlook - ------- 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. Accounting Standard - ------------------- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"), which changes the computation and presentation of net income per share. USX will adopt SFAS No. 128 in the fourth quarter of 1997, as required. While restatement for prior-periods is required by the standard, net income per share presented for each class of USX Common Stock for the second quarter and first six months of 1997 and for the years 1996 and 1995 will not change materially. 24
USX CORPORATION FINANCIAL STATISTICS (Unaudited) --------------------------------
Second Quarter Six Months Ended Ended June 30 June 30 -------------- -------------- (Dollars in millions) 1997 1996 1997 1996 - ------------------------------------------------------------------------------------ REVENUES Marathon Group $3,775 $4,071 $7,857 $7,698 U. S. Steel Group 1,721 1,580 3,341 3,171 Delhi Group 268 217 607 495 Eliminations (27) (22) (71) (45) ------- ------- ------- ------- Total $5,737 $5,846 $11,734 $11,319 OPERATING INCOME Marathon Group $231 $234 $445 $611 U. S. Steel Group 177 1 297 82 Delhi Group 3 4 11 12 ------ ------ ------ ------ Total $411 $239 $753 $705 CAPITAL EXPENDITURES Marathon Group $271 $150 $389 $250 U. S. Steel Group 67 102 117 158 Delhi Group 21 20 38 42 ------ ------ ------ ------ Total $359 $272 $544 $450
25 Part I - Financial Information (Continued): B. Marathon Group
MARATHON GROUP OF USX CORPORATION STATEMENT OF OPERATIONS (Unaudited) ----------------------------------- Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions, except per share amounts) 1997 1996 1997 1996 - -------------------------------------------------------------------------------- REVENUES $3,775 $4,071 $7,857 $7,698 OPERATING COSTS: Cost of sales (excludes items shown below) 2,479 2,742 5,237 5,172 Selling, general and administrative expenses 83 82 167 160 Depreciation, depletion and amortization 163 173 334 355 Taxes other than income taxes 714 745 1,422 1,427 Exploration expenses 41 23 74 56 Inventory market valuation charges (credits) 64 72 178 (83) ------ ------ ------ ------ Total operating costs 3,544 3,837 7,412 7,087 ------ ------ ------ ------ OPERATING INCOME 231 234 445 611 Other income 7 3 23 28 Interest and other financial income 6 5 8 9 Interest and other financial costs (69) (77) (136) (163) ------ ------ ------ ------ INCOME BEFORE INCOME TAXES 175 165 340 485 Less provision for estimated income taxes 57 41 114 145 ------ ------ ------ ------ NET INCOME $118 $124 $226 $340 ====== ====== ====== ====== MARATHON STOCK DATA: Net income per share - Primary $.41 $.43 $.78 $1.18 - Fully diluted .41 .43 .78 1.17 Dividends paid per share .19 .17 .38 .34 Weighted average shares, in thousands - Primary 288,290 287,604 288,140 287,532 - Fully diluted 288,308 293,582 288,169 296,565 Selected notes to financial statements appear on pages 28-31.
26 MARATHON GROUP OF USX CORPORATION BALANCE SHEET (Unaudited) ---------------------------------
June 30 December 31 (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $90 $32 Receivables, less allowance for doubtful accounts of $2 and $2 522 613 Inventories 1,175 1,282 Other current assets 122 119 ------ ------ Total current assets 1,909 2,046 Investments and long-term receivables 374 311 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $9,403 and $9,031 7,318 7,298 Prepaid pensions 291 280 Other noncurrent assets 216 216 ------ ------ Total assets $10,108 $10,151 ====== ====== LIABILITIES Current liabilities: Notes payable $72 $59 Accounts payable 1,126 1,385 Payroll and benefits payable 102 106 Accrued taxes 61 98 Deferred income taxes 125 155 Accrued interest 87 75 Long-term debt due within one year 172 264 ------ ------ Total current liabilities 1,745 2,142 Long-term debt, less unamortized discount 2,764 2,642 Long-term deferred income taxes 1,243 1,178 Employee benefits 366 356 Deferred credits and other liabilities 339 311 Preferred stock of subsidiary 182 182 STOCKHOLDERS' EQUITY 3,469 3,340 ------ ------ Total liabilities and stockholders' equity $10,108 $10,151 ====== ====== Selected notes to financial statements appear on pages 28-31.
27 MARATHON GROUP OF USX CORPORATION STATEMENT OF CASH FLOWS (Unaudited) -----------------------------------
Six Months Ended June 30 (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income $226 $340 Adjustments to reconcile to net cash provided from operating activities: Depreciation, depletion and amortization 334 355 Exploratory dry well costs 30 23 Inventory market valuation charges (credits) 178 (83) Pensions (9) (7) Postretirement benefits other than pensions 5 8 Deferred income taxes 34 70 Gain on disposal of assets (19) (25) Payment of amortized discount on zero coupon debentures(13) - Changes in: Current receivables 95 (25) Inventories (71) 19 Current accounts payable and accrued expenses (289) (89) All other - net 7 19 ------ ------ Net cash provided from operating activities 508 605 ------ ------ INVESTING ACTIVITIES: Capital expenditures (389) (250) Disposal of assets 22 115 Withdrawal from property exchange trusts - net 94 - Investments in equity affiliates - net (137) (2) ------ ------ Net cash used in investing activities (410) (137) ------ ------ FINANCING ACTIVITIES: Increase (decrease) in Marathon Group's share of USX consolidated debt 101 (369) Specifically attributed debt repayments (40) - Marathon Stock issued 9 1 Dividends paid (109) (98) ------ ------ Net cash used in financing activities (39) (466) ------ ------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (1) - ------ ------ NET INCREASE IN CASH AND CASH EQUIVALENTS 58 2 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 32 77 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $90 $79 ====== ====== Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $(131) $(185) Income taxes paid, including settlements with other groups (152) (41) Selected notes to financial statements appear on pages 28-31.
28 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS -------------------------------------- (Unaudited) 1. The information furnished in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. Additional information is contained in the USX Annual Report on Form 10-K for the year ended December 31, 1996. Effective January 1, 1997, USX adopted American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" (SOP 96-1), which provides additional interpretation of existing accounting standards related to recognition, measurement and disclosure of environmental remediation liabilities. As a result of adopting SOP 96-1 in the first quarter, the Marathon Group recognized additional environmental remediation liabilities of $11 million. Estimated receivables for recoverable costs related to adoption of SOP 96-1 were $4 million. The net unfavorable effect on Marathon Group first quarter 1997 operating income was $7 million. 2. The financial statements of the Marathon Group include the financial position, results of operations and cash flows for the businesses of Marathon Oil Company and certain other subsidiaries of USX, and a portion of the corporate assets and liabilities and related transactions which are not separately identified with ongoing operating units of USX. These financial statements are prepared using the amounts included in the USX consolidated financial statements. Corporate amounts reflected in these financial statements are determined based upon methods which management believes to be reasonable. The accounting policies applicable to the preparation of the financial statements of the Marathon Group may be modified or rescinded in the sole discretion of the Board of Directors of USX (Board), although the Board has no present intention to do so. The Board may also adopt additional policies depending on the circumstances. Although the financial statements of the Marathon Group, the U. S. Steel Group and the Delhi Group separately report the assets, liabilities (including contingent liabilities) and stockholders' equity of USX attributed to each such group, such attribution of assets, liabilities (including contingent liabilities) and stockholders' equity among the Marathon Group, the U. S. Steel Group and the Delhi Group for the purpose of preparing their respective financial statements does not affect legal title to such assets and responsibility for such liabilities. Holders of USX-Marathon Group Common Stock (Marathon Stock), USX-U. S. Steel Group Common Stock (Steel Stock) and USX-Delhi Group Common Stock (Delhi Stock) are holders of common stock of USX and continue to be subject to all the risks associated with an investment in 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 29 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 2. (Continued) USX Common Stock or series of Preferred Stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on all classes of Common Stock. Accordingly, the USX consolidated financial information should be read in connection with the Marathon Group financial information. 3. The method of calculating net income (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 based on the weighted average number of common shares outstanding plus common stock equivalents, provided they are not antidilutive. Common stock equivalents result from assumed exercise of stock options, where applicable. Fully diluted net income per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options provided, in each case, the effect is not antidilutive. 4. The items below are included in both revenues and operating costs, resulting in no effect on income.
(In millions) ------------------------------- Second Qtr. Six Months Ended Ended June 30 June 30 1997 1996 1997 1996 ---- ---- ---- ---- Consumer excise taxes on petroleum products and merchandise $664 $700 $1,319 $1,333 Matching crude oil and refined product buy/sell transactions settled in cash 551 723 1,306 1,322
5. The financial statement provision for estimated income taxes and related tax payments or refunds have been reflected in the Marathon Group, the U. S. Steel Group and the Delhi Group financial statements in accordance with USX's tax allocation policy for such groups. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated among the Marathon Group, the U. S. Steel Group and the Delhi Group for group financial statement purposes, based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to the respective groups. 30 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 5. (Continued) The provision for estimated income taxes for the Marathon Group is based on tax rates and amounts which recognize management's best estimate of current and deferred tax assets and liabilities. Differences between the combined interim tax provisions of the Marathon, U. S. Steel and Delhi Groups and USX consolidated are allocated to each group based on the relationship of the individual group provisions to the combined interim provisions. 6. Inventories are carried at the lower of cost or market. Cost of inventories of crude oil and refined products is determined under the last- in, first-out (LIFO) method.
(In millions) ---------------------- June 30 December 31 1997 1996 -------- ----------- Crude oil and natural gas liquids $471 $463 Refined products and merchandise 808 746 Supplies and sundry items 74 73 ------ ------ Total (at cost) 1,353 1,282 Less inventory market valuation reserve 178 - ------ ------ Net inventory carrying value $1,175 $1,282 ====== ======
The inventory market valuation reserve reflects the extent that the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. The reserve is decreased to reflect increases in market prices and inventory turnover and increased to reflect decreases in market prices. Changes in the inventory market valuation reserve result in noncash charges or credits to operating income. For additional information, see Outlook in the Marathon Group's Management's Discussion and Analysis of Financial Condition and Results of Operations. 7. The Marathon Group participates in an agreement (the program) to sell an undivided interest in certain accounts receivable subject to limited recourse. Payments are collected from the sold accounts receivable; the collections are reinvested in new accounts receivable for the buyers; and a yield, based on defined short-term market rates, is transferred to the buyers. At June 30, 1997, the amount sold under the program that had not been collected was $340 million, which will be forwarded to the buyers at the end of the agreement, or in the event of earlier contract termination. If the Marathon Group does not have a sufficient quantity of eligible accounts receivable to reinvest in for the buyers, the size of the program will be reduced accordingly. The buyers have rights to a pool of receivables that must be maintained at a level of 110% of the program size. 31 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 8. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Marathon Group involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Marathon Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Marathon Group. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. The Marathon Group is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At June 30, 1997, and December 31, 1996, accrued liabilities for remediation totaled $55 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 $41 million at June 30, 1997, and $23 million at December 31, 1996. For a number of years, the Marathon Group has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the first six months of 1997 and for the years 1996 and 1995, such capital expenditures totaled $31 million, $66 million and $50 million, respectively. The Marathon Group anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. At June 30, 1997, and December 31, 1996, accrued liabilities for platform abandonment and dismantlement totaled $122 million and $118 million, respectively. Guarantees by USX of the liabilities of affiliated entities of the Marathon Group totaled $48 million at June 30, 1997. As of June 30, 1997, the largest guarantee for a single affiliate was $41 million. At June 30, 1997, the Marathon Group's pro rata share of obligations of LOOP LLC and various pipeline affiliates secured by throughput and deficiency agreements totaled $175 million. Under the agreements, the Marathon Group is required to advance funds if the affiliates are unable to service debt. Any such advances are prepayments of future transportation charges. At June 30, 1997, contract commitments for the Marathon Group's capital expenditures for property, plant and equipment totaled $455 million compared with $388 million at December 31, 1996. 32 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The Marathon Group includes Marathon Oil Company ("Marathon") and certain other subsidiaries of USX which are engaged in worldwide exploration, production, transportation and marketing of crude oil and natural gas; domestic refining, marketing and transportation of petroleum products; and power generation. Management's Discussion and Analysis should be read in conjunction with the second quarter 1997 USX consolidated financial information and the Marathon Group Financial Statements and selected notes. The discussion of Results of Operations should be read in conjunction with the Supplemental Statistics provided on page 40. Certain sections of Management's Discussion and Analysis include forward- looking statements concerning trends or events potentially affecting the businesses of the Marathon Group. These statements typically contain words such as "believes", "estimates", "expects" or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in forward-looking statements. Results of Operations - --------------------- Revenues for the second quarter and first six months of 1997 and 1996 are summarized in the following table:
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 1997 1996 1997 1996 ----- ----- ----- ----- Refined products $1,724 $1,789 $3,410 $3,318 Merchandise 266 258 504 485 Liquid hydrocarbons 242 278 508 548 Natural gas 282 273 720 592 Transportation and other 46 50 90 100 ------ ------ ------ ------ Subtotal 2,560 2,648 5,232 5,043 Matching crude oil and refined product buy/sell transactions settled in cash (a) 551 723 1,306 1,322 Consumer excise taxes on petroleum products and merchandise (a) 664 700 1,319 1,333 ------ ------ ------ ------ Total Revenues $3,775 $4,071 $7,857 $7,698 ====== ====== ====== ====== (a)Included in both revenues and operating costs, resulting in no effect on income.
Revenues (excluding matching buy/sell transactions and excise taxes) decreased by $88 million, or 3%, in the second quarter of 1997 from the comparable prior-year period. The decrease primarily reflected lower average refined product prices and worldwide liquid hydrocarbon prices and volumes, partly offset by higher volumes of refined products. For the first six months of 1997, revenues increased by $189 million, or 4%, from the prior-year period, as higher average refined product and 33 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- worldwide natural gas prices and increased volumes of refined products were partially offset by reduced volumes of worldwide liquid hydrocarbons. Operating income and certain items included in operating income for the second quarter and first six months of 1997 and 1996 are set forth in the following table:
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 1997 1996 1997 1996 ----- ----- ----- ----- Operating income $231 $234 $445 $611 Less: Certain favorable (unfavorable) items Inventory market valuation reserve adjustment (a) (64) (72) (178) 83 Charges for withdrawal from MPA (b) - - - (10) ------ ------ ------ ------ Subtotal (64) (72) (178) 73 ------ ------ ------ ------ Operating income adjusted to exclude above items $295 $306 $623 $538 ====== ====== ====== ====== (a)The inventory market valuation reserve reflects the extent to which the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. For additional discussion of this noncash adjustment, see Outlook herein. (b)Marine Preservation Association ("MPA") is a non-profit oil spill response group.
Adjusted operating income in the second quarter of 1997 declined by $11 million from last year's second quarter, due primarily to decreased volumes and prices of worldwide liquid hydrocarbons and increased administrative expenses, partially offset by higher average margins on refined products. Adjusted operating income in the first six months of 1997 increased by $85 million from the first six months of 1996, as higher average refined product margins and higher worldwide natural gas and liquid hydrocarbon prices were partially offset by reduced worldwide liquid hydrocarbon production. Second quarter operating income for domestic exploration and production ("upstream") decreased by $34 million in 1997 from 1996. The decline was mainly due to lower liquid hydrocarbon prices, decreased liquid hydrocarbon production, and increased dry well expense, partially offset by an increase in natural gas production volumes. The lower liquid hydrocarbon volumes were mostly due to the fourth quarter 1996 disposal of oil producing properties in Alaska, while the increase in gas volumes was mainly attributable to the Cotton Valley Pinnacle Reef play in east Texas. International upstream's second quarter operating income was virtually unchanged in 1997 from 1996. While revenues declined, mainly due to lower liquid hydrocarbon and natural gas volumes and decreased liquid hydrocarbon prices, these unfavorable items were offset by lower pipeline and terminal expenses and reduced depreciation, depletion and amortization expense, also due largely to the lower volumes. The decrease in liquid hydrocarbon volumes primarily reflected lower 34 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- liftings in the U.K. North Sea, while the lower natural gas volumes were mainly attributable to the Heimdal field in the Norwegian North Sea due to reduced customer demand and temporary pipeline shutdowns. Second quarter operating income for refining, marketing and transportation ("downstream") operations increased by $39 million in 1997 from 1996, primarily reflecting higher refined product margins as crude oil and other feedstock acquisition costs decreased more than refined product prices. Administrative expense in the second quarter increased by $17 million in 1997 from 1996, mainly reflecting increased accruals for employee benefit and compensation plans, including Marathon's performance-based variable pay plan, and litigation. Other income in the first six months of 1997 and 1996 included gains of $11 million and $20 million, respectively, on the sales of interests in certain domestic pipeline companies and other investments. Net interest and other financial costs in the first six months of 1997 decreased by $26 million from the comparable 1996 period, mainly due to lower average debt levels. Net income for the second quarter and first six months decreased by $6 million and $114 million, respectively, in 1997 from 1996. Excluding the aftertax effects of the inventory market valuation adjustment and other special items, financial results decreased by $11 million for the second quarter and increased by $57 million for the first six months in 1997 from 1996, primarily reflecting the factors discussed above. Cash Flows - ---------- Net cash provided from operating activities was $508 million in the first six months of 1997, compared with $605 million in the first six months of 1996. Excluding first quarter 1996 payments of $39 million related to certain state tax issues, net cash from operating activities decreased by $136 million, mainly reflecting increased income tax payments and other unfavorable working capital changes, partially offset by the favorable effects of improved net income (excluding noncash items). Capital expenditures for property, plant and equipment in the first six months of 1997 totaled $389 million, compared with $250 million in the comparable 1996 period. Expenditures in these periods were primarily for domestic upstream projects, with spending in the first six months of 1997 including development of the following Gulf of Mexico properties - Viosca Knoll 786 ("Petronius"), Green Canyon 244 ("Troika") and Ewing Bank 963. Contract commitments for capital expenditures were $455 million at June 30, 1997, compared with $388 million at year-end 1996. Cash from the disposal of assets was $22 million in the first six months of 1997, compared with $115 million in the first six months of 1996. Proceeds in 1996 were mainly from the sales of interests in oil and gas production properties in Indonesia and Tunisia and an interest in a domestic pipeline company. 35 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The net withdrawal from property exchange trusts of $94 million in the first six months of 1997 mainly represents cash withdrawn from an interest- bearing escrow account that was established in the fourth quarter of 1996 in connection with the disposal of oil production properties in Alaska. Investments in equity affiliates of $137 million in the first six months of 1997 mainly reflected funding of equity affiliates' capital projects, including the Nautilus natural gas pipeline system in the Gulf of Mexico and the Sakhalin II project in Russia. Also included were Marathon's acquisition of an additional 7.5% interest in Sakhalin Energy Investment Company Ltd., and the acquisition of a 50% ownership in a power generation company in Ecuador. Financial obligations increased by $61 million in the first six months of 1997. Cash and cash equivalents increased by $58 million from year-end 1996, while cash used for capital expenditures, investments in equity affiliates and dividend payments was virtually offset by net cash provided from operating activities, trust withdrawals and asset disposals. Financial obligations consist of the Marathon Group's portion of USX debt and preferred stock of a subsidiary attributed to all three groups, as well as debt specifically attributed to the Marathon Group. Dividends paid in the first six months of 1997 increased by $11 million from the first six months of 1996 reflecting the two-cents-per-share increase in the quarterly USX-Marathon Group Common Stock dividend rate, initially declared in October 1996. 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 19 waste sites related to the Marathon Group under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of June 30, 1997. In addition, there are 9 sites related to the Marathon Group where USX has received information requests or other indications that USX may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability. There are also 67 additional sites, excluding retail marketing outlets, related to the Marathon Group where remediation is being sought under other 36 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. At many of these sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. The Marathon Group accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. Effective January 1, 1997, USX adopted the American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" ("SOP 96-1"). Operating income for the first six months of 1997 included first quarter charges of $7 million (net of expected recoveries) related to such adoption, primarily for accruals of post-closure monitoring costs, study costs and administrative costs. See Note 1 to the Marathon Group Financial Statements for additional discussion. Accrued liabilities for remediation totaled $55 million at June 30, 1997, an increase of $18 million from December 31, 1996, due primarily to first quarter accrual adjustments for adoption of SOP 96-1 and accruals related to retail marketing outlets. Receivables for expected recoveries totaled $41 million at June 30, 1997, an increase of $18 million from December 31, 1996, due primarily to first quarter accrual adjustments reflecting an increase in the estimated portion of costs that are ultimately recoverable, and accruals for recoveries associated with adoption of SOP 96-1. See Note 8 to the Marathon Group Financial Statements. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Marathon Group involving a variety of matters, including laws and regulations relating to the environment (see Note 8 to the Marathon Group Financial Statements for a discussion of certain of these matters). The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Marathon Group Financial Statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Marathon Group. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. Outlook - ------- The outlook regarding the Marathon Group's revenues, margins and income is largely dependent upon future prices and volumes of crude oil, natural gas and refined products. Prices have historically been volatile and have frequently been driven by unpredictable changes in supply and demand resulting from fluctuations in economic activity and political developments in the world's major oil and gas producing areas, including OPEC member countries. Any substantial decline in such prices could have a material adverse effect on the Marathon Group's results of operations. A prolonged decline in such prices could also adversely affect the quantity of crude oil and natural gas reserves that can be economically produced and the amount of capital available for exploration and development. 37 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Relative to the changing levels of commodity prices, when U.S. Steel Corporation acquired Marathon Oil Company in March 1982, crude oil and refined product prices were at historically high levels. In applying the purchase method of accounting, Marathon's crude oil and refined product inventories were revalued by reference to current prices at the time of acquisition. This became the new LIFO cost basis of the inventories, which has been maintained since the 1982 acquisition. Generally accepted accounting principles require that inventories be valued at lower of cost or market. Accordingly, Marathon has established an inventory market valuation ("IMV") reserve to reduce the LIFO cost basis of these inventories on a quarterly basis, to the extent necessary, to current market value. Adjustments to the IMV reserve result in noncash charges or credits to operating income. These adjustments affect the comparability of financial results from period to period as well as comparisons with other energy companies, which may not have such adjustments. The IMV reserve adjustments have been separately reported, on a consistent basis, as a component of operating results and separately identified in management's discussion of operations. Commodity prices have fluctuated widely and, since 1986, have generally remained below prices that existed at the time of the 1982 acquisition, resulting in periodic adjustments to the LIFO cost basis of the inventories. At December 31, 1996, market prices exceeded LIFO cost, and no IMV reserve was required. At June 30, 1997, LIFO cost exceeded market prices by $178 million, resulting in a corresponding charge to operating income ($64 million in the second quarter). During the first six months of 1996, favorable market price movements resulted in an $83 million credit to operating income ($72 million charge in the second quarter). This $261 million variance in operating income between the two six- month periods ($8 million variance for the second quarter) affects the comparability of reported financial results. In management's opinion, the Marathon Group's operating performance should be evaluated exclusive of the IMV reserve adjustments, which management believes provides a more indicative view of the profit and cash flow performance of the Group. As commodity prices continue to fluctuate, future quarterly IMV reserve adjustments can be reasonably expected. In addition to reported financial results, management believes that the Marathon Group's future operating performance should be evaluated exclusive of the impact of these adjustments, whether favorable or unfavorable. In May 1997, Marathon announced the completion of the Jenna Nicole well #1- 28, located in Oklahoma's Carter-Knox field. The well tested at a rate of 10 million cubic feet per day in the Arbuckle formation. Marathon owns a 100% working interest in this well. This discovery is significant in that it opens up the possibility of a large portion of the Carter-Knox field being commercially productive in the Arbuckle formation. Marathon owns an average working interest of about 40% in the Carter-Knox field. In June, Marathon announced an oil discovery in the U.K. North Sea on Block 16/6b. The well was drilled to a depth of 7,150 feet and encountered 107 feet of net oil pay. Marathon is the operator and holds a 62.5% working interest in the well, which is located 12 miles west of the Marathon-operated Brae "A" platform. Further appraisal drilling is planned. 38 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- In July, Marathon announced a deepwater discovery on Green Canyon Block 112 in the Gulf of Mexico. The well was drilled to 20,422 feet, encountering 70 feet of net oil pay in two reservoirs. A sidetrack hole encountered 67 feet of net oil pay in one of the previously penetrated reservoirs. Production liner has been run, and it is anticipated this well will be utilized as a development well. Marathon is the operator and holds a 65% working interest in this discovery, which is located six miles north of Marathon's Troika subsea development project. Further appraisal drilling is planned. The Marathon Group holds a 37.5% interest in Sakhalin Energy Investment Company Ltd. ("Sakhalin Energy"), an incorporated joint venture company responsible for the overall management of the Sakhalin II project. On July 25, 1997, authorized representatives of the Russian Government approved the Development Plan for the Piltun-Astokhskoye ("P-A") License Area, Phase 1: Astokh Feature. This approval authorizes Sakhalin Energy to develop the Astokh Feature, located offshore Sakhalin Island. The development plan estimates gross reserves for Phase 1 of the Astokh Feature to be approximately 240 million barrels of oil, with first production forecast for mid-1999. Appraisal work for the remainder of the P-A field was also authorized. The P-A full field development plan is scheduled to be completed and submitted to the Russian Government by June 1999. On May 15, 1997, USX Corporation announced that the Marathon Group and Ashland Inc. had signed a Letter of Intent to pursue a combination of major elements of their refining, marketing and transportation operations. Under the terms of the Letter of Intent, Marathon will have a 62% ownership interest and Ashland will have a 38% interest in a new limited liability joint venture company, which is expected to be formed following regulatory reviews, completion of due diligence work and execution of definitive agreements. Approval by the boards of USX and Ashland is also required. Prospective senior officers of the new company have been named, and identification of potential efficiencies and opportunities for the new company is ongoing. The transaction is targeted for completion by the end of 1997. Marathon and its co-venturers recently announced the formation of Odyssey Pipeline L.L.C. ("Odyssey"), a network of crude oil pipelines serving existing and future development projects in the eastern Gulf of Mexico. Odyssey, which is expected to have an initial capacity of 300,000 barrels per day, will combine an existing 40-mile system with 80 miles of new pipeline. One of the new pipeline segments, scheduled to begin construction in early 1998, will serve Marathon's Petronius project on Viosca Knoll 786. Marathon's interest in Odyssey is 29%. In April, Marathon and its Indonesian partner, Paramarthacitra Mulia pt, were awarded the development rights to the Suoh-Sekincau geothermal prospect in South Sumatra, Indonesia on a build-own-operate basis for the steam field and power plant. Initial project size is 110 megawatts, with Marathon having a net participating interest of 85%. Marathon is actively pursuing a variety of other power generation projects through its 100% subsidiary, Marathon Power Company, Ltd., including projects in Tunisia, Bangladesh and India. The above forward-looking statements regarding discoveries, projects, reserves and dates of initial production are based on a number of assumptions, including (among others) prices, supply and demand, regulatory constraints, reserve estimates, drilling rig availability and geological and operating considerations. In addition, development of new production properties in countries outside the United States may 39 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- require protracted negotiations with host governments and is frequently subject to political considerations, such as tax regulations, which could adversely affect the economics of projects. With respect to the Sakhalin II project in Russia, Sakhalin Energy continues to seek to have certain Russian laws and normative acts at the Russian Federation and local levels brought into compliance with the existing Production Sharing Agreement Law. To the extent these assumptions prove inaccurate and negotiations, other considerations and legal developments are not satisfactorily resolved, actual results could be materially different than present expectations. Accounting Standard - ------------------- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"), which changes the computation and presentation of net income per share. USX will adopt SFAS No. 128 in the fourth quarter of 1997, as required. While restatement for prior-periods is required by the standard, net income per share presented for USX-Marathon Group Common Stock for the second quarter and first six months of 1997 and for the years 1996 and 1995 will not change materially. 40
MARATHON GROUP OF USX CORPORATION SUPPLEMENTAL STATISTICS (Unaudited) ----------------------------------- Second Quarter Six Months Ended June 30 Ended June 30 (Dollars in millions) 1997 1996 1997 1996 - -------------------------------------------------------------------------------- OPERATING INCOME (LOSS) Exploration & Production Domestic $107 $141 $290 $261 International 72 71 173 168 Refining, Marketing & Transportation 165 126 247 160 Gas Gathering and Processing 2 2 5 5 Administrative (51) (34) (92) (66) ------ ------ ------ ------ $295 $306 $623 $528 Inventory Market Val. Res. Adjustment. (64) (72) (178) 83 ------ ------ ------ ------ Total Marathon Group $231 $234 $445 $611 CAPITAL EXPENDITURES $271 $150 $389 $250 INVESTMENTS IN EQUITY AFFILIATES-NET 80 4 137 2 OPERATING STATISTICS Net Liquid Hydrocarbon Production (a): Domestic 113.3 122.7 114.0 124.3 International 50.9 60.6 52.2 63.0 ------ ------ ------ ------ Worldwide 164.2 183.3 166.2 187.3 Net Natural Gas Production (b): Domestic 694.2 651.4 726.2 670.6 International - Equity 401.6 455.1 469.0 526.0 International - Other (c) 25.9 31.9 31.8 33.5 ------- ------- ------- ------- Total Consolidated 1,121.7 1,138.4 1,227.0 1,230.1 Equity Affiliate 39.4 36.8 47.1 49.5 ------- ------- ------- ------- Worldwide 1,161.1 1,175.2 1,274.1 1,279.6 Average Equity Sales Prices (d): Liquid Hydrocarbons (per Bbl) Domestic $16.10 $18.11 $17.69 $17.13 International 17.11 19.28 19.25 18.91 Natural Gas (per Mcf) Domestic $1.98 $2.01 $2.27 $2.02 International 1.90 1.90 2.05 1.88 Natural Gas Sales (b) (e): Domestic 1,123.8 972.7 1,184.3 1,031.7 International 427.5 487.0 500.8 559.5 ------- ------- ------- ------- Total Consolidated 1,551.3 1,459.7 1,685.1 1,591.2 Equity Affiliate 39.4 36.8 47.1 49.5 ------- ------- ------- ------- Worldwide 1,590.7 1,496.5 1,732.2 1,640.7 Crude Oil Refined (a) 499.9 523.4 488.0 506.6 Refined Products Sold (a) 758.2 784.4 741.2 754.8 Matching buy/sell volumes included in above (a) 45.9 95.0 54.8 77.1 - ------------ (a) Thousands of barrels per day (b) Millions of cubic feet per day (c) Represents gas acquired for injection and subsequent resale (d) Prices exclude gains and losses from hedging activities (e) Represents equity, royalty and resale volumes
41 Part I - Financial Information (Continued): C. U. S. Steel Group U. S. STEEL GROUP OF USX CORPORATION STATEMENT OF OPERATIONS (Unaudited) ------------------------------------
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions, except per share amounts) 1997 1996 1997 1996 - -------------------------------------------------------------------------------- REVENUES $1,721 $1,580 $3,341 $3,171 OPERATING COSTS: Cost of sales (excludes items shown below) 1,438 1,484 2,842 2,899 Selling, general and administrative expenses (credits) (33) (39) (70) (80) Depreciation, depletion and amortization 79 75 153 153 Taxes other than income taxes 60 59 119 117 ------ ------ ------ ------ Total operating costs 1,544 1,579 3,044 3,089 ------ ------ ------ ------ OPERATING INCOME 177 1 297 82 Gain on affiliate stock offering - 53 - 53 Other income 17 13 28 21 Interest and other financial income - 2 1 3 Interest and other financial costs (38) (29) (50) (58) ------ ------ ------ ------ INCOME BEFORE INCOME TAXES 156 40 276 101 Less provision for estimated income taxes 59 8 92 23 ------ ------ ------ ------ NET INCOME 97 32 184 78 Noncash credit from exchange of preferred stock 10 - 10 - Dividends on preferred stock (2) (5) (8) (11) ------ ------ ------ ------ NET INCOME APPLICABLE TO STEEL STOCK $105 $27 $186 $67 ====== ====== ====== ====== STEEL STOCK DATA: Net income per share - Primary $1.23 $.32 $2.19 $.80 - Fully diluted 1.06 .32 2.00 .80 Dividends paid per share .25 .25 .50 .50 Weighted average shares, in thousands - Primary 85,635 83,653 85,322 83,425 - Fully diluted 93,749 83,653 93,435 84,619 Selected notes to financial statements appear on pages 44-49.
42 U. S. STEEL GROUP OF USX CORPORATION BALANCE SHEET (Unaudited) ------------------------------------
June 30 December 31 (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $16 $23 Receivables, less allowance for doubtful accounts of $5 and $23 473 580 Inventories 706 648 Deferred income tax benefits 182 177 ------ ------ Total current assets 1,377 1,428 Investments and long-term receivables, less reserves of $17 and $17 648 621 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $5,742 and $5,796 2,498 2,551 Long-term deferred income tax benefits 198 217 Prepaid pensions 1,822 1,734 Other noncurrent assets 31 29 ------ ------ Total assets $6,574 $6,580 ====== ====== LIABILITIES Current liabilities: Notes payable $10 $18 Accounts payable 685 667 Payroll and benefits payable 419 365 Accrued taxes 136 154 Accrued interest 12 22 Long-term debt due within one year 28 73 ------ ------ Total current liabilities 1,290 1,299 Long-term debt, less unamortized discount 536 1,014 Employee benefits 2,414 2,430 Deferred credits and other liabilities 546 207 Preferred stock of subsidiary 64 64 USX obligated mandatorily redeemable convertible preferred securities of a subsidiary trust 182 - STOCKHOLDERS' EQUITY Preferred stock 3 7 Common stockholders' equity 1,539 1,559 ------ ------ Total stockholders' equity 1,542 1,566 ------ ------ Total liabilities and stockholders' equity $6,574 $6,580 ====== ====== Selected notes to financial statements appear on pages 44-49.
43 U. S. STEEL GROUP OF USX CORPORATION STATEMENT OF CASH FLOWS (Unaudited) ------------------------------------
Six Months Ended June 30 (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income $184 $78 Adjustments to reconcile to net cash provided from operating activities: Depreciation, depletion and amortization 153 153 Pensions (82) (84) Postretirement benefits other than pensions (1) 7 Deferred income taxes 24 49 Gain on disposal of assets (7) (5) Gain on affiliate stock offering - (53) Payment of amortized discount on zero coupon debentures (3) - Changes in: Current receivables 89 5 Inventories (58) (29) Current accounts payable and accrued expenses 28 (72) All other - net (33) (29) ------ ------ Net cash provided from operating activities 294 20 ------ ------ INVESTING ACTIVITIES: Capital expenditures (117) (158) Disposal of assets 374 142 Investments in equity affiliates - net (15) 5 All other - net 8 (8) ------ ------ Net cash provided from (used in) investing activities 250 (19) ------ ------ FINANCING ACTIVITIES: Decrease in U. S. Steel Group's share of USX consolidated debt (517) (12) Specifically attributed debt repayments (6) (3) Steel Stock issued 21 33 Dividends paid (49) (51) ------ ------ Net cash used in financing activities (551) (33) ------ ------ NET DECREASE IN CASH AND CASH EQUIVALENTS (7) (32) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 23 52 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $16 $20 ====== ====== Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $(59) $(45) Income taxes paid, including settlements with other groups (45) (20) NONCASH TRANSACTION - mandatorily redeemable securities exchanged for preferred stock 182 - Selected notes to financial statements appear on pages 44-49.
44 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS -------------------------------------- (Unaudited) 1. The information furnished in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. Additional information is contained in the USX Annual Report on Form 10-K for the year ended December 31, 1996. Effective January 1, 1997, USX adopted American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" (SOP 96-1), which provides additional interpretation of existing accounting standards related to recognition, measurement and disclosure of environmental remediation liabilities. As a result of adopting SOP 96-1 in the first quarter, the U. S. Steel Group identified additional environmental remediation liabilities of $35 million, of which $28 million was discounted to a present value of $13 million and $7 million was not discounted. Assumptions used in the calculation of the present value amount included an inflation factor of 2% and an interest rate of 7% over a range of 22 to 30 years. The unfavorable effect on first quarter 1997 operating income was $20 million. 2. The financial statements of the U. S. Steel Group include the financial position, results of operations and cash flows for all businesses of USX other than the businesses, assets and liabilities included in the Marathon Group or the Delhi Group, and a portion of the corporate assets and liabilities and related transactions which are not separately identified with ongoing operating units of USX. These financial statements are prepared using the amounts included in the USX consolidated financial statements. Corporate amounts reflected in these financial statements are determined based upon methods which management believes to be reasonable. The accounting policies applicable to the preparation of the financial statements of the U. S. Steel Group may be modified or rescinded in the sole discretion of the Board of Directors of USX (Board), although the Board has no present intention to do so. The Board may also adopt additional policies depending on the circumstances. Although the financial statements of the U. S. Steel Group, the Marathon Group and the Delhi Group separately report the assets, liabilities (including contingent liabilities) and stockholders' equity of USX attributed to each such group, such attribution of assets, liabilities (including contingent liabilities) and stockholders' equity among the U. S. Steel Group, the Marathon Group and the Delhi Group for purposes of preparing their respective 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 45 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 2. (Continued) Common Stock or series of Preferred Stock and repurchases of any class of USX Common Stock or series of Preferred Stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on all classes of Common Stock. Accordingly, the USX consolidated financial information should be read in connection with the U. S. Steel Group financial information. 3. The method of calculating net income (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 the noncash credit on exchange 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 $74 million and $81 million in the first six months of 1997 and 1996, respectively, ($36 million and $41 million in the second quarter of 1997 and 1996, respectively). These pension credits are primarily noncash and for the most part are included in selling, general and administrative expenses. 5. 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. 46 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 6. In December 1996, USX issued $117 million of debt (notes) indexed to the price of RMI common stock. At maturity in February 2000, USX must exchange these notes for shares of RMI common stock, or redeem the notes for the equivalent amount of cash. Interest and other financial costs included adjustments to the carrying value of the indexed debt of $10 million unfavorable for the second quarter of 1997 and $6 million favorable for the first six months of 1997. 7. 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. 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. 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) ----------------------- June 30 December 31 1997 1996 -------- ----------- Raw materials $122 $124 Semi-finished products 354 309 Finished products 176 162 Supplies and sundry items 54 53 ---- ---- Total $706 $648 ==== ====
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 47 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 9. (Continued) reinvested in new accounts receivable for the buyers; and a yield, based on defined short-term market rates, is transferred to the buyers. At June 30, 1997, the amount sold under the program that had not been collected was $350 million, which will be forwarded to the buyers at the end of the agreement, or in the event of earlier contract termination. If the U. S. Steel Group does not have a sufficient quantity of eligible accounts receivable to reinvest in for the buyers, the size of the program will be reduced accordingly. The buyers have rights to a pool of receivables that must be maintained at a level of 115% of the program size. In the event of a change in control of USX, as defined in the agreement, the U. S. Steel Group may be required to forward payments collected on sold accounts receivable to the buyers. Prior to 1993, USX Credit, a division of USX, sold certain of its loans receivable subject to limited recourse under an agreement that expires in December 1997. USX Credit continues to collect payments from the loans and transfer to the buyers principal collected plus yield based on defined short-term market rates. At June 30, 1997, the balance of sold loans receivable subject to recourse was $19 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. 10. In the second quarter of 1997, USX exchanged approximately 3.9 million 6.75% Convertible Quarterly Income Preferred Securities (Trust Preferred Securities) of USX Capital Trust I, a Delaware statutory business trust (Trust), for an equivalent number of shares of its 6.50% Cumulative Convertible Preferred Stock (6.50% Preferred Stock) (Exchange). The Exchange resulted in the recording of Trust Preferred Securities at a fair value of $182 million and a noncash credit to Retained Earnings of $10 million. USX owns all of the common securities of the Trust, which was formed for the purpose of the Exchange. (The Trust Common Securities and the Trust Preferred Securities are together referred to as the Trust Securities.) The Trust Securities represent undivided beneficial ownership interests in the assets of the Trust, which consist solely of USX 6.75% Convertible Junior Subordinated Debentures maturing March 31, 2037 (Debentures), having an aggregate principal amount equal to the aggregate initial liquidation amount ($50.00 per security and $203 million in total) of the Trust Securities issued by the Trust. Interest and principal payments on the Debentures will be used to make quarterly distributions and to pay redemption and liquidation amounts on the Trust Preferred Securities. The quarterly distributions, which accumulate at the rate of 6.75% per annum on the Trust Preferred Securities and the accretion from fair value to the initial liquidation amount, are charged to income and included in interest and other financial costs. 48 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 10. (Continued) Under the terms of the Debentures, USX has the right to defer payment of interest for up to 20 consecutive quarters and, as a consequence, monthly distributions on the Trust Preferred Securities will be deferred during such period. If USX exercises this right, then, subject to limited exceptions, it may not pay any dividend or make any distribution with respect to any shares of its capital stock. The Trust Preferred Securities are convertible at any time prior to the close of business on March 31, 2037, (unless such right is terminated earlier under certain circumstances) at the option of the holder, into shares of Steel Stock at a conversion price of $46.25 per share of Steel Stock (equivalent to a conversion ratio of 1.081 shares of Steel Stock for each Trust Preferred Security), subject to adjustment in certain circumstances. The Trust Preferred Securities may be redeemed at any time at the option of USX, initially at a premium of 103.90% of the initial liquidation amount through March 31, 1998, and thereafter, declining annually to the initial liquidation amount on April 1, 2003 and thereafter. They are mandatorily redeemable at March 31, 2037, or earlier under certain circumstances. Payments related to quarterly distributions and to the payment of redemption and liquidation amounts on the Trust Preferred Securities by the Trust are guaranteed by USX on a subordinated basis. 11. Effective June 1, 1997, the U. S. Steel Group entered into a strategic partnership with two limited partners to acquire an interest in three coke batteries at its Clairton (Pa.) Works and to operate and sell coke and byproducts from those facilities. The U. S. Steel Group is the general partner and is responsible for purchasing, operations and products marketing. Proceeds as a result of the transaction were $361 million, and deferred gains of $262 million at June 30, 1997 (included in deferred credits and other liabilities) will be recognized over the life of the partnership's assets. The U. S. Steel Group's partnership interest will be accounted for under the equity method of accounting. 12. 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. 49 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 12. (Continued) The U. S. Steel Group is subject to federal, state and local laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At June 30, 1997, and December 31, 1996, accrued liabilities for remediation totaled $110 million and $107 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. For a number of years, the U. S. Steel Group has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the first six months of 1997 and for the years 1996 and 1995, such capital expenditures totaled $26 million, $90 million and $55 million, respectively. The U. S. Steel Group anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. Guarantees by USX of the liabilities of affiliated entities of the U. S. Steel Group totaled $36 million at June 30, 1997. In the event that any defaults of guaranteed liabilities occur, USX has access to its interest in the assets of the affiliates to reduce U. S. Steel Group losses resulting from these guarantees. As of June 30, 1997, the largest guarantee for a single affiliate was $14 million. At June 30, 1997, contract commitments for the U. S. Steel Group's capital expenditures for property, plant and equipment totaled $127 million compared with $134 million at December 31, 1996. 50 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The U. S. Steel Group includes U. S. Steel, which is primarily engaged in the production and sale of steel mill products, coke and taconite pellets. The U. S. Steel Group also includes the management of mineral resources, domestic coal mining, engineering and consulting services and technology licensing (together with U. S. Steel, the "Steel and Related Businesses"). Other businesses that are part of the U. S. Steel Group include real estate development and management, and leasing and financing activities. Management's Discussion and Analysis should be read in conjunction with the second quarter 1997 USX consolidated financial information and the U. S. Steel Group Financial Statements and selected notes. The discussion of Results of Operations should be read in conjunction with the Supplemental Statistics provided on page 56. Certain sections of Management's Discussion and Analysis include forward- looking statements concerning trends or events potentially affecting the businesses of the U. S. Steel Group. These statements typically contain words such as "anticipates", "believes", "estimates", "expects" or similar words indicating that future outcomes are not known with certainty and subject to risk factors that could cause these outcomes to differ significantly from those projected. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in forward-looking statements. Results of Operations - --------------------- Revenues for the U. S. Steel Group increased $141 million and $170 million in the second quarter and first six months of 1997, respectively, compared with the same periods in 1996. These increases primarily reflected higher average realized steel prices and higher steel shipment volumes. Operating income and certain items included in operating income for the second quarter and first six months of 1997 and 1996 are set forth in the following table:
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 1997 1996 1997 1996 ------ ------ ------ ------ Operating income $177 $1 $297 $82 Less: certain favorable (unfavorable) items for Effect of adoption of SOP 96-1 (a) - - (20) - Certain other environmental accrual adj. - net - - 11 - Gary Works No. 13 blast furnace repairs (b) - (39) - (39) Certain legal accruals - (20) - (20) ----- ----- ----- ----- Subtotal - (59) (9) (59) ----- ----- ----- ----- Operating income adjusted to exclude above items $177 $60 $306 $141 ===== ===== ===== ===== - ------ (a) American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" ("SOP 96-1") provides additional guidance on recognition, measurement and disclosure of remediation liabilities. For further details, see Note 1 to the U. S. Steel Group 51 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Financial Statements. (b) Reflects repair of damages incurred during a break-out on April 2, 1996; excludes effects of business interruption.
Adjusted operating income for the U. S. Steel Group increased $117 million and $165 million in the second quarter and first six months of 1997, respectively, compared with the same periods in 1996. These increases were primarily due to higher results from Steel and Related Businesses. Operating income for Steel and Related Businesses increased $173 million and $227 million in the second quarter and first six months of 1997, respectively, compared with the same periods in 1996. Results in second quarter and first six months of 1996 included $39 million of charges related to repair costs on the Gary (Ind.) Works No. 13 blast furnace which was idled by a hearth break-out on April 2, 1996, and $16 million of charges for unrelated accruals. Excluding these charges, second quarter and first six months of 1997 operating income increased $118 million and $172 million, respectively, from the same periods in 1996. These increases were primarily due to higher steel shipment volumes, higher average realized steel prices, lower operating costs and operating efficiencies. In the second quarter of 1996, operations were negatively impacted by the Gary Works No. 13 blast furnace hearth break-out, which resulted in production inefficiencies at Gary Works, as well as other U. S. Steel plants, reduced shipments and higher costs for purchased iron and semifinished steel. Operating income for Administrative and Other Businesses in the first six months of 1997 included charges of $9 million related to environmental accruals and the adoption of SOP 96-1. Operating income for Administrative and Other Businesses in the first six months of 1996 included charges of $4 million related to legal accruals. Excluding these charges, first six months of 1997 operating income decreased $7 million from the same period of 1996 primarily due to lower pension credits, partially offset by higher income from USX Credit. Administrative and Other Businesses includes the portion of pension credits, postretirement benefit costs and certain other expenses principally attributable to the former businesses of the U. S. Steel Group as well as USX corporate general and administrative costs allocated to the U. S. Steel Group. The pension credits referred to in Administrative and Other Businesses, combined with pension costs for ongoing operating units of the U. S. Steel Group, resulted in net pension credits (which are primarily noncash) of $74 million and $81 million in the six months of 1997 and 1996, respectively. The amounts of these credits fluctuate over time primarily reflecting changes in the expected long-term rate of return on plan assets and assumed discount rate on the outstanding pension obligation. To the extent that these credits decline in the future, operating income would be adversely affected. Gain on affiliate stock offering totaled $53 million for the second quarter and first six months of 1996. For further details, see Note 5 to the U. S. Steel Group Financial Statements. Other income in the first six months of 1997 increased $7 million compared with first six months of 1996 due to higher income from affiliates. 52 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Net interest and other financial costs for the second quarter and first six months of 1997 and 1996 are set forth in the following table:
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 1997 1996 1997 1996 - -------------------------------------------------------------------------------- Interest and other financial income $- $2 $1 $3 Interest and other financial costs (38) (29) (50) (58) ------ ------ ------ ------ Net interest and other financial costs (38) (27) (49) (55) Less: Favorable (unfavorable) adjustment to carrying value of indexed debt(a) (10) - 6 - ------ ------ ------ ------ Net interest and other financial costs adjusted to exclude above item $(28) $(27) $(55) $(55) ====== ====== ====== ====== - ------ (a) In December 1996, USX issued $117 million in aggregate principal amount of 6.75% Notes Due February 1, 2000 ("indexed debt"), mandatorily exchangeable at maturity for common stock of RMI Titanium Company ("RMI") (or for the equivalent amount of cash, at USX's option). The carrying value of indexed debt is adjusted quarterly to settlement value based on changes in the value of RMI common stock. Any resulting adjustment is charged or credited to income and included in interest and other financial costs. USX's 27% interest in RMI continues to be accounted for under the equity method.
Provisions for estimated income taxes in the second quarter and first six months of 1997 included adjustments relating to the 1997 tax year, reflecting a reduction in estimated tax credits and an increase in estimated state income tax expense. A significant portion of these adjustments resulted from U. S. Steel Group's entry into a strategic partnership to acquire an interest in three coke batteries at its Clairton (Pa.) Works (for additional information, see Note 11 to the U. S. Steel Group Financial Statements). The six month effect of these adjustments was recorded in the second quarter. Net income increased $65 million and $106 million in the second quarter and first six months of 1997, respectively, as compared with the same periods in 1996. The increase mainly reflects the factors discussed above. Noncash credit from exchange of preferred stock totaled $10 million. On May 16, 1997, USX exchanged approximately 3.9 million 6.75% Convertible Quarterly Income Preferred Securities ("Trust Preferred Securities") of USX Capital Trust I, for an equivalent number of shares of its outstanding 6.50% Cumulative Convertible Preferred Stock ("6.50% Preferred Stock"). The noncash credit from exchange of preferred stock represents the difference between the carrying value of the 6.50% Preferred Stock compared to the fair value of the Trust Preferred Securities of USX Capital Trust I, at the date of the exchange. For additional discussion on the exchange, see Note 10 to the U. S. Steel Group Financial Statements. 53 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Operating Statistics - -------------------- Second quarter 1997 steel shipments of 2.9 million tons and raw steel production of 3.2 million tons increased 11% and 25%, respectively, from the same quarter of 1996. First half 1997 steel shipments of 5.8 million tons and raw steel production of 6.2 million tons increased 5% and 10%, respectively, from the first six months of 1996. Raw steel capability utilization in the second quarter and first six months of 1997 averaged 99% and 98%, respectively, versus 80% and 90% in the same periods of 1996. Cash Flows - ------------ Net cash provided from operating activities was $294 million in the first six months of 1997, compared with $20 million in the same period of 1996. The first six months of 1996 included a payment of $28 million related to the Pickering litigation. Excluding this item, net cash from operating activities increased by $246 million due to favorable working capital changes and increased profitability. Capital expenditures for property, plant and equipment in the first six months of 1997 was $117 million, compared with $158 million in the same period in 1996. Capital expenditures for the year 1997 are expected to total approximately $290 million, compared with $337 million in 1996. Capital expenditures for 1997 include a blast furnace reline at the Mon Valley Works, a new heat treat line for plates at the Gary Works and additional environmental expenditures primarily at the Gary Works. Contract commitments for capital expenditures at June 30, 1997 were $127 million, compared with $134 million at year-end 1996. Cash from the disposal of assets increased $232 million in the first six months of 1997, compared with the same period of 1996. The 1997 proceeds included $361 million resulting from U. S. Steel's entry into a strategic partnership with two limited partners to acquire an interest in three coke batteries at its Clairton Works. The gain of $262 million from this transaction will be recognized in income over the life of the partnership's assets. The net effect of this transaction did not have a material impact on second quarter net income and is not expected to have a material impact on full year 1997 net income. For additional information, see Note 11 to the U. S. Steel Group Financial Statements. The 1996 proceeds mainly reflected the sale of U. S. Steel Group's investment in National-Oilwell. Financial obligations decreased $523 million in the first six months of 1997 primarily reflecting the net effects of cash from operating, investing and other financing activities. Financial obligations consist of the U. S. Steel Group's portion of USX debt and preferred stock of a subsidiary attributed to all three groups, as well as debt and financing agreements specifically attributed to the U. S. Steel Group. Liquidity - --------- For discussion of USX's liquidity and capital resources, see USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. Environmental Matters, Contingencies and Commitments - ---------------------------------------------------- The U. S. Steel Group has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of 54 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- environmental laws and regulations. In recent years, these expenditures have been mainly for process changes in order to meet Clean Air Act obligations, although ongoing compliance costs have also been significant. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the U. S. Steel Group's products and services, operating results will be adversely affected. The U. S. Steel Group believes that all of its domestic competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities and its production methods. To the extent that competitors are not required to undertake equivalent costs in their operations, the competitive position of the U. S. Steel Group could be adversely affected. USX has been notified that it is a potentially responsible party ("PRP") at 24 waste sites related to the U. S. Steel Group under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of June 30, 1997. In addition, there are 16 sites related to the U. S. Steel Group where USX has received information requests or other indications that USX may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability or make any judgment as to the amount thereof. There are also 41 additional sites related to the U. S. Steel Group where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. At many of these sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. The U. S. Steel Group accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the U. S. Steel Group involving a variety of matters, including laws and regulations relating to the environment, certain of which are discussed in Note 12 to the U. S. Steel Group Financial Statements. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the U. S. Steel Group Financial Statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the U. S. Steel Group. See discussion of Cash Flows and Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. Outlook - ------- The U. S. Steel Group anticipates that steel demand will remain relatively strong in the third quarter as long as the domestic economy continues its pattern of modest growth and the favorable pattern of demand for capital goods and consumer durables continues. The U. S. Steel Group is seeing a continued healthy order book for sheet products and improvements in tubular markets. During third quarter of 1997, raw steel production will be reduced by a planned reline of the Mon Valley Works' No. 1 blast furnace, which provides approximately 10 percent of U. S. Steel's total iron capacity. The reline, which began in mid-June, is scheduled to be completed in early September and will result in increased operating costs for the third quarter of 1997. 55 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The world steel industry is characterized by excess production capacity which has restricted price increases during periods of economic growth and led to price decreases during economic contractions. Within the next year, the anticipated increased availability of flat-rolled steel could have an adverse effect on U. S. Steel's product prices and shipment levels as companies attempt to gain or retain market share. Steel imports to the United States accounted for an estimated 25% of the domestic steel market in the first five months of 1997, and 23%, 21% and 25% for the years 1996, 1995 and 1994, respectively. The domestic steel industry has, in the past, been adversely affected by unfairly traded imports, and higher levels of imported steel may ultimately have an adverse effect on product prices and shipment levels. In July, 1997, U. S. Steel concluded settlement with its insurers regarding claims related to the April 2, 1996, hearth break-out at the Gary No. 13 blast furnace. Proceeds of $25 million from the settlement will increase operating income by $25 million in third quarter 1997. A partial settlement of $15 million additional was received in the first quarter of 1997. The above forward-looking statements concerning anticipated steel demand and future operating results are based upon assumptions as to future product prices and mix, and levels of steel production capability, production and shipments. These assumptions are subject to risk factors that could cause actual results to differ significantly from those presently anticipated. Accounting Standard - ------------------- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"), which changes the computation and presentation of net income per share. USX will adopt SFAS No. 128 in the fourth quarter of 1997, as required. While restatement for prior-periods is required by the standard, net income per share presented for the USX-U. S. Steel Group Common Stock for the second quarter and first six months of 1997 and for the years 1996 and 1995 will not change materially. 56 U.S. STEEL GROUP OF USX CORPORATION SUPPLEMENTAL STATISTICS (Unaudited) -----------------------------------
Second Quarter Six Months Ended June 30 Ended June 30 (Dollars in millions) 1997 1996 1997 1996 - -------------------------------------------------------------------------------- REVENUES Steel and Related Businesses (a) $1,699 $1,559 $3,307 $3,143 Other 22 21 34 28 ------ ------ ------ ------ Total U. S. Steel Group $1,721 $1,580 $3,341 $3,171 OPERATING INCOME Steel and Related Businesses (a) $127 $(46) $214 $(13) Administrative and Other (b) 50 47 83 95 ------ ------ ------ ------ Total U. S. Steel Group $177 $1 $297 $82 CAPITAL EXPENDITURES $67 $102 $117 $158 OPERATING STATISTICS Public & Affiliated Steel Shipments (c) 2,943 2,658 5,809 5,556 Raw Steel-Production (c) 3,171 2,541 6,242 5,695 Raw Steel-Capability Utilization (d) 99.4% 79.8% 98.3% 89.5% - ------------ (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.
57 Part I - Financial Information (Continued): D. Delhi Group DELHI GROUP OF USX CORPORATION STATEMENT OF OPERATIONS (Unaudited) -----------------------------------
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions, except per share amounts) 1997 1996 1997 1996 - -------------------------------------------------------------------------------- REVENUES $268.0 $217.4 $606.7 $495.0 OPERATING COSTS: Cost of sales (excludes items shown below) 250.7 198.0 564.5 451.5 Selling, general and administrative expenses 7.2 7.2 14.6 13.9 Depreciation, depletion and amortization 4.3 6.8 12.1 13.7 Taxes other than income taxes 2.1 2.0 4.2 4.0 ------ ------ ------ ------ Total operating costs 264.3 214.0 595.4 483.1 ------ ------ ------ ------ OPERATING INCOME 3.7 3.4 11.3 11.9 Other income - - .1 .2 Interest and other financial costs (6.0) (5.2) (11.5) (10.2) ------ ------ ------ ------ INCOME (LOSS) BEFORE INCOME TAXES (2.3) (1.8) (.1) 1.9 Less provision (credit) for estimated income taxes (.8) (.6) - .7 ------ ------ ------ ------ NET INCOME (LOSS) $(1.5) $(1.2) $(.1) $1.2 ====== ====== ====== ====== DELHI STOCK DATA: Net income (loss) per share - Primary and fully diluted $(.16) $(.12) $(.01) $.13 Dividends paid per share .05 .05 .10 .10 Weighted average shares, in thousands - Primary and fully diluted 9,451 9,450 9,450 9,449 Selected notes to financial statements appear on pages 60-63.
58 DELHI GROUP OF USX CORPORATION BALANCE SHEET (Unaudited) ------------------------------
June 30 December 31 (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $.3 $.4 Receivables, less allowance for doubtful accounts of $.8 and $.8 78.5 131.3 Inventories 6.6 8.6 Other current assets 4.1 5.4 ------ ------ Total current assets 89.5 145.7 Long-term receivables and other investments 5.4 5.8 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $453.7 and $452.6 580.3 555.3 Other noncurrent assets 8.3 7.8 ------ ------ Total assets $683.5 $714.6 ====== ====== LIABILITIES Current liabilities: Notes payable $6.0 $4.3 Accounts payable 131.6 196.3 Payroll and benefits payable 4.1 4.2 Accrued taxes 4.1 5.4 Accrued interest 6.9 5.3 Long-term debt due within one year 14.2 16.5 ------ ------ Total current liabilities 166.9 232.0 Long-term debt, less unamortized discount 237.5 202.7 Long-term deferred income taxes 139.7 139.7 Deferred credits and other liabilities 20.3 20.2 Preferred stock of subsidiary 3.8 3.8 STOCKHOLDERS' EQUITY 115.3 116.2 ------ ------ Total liabilities and stockholders' equity $683.5 $714.6 ====== ====== Selected notes to financial statements appear on pages 60-63.
59 DELHI GROUP OF USX CORPORATION STATEMENT OF CASH FLOWS (Unaudited) -----------------------------------
Six Months Ended June 30 (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income (loss) $(.1) $1.2 Adjustments to reconcile to net cash provided from operating activities: Depreciation, depletion and amortization 12.1 13.7 Pensions 1.1 1.2 Deferred income taxes - .2 Gain on disposal of assets (.6) (.4) Payment of amortized discount on zero coupon debentures (1.0) - Changes in: Current receivables 52.8 24.2 Inventories 2.0 3.9 Current accounts payable and accrued expenses (64.4) (10.3) All other - net .2 2.3 ------ ------ Net cash provided from operating activities 2.1 36.0 ------ ------ INVESTING ACTIVITIES: Capital expenditures (37.6) (41.9) Disposal of assets 1.0 .6 ------ ------ Net cash used in investing activities (36.6) (41.3) ------ ------ FINANCING ACTIVITIES: Increase in Delhi Group's share of USX consolidated debt 35.3 4.9 Dividends paid (.9) (.9) ------ ------ Net cash provided from financing activities 34.4 4.0 ------ ------ NET DECREASE IN CASH AND CASH EQUIVALENTS (.1) (1.3) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .4 1.9 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $.3 $.6 ====== ====== Cash used in operating activities included: Interest and other financial costs paid $(10.8) $(9.5) Income taxes paid, including settlements with other groups (.5) (.2) Selected notes to financial statements appear on pages 60-63.
60 DELHI GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS -------------------------------------- (Unaudited) 1. The information furnished in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. Additional information is contained in the USX Annual Report on Form 10-K for the year ended December 31, 1996. Effective January 1, 1997, USX adopted American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" (SOP 96-1), which provides additional interpretation of existing accounting standards related to recognition, measurement and disclosure of environmental remediation liabilities. Adoption of SOP 96-1 had no effect on Delhi Group results of operations or financial condition. 2. The financial statements of the Delhi Group include the financial position, results of operations and cash flows for the businesses of Delhi Gas Pipeline Corporation and certain other subsidiaries of USX, and a portion of the corporate assets and liabilities and related transactions which are not separately identified with ongoing operating units of USX. These financial statements are prepared using amounts included in the USX consolidated financial statements. Corporate amounts reflected in these financial statements are determined based upon methods which management believes to be reasonable. The accounting policies applicable to the preparation of the financial statements of the Delhi Group may be modified or rescinded in the sole discretion of the Board of Directors of USX (Board), although the Board has no present intention to do so. The Board may also adopt additional policies depending on the circumstances. Although the financial statements of the Delhi Group, the Marathon Group and the U. S. Steel Group separately report the assets, liabilities (including contingent liabilities) and stockholders' equity of USX attributed to each such group, such attribution of assets, liabilities (including contingent liabilities) and stockholders' equity among the Delhi Group, the Marathon Group and the U. S. Steel Group for the purpose of preparing their respective financial statements does not affect legal title to such assets and responsibility for such liabilities. Holders of USX- Delhi Group Common Stock (Delhi Stock), USX-Marathon Group Common Stock (Marathon Stock) and USX-U. S. Steel Group Common Stock (Steel Stock) are holders of common stock of USX, and continue to be subject to all the risks associated with an investment in USX 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 61 DELHI GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 2. (Continued) 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 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. The financial statement provision for estimated income taxes and related tax payments or refunds have been reflected in the Delhi Group, the Marathon Group and the U. S. Steel Group financial statements in accordance with USX's tax allocation policy for such groups. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated among the Delhi Group, the Marathon Group and the U. S. Steel Group for group financial statement purposes, based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to the respective groups. The provision (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, Marathon and 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. 5. In the second quarter of 1997, the Delhi Group revised the estimated economic lives of its depreciable assets. Depreciation expense for 1997 has been revised based on this increase in the estimated economic lives. The favorable effect on net income in the second quarter and first six months of 1997 was $2.1 million, or $.22 per share. 62 DELHI GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 6. Inventories are carried at lower of average cost or market.
(In millions) ---------------------- June 30 December 31 1997 1996 -------- ----------- Natural gas in storage $4.5 $6.4 Natural gas liquids in storage .2 .1 Materials and supplies 1.9 2.1 ---- ---- Total $6.6 $8.6 ==== ====
7. The Delhi Group participates in an agreement (the program) to sell an undivided interest in certain accounts receivable subject to limited recourse. Payments are collected from the sold accounts receivable; the collections are reinvested in new accounts receivable for the buyers; and a yield, based on defined short-term market rates, is transferred to the buyers. At June 30, 1997, the amount sold under the program that had not been collected was $50 million, which will be forwarded to the buyers at the end of the agreement, or in the event of earlier contract termination. If the Delhi Group does not have a sufficient quantity of eligible accounts receivable to reinvest in for the buyers, the size of the program will be reduced accordingly. The buyers have rights to a pool of receivables that must be maintained at a level of 110% of the program size. 8. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Delhi Group involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Delhi Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Delhi Group. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. The Delhi Group is subject to federal, state and local laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. Expenditures for remediation and penalties have not been material. For a number of years, the Delhi Group has made capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the first six months of 1997 and for the years 1996 and 1995, such capital expenditures totaled $6.7 million, $9.0 million and $5.5 million, respectively. The Delhi Group anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. 63 DELHI GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 8. (Continued) At June 30, 1997, contract commitments for the Delhi Group's capital expenditures for property, plant and equipment totaled $6.4 million compared with $4.4 million at December 31, 1996. 64 DELHI GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The Delhi Group ("Delhi") includes Delhi Gas Pipeline Corporation and certain other subsidiaries of USX which are engaged in the purchasing, gathering, processing, treating, transporting and marketing of natural gas, natural gas liquids ("NGLs") and electric power. The following discussion should be read in conjunction with the second quarter 1997 USX consolidated financial information and the Delhi Group Financial Statements and selected notes. In addition, the discussion of Results of Operations should be read in conjunction with the Supplemental Statistics provided on page 69. Certain sections of the discussion include forward-looking statements concerning trends or events potentially affecting the Delhi Group. These statements typically contain words such as "anticipates", "believes", "estimates", or "expects", or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in forward-looking statements. Results of Operations - --------------------- Revenues for the second quarter and first six months of 1997 and 1996 are summarized in the following table:
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 1997 1996 1997 1996 - -------------------------------------------------------------------------------- Gas sales and trading $211.5 $ 184.8 $506.7 $432.4 Transportation 5.4 4.6 9.6 8.5 Gas processing and NGLs trading 31.6 20.7 59.9 39.8 Gathering service fees 6.5 5.4 15.0 10.5 Electric power marketing 13.0 1.9 14.9 3.3 Other - - .6 .5 ------ ------ ------ ------ Total revenues $268.0 $217.4 $606.7 $495.0 ====== ====== ====== ======
The increase for the second quarter of 1997 as compared to the second quarter of 1996 was primarily due to increased volumes for natural gas and NGLs trading and electric power marketing, and increased natural gas sales volumes, partially offset by lower average sales prices for natural gas and NGLs. The increase for the first six months of 1997 as compared to the first six months of 1996 was primarily due to increased volumes for natural gas and NGLs trading and electric power marketing, and higher average sales prices for natural gas and NGLs, partially offset by a decrease in natural gas sales volumes. Revenues from trading activities typically have a lower impact on gross margins than revenues from sales activities. Operating income in the second quarter of 1997 increased by $0.3 million as compared with the second quarter of 1996. In the second quarter of 1997, Delhi recorded a $3.4 million favorable adjustment to depreciation expense. The adjustment is the result of a change in the estimate of the economic lives of Delhi's pipeline systems and gas processing plants. The $3.4 million adjustment reflects the change in depreciation for the first six months of the year, with $1.7 million relating to each of the first two quarters. Excluding the $1.7 million that 65 DELHI GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- related to the first quarter, operating income in the second quarter of 1997 decreased by $1.4 million as compared to the second quarter of 1996. This was primarily the result of increased operating expenses and lower gross margins, partially offset by decreased depreciation expense. Operating income in the first six months of 1997 decreased by $0.6 million as compared with the first six months of 1996. This was primarily the result of increased operating expenses and selling, general and administrative expenses ("SG&A"), partially offset by increased gross margins and decreased depreciation expense. Gas sales and trading gross margin in the second quarter of 1997 decreased by $1.8 million as compared with the second quarter of 1996. This was primarily the result of a 21% decrease in unit margins, which was partially offset by a 9% increase in gas sales volumes. Gas sales and trading gross margin in the first six months of 1997 decreased by $7.6 million as compared with the first six months of 1996. This was primarily the result of unfavorable intra-month price fluctuations in the first two months of the year as relatively warm winter weather in Delhi's prime service areas resulted in reduced demand and falling prices. Reduced demand by Delhi's major customers resulted in a shift in the sales mix to lower margin spot market sales. Transportation gross margin for the second quarter and first six months of 1997, increased $0.8 million and $1.1 million, respectively, from the comparable prior-year periods, primarily due to volume increases of 25% and 23%, respectively, which were partially offset by lower average transportation rates. Natural gas processing involves extraction of NGLs such as ethane, propane, isobutane, normal butane and natural gasoline from the natural gas stream. Gas processing and NGLs trading gross margin in the second quarter of 1997 decreased by $0.7 million, as compared with the second quarter of 1996, primarily as the result of higher feedstock costs and lower NGLs sales prices, resulting in a 15% decrease in unit margins, partially offset by a 6% increase in NGLs sales volumes. Gas processing and NGLs trading gross margin in the first six months of 1997 increased by $3.1 million, from the comparable 1996 period, mainly due to higher NGLs sales prices, partially offset by higher feedstock costs, resulting in a 20% increase in unit margins, and an 8% increase in NGLs sales volumes. Gathering service fees from treating, dehydration, compression and other services, for the second quarter and first six months of 1997, increased $1.2 million and $4.5 million, respectively, from the comparable prior-year periods. These increases were due to higher systems volumes and, for the six month periods, higher natural gas sales prices, as most fees are determined as a percentage of sales price. Electric power marketing gross margin was $0.1 million in second quarter of both 1997 and 1996, and was $0.2 million in the first six months of 1997 as compared to $0.1 million in the first six months of 1996. The substantial increases in volumes in the second quarter and first six months of 1997 were almost entirely offset by decreased unit margins. Volumes in 1996 represent Delhi's initial start up in electric power marketing. Operating costs, excluding gas purchase costs, decreased $0.8 million in the second quarter of 1997 as compared with the second quarter of 1996. The primary reason for the decrease was the favorable adjustment to depreciation previously mentioned. The $2.5 million net decrease in depreciation was partially offset by a $1.6 million increase in operating expenses (cost of sales excluding gas purchase costs), which was primarily due to higher field operating expenses. Operating 66 DELHI GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- costs, excluding gas purchase costs, for the first six months of 1997 increased by $1.8 million as compared with the first six months of 1996. Operating expenses increased $2.5 million primarily due to higher field operating expenses. SG&A expenses increased $0.7 million, primarily due to increased corporate administrative costs and compensation charges. The increases in operating and SG&A expenses were partially offset by a $1.6 million decrease in depreciation. Interest and other financial costs, for the second quarter and first six months of 1997, increased $0.8 million and $1.3 million, respectively, from the comparable prior-year periods, primarily due to increased debt levels caused by capital spending in excess of cash provided from operating activities, reflecting the ongoing capital expansion program. A net loss of $1.5 million was recorded in the second quarter of 1997, compared with a net loss of $1.2 million in the second quarter of 1996. The second quarter 1997 net loss included the $2.1 million favorable aftertax effect of the depreciation adjustment described in the discussion of operating income. Excluding the $1.1 million favorable aftertax effect which relates to the first quarter of 1997, the second quarter 1997 net loss was $2.6 million as compared to the $1.2 million net loss in the second quarter of 1996. Delhi reported a net loss of $0.1 million for the first six months of 1997, as compared to net income of $1.2 million for the first six months of 1996. The changes in net income primarily reflect the factors discussed above. Cash Flows - ---------- Net cash provided from operating activities of $2.1 million decreased $33.9 million in the first six months of 1997, compared with the first six months of 1996. The decrease primarily reflected unfavorable changes in working capital. Capital expenditures for property, plant and equipment in the first six months of 1997 were $37.6 million, compared with $41.9 million in the first six months of 1996. Expenditures in the first six months of 1997 were primarily for completion of the second phase of the Cotton Valley Pinnacle Reef ("Pinnacle Reef") expansion project in east Texas, expansion of pipeline and processing assets in west Texas, and acquisitions and expansions related to Delhi's south Texas systems. Contract commitments for capital expenditures were $6.4 million at June 30, 1997, compared with $4.4 million at year-end 1996. Financial obligations increased by $35.3 million in the first six months of 1997 as capital expenditures exceeded net cash provided from operating activities. Financial obligations consist of the Delhi Group's portion of USX debt and preferred stock of a subsidiary attributed to all three groups. Liquidity - --------- For discussion of USX's liquidity and capital resources, see USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. Environmental Matters, Contingencies and Commitments - ---------------------------------------------------- The Delhi Group has incurred and will continue to incur capital and operating and maintenance expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the Delhi Group's products and services, operating results will be 67 DELHI GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- adversely affected. The Delhi Group believes that substantially all of its competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities and its production processes. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Delhi Group involving a variety of matters, including laws and regulations relating to the environment. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Delhi Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Delhi Group. See discussion of Cash Flows and Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. Outlook - ------- The Delhi Group continues to expand its natural gas pipeline systems and treating and processing facilities through acquisitions and expansions of existing facilities. The Delhi Group is currently involved in significant projects in the Pinnacle Reef gas play area in east Texas, the Pecos and Terrell County area in west Texas, and the Live Oak County area in south Texas. The south Texas expansion program announced in June 1997 includes the construction of pipelines to connect Delhi's existing south Texas gathering systems and the acquisition of a gas processing plant to increase Delhi's capacity to extract natural gas liquids from 30 million cubic feet per day ("mmcfd"), at an existing plant, to 120 mmcfd. These facilities are expected to be in operation by the end of the year. In conjunction with these projects, Delhi has entered into a long-term agreement to gather, treat and process additional natural gas volumes in Live Oak and McMullen Counties. Pinnacle Reef volumes purchased or transported by Delhi averaged 173 mmcfd in June 1997, up from an average of 133 mmcfd in December 1996. Due to the recent decrease of drilling success in the area, and increased competition, management currently estimates that by year end average daily volumes could be approximately 145 mmcfd. West Texas volumes purchased or transported by Delhi have exceeded management's expectations, averaging 334 mmcfd in the second quarter of 1997, up from an average of 190 mmcfd in 1996. Volumes from the Carter-Knox field in Oklahoma averaged 27 mmcfd in June 1997, as compared to 33 mmcfd in December 1996, due to reduced drilling activity. The Delhi Group's ability to complete anticipated expansions, upgrades or acquisitions, and to realize the projected increases in volumes and their related profitability, could be materially impacted by many factors that could change the economic feasibility of such projects. These factors include, but are not limited to, changes in price and demand for natural gas and NGLs, the success and level of drilling activity by producers in Delhi's primary operating areas, the increased presence of other gatherers and processors in these areas, the availability of capital funds, changes in environmental or regulatory requirements, and any other unforeseen operating difficulties. Accounting Standard - ------------------- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"), which 68 DELHI GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- changes the computation and presentation of net income per share. USX will adopt SFAS No. 128 in the fourth quarter of 1997, as required. While restatement for prior-periods is required by the standard, net income per share presented for USX-Delhi Group Common Stock for the second quarter and first six months of 1997 and for the years 1996 and 1995 will not change materially. 69 DELHI GROUP OF USX CORPORATION SUPPLEMENTAL STATISTICS (Unaudited) -----------------------------------
Second Quarter Six Months Ended June 30 Ended June 30 (Dollars in millions) 1997 1996* 1997* 1996* - -------------------------------------------------------------------------------- GROSS MARGIN Gas Sales and Trading Margin $11.6 $13.4 $25.1 $32.7 Transportation Margin 5.4 4.6 9.6 8.5 ------ ------ ------ ------ Systems and Trading Margin 17.0 18.0 34.7 41.2 Gas Processing and NGLs Trading Margin 5.1 5.8 13.9 10.8 Gathering Service Fees Margin 6.6 5.4 15.0 10.5 Electric Power Marketing Margin .1 .1 .2 .1 ------ ------ ------ ------ Total Gross Margin $28.8 $29.3 $63.8 $62.6 OPERATING INCOME $3.7 $3.4 $11.3 $11.9 CAPITAL EXPENDITURES $20.5 $19.3 $37.6 $41.9 OPERATING STATISTICS Natural Gas Volumes (a) Natural Gas Sales 500.0 457.6 524.4 541.2 Transportation 605.4 482.7 558.8 452.5 ------ ------ ------ ------ Systems Throughput 1,105.4 940.3 1,083.2 993.7 Trading Sales 670.1 473.5 647.3 549.1 ------- ------- ------- ------- Total Sales Volumes 1,775.5 1,413.8 1,730.5 1,542.8 Processed NGLs Sold (b) 811.3 762.5 806.4 745.1 Electric Power Marketing (c) 585.3 92.1 668.0 156.7 - --------------- (a) Millions of cubic feet per day (b) Thousands of gallons per day (c) Gigawatthours * Certain amounts have been reclassified to conform to current classifications
70 Part II - Other Information - ---------------------------- Item 1. LEGAL PROCEEDINGS Marathon Group On July 18, 1997, the United States Court of Federal Claims (Case No. 92- 331C) entered a final judgment in the amount of $78 million in favor of Marathon Oil Company and against the United States of America. The U.S. Government was effectively ordered to return lease bonuses that Marathon paid in 1981 for interests in five oil and gas leases offshore North Carolina. The lawsuit filed in May 1992 alleged, inter alia, that the federal government breached the leases through passage of legislation which disrupted the company's rights to explore, develop, and produce hydrocarbons from the leases. The U.S. Government has the right to appeal both the finding of liability and the amount of the award. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of stockholders was held April 29, 1997. In connection with the meeting, proxies were solicited pursuant to the Securities Exchange Act. The following are the voting results on proposals considered and voted upon at the meeting, all of which were described in the proxy statement. 1. All nominees for director listed in the proxy statement were elected. The following is a tabulation of votes with respect to each nominee for director:
Votes For Votes Withheld Neil A. Armstrong 330,647,534 4,024,788 Robert M. Hernandez 330,806,714 3,865,608 John F. McGillicuddy 330,649,573 4,022,749 John M. Richman 330,538,827 4,133,495 John W. Snow 330,803,986 3,868,336
2. Price Waterhouse LLP was elected as the independent accountants for 1997. (For, 332,736,358; against, 713,370; abstained 1,222,595) 3. Approval of Amended 1990 Stock Plan--To Add Individual Limit on Grants to Preserve Tax Deductibility Under Section 162(m) of the Internal Revenue Code and to Increase the Number of Delhi Shares Available for Grants. (For, 300,505,631; against, 30,662,543; abstained 2,715,018) 71 Part II - Other Information (Continued): - --------------------------- Item 5. OTHER INFORMATION Delhi Group Effective July 29, 1997, G. G. Gradick was elected president of USX-Delhi Group and president of Delhi Gas Pipeline Corporation, replacing D. M. Kihneman. Marathon Group SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION OF MARATHON OIL COMPANY Supplementary Data ---------------------------------------------------------------------- (Unaudited) The following summarized consolidated financial information of Marathon Oil Company, a wholly owned subsidiary of USX, is included in this Form 10-Q in satisfaction of the reporting obligation of Marathon which has debt securities registered under the Securities Exchange Act. All such securities are guaranteed by USX.
(In millions) ------------------------------- Second Quarter Six Months Ended Ended June 30 June 30 1997 1996 1997 1996 ---- ---- ---- ---- INCOME DATA: Revenues $3,759 $4,061 $7,835 $7,673 Operating income 236 240 458 622 Net income 106 107 204 315
(In millions) ----------------------- June 30 December 31 1997 1996 -------- ----------- BALANCE SHEET DATA: Assets: Current assets $3,212 $3,271 Noncurrent assets 8,064 7,977 ------ ------ Total assets $11,276 $11,248 ====== ====== Liabilities and Stockholder's Equity: Current liabilities $1,827 $2,197 Noncurrent liabilities 7,392 7,199 Stockholder's equity 2,057 1,852 ------- ------- Total liabilities and stockholder's equity $11,276 $11,248 ======= =======
72 Part II - Other Information (Continued): - ---------------------------------------- Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 3.1 USX Restated Certificate of Incorporation dated September 1, 1996................. Incorporated by reference to Exhibit 3.1 to the USX Report on Form 10-Q for the quarter ended March 31, 1997. 3.2 USX By-Laws, effective as of July 30, 1996..................... Incorporated by reference to Exhibit 3(a) to the USX Report on Form 10-Q for the quarter ended June 30, 1996. 4.1 Amended and Restated Rights Agreement......................... Incorporated by reference to USX's Form 8 Amendment to Form 8-A filed on October 9, 1992(File No. 1-5153). 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 May 15, 1997, reporting under Item 5, Other Events, announcing that USX Corporation's Marathon Group and Ashland Inc. had signed a letter of intent to pursue a combination of major elements of their refining, marketing and transportation operations. Form 8-K dated May 16, 1997, reporting under Item 5, Other Events, announcing USX Corporation's expiration of its offer to exchange 6.75% Convertible Preferred Securities of USX Capital Trust I for its 6.50% Cumulative Convertible Preferred Stock. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned chief accounting officer thereunto duly authorized. USX CORPORATION By /s/ Kenneth L. Matheny Kenneth L. Matheny Vice President & Comptroller August 12, 1997 EX-27 2
5 1,000,000 6-MOS DEC-31-1997 JUN-30-1997 106 0 1063 8 1888 3188 25996 15600 16955 3084 3538 182 3 383 4740 16955 11734 11734 10981 10981 0 0 197 616 206 410 0 0 0 410 0 0 CONSISTS OF MARATHON STOCK ISSUED, $288; STEEL STOCK ISSUED, $86; DELHI STOCK ISSUED, $9. PRIMARY EARNINGS (LOSS) PER SHARE APPLICABLE TO MARATHON STOCK, $.78; STEEL STOCK, $2.19; DELHI STOCK $(.01). FULLY DILUTED EARNINGS (LOSS) PER SHARE APPLICABLE TO MARATHON STOCK, $.78; STEEL STOCK, $2.00; DELHI STOCK, $(.01).
EX-12.1 3 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)
Six Months Ended Year Ended December 31 June 30 -------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- ---- Portion of rentals representing interest $41 $40 $80 $78 $85 $84 $87 Capitalized interest 10 6 11 13 58 105 78 Other interest and fixed charges 177 207 399 464 464 372 408 Pretax earnings which would be required to cover preferred stock dividend requirements of parent 13 18 36 46 49 44 14 ---- ---- ---- ---- ---- ---- ---- Combined fixed charges and preferred stock dividends (A) $241 $271 $526 $601 $656 $605 $587 ==== ==== ==== ==== ==== ==== ==== Earnings-pretax income with applicable adjustments (B) $837 $853 $1,867 $902 $1,263 $280 $376 ==== ==== ==== ==== ==== ==== ==== Ratio of (B) to (A) 3.47 3.15 3.55 1.50 1.92 (a) (a) ==== ==== ==== ==== ==== ==== ==== (a) Earnings did not cover combined fixed charges and preferred stock dividends by $325 million for 1993 and by $211 million for 1992.
EX-12.2 4 Exhibit 12.2 USX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES TOTAL ENTERPRISE BASIS - (Unaudited) ------------------------------------------------- (Dollars in Millions)
Six Months Ended Year Ended December 31 June 30 -------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---- ---- ---- ----- ---- ---- ---- Portion of rentals representing interest $41 $40 $80 $78 $85 $84 $87 Capitalized interest 10 6 11 13 58 105 78 Other interest and fixed charges 177 207 399 464 464 372 408 ---- ---- ---- ---- ----- ---- ---- Total fixed charges (A) $228 $253 $490 $555 $607 $561 $573 ==== ==== ==== ==== ==== ==== ==== Earnings-pretax income with applicable adjustments (B) $837 $853 $1,867 $902 $1,263 $280 $376 ==== ==== ==== ==== ==== ==== ==== Ratio of (B) to (A) 3.67 3.37 3.81 1.63 2.08 (a) (a) ==== ==== ==== ==== ==== ==== ==== (a) Earnings did not cover fixed charges by $281 million for 1993 and by $197 million for 1992.
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