-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, nyJwBt1WSOmnOIz4QPRD0drc46RwQAvxe7fAQ7HNtqRXhucMYh+ihccEEXLf3X/1 Z4jm3r69/JxxbccdEb0VNw== 0000950128-95-000038.txt : 19950609 0000950128-95-000038.hdr.sgml : 19950609 ACCESSION NUMBER: 0000950128-95-000038 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19941231 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19950303 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: USX CORP CENTRAL INDEX KEY: 0000101778 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 250996816 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05153 FILM NUMBER: 95518217 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 8-K 1 USX 8-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 ----------------------- Date of Report (Date of earliest event reported): March 3, 1995 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) 2 Item 5. OTHER EVENTS Filed herewith are the Registrant's audited financial statements for the year ended December 31, 1994, together with the reports of the independent accountants, Supplementary Data and Management's Discussion and Analysis. Item 7. Financial Statements and Exhibits. (a) Financial Statements
Page ---- USX Consolidated . . . . . . . . . . . . . . . . . . . . U-1 Marathon Group . . . . . . . . . . . . . . . . . . . . . M-1 U.S. Steel Group . . . . . . . . . . . . . . . . . . . . S-1 Delhi Group . . . . . . . . . . . . . . . . . . . . . . D-1
Exhibits. 23. Consent of Price Waterhouse LLP SIGNATURE 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 hereunto duly authorized. USX CORPORATION By s/ Lewis B. Jones ---------------------- Lewis B. Jones Vice President & Comptroller Dated: March 3, 1995 3 USX INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA AND MANAGEMENT'S DISCUSSION AND ANALYSIS
PAGE ---- USX Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U-1 Marathon Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M-1 U. S. Steel Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1 Delhi Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D-1
4 USX Index to Consolidated Financial Statements, Supplementary Data and Management's Discussion and Analysis
PAGE ---- Explanatory Note Regarding Financial Information................................................ U-2 Management's Report............................................................................. U-3 Audited Consolidated Financial Statements: Report of Independent Accountants.............................................................. U-3 Consolidated Statement of Operations........................................................... U-4 Consolidated Balance Sheet..................................................................... U-6 Consolidated Statement of Cash Flows........................................................... U-7 Consolidated Statement of Stockholders' Equity................................................. U-8 Notes to Consolidated Financial Statements..................................................... U-10 Selected Quarterly Financial Data............................................................... U-29 Principal Unconsolidated Affiliates............................................................. U-30 Supplementary Information....................................................................... U-30 Five-Year Operating Summary -- Marathon Group................................................... U-35 Five-Year Operating Summary -- U. S. Steel Group................................................ U-36 Five-Year Operating Summary -- Delhi Group...................................................... U-37 Management's Discussion and Analysis............................................................ U-38
U-1 5 USX Explanatory Note Regarding Financial Information 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 or responsibility for such liabilities. Holders of USX - Marathon Group Common Stock, USX - U. S. Steel Group Common Stock and USX - Delhi Group Common Stock are holders of common stock of USX, and 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 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. U-2 6 Management's Report The accompanying consolidated financial statements of USX Corporation and Subsidiary Companies (USX) are the responsibility of and have been prepared by USX in conformity with generally accepted accounting principles. They necessarily include some amounts that are based on best judgments and estimates. The consolidated financial information displayed in other sections of this report is consistent with these consolidated financial statements. USX seeks to assure the objectivity and integrity of its financial records by careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communications programs aimed at assuring that its policies and methods are understood throughout the organization. USX has a comprehensive formalized system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that financial records are reliable. Appropriate management monitors the system for compliance, and the internal auditors independently measure its effectiveness and recommend possible improvements thereto. In addition, as part of their audit of the consolidated financial statements, USX's independent accountants, who are elected by the stockholders, review and test the internal accounting controls selectively to establish a basis of reliance thereon in determining the nature, extent and timing of audit tests to be applied. The Board of Directors pursues its oversight role in the area of financial reporting and internal accounting control through its Audit Committee. This Committee, composed solely of nonmanagement directors, regularly meets (jointly and separately) with the independent accountants, management and internal auditors to monitor the proper discharge by each of its responsibilities relative to internal accounting controls and the consolidated financial statements. Charles A. Corry Robert M. Hernandez Lewis B. Jones Chairman, Board of Directors Vice Chairman Vice President & Chief Executive Officer & Chief Financial Officer & Comptroller Report of Independent Accountants To the Stockholders of USX Corporation: In our opinion, the accompanying consolidated financial statements appearing on pages U-4 through U-28 present fairly, in all material respects, the financial position of USX Corporation and its subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of USX's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1, page U-11, in 1993 USX adopted new accounting standards for postemployment benefits and for retrospectively rated insurance contracts. As discussed in Note 8, page U-16, and Note 9, page U-17, in 1992 USX adopted new accounting standards for postretirement benefits other than pensions and for income taxes, respectively. Price Waterhouse LLP 600 Grant Street, Pittsburgh, Pennsylvania 15219-2794 February 14, 1995 U-3 7 Consolidated Statement of Operations
(Dollars in millions) 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------- SALES (Note 2, page U-11) $ 19,341 $ 18,064 $ 17,813 OPERATING COSTS: Cost of sales (excludes items shown below) (Note 5, page U-12) 14,197 13,894 14,202 Inventory market valuation charges (credits) (Note 16, page U-22) (160) 241 (62) Selling, general and administrative expenses 221 246 230 Depreciation, depletion and amortization 1,065 1,077 1,091 Taxes other than income taxes 2,963 2,363 1,985 Exploration expenses 157 145 172 Restructuring charges (Note 4, page U-12) 37 42 125 --------- --------- --------- Total operating costs 18,480 18,008 17,743 --------- --------- --------- OPERATING INCOME 861 56 70 Other income (loss) (Note 3, page U-12) 261 257 (2) Interest and other financial income (Note 3, page U-12) 24 78 228 Interest and other financial costs (Note 3, page U-12) (461) (630) (485) --------- --------- --------- TOTAL INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES 685 (239) (189) Less provision (credit) for estimated income taxes (Note 9, page U-17) 184 (72) (29) --------- --------- --------- TOTAL INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES 501 (167) (160) Cumulative effect of changes in accounting principles: Postemployment benefits (Note 1, page U-11) - (86) - Retrospectively rated insurance contracts (Note 1, page U-11) - (6) - Postretirement benefits other than pensions (Note 8, page U-16) - - (1,306) Income taxes (Note 9, page U-17) - - (360) --------- --------- --------- NET INCOME (LOSS) 501 (259) (1,826) Dividends on preferred stock (31) (27) (9) --------- --------- --------- NET INCOME (LOSS) APPLICABLE TO COMMON STOCKS $ 470 $ (286) $ (1,835) - --------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. U-4 8 Income Per Common Share
(Dollars in millions, except per share data) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- APPLICABLE TO MARATHON STOCK: Total income (loss) before cumulative effect of changes in accounting principles $ 315 $ (12) $ 103 Cumulative effect of changes in accounting principles - (23) (331) --------- --------- --------- Net income (loss) $ 315 $ (35) $ (228) PRIMARY AND FULLY DILUTED PER SHARE: Total income (loss) before cumulative effect of changes in accounting principles $ 1.10 $ (.04) $ .37 Cumulative effect of changes in accounting principles - (.08) (1.17) --------- --------- --------- Net income (loss) $ 1.10 $ (.12) $ (.80) Weighted average shares, in thousands - primary 286,722 286,594 283,494 - fully diluted 286,725 286,594 283,495 - -------------------------------------------------------------------------------------------------------- APPLICABLE TO STEEL STOCK: Total income (loss) before cumulative effect of changes in accounting principles $ 176 $ (190) $ (274) Cumulative effect of changes in accounting principles - (69) (1,335) --------- --------- --------- Net income (loss) $ 176 $ (259) $ (1,609) PRIMARY PER SHARE: Total income (loss) before cumulative effect of changes in accounting principles $ 2.35 $ (2.96) $ (4.92) Cumulative effect of changes in accounting principles - (1.08) (23.93) --------- --------- --------- Net income (loss) $ 2.35 $ (4.04) $ (28.85) FULLY DILUTED PER SHARE: Total income (loss) before cumulative effect of changes in accounting principles $ 2.33 $ (2.96) $ (4.92) Cumulative effect of changes in accounting principles - (1.08) (23.93) --------- --------- --------- Net income (loss) $ 2.33 $ (4.04) $ (28.85) Weighted average shares, in thousands - primary 75,184 64,370 55,764 - fully diluted 78,624 64,370 55,764 - --------------------------------------------------------------------------------------------------------
Outstanding since Oct. 2, 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- APPLICABLE TO OUTSTANDING DELHI STOCK: Net income (loss) $ (21) $ 8 $ 2 PRIMARY AND FULLY DILUTED PER SHARE: Net income (loss) $ (2.22) $ .86 $ .22 Weighted average shares, in thousands - primary and fully diluted 9,407 9,067 9,001 - --------------------------------------------------------------------------------------------------------
See Note 21, page U-24, for a description of net income per common share. The accompanying notes are an integral part of these consolidated financial statements. U-5 9 Consolidated Balance Sheet
(Dollars in millions) December 31 1994 1993 - -------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 48 $ 268 Receivables, less allowance for doubtful accounts of $9 and $9 (Note 11, page U-19) 1,112 906 Inventories (Note 16, page U-22) 1,742 1,626 Deferred income tax benefits 339 245 Other current assets 81 94 --------- --------- Total current assets 3,322 3,139 Long-term receivables and other investments, less reserves of $22 and $22 (Note 10, page U-18) 1,005 999 Property, plant and equipment - net (Note 14, page U-21) 11,375 11,603 Prepaid pensions (Note 7, page U-15) 1,485 1,347 Other noncurrent assets 330 326 --------- --------- Total assets $ 17,517 $ 17,414 - -------------------------------------------------------------------------------------------------------- LIABILITIES Current liabilities: Notes payable $ 1 $ 1 Accounts payable (Note 5, page U-12) 1,873 2,213 Payroll and benefits payable 442 436 Accrued taxes 330 485 Accrued interest 128 141 Long-term debt due within one year (Note 13, page U-20) 78 35 --------- --------- Total current liabilities 2,852 3,311 Long-term debt (Note 13, page U-20) 5,521 5,935 Long-term deferred income taxes (Note 9, page U-17) 1,249 889 Employee benefits (Note 8, page U-16) 2,822 2,804 Deferred credits and other liabilities 521 611 Preferred stock of subsidiary (Note 24, page U-25) 250 - --------- --------- Total liabilities 13,215 13,550 STOCKHOLDERS' EQUITY (Details on pages U-8 and U-9) Preferred stocks (Note 18, page U-22): Adjustable Rate Cumulative issued - 2,099,970 shares 105 105 6.50% Cumulative Convertible issued - 6,900,000 shares ($345 liquidation preference) 7 7 Common stocks: Marathon Stock issued - 287,185,916 shares and 286,612,805 shares (par value $1 per share, authorized 550,000,000 shares) 287 287 Steel Stock issued - 75,969,771 shares and 70,328,685 shares (par value $1 per share, authorized 200,000,000 shares) 76 70 Delhi Stock issued - 9,437,891 shares and 9,282,870 shares (par value $1 per share, authorized 50,000,000 shares) 9 9 Treasury common stocks, at cost: Marathon Stock - 0 shares and 31,266 shares - (1) Additional paid-in capital 4,168 4,240 Accumulated deficit (330) (831) Other equity adjustments (20) (22) --------- --------- Total stockholders' equity 4,302 3,864 --------- --------- Total liabilities and stockholders' equity $ 17,517 $ 17,414 - --------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. U-6 10 Consolidated Statement of Cash Flows
(Dollars in millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income (loss) $ 501 $ (259) $ (1,826) Adjustments to reconcile to net cash provided from operating activities: Accounting principle changes - 92 1,666 Depreciation, depletion and amortization 1,065 1,077 1,091 Exploratory dry well costs 68 48 82 Inventory market valuation charges (credits) (160) 241 (62) Pensions (132) (221) (280) Postretirement benefits other than pensions 76 121 21 Deferred income taxes 188 (150) (105) Gain on disposal of assets (188) (253) (24) Restructuring charges 37 42 125 Changes in: Current receivables - sold 10 50 (40) - operating turnover (207) (72) 167 Inventories (26) 57 (10) Current accounts payable and accrued expenses (508) 192 61 All other items - net 58 (21) 54 --------- --------- --------- Net cash provided from operating activities 782 944 920 --------- --------- --------- INVESTING ACTIVITIES: Capital expenditures (1,033) (1,151) (1,505) Disposal of assets 293 469 117 All other items - net 21 (11) (55) --------- --------- --------- Net cash used in investing activities (719) (693) (1,443) --------- --------- --------- FINANCING ACTIVITIES: Commercial paper and revolving credit arrangements - net (151) (914) (570) Other debt - borrowings 513 803 759 - repayments (821) (347) (419) Production financing and other agreements - repayments - - (10) Issuance of preferred stock of subsidiary 242 - - Issuance of common stock of subsidiary 11 - - Preferred stock - issued - 336 - Common stock - issued 223 372 943 - repurchased - (1) (1) Dividends paid (301) (288) (397) --------- --------- --------- Net cash provided from (used in) financing activities (284) (39) 305 --------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 1 (1) (4) --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (220) 211 (222) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 268 57 279 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 48 $ 268 $ 57 - --------------------------------------------------------------------------------------------------------
See Note 17, page U-22, for supplemental cash flow information. The accompanying notes are an integral part of these consolidated financial statements. U-7 11 Consolidated Statement of Stockholders' Equity USX has three classes of common stock, being USX - Marathon Group Common Stock (Marathon Stock), USX - U. S. Steel Group Common Stock (Steel Stock), and USX - Delhi Group Common Stock (Delhi Stock), which are intended to reflect the performance of the Marathon Group, the U. S. Steel Group, and the Delhi Group, respectively. (See Note 6, page U-13 for a description of the three groups.) The USX Certificate of Incorporation was amended on September 30, 1992, to authorize a new class of common stock. On October 2, 1992, USX sold 9,000,000 shares of Delhi Stock to the public. On all matters where the holders of Marathon Stock, Steel Stock and Delhi Stock vote together as a single class, Marathon Stock has one vote per share, and Steel Stock and Delhi Stock each have a fluctuating vote per share based on the relative market value of a share of Steel Stock or Delhi Stock, as the case may be, to the market value of a share of Marathon Stock. In the event of a disposition of all or substantially all the properties and assets of either the U. S. Steel Group or the Delhi Group, USX must either distribute the net proceeds to the holders of the Steel Stock or Delhi Stock, as the case may be, as a special dividend or in redemption of the stock, or exchange the Steel Stock or Delhi Stock, as the case may be, for one of the other remaining two classes of stock. In the event of liquidation of USX, the holders of the Marathon Stock, Steel Stock and Delhi Stock will share in the funds remaining for common stockholders based on the relative market capitalization of the respective Marathon Stock, Steel Stock or Delhi Stock to the aggregate market capitalization of all classes of common stock.
Shares in thousands Dollars in millions ----------------------------- ---------------------------- 1994 1993 1992 1994 1993 1992 - --------------------------------------------------------------------------------------------------------- PREFERRED STOCKS (Note 18, page U-22): Adjustable Rate Cumulative 2,100 2,100 2,100 $ 105 $ 105 $ 105 -------- -------- -------- ------- ------ ------- 6.50% Cumulative Convertible: Balance at beginning of year 6,900 - - $ 7 $ - $ - Public offering - 6,900 - - 7 - -------- -------- -------- ------- ------ ------- Balance at end of year 6,900 6,900 - $ 7 $ 7 $ - - --------------------------------------------------------------------------------------------------------- COMMON STOCKS: Marathon Stock: Balance at beginning of year 286,613 286,563 259,257 $ 287 $ 286 $ 259 Public offering - - 25,000 - - 25 Issued for acquisition of assets 573 - - - - - Employee stock plans - 38 1,686 - 1 1 Dividend Reinvestment Plan - 12 620 - - 1 -------- -------- -------- ------- ------ ------- Issued at end of year 287,186 286,613 286,563 $ 287 $ 287 $ 286 - --------------------------------------------------------------------------------------------------------- Steel Stock: Balance at beginning of year 70,329 59,743 51,302 $ 70 $ 60 $ 51 Public offering 5,000 10,000 8,050 5 10 8 Employee stock plans 562 511 340 1 - 1 Dividend Reinvestment Plan 79 75 51 - - - -------- -------- -------- ------- ------ ------- Issued at end of year 75,970 70,329 59,743 $ 76 $ 70 $ 60 - --------------------------------------------------------------------------------------------------------- Delhi Stock: Balance at beginning of year 9,283 9,005 - $ 9 $ 9 $ - Public offering - - 9,000 - - 9 Employee stock plans 155 278 5 - - - -------- -------- -------- ------- ------ ------- Balance at end of year 9,438 9,283 9,005 $ 9 $ 9 $ 9 - ---------------------------------------------------------------------------------------------------------
(Table continued on next page) U-8 12
Shares in thousands Dollars in millions ----------------------------- ------------------------------- 1994 1993 1992 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------- TREASURY COMMON STOCKS, AT COST: Marathon Stock: Balance at beginning of year (31) - (1,039) $ (1) $ - $ (31) Repurchased (16) (31) (21) - (1) (1) Reissued: Acquisition of assets 46 - - 1 - - Employee stock plans 1 - 850 - - 26 Dividend Reinvestment Plan - - 210 - - 6 -------- -------- -------- ------- ------ ------- Balance at end of year - (31) - $ - $ (1) $ - -------- -------- -------- ------- ------ ------- Steel Stock: Balance at beginning of year - - (280) $ - $ - $ (8) Repurchased - (6) (10) - - - Reissued: Employee stock plans - 6 227 - - 6 Dividend Reinvestment Plan - - 63 - - 2 -------- -------- -------- ------- ------ ------- Balance at end of year - - - $ - $ - $ - - -------------------------------------------------------------------------------------------------------------- ADDITIONAL PAID-IN CAPITAL: Balance at beginning of year $ 4,240 $3,834 $ 3,372 Marathon Stock issued 10 1 550 Steel Stock issued 219 360 199 Delhi Stock issued 2 5 126 6.50% Convertible preferred stock issued - 329 - Dividends on preferred stock (31) (27) (9) Dividends on Marathon Stock (per share: $.68 in 1994 and 1993, and $1.22 in 1992) (195) (195) (348) Dividends on Steel Stock (per share: $1.00 in 1994, 1993 and 1992) (75) (65) (55) Dividends on Delhi Stock (per share: $.20 in 1994 and 1993, and $.05 in 1992) (2) (2) - Other - - (1) ------- ------ ------- Balance at end of year $ 4,168 $4,240 $ 3,834 - -------------------------------------------------------------------------------------------------------------- ACCUMULATED EARNINGS (DEFICIT): Balance at beginning of year $ (831) $ (572) $ 1,254 Net income (loss) 501 (259) (1,826) ------- ------ ------- Balance at end of year $ (330) $ (831) $ (572) - -------------------------------------------------------------------------------------------------------------- OTHER EQUITY ADJUSTMENTS: Foreign currency adjustments (Note 22, page U-25) $ (9) $ (7) $ (8) Deferred compensation adjustments (Note 19, page U-23) - (1) (5) Minimum pension liability adjustments (Note 7, page U-15) (11) (14) - ------- ------ ------- Total other equity adjustments $ (20) $ (22) $ (13) - -------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 4,302 $3,864 $ 3,709 - --------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. U-9 13 Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------- 1. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES PRINCIPLES APPLIED IN CONSOLIDATION - The consolidated financial statements include the accounts of USX Corporation and its majority-owned subsidiaries (USX). Investments in unincorporated oil and gas joint ventures, undivided interest pipelines and jointly-owned gas processing plants are accounted for on a pro rata basis. Investments in other entities in which USX has significant influence in management and control are accounted for using the equity method of accounting and are carried in the investment account at USX's share of net assets plus advances. The proportionate share of income from equity investments is included in other income. In 1994, USX reduced its voting interest in RMI Titanium Company (RMI) to less than 50% and began accounting for its investment using the equity method. Investments in marketable equity securities are carried at lower of cost or market and investments in other companies are carried at cost, with income recognized when dividends are received. CASH AND CASH EQUIVALENTS - Cash and cash equivalents includes cash on hand and on deposit and highly liquid debt instruments with maturities generally of three months or less. INVENTORIES - Inventories are carried at lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method. HEDGING TRANSACTIONS - USX engages in hedging activities within the normal course of its businesses (Note 26, page U-27). Management has been authorized to manage exposure to price fluctuations relevant to the purchase or sale of crude oil, natural gas, refined products and nonferrous metals through the use of a variety of derivative financial and nonfinancial instruments. Derivative financial instruments require settlement in cash and include such instruments as over-the-counter (OTC) commodity swap agreements and OTC commodity options. Derivative nonfinancial instruments require or permit settlement by delivery of commodities and include exchange-traded commodity futures contracts and options. Changes in the market value of derivative instruments are deferred and subsequently recognized in income, as sales or cost of sales, in the same period as the hedged item. OTC swaps are off-balance-sheet instruments; therefore, the effect of changes in the market value of such instruments are not recorded until settlement. The margin accounts for open commodity futures contracts, which reflect daily settlements as market values change, are recorded as accounts receivable. Premiums on all commodity-based option contracts are initially recorded based on the amount paid or received; the options' market value is subsequently recorded as accounts receivable or accounts payable, as appropriate. Forward currency contracts are primarily used to manage currency risks related to anticipated revenues and operating costs, firm commitments for capital expenditures and existing assets or liabilities denominated in a foreign currency. Gains or losses related to firm commitments are deferred and included with the hedged item; all other gains or losses are recognized in income in the current period as sales, cost of sales, interest income or expense, or other income, as appropriate. For balance sheet reporting, net contract values are included in receivables or payables, as appropriate. Recorded deferred gains or losses are reflected within other noncurrent assets or deferred credits and other liabilities. Cash flows from the use of derivative instruments are reported in the same category as the hedged item in the statement of cash flows. EXPLORATION AND DEVELOPMENT - USX follows the successful efforts method of accounting for oil and gas exploration and development. GAS BALANCING - USX follows the sales method of accounting for gas production imbalances. PROPERTY, PLANT AND EQUIPMENT - Except for oil and gas producing properties, depreciation is generally computed on the straight-line method based upon estimated lives of assets. USX's method of computing depreciation for steel producing assets modifies straight-line depreciation based on the level of production. The modification factors range from a minimum of 85% at a production level below 81% of capability, to a maximum of 105% for a 100% production level. No modification is made at the 95% production level, considered the normal long-range level. U-10 14 Depreciation and depletion of oil and gas producing properties are computed using predetermined rates based upon estimated proved oil and gas reserves applied on a units-of-production method. Depletion of mineral properties, other than oil and gas, is based on rates which are expected to amortize cost over the estimated tonnage of minerals to be removed. When an entire property, plant, major facility or facilities depreciated on an individual basis are sold or otherwise disposed of, any gain or loss is reflected in income. Proceeds from disposal of other facilities depreciated on a group basis are credited to the depreciation reserve with no immediate effect on income. ENVIRONMENTAL REMEDIATION - USX provides for remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. Generally, the timing of remediation accruals coincides with completion of a feasibility study or the commitment to a formal plan of action. Estimated abandonment and dismantlement costs of offshore production platforms are accrued based upon estimated proved oil and gas reserves on a units-of-production method. INSURANCE - USX is insured for catastrophic casualty and certain property exposures, as well as those risks required to be insured by law or contract. Costs resulting from noninsured losses are charged against income upon occurrence. In 1993, USX adopted Emerging Issues Task Force (EITF) Consensus No. 93-14, "Accounting for Multiple-Year Retrospectively Rated Insurance Contracts". EITF No. 93-14 requires accrual of retrospective premium adjustments when the insured has an obligation to pay cash to the insurer that would not have been required absent experience under the contract. The cumulative effect of the change in accounting principle determined as of January 1, 1993, reduced net income $6 million, net of $3 million income tax effect. POSTEMPLOYMENT BENEFITS - In 1993, USX adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" (SFAS No. 112). SFAS No. 112 requires employers to recognize the obligation to provide postemployment benefits on an accrual basis if certain conditions are met. USX is affected primarily by disability-related claims covering indemnity and medical payments. The obligation for these claims is measured using actuarial techniques and assumptions including appropriate discount rates. The cumulative effect of the change in accounting principle determined as of January 1, 1993, reduced net income $86 million, net of $50 million income tax effect. The effect of the change in accounting principle reduced 1993 operating income by $23 million. RECLASSIFICATIONS - Certain reclassifications of prior years' data have been made to conform to 1994 classifications. - -------------------------------------------------------------------------------- 2. SALES The items below were included in both sales and operating costs, resulting in no effect on income:
(In millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- Matching buy/sell transactions(a) $ 2,071 $ 2,018 $ 2,537 Consumer excise taxes on petroleum products and merchandise 2,542 1,927 1,655 - --------------------------------------------------------------------------------------------------------
(a) Reflected the gross amount of purchases and sales associated with crude oil and refined product buy/sell transactions which are settled in cash. U-11 15 - -------------------------------------------------------------------------------- 3. OTHER ITEMS
(In millions) 1994 1993 1992 - ----------------------------------------------------------------------------------------------------- OTHER INCOME (LOSS): Gain on disposal of assets $ 188 (a) $ 253 (b) $ 24 Income (loss) from affiliates - equity method 64 (1) (14) Other income (loss) 9 5 (12) -------- -------- ------- Total $ 261 $ 257 $ (2) - ----------------------------------------------------------------------------------------------------- INTEREST AND OTHER FINANCIAL INCOME: Interest income $ 18 $ 71 (b) $ 31 Other 6 7 197 (c) -------- -------- ------- Total 24 78 228 -------- -------- ------- INTEREST AND OTHER FINANCIAL COSTS: Interest incurred (428) (455) (446) Less interest capitalized 58 105 78 -------- -------- ------- Net interest (370) (350) (368) Interest on litigation (1) (170)(d) (15) Interest on tax issues 12 (e) (41) (32) Financial costs on preferred stock of subsidiary (18) - - Amortization of discounts (44) (37) (41) Expenses on sales of accounts receivable (Note 11, page U-19) (35) (26) (29) Other (5) (6) - -------- -------- ------- Total (461) (630) (485) -------- -------- ------- NET INTEREST AND OTHER FINANCIAL COSTS(f) $ (437) $ (552) $ (257) - -----------------------------------------------------------------------------------------------------
(a) Gains resulted primarily from the sale of the assets of a retail propane marketing subsidiary and certain domestic oil and gas production properties. (b) Gains resulted primarily from the sale of the Cumberland coal mine, an investment in an insurance company and the realization of a deferred gain resulting from collection of a subordinated note related to the 1988 sale of Transtar, Inc. (Transtar). The collection also resulted in interest income of $37 million. (c) Included a $177 million favorable adjustment related to interest income from a refund of prior years' production taxes. (d) Reflected $164 million related to the B&LE litigation (Note 5, page U-12). (e) Included a $35 million favorable adjustment related to interest and other financial costs from the settlement of various state tax issues. (f) Excludes financial income and costs of finance operations, which are included in operating income. - -------------------------------------------------------------------------------- 4. RESTRUCTURING CHARGES In mid-1994, the planned disposition of certain nonstrategic gas gathering and processing assets and other investments resulted in a $37 million charge to operating income and a $3 million charge to other income for the write-downs of assets to their estimated net realizable value. Disposition of these assets is expected to be completed in 1995. In 1993, the planned closure of a Pennsylvania coal mine resulted in a $42 million charge, primarily related to the write-down of property, plant and equipment, contract termination, and mine closure cost. In December 1994, a letter of intent for the sale of this coal mine was entered into, subject to certain conditions. This transaction, if concluded, will close in 1995. In 1992, restructuring actions resulted in a $125 million charge, of which $115 million was for the write-down of assets related to the planned disposition of nonstrategic domestic exploration and production properties, and $10 million for the completion of the 1991 restructuring plan related to steel operations. The disposal of the exploration and production properties was completed in 1993. - -------------------------------------------------------------------------------- 5. B&LE LITIGATION Pretax income (loss) in 1993 included a $506 million charge related to the Lower Lake Erie Iron Ore Antitrust Litigation against a former USX subsidiary, the Bessemer & Lake Erie Railroad (B&LE) (Note 25, page U-25). Charges of $342 million were included in cost of sales and $164 million included in interest and other financial costs. The effect on 1993 net income (loss) was $325 million unfavorable ($5.04 per share of Steel Stock). At December 31, 1993, accounts payable included $376 million for this litigation, which was substantially settled in 1994. U-12 16 - -------------------------------------------------------------------------------- 6. SEGMENT INFORMATION USX has three classes of common stock: Marathon Stock, Steel Stock and Delhi Stock, which are intended to reflect the performance of the Marathon Group, the U. S. Steel Group and the Delhi Group, respectively. The segments of USX conform to USX's group structure. A description of each group and its products and services is as follows: MARATHON GROUP - The Marathon Group is involved in worldwide exploration, production, transportation and marketing of crude oil and natural gas; and domestic refining, marketing and transportation of petroleum products. U. S. STEEL GROUP - The U. S. Steel Group, which consists primarily of steel operations, includes the largest domestic integrated steel producer and 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, and engineering and consulting services and technology licensing. Other businesses that are part of the U. S. Steel Group include real estate development and management, fencing products, leasing and financing activities, and RMI prior to the adoption of equity accounting in 1994. DELHI GROUP - The Delhi Group is engaged in the purchasing, gathering, processing, transporting and marketing of natural gas. The Delhi Group amounts prior to October 2, 1992, represent the historical financial data of the businesses included in the Delhi Group which were also included in the amounts of the Marathon Group. Intergroup sales and transfers were conducted on an arm's-length basis. Assets include certain assets attributed to each group that are not used to generate operating income. Export sales from domestic operations were not material. INDUSTRY SEGMENT:
Sales (a) Depreciation, ------------------------------------- Operating Depletion Unaffiliated Between Income and Capital (In millions) Year Customers Groups Total (Loss) Assets Amortization Expenditures - ----------------------------------------------------------------------------------------------------------------------------------- Marathon Group: 1994 $ 12,713 $ 44 $ 12,757 $ 584 $ 10,951 $ 721 $ 753 1993 11,922 40 11,962 169 10,822 727 910 1992 12,758 24 12,782 304 11,141 793 1,193 - ----------------------------------------------------------------------------------------------------------------------------------- U. S. Steel Group: 1994 6,065 1 6,066 313 6,480 314 248 1993 5,611 1 5,612 (149) 6,629 314 198 1992 4,918 1 4,919 (241) 6,251 288 298 - ----------------------------------------------------------------------------------------------------------------------------------- Delhi Group: 1994 563 4 567 (36) 521 30 32 1993 531 4 535 36 583 36 43 1992 454 4 458 33 565 40 27 ---------------------------------------------------------------------------------------------------------------------------------- Eliminations: 1994 - (49) (49) - (435) - - 1993 - (45) (45) - (620) - - 1992 (317) (29) (346) (26) (705) (30) (13) - ----------------------------------------------------------------------------------------------------------------------------------- Total USX Corporation: 1994 $ 19,341 $ - $ 19,341 $ 861 $ 17,517 $ 1,065 $ 1,033 1993 18,064 - 18,064 56 17,414 1,077 1,151 1992 17,813 - 17,813 70 17,252 1,091 1,505 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Operating income (loss) included the following: a $342 million charge related to the B&LE litigation for the U. S. Steel Group in 1993 (Note 5, page U-12); restructuring charges of $42 million and $10 million for the U. S. Steel Group in 1993 and 1992, respectively; restructuring charges of $115 million for the Marathon Group in 1992 (Note 4, page U-12); restructuring charges of $37 million for the Delhi Group in 1994 (Note 4, page U-12); and inventory market valuation charges (credits) for the Marathon Group of $(160) million, $241 million and $(62) million in 1994, 1993 and 1992, respectively (Note 16, page U-22). U-13 17 The information below summarizes the operations in different geographic areas. Transfers between geographic areas are at prices which approximate market.
Sales ---------------------------------------------- Within Between Operating GEOGRAPHIC AREA: Geographic Geographic Income Year Areas Areas Total (Loss) Assets - -------------------------------------------------------------------------------------------------------------------------------- Marathon Group: United States 1994 $ 12,270 $ - $ 12,270 $ 537 $ 7,533 1993 11,507 - 11,507 206 7,647 1992 12,210 - 12,210 255 8,094 Europe 1994 456 74 530 96 2,646 1993 371 - 371 16 2,511 1992 482 - 482 87 2,440 Middle East and Africa 1994 28 38 66 6 277 1993 77 31 108 13 313 1992 72 26 98 13 377 Other International 1994 3 20 23 (55) 495 1993 7 17 24 (66) 351 1992 18 34 52 (51) 232 Eliminations 1994 - (132) (132) - - 1993 - (48) (48) - - 1992 - (60) (60) - (2) Total Marathon Group 1994 $ 12,757 $ - $ 12,757 $ 584 $ 10,951 1993 11,962 - 11,962 169 10,822 1992 12,782 - 12,782 304 11,141 - -------------------------------------------------------------------------------------------------------------------------------- U. S. Steel Group: United States 1994 $ 5,989 $ - $ 5,989 $ 311 $ 6,435 1993 5,489 - 5,489 (151) 6,563 1992 4,842 - 4,842 (244) 6,206 International 1994 77 - 77 2 45 1993 123 - 123 2 66 1992 77 - 77 3 45 Total U. S. Steel Group 1994 $ 6,066 $ - $ 6,066 $ 313 $ 6,480 1993 5,612 - 5,612 (149) 6,629 1992 4,919 - 4,919 (241) 6,251 - -------------------------------------------------------------------------------------------------------------------------------- Delhi Group: United States 1994 $ 567 $ - $ 567 $ (36) $ 521 1993 535 - 535 36 583 1992 458 - 458 33 565 - -------------------------------------------------------------------------------------------------------------------------------- USX Corporation: Intergroup Eliminations 1994 $ (49) $ - $ (49) $ - $ (435) 1993 (45) - (45) - (620) 1992 (346) - (346) (26) (705) Total USX Corporation 1994 $ 19,341 $ - $ 19,341 $ 861 $ 17,517 1993 18,064 - 18,064 56 17,414 1992 17,813 - 17,813 70 17,252 - --------------------------------------------------------------------------------------------------------------------------------
U-14 18 - -------------------------------------------------------------------------------- 7. PENSIONS USX has noncontributory defined benefit plans covering substantially all employees. Benefits under these plans are based upon years of service and final average pensionable earnings, or a minimum benefit based upon years of service, whichever is greater. In addition, contributory pension benefits, which cover certain participating salaried employees, are based upon years of service and career earnings. The funding policy for defined benefit plans provides that payments to the pension trusts shall be equal to the minimum funding requirements of ERISA plus such additional amounts as may be approved from time to time. USX also participates in multiemployer plans, most of which are defined benefit plans associated with coal operations. PENSION COST (CREDIT) - The defined benefit cost for major plans for 1994, 1993 and 1992 was determined assuming an expected long-term rate of return on plan assets of 9%, 10% and 11%, respectively.
(In millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- USX major plans: Cost of benefits earned during the period $ 103 $ 90 $ 81 Interest cost on projected benefit obligation (6.5% for 1994; 7% for 1993; and 8% for 1992) 575 595 654 Return on assets - actual loss (return) 10 (765) (691) - deferred loss (818) (126) (290) Net amortization of unrecognized (gains) and losses 4 (12) (20) --------- --------- --------- Total major plans (126) (218) (266) Multiemployer and other USX plans 6 7 6 --------- --------- --------- Total periodic pension credit (120) (211) (260) Curtailment loss(a) 4 - - --------- --------- --------- Total pension credit $ (116) $ (211) $ (260) - ---------------------------------------------------------------------------------------------------------
(a) The curtailment loss in 1994 resulted from work force reduction programs in the Marathon and Delhi Groups. FUNDS' STATUS - The assumed discount rate used to measure the benefit obligations of major plans was 8% and 6.5% at December 31, 1994, and December 31, 1993, respectively. The assumed rate of future increases in compensation levels was 4% and 3% at December 31, 1994 and December 31, 1993, respectively.
(In millions) December 31 1994 1993 - -------------------------------------------------------------------------------------------------------- Reconciliation of funds' status to reported amounts: Projected benefit obligation(b) $ (7,994) $ (9,297) Plan assets at fair market value(c) 8,210 9,308 --------- --------- Assets in excess of projected benefit obligation(d) 216 11 Unrecognized net gain from transition (476) (562) Unrecognized prior service cost 811 887 Unrecognized net loss 910 993 Additional minimum liability(e) (76) (104) --------- --------- Net pension asset included in balance sheet $ 1,385 $ 1,225 - -------------------------------------------------------------------------------------------------------- (b) Projected benefit obligation includes: Vested benefit obligation $ 7,049 $ 8,208 Accumulated benefit obligation (ABO) 7,522 8,829 (c) Types of assets held: USX stocks 1% 1% Stocks of other corporations 55% 52% U.S. Government securities 22% 27% Corporate debt instruments and other 22% 20% (d) Includes several small plans that have ABOs in excess of plan assets: Projected benefit obligation (PBO) $ (159) $ (251) Plan assets 38 98 --------- --------- PBO in excess of plan assets $ (121) $ (153) (e) Additional minimum liability was offset by the following: Intangible asset $ 59 $ 81 Stockholders' equity adjustment (net of deferred income tax in both years and minority interest in 1993) 11 14 - --------------------------------------------------------------------------------------------------------
U-15 19 - -------------------------------------------------------------------------------- 8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS USX has defined benefit retiree health and life insurance plans covering most employees upon their retirement. Health benefits are provided, for the most part, through comprehensive hospital, surgical and major medical benefit provisions subject to various cost sharing features. Life insurance benefits are provided to nonunion and certain union represented retiree beneficiaries primarily based on employees' annual base salary at retirement. For other union retirees, benefits are provided for the most part based on fixed amounts negotiated in labor contracts with the appropriate unions. Except for certain life insurance benefits paid from reserves held by insurance carriers, benefits have not been prefunded. In 1994, USX agreed to establish a Voluntary Employee Beneficiary Association Trust to prefund a portion of health care and life insurance benefits for retirees covered under the United Steelworkers of America (USWA) union agreement. In early 1995, USX funded the initial $25 million contribution and will be required to fund a minimum of $10 million more in 1995 and each succeeding contract year. In 1992, USX adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS No. 106), which requires accrual accounting for all postretirement benefits other than pensions. USX elected to recognize immediately the transition obligation determined as of January 1, 1992, which represented the excess accumulated postretirement benefit obligation (APBO) for current and future retirees over the fair value of plan assets and recorded postretirement benefit cost accruals. The cumulative effect of the change in accounting principle reduced net income $1,306 million, consisting of the transition obligation of $2,070 million, net of $764 million income tax effect. POSTRETIREMENT BENEFIT COST - Postretirement benefit cost for defined benefit plans for 1994, 1993 and 1992 was determined assuming a discount rate of 6.5%, 7% and 8%, respectively, and an expected return on plan assets of 9% for 1994 and 10% for both 1993 and 1992.
(In millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- Cost of benefits earned during the period $ 37 $ 36 $ 29 Interest on APBO 199 202 194 Return on assets - actual return (8) (7) (7) - deferred loss (2) (5) (7) Amortization of unrecognized losses 16 12 2 --------- --------- --------- Total defined benefit plans 242 238 211 Multiemployer plans(a) 21 9 12 --------- --------- --------- Total periodic postretirement benefit cost 263 247 223 Curtailment and settlement gains(b) (4) (24) - --------- --------- --------- Total postretirement benefit cost $ 259 $ 223 $ 223 - --------------------------------------------------------------------------------------------------------
(a) Payments are made to a multiemployer benefit plan created by the Coal Industry Retiree Health Benefit Act of 1992 based on assigned beneficiaries receiving benefits. The present value of this unrecognized obligation is broadly estimated to be $160 million, including the effects of future medical inflation, and this amount could increase if additional beneficiaries are assigned. (b) In 1994, curtailment gains resulted from a work force reduction program in the Marathon Group. In 1993, other income (Note 3, page U-12) included a settlement gain resulting from the sale of the Cumberland coal mine. FUNDS' STATUS - The following table sets forth the plans' funded status and the amounts reported in USX's consolidated balance sheet:
(In millions) December 31 1994 1993 - -------------------------------------------------------------------------------------------------------- Reconciliation of funds' status to reported amounts: Fair value of plan assets $ 97 $ 116 APBO attributable to: Retirees (1,881) (2,196) Fully eligible plan participants (238) (273) Other active plan participants (476) (680) --------- --------- Total APBO (2,595) (3,149) --------- --------- APBO in excess of plan assets (2,498) (3,033) Unrecognized net (gain) loss (9) 586 Unamortized prior service cost (6) (15) --------- --------- Accrued liability included in balance sheet $ (2,513) $ (2,462) - --------------------------------------------------------------------------------------------------------
The assumed discount rate used to measure the APBO was 8% and 6.5% at December 31, 1994, and December 31, 1993, respectively. The assumed rate of future increases in compensation levels was 4% at both year ends. The weighted average health care cost trend rate in 1995 is approximately 7%, declining to an ultimate rate in 1997 of approximately 6%. A one percentage point increase in the assumed health care cost trend rates for each future year would have increased the aggregate of the service and interest cost components of the 1994 net periodic postretirement benefit cost by $34 million and would have increased the APBO as of December 31, 1994, by $268 million. U-16 20 - -------------------------------------------------------------------------------- 9. INCOME TAXES In 1992, USX adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109), which requires an asset and liability approach in accounting for income taxes. Under this method, deferred income tax assets and liabilities are established to reflect the future tax consequences of carryforwards and differences between the tax bases and financial bases of assets and liabilities. Provisions (credits) for estimated income taxes:
1994 1993 1992 ---------------------------- --------------------------- -------------------------- (In millions) CURRENT DEFERRED TOTAL Current Deferred Total Current Deferred Total - --------------------------------------------------------------------------------------------------------- Federal $ (16) $ 186 $ 170 $ 49 $(221) $(172) $ 42 $(121) $(79) State and local - (9) (9) 9 7 16 11 4 15 Foreign 12 11 23 20 64 84 23 12 35 ----- ----- ----- ---- ----- ----- ----- ----- ---- Total $ (4) $ 188 $ 184 $ 78 $(150) $ (72) $ 76 $(105) $(29) - ---------------------------------------------------------------------------------------------------------
In 1993, the cumulative effect of the change in accounting principles for postemployment benefits and for retrospectively rated insurance contracts included deferred tax benefits of $50 million and $3 million, respectively (Note 1, page U-11). In 1992, the cumulative effect of the change in accounting principle for other postretirement benefits included a deferred tax benefit of $764 million (Note 8, page U-16). Reconciliation of federal statutory tax rate (35% in 1994 and 1993, and 34% in 1992) to total provisions (credits):
(In millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- Statutory rate applied to income (loss) before tax $ 240 $ (84) $ (64) Remeasurement of deferred income tax liabilities for statutory rate increase as of January 1, 1993 - 29 - Foreign income taxes after federal income tax benefit(a) 11 (9) 24 State income taxes after federal income tax benefit(b) (5) 10 10 Sale of investments in subsidiaries - 3 - Deferred tax benefit of excess outside tax basis in equity affiliate (32) - - Liquidation of investment in subsidiary - (17) - Federal income tax effect on earnings of foreign subsidiaries (3) 1 6 Excess percentage depletion (7) (8) (9) Adjustment of prior years' tax (1) 8 3 Adjustment of prior years' valuation allowances (24) (12) - Other 5 7 1 --------- --------- --------- Total provisions (credits) $ 184 $ (72) $ (29) - --------------------------------------------------------------------------------------------------------
(a) Included incremental deferred tax benefit of $64 million in 1993 resulting from USX's ability to credit, rather than deduct, certain foreign income taxes for federal income tax purposes when paid in future periods. (b) Included favorable effects in 1994 resulting from the settlement of various state tax issues. Deferred tax assets and liabilities resulted from the following:
(In millions) December 31 1994 1993 - -------------------------------------------------------------------------------------------------------- Deferred tax assets: Federal tax loss carryforwards (expiring in 2006 through 2009)(c) $ 311 $ 272 State tax loss carryforwards (expiring in 1995 through 2009) 152 115 Foreign tax loss carryforwards (portion of which expire in 2000 through 2009) 545 475 Minimum tax credit carryforwards 307 325 General business credit carryforwards 30 30 Employee benefits 1,229 1,224 Receivables, payables and debt 107 75 Federal benefit for state and foreign deferred tax liabilities 188 180 Contingency and other accruals 180 408 Other 68 42 Valuation allowances(c) (280) (323) --------- --------- Total deferred tax assets 2,837 2,823 --------- --------- Deferred tax liabilities: Property, plant and equipment 2,733 2,680 Prepaid pensions 612 541 Inventory 219 150 Other 128 71 --------- --------- Total deferred tax liabilities 3,692 3,442 --------- --------- Net deferred tax liabilities $ 855 $ 619 - --------------------------------------------------------------------------------------------------------
(c) The decrease in valuation allowances reflected $52 million related to a previously consolidated subsidiary now accounted for using the equity method, of which $26 million related to federal tax loss carryforwards. The consolidated tax returns of USX for the years 1988 through 1991 are under various stages of audit and administrative review by the IRS. USX believes it has made adequate provision for income taxes and interest which may become payable for years not yet settled. Pretax income (loss) included $14 million, $(53) million and $55 million attributable to foreign sources in 1994, 1993 and 1992, respectively. U-17 21 - -------------------------------------------------------------------------------- 10. LONG-TERM RECEIVABLES AND OTHER INVESTMENTS
(In millions) December 31 1994 1993 - --------------------------------------------------------------------------------------------------------- Receivables due after one year $ 104 $ 107 Forward currency contracts 70 47 Equity method investments 654 632 Libyan investment (Note 25, page U-26) 107 108 Cost method companies 33 31 Other 37 74 --------- ---------- Total $ 1,005 $ 999 - ---------------------------------------------------------------------------------------------------------
The following financial information summarizes USX's share in investments accounted for by the equity method:
(In millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- Income data - year: Sales $ 1,543 $ 1,412 $ 1,259 Operating income 139 71 55 Income (loss) before cumulative effect of change in accounting principle 65 (1) (14) Net income (loss) 65 (1) (37) - -------------------------------------------------------------------------------------------------------- Dividends and partnership distributions $ 44 $ 22 $ 28 - -------------------------------------------------------------------------------------------------------- Balance sheet data - December 31: Current assets $ 521 $ 446 Noncurrent assets 1,165 1,130 Current liabilities 447 430 Noncurrent liabilities 674 654 - --------------------------------------------------------------------------------------------------------
USX purchases from equity affiliates totaled $431 million, $390 million and $348 million in 1994, 1993 and 1992, respectively. USX sales to equity affiliates totaled $681 million, $547 million and $283 million in 1994, 1993 and 1992, respectively. U-18 22 - -------------------------------------------------------------------------------- 11. SALES OF RECEIVABLES ACCOUNTS RECEIVABLE - USX has entered into agreements to sell 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. Collections on sold accounts receivable will be forwarded to the buyers at the end of the agreements in 1995, in the event of earlier contract termination or if USX does not have a sufficient quantity of eligible accounts receivable to reinvest in for the buyers. The balance of sold accounts receivable averaged $737 million, $733 million and $703 million for years 1994, 1993 and 1992, respectively. At December 31, 1994, the balance of sold accounts receivable that had not been collected was $750 million. Buyers have collection rights to recover payments from an amount of outstanding receivables for 115% to 120% of the outstanding receivables purchased on a nonrecourse basis; such overcollateralization cannot exceed $133 million. USX does not generally require collateral for accounts receivable, but significantly reduces credit risk through credit extension and collection policies, which include analyzing the financial condition of potential customers, establishing credit limits, monitoring payments and aggressively pursuing delinquent accounts. In the event of a change in control of USX, as defined in the agreements, USX may be required to forward payments collected on sold accounts receivable to the buyers. LOANS RECEIVABLE - Prior to 1993, USX Credit, a division of USX, sold certain of its loans receivable subject to limited recourse. USX Credit continues to collect payments from the loans and transfer to the buyers principal collected plus yield based on defined short-term market rates. In 1994, 1993 and 1992, USX Credit net repurchases of loans receivable totaled $38 million, $50 million and $24 million, respectively. At December 31, 1994, the balance of sold loans receivable subject to recourse was $131 million. USX Credit is not actively seeking new loans at this time. USX Credit is subject to market risk through fluctuations in short-term market rates on sold loans which pay fixed interest rates. USX Credit significantly reduces credit risk through a credit policy, which requires that loans be secured by the real property or equipment financed, often with additional security such as letters of credit, personal guarantees and committed long-term financing takeouts. Also, USX Credit diversifies its portfolio as to types and terms of loans, borrowers, loan sizes, sources of business and types and locations of collateral. As of December 31, 1994, and December 31, 1993, USX Credit had outstanding loan commitments of $26 million and $29 million, respectively. 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. Estimated credit losses under the limited recourse provisions for both accounts receivable and loans receivable are recognized when the receivables are sold consistent with bad debt experience. Recognized liabilities for future recourse obligations of sold receivables were $3 million at December 31, 1994, and December 31, 1993. - -------------------------------------------------------------------------------- 12. SHORT-TERM CREDIT AGREEMENTS USX had short-term credit agreements totaling $175 million at December 31, 1994. These agreements are with two banks, with interest based on their prime rate or London Interbank Offered Rate (LIBOR), and carry a commitment fee of .25%. Certain other banks provide short-term lines of credit totaling $165 million which require maintenance of compensating balances of 3%. No amounts were outstanding under these agreements at December 31, 1994. U-19 23 - ------------------------------------------------------------------------------- 13. LONG-TERM DEBT
Interest December 31 (In millions) Rates - % Maturity 1994 1993 - ----------------------------------------------------------------------------------------------------------- USX Corporation: Revolving credit(a) 1999 $ - $ 500 Commercial paper(a) 6.49 350 - Senior Notes 9-7/20 1996 100 100 Notes payable 6-3/8 - 9-4/5 1995 - 2023 2,550 2,120 Foreign currency obligations(b) 8-3/8 - 8-7/10 1995 - 1998 290 257 Zero Coupon Convertible Senior Debentures(a)(c) 7-7/8 2005 409 378 Convertible Subordinated Debentures(d) 5-3/4 1996 - 2001 214 214 Convertible Subordinated Debentures(e) 7 1997 - 2017 238 238 Obligations relating to Industrial Development and Environmental Improvement Bonds and Notes(f) 2-3/4 - 6-7/8 1995 - 2024 485 487 All other obligations, including sale-leaseback financing and capital leases 1995 - 2012 114 118 Consolidated subsidiaries: Guaranteed Notes 7 2002 135 77 Guaranteed Notes 9-1/2 1994 - 699 Guaranteed Notes(g) 9-3/4 1999 161 161 Guaranteed Loan(h) 9-1/20 1996 - 2006 300 300 Notes payable 5-1/8 - 8-5/8 1995 - 2001 17 135 Sinking Fund Debentures 8-1/2 1995 - 2006 223 236 All other obligations, including capital leases 1995 - 2009 82 26 ------- ------- Total (i)(j)(k) 5,668 6,046 Less unamortized discount 69 76 Less amount due within one year(a) 78 35 ------- ------- Long-term debt due after one year $ 5,521 $ 5,935 - -----------------------------------------------------------------------------------------------------------
(a) An agreement which terminates in August 1999, provides for borrowing under a $2,325 million revolving credit facility. Interest is based on defined short-term market rates. During the term of this agreement, USX is obligated to pay a facility fee of .20% on total commitments and a commitment fee of .05% on the unused portions. The commercial paper and Zero Coupon Convertible Senior Debentures were supported by the $2,325 million in unused and available credit at December 31, 1994, and, accordingly, were classified as long-term debt. (b) Foreign currency exchange agreements were executed in connection with the Swiss franc and European currency unit (ECU) obligations, which effectively fixed the principal repayment at $210 million and interest in U.S. dollars, thereby eliminating currency exchange risks (Note 26, page U-27). (c) The Zero Coupon Convertible Senior Debentures have a principal at maturity of $920 million. The original issue discount is being amortized recognizing a yield to maturity of 7-7/8% per annum. The carrying value represents the principal at maturity less the unamortized discount. Each debenture of $1,000 principal at maturity is convertible into a unit consisting of 8.207 shares of Marathon Stock and 1.6414 shares of Steel Stock subject to adjustment or, at the election of USX, cash equal to the market value of the unit. At the option of the holders, USX will purchase debentures at the carrying value of $430 million and $625 million on August 9, 1995, and August 9, 2000, respectively; USX may elect to pay the purchase price in cash, shares of Marathon and Steel stocks or notes. USX may call the debentures for redemption at the issue price plus amortized discount beginning on August 9, 1995, or earlier if the market value of one share of Marathon Stock and one-fifth of a share of Steel Stock equals or exceeds $57.375 for 20 out of 30 consecutive trading days. (d) The debentures are convertible into one share of Marathon Stock and one-fifth of a share of Steel Stock subject to adjustment for $62.75 and are redeemable at USX's option. Sinking fund requirements for all years through 1995 have been satisfied through repurchases. (e) The debentures are convertible into one share of Marathon Stock and one-fifth of a share of Steel Stock subject to adjustment for $38.125 and may be redeemed by USX. The sinking fund begins in 1997. (f) At December 31, 1994, USX had outstanding obligations relating to short-term maturity Environmental Improvement Bonds in the amount of $203 million, which were supported by long-term credit arrangements. (g) The notes may be redeemed at par by USX on or after March 1, 1996. (h) The guaranteed loan was used to fund a portion of the costs in connection with the development of the East Brae Field and the SAGE pipeline in the North Sea. A portion of proceeds from a long-term gas sales contract is dedicated to loan service under certain circumstances. Prepayment of the loan may be required under certain situations, including events impairing the security interest. (i) Required payments of long-term debt, excluding commercial paper, Zero Coupon Convertible Senior Debentures, and short-term maturity Environmental Improvement Bonds, for the years 1996-1999 are $475 million, $275 million, $521 million and $274 million, respectively. (j) In the event of a change in control of USX, as defined in the related agreements, debt obligations totaling $3,833 million may be declared immediately due and payable. The principal obligations subject to such a provision are Senior Notes - $100 million; Notes payable - $2,548 million; Zero Coupon Convertible Senior Debentures - $409 million; Guaranteed Loan - $300 million; and 9-3/4% Guaranteed Notes - $161 million. In such event, USX may also be required to either repurchase the leased Fairfield slab caster for $115 million or provide a letter of credit to secure the remaining obligation. (k) At December 31, 1994, $82 million of 4-5/8% Sinking Fund Subordinated Debentures due 1996, which have been extinguished by placing securities into an irrevocable trust, were still outstanding. U-20 24 - -------------------------------------------------------------------------------- 14. PROPERTY, PLANT AND EQUIPMENT
(In millions) December 31 1994 1993 - --------------------------------------------------------------------------------------------------------- Marathon Group $ 16,161 $ 15,891 U. S. Steel Group 8,490 8,637 Delhi Group 935 1,013 --------- --------- Total 25,586 25,541 Less accumulated depreciation, depletion and amortization 14,211 13,938 --------- --------- Net $ 11,375 $ 11,603 - ---------------------------------------------------------------------------------------------------------
Property, plant and equipment included gross assets acquired under capital leases (including sale-leasebacks accounted for as financings) of $155 million at December 31, 1994, and $156 million at December 31, 1993; related amounts included in accumulated depreciation, depletion and amortization were $82 million and $73 million, respectively. - -------------------------------------------------------------------------------- 15. LEASES Future minimum commitments for capital leases (including sale-leasebacks accounted for as financings) and for operating leases having remaining noncancelable lease terms in excess of one year are as follows:
Capital Operating (In millions) Leases Leases - -------------------------------------------------------------------------------------------------------- 1995 $ 15 $ 166 1996 15 143 1997 14 122 1998 14 197 1999 13 71 Later years 182 414 Sublease rentals - (19) --------- -------- Total minimum lease payments 253 $ 1,094 ======== Less imputed interest costs 116 --------- Present value of net minimum lease payments included in long-term debt $ 137 - --------------------------------------------------------------------------------------------------------
Operating lease rental expense:
(In millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- Minimum rental $ 213 $ 208 $ 225 Contingent rental 50 52 45 Sublease rentals (7) (9) (10) -------- ------- ------- Net rental expense $ 256 $ 251 $ 260 - --------------------------------------------------------------------------------------------------------
USX leases a wide variety of facilities and equipment under operating leases, including land and building space, office equipment, production facilities and transportation equipment. Contingent rental includes payments based on facility production and operating expense escalation on building space. Most long-term leases include renewal options and, in certain leases, purchase options. In the event of a change in control of USX, as defined in the agreements, or certain other circumstances, operating lease obligations totaling $180 million may be declared immediately due and payable. U-21 25 - -------------------------------------------------------------------------------- 16. INVENTORIES
(In millions) December 31 1994 1993 - -------------------------------------------------------------------------------------------------------- Raw materials $ 568 $ 637 Semi-finished products 336 329 Finished products 930 921 Supplies and sundry items 187 178 ---------- --------- Total (at cost) 2,021 2,065 Less inventory market valuation reserve 279 439 ---------- --------- Net inventory carrying value $ 1,742 $ 1,626 - --------------------------------------------------------------------------------------------------------
At December 31, 1994, and December 31, 1993, the LIFO method accounted for 88% and 87%, respectively, of total inventory value. Current acquisition costs were estimated to exceed the above inventory values at December 31 by approximately $260 million and $280 million in 1994 and 1993, respectively. The inventory market valuation reserve reflects the extent that the recorded cost of crude oil and refined products inventories exceeds net realizable value. The reserve is decreased to reflect increases in market prices and inventory turnover and increased to reflect decreases in market prices. Changes in the inventory market valuation reserve resulted in charges (credits) to operating income of $(160) million, $241 million and $(62) million in 1994, 1993 and 1992, respectively. Cost of sales was reduced and operating income was increased by $13 million, $11 million and $24 million in 1994, 1993 and 1992, respectively, as a result of liquidations of LIFO inventories. - -------------------------------------------------------------------------------- 17. SUPPLEMENTAL CASH FLOW INFORMATION
(In millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- CASH PROVIDED FROM (USED IN) OPERATING ACTIVITIES INCLUDED: Interest and other financial costs paid (net of amount capitalized) $ (577) $ (501) $ (404) Income taxes (paid) refunded 16 (78) (60) - -------------------------------------------------------------------------------------------------------- COMMERCIAL PAPER AND REVOLVING CREDIT ARRANGEMENTS - NET: Commercial paper - issued $ 1,515 $ 2,229 $ 2,412 - repayments (1,166) (2,598) (2,160) Credit agreements - borrowings 4,545 1,782 6,684 - repayments (5,045) (2,282) (7,484) Other credit arrangements - net - (45) (22) --------- --------- --------- Total $ (151) $ (914) $ (570) - -------------------------------------------------------------------------------------------------------- NONCASH INVESTING AND FINANCING ACTIVITIES: Common stock issued for dividend reinvestment and employee stock option plans $ 4 $ 5 $ 17 Contribution of assets to an equity affiliate 26 - - Capital lease obligations - - 22 Acquisition of assets - stock issued 11 - - - debt issued 58 - - Disposal of assets - notes received 3 9 12 - liabilities assumed by buyers - 47 - Decrease in debt resulting from the adoption of equity method accounting for RMI 41 - - Debt exchanged for debt 122 77 - - --------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 18. PREFERRED STOCK USX is authorized to issue 40,000,000 shares of preferred stock, without par value. The following series were outstanding as of December 31, 1994: ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK - As of December 31, 1994, a total of 2,099,970 shares (stated value $50 per share) were outstanding. Dividend rates vary within a range of 7.50% to 15.75% per annum in accordance with a formula based on various U.S. Treasury security rates. In 1994, dividend rates on an annualized basis ranged from 7.50% to 8.15%. This stock is redeemable, at USX's sole option, at a price of $50 per share. 6.50% CUMULATIVE CONVERTIBLE PREFERRED STOCK (6.50% CONVERTIBLE PREFERRED STOCK) - - As of December 31, 1994, 6,900,000 shares (stated value of $1.00 per share; liquidation preference of $50.00 per share) were outstanding. The 6.50% Convertible Preferred Stock is convertible at any time, at the option of the holder, into shares of Steel Stock at a conversion price of $46.125 per share of Steel Stock, subject to adjustment in certain circumstances. On and after April 1, 1996, this stock is redeemable at USX's sole option, at a price of $52.275 per share, and thereafter at prices declining annually on each April 1 to an amount equal to $50.00 per share on and after April 1, 2003. U-22 26 - ------------------------------------------------------------------------------- 19. STOCK PLANS The 1990 Stock Plan, as amended, authorizes the Compensation Committee of the Board of Directors to grant the following awards to key management employees; no further options will be granted under the predecessor plans. OPTIONS - the right to purchase shares of Marathon Stock, Steel Stock or Delhi Stock at not less than 100 percent of the fair market value of the stock at date of grant. STOCK APPRECIATION RIGHTS - the right to receive cash and/or common stock equal to the excess of the fair market value of a share of common stock, as determined in accordance with the plan, over the fair market value of a share on the date the right was granted for a specified number of shares. RESTRICTED STOCK - stock for no cash consideration or for such other consideration as determined by the Compensation Committee, subject to provisions for forfeiture and restricting transfer. Restriction may be removed as conditions such as performance, continuous service and other criteria are met. Such employees are generally granted awards of the class of common stock intended to reflect the performance of the group in which they work. Up to .5 percent of the outstanding Marathon Stock and .8 percent of each of the outstanding Steel Stock and Delhi Stock, as determined on December 31 of the preceding year, are available for grants during each calendar year the 1990 Plan is in effect. In addition, awarded shares that do not result in shares being issued are available for subsequent grant in the same year, and any ungranted shares from prior years' annual allocations are available for subsequent grant during the years the 1990 Plan is in effect. As of December 31, 1994, 4,873,031 Marathon Stock shares, 1,490,147 Steel Stock shares and 75,510 Delhi Stock shares were available for grants in 1995. The following table presents a summary of option and stock appreciation right transactions:
Marathon Stock Steel Stock Delhi Stock --------------------------- ----------------------- ------------------------- Shares Price Shares Price Shares Price - ----------------------------------------------------------------------------------------------------------------- Balance December 31, 1991 4,263,235 $16.57 - 32.22 836,678 $13.60 - 26.46 - $ - Granted 441,775 23.44 282,225 25.44 42,100 16.88 Exercised (41,376) 17.67 - 29.88 (426,569) 13.60 - 25.44 - - Canceled (272,297) 17.67 - 29.88 (49,452) 14.77 - 25.44 - - --------- -------------- -------- -------------- ------- -------------- Balance December 31, 1992 4,391,337 $16.57 - 32.22 642,882 $13.60 - 26.46 42,100 $16.88 Granted 784,425 18.63 303,475 44.19 76,900 20.00 Exercised (1,500) 17.67 - 29.88 (535,878) 13.60 - 26.46 - - Canceled (265,658) 17.67 - 32.22 (4,923) 14.77 - 44.19 - - --------- -------------- -------- -------------- ------- --------------- Balance December 31, 1993 4,908,604 $16.57 - 32.22 405,556 $13.60 - 44.19 119,000 $16.88 - 20.00 Granted 551,550 17.00 353,550 34.44 76,800 15.44 Exercised - - (26,479) 14.77 - 26.46 - - Canceled (281,804) 16.57 - 32.22 (12,327) 13.60 - 44.19 (3,000) - --------- -------------- -------- -------------- ------- --------------- Balance December 31, 1994(a) 5,178,350 $17.00 - 29.88 720,300 $14.77 - 44.19 192,800 $15.44 - 20.00 - -----------------------------------------------------------------------------------------------------------------
(a) All outstanding options and stock appreciation rights are exercisable. Deferred compensation is charged to stockholders' equity when the restricted stock is granted and is expensed over the balance of the vesting period if conditions of the restricted stock grant are met. The following table presents a summary of restricted stock transactions:
Marathon Stock Shares Steel Stock Shares Delhi Stock Shares ---------------------------- -------------------------- ------------------ 1994 1993 1992 1994 1993 1992 1994 1993 - --------------------------------------------------------------------------------------------------------- Balance January 1 150,301 227,050 309,075 50,803 71,050 85,305 3,000 - Granted 9,998 7,915 8,025 10,457 7,145 6,075 500 3,000 Earned (75,385) (63,364) (80,950) (27,012) (22,812) (18,510) (1,500) - Canceled (700) (21,300) (9,100) (140) (4,580) (1,820) - - ------- ------- ------- ------- ------- ------- ------ ----- Balance December 31 84,214 150,301 227,050 34,108 50,803 71,050 2,000 3,000 - ---------------------------------------------------------------------------------------------------------
U-23 27 - -------------------------------------------------------------------------------- 20. DIVIDENDS In accordance with the USX Certificate of Incorporation, dividends on the Marathon Stock, Steel Stock and Delhi Stock are limited to the legally available funds of USX. Net losses of any Group, as well as dividends and distributions on any class of USX Common Stock or series of preferred stock and repurchases of any class of USX Common Stock or series of preferred stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on all classes of Common Stock. Subject to this limitation, the Board of Directors intends to declare and pay dividends on the Marathon Stock, Steel Stock and Delhi Stock based on the financial condition and results of operations of the related group, although it has no obligation under Delaware law to do so. In making its dividend decisions with respect to each of the Marathon Stock, Steel Stock and Delhi Stock, the Board of Directors considers, among other things, the long-term earnings and cash flow capabilities of the related group as well as the dividend policies of similar publicly traded companies. Dividends on the Steel Stock and Delhi Stock are further limited to the Available Steel Dividend Amount and the Available Delhi Dividend Amount, respectively. At December 31, 1994, the Available Steel Dividend Amount was at least $2.170 billion, and the Available Delhi Dividend Amount was at least $104 million. The Available Steel Dividend Amount and Available Delhi Dividend Amount, respectively, will be increased or decreased, as appropriate, to reflect the respective group's separately reported net income, dividends, repurchases or issuances with respect to the related class of common stock and preferred stock attributed to the respective groups and certain other items. - -------------------------------------------------------------------------------- 21. NET INCOME PER COMMON SHARE 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. The USX Board of Directors has designated 14,003,205 shares of Delhi Stock to represent 100% of the common stockholders' equity value of USX attributable to the Delhi Group as of December 31, 1994. The Delhi Fraction is the percentage interest in the Delhi Group represented by the shares of Delhi Stock that are outstanding at any particular time and, based on 9,437,891 outstanding shares at December 31, 1994, is approximately 67%. The Marathon Group financial statements reflect a percentage interest in the Delhi Group of approximately 33% (Retained Interest) at December 31, 1994. Income per share applicable to outstanding Delhi Stock is presented for the periods subsequent to the October 2, 1992, initial issuance of Delhi Stock. Primary net income (loss) per share is calculated by adjusting net income (loss) for dividend requirements of preferred stock and, in the case of Delhi Stock, for the income applicable to the Retained Interest; and is based on the weighted average number of common shares outstanding plus common stock equivalents, provided they are not antidilutive. Common stock equivalents result from assumed exercise of stock options and surrender of stock appreciation rights associated with 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 and surrender of stock appreciation rights, provided, in each case, the effect is not antidilutive. U-24 28 - -------------------------------------------------------------------------------- 22. FOREIGN CURRENCY TRANSLATION Exchange adjustments resulting from foreign currency transactions generally are recognized in income, whereas adjustments resulting from translation of financial statements are reflected as a separate component of stockholders' equity. For 1994, 1993 and 1992, respectively, the aggregate foreign currency transaction gains (losses) included in determining net income were $(6) million, $(3) million and $14 million. An analysis of changes in cumulative foreign currency translation adjustments follows:
(In millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- Cumulative foreign currency translation adjustments at January 1 $ (7) $ (8) $ (7) Aggregate adjustments for the year: Foreign currency translation adjustments (2) - (5) Amount related to disposition of investments - 1 4 -------- -------- -------- Cumulative foreign currency adjustments at December 31 $ (9) $ (7) $ (8) - --------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 23. STOCKHOLDER RIGHTS PLAN USX's Board of Directors has adopted a Stockholder Rights Plan and declared a dividend distribution of one right for each outstanding share of Marathon Stock, Steel Stock and Delhi Stock referred to together as "Voting Stock." Each right becomes exercisable, at a price of $120, when any person or group has acquired, obtained the right to acquire or made a tender or exchange offer for 15 percent or more of the total voting power of the Voting Stock, except pursuant to a qualifying all-cash tender offer for all outstanding shares of Voting Stock, which is accepted with respect to shares of Voting Stock representing a majority of the voting power other than Voting Stock beneficially owned by the offeror. Each right entitles the holder, other than the acquiring person or group, to purchase one one-hundredth of a share of Series A Junior Preferred Stock or, upon the acquisition by any person of 15 percent or more of the total voting power of the Voting Stock, Marathon Stock, Steel Stock or Delhi Stock (as the case may be) or other property having a market value of twice the exercise price. After the rights become exercisable, if USX is acquired in a merger or other business combination where it is not the survivor, or if 50 percent or more of USX's assets, earnings power or cash flow are sold or transferred, each right entitles the holder to purchase common stock of the acquiring entity having a market value of twice the exercise price. The rights and exercise price are subject to adjustment, and the rights expire on October 9, 1999, or may be redeemed by USX for one cent per right at any time prior to the point they become exercisable. Under certain circumstances, the Board of Directors has the option to exchange one share of the respective class of Voting Stock for each exercisable right. - -------------------------------------------------------------------------------- 24. PREFERRED STOCK OF SUBSIDIARY USX Capital LLC, a wholly owned subsidiary of USX, sold 10,000,000 shares (carrying value of $250 million) of 8-3/4% Cumulative Monthly Income Preferred Shares (MIPS) (liquidation preference of $25 per share) in 1994. Proceeds of the issue were loaned to USX. USX has the right under the loan agreement to extend interest payment periods for up to 18 months, and as a consequence, monthly dividend payments on the MIPS can be deferred by USX Capital LLC during any such interest payment period. In the event that USX exercises this right, USX may not declare dividends on any share of its preferred or common stocks. The MIPS are redeemable at the option of USX Capital LLC and subject to the prior consent of USX, in whole or in part from time to time, for $25 per share on or after March 31, 1999, and will be redeemed from the proceeds of any repayment of the loan by USX. In addition, upon final maturity of the loan, USX Capital LLC is required to redeem the MIPS. The financial costs are included in interest and other financial costs. - -------------------------------------------------------------------------------- 25. CONTINGENCIES AND COMMITMENTS USX is the subject of, or 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. LEGAL PROCEEDINGS - B&LE litigation In 1994, USX paid $367 million to satisfy substantially all judgments against the B&LE in the Lower Lake Erie Iron Ore Antitrust Litigation. Two remaining plaintiffs in this case have had their damage claims remanded for retrial. A new trial may result in awards more or less than the original asserted claims of $8 million and would be subject to trebling. In a separate lawsuit brought by Armco Steel, settlement was reached in 1994 with immaterial financial impact. U-25 29 - -------------------------------------------------------------------------------- 25. CONTINGENCIES AND COMMITMENTS (CONTINUED) Pickering litigation In 1992, the United States District Court for the District of Utah Central Division issued a Memorandum Opinion and Order in Pickering v. USX relating to pension and compensation claims by approximately 1,900 employees of USX's former Geneva (Utah) Works. Although the court dismissed a number of the claims by the plaintiffs, it found that USX had violated the Employee Retirement Income Security Act by interfering with the accrual of pension benefits of certain employees and amending a benefit plan to reduce the accrual of future benefits without proper notice to plan participants. Further proceedings were held to determine damages for a sample group and, pending the court's determinations, USX may appeal. Plaintiffs' counsel has been reported as estimating plaintiffs' anticipated recovery to be in excess of $100 million. USX believes actual damages will be substantially less than plaintiffs' estimates. In 1994, USX entered into settlement agreements with 227 plaintiffs providing for releases of liability against USX and the aggregate payment of approximately $1 million by USX. ENVIRONMENTAL MATTERS - 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 both December 31, 1994, and December 31, 1993, accrued liabilities for remediation totaled $186 million. 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, USX has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In 1994 and 1993, such capital expenditures totaled $132 million and $181 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 December 31, 1994, and December 31, 1993, accrued liabilities for platform abandonment and dismantlement totaled $127 million and $126 million, respectively. LIBYAN OPERATIONS - By reason of Executive Orders and related regulations under which the U.S. Government is continuing economic sanctions against Libya, USX was required to discontinue performing its Libyan petroleum contracts on June 30, 1986. In June 1989, the Department of the Treasury authorized USX to resume performing under those contracts. Pursuant to that authorization, USX has engaged the Libyan National Oil Company and the Secretary of Petroleum in continuing negotiations to determine when and on what basis they are willing to allow USX to resume realizing revenue from USX's investment of $107 million in Libya. USX is uncertain when these negotiations can be completed. GUARANTEES - Guarantees by USX of the liabilities of affiliated and other entities totaled $190 million at December 31, 1994, and $227 million at December 31, 1993. 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 December 31, 1994, the largest guarantee for a single affiliate was $87 million. At December 31, 1994, and December 31, 1993, USX's pro rata share of obligations of LOOP INC. and various pipeline affiliates secured by throughput and deficiency agreements totaled $197 million and $206 million, respectively. 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. COMMITMENTS - At December 31, 1994, and December 31, 1993, contract commitments for capital expenditures for property, plant and equipment totaled $283 million and $389 million, respectively. USX has entered into a 15-year take-or-pay arrangement which requires USX to accept pulverized coal each month or pay a minimum monthly charge. In 1994 and 1993, charges for deliveries of pulverized coal totaled $24 million and $14 million (deliveries began in 1993), respectively. In the future, USX will be obligated to make minimum payments of approximately $16 million per year. If USX elects to terminate the contract early, a maximum termination payment of $126 million, which declines over the duration of the agreement, may be required. USX is a party to a transportation agreement with Transtar for Great Lakes shipments of raw materials required by steel operations. The agreement cannot be canceled until 1999 and requires USX to pay, at a minimum, Transtar's annual fixed costs related to the agreement, including lease/charter costs, depreciation of owned vessels, dry dock fees and other administrative costs. Total transportation costs under the agreement were $70 million in 1994 and $68 million in 1993, including fixed costs of $21 million in each year. The fixed costs are expected to continue at approximately the same level over the duration of the agreement. U-26 30 - -------------------------------------------------------------------------------- 26. DERIVATIVE FINANCIAL INSTRUMENTS USX uses derivative financial instruments, such as OTC commodity swaps, to hedge exposure to price fluctuations relevant to the anticipated purchase or production and sale of crude oil, natural gas and refined products. USX also uses exchange-traded commodity contracts as a part of its overall hedging activities. The use of derivative instruments helps to protect against adverse market price changes for products sold and volatility in raw material costs. USX uses forward currency contracts to reduce exposure to currency price fluctuations when transactions require settlement in a foreign currency (principally Swiss franc, ECU, U.K. pound and Irish punt) rather than U.S. dollars. USX remains at risk for possible changes in the market value of the derivative instrument; however, such risk should be mitigated by price changes in the underlying hedged item. USX is also exposed to credit risk in the event of nonperformance by counterparties. The credit worthiness of counterparties is subject to continuing review, including the use of master netting agreements to the extent practical, and full performance is anticipated. The following table sets forth quantitative information by class of derivative financial instrument:
FAIR CARRYING RECORDED VALUE AMOUNT DEFERRED AGGREGATE ASSETS ASSETS GAIN OR CONTRACT (In millions) (LIABILITIES)(a) (LIABILITIES) (LOSS) VALUES(b) - -------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1994 OTC commodity swaps(c) $ - (d) $ - $ 1 $ 263 Forward currency contracts(e): - receivable $ 84 $ 81 $ - $ 215 - payable (4) (4) (3) 37 ------ ------ ------- ------ Total currencies $ 80 $ 77 $ (3) $ 252 - -------------------------------------------------------------------------------------------------------------- December 31, 1993: OTC commodity swaps $ (5) $ - $ - $ 95 OTC commodity options - - - 4 ------ ------ ------- ------ Total commodities $ (5) $ - $ - $ 99 ====== ====== ======= ====== Forward currency contracts: - receivable $ 51 $ 47 $ - $ 244 - payable (14) (10) (9) 51 ------- -------- ------- ------ Total currencies $ 37 $ 37 $ (9) $ 295 - --------------------------------------------------------------------------------------------------------------
(a) The fair value amounts are based on exchange-traded index prices and dealer quotes. (b) Contract or notional amounts do not quantify risk exposure, but are used in the calculation of cash settlements under the contracts. The contract or notional amounts do not reflect the extent to which positions may offset one another. (c) The OTC swap arrangements vary in duration with certain contracts extending into early 1997. (d) The fair value amount includes fair value assets of $11 million and fair value liabilities of $(11) million. (e) The forward currency contracts mature in 1995-1998. U-27 31 - ------------------------------------------------------------------------------- 27. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. The following table summarizes financial instruments, excluding derivative financial instruments disclosed in Note 26, page U-27, by individual balance sheet account:
1994 1993 --------------------- ------------------- CARRYING FAIR Carrying Fair (In millions) December 31 AMOUNT VALUE Amount Value - -------------------------------------------------------------------------------------------------------- Financial assets: Cash and cash equivalents $ 48 $ 48 $ 268 $ 268 Receivables 1,094 1,094 899 899 Long-term receivables and other investments 146 180 166 200 -------- -------- -------- -------- Total financial assets $ 1,288 $ 1,322 $ 1,333 $ 1,367 ======== ======== ======== ======== Financial liabilities: Notes payable $ 1 $ 1 $ 1 $ 1 Accounts payable 1,873 1,873 2,213 2,213 Accrued interest 128 128 142 142 Long-term debt (including amounts due within one year) 5,462 5,285 5,828 5,988 -------- -------- -------- -------- Total financial liabilities $ 7,464 $ 7,287 $ 8,184 $ 8,344 - --------------------------------------------------------------------------------------------------------
Fair value of financial instruments classified as current assets or liabilities approximate carrying value due to the short-term maturity of the instruments. Fair value of long-term receivables and other investments was based on discounted cash flows or other specific instrument analysis. Fair value of long-term debt instruments was based on market prices where available or current borrowing rates available for financings with similar terms and maturities. In addition to certain derivative financial instruments, USX's unrecognized financial instruments consist of receivables sold subject to limited recourse, commitments to extend credit and financial guarantees. It is not practicable to estimate the fair value of these forms of financial instrument obligations because there are no quoted market prices for transactions which are similar in nature. For details relating to sales of receivables and commitments to extend credit see Note 11, page U-19. For details relating to financial guarantees see Note 25, page U-26. U-28 32 Selected Quarterly Financial Data (Unaudited)
1994 1993 --------------------------------------------- ----------------------------------------------- (In millions, except per share data) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. - ------------------------------------------------------------------------------------------------------------------------------------ Sales $ 5,184 $ 5,123 $4,761 $ 4,273 $4,604 $4,533 $ 4,647 $4,280 Operating income (loss) 234 225 198 204 28 158 (288) 158 Operating costs include: B&LE litigation charge (credit) - - - - (96) - 438 - Inventory market valuation charges (credits) (2) 63 (93) (128) 187 30 47 (23) Restructuring charges - - 37 - 42 - - - Total income (loss) before cumulative effect of changes in accounting principles 128 191 107 75 37 63 (314) 47 NET INCOME (LOSS) 128 191 107 75 37 63 (314) (45) - ------------------------------------------------------------------------------------------------------------------------------------
1994 1993 --------------------------------------------- ----------------------------------------------- (In millions, except per share data) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. - ------------------------------------------------------------------------------------------------------------------------------------ MARATHON STOCK DATA: Total income (loss) before cumulative effect of changes in accounting principles applicable to Marathon Stock $ 35 $ 101 $ 70 $ 109 $ (90) $ 29 $ 20 $ 29 - Per share: primary and fully diluted .12 .35 .25 .38 (.31) .10 .07 .10 Dividends paid per share .17 .17 .17 .17 .17 .17 .17 .17 Price range of Marathon Stock(a): - Low 16-3/8 16-3/4 15-5/8 16-3/8 16-3/8 16-1/2 16-5/8 16-3/8 - High 19-1/8 18-3/8 18 18-5/8 20-5/8 20-3/8 20-1/8 20-3/8 - ------------------------------------------------------------------------------------------------------------------------------------
(a) Composite tape.
1994 1993 --------------------------------------------- ----------------------------------------------- (In millions, except per share data) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. - ------------------------------------------------------------------------------------------------------------------------------------ STEEL STOCK DATA: Total income (loss) before cumulative effect of changes in accounting principles applicable to Steel Stock $ 84 $ 84 $ 49 $ (41) $ 119 $ 26 $ (343) $ 8 - Per share(a): primary 1.11 1.11 .65 (.56) 1.67 .41 (5.71) .13 fully diluted 1.05 1.05 .64 (.56) 1.53 .41 (5.71) .13 Dividends paid per share .25 .25 .25 .25 .25 .25 .25 .25 Price range of Steel Stock(b): - Low 32-7/8 32-7/8 30-1/4 36-1/8 30-3/8 27-1/2 35-1/2 31-1/2 - High 42-3/8 43 38-1/2 45-5/8 43-3/8 40-3/4 46 41-1/2 - ------------------------------------------------------------------------------------------------------------------------------------
(a) Primary and fully diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share in 1994 and 1993 does not equal the total computed for the year due primarily to the effect of the 6.50% Convertible Preferred Stock on the quarterly calculations during 1994, and stock transactions which occurred during 1993. (b) Composite tape.
1994 1993 -------------------------------------------- ------------------------------------------------ (In millions, except per share data) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. - ------------------------------------------------------------------------------------------------------------------------------------ DELHI STOCK DATA: Total income (loss) before cumulative effect of change in accounting principle applicable to Delhi Stock $ 1 $ (1) $ (21) $ - $ 2 $ (1) $ 1 $ 6 - Per share: primary and fully diluted .09 (.07) (2.27) .03 .15 (.05) .15 .62 Dividends paid per share .05 .05 .05 .05 .05 .05 .05 .05 Price range of Delhi Stock(a): - Low 9-5/8 12-1/4 12-7/8 13-1/2 15 18-3/4 16-1/2 15-1/4 - High 13-3/4 15 15-7/8 17-7/8 24 24-3/4 21-7/8 19-1/4 - ------------------------------------------------------------------------------------------------------------------------------------
(a) Composite tape. U-29 33 Principal Unconsolidated Affiliates (Unaudited)
Company Country % Ownership(a) Activity - ---------------------------------------------------------------------------------------------------------------------------------- CLAM Petroleum Company Netherlands 50% Oil & Gas Production Double Eagle Steel Coating Company United States 50% Steel Processing Kenai LNG Corporation United States 30% Natural Gas Liquification Laredo-Nueces Pipeline Company United States 50% Natural Gas Transmission LOCAP INC. United States 37% Pipeline & Storage Facilities LOOP INC. United States 32% Offshore Oil Port National-Oilwell United States 50% Oilwell Equipment, Supplies Ozark Gas Transmission System United States 25% Natural Gas Transmission PRO-TEC Coating Company United States 50% Steel Processing RMI Titanium Co. United States 54% Titanium Metal Products Sakhalin Energy Investment Company Limited Russia 30% Oil & Gas Exploration Transtar, Inc. United States 46% Transportation USS/Kobe Steel Company United States 50% Steel Products USS-POSCO Industries United States 50% Steel Processing Worthington Specialty Processing United States 50% Steel Processing - ----------------------------------------------------------------------------------------------------------------------------------
(a) Economic interest as of December 31, 1994. Supplementary Information on Mineral Reserves (Unaudited) MINERAL RESERVES (OTHER THAN OIL AND GAS)
Reserves (a) at December 31 Production --------------------------- ------------------------ (Million tons) 1994 1993 1992 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------------- Iron(b) 746.4 790.5 804.7 16.0 14.2 14.1 Coal(c) 928.4 945.1 1,265.5 7.5 8.9 12.5 - ---------------------------------------------------------------------------------------------------------------------------------
(a) Commercially recoverable reserves include demonstrated (measured and indicated) quantities which are expressed in recoverable net product tons. Coal reserves of 284 million tons for 1992, were included in the Marathon Group; the remaining coal reserves and all iron reserves, as well as related production, were included in the U. S. Steel Group. (b) In 1994, iron ore reserves were reduced 28 million tons as a result of lease activity. (c) In 1994, coal reserves were reduced 9 million tons as a result of lease activity. In 1993, 320 million tons of reserves were sold, including all the Marathon Group reserves and 36 million tons associated with the Cumberland coal mine. U-30 34 Supplementary Information on Oil and Gas Producing Activities (Unaudited) RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES, EXCLUDING CORPORATE OVERHEAD AND INTEREST COSTS(a)
UNITED MIDDLE EAST OTHER (In millions) STATES EUROPE AND AFRICA INTERNATIONAL TOTAL - -------------------------------------------------------------------------------------------------------------------- 1994: Revenues: Sales $ 410 $ 407 $ 27 $ 3 $ 847 Transfers 545 65 37 20 667 ------- -------- -------- ------- ------- Total revenues 955 472 64 23 1,514 Expenses: Production costs (302) (197) (20) (10) (529) Exploration expenses (82) (28) (17) (27) (154) Depreciation, depletion and amortization (335) (153) (18) (8) (514) Other expenses(b) (41) (8) (2) (5) (56) ------- -------- -------- -------- ------- Total expenses (760) (386) (57) (50) (1,253) Gain (loss) on sale of assets 20 (1) 1 - 20 ------- -------- -------- -------- ------- Results before income taxes 215 85 8 (27) 281 Income taxes (credits) 80 35 5 (7) 113 ------- -------- -------- -------- ------- Results of operations $ 135 $ 50 $ 3 $ (20) $ 168 - --------------------------------------------------------------------------------------------------------------------- USX's share of equity investee's operations $ - $ 9 $ - $ - $ 9 - -------------------------------------------------------------------------------------------------------------------- 1993: Revenues: Sales $ 412 $ 331 $ 73 $ 6 $ 822 Transfers 550 - 29 17 596 ------- -------- -------- -------- ------- Total revenues 962 331 102 23 1,418 Expenses: Production costs (365) (172) (21) (8) (566) Exploration expenses (57) (25) (14) (44) (140) Depreciation, depletion and amortization (345) (127) (52) (8) (532) Other expenses(b) (37) (5) (2) (7) (51) ------- -------- -------- -------- ------- Total expenses (804) (329) (89) (67) (1,289) Gain (loss) on sale of assets 1 - - - 1 ------- -------- -------- -------- ------- Results before income taxes 159 2 13 (44) 130 Income taxes (credits) 57 (3) 7 (13) 48 ------- -------- -------- -------- ------- Results of operations $ 102 $ 5 $ 6 $ (31) $ 82 - -------------------------------------------------------------------------------------------------------------------- USX's share of equity investee's operations $ - $ 3 $ - $ - $ 3 - -------------------------------------------------------------------------------------------------------------------- 1992: Revenues: Sales $ 440 $ 436 $ 66 $ 17 $ 959 Transfers 640 - 25 34 699 ------- -------- -------- -------- ------- Total revenues 1,080 436 91 51 1,658 Expenses: Production costs(c) (268) (201) (14) (18) (501) Exploration expenses (72) (21) (35) (44) (172) Depreciation, depletion and amortization (423) (146) (27) (11) (607) Other expenses(b) (37) (5) (2) (4) (48) ------- -------- -------- -------- ------- Total expenses (800) (373) (78) (77) (1,328) Gain (loss) on sale of assets (3) - - - (3) ------- -------- -------- -------- ------- Results before income taxes 277 63 13 (26) 327 Income taxes (credits) 93 26 16 (2) 133 ------- -------- -------- -------- ------- Results of operations $ 184 $ 37 $ (3) $ (24) $ 194 - -------------------------------------------------------------------------------------------------------------------- USX's share of equity investee's operations $ - $ 13 $ - $ - $ 13 - --------------------------------------------------------------------------------------------------------------------
(a) Certain reclassifications of prior years' data have been made to conform to 1994 reporting practices. (b) Other expenses include administrative costs and costs associated with reorganization efforts in 1994. (c) U.S. production costs included a $119 million refund of prior years' production taxes and excluded a $115 million restructuring charge relating to planned disposition of certain domestic exploration and production properties. CAPITALIZED COSTS AND ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
(In millions) December 31 1994 1993 - --------------------------------------------------------------------------------------------------------- Capitalized costs: Proved properties $ 12,280 $ 12,117 Unproved properties 448 495 --------- --------- Total 12,728 12,612 --------- --------- Accumulated depreciation, depletion and amortization: Proved properties 6,301 6,080 Unproved properties 95 90 --------- --------- Total 6,396 6,170 --------- --------- Net capitalized costs $ 6,332 $ 6,442 - --------------------------------------------------------------------------------------------------------- USX's share of equity investee's net capitalized costs $ 85 $ 82 - ---------------------------------------------------------------------------------------------------------
U-31 35 SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) CONTINUED COSTS INCURRED FOR PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT - INCLUDING CAPITAL EXPENDITURES(a)
UNITED MIDDLE EAST OTHER (In millions) STATES EUROPE AND AFRICA INTERNATIONAL TOTAL - ----------------------------------------------------------------------------------------------------------------- 1994: Property acquisition: Proved $ 2 $ - $ 1 $ - $ 3 Unproved 11 - - 4 15 Exploration 108 35 13 26 182 Development 276 115 - 31 422 USX's share of equity investee's costs incurred - 11 - - 11 - ----------------------------------------------------------------------------------------------------------------- 1993: Property acquisition: Proved $ 3 $ - $ - $ - $ 3 Unproved 11 - - 4 15 Exploration 100 30 15 45 190 Development 233 306 8 5 552 USX's share of equity investee's costs incurred - 5 - - 5 - ----------------------------------------------------------------------------------------------------------------- 1992: Property acquisition: Proved $ 1 $ 1 $ - $ - $ 2 Unproved 10 - 1 19 30 Exploration 109 32 47 50 238 Development 114 397 44 6 561 USX's share of equity investee's costs incurred - 10 - - 10 - -----------------------------------------------------------------------------------------------------------------
(a) Certain restatement of prior years' data has been made to conform to 1994 reporting practices. ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES The following estimates of net reserves have been determined by deducting royalties of various kinds from USX's gross reserves. The reserve estimates are believed to be reasonable and consistent with presently known physical data concerning size and character of the reservoirs and are subject to change as additional knowledge concerning the reservoirs becomes available. The estimates include only such reserves as can reasonably be classified as proved; they do not include reserves which may be found by extension of proved areas or reserves recoverable by secondary or tertiary recovery methods unless these methods are in operation and are showing successful results. Undeveloped reserves consist of reserves to be recovered from future wells on undrilled acreage or from existing wells where relatively major expenditures will be required to realize production. Liquid hydrocarbon production amounts for international operations principally reflect tanker liftings of equity production. USX did not have any quantities of oil and gas reserves subject to long-term supply agreements with foreign governments or authorities in which USX acts as producer.
UNITED MIDDLE EAST OTHER (Millions of barrels) STATES EUROPE AND AFRICA(a) INTERNATIONAL TOTAL - ------------------------------------------------------------------------------------------------------------- Liquid Hydrocarbons Proved developed and undeveloped reserves: Beginning of year - 1992 597 233 27 11 868 Purchase of reserves in place 1 - - - 1 Revisions of previous estimates 1 1 3 - 5 Improved recovery 12 - - - 12 Extensions, discoveries and other additions 11 8 - 8 27 Production (42) (12) (4) (3) (61) Sales of reserves in place (4) - - - (4) --- --- --- --- --- End of year - 1992 576 230 26 16 848 Purchase of reserves in place 4 - - - 4 Revisions of previous estimates 1 (1) 2 2 4 Improved recovery 24 - - - 24 Extensions, discoveries and other additions 11 10 - - 21 Production (41) (9) (6) (1) (57) Sales of reserves in place (2) - - - (2) --- --- --- --- --- End of year - 1993 573 230 22 17 842 Purchase of reserves in place 3 - - - 3 Revisions of previous estimates (1) (2) (2) (1) (6) Improved recovery 6 - - - 6 Extensions, discoveries and other additions 13 - - - 13 Production (40) (17) (4) (1) (62) Sales of reserves in place (1) - - - (1) --- --- --- --- --- End of year - 1994 553 211 16 15 795 - -------------------------------------------------------------------------------------------------------------- Proved developed reserves: Beginning of year - 1992 514 108 6 11 639 End of year - 1992 495 97 19 8 619 End of year - 1993 494 221 22 7 744 End of year - 1994 493 202 16 6 717 - --------------------------------------------------------------------------------------------------------------
(a) Excluded reserves located in Libya. See Note 25, page U-26, for current status. U-32 36 SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) CONTINUED ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES (CONTINUED)
UNITED MIDDLE EAST OTHER (Billions of cubic feet) STATES EUROPE AND AFRICA(a) INTERNATIONAL TOTAL - ------------------------------------------------------------------------------------------------------------- Natural Gas Proved developed and undeveloped reserves: Beginning of year - 1992 2,267 1,708 59 43 4,077 Purchase of reserves in place 5 - - - 5 Revisions of previous estimates 35 26 (3) - 58 Improved recovery 6 - - - 6 Extensions, discoveries and other additions 99 48 - - 147 Production (224) (109) (4) (1) (338) Sales of reserves in place (89) - - - (89) ----- ----- --- --- ----- End of year - 1992 2,099 1,673 52 42 3,866 Purchase of reserves in place 16 - - - 16 Revisions of previous estimates (9) (11) 13 (16) (23) Improved recovery 33 - - - 33 Extensions, discoveries and other additions 173 74 1 - 248 Production (193) (117) (6) (1) (317) Sales of reserves in place (75) - - - (75) ----- ----- --- --- ----- End of year - 1993 2,044 1,619 60 25 3,748 Purchase of reserves in place 9 - - - 9 Revisions of previous estimates 11 (7) (11) - (7) Extensions, discoveries and other additions 303 - - - 303 Production (210) (128) (6) (1) (345) Sales of reserves in place (30) - - (24) (54) ----- ----- --- --- ----- End of year - 1994 2,127 1,484 43 - 3,654 - ------------------------------------------------------------------------------------------------------------- Proved developed reserves: Beginning of year - 1992 1,713 1,089 - 43 2,845 End of year - 1992 1,523 1,020 52 42 2,637 End of year - 1993 1,391 1,566 58 25 3,040 End of year - 1994 1,442 1,436 41 - 2,919 - ------------------------------------------------------------------------------------------------------------- USX's share in proved developed and undeveloped reserves of equity investee (CLAM): End of year - 1992 - 164 - - 164 End of year - 1993 - 153 - - 153 End of year - 1994 - 153 - - 153 - -------------------------------------------------------------------------------------------------------------
(a) Excluded reserves located in Libya. See Note 25, page U-26, for current status. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES Estimated discounted future net cash flows and changes therein were determined in accordance with Statement of Financial Accounting Standards No. 69. Certain information concerning the assumptions used in computing the valuation of proved reserves and their inherent limitations are discussed below. USX believes such information is essential for a proper understanding and assessment of the data presented. Future cash inflows are computed by applying year-end prices of oil and gas relating to USX's proved reserves to the year-end quantities of those reserves. Future price changes are considered only to the extent provided by contractual arrangements in existence at year-end. The assumptions used to compute the proved reserve valuation do not necessarily reflect USX's expectations of actual revenues to be derived from those reserves nor their present worth. Assigning monetary values to the estimated quantities of reserves, described on the preceding page, does not reduce the subjective and ever-changing nature of such reserve estimates. Additional subjectivity occurs when determining present values because the rate of producing the reserves must be estimated. In addition to uncertainties inherent in predicting the future, variations from the expected production rate also could result directly or indirectly from factors outside of USX's control, such as unintentional delays in development, environmental concerns, changes in prices or regulatory controls. The reserve valuation assumes that all reserves will be disposed of by production. However, if reserves are sold in place or subjected to participation by foreign governments, additional economic considerations also could affect the amount of cash eventually realized. Future development and production costs, including abandonment and dismantlement costs, are computed by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves at the end of the year, based on year-end costs and assuming continuation of existing economic conditions. Future income tax expenses are computed by applying the appropriate year-end statutory tax rates, with consideration of future tax rates already legislated, to the future pretax net cash flows relating to USX's proved oil and gas reserves. Permanent differences in oil and gas related tax credits and allowances are recognized. Discount was derived by using a discount rate of 10 percent a year to reflect the timing of the future net cash flows relating to proved oil and gas reserves. U-33 37 SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) CONTINUED STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES (CONTINUED) STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES
UNITED MIDDLE EAST OTHER (In millions) STATES EUROPE AND AFRICA INTERNATIONAL TOTAL - ----------------------------------------------------------------------------------------------------------- DECEMBER 31, 1994: Future cash inflows $ 11,473 $ 7,965 $ 325 $ 247 $ 20,010 Future production costs (4,656) (2,971) (82) (103) (7,812) Future development costs (506) (162) (10) (30) (708) Future income tax expenses (1,620) (1,717) (82) (28) (3,447) -------- ------- -------- --------- ------- Future net cash flows 4,691 3,115 151 86 8,043 10% annual discount for estimated timing of cash flows (2,233) (1,171) (45) (18) (3,467) -------- ------- -------- --------- ------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves $ 2,458 $ 1,944 $ 106 $ 68 $ 4,576 - ----------------------------------------------------------------------------------------------------------- USX's share of equity investee's standardized measure of discounted future net cash flows $ - $ 86 $ - $ - $ 86 - ----------------------------------------------------------------------------------------------------------- December 31, 1993: Future cash inflows $ 9,965 $ 7,442 $ 351 $ 243 $ 18,001 Future production costs (4,677) (2,999) (80) (113) (7,869) Future development costs (542) (168) (13) (54) (777) Future income tax expenses (1,066) (1,355) (89) (30) (2,540) -------- ------- -------- --------- ------- Future net cash flows 3,680 2,920 169 46 6,815 10% annual discount for estimated timing of cash flows (1,747) (1,289) (41) (19) (3,096) -------- ------- -------- --------- ------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves $ 1,933 $ 1,631 $ 128 $ 27 $ 3,719 - ----------------------------------------------------------------------------------------------------------- USX's share of equity investee's standardized measure of discounted future net cash flows $ - $ 74 $ - $ - $ 74 - ----------------------------------------------------------------------------------------------------------- December 31, 1992: Future cash inflows $ 12,937 $ 8,190 $ 532 $ 327 $ 21,986 Future production costs (5,184) (3,162) (158) (129) (8,633) Future development costs (710) (423) (16) (50) (1,199) Future income tax expenses (1,786) (1,812) (130) (91) (3,819) -------- ------- -------- --------- ------- Future net cash flows 5,257 2,793 228 57 8,335 10% annual discount for estimated timing of cash flows (2,684) (1,246) (56) (26) (4,012) -------- ------- -------- --------- ------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves $ 2,573 $ 1,547 $ 172 $ 31 $ 4,323 - ----------------------------------------------------------------------------------------------------------- USX's share of equity investee's standardized measure of discounted future net cash flows $ - $ 88 $ - $ - $ 88 - -----------------------------------------------------------------------------------------------------------
SUMMARY OF CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES(a)
(In millions) 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------- Sales and transfers of oil and gas produced, net of production costs $ (985) $ (852) $ (1,157) Net changes in prices and production costs related to future production 1,400 (1,656) 426 Extensions, discoveries and improved recovery, less related costs 316 443 352 Development costs incurred during the period 422 552 561 Changes in estimated future development costs (265) (61) 16 Revisions of previous quantity estimates (27) 19 42 Net change in purchases and sales of minerals in place (39) (20) (54) Accretion of discount 497 608 539 Net change in income taxes (300) 682 (417) Other (162) (319) 234 --------- --------- --------- Net increase (decrease) in discounted future net cash flows 857 (604) 542 Beginning of year 3,719 4,323 3,781 --------- --------- --------- End of year $ 4,576 $ 3,719 $ 4,323 - ----------------------------------------------------------------------------------------------------------------
(a) Certain reclassifications of prior years' data have been made to conform to 1994 reporting practices. U-34 38 Five-Year Operating Summary - Marathon Group
1994 1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------------------------ NET LIQUID HYDROCARBON PRODUCTION (thousands of barrels per day) United States 110 111 118 127 126 International - Europe 48 26 36 44 56 - Other 14 19 20 24 15 -------------------------------------------------- Total Worldwide 172 156 174 195 197 - ------------------------------------------------------------------------------------------------------------------------ NET NATURAL GAS PRODUCTION (millions of cubic feet per day) United States 574 529 593 689 790 International - Europe 382 356 326 336 324 - Other 18 17 12 - - -------------------------------------------------- Total Consolidated 974 902 931 1,025 1,114 Equity production - CLAM Petroleum Co. 40 35 41 49 47 -------------------------------------------------- Total Worldwide 1,014 937 972 1,074 1,161 - ------------------------------------------------------------------------------------------------------------------------ AVERAGE SALES PRICES Liquid Hydrocarbons (dollars per barrel) United States $13.53 $14.54 $16.47 $17.43 $20.67 International 15.61 16.22 18.95 19.38 23.77 Natural Gas (dollars per thousand cubic feet) United States $ 1.94 $ 1.94 $ 1.60 $ 1.57 $ 1.61 International 1.58 1.52 1.77 2.18 1.82 - ------------------------------------------------------------------------------------------------------------------------ NET PROVED RESERVES - YEAR-END Liquid Hydrocarbons (millions of barrels) Beginning of year 842 848 868 846 764 Extensions, discoveries and other additions 13 21 27 58 140 Improved recovery 6 24 12 27 6 Revisions of previous estimates (6) 4 5 10 12 Net purchase (sale) of reserves in place 2 2 (3) (3) (6) Production (62) (57) (61) (70) (70) -------------------------------------------------- Total 795 842 848 868 846 - ------------------------------------------------------------------------------------------------------------------------ Natural Gas (billions of cubic feet) Beginning of year 3,748 3,866 4,077 4,265 4,281 Extensions, discoveries and other additions 303 248 147 167 691 Improved recovery - 33 6 6 2 Revisions of previous estimates (7) (23) 58 24 (54) Net purchase (sale) of reserves in place (45) (59) (84) (22) (255) Production (345) (317) (338) (363) (400) -------------------------------------------------- Total 3,654 3,748 3,866 4,077 4,265 - ------------------------------------------------------------------------------------------------------------------------ U.S. REFINERY OPERATIONS (thousands of barrels per day) In-use crude oil capacity - year-end 570 (a) 570 (a) 620 620 603 Refinery runs - crude oil refined 491 549 546 542 567 - other charge and blend stocks 107 102 79 85 75 % in-use capacity utilization 86.0 90.4 88.1 87.5 94.1 - ------------------------------------------------------------------------------------------------------------------------ U.S. REFINED PRODUCT SALES (thousands of barrels per day) Gasoline 443 420 404 403 395 Distillates 183 179 169 173 173 Propane 16 18 19 17 17 Feedstocks and special products 32 32 39 37 31 Heavy fuel oil 38 39 39 44 34 Asphalt 31 38 37 35 39 -------------------------------------------------- Total 743 726 707 709 689 - ------------------------------------------------------------------------------------------------------------------------ U.S. REFINED PRODUCT MARKETING OUTLETS - YEAR-END Marathon operated terminals 51 51 52 53 53 Retail - Marathon brand 2,356 2,331 2,290 2,106 2,132 - Emro Marketing Company 1,659 1,571 1,549 1,596 1,673 - ------------------------------------------------------------------------------------------------------------------------
(a) Excludes the Indianapolis Refinery which was temporarily idled in October 1993. U-35 39 FIVE-YEAR OPERATING SUMMARY - U. S. STEEL GROUP
(Thousands of net tons, unless otherwise noted) 1994 1993 1992 1991 1990 - --------------------------------------------------------------------------------------------------------- RAW STEEL PRODUCTION Gary, IN 6,768 6,624 5,969 5,817 6,740 Mon Valley, PA 2,669 2,507 2,276 2,088 2,607 Fairfield, AL 2,240 2,203 2,146 1,969 1,937 All other plants(a) - - 44 648 2,335 ------------------------------------------- Total Raw Steel Production 11,677 11,334 10,435 10,522 13,619 Total Cast Production 11,606 11,295 8,695 7,088 7,228 Continuous cast as % of total production 99.4 99.7 83.3 67.4 53.1 - --------------------------------------------------------------------------------------------------------- RAW STEEL CAPABILITY (average) Continuous cast 11,990 11,850 9,904 8,057 6,950 Ingots - - 2,240 6,919 9,451 ------------------------------------------- Total 11,990 11,850 12,144 14,976 16,401 Total production as % of total capability 97.4 95.6 85.9 70.3 83.0 Continuous cast as % of total capability 100.0 100.0 81.6 53.8 42.4 - --------------------------------------------------------------------------------------------------------- HOT METAL PRODUCTION 10,328 9,972 9,270 8,941 11,038 - --------------------------------------------------------------------------------------------------------- COKE PRODUCTION 6,777 6,425 5,917 5,091 6,663 - --------------------------------------------------------------------------------------------------------- IRON ORE PELLETS - MINNTAC, MN Production as % of capacity 90 90 83 84 85 Shipments 16,174 15,911 14,822 14,897 14,922 - --------------------------------------------------------------------------------------------------------- COAL SHIPMENTS(b) 7,698 10,980 12,164 10,020 11,325 - --------------------------------------------------------------------------------------------------------- STEEL SHIPMENTS BY PRODUCT Sheet and tin mill products 8,138 7,717 6,803 6,508 7,709 Plate, structural and other steel mill products(c) 1,748 1,621 1,473 1,721 2,476 Tubular products 682 631 578 617 854 ------------------------------------------- Total 10,568 9,969 8,854 8,846 11,039 Total as % of domestic steel industry 11.1 11.3 10.8 11.2 13.0 - --------------------------------------------------------------------------------------------------------- STEEL SHIPMENTS BY MARKET Steel service centers 2,795 2,837 2,680 2,364 3,425 Further conversion 2,390 2,248 1,565 1,354 1,657 Transportation 2,023 1,805 1,553 1,293 1,502 Containers 995 840 715 754 895 Construction 738 669 598 840 1,134 Export 375 359 629 1,314 926 All other 1,252 1,211 1,114 927 1,500 ------------------------------------------- Total 10,568 9,969 8,854 8,846 11,039 - ---------------------------------------------------------------------------------------------------------
(a) In July 1991, U. S. Steel closed all iron and steel producing operations at Fairless (PA) Works. In April 1992, U. S. Steel closed South (IL) Works. (b) In June 1993, U. S. Steel sold the Cumberland coal mine. In 1994, U. S. Steel permanently closed the Maple Creek coal mine. (c) U. S. Steel ceased production of structural products when South Works closed in April 1992. U-36 40 FIVE-YEAR OPERATING SUMMARY - DELHI GROUP
1994 1993 1992 1991 1990 - --------------------------------------------------------------------------------------------------------- SALES VOLUMES Natural gas throughput (billions of cubic feet) Natural gas sales 227.9 203.2 200.0 195.9 180.0 Transportation 99.1 117.6 103.4 81.0 99.3 ------------------------------------------- Total systems throughput 327.0 320.8 303.4 276.9 279.3 Trading sales 34.6 - - - - Partnerships - equity share(a) 7.1 6.5 10.2 14.5 19.9 ------------------------------------------- Total throughput 368.7 327.3 313.6 291.4 299.2 ------------------------------------------- Natural gas throughput (millions of cubic feet per day) Natural gas sales 624.5 556.7 546.4 536.7 493.1 Transportation 271.4 322.1 282.6 221.9 272.1 ------------------------------------------ Total systems throughput 895.9 878.8 829.0 758.6 765.2 Trading sales 94.7 - - - - Partnerships - equity share(a) 19.6 17.9 27.8 39.7 54.5 ------------------------------------------ Total throughput 1,010.2 896.7 856.8 798.3 819.7 NGLs sales Millions of gallons 275.8 282.0 261.4 214.7 144.4 Thousands of gallons per day 755.7 772.5 714.2 588.2 395.6 - --------------------------------------------------------------------------------------------------------- GROSS UNIT MARGIN ($/mcf) $0.26 $0.42 $0.44 $0.47 $0.43 - --------------------------------------------------------------------------------------------------------- PIPELINE MILEAGE (INCLUDING PARTNERSHIPS) Arkansas 349 362 377 377 377 Colorado(b) - - 91 91 91 Kansas(c) - 164 164 164 164 Louisiana(c) - 141 141 142 140 Oklahoma 2,990 2,908 2,795 2,819 2,800 Texas(a)(c) 4,060 4,544 4,811 4,764 4,739 ------------------------------------------- Total 7,399 8,119 8,379 8,357 8,311 - --------------------------------------------------------------------------------------------------------- PLANTS - OPERATING AT YEAR-END Gas processing 15 15 14 14 12 Sulfur 6 3 3 3 3 - --------------------------------------------------------------------------------------------------------- DEDICATED GAS RESERVES - YEAR-END (billions of cubic feet) Beginning of year 1,663 1,652 1,643 1,680 1,699 Additions 431 382 273 255 212 Production (334) (328) (307) (275) (280) Revisions/Asset Sales (110) (43) 43 (17) 49 ------------------------------------------ Total 1,650 1,663 1,652 1,643 1,680 - ---------------------------------------------------------------------------------------------------------
(a) In January 1993, the Delhi Group sold its 25% interest in Red River Pipeline. (b) In 1993, the Delhi Group sold its pipeline systems located in Colorado. (c) In 1994, the Delhi Group sold certain pipeline systems associated with the planned disposition of nonstrategic assets. U-37 41 USX CORPORATION Management's Discussion and Analysis Management's Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INCOME SALES were $19.3 billion in 1994, compared with $18.1 billion in 1993 and $17.8 billion in 1992. The increase in 1994 primarily reflected increased sales for the Marathon Group and U. S. Steel Group. Marathon Group sales increased mainly due to higher excise taxes and higher volumes of worldwide liquid hydrocarbons and refined product matching buy/sell transactions, partially offset by lower worldwide liquid hydrocarbon prices. U. S. Steel Group sales increased primarily due to higher steel shipment volumes and prices and increased commercial shipments of coke, partly offset by lower commercial shipments of coal. The increase in 1993 primarily reflected increased sales for the U. S. Steel Group due mainly to higher steel shipment volumes and prices, and increased commercial shipments of taconite pellets and coke. These were partially offset by lower sales for the Marathon Group (excluding the effect of the businesses of the Delhi Group which were included in the Marathon Group for periods prior to October 2, 1992). The decrease in Marathon Group sales was mainly due to lower worldwide liquid hydrocarbon volumes and prices and lower refined product prices, partially offset by increased excise taxes and higher refined product sales volumes, excluding matching buy/sell transactions. Matching buy/sell transactions and excise taxes are included in both sales and operating costs of the Marathon Group, resulting in no effect on operating income. Higher excise taxes were the predominant factor in the increase in taxes other than income taxes during 1994 and 1993 primarily resulting from the fourth quarter 1993 increase in the federal excise tax rate and a change in the collection point on distillates from third-party locations to the Marathon Group's terminals. OPERATING INCOME increased by $805 million in 1994, following a $14 million decrease in 1993. Results in 1994 included a $160 million favorable noncash effect resulting from a decrease in the inventory market valuation reserve, partially offset by charges of $37 million related to the planned disposition of certain Delhi Group nonstrategic gas gathering and processing assets. Results in 1993 included a $342 million charge for the Lower Lake Erie Iron Ore Antitrust Litigation against the Bessemer & Lake Erie Railroad ("B&LE litigation") (which also resulted in $164 million of interest costs) (see Note 5 to the Consolidated Financial Statements), a $241 million unfavorable noncash effect resulting from an increase in the inventory market valuation reserve and restructuring charges of $42 million related to the planned closure of the Maple Creek coal mine and preparation plant. Excluding the effect of these items, operating income increased $57 million in 1994 primarily due to higher results for the U. S. Steel Group and Marathon Group, partially offset by lower results for the Delhi Group. Results in 1992 included a favorable impact of $119 million for the settlement of a tax refund claim related to prior years' production taxes and a $62 million favorable noncash effect resulting from a decrease in the inventory market valuation reserve, partially offset by charges of $125 million primarily related to the planned disposition of certain domestic exploration and production properties. Excluding the effects of these items and the 1993 items previously discussed, operating income increased $667 million in 1993 mainly due to improved results for the U. S. Steel Group, as well as the Marathon Group. The adoption of Statement of Financial Accounting Standards No.112 - Employers' Accounting for Postemployment Benefits ("SFAS No.112") resulted in a $23 million increase in operating costs in 1993, principally for the U. S. Steel Group. Net pension credits included in operating income totaled $116 million in 1994, compared to $211 million in 1993 and $260 million in 1992. The decrease over the three-year period primarily reflects decreases in the expected long-term rate of return on plan assets. In 1995, net pension credits are expected to remain at approximately the same level as in 1994. See Note 7 to the Consolidated Financial Statements. OTHER INCOME was $261 million in 1994, compared with income of $257 million in 1993 and a loss of $2 million in 1992. The slight increase in 1994 was mainly due to increased income from equity affiliates, partly offset by lower gains from the disposal of assets. The increase in 1993 primarily resulted from higher gains from the disposal of assets, including the sale of the Cumberland coal mine, the realization of a $70 million deferred gain resulting from the collection of a subordinated note related to the 1988 sale of Transtar, Inc. ("Transtar") (which also resulted in $37 million of interest income) and the sale of an investment in an insurance company. The increase in 1993 also reflected the absence of a $19 million impairment of an investment recorded in 1992. U-38 42 Management's Discussion and Analysis continued INTEREST AND OTHER FINANCIAL INCOME was $24 million in 1994, compared with $78 million in 1993 and $228 million in 1992. The 1993 amount included $37 million of interest income resulting from collection of the Transtar note while the 1992 amount included $177 million of interest income resulting from the settlement of a tax refund claim related to prior years' production taxes. Excluding these items, interest and other financial income was $24 million in 1994, compared with $41 million in 1993 and $51 million in 1992. INTEREST AND OTHER FINANCIAL COSTS were $461 million in 1994, compared with $630 million in 1993 and $485 million in 1992. The 1994 amount included a $35 million favorable effect resulting from settlement of various state tax issues. Excluding this item, the decrease from 1993 mostly reflected the absence of $164 million of interest expense related to the adverse decision in the B&LE litigation recorded in 1993, partially offset by lower capitalized interest in 1994 due mainly to the completion of the East Brae platform and SAGE system in the United Kingdom ("U.K.") sector of the North Sea. Excluding the $164 million of interest expense previously mentioned, the decrease in 1993 primarily resulted from an increase in capitalized interest. Interest and other financial costs in 1995 are expected to increase by approximately $35 million because of lower capitalized interest due to the completion of the aforementioned international projects. THE PROVISION FOR ESTIMATED INCOME TAXES in 1994 was $184 million, compared with credits of $72 million in 1993 and $29 million in 1992. The 1994 provision included a one-time $32 million deferred tax benefit related to an excess of tax over book basis in an equity affiliate. The 1994 income tax provision also included a $24 million credit for the reversal of a valuation allowance related to deferred tax assets. The 1993 income tax credit included an incremental deferred tax benefit of $64 million resulting from USX Corporation's ("USX") ability to elect to credit, rather than deduct, certain foreign income taxes for U.S. federal income tax purposes when paid in future years. The anticipated use of the U.S. foreign tax credit reflects the Marathon Group's improving international production profile. The 1993 income tax credit also included a $29 million charge associated with an increase in the federal income tax rate from 34% to 35%, reflecting remeasurement of deferred federal income tax assets and liabilities as of January 1, 1993. See Note 9 to the Consolidated Financial Statements. NET INCOME of $501 million was recorded in 1994, compared with a net loss of $259 million in 1993 and a net loss of $1.826 billion in 1992. Excluding the unfavorable cumulative effect of changes in accounting principles, which totaled $92 million and $1.666 billion in 1993 and 1992, respectively, net income increased $668 million in 1994 from 1993, compared with a decrease of $7 million in 1993 from 1992. The changes in net income primarily reflect the factors discussed above. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION CURRENT ASSETS increased $183 million from year-end 1993 primarily reflecting higher trade receivables and inventories, partially offset by a reduction in cash and cash equivalent balances. The increase in trade receivables primarily resulted from higher Marathon Group sales of refined products and crude oil and higher U. S. Steel Group sales of flat-rolled steel products. The increase in inventories was mainly due to an increase in inventory values, which reflected a $160 million decrease in the inventory market valuation reserve. This reserve reflects the extent to which the recorded costs of crude oil and refined product inventories exceed net realizable value. Subsequent changes to the inventory market valuation reserve are dependent upon changes in future crude oil and refined product price levels and inventory turnover. The $220 million decrease in cash and cash equivalent balances from year-end 1993 primarily reflects cash applied to debt reduction. CURRENT LIABILITIES were $459 million lower at year-end 1994 mainly due to decreases in accounts payable and accrued taxes, partially offset by an increase in long-term debt due within one year. The decrease in accounts payable primarily resulted from payments against B&LE litigation accruals while the decrease in accrued taxes mainly reflected the settlement of various state tax issues. TOTAL LONG-TERM DEBT AND NOTES PAYABLE at December 31, 1994, was $5.6 billion. The $371 million decrease from year-end 1993 reflected, in part, a reduction of cash and cash equivalent balances. The remaining decrease primarily resulted from other financing activities. For a discussion of these activities, see Management's Discussion and Analysis of Cash Flows below. U-39 43 Management's Discussion and Analysis continued STOCKHOLDERS' EQUITY of $4.3 billion at year-end 1994 increased by $438 million from the end of 1993 mainly reflecting 1994 net income and the issuance of additional common equity, partially offset by dividend payments. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CASH FLOWS NET CASH PROVIDED FROM OPERATING ACTIVITIES totaled $782 million in 1994, compared with $944 million in 1993 and $920 million in 1992. The 1994 period was negatively affected by payments of $367 million to satisfy substantially all judgments from the B&LE litigation and payments of $124 million to settle various state tax issues. The 1993 period was negatively affected by payments of $314 million related to partial settlement of the B&LE litigation and settlement of the Energy Buyers litigation. Excluding these items, net cash provided from operating activities was $1.273 billion in 1994, compared with $1.258 billion in 1993. The 1992 period included $296 million associated with the refund of prior years' production taxes. Excluding this item and 1993 items discussed above, net cash provided from 1993 operating activities improved $634 million from 1992. The increase primarily reflected improved operations for the U. S. Steel Group, improved refined product margins for the Marathon Group and a $103 million favorable effect from the use of available funds from previously established insurance reserves to pay for certain active and retired employee insurance benefits. CAPITAL EXPENDITURES were $1.033 billion in 1994, compared with $1.151 billion in 1993 and $1.505 billion in 1992. The $118 million decrease in 1994 was primarily due to lower expenditures for the Marathon Group, partially offset by higher expenditures for the U. S. Steel Group. The $157 million decline for the Marathon Group mainly reflected decreased expenditures resulting from the substantial completion of the East Brae Field and SAGE system in the U.K. and the distillate hydrotreater complex at the Robinson, Illinois refinery. The $50 million increase for the U. S. Steel Group primarily reflected hot-strip mill and pickle line improvements at Gary Works, a coke oven gas transmission line replacement from Clairton to Mon Valley and the preparation for a blast furnace reline project at Mon Valley Works. The $354 million decrease in 1993 was due primarily to lower expenditures for the Marathon Group and the U. S. Steel Group. Contract commitments for capital expenditures at year-end 1994 were $283 million, compared with $389 million at year-end 1993. In addition to the capital expenditures discussed above, USX's noncash investment activities during 1994 included the issuance of $58 million of debt instruments and $11 million (619,168 shares) of USX - Marathon Group Common Stock ("Marathon Stock") related to acquisitions of 89 gasoline outlets/convenience stores from independent petroleum retailers. Capital expenditures in 1995 are expected to total approximately $1.1 billion. The U. S. Steel Group's capital expenditures are expected to increase approximately $50 million to $300 million and will include spending on a degasser at Mon Valley Works and installation of a granulated coal injection facility at Fairfield Works' blast furnace. The Marathon Group's capital expenditures are expected to remain at approximately the same level as 1994 at $750 million. CASH FROM THE DISPOSAL OF ASSETS was $293 million in 1994, compared with $469 million in 1993 and $117 million in 1992. The 1994 proceeds mainly resulted from the sales of the assets of a retail propane marketing subsidiary and certain domestic oil and gas production properties. The 1993 amount primarily reflected the realization of proceeds from a subordinated note related to the 1988 sale of Transtar, the sale of the Cumberland coal mine, the sale/leaseback of interests in two LNG tankers, and the sales of various domestic oil and gas production properties and of an investment in an insurance company. No individually significant sales transactions occurred in 1992. FINANCIAL OBLIGATIONS decreased by $217 million in 1994, compared with a decrease of $458 million in 1993 and a decrease of $240 million in 1992. These amounts represent changes in balances outstanding of commercial paper, revolving credit agreements, lines of credit, preferred stock of subsidiary, other debt and production financing and other agreements. The decrease in 1994 primarily reflected a reduction in cash and cash equivalent balances. During 1994, USX issued $300 million in aggregate principal amount of 7.20% Notes Due 2004 and $150 million in aggregate principal amount of LIBOR-based Floating Rate Notes Due 1996. In addition, an aggregate principal amount of $57 million of Marathon's 7% Monthly Interest Guaranteed Notes Due 2002 ("7% Notes") was issued in exchange for an equivalent principal amount of its 9-1/2% U-40 44 Management's Discussion and Analysis continued Guaranteed Notes Due 1994 ("Marathon 9-1/2% Notes"). The $642 million balance of Marathon 9-1/2% Notes was paid in March 1994. USX also issued $55 million of 6.70% Environmental Improvement Revenue Refunding Bonds due 2020 and 2024 to refinance Environmental Improvement Bonds. During 1993, USX issued an aggregate principal amount of $800 million of fixed rate debt through its medium-term note program and three separate series of unsecured, noncallable debt securities in the public market. Maturities ranged from 5 to 30 years, and interest rates ranged from 6-3/8% to 8-1/2% per annum. In addition, an aggregate principal amount of $77 million of Marathon 9-1/2% Notes was tendered in exchange for the 7% Notes. During 1992, USX issued an aggregate principal amount of $748 million of fixed rate debt through its medium-term note program and three separate series of unsecured, noncallable debt securities in the public market. Maturities ranged from 5 to 30 years, and interest rates ranged from 6.65% to 9.375% per annum. Preferred stock of a subsidiary generated proceeds, net of issue costs, of $242 million in 1994. This amount reflected the sale of 10,000,000 shares of 8-3/4% Cumulative Monthly Income Preferred Stock ("MIPS") of USX Capital LLC, a wholly owned subsidiary of USX. MIPS is classified in the liability section of the consolidated balance sheet, and the financial costs are included in interest and other financial costs on the consolidated statement of operations. See Note 24 to the Consolidated Financial Statements. In August 1994, USX entered into a $2.325 billion revolving credit agreement which terminates in August 1999. Interest is based on defined short-term market rates. This agreement replaced the $2.0 billion in revolving credit agreements entered into in October 1992. At December 31, 1994, USX had no outstanding borrowings against long-term credit agreements, leaving $2.325 billion of available unused committed credit lines. In addition, USX had $340 million of available unused short-term lines of credit, of which $175 million requires a commitment fee and the other $165 million generally requires maintenance of compensating balances. USX currently has three active shelf registration statements with the Securities and Exchange Commission aggregating slightly more than $1.2 billion, of which $750 million is dedicated to offer and issue debt securities, only. The balance allows USX to offer and issue debt and equity securities. In the event of a change of control of USX, debt and guaranteed obligations totaling $5.0 billion at year-end 1994 may be declared immediately due and payable or required to be collateralized. See Notes 11,12,13 and 15 to the Consolidated Financial Statements. PREFERRED STOCK ISSUED totaled $336 million in 1993. This amount reflected the sale of 6,900,000 shares of 6.50% Cumulative Convertible Preferred Stock ($50.00 liquidation preference per share) ("6.50% Convertible Preferred"). The 6.50% Convertible Preferred is convertible at any time into shares of USX - U. S. Steel Group Common Stock ("Steel Stock") at a conversion price of $46.125 per share of Steel Stock. COMMON STOCK ISSUED, net of repurchases, totaled $223 million in 1994, compared with $371 million in 1993 and $942 million in 1992. The 1994 amount mainly resulted from the sale of 5,000,000 shares of Steel Stock to the public for net proceeds of $201 million. In 1993, USX sold 10,000,000 shares of Steel Stock to the public for net proceeds of $350 million. The 1992 amount primarily reflected sales to the public of all three classes of common stock, including 25,000,000 shares of Marathon Stock for net proceeds of $541 million, 8,050,000 shares of Steel Stock for net proceeds of $198 million and 9,000,000 shares of USX - Delhi Group Common Stock for net proceeds of $136 million. DIVIDEND PAYMENTS increased slightly in 1994 primarily due to the first quarter sale of additional shares of Steel Stock. Dividend payments decreased in 1993 from 1992 mainly reflecting a decrease in the dividend rate on Marathon Stock in the fourth quarter of 1992, partially offset by increased dividends due primarily to the sale in 1993 of additional shares of Steel Stock and of the 6.50% Convertible Preferred. PENSION PLAN ACTIVITY In accordance with USX's long-term funding practice, which is designed to maintain an appropriate funded status, USX will resume funding the U. S. Steel Group's principal pension plan in amounts of approximately $100 million per year commencing with the 1994 plan year. The funding for the 1994 plan year and possibly the 1995 plan year will take place in 1995. U-41 45 Management's Discussion and Analysis continued RATING AGENCY ACTIVITY In September 1993, Standard & Poor's Corp. lowered its ratings on USX's and Marathon's senior debt to below investment grade (from BBB- to BB+) and on USX's subordinated debt, preferred stock and commercial paper. In October 1993, Moody's Investors Services, Inc. ("Moody's") confirmed its Baa3 investment grade ratings on USX's and Marathon's senior debt. Moody's also confirmed its ratings on USX's subordinated debt and commercial paper, but lowered its ratings on USX's preferred stock from ba1 to ba2. The ratings described above remain unchanged. HEDGING ACTIVITY USX engages in hedging activities in the normal course of its businesses. Futures contracts, commodity swaps and options are used to hedge exposure to price fluctuations relevant to the purchase or sale of crude oil, natural gas, refined products and nonferrous metals. Forward currency contracts have been used to manage currency risks related to anticipated revenues and operating costs, firm commitments for capital expenditures and existing assets or liabilities denominated in a foreign currency. While hedging activities are generally used to reduce risks from unfavorable commodity price and currency rate movements, they also may limit the opportunity to benefit from favorable movements. USX's hedging activities have not been significant in relation to its overall business activity. Based on risk assessment procedures and internal controls in place, management believes that its use of hedging instruments will not have a material adverse effect on the financial position, liquidity or results of operations of USX. See Notes 1 and 26 to the Consolidated Financial Statements. LIQUIDITY USX believes that its short-term and long-term liquidity is adequate to satisfy its obligations as of December 31, 1994, and to complete currently authorized capital spending programs. Future requirements for USX's business needs, including the funding of capital expenditures and debt maturities for the years 1995 to 1997 are expected to be financed by a combination of internally generated funds, proceeds from the sale of stock, future borrowings and other external financing sources. Long-term debt of $78 million matures within one year. In addition, at the option of the holders, USX may be obligated to repurchase zero coupon convertible debentures at a carrying value of $430 million on August 9, 1995. If tendered, USX may elect to pay the purchase price in cash, shares of Marathon Stock and Steel Stock, notes or a combination thereof. See Note 13 to the Consolidated Financial Statements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF ENVIRONMENTAL MATTERS, LITIGATION AND CONTINGENCIES USX has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. In recent years, these expenditures have increased primarily due to required refined product reformulation and 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 USX's products and services, operating results will be adversely affected. USX believes that integrated 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. U-42 46 Management's Discussion and Analysis continued The following table summarizes USX's environmental expenditures for each of the last three years(a):
(Dollars in millions) 1994 1993 1992 - --------------------------------------------------------------------------------------------------------- Capital Marathon Group $ 70 $ 123 $ 240 U. S. Steel Group 57 53 52 Delhi Group 5 5 3 ------- ------- ------- Total Capital $ 132 $ 181 $ 295 - --------------------------------------------------------------------------------------------------------- Compliance Operating & Maintenance Marathon Group $ 106 $ 92 $ 109 U. S. Steel Group 202 168 157 Delhi Group 6 5 5 ------- ------- ------- Total Operating & Maintenance 314 265 271 Remediation(b) Marathon Group 25 38 21 U. S. Steel Group 32 19 11 ------- ------- ------- Total Remediation 57 57 32 Total Compliance $ 371 $ 322 $ 303 - ---------------------------------------------------------------------------------------------------------
(a) Estimated for the Marathon Group and Delhi Group based on American Petroleum Institute survey guidelines and for the U. S. Steel Group based on U.S. Department of Commerce survey guidelines. (b) These amounts do not include noncash provisions recorded for environmental remediation, but include spending charged against such reserves. USX's environmental capital expenditures accounted for 13%, 16%, and 20% of total consolidated capital expenditures in 1994, 1993 and 1992, respectively. The decline over the three-year period was primarily the result of the Marathon Group's multi-year capital spending program for diesel fuel desulfurization which began in 1990 and was substantially completed in 1993. During 1992 through 1994, compliance expenditures averaged 2% of total consolidated operating costs. Remediation spending during this period was primarily related to retail gasoline stations which incur ongoing clean-up costs for soil and groundwater contamination associated with underground storage tanks and piping, and dismantlement and restoration activities at former and present operating locations. USX has been notified that it is a potentially responsible party ("PRP") at 45 waste sites under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of December 31, 1994. In addition, there are 31 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 114 additional sites, excluding retail gasoline stations, where remediation is being sought under other environmental statutes, both federal and state. At many of these sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. USX accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. See Note 25 to the Consolidated Financial Statements. New or expanded environmental requirements, which could increase USX's environmental costs, may arise in the future. USX intends to comply with all legal requirements regarding the environment, but since many of them are not fixed or presently determinable (even under existing legislation) and may be affected by future legislation, it is not possible to accurately predict the ultimate cost of compliance, including remediation costs which may be incurred and penalties which may be imposed. However, based on presently available information, and existing laws and regulations as currently implemented, USX does not anticipate that environmental compliance expenditures (including operating and maintenance and remediation) will materially increase in 1995. USX expects environmental capital expenditures to approximate $105 million in 1995 or approximately 10% of total estimated consolidated capital expenditures. Predictions beyond 1995 can only be broad-based estimates which have varied, and will continue to vary, due to the ongoing U-43 47 Management's Discussion and Analysis continued evolution of specific regulatory requirements, the possible imposition of more stringent requirements and the availability of new technologies, among other matters. Based upon currently identified projects, USX anticipates that environmental capital expenditures in 1996 will total approximately $120 million; however, actual expenditures may vary as the number and scope of environmental projects are revised as a result of improved technology or changes in regulatory requirements and could increase if additional projects are identified or additional requirements are imposed. USX is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment, certain of which are discussed in Note 25 to the Consolidated Financial Statements. 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 Management's Discussion and Analysis of Cash Flows. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS BY INDUSTRY SEGMENT THE MARATHON GROUP The Marathon Group includes Marathon Oil Company and certain other subsidiaries of USX, which are engaged in worldwide exploration, production, transportation and marketing of crude oil and natural gas; and domestic refining, marketing and transportation of petroleum products. The Marathon Group financial data for the periods prior to the creation of the Delhi Group on October 2, 1992, include the combined historical financial position, results of operations and cash flows for the businesses of the Delhi Group. Sales of $12.8 billion in 1994 increased $795 million from 1993 mainly due to higher excise taxes and higher volumes of worldwide liquid hydrocarbons and refined product matching buy/sell transactions, partially offset by lower worldwide liquid hydrocarbon prices. Sales of $12.0 billion in 1993 declined $820 million from 1992 primarily due to lower worldwide liquid hydrocarbon volumes and prices, lower refined product prices and the absence of sales from the Delhi Group. These decreases were partially offset by increased excise taxes and higher refined product sales volumes, excluding matching buy/sell transactions. Matching buy/sell transactions and excise taxes are included in both sales and operating costs, resulting in no effect on operating income. Higher excise taxes were the predominant factor in the increase in taxes other than income taxes during 1994 and 1993. Excise taxes increased mainly due to the fourth quarter 1993 increase in the federal excise tax rate and a change in the collection point on distillates from third-party locations to Marathon's terminals. The Marathon Group reported operating income of $584 million in 1994, compared with $169 million in 1993 and $304 million in 1992. Results included a $160 million favorable effect in 1994, a $241 million unfavorable effect in 1993 and a $62 million favorable effect in 1992 resulting from noncash adjustments to the inventory market valuation reserve. The 1992 results also included a favorable impact of $119 million for the settlement of a tax refund claim related to prior years' production taxes and a restructuring charge of $115 million related to the planned disposition of certain domestic exploration and production properties. Excluding the effects of these items, operating income was $424 million in 1994, $410 million in 1993 and $238 million in 1992. The increase in 1994 mainly reflected reduced worldwide operating expenses and higher international liquid hydrocarbon volumes and worldwide natural gas volumes, largely offset by lower refined product margins, lower liquid hydrocarbon prices and $42 million of employee reorganization charges. The increase in 1993 was mainly due to increased refined product margins and increased domestic natural gas prices, partially offset by lower worldwide liquid hydrocarbon prices and volumes. Worldwide liquid hydrocarbon volumes are expected to increase approximately 20% in 1995, primarily reflecting increased production from the East Brae Field, a full year of production from Ewing Bank 873 in the Gulf of Mexico and new production from the Kakap KRA and KG Fields, offshore Indonesia. Worldwide natural gas volumes are also expected to increase approximately 20% in 1995, resulting from a successful 1994 domestic drilling program and a full year of contractual Brae area gas sales, which commenced in October 1994. Contractual sales volumes of Brae area gas through the SAGE pipeline system for the fourth quarter of 1994 averaged approximately 80 million cubic feet per day, which was less than originally anticipated due to unseasonably warm weather in the U.K. In 1995, contractual gas sales volumes through the SAGE system should exceed the level experienced in the fourth quarter of 1994. U-44 48 Management's Discussion and Analysis continued The Marathon Group expects to realize annual cost structure reductions of approximately $80 million from work force reduction programs completed during 1994. These reductions will impact salary and related benefits expenses, capitalized costs and billings to joint venture partners. The outlook regarding prices and costs for the Marathon Group's principal products is largely dependent upon world market developments for crude oil and refined products. Market conditions in the petroleum industry are cyclical and subject to global economic and political events. THE U. S. STEEL GROUP 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. Other businesses that are part of the U. S. Steel Group include real estate development and management, fencing products and leasing and financing activities. Sales were $6.1 billion in 1994, compared with $5.6 billion in 1993 and $4.9 billion in 1992. The $454 million increase in 1994 from 1993 was mainly the result of higher steel shipment volumes and prices and increased commercial shipments of coke, partially offset by lower commercial shipments of coal. The $693 million increase in 1993 from 1992 primarily reflected higher steel shipment volumes and prices, and increased commercial shipments of taconite pellets and coke. The U. S. Steel Group reported operating income of $313 million in 1994, compared with an operating loss of $149 million in 1993 and an operating loss of $241 million in 1992. The 1993 operating loss included a $342 million charge for the B&LE litigation and restructuring charges of $42 million related to the planned closure of the Maple Creek coal mine and preparation plant. The 1992 operating loss included a charge of $10 million for completion of a restructuring plan related to steel facilities. Excluding the effects of these items, operating income increased $78 million in 1994, compared with an increase of $466 million from 1992 to 1993. The improvement in 1994 was primarily due to higher steel prices and shipment volumes. These were partially offset by higher pension, labor and scrap metal costs, the absence of a $39 million favorable effect in 1993 related to employee insurance benefits, the adverse effects of utility curtailments and other severe winter weather complications, a caster fire at Mon Valley Works and planned outages for modernization at Gary Works. The increase in 1993 was mainly due to higher steel shipment volumes and prices, improved operating efficiencies and lower accruals for environmental and legal contingencies, other than the B&LE litigation mentioned above. In addition, 1993 results benefited from a $39 million favorable effect from the utilization of funds from previously established insurance reserves to pay for certain employee insurance benefits, lower provisions for loan losses by USX Credit and the absence of a 1992 unfavorable effect of $28 million resulting from market valuation provisions for foreclosed real estate assets. These were partially offset by higher hourly steel labor costs, unfavorable effects associated with pension and other employee benefits, lower results from coal operations and a $21 million increase in operating costs related to the adoption of SFAS No. 112. Based on strong recent order levels and favorable steel market conditions, the U. S. Steel Group anticipates that steel demand will remain strong in 1995, although domestic industry shipments for 1995 may decrease slightly from the 1994 level of 95 million tons. Market prices for steel products have generally remained firm because of strong demand. Price increases for most steel products were implemented effective January 1, 1995, including increases in long-term contract prices with several major customers. Steel imports to the United States accounted for an estimated 25%, 19% and 17% of the domestic steel market in 1994, 1993 and 1992, 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. U. S. Steel Group shipments in the first quarter of 1995 are expected to be lower than the previous quarter as some customers increased purchases prior to the January 1, 1995 price increases, and there may be some weakness in shipments to automotive companies which have recently announced some reductions in build schedules. During the first quarter of 1995, raw steel production will be reduced by planned blast furnace outages at Gary Works and Fairfield Works. THE DELHI GROUP The Delhi Group includes Delhi Gas Pipeline Corporation and certain related companies which are engaged in the purchasing, gathering, processing, transporting and marketing of natural gas. U-45 49 Management's Discussion and Analysis continued Sales of $567 million in 1994 increased $32 million from 1993 primarily reflecting increased volumes from its trading business and from spot market sales, partially offset by decreased revenues from Southwestern Electric Power Company ("SWEPCO") and other customers and lower average prices for natural gas and natural gas liquids ("NGLs"). Sales of $535 million in 1993 increased $77 million from 1992, mainly due to increased revenues from premium services and higher average natural gas sales prices. The Delhi Group reported an operating loss of $36 million in 1994, compared with operating income of $36 million in 1993 and operating income of $33 million in 1992. The 1994 operating loss included charges of $37 million for the planned disposition of certain nonstrategic assets, expenses of $2 million related to a workforce reduction program, other employment-related costs of $2 million and a $2 million favorable effect of the settlement of litigation related to a prior-year take-or-pay claim. Operating income in 1993 included favorable effects of $2 million for the reversal of a prior-period accrual related to a natural gas contract settlement, $1 million related to gas imbalance settlements and a net $1 million for a refund of prior years' taxes other than income taxes. Excluding the effects of these items, operating income in 1994 was $3 million, down $29 million from 1993, mainly reflecting a decline in gas sales premiums from SWEPCO and lower margins from other customers, partially offset by higher natural gas throughput volumes and lower depreciation expense due to the previously mentioned asset disposition plan. Operating income in 1992 included favorable effects totaling $2 million relating to the settlement of various lawsuits and third-party disputes. Excluding the effect of this item and 1993 special items previously discussed, 1993 operating income improved by $1 million, primarily as a result of higher gas sales margins and lower operating and other expenses, partially offset by a 34% decline in gas processing margins from the sale of NGLs. During 1995, the Delhi Group expects to complete the restructuring plan begun in the second quarter of 1994, allowing a more concentrated focus on the management of core assets in western Oklahoma and east, west and south Texas. The benefits of the restructuring plan and the 1994 work force reduction program, such as reduced depreciation, operating and other expenses, are expected to continue in 1995. The levels of gas sales margin for future periods are difficult to accurately project because of systemic fluctuations in customer demand for premium services, competition in attracting new premium customers and the volatility of natural gas prices. However, continued mild weather in the Delhi Group's core service areas during January 1995 reduced demand for premium services, and gas sales margin in the summer of 1995 could be unfavorably affected by the expiration in August 1994 of the Delhi Group's premium service contract with Central Power and Light Company, a utility electric generator serving south Texas. If the mild weather persists, high natural gas inventory levels may continue to put pressure on prices during 1995, as wellhead deliveries compete with storage withdrawals for market share. The volume of trading sales is expected to expand significantly during 1995, although margins earned on trading sales are usually significantly less than those earned on system premium sales. The levels of gas processing margin for future periods are also difficult to project, due to fluctuations in the price and demand for NGLs and the volatility of natural gas prices (feedstock costs). However, management can reduce the volume of NGLs extracted and sold during periods of unfavorable economics by curtailing the extraction of certain NGLs. OUTLOOK The Financial Accounting Standards Board intends to issue "Accounting for the Impairment of Long-Lived Assets" in the near future. This standard, which is expected to be effective for 1996, requires that operating assets be written down to fair value whenever an impairment review indicates that the carrying value cannot be recovered on an undiscounted cash flow basis. After any such noncash write-down of operating assets, results of operations would be favorably affected by reduced depreciation, depletion and amortization charges. USX will be initiating an extensive review to implement the anticipated standard and, at this time, cannot provide an assessment of either the impact or the timing of adoption, although it is likely that it may be required to recognize certain charges upon adoption. Under current accounting policy, USX generally has only impaired property, plant and equipment under the provisions of Accounting Principles Board Opinion No. 30 and its interpretations. U-46 50 MARATHON GROUP Index to Financial Statements, Supplementary Data and Management's Discussion and Analysis
PAGE ---- Explanatory Note Regarding Financial Information.......................... M-2 Management's Report....................................................... M-3 Audited Financial Statements: Report of Independent Accountants........................................ M-3 Statement of Operations.................................................. M-4 Balance Sheet............................................................ M-5 Statement of Cash Flows.................................................. M-6 Notes to Financial Statements............................................ M-7 Selected Quarterly Financial Data......................................... M-22 Principal Unconsolidated Affiliates....................................... M-22 Supplementary Information................................................. M-22 Five-Year Operating Summary .............................................. M-23 Management's Discussion and Analysis...................................... M-24
M-1 51 MARATHON GROUP Explanatory Note Regarding Financial Information 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 or responsibility for such liabilities. Holders of USX - Marathon Group Common Stock, USX - U. S. Steel Group Common Stock and USX - Delhi Group Common Stock are holders of common stock of USX, and 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 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 Marathon Group financial information. M-2 52 Management's Report The accompanying financial statements of the Marathon Group are the responsibility of and have been prepared by USX Corporation (USX) in conformity with generally accepted accounting principles. They necessarily include some amounts that are based on best judgments and estimates. The Marathon Group financial information displayed in other sections of this report is consistent with these financial statements. USX seeks to assure the objectivity and integrity of its financial records by careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communications programs aimed at assuring that its policies and methods are understood throughout the organization. USX has a comprehensive formalized system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that financial records are reliable. Appropriate management monitors the system for compliance, and the internal auditors independently measure its effectiveness and recommend possible improvements thereto. In addition, as part of their audit of the financial statements, USX's independent accountants, who are elected by the stockholders, review and test the internal accounting controls selectively to establish a basis of reliance thereon in determining the nature, extent and timing of audit tests to be applied. The Board of Directors pursues its oversight role in the area of financial reporting and internal accounting control through its Audit Committee. This Committee, composed solely of nonmanagement directors, regularly meets (jointly and separately) with the independent accountants, management and internal auditors to monitor the proper discharge by each of its responsibilities relative to internal accounting controls and the consolidated and group financial statements. Charles A. Corry Robert M. Hernandez Lewis B. Jones Chairman, Board of Directors Vice Chairman Vice President & Chief Executive Officer & Chief Financial Officer & Comptroller Report of Independent Accountants To the Stockholders of USX Corporation: In our opinion, the accompanying financial statements appearing on pages M-4 through M-21 present fairly, in all material respects, the financial position of the Marathon Group at December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of USX's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 2, page M-8, in 1993 USX adopted new accounting standards for postemployment benefits and for retrospectively rated insurance contracts. As discussed in Note 10, page M-14, and Note 11, page M-15, in 1992 USX adopted new accounting standards for postretirement benefits other than pensions and for income taxes, respectively. The Marathon Group is a business unit of USX Corporation (as described in Note 1, page M-7); accordingly, the financial statements of the Marathon Group should be read in connection with the consolidated financial statements of USX Corporation. Price Waterhouse LLP 600 Grant Street, Pittsburgh, Pennsylvania 15219-2794 February 14, 1995 M-3 53 Statement of Operations
(Dollars in millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- SALES (Note 4, page M-10) $ 12,757 $ 11,962 $ 12,782 OPERATING COSTS: Cost of sales (excludes items shown below) 8,405 8,209 9,341 Inventory market valuation charges (credits) (Note 17, page M-18) (160) 241 (62) Selling, general and administrative expenses 313 325 343 Depreciation, depletion and amortization 721 727 793 Taxes other than income taxes 2,737 2,146 1,776 Exploration expenses 157 145 172 Restructuring charges (Note 12, page M-16) - - 115 --------- --------- --------- Total operating costs 12,173 11,793 12,478 --------- --------- --------- OPERATING INCOME 584 169 304 Other income (loss) (Note 8, page M-12) 177 46 (7) Interest and other financial income (Note 8, page M-12) 15 22 210 Interest and other financial costs (Note 8, page M-12) (300) (292) (306) --------- --------- --------- TOTAL INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES 476 (55) 201 Less provision (credit) for estimated income taxes (Note 11, page M-15) 155 (49) 92 --------- --------- --------- TOTAL INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES 321 (6) 109 Cumulative effect of changes in accounting principles: Postemployment benefits (Note 2, page M-8) - (17) - Retrospectively rated insurance contracts (Note 2, page M-8) - (6) - Postretirement benefits other than pensions (Note 10, page M-14) - - (147) Income taxes (Note 11, page M-15) - - (184) --------- --------- --------- NET INCOME (LOSS) 321 (29) (222) Dividends on preferred stock (6) (6) (6) --------- --------- --------- NET INCOME (LOSS) APPLICABLE TO MARATHON STOCK $ 315 $ (35) $ (228) - --------------------------------------------------------------------------------------------------------
Income Per Common Share of Marathon Stock
1994 1993 1992 - -------------------------------------------------------------------------------------------------------- PRIMARY AND FULLY DILUTED: Total income (loss) before cumulative effect of changes in accounting principles applicable to Marathon Stock $ 1.10 $ (.04) $ .37 Cumulative effect of changes in accounting principles - (.08) (1.17) --------- --------- --------- Net income (loss) applicable to Marathon Stock $ 1.10 $ (.12) $ (.80) Weighted average shares, in thousands - primary 286,722 286,594 283,494 - fully diluted 286,725 286,594 283,495 - --------------------------------------------------------------------------------------------------------
See Note 21, page M-19, for a description of net income per common share. The accompanying notes are an integral part of these financial statements. M-4 54 Balance Sheet
(Dollars in millions) December 31 1994 1993 - ------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 28 $ 185 Receivables, less allowance for doubtful accounts of $3 and $3 (Note 18, page M-18) 438 311 Inventories (Note 17, page M-18) 1,137 987 Other current assets 134 89 -------- -------- Total current assets 1,737 1,572 Long-term receivables and other investments (Note 13, page M-16) 376 352 Property, plant and equipment - net (Note 16, page M-17) 8,364 8,428 Prepaid pensions (Note 9, page M-13) 261 263 Other noncurrent assets 213 207 -------- -------- Total assets $ 10,951 $ 10,822 - ------------------------------------------------------------------------------------------------------- LIABILITIES Current liabilities: Notes payable $ 1 $ 1 Accounts payable 1,129 1,085 Payable to the other groups (Note 14, page M-17) 44 13 Payroll and benefits payable 84 85 Accrued taxes 133 294 Deferred income taxes (Note 11, page M-15) 171 37 Accrued interest 95 105 Long-term debt due within one year (Note 6, page M-11) 55 23 -------- -------- Total current liabilities 1,712 1,643 Long-term debt (Note 6, page M-11) 3,983 4,274 Long-term deferred income taxes (Note 11, page M-15) 1,270 1,223 Employee benefits (Note 10, page M-14) 317 306 Deferred credits and other liabilities 246 266 Preferred stock of subsidiary (Note 5, page M-10) 182 - -------- -------- Total liabilities 7,710 7,712 STOCKHOLDERS' EQUITY (Note 19, page M-18) Preferred stock 78 78 Common stockholders' equity 3,163 3,032 -------- -------- Total stockholders' equity 3,241 3,110 -------- -------- Total liabilities and stockholders' equity $ 10,951 $ 10,822 - -------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. M-5 55 Statement of Cash Flows
(Dollars in millions) 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income (loss) $ 321 $ (29) $ (222) Adjustments to reconcile to net cash provided from operating activities: Accounting principle changes - 23 331 Depreciation, depletion and amortization 721 727 793 Exploratory dry well costs 68 48 82 Inventory market valuation charges (credits) (160) 241 (62) Pensions 1 (6) (31) Postretirement benefits other than pensions 10 24 20 Deferred income taxes 116 (116) 2 Gain on disposal of assets (175) (34) (1) Restructuring charges - - 115 Changes in: Current receivables (105) 189 91 Inventories 3 44 8 Current accounts payable and accrued expenses (122) (313) (127) All other items - net 41 29 (4) ------- ------ ------- Net cash provided from operating activities 719 827 995 ------- ------ ------- INVESTING ACTIVITIES: Capital expenditures (753) (910) (1,193) Disposal of assets 263 174 77 Proceeds from issuance of Delhi Stock - net of cash attributed to the Delhi Group 2 5 122 All other items - net 8 (5) 9 ------- ------ ------- Net cash used in investing activities (480) (736) (985) ------- ------ ------- FINANCING ACTIVITIES (Note 3, page M-9): Marathon Group activity - USX debt attributed to all groups - net (371) 261 (410) Specifically attributed debt - repayments (1) - (6) Production financing and other agreements - repayments - - (10) Marathon Stock repurchased - (1) (1) Marathon Stock issued - 1 596 Attributed preferred stock of subsidiary 176 - - Dividends paid (201) (201) (340) ------- ------ ------- Net cash provided from (used in) financing activities (397) 60 (171) ------- ------ ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 1 (1) (4) ------- ------ ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (157) 150 (165) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 185 35 200 ------- ------ ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 28 $ 185 $ 35 - ----------------------------------------------------------------------------------------------------------
See Note 7, page M-11, for supplemental cash flow information. The accompanying notes are an integral part of these financial statements. M-6 56 Notes to Financial Statements - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION USX Corporation (USX) has 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), which are intended to reflect the performance of the Marathon Group, the U. S. Steel Group and the Delhi Group, respectively. The financial statements of the Marathon Group include the financial position, results of operations and cash flows for the businesses of Marathon Oil Company and certain other subsidiaries of USX, and a portion of the corporate assets and liabilities and related transactions which are not separately identified with ongoing operating units of USX. The Marathon Group is involved in worldwide exploration, production, transportation and marketing of crude oil and natural gas; and domestic refining, marketing and transportation of petroleum products. The Marathon Group financial statements are prepared using the amounts included in the USX consolidated financial statements. The Delhi Group was established October 2, 1992; the Marathon Group financial data for the periods presented prior to this date included the combined historical financial position, results of operations and cash flows for the businesses of the Delhi Group. Beginning October 2, 1992, the financial statements of the Marathon Group do not include the financial position, results of operations and cash flows for the businesses of the Delhi Group except for the financial effects of the Retained Interest (Note 3, page M-9). 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 or responsibility for such liabilities. Holders of Marathon Stock, Steel Stock and 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 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 Marathon Group financial information. - -------------------------------------------------------------------------------- 2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES PRINCIPLES APPLIED IN CONSOLIDATION - These financial statements include the accounts of the businesses comprising the Marathon Group. The Marathon Group, the U. S. Steel Group and the Delhi Group financial statements, taken together, comprise all of the accounts included in the USX consolidated financial statements. Investments in unincorporated oil and gas joint ventures, undivided interest pipelines and jointly-owned gas processing plants are accounted for on a pro rata basis. Investments in other entities in which the Marathon Group has significant influence in management and control are accounted for using the equity method of accounting and are carried in the investment account at the Marathon Group's share of net assets plus advances. The proportionate share of income from equity investments is included in other income. The proportionate share of income represented by the Retained Interest in the Delhi Group is included in other income. Investments in marketable equity securities are carried at lower of cost or market and investments in other companies are carried at cost, with income recognized when dividends are received. CASH AND CASH EQUIVALENTS - Cash and cash equivalents includes cash on hand and on deposit and highly liquid debt instruments with maturities generally of three months or less. INVENTORIES - Inventories are carried at lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method. M-7 57 HEDGING TRANSACTIONS - The Marathon Group engages in commodity and currency hedging within the normal course of its activities (Note 24, page M-19). Management has been authorized to manage exposure to price fluctuations relevant to the purchase or sale of crude oil, natural gas and refined products through the use of a variety of derivative financial and nonfinancial instruments. Derivative financial instruments require settlement in cash and include such instruments as over-the-counter (OTC) commodity swap agreements and OTC commodity options. Derivative nonfinancial instruments require or permit settlement by delivery of commodities and include exchange-traded commodity futures contracts and options. Changes in the market value of derivative instruments are deferred and subsequently recognized in income, as sales or cost of sales, in the same period as the hedged item. OTC swaps are off-balance-sheet instruments; therefore, the effect of changes in the market value of such instruments are not recorded until settlement. The margin accounts for open commodity futures contracts, which reflect daily settlements as market values change, are recorded as accounts receivable. Premiums on all commodity-based option contracts are initially recorded based on the amount paid or received; the options' market value is subsequently recorded as accounts receivable or accounts payable, as appropriate. Forward currency contracts are primarily used to manage currency risks related to anticipated revenues and operating costs, firm commitments for capital expenditures and existing assets or liabilities denominated in a foreign currency. Gains or losses related to firm commitments are deferred and included with the hedged item; all other gains or losses are recognized in income in the current period as sales, cost of sales, interest income or expense, or other income, as appropriate. For balance sheet reporting, net contract values are included in receivables or payables, as appropriate. Recorded deferred gains or losses are reflected within other noncurrent assets or deferred credits and other liabilities. Cash flows from the use of derivative instruments are reported in the same category as the hedged item in the statement of cash flows. EXPLORATION AND DEVELOPMENT - The Marathon Group follows the successful efforts method of accounting for oil and gas exploration and development. GAS BALANCING - The Marathon Group follows the sales method of accounting for gas production imbalances. PROPERTY, PLANT AND EQUIPMENT - Depreciation and depletion of oil and gas producing properties are computed using predetermined rates based upon estimated proved oil and gas reserves applied on a units-of-production method. Other items of property, plant and equipment are depreciated principally by the straight-line method. When an entire property, major facility or facilities depreciated on an individual basis are sold or otherwise disposed of, any gain or loss is reflected in income. Proceeds from disposal of other facilities depreciated on a group basis are credited to the depreciation reserve with no immediate effect on income. ENVIRONMENTAL REMEDIATION - The Marathon Group provides for remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. Generally, the timing of remediation accruals coincides with completion of a feasibility study or the commitment to a formal plan of action. Estimated abandonment and dismantlement costs of offshore production platforms are accrued based upon estimated proved oil and gas reserves on a units-of-production method. INSURANCE - The Marathon Group is insured for catastrophic casualty and certain property exposures, as well as those risks required to be insured by law or contract. Costs resulting from noninsured losses are charged against income upon occurrence. In 1993, USX adopted Emerging Issues Task Force (EITF) Consensus No. 93-14, "Accounting for Multiple-Year Retrospectively Rated Insurance Contracts". EITF No. 93-14 requires accrual of retrospective premium adjustments when the insured has an obligation to pay cash to the insurer that would not have been required absent experience under the contract. The cumulative effect of the change in accounting principle determined as of January 1, 1993, reduced net income $6 million, net of $3 million income tax effect. POSTEMPLOYMENT BENEFITS - In 1993, USX adopted Statement of Finacial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" (SFAS No. 112). SFAS No. 112 requires employers to recognize the obligation to provide postemployment benefits on an accrual basis if certain conditions are met. The Marathon Group is affected primarily by disability-related claims covering indemnity and medical payments. The obligation for these claims is measured using actuarial techniques and assumptions including appropriate discount rates. The cumulative effect of the change in accounting principle determined as of January 1, 1993, reduced net income $17 millon, net of $10 million income tax effect. The effect of the change in accounting principle reduced 1993 operating income by $2 million. RECLASSIFICATIONS - Certain reclassifications of prior years' data have been made to conform to 1994 classifications. M-8 58 - -------------------------------------------------------------------------------- 3. CORPORATE ACTIVITIES FINANCIAL ACTIVITIES - As a matter of policy, USX manages most financial activities on a centralized, consolidated basis. Such financial activities include the investment of surplus cash; the issuance, repayment and repurchase of short-term and long-term debt; the issuance, repurchase and redemption of preferred stock; and the issuance and repurchase of common stock. Transactions related primarily to invested cash, short-term and long-term debt (including convertible debt), related net interest and other financial costs, and preferred stock and related dividends are attributed to the Marathon Group, the U. S. Steel Group and the Delhi Group based upon the cash flows of each group for the periods presented and the initial capital structure of each group. Most financing transactions are attributed to and reflected in the financial statements of all three groups. See Note 5, page M-10, for the Marathon Group's portion of USX's financial activities attributed to all three groups. However, transactions such as leases, certain collaterized financings, production payment financings, financial activities of consolidated entities which are less than wholly owned by USX and transactions related to securities convertible solely into any one class of common stock are or will be specifically attributed to and reflected in their entirety in the financial statements of the group to which they relate. CORPORATE GENERAL & ADMINISTRATIVE COSTS - Corporate general and administrative costs are allocated to the Marathon Group, the U. S. Steel Group and the Delhi Group based upon utilization or other methods management believes to be reasonable and which consider certain measures of business activities, such as employment, investments and sales. The costs allocated to the Marathon Group were $29 million, $28 million and $30 million in 1994, 1993 and 1992, respectively, and primarily consist of employment costs including pension effects, professional services, facilities and other related costs associated with corporate activities. COMMON STOCK TRANSACTIONS - The USX Certificate of Incorporation was amended on September 30, 1992, to authorize a new class of common stock, Delhi Stock, which is intended to reflect the performance of the Delhi Group. On October 2, 1992, USX sold 9,000,000 shares of Delhi Stock to the public. The businesses of the Delhi Group were previously included in the Marathon Group. The USX Board of Directors has designated 14,003,205 shares of Delhi Stock to represent 100% of the common stockholders' equity value of USX attributable to the Delhi Group as of December 31, 1994. The Delhi Fraction is the percentage interest in the Delhi Group represented by the shares of Delhi Stock that are outstanding at any particular time and, based on 9,437,891 outstanding shares at December 31, 1994, is approximately 67%. The Marathon Group financial statements reflect a percentage interest in the Delhi Group of approximately 33% (Retained Interest) at December 31, 1994. Beginning October 2, 1992, the financial position, results of operations and cash flows of the Delhi Group were reflected in the financial statements of the Marathon Group only to the extent of the Retained Interest. The shares deemed to represent the Retained Interest are not outstanding shares of Delhi Stock and cannot be voted by the Marathon Group. As additional shares of Delhi Stock deemed to represent the Retained Interest are sold, the Retained Interest will decrease. When a dividend or other distribution is paid or distributed in respect to the outstanding Delhi Stock, or any amount paid to repurchase shares of Delhi Stock generally, the Marathon Group financial statements are credited, and the Delhi Group financial statements are charged, with the aggregate transaction amount times the quotient of the Retained Interest divided by the Delhi Fraction. INCOME TAXES - All members of the USX affiliated group are included in the consolidated United States federal income tax return filed by USX. Accordingly, the provision for federal income taxes and the related payments or refunds of tax are determined on a consolidated basis. The consolidated provision and the related tax payments or refunds have been reflected in the Marathon Group, the U. S. Steel Group and the Delhi Group financial statements in accordance with USX's tax allocation policy. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated among the Marathon Group, the U. S. Steel Group and the Delhi Group, for group financial statement purposes, based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to the respective groups. For tax provision and settlement purposes, tax benefits resulting from attributes (principally net operating losses), which cannot be utilized by one of the three groups on a separate return basis but which can be utilized on a consolidated basis in that year or in a carryback year, are allocated to the group that generated the attributes. However, if such tax benefits cannot be utilized on a consolidated basis in that year or in a carryback year, the prior years' allocation of such consolidated tax effects is adjusted in a subsequent year to the extent necessary to allocate the tax benefits to the group that would have realized the tax benefits on a separate return basis. The allocated group amounts of taxes payable or refundable are not necessarily comparable to those that would have resulted if the groups had filed separate tax returns; however, such allocation should not result in any of the three groups paying more income taxes over time than it would if it filed separate tax returns and, in certain situations, could result in any of the three groups paying less. M-9 59 - -------------------------------------------------------------------------------- 4. SALES The items below were included in both sales and operating costs, resulting in no effect on income:
(In millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- Matching buy/sell transactions(a) $ 2,071 $ 2,018 $ 2,537 Consumer excise taxes on petroleum products and merchandise 2,542 1,927 1,655 - --------------------------------------------------------------------------------------------------------
(a)Reflected the gross amount of purchases and sales associated with crude oil and refined product buy/sell transactions which are settled in cash. - -------------------------------------------------------------------------------- 5. FINANCIAL ACTIVITIES ATTRIBUTED TO ALL THREE GROUPS The following is Marathon Group's portion of USX's financial activities attributed to all groups based on their respective cash flows as described in Note 3, page M-9. These amounts exclude debt amounts specifically attributed to a group as disclosed in Note 6, page M-11.
Marathon Group Consolidated USX(a) -------------------- ------------------- (In millions) December 31 1994 1993 1994 1993 - -------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 3 $ 145 $ 4 $ 196 Receivables(b) 8 - 11 - Long-term receivables(b) 51 35 70 47 Other noncurrent assets(b) 8 7 11 9 -------- -------- -------- -------- Total assets $ 70 $ 187 $ 96 $ 252 - -------------------------------------------------------------------------------------------------------- Accounts payable(b) $ 2 $ 3 $ 3 $ 4 Accrued interest 90 102 123 138 Long-term debt due within one year (Note 6, page M-11) 54 23 74 31 Long-term debt (Note 6, page M-11) 3,917 4,249 5,346 5,730 Deferred credits and other liabilities(b) 2 6 3 8 Preferred stock of subsidiary 182 - 250 - -------- -------- -------- -------- Total liabilities $ 4,247 $ 4,383 $ 5,799 $ 5,911 - -------------------------------------------------------------------------------------------------------- Preferred stock $ 78 $ 78 $ 105 $ 105 - --------------------------------------------------------------------------------------------------------
Marathon Group(c) Consolidated USX ----------------------- ----------------------- (In millions) Year ended December 31 1994 1993 1992 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- Net interest and other financial costs (Note 8, page M-12) $(346) $(338) $(311) $(471) $(471) $(458) - -------------------------------------------------------------------------------------------------------
(a)For details of USX long-term debt, preferred stock of subsidiary and preferred stock, see Notes 13, page U-20; 24, page U-25; and 18 page U-22, respectively, to the USX consolidated financial statements. (b)Primarily reflects forward currency contracts used to manage currency risks related to USX debt and interest denominated in a foreign currency. (c)The Marathon Group's net interest and other financial costs reflect weighted average effects of all financial activities attributed to all three groups. M-10 60 6. LONG-TERM DEBT The Marathon Group's portion of USX's consolidated long-term debt is as follows:
Marathon Group Consolidated USX(a) ------------------- ------------------- (In millions) December 31 1994 1993 1994 1993 - -------------------------------------------------------------------------------------------------------- Specifically attributed debt(b): Sale-leaseback financing and capital leases $ 25 $ 25 $ 137 $ 142 Seller-provided financing 42 - 42 - Other - - - 67 -------- -------- -------- -------- Total 67 25 179 209 Less amount due within one year 1 - 4 4 -------- -------- -------- -------- Total specifically attributed long-term debt $ 66 $ 25 $ 175 $ 205 - -------------------------------------------------------------------------------------------------------- Debt attributed to all three groups(c) $ 4,022 $ 4,328 $ 5,489 $ 5,837 Less unamortized discount 51 56 69 76 Less amount due within one year 54 23 74 31 -------- -------- -------- -------- Total long-term debt attributed to all three groups $ 3,917 $ 4,249 $ 5,346 $ 5,730 - -------------------------------------------------------------------------------------------------------- Total long-term debt due within one year $ 55 $ 23 $ 78 $ 35 Total long-term debt due after one year 3,983 4,274 5,521 5,935 - --------------------------------------------------------------------------------------------------------
(a)See Note 13, page U-20, to the USX consolidated financial statements for details of interest rates, maturities and other terms of long-term debt. (b)As described in Note 3, page M-9, certain financial activities are specifically attributed only to the Marathon Group, the U. S. Steel Group or the Delhi Group. (c)Most long-term debt activities of USX Corporation and its wholly owned subsidiaries are attributed to all three groups (in total, but not with respect to specific debt issues) based on their respective cash flows (Notes 3, page M-9; 5, page M-10; and 7, page M-11). - -------------------------------------------------------------------------------- 7. SUPPLEMENTAL CASH FLOW INFORMATION
(In millions) 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------- CASH USED IN OPERATING ACTIVITIES INCLUDED: Interest and other financial costs paid (net of amount capitalized) $ (380) $ (237) $ (247) Income taxes paid, including settlements with other groups (31) (86) (125) - ---------------------------------------------------------------------------------------------------------- USX DEBT ATTRIBUTED TO ALL THREE GROUPS - NET: Commercial paper: Issued $ 1,515 $ 2,229 $ 2,412 Repayments (1,166) (2,598) (2,160) Credit agreements: Borrowings 4,545 1,782 6,684 Repayments (5,045) (2,282) (7,484) Other credit arrangements - net - (45) (22) Other debt: Borrowings 509 791 742 Repayments (791) (318) (381) --------- --------- --------- Total $ (433) $ (441) $ (209) ========= ========= ========= Marathon Group activity $ (371) $ 261 $ (410) U. S. Steel Group activity (57) (713) 218 Delhi Group activity (5) 11 (17) --------- --------- --------- Total $ (433) $ (441) $ (209) - ---------------------------------------------------------------------------------------------------------- NONCASH INVESTING AND FINANCING ACTIVITIES: Marathon Stock issued for Dividend Reinvestment Plan and employee stock option plans $ - $ 1 $ 13 Contribution of assets to an equity affiliate 26 - - Acquisition of assets - stock issued 11 - - - debt issued 58 - - Debt attributed to the Delhi Group - - (117) Capital lease obligations - - 2 - ----------------------------------------------------------------------------------------------------------
M-11 61 - -------------------------------------------------------------------------------- 8. OTHER ITEMS
(In millions) 1994 1993 1992 - ------------------------------------------------------------------------------------------------------- OTHER INCOME (LOSS): Gain on disposal of assets $ 175 (a) $ 34 (b) $ 1 Income from affiliates - equity method 4 9 13 Income (loss) from Retained Interest in the Delhi Group (10)(c) 4 1 Other income (loss) 8 (1) (22) ------ ------ ------ Total $ 177 $ 46 $ (7) - ------------------------------------------------------------------------------------------------------- INTEREST AND OTHER FINANCIAL INCOME(d): Interest income $ 10 $ 11 $ 11 Other 5 11 199 (e) ------ ------ ------ Total 15 22 210 ------ ------ ------ INTEREST AND OTHER FINANCIAL COSTS(d): Interest incurred (305) (315) (290) Less interest capitalized 50 97 68 ------ ------ ------ Net interest (255) (218) (222) Interest on litigation - (6) (15) Interest on tax issues 24 (f) (25) (21) Financial cost on preferred stock of subsidiary (13) - - Amortization of discounts (32) (26) (29) Expenses on sales of accounts receivable (Note 18, page M-18) (19) (14) (16) Other (5) (3) (3) ------ ------ ------ Total (300) (292) (306) ------ ------ ------ NET INTEREST AND OTHER FINANCIAL COSTS(d) $ (285) $ (270) $ (96) - -------------------------------------------------------------------------------------------------------
(a) Gains resulted primarily from the sale of the assets of a retail propane marketing subsidiary and certain domestic oil and gas production properties. (b) Gains resulted primarily from the sale of two product tug/barge units and the sale of assets of a convenience store wholesale distributor subsidiary. (c) Delhi Group's loss included restructuring charges. (d) See Note 3, page M-9, for discussion of USX net interest and other financial costs attributable to the Marathon Group. (e) Included a $177 million favorable adjustment related to interest income from a refund of prior years' production taxes. (f) Included a $34 million favorable adjustment related to interest and other financial costs from the settlement of various state tax issues. M-12 62 - -------------------------------------------------------------------------------- 9. PENSIONS The Marathon Group has noncontributory defined benefit plans covering substantially all employees. Benefits under these plans are based primarily upon years of service and the highest three years earnings during the last ten years before retirement. Certain subsidiaries provide benefits for employees covered by other plans based primarily upon employees' service and career earnings. The funding policy for all plans provides that payments to the pension trusts shall be equal to the minimum funding requirements of ERISA plus such additional amounts as may be approved from time to time. PENSION COST (CREDIT) - The defined benefit cost for major plans for 1994, 1993 and 1992 was determined assuming an expected long-term rate of return on plan assets of 9%, 10% and 11%, respectively.
(In millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- Major plans: Cost of benefits earned during the period $ 36 $ 33 $ 25 Interest cost on projected benefit obligation (6.5% for 1994; 7% for 1993; and 8% for 1992) 45 43 41 Return on assets - actual return (1) (38) (70) - deferred loss (81) (48) (23) Net amortization of unrecognized gains (5) (5) (6) --------- --------- --------- Total major plans (6) (15) (33) Other plans 4 4 3 --------- --------- --------- Total periodic pension credit (2) (11) (30) Curtailment loss(a) 4 - - --------- --------- --------- Total pension cost (credit) $ 2 $ (11) $ (30) - --------------------------------------------------------------------------------------------------------
(a)The curtailment loss resulted from a work force reduction program. FUNDS' STATUS - The assumed discount rate used to measure the benefit obligations of major plans was 8% and 6.5% at December 31, 1994, and December 31, 1993, respectively. The assumed rate of future increases in compensation levels was 5% at both year-ends.
(In millions) December 31 1994 1993 - -------------------------------------------------------------------------------------------------------- Reconciliation of funds' status to reported amounts: Projected benefit obligation(b) $ (542) $ (709) Plan assets at fair market value(c) 761 896 --------- --------- Assets in excess of projected benefit obligation(d) 219 187 Unrecognized net gain from transition (57) (74) Unrecognized prior service cost 9 10 Unrecognized net loss 73 125 Additional minimum liability (1) (4) --------- --------- Net pension asset included in balance sheet $ 243 $ 244 - -------------------------------------------------------------------------------------------------------- (b) Projected benefit obligation includes: Vested benefit obligation $ 368 $ 468 Accumulated benefit obligation (ABO) 416 537 (c) Types of assets held: Stocks of other corporations 66% 71% U.S. Government securities 14% 10% Corporate debt instruments and other 20% 19% (d) Includes several small plans that have ABOs in excess of plan assets: Projected benefit obligation (PBO) (45) (51) Plan assets 11 17 --------- --------- PBO in excess of plan assets $ (34) $ (34) - --------------------------------------------------------------------------------------------------------
M-13 63 - -------------------------------------------------------------------------------- 10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Marathon Group has defined benefit retiree health and life insurance plans covering most employees upon their retirement. Health benefits are provided, for the most part, through comprehensive hospital, surgical and major medical benefit provisions subject to various cost sharing features. Life insurance benefits are provided to nonunion and most union represented retiree beneficiaries primarily based on employees' annual base salary at retirement. Benefits have not been prefunded. In 1992, USX adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS No. 106), which requires accrual accounting for all postretirement benefits other than pensions. USX elected to recognize immediately the transition obligation determined as of January 1, 1992, which represents the excess accumulated postretirement benefit obligation (APBO) for current and future retirees over the recorded postretirement benefit cost accruals. The cumulative effect of the change in accounting principle for the Marathon Group reduced net income $147 million, consisting of the transition obligation of $233 million, net of $86 million income tax effect. POSTRETIREMENT BENEFIT COST - Postretirement benefit cost for defined benefit plans for 1994, 1993 and 1992 was determined assuming a discount rate of 6.5%, 7% and 8%, respectively.
(In millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- Cost of benefits earned during the period $ 10 $ 10 $ 8 Interest on APBO 20 23 19 Amortization of unrecognized (gains) losses (3) 2 - --------- --------- --------- Total periodic postretirement benefit cost 27 35 27 Curtailment gain(a) (4) - - --------- --------- --------- Total postretirement benefit cost $ 23 $ 35 $ 27 - --------------------------------------------------------------------------------------------------------
(a) The curtailment gain resulted from a workforce reduction program. OBLIGATIONS - The following table sets forth the plans' obligations and the amounts reported in the Marathon Group's balance sheet:
(In millions) December 31 1994 1993 - -------------------------------------------------------------------------------------------------------- Reconciliation of APBO to reported amounts: APBO attributable to: Retirees $ (159) $ (144) Fully eligible plan participants (42) (55) Other active plan participants (80) (120) ------ ------ Total APBO (281) (319) Unrecognized net loss 19 58 Unamortized prior service cost (28) (20) ------ ------ Accrued liability included in balance sheet $ (290) $ (281) - --------------------------------------------------------------------------------------------------------
The assumed discount rate used to measure the APBO was 8% and 6.5% at December 31, 1994, and December 31, 1993, respectively. The assumed rate of future increases in compensation levels was 5.0% at both year ends. The weighted average health care cost trend rate in 1995 is approximately 7%, gradually declining to an ultimate rate in 1999 of approximately 5.5%. A one percentage point increase in the assumed health care cost trend rates for each future year would have increased the aggregate of the service and interest cost components of the 1994 net periodic postretirement benefit cost by $6 million and would have increased the APBO as of December 31, 1994, by $37 million. M-14 64 - ------------------------------------------------------------------------------- 11. INCOME TAXES Income tax provisions and related assets and liabilities attributed to the Marathon Group are determined in accordance with the USX group tax allocation policy (Note 3, page M-9). In 1992, USX adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109), which requires an asset and liability approach in accounting for income taxes. Under this method, deferred income tax assets and liabilities are established to reflect the future tax consequences of carryforwards and differences between the tax bases and financial bases of assets and liabilities. Provisions (credits) for estimated income taxes:
1994 1993 1992 ---------------------------- --------------------------- -------------------------- (In millions) CURRENT DEFERRED TOTAL Current Deferred Total Current Deferred Total - -------------------------------------------------------------------------------------------------------------- Federal $ 29 $ 106 $ 135 $ 38 $(162) $(124) $ 62 $ (5) $ 57 State and local (2) (1) (3) 9 (18) (9) 7 (5) 2 Foreign 12 11 23 20 64 84 21 12 33 ----- ------ ------- ----- ----- ----- ----- ----- ------ Total $ 39 $ 116 $ 155 $ 67 $(116) $ (49) $ 90 $ 2 $ 92 - --------------------------------------------------------------------------------------------------------------
In 1993, the cumulative effects of the changes in accounting principles for postemployment benefits and for retrospectively rated insurance contracts included deferred tax benefits of $10 million and $3 million, respectively (Note 2, page M-8). In 1992, the cumulative effect of the change in accounting principle for other postretirement benefits included a deferred tax benefit of $86 million (Note 10, page M-14). Reconciliation of federal statutory tax rate (35% in 1994 and 1993, and 34% in 1992) to total provisions (credits):
(In millions) 1994 1993 1992 - --------------------------------------------------------------------------------------------------------- Statutory rate applied to income before tax $ 166 $ (19) $ 68 Remeasurement of deferred income tax liabilities for statutory rate increase as of January 1, 1993 - 40 - Foreign income taxes after federal income tax benefit(a) 11 (9) 22 State income taxes after federal income tax benefit(b) (2) (6) 1 Sale of investments in subsidiaries - (6) - Liquidation of investment in subsidiary - (17) - Federal income tax effect on earnings of foreign subsidiaries 2 3 7 Adjustment of prior years' tax - (13) 1 Adjustment of prior years' valuation allowances (24) (22) - Effect of Retained Interest 4 (1) - Other (2) 1 (7) --------- --------- --------- Total provisions (credits) $ 155 $ (49) $ 92 - ---------------------------------------------------------------------------------------------------------
(a)Included incremental deferred tax benefit of $64 million in 1993 resulting from USX's ability to credit, rather than deduct, certain foreign income taxes for federal income tax purposes when paid in future periods. (b)Included favorable effects in 1994 resulting from the settlement of various state tax issues. Deferred tax assets and liabilities resulted from the following:
(In millions) December 31 1994 1993 - --------------------------------------------------------------------------------------------------------- Deferred tax assets: State tax loss carryforwards (expiring in 1995 through 2009) $ 36 $ 23 Foreign tax loss carryforwards (portion of which expire in 2000 through 2009) 545 475 Minimum tax credit carryforwards 235 239 Employee benefits 144 137 Federal benefit for state and foreign deferred tax liabilities 197 186 Contingency and other accruals 104 158 Other 40 41 Valuation allowances (150) (119) --------- --------- Total deferred tax assets 1,151 1,140 --------- --------- Deferred tax liabilities: Property, plant and equipment 2,114 2,036 Inventory 202 142 Prepaid pensions 110 112 Other 110 110 --------- --------- Total deferred tax liabilities 2,536 2,400 --------- --------- Net deferred tax liabilities $ 1,385 $ 1,260 - ---------------------------------------------------------------------------------------------------------
The consolidated tax returns of USX for the years 1988 through 1991 are under various stages of audit and administrative review by the IRS. USX believes it has made adequate provision for income taxes and interest which may become payable for years not yet settled. Pretax income (loss) included $14 million, $(55) million and $54 million attributable to foreign sources in 1994, 1993 and 1992, respectively. M-15 65 - -------------------------------------------------------------------------------- 12. RESTRUCTURING CHARGES In 1992, the write-down of assets related to the planned disposition of nonstrategic domestic exploration and production properties resulted in a $115 million charge. The disposal of these assets was completed in 1993. - -------------------------------------------------------------------------------- 13. LONG-TERM RECEIVABLES AND OTHER INVESTMENTS
(In millions) December 31 1994 1993 - -------------------------------------------------------------------------------------------------------- Receivables due after one year $ 14 $ 12 Forward currency contracts 51 35 Equity method investments 117 97 Retained Interest in the Delhi Group 55 69 Libyan investment (Note 26, page M-21) 107 108 Cost method companies 30 28 Other 2 3 --------- --------- Total $ 376 $ 352 - --------------------------------------------------------------------------------------------------------
The following financial information summarizes the Marathon Group's share of investments accounted for by the equity method, except for the Retained Interest in the Delhi Group:
(In millions) 1994 1993 1992 - --------------------------------------------------------------------------------------------------------- Income data - year: Sales $ 91 $ 115 $ 171 Operating income 33 34 51 Net income 4 9 13 - --------------------------------------------------------------------------------------------------------- Dividends and partnership distributions $ 10 $ 15 $ 26 - --------------------------------------------------------------------------------------------------------- Balance sheet data - December 31: Current assets $ 26 $ 30 Noncurrent assets 368 334 Current liabilities 37 43 Noncurrent liabilities 240 224 - ---------------------------------------------------------------------------------------------------------
Marathon Group purchases from equity affiliates totaled $71 million, $77 million and $75 million in 1994, 1993 and 1992, respectively. Marathon Group sales to equity affiliates totaled $1 million, $21 million and $34 million in 1994, 1993 and 1992, respectively. The following financial information summarizes the Marathon Group's Retained Interest of 33% in the Delhi Group which is accounted for using the principles of equity accounting (Note 3, page M-9):
(In millions) 1994 1993 1992(a) - ---------------------------------------------------------------------------------------------------------- Income data - year: Sales $ 185 $ 180 $ 49 Operating income (loss) (12) 12 3 Net income (loss) (10)(b) 4 1 - ---------------------------------------------------------------------------------------------------------- Distributions from Retained Interest $ 1 $ 1 $ - - ---------------------------------------------------------------------------------------------------------- Balance sheet data - December 31: Current assets $ 8 $ 14 Noncurrent assets 161 181 Current liabilities 29 34 Noncurrent liabilities 85 92 - ----------------------------------------------------------------------------------------------------------
(a) For period from October 2, 1992 to December 31, 1992. (b) Delhi Group's loss included restructuring charges of $40 million. M-16 66 - ------------------------------------------------------------------------------- 14. INTERGROUP TRANSACTIONS SALES AND PURCHASES - Marathon Group sales to the U. S. Steel Group totaled $2 million, $10 million and $16 million in 1994, 1993 and 1992, respectively. Marathon Group sales to the Delhi Group totaled $42 million in 1994, $30 million in 1993 and $8 million from October 2 through December 31, 1992. Marathon Group purchases from the Delhi Group totaled $4 million in both 1994 and 1993 and $2 million from October 2 through December 31, 1992. These transactions were conducted on an arm's-length basis. See Note 18, page M-18 for purchases of Delhi Group accounts receivable. PAYABLE TO THE OTHER GROUPS - These amounts represent payables for income taxes determined in accordance with the tax allocation policy described in Note 3, page M-9. Tax settlements between the groups are generally made in the year succeeding that in which such amounts are accrued. - ------------------------------------------------------------------------------- 15. LEASES Future minimum commitments for capital leases and for operating leases having remaining noncancelable lease terms in excess of one year are as follows:
Capital Operating (In millions) Leases Leases - ---------------------------------------------------------------------------------------------------------- 1995 $ 2 $ 96 1996 2 81 1997 1 75 1998 2 155 1999 2 32 Later years 34 244 Sublease rentals - (14) ------- ------- Total minimum lease payments 43 $ 669 ======= Less imputed interest costs 18 ------- Present value of net minimum lease payments included in long-term debt $ 25 - --------------------------------------------------------------------------------------------------------
Operating lease rental expense:
(In millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- Minimum rental $ 105 $ 97 $ 111 Contingent rental 10 9 10 Sublease rentals (5) (6) (7) -------- ------- ------ Net rental expense $ 110 $ 100 $ 114 - --------------------------------------------------------------------------------------------------------
The Marathon Group leases a wide variety of facilities and equipment under operating leases, including land and building space, office equipment, production facilities and transportation equipment. Most long-term leases include renewal options and, in certain leases, purchase options. In the event of a change in control of USX, as defined in the agreements, or certain other circumstances, operating lease obligations totaling $116 million may be declared immediately due and payable. - ------------------------------------------------------------------------------- 16. PROPERTY, PLANT AND EQUIPMENT
(In millions) December 31 1994 1993 - -------------------------------------------------------------------------------------------------------- Production $ 12,774 $ 12,659 Refining 1,502 1,427 Marketing 1,168 1,096 Transportation 500 497 Other 217 212 --------- --------- Total 16,161 15,891 Less accumulated depreciation, depletion and amortization 7,797 7,463 --------- --------- Net $ 8,364 $ 8,428 - ----------------------------------------------------------------------------------------------------------
Property, plant and equipment included gross assets acquired under capital leases of $39 million at both year ends; related amounts included in accumulated depreciation, depletion and amortization were $33 million and $32 million, respectively. M-17 67 - ------------------------------------------------------------------------------- 17. INVENTORIES
(In millions) December 31 1994 1993 - ---------------------------------------------------------------------------------------------------------- Crude oil and natural gas liquids $ 516 $ 522 Refined products and merchandise 801 796 Supplies and sundry items 99 108 ---------- --------- Total (at cost) 1,416 1,426 Less inventory market valuation reserve 279 439 ---------- --------- Net inventory carrying value $ 1,137 $ 987 - ----------------------------------------------------------------------------------------------------------
Inventories of crude oil and refined products are valued by the LIFO method. The LIFO method accounted for 90% and 87% of total inventory value at December 31, 1994, and December 31, 1993, respectively. The inventory market valuation reserve reflects the extent that the recorded cost of crude oil and refined products inventories exceeds net realizable value. The reserve is decreased to reflect increases in market prices and inventory turnover and increased to reflect decreases in market prices. Changes in the inventory market valuation reserve resulted in charges (credits) to operating income of $(160) million, $241 million and $(62) million in 1994, 1993 and 1992, respectively. - ------------------------------------------------------------------------------- 18. SALES OF RECEIVABLES The Marathon Group has entered into an agreement, subject to limited recourse, to sell certain accounts receivable including accounts receivable purchased from the Delhi Group. 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. Collections on sold accounts receivable will be forwarded to the buyers at the end of the agreement in 1995, in the event of earlier contract termination or if the Marathon Group does not have a sufficient quantity of eligible accounts receivable to reinvest in for the buyers. The balance of sold accounts receivable averaged $400 million, $400 million and $393 million for the years 1994, 1993 and 1992, respectively. At December 31, 1994, the balance of sold accounts receivable that had not been collected was $400 million. Buyers have collection rights to recover payments from an amount of outstanding receivables equal to 120% of the outstanding receivables purchased on a nonrecourse basis; such overcollateralization cannot exceed $80 million. The Marathon Group does not generally require collateral for accounts receivable, but significantly reduces credit risk through credit extension and collection policies, which include analyzing the financial condition of potential customers, establishing credit limits, monitoring payments and aggressively pursuing delinquent accounts. In the event of a change in control of USX, as defined in the agreement, the Marathon Group may be required to forward payments collected on sold accounts receivable to the buyers. - ------------------------------------------------------------------------------- 19. STOCKHOLDERS' EQUITY
(In millions, except per share data) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- PREFERRED STOCK: Balance at beginning of year $ 78 $ 78 $ 80 Attribution to the Delhi Group - - (2) --------- --------- --------- Balance at end of year $ 78 $ 78 $ 78 - -------------------------------------------------------------------------------------------------------- COMMON STOCKHOLDERS' EQUITY (Note 3, page M-9): Balance at beginning of year $ 3,032 $ 3,257 $ 3,215 Net income (loss) 321 (29) (222) Marathon Stock issued 11 1 609 Marathon Stock repurchased - (1) (1) Equity adjustment - Delhi Stock(a) - - 13 Dividends on preferred stock (6) (6) (6) Dividends on Marathon Stock (per share: $.68 in 1994 and 1993; and $1.22 in 1992) (195) (195) (348) Foreign currency translation adjustments (Note 22, page M-19) - - (4) Deferred compensation adjustments 1 3 2 Other (1) 2 (1) --------- --------- --------- Balance at end of year $ 3,163 $ 3,032 $ 3,257 - -------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 3,241 $ 3,110 $ 3,335 - --------------------------------------------------------------------------------------------------------
(a) Reflected the proceeds received from the sale of Delhi Stock to the public of $136 million, net of the Delhi Fraction multiplied by the USX common stockholders' equity of $191 million attributed to the Delhi Group as of October 2, 1992 (Note 3, page M-9). M-18 68 - ------------------------------------------------------------------------------- 20. DIVIDENDS In accordance with the USX Certificate of Incorporation, dividends on the Marathon Stock, Steel Stock and Delhi Stock are limited to the legally available funds of USX. Net losses of any Group, as well as dividends and distributions on any class of USX Common Stock or series of preferred stock and repurchases of any class of USX Common Stock or series of preferred stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on all classes of Common Stock. Subject to this limitation, the Board of Directors intends to declare and pay dividends on the Marathon Stock based on the financial condition and results of operation of the Marathon Group, although it has no obligation under Delaware law to do so. In making its dividend decisions with respect to Marathon Stock, the Board of Directors considers among other things, the long-term earnings and cash flow capabilities of the Marathon Group as well as the dividend policies of similar publicly traded companies. - -------------------------------------------------------------------------------- 21. NET INCOME PER COMMON SHARE 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 to the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. Primary net income (loss) per share is calculated by adjusting net income (loss) for dividend requirements of preferred stock and is based on the weighted average number of common shares outstanding plus common stock equivalents, provided they are not antidilutive. Common stock equivalents result from assumed exercise of stock options and surrender of stock appreciation rights associated with 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 and surrender of stock appreciation rights, provided, in each case, the effect is not antidilutive. - ------------------------------------------------------------------------------- 22. FOREIGN CURRENCY TRANSLATION Exchange adjustments resulting from foreign currency transactions generally are recognized in income, whereas adjustments resulting from translation of financial statements are reflected as a separate component of stockholders' equity. For 1994, 1993 and 1992, respectively, the aggregate foreign currency transaction gains (losses) included in determining net income were $(7) million, $1 million and $16 million. An analysis of changes in cumulative foreign currency translation adjustments follows:
(In millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- Cumulative foreign currency translation adjustments at January 1 $ (6) $ (6) $ (2) Aggregate adjustments for the year: Foreign currency translation adjustments - - (4) -------- -------- -------- Cumulative foreign currency adjustments at December 31 $ (6) $ (6) $ (6) - --------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 23. STOCK PLANS AND STOCKHOLDER RIGHTS PLAN USX Stock Plans and Stockholder Rights Plan are discussed in Note 19, page U-23, and Note 23, page U-25, respectively, to the USX consolidated financial statements. - -------------------------------------------------------------------------------- 24. DERIVATIVE FINANCIAL INSTRUMENTS The Marathon Group uses derivative financial instruments, such as OTC commodity swaps, to hedge exposure to price fluctuations relevant to the anticipated purchase or production and sale of crude oil, natural gas and refined products. The Marathon Group also uses exchange-traded commodity contracts as a part of its overall hedging activities. The use of derivative instruments helps to protect against adverse market price changes for products sold and volatility in raw material costs. The Marathon Group uses forward currency contracts to reduce exposure to currency price fluctuations when transactions require settlement in a foreign currency (principally U.K. pound and Irish punt) rather than U. S. dollars. USX has used forward currency contracts to hedge debt denominated in Swiss francs and European currency units, a portion of which has been attributed to the Marathon Group. The Marathon Group remains at risk for possible changes in the market value of the hedging instrument; however, such risk should be mitigated by price changes in the underlying hedged item. The Marathon Group is also exposed to credit risk in the event of nonperformance by counterparties. The credit worthiness of counterparties is subject to continuing review, including the use of master netting agreements to the extent practical, and full performance is anticipated. M-19 69 The following table sets forth quantitative information by class of derivative financial instrument:
FAIR CARRYING RECORDED VALUE AMOUNT DEFERRED AGGREGATE ASSETS ASSETS GAIN OR CONTRACT (In millions) (LIABILITIES)(a) (LIABILITIES) (LOSS) VALUES(b) - ----------------------------------------------------------------------------------------------------------- DECEMBER 31, 1994: OTC commodity swaps(c) $ 10 (d) $ - $ 1 $ 184 Forward currency contracts: - receivable $ 62 $ 59 $ - $ 158 - payable (3) (2) (2) 27 ------ ------ ------- ------ Total currencies $ 59 $ 57 $ (2) $ 185 - ---------------------------------------------------------------------------------------------------------- December 31, 1993: OTC commodity swaps $ (3) $ - $ - $ 44 OTC commodity options - - - 4 ------ ------ ------ ------ Total commodities $ (3) $ - $ - $ 48 ====== ====== ====== ====== Forward currency contracts: - receivable $ 38 $ 35 $ - $ 188 - payable (11) (8) (7) 38 ------ ------ ------ ------ Total currencies $ 27 $ 27 $ (7) $ 226 - ----------------------------------------------------------------------------------------------------------
(a) The fair value amounts are based on exchange-traded index prices and dealer quotes. (b) Contract or notional amounts do not quantify risk exposure, but are used in the calculation of cash settlements under the contracts. The contract or notional amounts do not reflect the extent to which positions may offset one another. (c) The OTC swap arrangements vary in duration with certain contracts extending into early 1997. (d) The fair value amount includes fair value assets of $11 million and fair value liabilities of $(1) million. - -------------------------------------------------------------------------------- 25. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. As described in Note 3, page M-9, the Marathon Group's specifically attributed financial instruments and the Marathon Group's portion of USX's financial instruments attributed to all groups are as follows:
1994 1993 ------------------- ------------------- CARRYING FAIR Carrying Fair (In millions) December 31 AMOUNT VALUE Amount Value - -------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS: Cash and cash equivalents $ 28 $ 28 $ 185 $ 185 Receivables 423 423 304 304 Long-term receivables and other investments 44 79 42 75 -------- -------- -------- -------- Total financial assets $ 495 $ 530 $ 531 $ 564 ======== ======== ======== ======== FINANCIAL LIABILITIES: Notes payable $ 1 $ 1 $ 1 $ 1 Accounts payable 1,129 1,129 1,085 1,085 Accrued interest 95 95 106 106 Long-term debt (including amounts due within one year) 4,013 3,883 4,272 4,389 -------- -------- -------- -------- Total financial liabilities $ 5,238 $ 5,108 $ 5,464 $ 5,581 - --------------------------------------------------------------------------------------------------------
Fair value of financial instruments classified as current assets or liabilities approximate carrying value due to the short-term maturity of the instruments. Fair value of long-term receivables and other investments was based on discounted cash flows or other specific instrument analysis. Fair value of long-term debt instruments was based on market prices where available or current borrowing rates available for financings with similar terms and maturities. In addition to certain derivative financial instruments disclosed in Note 24, page M-19, the Marathon Group's unrecognized financial instruments consist of accounts receivables sold subject to limited recourse and financial guarantees. It is not practicable to estimate the fair value of these forms of financial instrument obligations because there are no quoted market prices for transactions which are similar in nature. For details relating to sales of receivables see Note 18, page M-18. For details relating to financial guarantees see Note 26, page M-21. M-20 70 - -------------------------------------------------------------------------------- 26. CONTINGENCIES AND COMMITMENTS USX is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Marathon Group involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Marathon Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Marathon Group. ENVIRONMENTAL MATTERS - The Marathon Group is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At December 31, 1994, and December 31, 1993, accrued liabilities for remediation totaled $45 million and $35 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 Marathon Group has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In 1994 and 1993, such capital expenditures totaled $70 million and $123 million, respectively. The Marathon Group anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. At December 31, 1994, and December 31, 1993, accrued liabilities for platform abandonment and dismantlement totaled $127 million and $126 million, respectively. LIBYAN OPERATIONS - By reason of Executive Orders and related regulations under which the U.S. Government is continuing economic sanctions against Libya, the Marathon Group was required to discontinue performing its Libyan petroleum contracts on June 30, 1986. In June 1989, the Department of the Treasury authorized the Marathon Group to resume performing under those contracts. Pursuant to that authorization, the Marathon Group has engaged the Libyan National Oil Company and the Secretary of Petroleum in continuing negotiations to determine when and on what basis they are willing to allow the Marathon Group to resume realizing revenue from the Marathon Group's investment of $107 million in Libya. The Marathon Group is uncertain when these negotiations can be completed. GUARANTEES - Guarantees by USX of the liabilities of affiliated and other entities of the Marathon Group totaled $19 million and $18 million at December 31, 1994, and December 31, 1993, respectively. At December 31, 1994, and December 31, 1993, the Marathon Group's pro rata share of obligations of LOOP INC. and various pipeline affiliates secured by throughput and deficiency agreements totaled $197 million and $206 million, respectively. Under the agreements, the Marathon Group is required to advance funds if the affiliates are unable to service debt. Any such advances are prepayments of future transportation charges. COMMITMENTS - At December 31, 1994, and December 31, 1993, contract commitments for the Marathon Group's capital expenditures for property, plant and equipment totaled $158 million and $284 million, respectively. M-21 71 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1994 1993 -------------------------------------------- ---------------------------------------------- (IN MILLIONS, EXCEPT PER SHARE DATA) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. - --------------------------------------------------------------------------------------------------------------------------------- Sales $3,408 $3,497 $3,105 $2,747 $2,922 $2,983 $3,103 $2,954 Operating income (loss) 85 117 156 226 (115) 84 94 106 Operating costs include: Inventory market valuation charges (credits) (2) 63 (93) (128) 187 30 47 (23) Total income (loss) before cumulative effect of changes in accounting principles 37 102 72 110 (88) 30 21 31 NET INCOME (LOSS) 37 102 72 110 (88) 30 21 8 - --------------------------------------------------------------------------------------------------------------------------------- MARATHON STOCK DATA: Total income (loss) before cumulative effect of changes in accounting principles applicable to Marathon Stock $ 35 $ 101 $ 70 $ 109 $ (90) $ 29 $ 20 $ 29 - Per share: primary and fully diluted .12 .35 .25 .38 (.31) .10 .07 .10 Dividends paid per share .17 .17 .17 .17 .17 .17 .17 .17 Price range of Marathon Stock(a) - Low 16-3/8 16-3/4 15-5/8 16-3/8 16-3/8 16-1/2 16-5/8 16-3/8 - High 19-1/8 18-3/8 18 18-5/8 20-5/8 20-3/8 20-1/8 20-3/8 - ---------------------------------------------------------------------------------------------------------------------------------
(a) Composite tape. PRINCIPAL UNCONSOLIDATED AFFILIATES (UNAUDITED)
Company Country % Ownership(a) Activity - ---------------------------------------------------------------------------------------------------------------------------------- CLAM Petroleum Company Netherlands 50% Oil & Gas Production Kenai LNG Corporation United States 30% Natural Gas Liquification LOCAP INC. United States 37% Pipeline & Storage Facilities LOOP INC. United States 32% Offshore Oil Port Sakhalin Energy Investment Company Limited Russia 30% Oil & Gas Exploration - ----------------------------------------------------------------------------------------------------------------------------------
(a) Economic interest as of December 31, 1994. SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) See the USX consolidated financial statements for Supplementary Information on Oil and Gas Producing Activities relating to the Marathon Group, pages U-31 through U-34. M-22 72 FIVE-YEAR OPERATING SUMMARY
1994 1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------------------- NET LIQUID HYDROCARBON PRODUCTION (thousands of barrels per day) United States 110 111 118 127 126 International - Europe 48 26 36 44 56 - Other 14 19 20 24 15 ------------------------------------------------- Total Worldwide 172 156 174 195 197 - ------------------------------------------------------------------------------------------------------------------- NET NATURAL GAS PRODUCTION (millions of cubic feet per day) United States 574 529 593 689 790 International - Europe 382 356 326 336 324 - Other 18 17 12 - - ------------------------------------------------- Total Consolidated 974 902 931 1,025 1,114 Equity production - CLAM Petroleum Co. 40 35 41 49 47 ------------------------------------------------- Total Worldwide 1,014 937 972 1,074 1,161 - ------------------------------------------------------------------------------------------------------------------- AVERAGE SALES PRICES Liquid Hydrocarbons (dollars per barrel) United States $13.53 $14.54 $16.47 $17.43 $20.67 International 15.61 16.22 18.95 19.38 23.77 Natural Gas (dollars per thousand cubic feet) United States $ 1.94 $ 1.94 $ 1.60 $ 1.57 $ 1.61 International 1.58 1.52 1.77 2.18 1.82 - ------------------------------------------------------------------------------------------------------------------- NET PROVED RESERVES - YEAR-END Liquid Hydrocarbons (millions of barrels) Beginning of year 842 848 868 846 764 Extensions, discoveries and other additions 13 21 27 58 140 Improved recovery 6 24 12 27 6 Revisions of previous estimates (6) 4 5 10 12 Net purchase (sale) of reserves in place 2 2 (3) (3) (6) Production (62) (57) (61) (70) (70) ------------------------------------------------- Total 795 842 848 868 846 - ------------------------------------------------------------------------------------------------------------------- Natural Gas (billions of cubic feet) Beginning of year 3,748 3,866 4,077 4,265 4,281 Extensions, discoveries and other additions 303 248 147 167 691 Improved recovery - 33 6 6 2 Revisions of previous estimates (7) (23) 58 24 (54) Net purchase (sale) of reserves in place (45) (59) (84) (22) (255) Production (345) (317) (338) (363) (400) ------------------------------------------------- Total 3,654 3,748 3,866 4,077 4,265 - ------------------------------------------------------------------------------------------------------------------- U.S. REFINERY OPERATIONS (thousands of barrels per day) In-use crude oil capacity - year-end 570(a) 570(a) 620 620 603 Refinery runs - crude oil refined 491 549 546 542 567 - other charge and blend stocks 107 102 79 85 75 % in-use capacity utilization 86.0 90.4 88.1 87.5 94.1 - ------------------------------------------------------------------------------------------------------------------- U.S. REFINED PRODUCT SALES (thousands of barrels per day) Gasoline 443 420 404 403 395 Distillates 183 179 169 173 173 Propane 16 18 19 17 17 Feedstocks and special products 32 32 39 37 31 Heavy fuel oil 38 39 39 44 34 Asphalt 31 38 37 35 39 ------------------------------------------------- Total 743 726 707 709 689 - ------------------------------------------------------------------------------------------------------------------- U.S. REFINED PRODUCT MARKETING OUTLETS - YEAR-END Marathon operated terminals 51 51 52 53 53 Retail - Marathon brand 2,356 2,331 2,290 2,106 2,132 - Emro Marketing Company 1,659 1,571 1,549 1,596 1,673 - -------------------------------------------------------------------------------------------------------------------
(a) Excludes the Indianapolis Refinery which was temporarily idled in October 1993. M-23 73 THE MARATHON GROUP Management's Discussion And Analysis The Marathon Group includes Marathon Oil Company ("Marathon") and certain other subsidiaries of USX Corporation ("USX"), which are engaged in worldwide exploration, production, transportation and marketing of crude oil and natural gas; and domestic refining, marketing and transportation of petroleum products. Management's Discussion and Analysis should be read in conjunction with the Marathon Group's Financial Statements and Notes to Financial Statements. Prior to October 2, 1992, the Marathon Group also included the businesses of Delhi Gas Pipeline Corporation and certain other USX subsidiaries engaged in the purchasing, gathering, processing, transporting and marketing of natural gas which are now included in the Delhi Group. The Marathon Group financial data for the periods prior to October 2, 1992, include the combined historical financial position, results of operations and cash flows for the businesses of the Delhi Group. Beginning October 2, 1992, the financial statements of the Marathon Group do not include the financial position, results of operations and cash flows for the businesses of the Delhi Group except for the financial effects of the Retained Interest. See Note 3 to the Marathon Group Financial Statements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INCOME SALES increased $795 million in 1994 from 1993, following an $820 million decrease in 1993 from 1992. The increase in 1994 from 1993 was mainly due to higher excise taxes and higher volumes of worldwide liquid hydrocarbons and refined product matching buy/sell transactions, partially offset by lower worldwide liquid hydrocarbon prices. The 1993 decline primarily reflected lower worldwide liquid hydrocarbon volumes and prices, lower refined product prices and the absence of sales from the Delhi Group. These decreases were partially offset by increased excise taxes and higher refined product sales volumes, excluding matching buy/sell transactions. Matching buy/sell transactions and excise taxes are included in both sales and operating costs, resulting in no effect on operating income. Higher excise taxes were the predominant factor in the increase in taxes other than income taxes in 1994 and 1993 largely resulting from the fourth quarter 1993 increase in the federal excise tax rate and a change in the collection point on distillates from third-party locations to Marathon's terminals. OPERATING INCOME increased $415 million in 1994, following a $135 million decline in 1993 from 1992. Results included a $160 million favorable effect in 1994, a $241 million unfavorable effect in 1993 and a $62 million favorable effect in 1992 for noncash adjustments to the inventory market valuation reserve. The 1992 results also included a favorable impact of $119 million for the settlement of a tax refund claim related to prior years' production taxes, partially offset by a $115 million charge related to the planned disposition of certain domestic exploration and production properties. Excluding the effects of these items, operating income increased $14 million in 1994 from 1993, following an increase of $172 million in 1993 from 1992. The increase in 1994 was primarily due to reduced worldwide operating expenses and higher international liquid hydrocarbon and worldwide natural gas volumes, predominantly offset by lower refined product margins, lower liquid hydrocarbon volumes and $42 million of employee reorganization charges. The increase in 1993 was mainly due to increased refined product margins and domestic natural gas prices, partially offset by lower worldwide liquid hydrocarbon prices and volumes. OTHER INCOME was $177 million in 1994, compared with income of $46 million in 1993 and a loss of $7 million in 1992. The increase in 1994 mainly resulted from a gain on the sale of the assets of a retail propane marketing subsidiary. In addition to the absence of a $19 million impairment of an investment recorded in 1992, other income in 1993 increased primarily due to gains from disposal of assets totaling $34 million, which mainly reflected the sale of assets of a convenience store wholesale distributor, two tug/barge units and various domestic oil and gas production properties. M-24 74 Management's Discussion and Analysis continued INTEREST AND OTHER FINANCIAL INCOME was $15 million in 1994, compared with $22 million in 1993 and $210 million in 1992. The 1992 amount included $177 million of interest income resulting from the settlement of a tax refund claim related to prior years' production taxes. INTEREST AND OTHER FINANCIAL COSTS were $300 million in 1994, compared with $292 million in 1993 and $306 million in 1992. The 1994 amount included a $34 million favorable effect resulting from settlement of various state tax issues. Excluding the effect of this item, the increase in 1994 was primarily due to lower capitalized interest resulting from the completion of the East Brae platform and SAGE system in the United Kingdom ("U.K.") sector of the North Sea. The decrease in 1993 from 1992 mainly reflected higher capitalized interest for international projects, predominantly offset by higher interest costs related to increased levels of debt. Interest and other financial costs in 1995 are expected to increase by approximately $35 million because of lower capitalized interest due to the completion of the aforementioned international projects. THE PROVISION FOR ESTIMATED INCOME TAXES in 1994 was $155 million, compared to a credit of $49 million in 1993 and a provision of $92 million in 1992. The 1994 income tax provision included a $24 million credit for the reversal of a valuation allowance related to deferred tax assets. The 1993 income tax credit included an incremental deferred tax benefit of $64 million resulting from USX's ability to elect to credit, rather than deduct, certain foreign income taxes for U.S. federal income tax purposes when paid in future years. The anticipated use of the U.S. foreign tax credit reflected the Marathon Group's improving international production profile. The 1993 income tax credit also included a $40 million charge associated with an increase in the federal income tax rate from 34% to 35%, reflecting remeasurement of deferred federal income tax assets and liabilities as of January 1, 1993. NET INCOME of $321 million was recorded in 1994, compared with a net loss of $29 million in 1993 and a net loss of $222 million in 1992. Excluding the unfavorable cumulative effect of changes in accounting principles, which totaled $23 million and $331 million in 1993 and 1992, respectively, net income increased $327 million in 1994 from 1993, compared with a decrease of $115 million in 1993 from 1992. The changes in net income primarily reflect the factors discussed above. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION CURRENT ASSETS increased $165 million from year-end 1993 primarily due to higher inventories and receivables, partially offset by a decrease in cash and cash equivalents. The increase in inventories was mainly due to an increase in inventory values, which reflected a $160 million decrease in the inventory market valuation reserve. This reserve reflects the extent to which the recorded costs of crude oil and refined product inventories exceed net realizable value. Subsequent changes to the inventory market valuation reserve are dependent upon changes in future crude oil and refined product price levels and inventory turnover. The increase in accounts receivable primarily resulted from higher sales of refined products and crude oil. The $157 million decrease in cash balances mainly reflects cash applied to debt reduction. CURRENT LIABILITIES increased $69 million in 1994, mostly due to increases in deferred income tax liabilities and accounts payable, partially offset by a decrease in accrued taxes. The increase in deferred income tax liabilities is mainly attributable to the federal tax impact of the settlement of various state tax issues and the decrease in the inventory market valuation reserve. The decrease in accrued taxes primarily reflected the settlements of various state tax issues. TOTAL LONG-TERM DEBT AND NOTES PAYABLE at December 31, 1994, was $4.0 billion. The $259 million decrease from year-end 1993 reflected, in part, a reduction of cash and cash equivalent balances. The remaining decrease primarily resulted from other financing activities. The amount of total long-term debt, as well as the amount shown as notes payable, principally represented the M-25 75 Management's Discussion and Analysis continued Marathon Group's portion of USX debt attributed to all three groups. Virtually all of the debt is a direct obligation of, or is guaranteed by, USX. For a discussion of financial obligations, see Management's Discussion and Analysis of Cash Flows below. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CASH FLOWS THE MARATHON GROUP'S NET CASH PROVIDED FROM OPERATING ACTIVITIES totaled $719 million in 1994, compared with $827 million in 1993 and $995 million in 1992. The 1994 amount reflected payments of $123 million related to the settlement of various state tax issues. Excluding this item, net cash provided from operating activities increased $15 million from 1993. Cash flows in 1992 included $296 million associated with the refund of prior years' production taxes. Excluding the impact of this item, net cash provided from operating activities in 1993 improved $128 million mainly due to the impact of improved refined product margins on operating results. CAPITAL EXPENDITURES were $753 million in 1994, down $157 million from 1993, following a $283 million decrease from 1992. The decrease in 1994 was largely due to the substantial completion of the East Brae Field and SAGE system in the U.K. and the distillate hydrotreater complex at the Robinson, Illinois refinery. Contract commitments for capital expenditures at year-end 1994 were $158 million, compared with $284 million at year-end 1993. In addition to the capital expenditures discussed above, the Marathon Group's noncash investment activities during 1994 included the issuance of $58 million of debt instruments and $11 million (619,168 shares) of USX - Marathon Group Common Stock ("Marathon Stock") related to acquisitions of 89 gasoline outlets/convenience stores from independent petroleum retailers. Capital expenditures in 1995 are expected to remain at approximately the same level as 1994 at $750 million. CASH FROM DISPOSAL OF ASSETS was $263 million in 1994, compared with $174 million in 1993 and $77 million in 1992. The 1994 proceeds mainly resulted from the sales of the assets of a retail propane marketing subsidiary and certain domestic oil and gas production properties. The 1993 proceeds primarily reflected the sale/leaseback of interests in two LNG tankers and the sales of various domestic oil and gas production properties, assets of a convenience store wholesale distributor and two tug/barge units. No individually significant sales transactions occurred in 1992. FINANCIAL OBLIGATIONS decreased $196 million, compared with an increase of $261 million in 1993, and a decrease of $426 million in 1992. The decrease in 1994 primarily reflected a reduction in cash and cash equivalent balances. These 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 and production financing and other agreements that are specifically attributed to the Marathon Group. For a discussion of USX financing activities attributed to all three groups, see USX Consolidated Management's Discussion and Analysis of Cash Flows. MARATHON STOCK ISSUED, net of repurchases, totaled $595 million in 1992, mainly reflecting the sale of 25,000,000 shares of Marathon Stock to the public for net proceeds of $541 million, which were reflected in their entirety in the Marathon Group financial statements. DIVIDEND PAYMENTS were $201 million in both 1994 and 1993 and $340 million in 1992. The $139 million decline in 1993 was primarily due to a decrease in the Marathon Stock dividend rate in the fourth quarter of 1992. The annualized rate of dividends per share for the Marathon Stock based on the most recently declared quarterly dividend is $.68. M-26 76 Management's Discussion and Analysis continued RATING AGENCY ACTIVITY In September 1993, Standard & Poor's Corp. lowered its ratings on USX's and Marathon's senior debt to below investment grade (from BBB- to BB+) and on USX's subordinated debt, preferred stock and commercial paper. In October 1993, Moody's Investors Services, Inc. ("Moody's") confirmed its Baa3 investment grade ratings on USX's and Marathon's senior debt. Moody's also confirmed its ratings on USX's subordinated debt and commercial paper, but lowered its ratings on USX's preferred stock from ba1 to ba2. The ratings described above remain unchanged. HEDGING ACTIVITY The Marathon Group engages in hedging activities in the normal course of its business. Futures contracts, commodity swaps and options are used to hedge exposure to price fluctuations relevant to the purchase or sale of crude oil, natural gas and refined products. Forward currency contracts have been used to manage currency risks related to anticipated revenues and operating costs, firm commitments for capital expenditures and existing assets or liabilities denominated in a foreign currency. While hedging activities are generally used to reduce risks from unfavorable commodity price and currency rate movements, they also may limit the opportunity to benefit from favorable movements. The Marathon Group's hedging activities have not been significant in relation to its overall business activity. Based on risk assessment procedures and internal controls in place, management believes that its use of hedging instruments will not have a material adverse effect on the financial position, liquidity or results of operations of the Marathon Group. See Notes 2 and 24 to the Marathon Group Financial Statements. LIQUIDITY For discussion of USX's liquidity and capital resources, see USX Consolidated Management's Discussion and Analysis of Cash Flows. MANAGEMENT'S DISCUSSION AND ANALYSIS OF ENVIRONMENTAL MATTERS, LITIGATION AND CONTINGENCIES The Marathon Group has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. In recent years, these expenditures have increased primarily due to required refined product reformulation and 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 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. Marathon Group environmental expenditures for each of the last three years were(a):
(Dollars in millions) 1994 1993 1992 - -------------------------------------------------------------------------------- Capital $ 70 $ 123 $ 240 Compliance Operating & Maintenance 106 92 109 Remediation(b) 25 38 21 ----- ----- ----- Total $ 201 $ 253 $ 370 - --------------------------------------------------------------------------------
(a) Estimated based on American Petroleum Institute survey guidelines. (b) These amounts do not include noncash provisions recorded for environmental remediation, but include spending charged against such reserves. M-27 77 Management's Discussion and Analysis continued The Marathon Group's environmental capital expenditures accounted for 9%, 14% and 20% of total capital expenditures in 1994, 1993 and 1992, respectively. The decline in environmental capital expenditures over the three-year period mainly reflected lower expenditures for the Marathon Group's multi-year capital spending program for diesel fuel desulfurization which began in 1990 and was substantially completed by the end of 1993. During 1992 through 1994, compliance expenditures represented 1% of the Marathon Group's total operating costs. Remediation spending during this period was primarily related to retail gasoline stations which incur ongoing clean-up costs for soil and groundwater contamination associated with underground storage tanks and piping. USX has been notified that it is a potentially responsible party ("PRP") at 17 waste sites related to the Marathon Group under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of December 31, 1994. In addition, there are 7 sites related to the Marathon Group where USX has received information requests or other indications that USX may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability. There are also 70 additional sites, excluding retail gasoline stations, related to the Marathon Group where remediation is being sought under other environmental statutes, both federal and state. At many of these sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. The Marathon Group accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. See Note 26 to the Marathon Group Financial Statements. New or expanded environmental requirements, which could increase the Marathon Group's environmental costs, may arise in the future. USX intends to comply with all legal requirements regarding the environment, but since many of them are not fixed or presently determinable (even under existing legislation) and may be affected by future legislation, it is not possible to accurately predict the ultimate cost of compliance, including remediation costs which may be incurred and penalties which may be imposed. However, based on presently available information, and existing laws and regulations as currently implemented, the Marathon Group does not anticipate that environmental compliance expenditures (including operating and maintenance and remediation) will materially increase in 1995. The Marathon Group's capital expenditures for environmental controls are expected to be approximately $40 million in 1995. Predictions beyond 1995 can only be broad-based estimates which have varied, and will continue to vary, due to the ongoing evolution of specific regulatory requirements, the possible imposition of more stringent requirements and the availability of new technologies, among other matters. Based upon currently identified projects, the Marathon Group anticipates that environmental capital expenditures will be approximately $45 million in 1996; however, actual expenditures may vary as the number and scope of environmental projects are revised as a result of improved technology or changes in regulatory requirements and could increase if additional projects are identified or additional requirements are imposed. USX is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Marathon Group involving a variety of matters, including laws and regulations relating to the environment, certain of which are discussed in Note 26 to the Marathon Group Financial Statements. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Marathon Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Marathon Group. See USX Consolidated Management's Discussion and Analysis of Cash Flows. M-28 78 Management's Discussion and Analysis continued MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS The Marathon Group had operating income of $584 million in 1994, compared with $169 million in 1993 and $304 million in 1992. Excluding the effects of noncash adjustments to the inventory market valuation reserve and other items, operating income was $424 million in 1994, $410 million in 1993 and $238 million in 1992 (see Management's Discussion and Analysis of Income). OPERATING INCOME (LOSS)
(Dollars in millions) 1994 1993 1992 - ------------------------------------------------------------------------------- Exploration and Production ("Upstream") Domestic $ 151 $ 117 $ 123 International 59 (37) 49 ----- ----- ----- Total Exploration & Production 210 80 172 Refining, Marketing & Transportation ("Downstream") 287 407 128 Gas Gathering and Processing -- -- 21 Administrative * (73) (77) (83) Inventory Market Valuation Reserve Adjustment 160 (241) 62 Other Items -- -- 4 ----- ----- ----- Total $ 584 $ 169 $ 304 - -------------------------------------------------------------------------------
*Includes the portion of the Marathon Group's administrative costs not allocated to the operating components and the portion of USX corporate general and administrative costs allocated to the Marathon Group. AVERAGE VOLUMES AND SELLING PRICES
1994 1993 1992 - ------------------------------------------------------------------------------ (thousands of barrels per day) Net Liquids Production* - U.S. 110 111 118 - International 62 45 56 ---- ---- ---- - Total Consolidated 172 156 174 (millions of cubic feet per day) Net Natural Gas Production - U.S. 574 529 593 - International 400 373 338 ---- ---- ---- - Total Consolidated 974 902 931 - ------------------------------------------------------------------------------ (dollars per barrel) Liquid Hydrocarbons* - U.S. $13.53 $14.54 $ 16.47 - International 15.61 16.22 18.95 (dollars per mcf) Natural Gas - U.S. $ 1.94 $ 1.94 $ 1.60 - International 1.58 1.52 1.77 - ------------------------------------------------------------------------------
*Includes Crude Oil, Condensate and Natural Gas Liquids. UPSTREAM operating income increased $130 million in 1994, following a $92 million decrease in 1993. The increase in 1994 primarily reflected reduced worldwide operating expenses, higher international liquid hydrocarbon volumes and worldwide natural gas volumes, partially offset by lower worldwide liquid hydrocarbon prices and employee reorganization charges. Operating income in 1992 included a $20 million gain recognized as a result of a settlement of a natural gas contract. Excluding this settlement, the decline in 1993 was mostly due to significant decreases in worldwide liquid hydrocarbon prices and volumes and lower international natural gas prices, partially offset by increased domestic natural gas prices. M-29 79 Management's Discussion and Analysis continued Domestic upstream operating income in 1994 increased $34 million from 1993, following a $6 million decrease in 1993 from 1992. The increase in 1994 mainly reflected reduced operating expenses and higher natural gas volumes, partially offset by lower liquid hydrocarbon prices, higher dry well expenses and $18 million of employee reorganization charges. Excluding the previously mentioned contract settlement, the increase in 1993 was primarily due to increased natural gas prices and reduced dry well expenses, partially offset by reduced liquid hydrocarbon prices and volumes. In addition, operating income in 1993 reflected ongoing cost reduction efforts and reduced depletion expenses. International upstream operating income increased $96 million in 1994, following an $86 million decline in 1993. The increase in 1994 was mainly due to increased liquid hydrocarbon liftings, reduced operating and exploration expenses and increased natural gas volumes, partially offset by lower liquid hydrocarbon prices and $9 million of employee reorganization charges. The decrease in 1993 was primarily due to lower liquid hydrocarbon prices, reduced liftings primarily from the U.K. sector of the North Sea as a result of natural production declines, lower natural gas prices, and a $17 million charge for the relinquishment of Marathon's interest in the Arzanah Oil Field, Abu Dhabi. The decrease was partially offset by reduced pipeline and terminal expenses and reduced dry well expenses. In June 1994, Sakhalin Energy Investment Company Ltd. ("Sakhalin Energy"), a joint venture company in which Marathon has a 30% interest, joined with representatives of the Russian Government in the signing of the Sakhalin II Production Sharing Contract ("PSC") for the development of the Lunskoye gas field and the Piltun-Astokhskoye oil field located offshore Sakhalin Island in the Russian Far East Region. Subsequent efforts during the year focused on working with the Russian Parliament to finalize legislation to ensure the stabilization of laws complementary to the Sakhalin II PSC. This is necessary before Sakhalin Energy commits to undertaking appraisal period activities, which include the finalizing of the development plan and efforts to secure natural gas liquid markets and financing arrangements. Marathon has a 24% working interest in the Heimdal Field located in the Norwegian North Sea. On June 11, 1994, Marathon issued notice of termination on the two original gas sales agreements entered into for the evacuation of Heimdal gas. Marathon issued notice of termination based upon low gas prices and high pipeline tariffs associated with the original contracts. Negotiations are ongoing to raise prices and lower tariffs for current and post-June 1996 sales. Unless otherwise agreed, the effective date of termination under the original gas sales agreements is June 11, 1996. DOWNSTREAM operating income decreased $120 million in 1994, after increasing $279 million in 1993. The decrease in 1994 was predominantly due to lower refined product margins from refining and wholesale marketing, and $14 million of employee reorganization charges. The increase in 1993 was primarily due to increased refined product margins from refining and wholesale marketing which nearly doubled from 1992 as a result of decreased crude oil costs and lower maintenance costs for refinery turnaround activities, partially offset by decreased refined product prices in 1993. Also contributing to the increase in operating income were higher margins from refined products and convenience store merchandise at Emro Marketing Company, a Marathon subsidiary. Downstream operating income in 1993 also included a $17 million charge for environmental remediation. In late 1993, Marathon temporarily idled its 50,000 barrels-per-day Indianapolis refinery to enhance the efficiency of downstream operations. Idling of the Indianapolis facility had no impact on Marathon's supply of transportation fuels to its various classes of trade in Indiana or the Midwest marketing area. The costs related to the idling did not have a material effect on Marathon's 1993 operating results. The status of the refinery is periodically reviewed. This includes consideration of economic as well as regulatory matters. As of February 28, 1995, the refinery remained temporarily idled. M-30 80 Management's Discussion and Analysis continued On November 15, 1994, 239 employees at the Detroit refinery and terminal represented by the International Brotherhood of Teamsters ("Teamsters") went on strike. Management and the Teamsters are currently negotiating a new labor agreement. The refinery and terminal are currently being operated by salaried personnel, so the strike has had virtually no impact on refinery and terminal operations or on Marathon's supply of products to associated marketing areas. OUTLOOK Worldwide liquid hydrocarbon volumes are expected to increase approximately 20% in 1995, primarily reflecting increased production from the East Brae Field, a full year of production from Ewing Bank 873 in the Gulf of Mexico and new production from the Kakap KRA and KG Fields, offshore Indonesia. Worldwide natural gas volumes are also expected to increase approximately 20% in 1995, resulting from a successful 1994 domestic drilling program and a full year of contractual Brae area gas sales, which commenced in October 1994. Contractual sales volumes of Brae area gas through the SAGE pipeline system for the fourth quarter of 1994 averaged approximately 80 million cubic feet per day, which was less than originally anticipated due to unseasonably warm weather in the U.K. In 1995, contractual gas sales volumes through the SAGE system should exceed the level experienced in the fourth quarter of 1994. The Marathon Group expects to realize annual cost structure reductions of approximately $80 million from work force reduction programs completed during 1994. These reductions will impact salary and related benefits expenses, capitalized costs and billings to joint venture partners. The outlook regarding prices and costs for the Marathon Group's principal products is largely dependent upon world market developments for crude oil and refined products. Market conditions in the petroleum industry are cyclical and subject to global economic and political events. The Financial Accounting Standards Board intends to issue "Accounting for the Impairment of Long-Lived Assets" in the near future. This standard, which is expected to be effective for 1996, requires that operating assets be written down to fair value whenever an impairment review indicates that the carrying value cannot be recovered on an undiscounted cash flow basis. After any such noncash write-down of operating assets, results of operations would be favorably affected by reduced depreciation, depletion and amortization charges. USX will be initiating an extensive review to implement the anticipated standard and, at this time, cannot provide an assessment of either the impact or the timing of adoption, although it is likely that the Marathon Group may be required to recognize certain charges upon adoption. Under current accounting policy, USX generally has only impaired property, plant and equipment under the provisions of Accounting Principles Board Opinion No. 30 and its interpretations. M-31 81 THIS PAGE IS INTENTIONALLY LEFT BLANK M-32 82 U.S. STEEL GROUP INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA AND MANAGEMENT'S DISCUSSION AND ANALYSIS
PAGE ---- Explanatory Note Regarding Financial Information............................. S-2 Management's Report.......................................................... S-3 Audited Financial Statements: Report of Independent Accountants........................................... S-3 Statement of Operations..................................................... S-4 Balance Sheet............................................................... S-5 Statement of Cash Flows..................................................... S-6 Notes to Financial Statements............................................... S-7 Selected Quarterly Financial Data............................................ S-21 Principal Unconsolidated Affiliates.......................................... S-21 Supplementary Information.................................................... S-21 Five-Year Operating Summary ................................................. S-22 Management's Discussion and Analysis......................................... S-23
S-1 83 U.S. STEEL GROUP EXPLANATORY NOTE REGARDING FINANCIAL INFORMATION 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 the purpose of preparing their respective financial statements does not affect legal title to such assets or responsibility for such liabilities. Holders of USX - U. S. Steel Group Common Stock, USX - Marathon Group Common Stock and USX - Delhi Group Common 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 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 U. S. Steel Group financial information. S-2 84 MANAGEMENT'S REPORT The accompanying financial statements of the U. S. Steel Group are the responsibility of and have been prepared by USX Corporation (USX) in conformity with generally accepted accounting principles. They necessarily include some amounts that are based on best judgments and estimates. The U. S. Steel Group financial information displayed in other sections of this report is consistent with these financial statements. USX seeks to assure the objectivity and integrity of its financial records by careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communications programs aimed at assuring that its policies and methods are understood throughout the organization. USX has a comprehensive formalized system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that financial records are reliable. Appropriate management monitors the system for compliance, and the internal auditors independently measure its effectiveness and recommend possible improvements thereto. In addition, as part of their audit of the financial statements, USX's independent accountants, who are elected by the stockholders, review and test the internal accounting controls selectively to establish a basis of reliance thereon in determining the nature, extent and timing of audit tests to be applied. The Board of Directors pursues its oversight role in the area of financial reporting and internal accounting control through its Audit Committee. This Committee, composed solely of nonmanagement directors, regularly meets (jointly and separately) with the independent accountants, management and internal auditors to monitor the proper discharge by each of its responsibilities relative to internal accounting controls and the consolidated and group financial statements. Charles A. Corry Robert M. Hernandez Lewis B. Jones Chairman, Board of Directors Vice Chairman Vice President & Chief Executive Officer & Chief Financial Officer & Comptroller REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders of USX Corporation: In our opinion, the accompanying financial statements appearing on pages S-4 through S-20 present fairly, in all material respects, the financial position of the U. S. Steel Group at December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of USX's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 2, page S-8, in 1993 USX adopted a new accounting standard for postemployment benefits. As discussed in Note 11, page S-13, and Note 12, page S-14, in 1992 USX adopted new accounting standards for postretirement benefits other than pensions and for income taxes, respectively. The U. S. Steel Group is a business unit of USX Corporation (as described in Note 1, page S-7); accordingly, the financial statements of the U. S. Steel Group should be read in connection with the consolidated financial statements of USX Corporation. Price Waterhouse LLP 600 Grant Street, Pittsburgh, Pennsylvania 15219-2794 February 14, 1995 S-3 85 STATEMENT OF OPERATIONS
(Dollars in millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- SALES $ 6,066 $ 5,612 $ 4,919 OPERATING COSTS: Cost of sales (excludes items shown below) (Note 5, page S-9) 5,342 5,304 4,776 Selling, general and administrative expenses (Note 10, page S-12) (121) (108) (122) Depreciation, depletion and amortization 314 314 288 Taxes other than income taxes 218 209 208 Restructuring charges (Note 4, page S-9) - 42 10 --------- --------- --------- Total operating costs 5,753 5,761 5,160 --------- --------- --------- OPERATING INCOME (LOSS) 313 (149) (241) Other income (Note 6, page S-10) 75 210 5 Interest and other financial income (Note 6, page S-10) 12 59 18 Interest and other financial costs (Note 6, page S-10) (152) (330) (176) --------- --------- --------- TOTAL INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES 248 (210) (394) Less provision (credit) for estimated income taxes (Note 12, page S-14) 47 (41) (123) --------- --------- --------- TOTAL INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES 201 (169) (271) Cumulative effect of changes in accounting principles: Postemployment benefits (Note 2, page S-8) - (69) - Postretirement benefits other than pensions (Note 11, page S-13) - - (1,159) Income taxes (Note 12, page S-14) - - (176) --------- --------- --------- NET INCOME (LOSS) 201 (238) (1,606) Dividends on preferred stock (25) (21) (3) --------- --------- --------- NET INCOME (LOSS) APPLICABLE TO STEEL STOCK $ 176 $ (259) $ (1,609) - --------------------------------------------------------------------------------------------------------
INCOME PER COMMON SHARE OF STEEL STOCK
1994 1993 1992 - -------------------------------------------------------------------------------------------------------- PRIMARY: Total income (loss) before cumulative effect of changes in accounting principles applicable to Steel Stock $ 2.35 $ (2.96) $ (4.92) Cumulative effect of changes in accounting principles - (1.08) (23.93) --------- --------- --------- Net income (loss) applicable to Steel Stock $ 2.35 $ (4.04) $ (28.85) FULLY DILUTED: Total income (loss) before cumulative effect of changes in accounting principles applicable to Steel Stock $ 2.33 $ (2.96) $ (4.92) Cumulative effect of changes in accounting principles - (1.08) (23.93) --------- --------- --------- Net income (loss) applicable to Steel Stock $ 2.33 $ (4.04) $ (28.85) Weighted average shares, in thousands - primary 75,184 64,370 55,764 - fully diluted 78,624 64,370 55,764 - --------------------------------------------------------------------------------------------------------
See Note 21, page S-18, for a description of net income per common share. The accompanying notes are an integral part of these financial statements. S-4 86 BALANCE SHEET
(Dollars in millions) December 31 1994 1993 - -------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 20 $ 79 Receivables, less allowance for doubtful accounts of $5 and $5 (Note 18, page S-16) 672 583 Receivables from other groups (Note 13, page S-15) 44 13 Inventories (Note 15, page S-15) 595 629 Deferred income tax benefits (Note 12, page S-14) 449 256 Other current assets - 2 --------- --------- Total current assets 1,780 1,562 Long-term receivables and other investments, less reserves of $22 and $22 (Note 14, page S-15) 667 696 Property, plant and equipment - net (Note 17, page S-16) 2,536 2,653 Long-term deferred income tax benefits (Note 12, page S-14) 223 551 Prepaid pensions (Note 10, page S-12) 1,224 1,084 Other noncurrent assets 50 83 --------- --------- Total assets $ 6,480 $ 6,629 - -------------------------------------------------------------------------------------------------------- LIABILITIES Current liabilities: Accounts payable (Note 5, page S-9) $ 678 $ 1,048 Payroll and benefits payable 354 349 Accrued taxes 183 182 Accrued interest 31 33 Long-term debt due within one year (Note 8, page S-11) 21 11 --------- --------- Total current liabilities 1,267 1,623 Long-term debt (Note 8, page S-11) 1,432 1,551 Employee benefits (Note 11, page S-13) 2,496 2,491 Deferred credits and other liabilities 276 347 Preferred stock of subsidiary (Note 7, page S-10) 64 - --------- --------- Total liabilities 5,535 6,012 STOCKHOLDERS' EQUITY (Note 19, page S-17) Preferred stock 32 32 Common stockholders' equity 913 585 --------- --------- Total stockholders' equity 945 617 --------- --------- Total liabilities and stockholders' equity $ 6,480 $ 6,629 - --------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. S-5 87 STATEMENT OF CASH FLOWS
(Dollars in millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income (loss) $ 201 $ (238) $ (1,606) Adjustments to reconcile to net cash provided from (used in) operating activities: Accounting principle changes - 69 1,335 Depreciation, depletion and amortization 314 314 288 Pensions (136) (216) (250) Postretirement benefits other than pensions 66 97 1 Deferred income taxes 93 (38) (97) Gain on disposal of assets (12) (216) (23) Restructuring charges - 42 10 Changes in: Current receivables - sold 10 50 (40) - operating turnover (145) (214) 131 Inventories (29) 14 (21) Current accounts payable and accrued expenses (344) 469 133 All other items - net 26 (47) 50 --------- --------- --------- Net cash provided from (used in) operating activities 44 86 (89) --------- --------- --------- INVESTING ACTIVITIES: Capital expenditures (248) (198) (298) Disposal of assets 19 291 39 All other items - net 12 (9) (68) --------- --------- --------- Net cash provided from (used in) investing activities (217) 84 (327) --------- --------- --------- FINANCING ACTIVITIES (Note 3, page S-9) U. S. Steel Group activity - USX debt attributed to all groups - net (57) (713) 218 Specifically attributed debt: Borrowings 4 12 17 Repayments (29) (29) (32) Attributed preferred stock of subsidiary 62 - - Issuance of common stock of subsidiary 11 - - Preferred stock issued - 336 - Steel Stock issued 221 366 212 Dividends paid (98) (85) (56) --------- --------- --------- Net cash provided from (used in) financing activities 114 (113) 359 --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (59) 57 (57) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 79 22 79 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 20 $ 79 $ 22 - --------------------------------------------------------------------------------------------------------
See Note 9, page S-11, for supplemental cash flow information. The accompanying notes are an integral part of these financial statements. S-6 88 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION USX Corporation (USX) has three classes of common stock: USX - U. S. Steel Group Common Stock (Steel Stock), USX - Marathon Group Common Stock (Marathon Stock) and USX - Delhi Group Common Stock (Delhi Stock), which are intended to reflect the performance of the U. S. Steel Group, the Marathon Group and the Delhi Group, respectively. 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. The U. S. Steel Group, which consists primarily of steel operations, includes the largest domestic integrated steel producer and 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, and engineering and consulting services and technology licensing. Other businesses that are part of the U. S. Steel Group include real estate development and management, fencing products, and leasing and financing activities. The U. S. Steel Group financial statements are prepared using the amounts included in the USX consolidated financial statements. 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 the purpose of preparing their respective financial statements does not affect legal title to such assets or responsibility for such liabilities. Holders of Steel Stock, Marathon Stock and 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 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 U. S. Steel Group financial information. - -------------------------------------------------------------------------------- 2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES PRINCIPLES APPLIED IN CONSOLIDATION - These financial statements include the accounts of the U. S. Steel Group. The U. S. Steel Group, the Marathon Group and the Delhi Group financial statements, taken together, comprise all of the accounts included in the USX consolidated financial statements. Investments in other entities in which the U. S. Steel Group has significant influence in management and control are accounted for using the equity method of accounting, and are carried in the investment account at the U. S. Steel Group's share of net assets plus advances. The proportionate share of income from equity investments is included in other income. In 1994, the U. S. Steel Group reduced its voting interest in RMI Titanium Company (RMI) to less than 50% and began accounting for its investment using the equity method. Investments in marketable equity securities are carried at lower of cost or market and investments in other companies are carried at cost, with income recognized when dividends are received. CASH AND CASH EQUIVALENTS - Cash and cash equivalents includes cash on hand and on deposit and highly liquid debt instruments with maturities generally of three months or less. INVENTORIES - Inventories are carried at lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method. S-7 89 HEDGING TRANSACTIONS - The U. S. Steel Group engages in commodity hedging within the normal course of its activities (Note 24, page S-18). Management has been authorized to manage exposure to price fluctuations relevant to the purchase of natural gas and nonferrous metals through the use of a variety of derivative financial and nonfinancial instruments. Derivative financial instruments require settlement in cash and include such instruments as over-the-counter (OTC) commodity swap agreements and OTC commodity options. Derivative nonfinancial instruments require or permit settlement by delivery of commodities and include exchange-traded commodity futures contracts and options. Changes in the market value of derivative instruments are deferred and subsequently recognized in income as cost of sales in the same period as the hedged item. OTC swaps are off-balance-sheet instruments; therefore, the effect of changes in the market value of such instruments are not recorded until settlement. The margin accounts for open commodity futures contracts, which reflect daily settlements as market values change, are recorded as accounts receivable. Premiums on all commodity-based option contracts are initially recorded based on the amount paid or received; the options' market value is subsequently recorded as accounts receivable or accounts payable, as appropriate. Forward currency contracts are used to manage currency risks related to USX attributed debt denominated in a foreign currency. Gains or losses related to firm commitments are deferred and included with the hedged item; all other gains or losses are recognized in income in the current period as interest income or expense, as appropriate. For balance sheet reporting, net contract values are included in receivables or payables, as appropriate. Recorded deferred gains or losses are reflected within other noncurrent assets or deferred credits and other liabilities. Cash flows from the use of derivative instruments are reported in the same category as the hedged item in the statement of cash flows. PROPERTY, PLANT AND EQUIPMENT - Depreciation is generally computed using a modified straight-line method based upon estimated lives of assets and production levels. The modification factors range from a minimum of 85% at a production level below 81% of capability, to a maximum of 105% for a 100% production level. No modification is made at the 95% production level, considered the normal long-range level. Depletion of mineral properties is based on rates which are expected to amortize cost over the estimated tonnage of minerals to be removed. When an entire plant, major facility or facilities depreciated on an individual basis are sold or otherwise disposed of, any gain or loss is reflected in income. Proceeds from disposal of other facilities depreciated on a group basis are credited to the depreciation reserve with no immediate effect on income. ENVIRONMENTAL REMEDIATION - The U. S. Steel Group provides for remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. Generally, the timing of remediation accruals coincides with completion of a feasibility study or the commitment to a formal plan of action. INSURANCE - The U. S. Steel Group is insured for catastrophic casualty and certain property and business interruption exposures, as well as those risks required to be insured by law or contract. Costs resulting from noninsured losses are charged against income upon occurrence. POSTEMPLOYMENT BENEFITS - In 1993, USX adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" (SFAS No. 112). SFAS No. 112 requires employers to recognize the obligation to provide postemployment benefits on an accrual basis if certain conditions are met. The U. S. Steel Group is affected primarily by disability-related claims covering indemnity and medical payments. The obligation for these claims is measured using actuarial techniques and assumptions including appropriate discount rates. The cumulative effect of the change in accounting principle determined as of January 1, 1993, reduced net income $69 million, net of $40 million income tax effect. The effect of the change in accounting principle reduced 1993 operating income by $21 million. RECLASSIFICATIONS - Certain reclassifications of prior years' data have been made to conform to 1994 classifications. S-8 90 - -------------------------------------------------------------------------------- 3. CORPORATE ACTIVITIES FINANCIAL ACTIVITIES - As a matter of policy, USX manages most financial activities on a centralized, consolidated basis. Such financial activities include the investment of surplus cash; the issuance, repayment and repurchase of short-term and long-term debt; the issuance, repurchase and redemption of preferred stock; and the issuance and repurchase of common stock. Transactions related primarily to invested cash, short-term and long-term debt (including convertible debt), related net interest and other financial costs, and preferred stock and related dividends are attributed to the U. S. Steel Group, the Marathon Group and the Delhi Group based upon the cash flows of each group for the periods presented and the initial capital structure of each group. Most financing transactions are attributed to and reflected in the financial statements of all three groups. See Note 7, page S-10, for the U. S. Steel Group's portion of USX's financial activities attributed to all three groups. However, transactions such as leases, certain collateralized financings, production payment financings, financial activities of consolidated entities which are less than wholly owned by USX and transactions related to securities convertible solely into any one class of common stock are or will be specifically attributed to and reflected in their entirety in the financial statements of the group to which they relate. CORPORATE GENERAL & ADMINISTRATIVE COSTS - Corporate general and administrative costs are allocated to the U. S. Steel Group, the Marathon Group and the Delhi Group based upon utilization or other methods management believes to be reasonable and which consider certain measures of business activities, such as employment, investments and sales. The costs allocated to the U. S. Steel Group were $36 million in 1994, and $33 million in both 1993 and 1992, and primarily consist of employment costs including pension effects, professional services, facilities and other related costs associated with corporate activities. INCOME TAXES - All members of the USX affiliated group are included in the consolidated United States federal income tax return filed by USX. Accordingly, the provision for federal income taxes and the related payments or refunds of tax are determined on a consolidated basis. The consolidated provision and the related tax payments or refunds have been reflected in the U. S. Steel Group, the Marathon Group and the Delhi Group financial statements in accordance with USX's tax allocation policy. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated among the 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. For tax provision and settlement purposes, tax benefits resulting from attributes (principally net operating losses), which cannot be utilized by one of the three groups on a separate return basis but which can be utilized on a consolidated basis in that year or in a carryback year, are allocated to the group that generated the attributes. However, if such tax benefits cannot be utilized on a consolidated basis in that year or in a carryback year, the prior years' allocation of such consolidated tax effects is adjusted in a subsequent year to the extent necessary to allocate the tax benefits to the group that would have realized the tax benefits on a separate return basis. The allocated group amounts of taxes payable or refundable are not necessarily comparable to those that would have resulted if the groups had filed separate tax returns; however, such allocation should not result in any of the three groups paying more income taxes over time than it would if it filed separate tax returns, and in certain situations, could result in any of the three groups paying less. - -------------------------------------------------------------------------------- 4. RESTRUCTURING CHARGES In 1993, the planned closure of a Pennsylvania coal mine resulted in a $42 million charge, primarily related to the writedown of property, plant and equipment, contract termination, and mine closure cost. In December 1994, a letter of intent for the sale of this coal mine was entered into, subject to certain conditions. This transaction, if concluded, will close in 1995. In 1992, the completion of the 1991 restructuring plan related to steel operations resulted in a $10 million charge. - -------------------------------------------------------------------------------- 5. B&LE LITIGATION CHARGES Pretax income (loss) in 1993 included a $506 million charge related to the Lower Lake Erie Iron Ore Antitrust Litigation against a former USX subsidiary, the Bessemer & Lake Erie Railroad (B&LE) (Note 26, page S-20). Charges of $342 million were included in cost of sales and $164 million included in interest and other financial costs. The effect on 1993 net income (loss) was $325 million unfavorable ($5.04 per share of Steel Stock). At December 31, 1993, accounts payable included $376 million for this litigation, which was substantially settled in 1994. S-9 91 - -------------------------------------------------------------------------------- 6. OTHER ITEMS
(In millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- OTHER INCOME: Gain on disposal of assets $ 12 $ 216 (a) $ 23 Income (loss) from affiliates - equity method 59 (11) (27) Other income 4 5 9 -------- ------ ------ Total $ 75 $ 210 $ 5 - -------------------------------------------------------------------------------------------------------- INTEREST AND OTHER FINANCIAL INCOME(b): Interest income $ 11 $ 63 (a) $ 20 Other 1 (4) (2) -------- ------ ------ Total 12 59 18 -------- ------ ------ INTEREST AND OTHER FINANCIAL COSTS(b): Interest incurred $ (115) $ (133) $ (154) Less interest capitalized 8 8 10 -------- ------ ------ Net interest (107) (125) (144) Interest on B&LE litigation (1) (164) - Interest on tax issues (12) (16) (11) Financial cost on preferred stock of subsidiary (5) - - Amortization of discounts (11) (11) (12) Expenses on sales of accounts receivable (Note 18, page S-16) (16) (12) (12) Other - (2) 3 -------- ------ ------ Total (152) (330) (176) -------- ------ ------ NET INTEREST AND OTHER FINANCIAL COSTS(b) (c) $ (140) $ (271) $ (158) - --------------------------------------------------------------------------------------------------------
(a) Gains resulted primarily from the sale of the Cumberland coal mine, an investment in an insurance company and the realization of a deferred gain resulting from collection of a subordinated note related to the 1988 sale of Transtar, Inc. (Transtar). The collection also resulted in interest income of $37 million. (b) See Note 3, page S-9, for discussion of USX net interest and other financial costs attributable to the U. S. Steel Group. (c) Excludes financial income and costs of finance operations, which are included in operating income. - -------------------------------------------------------------------------------- 7. FINANCIAL ACTIVITIES ATTRIBUTED TO ALL THREE GROUPS The following is U. S. Steel Group's portion of USX's financial activities attributed to all groups based on their respective cash flows as described in Note 3, page S-9. These amounts exclude debt amounts specifically attributed to a group as described in Note 8, page S-11.
U. S. Steel Group Consolidated USX(a) ----------------- ------------------- (In millions) December 31 1994 1993 1994 1993 - -------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 1 $ 47 $ 4 $ 196 Receivables(b) 3 - 11 - Long-term receivables(b) 17 11 70 47 Other noncurrent assets(b) 3 2 11 9 -------- -------- -------- -------- Total assets $ 24 $ 60 $ 96 $ 252 - -------------------------------------------------------------------------------------------------------- Accounts payable(b) $ 1 $ 1 $ 3 $ 4 Accrued interest 31 33 123 138 Long-term debt due within one year (Note 8, page S-11) 18 7 74 31 Long-term debt (Note 8, page S-11) 1,323 1,371 5,346 5,730 Deferred credits and other liabilities(b) 1 2 3 8 Preferred stock of subsidiary 64 - 250 - -------- -------- -------- -------- Total liabilities $ 1,438 $ 1,414 $ 5,799 $ 5,911 - -------------------------------------------------------------------------------------------------------- Preferred stock $ 25 $ 25 $ 105 $ 105 - --------------------------------------------------------------------------------------------------------
U. S. Steel Group(c) Consolidated USX --------------------- -------------------- (In millions) Year ended December 31 1994 1993 1992 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------ Net interest and other financial costs (Note 6, page S-10) $(117) $(125) $(145) $(471) $(471) $(458) - ------------------------------------------------------------------------------------------------------------
(a) For details of USX long-term debt, preferred stock of subsidiary and preferred stock, see Notes 13, page U-20; 24, page U-25; and 18, page U-22, respectively, to the USX consolidated financial statements. (b) Primarily reflects forward currency contracts used to manage currency risks related to USX debt and interest denominated in a foreign currency. (c) The U. S. Steel Group's net interest and other financial costs reflect weighted average effects of all financial activities attributed to all three groups. S-10 92 - -------------------------------------------------------------------------------- 8. LONG-TERM DEBT The U. S. Steel Group's portion of USX's consolidated long-term debt is as follows:
U. S. Steel Group Consolidated USX(a) ------------------- ------------------- (In millions) December 31 1994 1993 1994 1993 - --------------------------------------------------------------------------------------------------------- Specifically attributed debt(b): Sale-leaseback financing and capital leases $ 112 $ 117 $ 137 $ 142 Seller-provided financing - - 42 - Debt of majority-owned subsidiary - 67 - 67 -------- --------- -------- --------- Total 112 184 179 209 Less amount due within one year 3 4 4 4 -------- --------- -------- --------- Total specifically attributed long-term debt $ 109 $ 180 $ 175 $ 205 - --------------------------------------------------------------------------------------------------------- Debt attributed to all three groups(c) $ 1,358 $ 1,397 $ 5,489 $ 5,837 Less unamortized discount 17 19 69 76 Less amount due within one year 18 7 74 31 -------- -------- -------- -------- Total long-term debt attributed to all three groups $ 1,323 $ 1,371 $ 5,346 $ 5,730 - --------------------------------------------------------------------------------------------------------- Total long-term debt due within one year $ 21 $ 11 $ 78 $ 35 Total long-term debt due after one year 1,432 1,551 5,521 5,935 - ---------------------------------------------------------------------------------------------------------
(a) See Note 13, page U-20, to the USX consolidated financial statements for details of interest rates, maturities and other terms of long-term debt. (b) As described in Note 3, page S-9, certain financial activities are specifically attributed only to the U. S. Steel Group, the Marathon Group or the Delhi Group. (c) Most long-term debt activities of USX Corporation and its wholly owned subsidiaries are attributed to all three groups (in total, but not with respect to specific debt issues) based on their respective cash flows (Notes 3, page S-9, 7, page S-10, and 9, page S-11). - -------------------------------------------------------------------------------- 9. SUPPLEMENTAL CASH FLOW INFORMATION
(In millions) 1994 1993 1992 - --------------------------------------------------------------------------------------------------------- CASH PROVIDED FROM (USED IN) OPERATING ACTIVITIES INCLUDED: Interest and other financial costs paid (net of amount capitalized) $ (189) $ (257) $ (155) Income taxes refunded, including settlements with other groups 48 31 76 - --------------------------------------------------------------------------------------------------------- USX DEBT ATTRIBUTED TO ALL THREE GROUPS - NET: Commercial paper: Issued $ 1,515 $ 2,229 $ 2,412 Repayments (1,166) (2,598) (2,160) Credit agreements: Borrowings 4,545 1,782 6,684 Repayments (5,045) (2,282) (7,484) Other credit arrangements - net - (45) (22) Other debt: Borrowings 509 791 742 Repayments (791) (318) (381) --------- --------- --------- Total $ (433) $ (441) $ (209) ========= ========= ========= U. S. Steel Group activity $ (57) $ (713) $ 218 Marathon Group activity (371) 261 (410) Delhi Group activity (5) 11 (17) --------- --------- --------- Total $ (433) $ (441) $ (209) - --------------------------------------------------------------------------------------------------------- NONCASH INVESTING AND FINANCING ACTIVITIES: Steel Stock issued for Dividend Reinvestment Plan and employee stock option plans $ 4 $ 4 $ 4 Capital lease obligations - - 20 Disposal of assets - notes received 3 9 12 - liabilities assumed by buyers - 47 - Decrease in debt resulting from the adoption of equity method accounting for RMI 41 - - - ---------------------------------------------------------------------------------------------------------
S-11 93 - -------------------------------------------------------------------------------- 10. PENSIONS The U. S. Steel Group has noncontributory defined benefit plans covering substantially all employees. Benefits under these plans are based upon years of service and final average pensionable earnings, or a minimum benefit based upon years of service, whichever is greater. In addition, contributory pension benefits, which cover participating salaried employees, are based upon years of service and career earnings. The funding policy for defined benefit plans provides that payments to the pension trusts shall be equal to the minimum funding requirements of ERISA plus such additional amounts as may be approved from time to time. Certain of these plans provide benefits to USX corporate employees, and the related costs or credits for such employees are allocated to all three groups (Note 3, page S-9). The U. S. Steel Group also participates in multiemployer plans, most of which are defined benefit plans associated with coal operations. PENSION COST (CREDIT) - The defined benefit cost for major plans for 1994, 1993 and 1992 was determined assuming an expected long-term rate of return on plan assets of 9%, 10%, and 11%, respectively. The total pension credit is primarily included in selling, general and administrative expenses.
(In millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- Major plans: Cost of benefits earned during the period $ 65 $ 55 $ 55 Interest cost on projected benefit obligation (6.5% for 1994; 7% for 1993; and 8% for 1992) 527 549 610 Return on assets - actual loss (return) 11 (725) (617) - deferred loss (734) (77) (268) Net amortization of unrecognized (gains) and losses 9 (7) (14) --------- --------- --------- Total major plans (122) (205) (234) Multiemployer and other plans 2 3 3 --------- --------- --------- Total periodic pension cost (credit) $ (120) $ (202) $ (231) - --------------------------------------------------------------------------------------------------------
FUNDS' STATUS - The assumed discount rate used to measure the benefit obligations of major plans was 8% and 6.5% at December 31, 1994, and December 31, 1993, respectively. The assumed rate of future increases in compensation levels was 4% and 3% at December 31, 1994, and December 31, 1993, respectively.
(In millions) December 31 1994 1993 - -------------------------------------------------------------------------------------------------------- Reconciliation of funds' status to reported amounts: Projected benefit obligation(a) $ (7,417) $ (8,544) Plan assets at fair market value(b) 7,422 8,381 --------- --------- Assets in excess of (less than) projected benefit obligation(c) 5 (163) Unrecognized net gain from transition (416) (485) Unrecognized prior service cost 799 873 Unrecognized net loss 835 860 Additional minimum liability(d) (75) (100) --------- --------- Net pension asset included in balance sheet $ 1,148 $ 985 - -------------------------------------------------------------------------------------------------------- (a) Projected benefit obligation includes: Vested benefit obligation $ 6,654 $ 7,710 Accumulated benefit obligation (ABO) 7,078 8,259 (b) Types of assets held: USX stocks 1% 1% Stocks of other corporations 54% 50% U.S. Government securities 23% 29% Corporate debt instruments and other 22% 20% (c) Includes several small plans that have ABOs in excess of plan assets: Projected benefit obligation (PBO) $ (79) $ (156) Plan assets - 50 --------- --------- PBO in excess of plan assets (79) (106) (d) Additional minimum liability is offset by the following: Intangible asset $ 58 $ 77 Stockholders' equity adjustment (net of deferred income tax in both years and minority interest in 1993) 11 14 - --------------------------------------------------------------------------------------------------------
S-12 94 - -------------------------------------------------------------------------------- 11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The U. S. Steel Group has defined benefit retiree health and life insurance plans covering most employees upon their retirement. Health benefits are provided, for the most part, through comprehensive hospital, surgical and major medical benefit provisions subject to various cost sharing features. Life insurance benefits are provided to nonunion retiree beneficiaries primarily based on employees' annual base salary at retirement. For union retirees, benefits are provided for the most part based on fixed amounts negotiated in labor contracts with the appropriate unions. Except for certain life insurance benefits paid from reserves held by insurance carriers, benefits have not been prefunded. In 1994, the U. S. Steel Group agreed to establish a Voluntary Employee Beneficiary Association Trust to prefund a portion of health care and life insurance benefits for retirees covered under the United Steelworkers of America (USWA) union agreement. In early 1995, USX funded the initial $25 million contribution and will be required to fund a minimum of $10 million more in 1995 and each succeeding contract year. These plans provide benefits to USX corporate employees, and the related costs for such employees are allocated to all three groups (Note 3, page S-9). In 1992, USX adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS No. 106), which requires accrual accounting for all postretirement benefits other than pensions. USX elected to recognize immediately the transition obligation determined as of January 1, 1992, which represented the excess accumulated postretirement benefit obligation (APBO) for current and future retirees over the fair value of plan assets and recorded postretirement benefit cost accruals. The cumulative effect of the change in accounting principle for the U. S. Steel Group reduced net income $1,159 million, consisting of the transition obligation of $1,837 million, net of $678 million income tax effect. POSTRETIREMENT BENEFIT COST - Postretirement benefit cost for defined benefit plans for 1994, 1993 and 1992 was determined assuming a discount rate of 6.5%, 7% and 8%, respectively, and an expected return on plan assets of 9% for 1994 and 10% for both 1993 and 1992:
(In millions) 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------- Cost of benefits earned during the period $ 27 $ 26 $ 21 Interest on APBO 179 179 175 Return on assets - actual return (8) (7) (7) - deferred loss (2) (5) (7) Amortization of unrecognized losses 19 10 2 --------- --------- --------- Total defined benefit plans 215 203 184 Multiemployer plans(a) 21 9 12 --------- --------- --------- Total periodic postretirement benefit cost 236 212 196 Settlement gain(b) - (24) - --------- --------- --------- Total postretirement benefit cost $ 236 $ 188 $ 196 - -----------------------------------------------------------------------------------------------------------
(a) Payments are made to a multiemployer benefit plan created by the Coal Industry Retiree Health Benefit Act of 1992 based on assigned beneficiaries receiving benefits. The present value of this unrecognized obligation is broadly estimated to be $160 million, including the effects of future medical inflation, and this amount could increase if additional beneficiaries are assigned. (b) In 1993, other income (Note 6, page S-10) included a settlement gain resulting from the sale of the Cumberland coal mine. FUNDS' STATUS - The following table sets forth the plans' funded status and the amounts reported in the U. S. Steel Group's balance sheet:
(In millions) December 31 1994 1993 - ---------------------------------------------------------------------------------------------------------- Reconciliation of funds' status to reported amounts: Fair value of plan assets $ 97 $ 116 APBO attributable to: Retirees (1,722) (2,052) Fully eligible plan participants (196) (218) Other active plan participants (396) (560) --------- --------- Total APBO (2,314) (2,830) --------- --------- APBO in excess of plan assets (2,217) (2,714) Unrecognized net (gain) loss (28) 528 Unamortized prior service cost 22 5 --------- --------- Accrued liability included in balance sheet $ (2,223) $ (2,181) - ----------------------------------------------------------------------------------------------------------
The assumed discount rate used to measure the APBO was 8% and 6.5% at December 31, 1994, and December 31, 1993, respectively. The assumed rate of future increases in compensation levels was 4% and 3% at December 31, 1994, and December 1993, respectively. The weighted average health care cost trend rate in 1995 is approximately 7%, declining to an ultimate rate in 1997 of approximately 6%. A one percentage point increase in the assumed health care cost trend rates for each future year would have increased the aggregate of the service and interest cost components of the 1994 net periodic postretirement benefit cost by $28 million and would have increased the APBO as of December 31, 1994, by $231 million. S-13 95 - -------------------------------------------------------------------------------- 12. INCOME TAXES Income tax provisions and related assets and liabilities attributed to the U. S. Steel Group are determined in accordance with the USX group tax allocation policy (Note 3, page S-9). In 1992, USX adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109), which requires an asset and liability approach in accounting for income taxes. Under this method, deferred income tax assets and liabilities are established to reflect the future tax consequences of carryforwards and differences between the tax bases and financial bases of assets and liabilities. Provisions (credits) for estimated income taxes:
1994 1993 1992 ---------------------------- ------------------------- ------------------------ (In millions) CURRENT DEFERRED TOTAL Current Deferred Total Current Deferred Total - -------------------------------------------------------------------------------------------------------- Federal $ (48) $ 98 $ 50 $ (1) $ (63) $ (64) $ (31) $(106) $(137) State and local 2 (5) (3) (2) 25 23 3 9 12 Foreign - - - - - - 2 - 2 ----- ---- ----- ---- ------ ------ ----- ----- ----- Total $ (46) $ 93 $ 47 $ (3) $ (38) $ (41) $ (26) $ (97) $(123) - --------------------------------------------------------------------------------------------------------
In 1993, the cumulative effect of the change in accounting principle for postemployment benefits included a deferred tax benefit of $40 million (Note 2, page S-8). In 1992, the cumulative effect of the change in accounting principle for other postretirement benefits included a deferred tax benefit of $678 million (Note 11, page S-13). Reconciliation of federal statutory tax rate (35% in 1994 and 1993, and 34% in 1992) to total provisions (credits):
(In millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- Statutory rate applied to income (loss) before tax $ 87 $ (74) $ (134) Remeasurement of deferred income tax assets for statutory rate increase as of January 1, 1993 - (15) - Excess percentage depletion (7) (8) (9) Foreign income taxes after federal income tax benefit - - 2 State income taxes after federal income tax benefit (1) 15 8 Deferred tax benefit of excess outside tax basis in equity affiliate (32) - - Sale of investment in subsidiary - 7 - Federal income tax effect on earnings of foreign subsidiaries (5) (2) (1) Adjustment of prior years' tax (2) 21 2 Adjustment of prior years' valuation allowances - 10 - Other 7 5 9 --------- --------- --------- Total provisions (credits) $ 47 $ (41) $ (123) - --------------------------------------------------------------------------------------------------------
Deferred tax assets and liabilities resulted from the following:
(In millions) December 31 1994 1993 - -------------------------------------------------------------------------------------------------------- Deferred tax assets: Federal tax loss carryforwards (expiring in 2006 through 2009)(a) $ 311 $ 272 State tax loss carryforwards (expiring in 1995 through 2008) 116 92 Minimum tax credit carryforwards 70 86 General business credit carryforwards 30 30 Employee benefits 1,083 1,086 Receivables, payables and debt 107 83 Contingency and other accruals 76 248 Other 33 73 Valuation allowances(a) (130) (204) --------- --------- Total deferred tax assets 1,696 1,766 --------- --------- Deferred tax liabilities: Property, plant and equipment 478 486 Prepaid pensions 502 429 Inventory 17 8 Federal effect of state deferred tax assets 13 12 Other 20 33 --------- --------- Total deferred tax liabilities 1,030 968 --------- --------- Net deferred tax assets $ 666 $ 798 - --------------------------------------------------------------------------------------------------------
(a) The decrease in valuation allowances reflected $52 million related to a previously consolidated subsidiary now accounted for using the equity method, of which $26 million related to federal tax loss carryforwards. The consolidated tax returns of USX for the years 1988 through 1991 are under various stages of audit and administrative review by the IRS. USX believes it has made adequate provision for income taxes and interest which may become payable for years not yet settled. S-14 96 - -------------------------------------------------------------------------------- 13. INTERGROUP TRANSACTIONS PURCHASES - U. S. Steel Group purchases from the Marathon Group totaled $2 million, $10 million and $16 million in 1994, 1993 and 1992, respectively. These transactions were conducted on an arm's length basis. RECEIVABLES FROM THE OTHER GROUPS - These amounts represent receivables for income taxes determined in accordance with the tax allocation policy described in Note 3, page S-9. Tax settlements between the groups are generally made in the year succeeding that in which such amounts are accrued. - -------------------------------------------------------------------------------- 14. LONG-TERM RECEIVABLES AND OTHER INVESTMENTS
(In millions) December 31 1994 1993 - -------------------------------------------------------------------------------------------------------- Receivables due after one year $ 85 $ 90 Forward currency contracts 17 11 Equity method investments 526 522 Cost method companies 3 3 Other 36 70 --------- --------- Total $ 667 $ 696 - --------------------------------------------------------------------------------------------------------
The following financial information summarizes U. S. Steel Group's share in investments accounted for by the equity method:
(In millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- Income data - year: Sales $ 1,449 $ 1,291 $ 1,087 Operating income 105 35 4 Income (loss) before cumulative effect of change in accounting principle 60 (11) (27) Net income (loss) 60 (11) (50) - -------------------------------------------------------------------------------------------------------- Dividends and partnership distributions $ 34 $ 6 $ 2 - -------------------------------------------------------------------------------------------------------- Balance sheet data - December 31: Current assets $ 491 $ 413 Noncurrent assets 785 779 Current liabilities 405 381 Noncurrent liabilities 434 430 - --------------------------------------------------------------------------------------------------------
U. S. Steel Group purchases of transportation services and semi-finished steel from equity affiliates totaled $360 million, $313 million and $273 million in 1994, 1993, and 1992, respectively. At December 31, 1994 and 1993, U. S. Steel Group payables to these affiliates totaled $22 million and $17 million, respectively. U. S. Steel Group sales of steel and raw materials to equity affiliates totaled $680 million, $526 million and $249 million in 1994, 1993, and 1992, respectively. At December 31, 1994 and 1993, U. S. Steel Group receivables from these affiliates was $198 million and $168 million, respectively. Generally, these transactions were conducted under long-term, market-based contractual arrangements. - -------------------------------------------------------------------------------- 15. INVENTORIES
(In millions) December 31 1994 1993 - --------------------------------------------------------------------------------------------------------- Raw materials $ 44 $ 108 Semi-finished products 336 329 Finished products 128 125 Supplies and sundry items 87 67 --------- ---------- Total $ 595 $ 629 - ---------------------------------------------------------------------------------------------------------
At December 31, 1994, and December 31, 1993, the LIFO method accounted for 86% and 89% of total inventory value. Current acquisition costs were estimated to exceed the above inventory values at December 31 by approximately $260 million and $280 million in 1994 and 1993, respectively. Cost of sales was reduced by $13 million in 1994, $11 million in 1993 and $24 million in 1992 as a result of liquidations of LIFO inventories. S-15 97 - -------------------------------------------------------------------------------- 16. LEASES Future minimum commitments for capital leases (including sale-leasebacks accounted for as financings) and for operating leases having remaining noncancelable lease terms in excess of one year are as follows:
Capital Operating (In millions) Leases Leases - -------------------------------------------------------------------------------------------------------- 1995 $ 13 $ 66 1996 13 59 1997 13 45 1998 12 40 1999 11 37 Later years 148 166 Sublease rentals - (5) --------- --------- Total minimum lease payments 210 $ 408 ========= Less imputed interest costs 98 --------- Present value of net minimum lease payments included in long-term debt $ 112 - --------------------------------------------------------------------------------------------------------
Operating lease rental expense:
(In millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- Minimum rental $ 103 $ 106 $ 112 Contingent rental 39 41 35 Sublease rentals (2) (3) (3) --------- --------- --------- Net rental expense $ 140 $ 144 $ 144 - --------------------------------------------------------------------------------------------------------
The U. S. Steel Group leases a wide variety of facilities and equipment under operating leases, including land and building space, office equipment, production facilities and transportation equipment. Contingent rental includes payments based on facility production and operating expense escalation on building space. Most long-term leases include renewal options and, in certain leases, purchase options. In the event of a change in control of USX, as defined in the agreements, or certain other circumstances, lease obligations totaling $64 million may be declared immediately due and payable. - -------------------------------------------------------------------------------- 17. PROPERTY, PLANT AND EQUIPMENT
(In millions) December 31 1994 1993 - --------------------------------------------------------------------------------------------------------- Land and depletable property $ 155 $ 154 Buildings 513 521 Machinery and equipment 7,706 7,845 Leased assets 116 117 --------- ---------- Total 8,490 8,637 Less accumulated depreciation, depletion and amortization 5,954 5,984 --------- ---------- Net $ 2,536 $ 2,653 - ---------------------------------------------------------------------------------------------------------
Amounts included in accumulated depreciation, depletion and amortization for assets acquired under capital leases (including sale-leasebacks accounted for as financings) were $49 million and $41 million at December 31, 1994, and December 31, 1993, respectively. - -------------------------------------------------------------------------------- 18. SALES OF RECEIVABLES ACCOUNTS RECEIVABLE - The U. S. Steel Group has entered into an agreement to sell 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. Collections on sold accounts receivable will be forwarded to the buyers at the end of the agreement in 1995, in the event of earlier contract termination or if a sufficient quantity of eligible accounts receivable is not available to reinvest in for the buyers. The balance of sold accounts receivable averaged $337 million, $333 million and $310 million for the years 1994, 1993 and 1992, respectively. At December 31, 1994, the balance of sold accounts receivable that had not been collected was $350 million. Buyers have collection rights to recover payments from an amount of outstanding receivables equal to 115% of the outstanding receivables purchased on a nonrecourse basis; such overcollateralization cannot exceed $53 million. The U. S. Steel Group does not generally require collateral for accounts receivable, but significantly reduces credit risk through credit extension and collection policies, which include analyzing the financial condition of potential customers, establishing credit limits, monitoring payments and aggressively pursuing delinquent accounts. 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. S-16 98 LOANS RECEIVABLE - Prior to 1993, USX Credit, a division of USX, sold certain of its loans receivable subject to limited recourse. USX Credit continues to collect payments from the loans and transfer to the buyers principal collected plus yield based on defined short-term market rates. In 1994, 1993 and 1992, USX Credit net repurchases of loans receivable totaled $38 million, $50 million and $24 million, respectively. At December 31, 1994, the balance of sold loans receivable subject to recourse was $131 million. USX Credit is not actively seeking new loans at this time. USX Credit is subject to market risk through fluctuations in short-term market rates on sold loans which pay fixed interest rates. USX Credit significantly reduces credit risk through a credit policy, which requires that loans be secured by the real property or equipment financed, often with additional security such as letters of credit, personal guarantees and committed long-term financing takeouts. Also, USX Credit diversifies its portfolio as to types and terms of loans, borrowers, loan sizes, sources of business and types and locations of collateral. As of December 31, 1994, and December 31, 1993, USX Credit had outstanding loan commitments of $26 million and $29 million, respectively. 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. Estimated credit losses under the limited recourse provisions for both accounts receivable and loans receivable are recognized when the receivables are sold consistent with bad debt experience. Recognized liabilities for future recourse obligations of sold receivables were $3 million and $3 million at December 31, 1994, and December 31, 1993, respectively. - -------------------------------------------------------------------------------- 19. STOCKHOLDERS' EQUITY
(In millions, except per share data) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- PREFERRED STOCK: Balance at beginning of year $ 32 $ 25 $ 25 Issued(a) - 7 - --------- --------- --------- Balance at end of year $ 32 $ 32 $ 25 - -------------------------------------------------------------------------------------------------------- COMMON STOCKHOLDERS' EQUITY: Balance at beginning of year $ 585 $ 222 $ 1,667 Net income (loss) 201 (238) (1,606) Steel Stock issued 225 370 216 Preferred stock issued(a) - 329 - Dividends on preferred stock (25) (21) (3) Dividends on Steel Stock (per share: $1.00 in 1994, 1993 and 1992) (75) (65) (55) Foreign currency translation adjustments (Note 22, page S-18) (2) 1 2 Deferred compensation adjustments - 1 1 Minimum pension liability adjustment (Note 10, page S-12) 3 (14) - Other 1 - - --------- --------- --------- Balance at end of year $ 913 $ 585 $ 222 - -------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 945 $ 617 $ 247 - --------------------------------------------------------------------------------------------------------
(a) For details of 6.50% Cumulative Convertible Preferred Stock, which was sold in 1993 for net proceeds of $336 million and attributed entirely to the U.S. Steel Group, see Note 18, page U-22 to the USX consolidated financial statements. - -------------------------------------------------------------------------------- 20. DIVIDENDS In accordance with the USX Certificate of Incorporation, dividends on the Steel Stock, Marathon Stock and Delhi Stock are limited to the legally available funds of USX. Net losses of any Group, as well as dividends and distributions on any class of USX Common Stock or series of preferred stock and repurchases of any class of USX Common Stock or series of preferred stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on all classes of Common Stock. Subject to this limitation, the Board of Directors intends to declare and pay dividends on the Steel Stock based on the financial condition and results of operations of the U. S. Steel Group, although it has no obligation under Delaware law to do so. In making its dividend decisions with respect to Steel Stock, the Board of Directors considers, among other things, the long-term earnings and cash flow capabilities of the U. S. Steel Group as well as the dividend policies of similar publicly traded steel companies. Dividends on the Steel Stock are further limited to the Available Steel Dividend Amount. At December 31, 1994, the Available Steel Dividend Amount was at least $2.170 billion. The Available Steel Dividend Amount will be increased or decreased, as appropriate, to reflect U. S. Steel Group net income, dividends, repurchases or issuances with respect to the Steel Stock and preferred stock attributed to the U. S. Steel Group and certain other items. S-17 99 - -------------------------------------------------------------------------------- 21. NET INCOME PER COMMON SHARE The method of calculating net income (loss) per share for the Steel Stock, Marathon Stock and Delhi Stock reflects the USX Board of Directors' 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 to the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. Primary net income (loss) per share is calculated by adjusting net income (loss) for dividend requirements of preferred stock and is based on the weighted average number of common shares outstanding plus common stock equivalents, provided they are not antidilutive. Common stock equivalents result from assumed exercise of stock options and surrender of stock appreciation rights associated with 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 and surrender of stock appreciation rights, provided, in each case, the effect is not antidilutive. - -------------------------------------------------------------------------------- 22. FOREIGN CURRENCY TRANSLATION Exchange adjustments resulting from foreign currency transactions generally are recognized in income, whereas adjustments resulting from translation of financial statements are reflected as a separate component of stockholders' equity. For 1994, 1993 and 1992, respectively, the aggregate foreign currency transaction gains (losses) included in determining net income were $1 million, $(4) million and $(2) million. An analysis of changes in cumulative foreign currency translation adjustments follows:
(In millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- Cumulative foreign currency translation adjustments at January 1 $ (1) $ (2) $ (5) Aggregate adjustments for the year: Foreign currency translation adjustments (2) - (1) Amount related to disposition of investments - 1 4 -------- -------- -------- Cumulative foreign currency adjustments at December 31 $ (3) $ (1) $ (2) - --------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 23. STOCK PLANS AND STOCKHOLDER RIGHTS PLAN USX Stock Plans and Stockholder Rights Plan are discussed in Note 19, page U-23, and Note 23, page U-25, respectively, to the USX consolidated financial statements. - -------------------------------------------------------------------------------- 24. DERIVATIVE FINANCIAL INSTRUMENTS The U. S. Steel Group uses derivative financial instruments, such as commodity swaps, to hedge the cost of natural gas used in steel operations. USX has used forward currency contracts to manage currency risks related to debt denominated in Swiss francs and European currency units, a portion of which has been attributed to the U. S. Steel Group. The U. S. Steel Group remains at risk for possible changes in the market value of the hedging instrument; however, such risk should be mitigated by price changes in the underlying hedged item. The U. S. Steel Group is also exposed to credit risk in the event of nonperformance by counterparties. The credit worthiness of counterparties is subject to continuing review, including the use of master netting agreements to the extent practical, and full performance is anticipated. S-18 100 The following table sets forth quantitative information by class of derivative financial instrument:
FAIR CARRYING RECORDED VALUE AMOUNT DEFERRED AGGREGATE ASSETS ASSETS GAIN OR CONTRACT (In millions) (LIABILITIES)(a) (LIABILITIES) (LOSS) VALUES(b) - --------------------------------------------------------------------------------------------------------- DECEMBER 31, 1994: OTC commodity swaps(c) $ (10) $ - $ - $ 79 Forward currency contracts: - receivable $ 21 $ 20 $ - $ 53 - payable (1) (1) (1) 9 ------ ------ ------- ------ Total currencies $ 20 $ 19 $ (1) $ 62 - --------------------------------------------------------------------------------------------------------- December 31, 1993: OTC commodity swaps $ (2) $ - $ - $ 51 Forward currency contracts: - receivable $ 12 $ 11 $ - $ 52 - payable (3) (2) (2) 12 ------ ------ ------- ------ Total currencies $ 9 $ 9 $ (2) $ 64 - ---------------------------------------------------------------------------------------------------------
(a) The fair value amounts are based on exchange-traded index prices and dealer quotes. (b) Contract or notional amounts do not quantify risk exposure, but are used in the calculation of cash settlements under the contracts. (c) The OTC swap arrangements vary in duration with certain contracts extending up to one year. - -------------------------------------------------------------------------------- 25. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. As described in Note 3, page S-9, the U. S. Steel Group's specifically attributed financial instruments and the U. S. Steel Group's portion of USX's financial instruments attributed to all groups are as follows:
1994 1993 ----------------- ------------------- CARRYING FAIR Carrying Fair (In millions) December 31 AMOUNT VALUE Amount Value - -------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS: Cash and cash equivalents $ 20 $ 20 $ 79 $ 79 Receivables 668 668 583 583 Long-term receivables and other investments 102 101 122 123 -------- -------- -------- -------- Total financial assets $ 790 $ 789 $ 784 $ 785 ======== ======== ======== ======== FINANCIAL LIABILITIES: Accounts payable $ 678 $ 678 $ 1,048 $ 1,048 Accrued interest 31 31 33 33 Long-term debt (including amounts due within one year) 1,341 1,298 1,445 1,485 -------- -------- -------- -------- Total financial liabilities $ 2,050 $ 2,007 $ 2,526 $ 2,566 - --------------------------------------------------------------------------------------------------------
Fair value of financial instruments classified as current assets or liabilities approximate carrying value due to the short-term maturity of the instruments. Fair value of long-term receivables and other investments was based on discounted cash flows or other specific instrument analysis. Fair value of long-term debt instruments was based on market prices where available or current borrowing rates available for financings with similar terms and maturities. In addition to certain derivative financial instruments disclosed in Note 24, page S-18, the U. S. Steel Group's unrecognized financial instruments consist of receivables sold subject to limited recourse, commitments to extend credit and financial guarantees. It is not practicable to estimate the fair value of these forms of financial instrument obligations because there are no quoted market prices for transactions which are similar in nature. For details relating to sales of receivables and commitments to extend credit see Note 18, page S-16. For details relating to financial guarantees see Note 26, page S-20. S-19 101 - -------------------------------------------------------------------------------- 26. CONTINGENCIES AND COMMITMENTS USX is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments relating to the 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. LEGAL PROCEEDINGS - B&LE litigation In 1994, USX paid $367 million to satisfy substantially all judgments against the B&LE in the Lower Lake Erie Iron Ore Antitrust Litigation. Two remaining plaintiffs in this case have had their damage claims remanded for retrial. A new trial may result in awards more or less than the original asserted claims of $8 million and would be subject to trebling. In a separate lawsuit brought by Armco Steel, settlement was reached in 1994 with immaterial financial impact. Pickering litigation In 1992, the United States District Court for the District of Utah Central Division issued a Memorandum Opinion and Order in Pickering v. USX relating to pension and compensation claims by approximately 1,900 employees of USX's former Geneva (Utah) Works. Although the court dismissed a number of the claims by the plaintiffs, it found that USX had violated the Employee Retirement Income Security Act by interfering with the accrual of pension benefits of certain employees and amending a benefit plan to reduce the accrual of future benefits without proper notice to plan participants. Further proceedings were held to determine damages for a sample group and, pending the court's determinations, USX may appeal. Plaintiffs' counsel has been reported as estimating plaintiffs' anticipated recovery to be in excess of $100 million. USX believes actual damages will be substantially less than plaintiffs' estimates. In 1994, USX entered into settlement agreements with 227 plaintiffs providing for releases of liability against USX and the aggregate payment of approximately $1 million by USX. ENVIRONMENTAL MATTERS - 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. Accrued liabilities for remediation totaled $141 million and $151 million at December 31, 1994 and December 31, 1993, 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 1994 and 1993, such capital expenditures totaled $57 million and $53 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 - Guarantees by USX of the liabilities of affiliated entities of the U. S. Steel Group totaled $171 million at December 31, 1994, and $209 million at December 31, 1993. 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 December 31, 1994, the largest guarantee for a single affiliate was $87 million. COMMITMENTS - At December 31, 1994, and December 31, 1993, contract commitments for the U. S. Steel Group's capital expenditures for property, plant and equipment totaled $125 million and $105 million, respectively. USX has entered into a 15-year take-or-pay arrangement which requires the U. S. Steel Group to accept pulverized coal each month or pay a minimum monthly charge. In 1994 and 1993, such charges for deliveries of pulverized coal totaled $24 and $14 million (deliveries began in 1993), respectively. In the future, the U. S. Steel Group will be obligated to make minimum payments of approximately $16 million per year. If USX elects to terminate the contract early, a maximum termination payment of $126 million, which declines over the duration of the agreement, may be required. The U. S. Steel Group is a party to a transportation agreement with Transtar for Great Lakes shipments of raw materials required by the U. S. Steel Group. The agreement cannot be canceled until 1999 and requires the U. S. Steel Group to pay, at a minimum, Transtar's annual fixed costs related to the agreement, including lease/charter costs, depreciation of owned vessels, dry dock fees and other administrative costs. Total transportation costs under the agreement were $70 million in 1994 and $68 million in 1993, including fixed costs of $21 million in each year. The fixed costs are expected to continue at approximately the same level over the duration of the agreement. S-20 102 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1994 1993 ----------------------------------------------- --------------------------------------------- (In millions, except per share data) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. - ----------------------------------------------------------------------------------------------------------------------------- Sales $ 1,643 $ 1,505 $1,534 $ 1,384 $1,548 $1,429 $ 1,427 $1,208 Operating income(loss) 143 106 88 (24) 137 66 (387) 35 Operating costs includes: B&LE litigation charge (credit) - - - - (96) - 438 - Restructuring charges - - - - 42 - - - Total income (loss) before cumulative effect of change in accounting principle 90 90 56 (35) 124 33 (336) 10 NET INCOME (LOSS) 90 90 56 (35) 124 33 (336) (59) - ----------------------------------------------------------------------------------------------------------------------------- STEEL STOCK DATA: Total income (loss) before cumulative effect of change in accounting principle applicable to Steel Stock $ 84 $ 84 $ 49 $ (41) $ 119 $ 26 $ (343) $ 8 - Per share(a): primary 1.11 1.11 .65 (.56) 1.67 .41 (5.71) .13 fully diluted 1.05 1.05 .64 (.56) 1.53 .41 (5.71) .13 Dividends paid per share .25 .25 .25 .25 .25 .25 .25 .25 Price range of Steel Stock(b) - Low 32-7/8 32-7/8 30-1/4 36-1/8 30-3/8 27-1/2 35-1/2 31-1/2 - High 42-3/8 43 38-1/2 45-5/8 43-3/8 40-3/4 46 41-1/2 - -----------------------------------------------------------------------------------------------------------------------------
(a) Primary and fully diluted earnings per share are computed independently for each of the quarters presented. Therefore the sum of the quarterly earnings per share in 1994 and 1993 does not equal the total computed for the year due primarily to the effect of the 6.50% Convertible Preferred Stock on the quarterly calculations during 1994, and stock transactions which occurred during 1993. (b) Composite tape. PRINCIPAL UNCONSOLIDATED AFFILIATES (UNAUDITED)
Company Country % Ownership(a) Activity - --------------------------------------------------------------------------------------------------------------------------------- Double Eagle Steel Coating Company United States 50% Steel Processing National-Oilwell United States 50% Oilwell Equipment, Supplies PRO-TEC Coating Company United States 50% Steel Processing RMI Titanium Company United States 54% Titanium metal products Transtar, Inc. United States 46% Transportation USS/Kobe Steel Company United States 50% Steel Products USS-POSCO Industries United States 50% Steel Processing Worthington Specialty Processing United States 50% Steel Processing - ---------------------------------------------------------------------------------------------------------------------------------
(a) Economic interest as of December 31, 1994. SUPPLEMENTARY INFORMATION ON MINERAL RESERVES (UNAUDITED) See the USX consolidated financial statements for Supplementary Information on Mineral Reserves relating to the U. S. Steel Group, page U-30. S-21 103 FIVE-YEAR OPERATING SUMMARY
(Thousands of net tons, unless otherwise noted) 1994 1993 1992 1991 1990 - --------------------------------------------------------------------------------------------------------- RAW STEEL PRODUCTION Gary, IN 6,768 6,624 5,969 5,817 6,740 Mon Valley, PA 2,669 2,507 2,276 2,088 2,607 Fairfield, AL 2,240 2,203 2,146 1,969 1,937 All other plants(a) - - 44 648 2,335 ----------------------------------------------------- Total Raw Steel Production 11,677 11,334 10,435 10,522 13,619 Total Cast Production 11,606 11,295 8,695 7,088 7,228 Continuous cast as % of total production 99.4 99.7 83.3 67.4 53.1 - --------------------------------------------------------------------------------------------------------- RAW STEEL CAPABILITY (average) Continuous cast 11,990 11,850 9,904 8,057 6,950 Ingots - - 2,240 6,919 9,451 ----------------------------------------------------- Total 11,990 11,850 12,144 14,976 16,401 Total production as % of total capability 97.4 95.6 85.9 70.3 83.0 Continuous cast as % of total capability 100.0 100.0 81.6 53.8 42.4 - --------------------------------------------------------------------------------------------------------- HOT METAL PRODUCTION 10,328 9,972 9,270 8,941 11,038 - --------------------------------------------------------------------------------------------------------- COKE PRODUCTION 6,777 6,425 5,917 5,091 6,663 - --------------------------------------------------------------------------------------------------------- IRON ORE PELLETS - MINNTAC, MN Production as % of capacity 90 90 83 84 85 Shipments 16,174 15,911 14,822 14,897 14,922 - --------------------------------------------------------------------------------------------------------- COAL SHIPMENTS(b) 7,698 10,980 12,164 10,020 11,325 - --------------------------------------------------------------------------------------------------------- STEEL SHIPMENTS BY PRODUCT Sheet and tin mill products 8,138 7,717 6,803 6,508 7,709 Plate, structural and other steel mill products(c) 1,748 1,621 1,473 1,721 2,476 Tubular products 682 631 578 617 854 ----------------------------------------------------- Total 10,568 9,969 8,854 8,846 11,039 Total as % of domestic steel industry 11.1 11.3 10.8 11.2 13.0 - --------------------------------------------------------------------------------------------------------- STEEL SHIPMENTS BY MARKET Steel service centers 2,795 2,837 2,680 2,364 3,425 Further conversion 2,390 2,248 1,565 1,354 1,657 Transportation 2,023 1,805 1,553 1,293 1,502 Containers 995 840 715 754 895 Construction 738 669 598 840 1,134 Export 375 359 629 1,314 926 All other 1,252 1,211 1,114 927 1,500 ----------------------------------------------------- Total 10,568 9,969 8,854 8,846 11,039 - ---------------------------------------------------------------------------------------------------------
(a) In July 1991, U. S. Steel closed all iron and steel producing operations at Fairless (PA) Works. In April 1992, U. S. Steel closed South (IL) Works. (b) In June 1993, U. S. Steel sold the Cumberland coal mine. In March 1994, U. S. Steel closed the Maple Creek coal mine. (c) U. S. Steel ceased production of structural products when South Works closed in April 1992. S-22 104 THE STEEL GROUP Management's Discussion and Analysis 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, fencing products and leasing and financing activities. Management's Discussion and Analysis should be read in conjunction with the U. S. Steel Group's Financial Statements and Notes to Financial Statements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INCOME THE U. S. STEEL GROUP'S SALES increased by $454 million in 1994 from 1993, following an increase of $693 million in 1993 from 1992. The increase in 1994 primarily reflected an increase in steel shipment volumes of approximately 0.6 million tons, higher average steel prices and increased commercial shipments of coke, partially offset by lower commercial shipments of coal. The increase in 1993 relative to 1992 primarily reflected an increase in steel shipment volumes of approximately 1.1 million tons, higher average steel prices and increased commercial shipments of taconite pellets and coke. THE U. S. STEEL GROUP REPORTED OPERATING INCOME of $313 million in 1994, compared with an operating loss of $149 million in 1993 and an operating loss of $241 million in 1992. The 1993 operating loss included a $342 million charge for the Lower Lake Erie Iron Ore Antitrust Litigation against the Bessemer & Lake Erie Railroad ("B&LE litigation") (which also resulted in $164 million of interest costs) (see Note 5 to the U. S. Steel Group Financial Statements) and restructuring charges of $42 million related to the planned closure of the Maple Creek coal mine and preparation plant. Excluding these items, operating results in 1994 improved by $78 million over 1993 primarily due to higher steel prices and shipment volumes. These were partially offset by higher pension, labor and scrap metal costs, the absence of a $39 million favorable effect from the utilization of funds from previously established insurance reserves to pay for certain employee insurance benefits, the adverse effects of utility curtailments and other severe winter weather complications, a caster fire at Mon Valley Works and planned outages for modernization of the Gary Works hot strip mill and pickle line. The operating loss in 1992 included a charge of $10 million for completion of the portion of the 1991 restructuring plan related to steel facilities. Excluding the effect of this item and the 1993 items previously discussed, operating results increased by $466 million from 1992 to 1993. The increase in 1993 was primarily due to higher steel shipment volumes and prices, improved operating efficiencies and lower accruals for environmental and legal contingencies, other than the B&LE litigation mentioned above. In addition, 1993 results benefited from a $39 million favorable effect from the utilization of funds from previously established insurance reserves, as discussed above, lower provisions for loan losses by USX Credit and the absence of a 1992 unfavorable effect of $28 million resulting from market valuation provisions for foreclosed real estate assets. These were partially offset by higher hourly steel labor costs, unfavorable effects associated with pension and other employee benefits, lower results from coal operations and a $21 million increase in operating costs related to the adoption of Statement of Financial Accounting Standards No. 112 - Employers' Accounting for Post Employment Benefits ("SFAS No. 112"). OTHER INCOME was $75 million in 1994, compared with $210 million in 1993 and $5 million in 1992. Results in 1993 included higher gains from the disposal of assets, including the sale of the Cumberland coal mine, the realization of a $70 million deferred gain resulting from the collection of a subordinated note related to the 1988 sale of Transtar, Inc. ("Transtar") (which also resulted in $37 million of interest income) and the sale of an investment in an insurance S-23 105 Management's Discussion and Analysis continued company. Excluding these items, results in 1994 improved by $50 million over 1993 mainly due to increased income from equity affiliates. INTEREST AND OTHER FINANCIAL INCOME was $12 million in 1994, compared with $59 million in 1993 and $18 million in 1992. The 1993 amount included $37 million of interest income resulting from the collection of the Transtar note, as previously mentioned. INTEREST AND OTHER FINANCIAL COSTS were $152 million in 1994, compared with $330 million in 1993 and $176 million in 1992. The 1993 amount included $164 million of interest expense related to the B&LE litigation. THE PROVISION FOR ESTIMATED INCOME TAXES in 1994 was $47 million, compared with credits of $41 million in 1993 and $123 million in 1992. The provision for 1994 included a one-time $32 million deferred tax benefit related to an excess of tax over book basis in an equity affiliate (see Note 12 to the U. S. Steel Group Financial Statements). The credit for 1993 included a $15 million favorable effect associated with an increase in the federal income tax rate from 34% to 35%, reflecting remeasurement of deferred federal income tax assets as of January 1, 1993, offset by adjustments for prior years' Internal Revenue Service examinations. NET INCOME in 1994 was $201 million, compared with a net loss of $238 million in 1993 and a net loss of $1.606 billion in 1992. Excluding the unfavorable cumulative effect of changes in accounting principles, which totaled $69 million and $1.335 billion in 1993 and 1992, respectively, net income increased $370 million in 1994 from 1993, compared with an increase of $102 million in 1993 from 1992. The changes in net income primarily reflect the factors discussed above. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION CURRENT ASSETS at year-end 1994 increased $218 million from year-end 1993 primarily due to an increase in deferred income tax benefits and trade receivables partially offset by a decrease in cash and cash equivalent balances. The U. S. Steel Group financial statements reflect current and deferred tax assets and liabilities that relate to tax attributes utilized and recognized on a consolidated basis and attributed in accordance with the USX Corporation ("USX") group tax allocation policy. See Notes 3 and 12 to the U. S. Steel Group Financial Statements. CURRENT LIABILITIES in 1994 decreased $356 million from 1993 primarily due to a decrease in accounts payable that principally resulted from payments of $367 million in 1994 relative to the B&LE litigation. TOTAL LONG-TERM DEBT AND NOTES PAYABLE at December 31, 1994 was $1.453 billion. The $109 million decrease from year-end 1993 reflected, in part, a reduction of cash and cash equivalent balances. An additional decrease resulted from the U. S. Steel Group's adoption of the equity method of accounting for RMI Titanium Company. The amount of total long-term debt, as well as the amount shown as notes payable, principally represented the U. S. Steel Group's portion of USX debt attributed to all three groups. Virtually all of the debt is a direct obligation of, or is guaranteed by, USX. For a discussion of financial obligations and the issuance of Steel Stock, see Management's Discussion and Analysis of Cash Flows below. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CASH FLOWS THE U. S. STEEL GROUP'S NET CASH PROVIDED FROM OPERATING ACTIVITIES in 1994 was $44 million, compared with $86 million in 1993. The 1994 and 1993 periods reflect payments of $367 million and $219 million, respectively, to satisfy substantially all judgments from the B&LE litigation. In addition, the 1993 period was negatively affected by payments of $95 million related S-24 106 Management's Discussion and Analysis continued to the settlement of the Energy Buyers litigation offset by a $103 million favorable effect from the use of available funds from previously established insurance reserves to pay for certain active and retired employee insurance benefits. Excluding these items, net cash provided from operating activities improved by $114 million in 1994. The U. S. Steel Group's net cash provided from operating activities in 1993, excluding the previously mentioned items, was $297 million compared with net cash used in operating activities of $89 million in 1992. The increase mainly reflected improved profitability. CAPITAL EXPENDITURES totaled $248 million in 1994, compared with $198 million in 1993 and $298 million in 1992. Spending over this period included completion of the continuous caster at Mon Valley Works and modernization of the hot strip mill and electrogalvanizing line at Gary Works. Increased spending in 1994 compared with 1993 reflected modernization of the pickle line at Gary Works, replacement of a coke oven gas transmission line from Clairton to Mon Valley and the preparation for a blast furnace reline at Mon Valley Works. Contract commitments for capital expenditures at year-end 1994 were $125 million, compared with $105 million at year-end 1993. Capital expenditures for 1995 are expected to be approximately $300 million and will include spending on a degasser at Mon Valley Works, installation of a granulated coal injection facility at Fairfield Works' blast furnace as well as additional environmental expenditures. Capital expenditures in 1996 and 1997 are currently expected to remain at about the same level as in 1995. CASH FROM DISPOSAL OF ASSETS totaled $19 million in 1994, compared with $291 million in 1993 and $39 million in 1992. The 1993 amount primarily reflected the realization of proceeds from a subordinated note related to the 1988 sale of Transtar and the sales of the Cumberland coal mine and investments in an insurance company and a foreign manganese mining affiliate. FINANCIAL OBLIGATIONS decreased by $20 million in 1994, compared with a decrease of $730 million in 1993 and an increase of $203 million in 1992. The decrease in 1994 primarily reflected the effects of proceeds from the issuance of USX - U. S. Steel Group Common Stock ("Steel Stock") and a reduction of cash and cash equivalent balances, partially offset by the net effects of cash from operating, investing and other financing activities. These 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. For a discussion of USX financing activities attributed to all three groups, see USX Consolidated Management's Discussion and Analysis of Cash Flows. PREFERRED STOCK ISSUED totaled $336 million in 1993. This amount was due to the sale of 6,900,000 shares of 6.50% Convertible Preferred ($50.00 liquidation preference per share) to the public for net proceeds of $336 million which were reflected in their entirety in the U. S. Steel Group financial statements. The 6.50% Convertible Preferred is convertible at any time into shares of Steel Stock at a conversion price of $46.125 per share of Steel Stock. STEEL STOCK ISSUED totaled $221 million in 1994, $366 million in 1993 and $212 million in 1992. This included public offerings of 5,000,000 shares in 1994 for net proceeds of $201 million, 10,000,000 shares in 1993 for net proceeds of $350 million and 8,050,000 shares in 1992 for net proceeds of $198 million. These amounts were reflected in their entirety in the U. S. Steel Group financial statements. PENSION PLAN ACTIVITY In accordance with USX's long-term funding practice, which is designed to maintain an appropriate funded status, USX will resume funding the U. S. Steel Group's principal pension plan in amounts of approximately $100 million per year commencing with the 1994 plan year. The funding for the 1994 plan year and possibly the 1995 plan year will take place in 1995. S-25 107 Management's Discussion and Analysis continued RATING AGENCY ACTIVITY In September 1993, Standard & Poor's Corp. lowered its ratings on USX's and Marathon Oil Company's ("Marathon") senior debt to below investment grade (from BBB- to BB+) and on USX's subordinated debt, preferred stock and commercial paper. In October 1993, Moody's Investors Services, Inc. ("Moody's") confirmed its Baa3 investment grade ratings on USX's and Marathon's senior debt. Moody's also confirmed its ratings on USX's subordinated debt and commercial paper, but lowered its ratings on USX's preferred stock from ba1 to ba2. The ratings described above remain unchanged. HEDGING ACTIVITY The U. S. Steel Group engages in hedging activities in the normal course of its business. Commodity swaps are used to hedge exposure to price fluctuations relevant to the purchase of natural gas. While hedging activities are generally used to reduce risks from unfavorable price movements, they also may limit the opportunity to benefit from favorable movements. The U. S. Steel Group's hedging activities have not been significant in relation to its overall business activity. Based on risk assessment procedures and internal controls in place, management believes that its use of hedging instruments will not have a material adverse effect on the financial position, liquidity or results of operations of the U. S. Steel Group. See Notes 2 and 24 to the U. S. Steel Group Financial Statements. LIQUIDITY For discussion of USX's liquidity and capital resources, see USX Consolidated Management's Discussion and Analysis of Cash Flows. MANAGEMENT'S DISCUSSION AND ANALYSIS OF ENVIRONMENTAL MATTERS, LITIGATION AND CONTINGENCIES The U. S. Steel Group has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. In recent years, these expenditures have been mainly for process changes in order to meet Clean Air Act obligations, although ongoing compliance costs have also been significant. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the U. S. Steel Group's products and services, operating results will be adversely affected. The U. S. Steel Group believes that all of its domestic competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities and its production methods. The U. S. Steel Group's environmental expenditures for the last three years were:
(Dollars in millions) 1994 1993 1992 - --------------------------------------------------------------------------------------------------------- Capital $ 57 $ 53 $ 52 Compliance(a) Operating & Maintenance 202 168 157 Remediation(b) 32 19 11 ------- ------- ------- Total U. S. Steel Group $ 291 $ 240 $ 220 - ---------------------------------------------------------------------------------------------------------
(a) Based on U.S. Department of Commerce survey guidelines. (b) These amounts do not include noncash provisions recorded for environmental remediation, but include spending charged against such reserves. The U. S. Steel Group's environmental capital expenditures accounted for 23%, 27% and 17% of total capital expenditures in 1994, 1993 and 1992, respectively. S-26 108 Management's Discussion and Analysis continued Compliance expenditures represented 4% of the U. S. Steel Group's total operating costs in 1994, and 3% in both 1993 and 1992. Remediation spending during 1992 to 1994 was mainly related to dismantlement and restoration activities at former and present operating locations. USX has been notified that it is a potential responsible party ("PRP") at 28 waste sites related to the U. S. Steel Group under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of December 31, 1994. In addition, there are 24 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. There are also 44 additional sites related to the U. S. Steel Group where remediation is being sought under other environmental statutes, both federal and state. At many of these sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. The 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. See Note 26 to the U. S. Steel Group Financial Statements. New or expanded environmental requirements, which could increase the U. S. Steel Group's environmental costs, may arise in the future. USX intends to comply with all legal requirements regarding the environment, but since many of them are not fixed or presently determinable (even under existing legislation) and may be affected by future legislation, it is not possible to accurately predict the ultimate cost of compliance, including remediation costs which may be incurred and penalties which may be imposed. However, based on presently available information, and existing laws and regulations as currently implemented, the U. S. Steel Group does not anticipate that environmental compliance expenditures (including operating and maintenance and remediation) will materially increase in 1995. The U. S. Steel Group's capital expenditures for environmental controls are expected to be approximately $60 million in 1995. These amounts will primarily be spent on projects at Gary Works. Predictions beyond 1995 can only be broad-based estimates which have varied, and will continue to vary, due to the ongoing evolution of specific regulatory requirements, the possible imposition of more stringent requirements and the availability of new technologies, among other matters. Based upon currently identified projects, the U. S. Steel Group anticipates that environmental capital expenditures will be approximately $70 million in 1996; however, actual expenditures may vary as the number and scope of environmental projects are revised as a result of improved technology or changes in regulatory requirements and could increase if additional projects are identified or additional requirements are imposed. USX is the subject of, or 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 26 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS The U. S. Steel Group reported operating income of $313 million in 1994, compared with operating losses of $149 million in 1993 and $241 million in 1992. The operating loss for 1993 included a $342 million charge for the B&LE litigation. The 1993 and 1992 operating losses S-27 109 Management's Discussion and Analysis continued included restructuring charges of $42 million and $10 million, respectively, which are discussed below.
OPERATING INCOME (LOSS) (Dollars in millions) 1994 1993* 1992* - --------------------------------------------------------------------------------------------------------- Steel and Related Businesses $ 239 $ 123 $ (140) Administrative and Other Businesses 74 (230) (91) Restructuring - (42) (10) ------ ------ ------ Total $ 313 $ (149) $ (241) - ---------------------------------------------------------------------------------------------------------
* Certain reclassifications have been made to conform to 1994 classifications. STEEL AND RELATED BUSINESSES recorded operating income of $239 million in 1994, compared with operating income of $123 million in 1993 and an operating loss of $140 million in 1992. Results in 1993 benefited from a $39 million favorable effect from the utilization of funds from previously established insurance reserves to pay for certain employee insurance benefits. Excluding this item, operating results for 1994 improved by $155 million over 1993 primarily due to higher steel shipment volumes and prices. These positive factors were partially offset by higher pension, labor and scrap metal costs, the adverse effects of utility curtailments and other severe winter weather complications, a caster fire at the Mon Valley Works and planned outages for modernization of the Gary Works hot strip mill and pickle line. The improvement in 1993 compared with 1992, excluding the item mentioned above, was mainly due to higher steel shipment volumes and prices, improved operating efficiencies and lower accruals for environmental and legal contingencies. These benefits were partially offset by higher hourly steel labor costs, unfavorable effects associated with pension and other employee benefits, including higher costs following the adoption of SFAS No. 112 and lower results from coal operations. Average realized steel prices improved $19 per ton in 1994, compared with an $8 per ton improvement in 1993. Steel shipments were 10.6 million tons in 1994, compared with 10.0 million tons in 1993 and 8.8 million tons in 1992. U. S. Steel Group shipments comprised approximately 11% of the domestic steel market in 1994. Exports accounted for approximately 4% of U. S. Steel Group shipments in 1994, compared with 4% in 1993 and 7% in 1992. Raw steel production was 11.7 million tons in 1994, compared with 11.3 million tons in 1993 and 10.4 million tons in 1992. Raw steel produced was nearly 100% continuous cast in 1994 and 1993 versus 83% in 1992. U. S. Steel completed its continuous cast modernization program with the start-up of the Mon Valley Works continuous caster in August 1992. Raw steel production averaged 97% of capability in 1994, compared with 96% of capability in 1993 and 86% of capability in 1992. As a result of improvements in operating efficiency, U. S. Steel has increased its stated annual raw steel production capability by 0.5 million tons to 12.5 million tons for 1995. Oil country tubular goods ("OCTG") accounted for 3.6% of U. S. Steel Group shipments in 1994. On June 30, 1994, in conjunction with six other domestic producers, USX filed antidumping and countervailing duty cases with the U.S. Department of Commerce ("Commerce") and the International Trade Commission ("ITC") asserting that seven foreign nations have engaged in unfair trade practices with respect to the export of OCTG. On August 15, 1994, the ITC unanimously issued a preliminary ruling that there is a reasonable indication that domestic OCTG producers may have been injured by illegal subsidies and dumping. By the end of January 1995, Commerce had issued its preliminary determinations of the applicable margins of dumping and subsidies in the OCTG cases. Total margins ranging from 44.2% to 51.2% were found against producers in Austria, Italy and Japan. The total margin against Union Steel of Korea was 12.17% and against producers in Argentina was 0.61%. No margins were found for producers in Mexico S-28 110 Management's Discussion and Analysis continued and Spain as well as for Hyundai of Korea. Commerce is scheduled to make final determinations of applicable margins in June, and the ITC is scheduled to make final determinations of injury to the domestic industry in July. USX will file additional antidumping and countervailing duty petitions if unfairly traded imports adversely impact, or threaten to adversely impact, the results of the U. S. Steel Group. For additional information regarding levels of imported steel, see Outlook below. The U. S. Steel Group depreciates steel assets by modifying straight-line depreciation based on the level of production. Depreciation charges for 1994, 1993 and 1992 were 102%,100% and 91%, respectively, of straight-line depreciation based on production levels for each of the years. The U. S. Steel Group does not expect that depreciation charges in 1995 will be materially impacted as a result of the increase in raw steel production capability discussed above. See Note 2 to the U. S. Steel Group Financial Statements. The U. S. Steel Group entered into a five and one-half year contract with the United Steelworkers of America, effective February 1, 1994, covering approximately 15,000 employees. The agreement will result in higher labor and benefit costs for the U. S. Steel Group each year throughout the term of the agreement. The agreement also provided for the establishment of a Voluntary Employee Benefit Association Trust to prefund health care and life insurance benefits for retirees covered under the agreement. A payment of $25 million was made in the first quarter of 1995 relative to the 1994 contract year, with additional funding of $10 million expected later in 1995 and $10 million per year thereafter for the duration of the contract. The funding of the trust will have no immediate effect on income of the U. S. Steel Group. Management believes that this agreement is competitive with labor agreements reached by U. S. Steel's major domestic integrated competitors and thus does not believe that U. S. Steel's competitive position with regard to such other competitors will be materially affected by this agreement. The U. S. Steel Group has certain profit sharing plans in place that will require payments of approximately $10 million to be made in 1995 based on 1994 results. Improved financial results in 1995 could increase costs associated with these plans, with payments required in 1996. In October 1994, the U. S. Steel Group entered into a letter of intent with Nucor Corporation and Praxair, Inc. for the establishment of a joint venture to develop a new technology to produce steel directly from iron carbide. The parties would initially conduct a feasibility study of the iron carbide to steel process. If the feasibility study proves successful, the joint venture company would construct a demonstration plant to develop and evaluate the commercial feasibility of the steelmaking process. 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. Administrative and Other Businesses recorded operating income of $74 million in 1994, compared with operating losses of $230 million in 1993 and $91 million in 1992. The 1993 operating loss included a $342 million charge for the B&LE litigation (see Note 5 to the U. S. Steel Group Financial Statements). Excluding this item, operating results decreased $38 million in 1994 and increased $203 million in 1993 primarily due to a charge incurred in 1992 to cover the amount of the award in the Energy Buyers litigation and a credit in 1993 as a result of the settlement of all claims in the case. In addition, 1992 results included a $28 million charge resulting from market valuation provisions for foreclosed real estate assets and as well as provisions for loan losses by USX Credit. Loan losses were $11 million in 1994, $11 million in 1993 and $42 million in 1992. 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 $120 million, $202 million and $231 million in 1994, 1993 and 1992, respectively. The decrease over the three-year period was primarily due to a lower expected long-term rate of return on plan assets. In 1995, net pension credits are expected to remain at S-29 111 Management's Discussion and Analysis continued approximately the same level as in 1994. See Note 10 to the U. S. Steel Group Financial Statements. The U. S. Steel Group's 1993 operating loss included restructuring charges of $42 million related to the planned closure of the Maple Creek coal mine and preparation plant. The 1992 loss included a charge of $10 million for completion of the portion of the 1991 restructuring plan related to steel facilities. In December 1994, the U. S. Steel Group and Maple Creek Mining, Inc. entered into a letter of intent for the sale of the Maple Creek Mine and Preparation Plant. The parties intend to close the sale in April 1995 contingent on certain conditions, including financing and governmental approvals. Completion of the sale is not expected to have a material effect on the U. S. Steel Group's financial statements. OUTLOOK Based on strong recent order levels and favorable steel market conditions, the U. S. Steel Group anticipates that steel demand will remain strong in 1995, although domestic industry shipments for 1995 may decrease slightly from the 1994 level of 95 million tons. Market prices for steel products have generally remained firm because of strong demand. Price increases for most steel products were implemented effective January 1, 1995, including increases in long-term contract prices with several major customers. Steel imports to the United States accounted for an estimated 25%, 19% and 17% of the domestic steel market in 1994, 1993 and 1992, 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. U. S. Steel Group shipments in the first quarter of 1995 are expected to be lower than the previous quarter as some customers increased purchases prior to the January 1, 1995 price increases, and there may be some weakness in shipments to automotive companies which have recently announced some reductions in build schedules. During the first quarter of 1995, raw steel production will be reduced by planned blast furnace outages at Gary Works and Fairfield Works. The Financial Accounting Standards Board intends to issue "Accounting for the Impairment of Long-Lived Assets" in the near future. This standard, which is expected to be effective for 1996, requires that operating assets be written down to fair value whenever an impairment review indicates that the carrying value cannot be recovered on an undiscounted cash flow basis. After any such noncash writedown of operating assets, results of operations would be favorably affected by reduced depreciation, depletion and amortization charges. USX will be initiating an extensive review to implement the anticipated standard and, at this time, cannot provide an assessment of either the impact or the timing of adoption, although it is possible that the U. S. Steel Group may be required to recognize certain charges upon adoption. Under current accounting policy, USX generally has only impaired property, plant and equipment under the provisions of Accounting Principles Board Opinion No. 30 and its interpretations. S-30 112 DELHI GROUP Index to Financial Statements, Supplementary Data and Management's Discussion and Analysis
PAGE ---- Explanatory Note Regarding Financial Information................................................ D-2 Management's Report............................................................................. D-3 Audited Financial Statements: Report of Independent Accountants.............................................................. D-3 Statement of Operations........................................................................ D-4 Balance Sheet.................................................................................. D-5 Statement of Cash Flows........................................................................ D-6 Notes to Financial Statements.................................................................. D-7 Principal Unconsolidated Affiliates............................................................. D-18 Selected Quarterly Financial Data............................................................... D-19 Five-Year Operating Summary .................................................................... D-20 Management's Discussion and Analysis............................................................ D-21
D-1 113 DELHI GROUP Explanatory Note Regarding Financial Information 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 or responsibility for such liabilities. Holders of USX - Delhi Group Common Stock, USX - Marathon Group Common Stock and USX - Steel Group Common 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 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. D-2 114 Management's Report The accompanying financial statements of the Delhi Group are the responsibility of and have been prepared by USX Corporation (USX) in conformity with generally accepted accounting principles. They necessarily include some amounts that are based on best judgments and estimates. The Delhi Group financial information displayed in other sections of this report is consistent with these financial statements. USX seeks to assure the objectivity and integrity of its financial records by careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communications programs aimed at assuring that its policies and methods are understood throughout the organization. USX has a comprehensive formalized system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that financial records are reliable. Appropriate management monitors the system for compliance, and the internal auditors independently measure its effectiveness and recommend possible improvements thereto. In addition, as part of their audit of the financial statements, USX's independent accountants, who are elected by the stockholders, review and test the internal accounting controls selectively to establish a basis of reliance thereon in determining the nature, extent and timing of audit tests to be applied. The Board of Directors pursues its oversight role in the area of financial reporting and internal accounting control through its Audit Committee. This Committee, composed solely of nonmanagement directors, regularly meets (jointly and separately) with the independent accountants, management and internal auditors to monitor the proper discharge by each of its responsibilities relative to internal accounting controls and the consolidated and group financial statements. Charles A. Corry Robert M. Hernandez Lewis B. Jones Chairman, Board of Directors Vice Chairman Vice President Chief Executive Officer & Chief Financial Officer & Comptroller Report of Independent Accountants To the Stockholders of USX Corporation: In our opinion, the accompanying financial statements appearing on pages D-4 through D-18 present fairly, in all material respects, the financial position of the Delhi Group at December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of USX's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 11, page D-13, in 1992 USX adopted a new accounting standard for income taxes. The Delhi Group is a business unit of USX Corporation (as described in Note 1, page D-7); accordingly, the financial statements of the Delhi Group should be read in connection with the consolidated financial statements of USX Corporation. Price Waterhouse LLP 600 Grant Street, Pittsburgh, Pennsylvania 15219-2794 February 14, 1995 D-3 115 Statement of Operations
(Dollars in millions, except per share data) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- SALES (Note 1, page D-7) $ 566.9 $ 534.8 $ 457.8 OPERATING COSTS: Cost of sales (excludes items shown below) (Note 8, page D-11) 498.5 426.7 349.0 Selling, general and administrative expenses 28.7 28.6 28.8 Depreciation, depletion and amortization 30.1 36.3 40.2 Taxes other than income taxes 8.0 7.6 7.2 Restructuring charges (Note 4, page D-10) 37.4 - - --------- --------- --------- Total operating costs 602.7 499.2 425.2 --------- --------- --------- OPERATING INCOME (LOSS) (35.8) 35.6 32.6 Other income (loss) (Note 8, page D-11) (.9) 5.2 1.7 Interest and other financial costs (Note 8, page D-11) (11.8) (10.5) (4.6) --------- --------- --------- TOTAL INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (48.5) 30.3 29.7 Less provision (credit) for estimated income taxes (Note 11, page D-13) (17.6) 18.1 11.1 --------- --------- --------- TOTAL INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (30.9) 12.2 18.6 Cumulative effect of change in accounting principle: Income taxes (Note 11, page D-13) - - 17.9 --------- --------- --------- NET INCOME (LOSS) (30.9) 12.2 $ 36.5 ========= Dividends on preferred stock (.1) (.1) Net loss (income) applicable to Retained Interest 10.1 (4.3) --------- --------- NET INCOME (LOSS) APPLICABLE TO OUTSTANDING DELHI STOCK $ (20.9) $ 7.8 ========= ========= - ----------------------------------------------------------------------------------------------------------
Income Per Common Share of Delhi Stock
(Dollars in millions, except per share data) 1994 1993 1992(a) - ---------------------------------------------------------------------------------------------------------- Net income (loss) applicable to outstanding Delhi Stock $ (20.9) $ 7.8 $ 2.0 PRIMARY AND FULLY DILUTED PER SHARE: Net income (loss) applicable to outstanding Delhi Stock $ (2.22) $ .86 $ .22 Weighted average shares, in thousands - primary and fully diluted 9,407 9,067 9,001 - ----------------------------------------------------------------------------------------------------------
(a) For period from October 2, 1992, to December 31, 1992. See Note 1, page D-7, for basis of presentation and Note 19, page D-16, for a description of net income per common share. Pro Forma Income Per Common Share of Delhi Stock (Unaudited)
(Dollars in millions, except per share data) 1992 - ---------------------------------------------------------------------------------------------------------- Pro forma income before cumulative effect of change in accounting principle $ 13.8 Pro forma income before cumulative effect of change in accounting principle applicable to outstanding Delhi Stock 8.8 Pro forma income before cumulative effect of change in accounting principle applicable to outstanding Delhi Stock - per share .98 Pro forma average shares, in thousands 9,000 - ----------------------------------------------------------------------------------------------------------
See Note 24, page D-18, for a description of pro forma income per common share. The accompanying notes are an integral part of these financial statements. D-4 116 Balance Sheet
(Dollars in millions) December 31 1994 1993 - -------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ .1 $ 3.8 Receivables less allowance for doubtful accounts of $.7 and $.5 (Note 16, page D-14) 12.5 24.2 Receivable from other groups .2 - Inventories (Note 14, page D-14) 9.9 9.6 Other current assets 3.1 2.8 --------- --------- Total current assets 25.8 40.4 Long-term receivables and other investments (Note 13, page D-14) 17.0 19.3 Property, plant and equipment - net (Note 15, page D-14) 475.6 521.8 Other noncurrent assets 2.8 1.9 --------- --------- Total assets $ 521.2 $ 583.4 - -------------------------------------------------------------------------------------------------------- LIABILITIES Current liabilities: Accounts payable $ 71.8 $ 88.9 Payable to other groups (Note 9, page D-12) 1.4 .3 Payroll and benefits payable 4.7 2.2 Accrued taxes 7.6 8.1 Accrued interest 2.4 2.7 Long-term debt due within one year (Note 6, page D-10) 1.5 .6 --------- --------- Total current liabilities 89.4 102.8 Long-term debt (Note 6, page D-10) 106.0 109.9 Long-term deferred income taxes (Note 11, page D-13) 135.4 154.0 Deferred credits and other liabilities 14.8 11.2 Preferred stock of subsidiary (Note 5, page D-10) 3.8 - --------- --------- Total liabilities 349.4 377.9 EQUITY (Note 17, page D-15) Preferred stock 2.5 2.5 Common stockholders' equity 169.3 203.0 --------- --------- Total equity 171.8 205.5 --------- --------- Total liabilities and stockholders' equity $ 521.2 $ 583.4 - --------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. D-5 117 Statement of Cash Flows
(Dollars in millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income (loss) $ (30.9) $ 12.2 $ 36.5 Adjustments to reconcile to net cash provided from operating activities: Accounting principle change - - (17.9) Depreciation, depletion and amortization 30.1 36.3 40.2 Pensions 2.5 1.5 .6 Deferred income taxes (20.9) 4.5 (1.0) Gain on disposal of assets (.8) (2.9) (.6) Restructuring charges 37.4 - - Changes in: Current receivables - sold (5.4) 3.5 14.7 - operating turnover 16.8 (15.2) (4.6) Inventories (.3) (1.2) 2.5 Current accounts payable and accrued expenses (11.6) (.5) 6.6 All other items - net 3.0 (5.0) (1.2) -------- -------- -------- Net cash provided from operating activities 19.9 33.2 75.8 -------- -------- -------- INVESTING ACTIVITIES: Capital expenditures (32.1) (42.6) (26.6) Disposal of assets 11.8 4.2 .9 All other items - net .4 1.2 (2.0) -------- -------- -------- Net cash used in investing activities (19.9) (37.2) (27.7) -------- -------- -------- FINANCING ACTIVITIES (Note 3, page D-9) Delhi Group activity - USX debt attributed to all groups - net (4.5) 10.6 (17.0) Attributed preferred stock of subsidiary 3.7 - - Transactions with USX through October 2, 1992 - - (43.4) Cash attributed to the Delhi Group on October 2, 1992 - - 13.2 Dividends paid (1.9) (1.9) (.5) Payment attributed to Retained Interest (1.0) (1.0) (.3) -------- -------- -------- Net cash provided from (used in) financing activities (3.7) 7.7 (48.0) -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3.7) 3.7 .1 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3.8 .1 - -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ .1 $ 3.8 $ .1 - --------------------------------------------------------------------------------------------------------
See Note 7, page D-11, for supplemental cash flow information. The accompanying notes are an integral part of these financial statements. D-6 118 Notes to Financial Statements 1. BASIS OF PRESENTATION On October 2, 1992, USX Corporation (USX) publicly sold 9,000,000 shares of a new class of common stock, USX - Delhi Group Common Stock (Delhi Stock), which is intended to reflect the performance of the Delhi Group. As a result, USX has three classes of common stock, the others being USX - Marathon Group Common Stock (Marathon Stock) and USX - U. S. Steel Group Common Stock (Steel Stock), which are intended to reflect the performance of the Marathon Group and the U. S. Steel Group, respectively. The Delhi Group includes the businesses of the Delhi Gas Pipeline Corporation (DGP) and certain other subsidiaries of USX. The Delhi Group is engaged in the purchasing, gathering, processing, transporting and marketing of natural gas. The financial data for the periods presented prior to October 2, 1992, reflected the combined historical financial position, results of operations and cash flows for the businesses of the Delhi Group which were included in the financial statements of the Marathon Group. Beginning October 2, 1992, the financial statements of the Delhi Group include the financial position, results of operations and cash flows for the businesses of the Delhi Group; the effects of the capital structure of the Delhi Group determined by the Board of Directors in accordance with the USX Certificate of Incorporation; and a portion of the corporate assets and liabilities and related transactions which are not separately identified with ongoing operating units of USX. Pro forma data is reported for the year 1992 to reflect the results of operations as if the capital structure of the Delhi Group was in effect beginning January 1, 1992 (Note 24, page D-18). The Delhi Group financial statements are prepared using the amounts included in the USX consolidated financial statements. The USX Board of Directors has designated 14,003,205 shares of Delhi Stock as the total number of shares of Delhi Stock which it deemed to represent 100% of the common stockholders' equity value of USX attributable to the Delhi Group as of December 31, 1994. The Delhi Fraction is the percentage interest in the Delhi Group represented by the shares of Delhi Stock that are outstanding at any particular time and, based on 9,437,891 outstanding shares at December 31, 1994, is approximately 67%. The Marathon Group financial statements reflect a Retained Interest in the Delhi Group of approximately 33% at December 31, 1994. The Retained Interest is subject to reduction as shares of Delhi stock attributed to the Retained Interest are sold. (See Note 3, page D-9, for a description of common stock transactions.) 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 Steel Group for the purpose of preparing their respective financial statements does not affect legal title to such assets or responsibility for such liabilities. Holders of Delhi Stock, Marathon Stock and Steel Stock are holders of common stock of USX, and continue to be subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts arising from one Group that affect the overall cost of USX's capital could affect the results of operations and financial condition of other groups. In addition, net losses of any Group, as well as dividends and distributions on any class of USX Common Stock and 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. During 1994, 1993 and 1992 sales to one customer who accounted for 10 percent or more of the Delhi Group's total revenues totaled $71.7 million, $76.4 million and $55.4 million, respectively. In addition, sales to several customers having a common parent aggregated $54.7 million, $66.3 million and $63.2 million during 1994, 1993 and 1992, respectively. D-7 119 - ------------------------------------------------------------------------------- 2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES PRINCIPLES APPLIED IN CONSOLIDATION - These financial statements include the accounts of the businesses comprising the Delhi Group. Beginning October 2, 1992, the Delhi Group, the Marathon Group and the U. S. Steel Group financial statements, taken together, comprise all of the accounts included in the USX consolidated financial statements. Investments in jointly-owned gas processing plants are accounted for on a pro rata basis. Investments in other entities in which the Delhi Group has significant influence in management and control are accounted for using the equity method of accounting and are carried in the investment account at the Delhi Group's share of net assets plus advances. The proportionate share of income from equity investments is included in other income. Investments in marketable equity securities are carried at lower of cost or market. CASH AND CASH EQUIVALENTS - Cash and cash equivalents includes cash on hand and on deposit and highly liquid debt instruments with maturities generally of three months or less. INVENTORIES - Inventories are carried at lower of average cost or market. HEDGING TRANSACTIONS - The Delhi Group engages in commodity hedging within the normal course of its activities (Note 21, page D-16). Management has been authorized to manage exposure to price fluctuations relevant to the purchase or sale of natural gas through the use of a variety of derivative financial and nonfinancial instruments. Derivative financial instruments require settlement in cash and include such instruments as over-the-counter (OTC) commodity swap agreements and OTC commodity options. Derivative nonfinancial instruments require or permit settlement by delivery of commodities and include exchange-traded commodity futures contracts and options. Changes in the market value of derivative instruments are deferred and subsequently recognized in income, as sales or cost of sales, in the same period as the hedged item. OTC swaps are off-balance-sheet instruments; therefore, the effect of changes in the market value of such instruments are not recorded until settlement. The margin accounts for open commodity futures contracts, which reflect daily settlements as market values change, are recorded as accounts receivable. Premiums on all commodity-based option contracts are initially based on the amount paid or received; the options' market value is subsequently recorded as accounts receivable or accounts payable, as appropriate. Forward currency contracts are used to manage currency risks related to USX attributed debt denominated in a foreign currency. Gains or losses related to firm commitments are deferred and included with the hedged item; all other gains or losses are recognized in income in the current period as interest income or expense, as appropriate. For balance sheet reporting, net contract values are included in receivables or payables, as appropriate. Recorded deferred gains or losses are reflected within other noncurrent assets or deferred credits and other liabilities. Cash flow from the use of derivative instruments are reported in the same category as the hedged item in the statement of cash flows. PROPERTY, PLANT AND EQUIPMENT - Depreciation is generally computed on a straight-line method based upon estimated lives of assets. When an entire pipeline system, plant, major facility or facilities depreciated on an individual basis are sold or otherwise disposed of, any gain or loss is reflected in income. Proceeds from disposal of other facilities depreciated on a group basis are credited to the depreciation reserve with no immediate effect on income. INSURANCE - The Delhi Group is insured for catastrophic casualty and certain property exposures, as well as those risks required to be insured by law or contract. Costs resulting from noninsured losses are charged against income upon occurrence. POSTEMPLOYMENT BENEFITS - In 1993, USX adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" (SFAS No. 112). SFAS No. 112 requires employers to recognize the obligation to provide postemployment benefits on an accrual basis if certain conditions are met. The Delhi Group is affected primarily by disability-related claims covering indemnity and medical payments. The obligation for these claims is measured using actuarial techniques and assumptions including appropriate discount rates. The effects in 1993 were not material. RECLASSIFICATIONS - Certain reclassifications of prior years' data have been made to conform to 1994 classifications. D-8 120 - ------------------------------------------------------------------------------- 3. CORPORATE ACTIVITIES Beginning October 2, 1992, the following corporate activities were reflected in the Delhi Group financial statements. FINANCIAL ACTIVITIES - As a matter of policy, USX manages most financial activities on a centralized, consolidated basis. Such financial activities include the investment of surplus cash; the issuance, repayment and repurchase of short-term and long-term debt; the issuance, repurchase and redemption of preferred stock; and the issuance and repurchase of common stock. The initial capital structure of the Delhi Group determined by the Board of Directors pursuant to the USX Certificate of Incorporation as of June 30, 1992, reflects the Delhi Group's portion of USX's financial activities attributed to each of the three groups. Subsequent to June 30, 1992, transactions related primarily to invested cash, short-term and long-term debt (including convertible debt), related net interest and other financial costs, and preferred stock and related dividends are attributed to the Delhi Group, as well as to the Marathon Group and the U. S. Steel Group, based upon the cash flows of each group for the periods presented. Most financing transactions are attributed to and reflected in the financial statements of all three groups. See Note 5, page D-10 for the Delhi Group's portion of USX's financial activities attributed to all three groups. However, transactions such as leases, certain collateralized financings, production payment financings, financial activities of consolidated entities which are less than wholly owned by USX and transactions related to securities convertible solely into any one class of common stock are or will be specifically attributed to and reflected in their entirety in the financial statements of the group to which they relate. CORPORATE GENERAL & ADMINISTRATIVE COSTS - Corporate general and administrative costs are allocated to the Delhi Group, the Marathon Group and the U. S. Steel Group based upon utilization or other methods management believes to be reasonable and which consider certain measures of business activities, such as employment, investments and sales. Such costs were also reflected in the historical financial data of the businesses of the Delhi Group. The costs allocated to the Delhi Group were $1.7 million, $1.4 million and $1.5 million in 1994, 1993 and 1992, respectively, and primarily consist of employment costs including pension effects, professional services, facilities and other related costs associated with corporate activities. COMMON STOCK TRANSACTIONS - The proceeds from issuances of Delhi Stock representing shares attributable to the Retained Interest will be reflected in the financial statements of the Marathon Group (Note 1, page D-7). All proceeds from issuances of additional shares of Delhi Stock not deemed to represent the Retained Interest will be reflected in their entirety in the financial statements of the Delhi Group. When a dividend or other distribution is paid or distributed in respect to the outstanding Delhi Stock, or any amount paid to repurchase shares of Delhi Stock generally, the Marathon Group financial statements are credited, and the Delhi Group financial statements are charged, with the aggregate transaction amount times the quotient of the Retained Interest divided by the Delhi Fraction. INCOME TAXES - All members of the USX affiliated group are included in the consolidated United States federal income tax return filed by USX. Accordingly, the provision for federal income taxes and the related payments or refunds of tax are determined on a consolidated basis. The consolidated provision and the related tax payments or refunds will be reflected in the Delhi Group, the Marathon Group and the U. S. Steel Group financial statements in accordance with USX's tax allocation policy. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated among the Delhi Group, the Marathon Group and the U. S. Steel Group, for financial statement purposes, based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to the respective groups. For tax provision and settlement purposes, tax benefits resulting from attributes (principally net operating losses), which cannot be utilized by one of the three groups on a separate return basis but which can be utilized on a consolidated basis in that year or in a carryback year, are allocated to the group that generated the attributes. However, if such tax benefits cannot be utilized on a consolidated basis in that year or in a carryback year, the prior years' allocation of such consolidated tax effects is adjusted in a subsequent year to the extent necessary to allocate the tax benefits to the group that would have realized the tax benefits on a separate return basis. The allocated group amounts of taxes payable or refundable are not necessarily comparable to those that would have resulted if the groups had filed separate returns; however, such allocation should not result in any of the three groups paying more taxes over time than it would if it filed separate tax returns and, in certain situations, could result in any of the three groups paying less. D-9 121 - ------------------------------------------------------------------------------- 4. RESTRUCTURING CHARGES In mid-1994, the planned disposition of certain nonstrategic gas gathering and processing assets and other investments resulted in a $37.4 million charge to operating income and a $2.5 million charge to other income for the write-down of assets to their estimated net realizable value. Disposition of these assets is expected to be completed in 1995. - ------------------------------------------------------------------------------- 5. FINANCIAL ACTIVITIES ATTRIBUTED TO ALL THREE GROUPS The following is Delhi Group's portion of USX's financial activities attributed to all groups based on their respective cash flows as described in Note 3, page D-9.
Delhi Group Consolidated USX(a) ------------------- ------------------ (In millions) December 31 1994 1993 1994 1993 - -------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ .1 $ 3.8 $ 4 $ 196 Receivables(b) .2 - 11 - Long-term receivables(b) 1.4 .9 70 47 Other noncurrent assets(b) .2 .2 11 9 --------- --------- --------- -------- Total assets $ 1.9 $ 4.9 $ 96 $ 252 - -------------------------------------------------------------------------------------------------------- Accounts payable(b) $ .1 $ .1 $ 3 $ 4 Accrued interest 2.4 2.7 123 138 Long-term debt due within one year (Note 6, page D-10) 1.5 .6 74 31 Long-term debt (Note 6, page D-10) 106.0 109.9 5,346 5,730 Deferred credits and other liabilities(b) .1 .2 3 8 Preferred stock of subsidiary 3.8 - 250 - -------- -------- -------- -------- Total liabilities $ 113.9 $ 113.5 $ 5,799 $ 5,911 - -------------------------------------------------------------------------------------------------------- Preferred stock $ 2.5 $ 2.5 $ 105 $ 105 - --------------------------------------------------------------------------------------------------------
Delhi Group(c) Consolidated USX --------------------------- -------------------------- (In millions) 1994 1993 1992 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- Net interest and other financial costs (Note 8, page D-11) $ (8.3) $ (7.7) $ (2.1) $ (471) $ (471) $ (458) - --------------------------------------------------------------------------------------------------------
(a) For details of USX long-term debt, preferred stock of subsidiary and preferred stock, see Notes 13, page U-20; 24, page U-25; and 18, page U-22, respectively, to the USX consolidated financial statements. (b) Primarily reflects forward currency contracts used to manage currency risks related to USX debt and interest denominated in a foreign currency. (c) The Delhi Group's net interest and other financial costs reflect weighted average effects of all financial activities attributed to all three groups. The costs reported for 1992 are for the period October 2, 1992, to December 31, 1992. - -------------------------------------------------------------------------------- 6. LONG-TERM DEBT The Delhi Group's portion of USX's consolidated long-term debt is as follows:
Delhi Group Consolidated USX(a) -------------------- -------------------- (In millions) December 31 1994 1993 1994 1993 - -------------------------------------------------------------------------------------------------------- Debt attributed to all three groups(b) $ 108.9 $ 112.0 $ 5,489 $ 5,837 Less unamortized discount 1.4 1.5 69 76 Less amount due within one year 1.5 .6 74 31 -------- -------- -------- ------ Total long-term debt attributed to all three groups $ 106.0 $ 109.9 $ 5,346 $ 5,730 - --------------------------------------------------------------------------------------------------------
(a) See Note 13, page U-20, to the USX consolidated financial statements for details of interest rates, maturities and other terms of long-term debt. (b) Most long-term debt activities of USX Corporation and its wholly owned subsidiaries are attributed to all three groups (in total, but not with respect to specific debt issues) based on their respective cash flows (Notes 3, page D-9; 5, page D-10; and 7, page D-11). D-10 122 - -------------------------------------------------------------------------------- 7. SUPPLEMENTAL CASH FLOW INFORMATION
(In millions) 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------- CASH USED IN OPERATING ACTIVITIES INCLUDED: Interest and other financial costs paid $ (11.2) $ (9.2) $ (3.5) Income taxes paid including settlements with other groups (.5) (22.7) (12.3) - ---------------------------------------------------------------------------------------------------------- USX DEBT ATTRIBUTED TO ALL THREE GROUPS - NET: Commercial paper: Issued $ 1,515 $ 2,229 $ 2,412 Repayments (1,166) (2,598) (2,160) Credit agreements: Borrowings 4,545 1,782 6,684 Repayments (5,045) (2,282) (7,484) Other credit arrangements - net - (45) (22) Other debt: Borrowings 509 791 742 Repayments (791) (318) (381) --------- --------- --------- Total $ (433) $ (441) $ (209) ========= ========= ========= Delhi Group activity (from October 2, 1992) $ (5) $ 11 $ (17) Marathon Group activity (371) 261 (410) U. S. Steel Group activity (57) (713) 218 --------- --------- --------- Total $ (433) $ (441) $ (209) - ---------------------------------------------------------------------------------------------------------- NONCASH INVESTING AND FINANCING ACTIVITIES: USX debt initially attributed to the Delhi Group $ - $ - $ 116.8 - ----------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- 8. OTHER ITEMS
(In millions) 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------- COST OF SALES INCLUDED: Gas purchases $ 469.1 $ 398.7 $ 319.9 Operating expenses 29.4 28.0 29.1 --------- --------- --------- Total $ 498.5 $ 426.7 $ 349.0 - ---------------------------------------------------------------------------------------------------------- OTHER INCOME (LOSS): Gain on disposal of assets $ .8 $ 2.9 (a) $ .6 Income from affiliates - equity method .7 1.0 1.1 Restructuring charge (Note 4, page D-10) (2.5) - - Other .1 1.3 - --------- --------- --------- Total $ (.9) $ 5.2 $ 1.7 - ---------------------------------------------------------------------------------------------------------- INTEREST AND OTHER FINANCIAL COSTS(b): Interest incurred $ (7.2) $ (7.0) $ (1.9) Financial cost of preferred stock of subsidiary (.3) - - Expenses on sales of accounts receivable (Note 16, page D-14) (3.3) (2.5) (2.3) Amortization of discounts (.8) (.7) (.2) Other (.2) (.3) (.2) --------- --------- --------- Total $ (11.8) $ (10.5) $ (4.6) - ----------------------------------------------------------------------------------------------------------
(a) Gain includes the sale of Red River Pipeline partnership. (b) See Note 3, page D-9, for discussion of USX interest and other financial costs attributable to the Delhi Group. D-11 123 - ------------------------------------------------------------------------------- 9. INTERGROUP TRANSACTIONS SALES AND PURCHASES - Delhi Group sales to the Marathon Group totaled $4.1 million, $4.3 million and $4.3 million in 1994, 1993 and 1992, respectively. Delhi Group purchases from the Marathon Group totaled $41.6 million, $30.3 million and $31.2 million in 1994, 1993 and 1992, respectively. These transactions were conducted on an arm's-length basis. See Note 16, page D-14, for sales of Delhi Group receivables to the Marathon Group. RECEIVABLE FROM/PAYABLE TO OTHER GROUPS - These amounts represent receivables or payables for income taxes determined in accordance with the tax allocation policy described in Note 11, page D-13. Tax settlements between the groups are generally made in the year succeeding that in which such amounts are accrued. - ------------------------------------------------------------------------------- 10. PENSIONS The Delhi Group has a noncontributory defined benefit plan covering all employees over 21 years of age who have one or more years of continuous service. Benefits are based primarily on years of service and compensation during the later years of employment. The funding policy for the plan provides that payments to the pension trust shall be equal to the minimum funding requirements of ERISA plus such additional amounts as may be approved from time to time. The plan also provides benefits to certain employees of the Marathon Group which are not part of the Delhi Group. PENSION COST (CREDIT) - The defined benefit cost for 1994, 1993 and 1992 was determined assuming an expected long-term rate of return on plan assets of 9%, 10% and 11%, respectively.
(In millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- Cost of benefits earned during the period $ 1.9 $ 1.7 $ 1.3 Interest cost on projected benefit obligation (6.5% for 1994; 7% for 1993; and 8% for 1992) 2.8 2.6 2.6 Return on assets - actual loss (return) .2 (2.0) (3.9) - deferred gain (loss) (2.9) (.9) .6 Net amortization of unrecognized losses .2 .1 - --------- --------- --------- Total periodic pension cost 2.2 1.5 .6 Curtailment loss(a) .2 - - --------- --------- --------- Total pension cost $ 2.4 $ 1.5 $ .6 - --------------------------------------------------------------------------------------------------------
(a) The curtailment loss in 1994 resulted from a work force reduction program. FUNDS' STATUS - The assumed discount rate used to measure the benefit obligations was 8% and 6.5% at December 31, 1994, and December 31, 1993, respectively. The assumed rate of future increases in compensation levels was 4.5% at both year ends.
(In millions) December 31 1994 1993 - ---------------------------------------------------------------------------------------------------------- Reconciliation of funds' status to reported amounts: Projected benefit obligation(b) $ (35.8) $ (44.1) Plan assets at fair market value(c) 27.3 31.2 --------- --------- Assets less than projected benefit obligation (8.5) (12.9) Unrecognized net gain from transition (2.9) (3.2) Unrecognized prior service cost 3.2 3.7 Unrecognized net loss 1.9 8.3 Additional minimum liability (.1) - --------- --------- Net pension liability included in balance sheet $ (6.4) $ (4.1) - ---------------------------------------------------------------------------------------------------------- (b) Projected benefit obligation includes: Vested benefit obligation $ 27.0 $ 30.2 Accumulated benefit obligation 27.8 32.9 (c) Types of assets held: Stocks of other corporations 65% 71% U.S. Government securities 20% 21% Corporate debt instruments and other 15% 8% - ----------------------------------------------------------------------------------------------------------
D-12 124 - -------------------------------------------------------------------------------- 11. INCOME TAXES Income tax provisions and related assets and liabilities attributed to the Delhi Group are determined in accordance with the USX group tax allocation policy (Note 3, page D-9). In 1992, USX adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109), which requires an asset and liability approach in accounting for income taxes. Under this method, deferred income tax assets and liabilities are established to reflect the future tax consequences of carryforwards and differences between the tax bases and financial bases of assets and liabilities. Provisions (credits) for estimated income taxes:
1994 1993 1992 ----------------------------- ------------------------- ---------------------- (In millions) CURRENT DEFERRED TOTAL Current Deferred Total Current Deferred Total - --------------------------------------------------------------------------------------------------------- Federal $ 2.7 $ (17.3) $ (14.6) $ 11.8 $ 4.8 $ 16.6 $ 11.3 $ (1.1) $10.2 State and local .6 (3.6) (3.0) 1.8 (.3) 1.5 .8 .1 .9 ----- ------ ------ ------ ------ ------ ------ ------ ------ Total $ 3.3 $ (20.9) $ (17.6) $ 13.6 $ 4.5 $ 18.1 $ 12.1 $ (1.0) $ 11.1 - ---------------------------------------------------------------------------------------------------------
Reconciliation of federal statutory tax rate (35% in 1994 and 1993, and 34% in 1992) to total provisions (credits):
(In millions) 1994 1993 1992 - --------------------------------------------------------------------------------------------------------- Statutory rate applied to income before tax $ (17.0) $ 10.6 $ 10.1 Remeasurement of deferred income tax liabilities for statutory rate increase as of January 1, 1993 - 4.1 - State income taxes after federal income tax benefit (2.0) 1.0 .6 Sale of investment in subsidiary - 2.3 - Adjustments of prior year's tax 1.2 - - Other .2 .1 .4 --------- --------- --------- Total provisions (credits) $ (17.6) $ 18.1 $ 11.1 - ---------------------------------------------------------------------------------------------------------
Deferred tax liabilities primarily relate to property, plant and equipment:
(In millions) December 31 1994 1993 - --------------------------------------------------------------------------------------------------------- Deferred tax assets $ 9.6 $ 7.7 Deferred tax liabilities 145.5 164.4 --------- --------- Net deferred tax liabilities $ 135.9 $ 156.7 - ---------------------------------------------------------------------------------------------------------
The consolidated tax returns of USX for the years 1988 through 1991 are under various stages of audit and administrative review by the IRS. USX believes it has made adequate provision for income taxes and interest which may become payable for years not yet settled. - -------------------------------------------------------------------------------- 12. LEASES Future minimum commitments for operating leases having remaining noncancelable lease terms in excess of one year are as follows:
Operating (In millions) Leases - -------------------------------------------------------------------------------------------------------- 1995 $4.0 1996 3.0 1997 2.0 1998 1.6 1999 1.6 Later years 4.7 Sublease rentals (.1) ----- Total minimum lease payments $ 16.8 - --------------------------------------------------------------------------------------------------------
Operating lease rental expense:
(In millions) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- Minimum rental $ 5.0 $ 5.4 $ 8.0 Contingent rental 1.1 1.7 2.0 ---------- ------- ------- Rental expense $ 6.1 $ 7.1 $ 10.0 - --------------------------------------------------------------------------------------------------------
The Delhi Group leases a wide variety of facilities and equipment under operating leases, including building space, office equipment and production equipment. Contingent rental includes payments for the lease of a pipeline system owned by an affiliate; payments to the lessor are based on the volume of gas transported through the pipeline system less certain operating expenses. Most long-term leases include renewal options and, in certain leases, purchase options. D-13 125 - -------------------------------------------------------------------------------- 13. LONG-TERM RECEIVABLES AND OTHER INVESTMENTS
(In millions) December 31 1994 1993 - --------------------------------------------------------------------------------------------------------- Receivables due after one year $ 4.5 $ 5.1 Forward currency contracts 1.4 .9 Equity method investments(a) 11.0 13.2 Other .1 .1 ---------- ---------- Total $ 17.0 $ 19.3 - ----------------------------------------------------------------------------------------------------------
(a) The 25% interest in Ozark Gas Transmission System (Ozark) was written down in mid-1994 in connection with the planned disposition of assets (Note 4, page D-10), and recording of equity income was suspended. The sale of Ozark is expected to be completed in the second quarter of 1995, subject to certain government approvals. The following financial information summarizes the Delhi Group's share in investments accounted for by the equity method:
(In millions) 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------- Income data - year: Sales $ 3.0 $ 5.6 $ 6.1 Operating income 1.1 1.9 2.2 Net income (loss) .7 1.0 1.1 - ---------------------------------------------------------------------------------------------------------- Partnership distributions $ .4 $ 1.3 $ .7 - ---------------------------------------------------------------------------------------------------------- Balance sheet data - December 31: Current assets $ 3.9 $ 3.0 Noncurrent assets 11.7 16.6 Current liabilities 4.6 6.4 - ----------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 14. INVENTORIES
(In millions) December 31 1994 1993 - ---------------------------------------------------------------------------------------------------------- Natural gas in storage $ 8.2 $ 6.8 Natural gas liquids (NGLs) in storage .4 .4 Materials and supplies 1.3 2.4 ---------- ---------- Total $ 9.9 $ 9.6 - ----------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 15. PROPERTY, PLANT AND EQUIPMENT
(In millions) December 31 1994 1993 - ---------------------------------------------------------------------------------------------------------- Gas gathering systems $ 796.1 $ 869.3 Gas processing plants 120.5 126.4 Other 18.5 17.6 --------- ---------- Total 935.1 1,013.3 Less accumulated depreciation, depletion and amortization 459.5 491.5 --------- ---------- Net $ 475.6 $ 521.8 - ----------------------------------------------------------------------------------------------------------
16. SALES OF RECEIVABLES Certain of the Delhi Group accounts receivables are sold in combination with the Marathon Group receivables under a limited recourse agreement. Payments are collected from the sold accounts receivable; the collections are reinvested in new accounts receivable for the buyers; and a yield, based on short-term market rates, is transferred to the buyers. Collections on sold accounts receivable will be forwarded to the buyers at the end of the agreement in 1995, in the event of earlier contract termination or if the Delhi Group does not have a sufficient quantity of eligible accounts receivable to reinvest in for the buyers. The balance of sold accounts receivable averaged $72.5 million, $69.1 million and $56.9 million for the years 1994, 1993 and 1992, respectively. At December 31, 1994, the balance of the Delhi Group's sold accounts receivable that had not been collected was $68.3 million. A substantial portion of the Delhi Group's sales are to local distribution companies and electric utilities. This could impact the Delhi Group's overall exposure to credit risk inasmuch as these customers could be affected by similar economic or other conditions. The Delhi Group does not generally require collateral for accounts receivable, but significantly reduces credit risk through credit extension and collection policies, which include analyzing the financial condition of potential customers, establishing credit limits, monitoring payments and aggressively pursuing delinquent accounts. In the event of a change in control of USX, as defined in the agreement, the Delhi Group may be required to forward payments collected on sold Delhi Group accounts receivable to the buyers. D-14 126 - ------------------------------------------------------------------------------- 17. EQUITY
(In millions, except per share data) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- USX EQUITY INVESTMENT: Balance at beginning of year $ - $ - $ 307.9 Net income - - 33.4 Transactions with USX(a) - - (43.4) Elimination of USX investment(b) - - (297.9) --------- --------- --------- Balance at end of year $ - $ - $ - - -------------------------------------------------------------------------------------------------------- PREFERRED STOCK: Balance at beginning of year $ 2.5 $ 2.5 $ - Attribution of preferred stock - - 2.5 --------- --------- --------- Balance at end of year $ 2.5 $ 2.5 $ 2.5 - -------------------------------------------------------------------------------------------------------- COMMON STOCKHOLDERS' EQUITY (Note 3, page D-9): Balance at beginning of year $ 203.0 $ 193.6 $ - Net income (loss) (30.9) 12.2 3.1 Attribution of USX common stockholders' equity value(b) - - 191.3 Dividends on Delhi Stock (per share: $.20 in 1994 and 1993; and $.05 in 1992) (1.8) (1.8) (.4) Dividends on preferred stock (.1) (.1) (.1) Payment attributed to Retained Interest (Note 3, page D-9) (1.0) (1.0) (.3) Deferred compensation adjustments .1 .1 - --------- --------- --------- Balance at end of year $ 169.3 $ 203.0 $ 193.6 - -------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 171.8 $ 205.5 $ 196.1 - --------------------------------------------------------------------------------------------------------
(a) Transactions with USX included cash management, intergroup sales and purchases (Note 9, page D-12), settlement of federal income taxes with USX (Note 3, page D-9) and allocation of corporate general and administrative costs (Note 3, page D-9). Cash management reflected net distributions to USX of $65.5 million in 1992. (b) Pursuant to the USX Certificate of Incorporation and the capital structure of the Delhi Group determined by the Board of Directors, the USX equity investment in the Delhi Group was eliminated on October 2, 1992, in conjunction with the attribution of the Delhi Group's portion of USX's financial activities attributed to all groups (Note 3, page D-9) and the USX common stockholders' equity value, attributed to the 14,000,000 shares of Delhi Stock initially deemed to represent 100% of the initial common stockholders' equity in the Delhi Group. - ------------------------------------------------------------------------------- 18. DIVIDENDS In accordance with the USX Certificate of Incorporation, dividends on the Delhi Stock, Marathon Stock and Steel Stock are limited to the legally available funds of USX. Net losses of any Group, as well as dividends and distributions on any class of USX Common Stock or series of preferred stock and repurchases of any class of USX Common Stock or series of preferred stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on all classes of Common Stock. Subject to this limitation, the Board of Directors intends to declare and pay dividends on the Delhi Stock based on the financial condition and results of operations of the Delhi Group, although it has no obligation under Delaware law to do so. In making its dividend decisions with respect to Delhi Stock, the Board of Directors considers among other things, the long-term earnings and cash flow capabilities of the Delhi Group as well as the dividend policies of similar publicly traded companies. Dividends on the Delhi Stock are further limited to the Available Delhi Dividend Amount. At December 31, 1994, the Available Delhi Dividend Amount was at least $104.6 million. The Available Delhi Dividend Amount will be increased or decreased, as appropriate, to reflect Delhi Net Income, dividends, repurchases or issuances with respect to the Delhi Stock and preferred stock attributed to the Delhi Group and certain other items. D-15 127 - ------------------------------------------------------------------------------- 19. NET INCOME PER COMMON SHARE The method of calculating net income (loss) per share for the Delhi Stock, Marathon Stock and Steel Stock reflects the USX Board of Directors' 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 to the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. Net income per share applicable to outstanding Delhi Stock is presented for periods subsequent to the October 2, 1992, initial issuance of Delhi Stock. (See Note 24, page D-18, for pro forma income per common share.) Primary net income per share is calculated by adjusting net income for dividend requirements of preferred stock and income applicable to the Retained Interest and is based on the weighted average number of common shares outstanding plus common stock equivalents, provided they are not antidilutive. Common stock equivalents result from assumed exercise of stock options and surrender of stock appreciation rights associated with stock options, where applicable. Fully diluted net income (loss) per share assumes exercise of stock options and surrender of stock appreciation rights, provided, in each case, the effect is not antidilutive. - ------------------------------------------------------------------------------- 20. STOCK PLANS AND STOCKHOLDER RIGHTS PLAN USX Stock Plans and Stockholder Rights Plan are discussed in Note 19, page U-23 and Note 23, page U-25, respectively, to the USX consolidated financial statements. - ------------------------------------------------------------------------------- 21. DERIVATIVE FINANCIAL INSTRUMENTS USX has used forward currency contracts to manage currency risks related to debt denominated in Swiss francs and European currency units, a portion of which has been attributed to the Delhi Group. The Delhi Group also has used derivative nonfinancial instruments such as exchange-traded commodity contracts to help protect its natural gas margins. The Delhi Group remains at risk for possible changes in the market value of the hedging instrument; however, such risk should be mitigated by price changes in the underlying hedged item. The Delhi Group is also exposed to credit risk in the event of nonperformance by counterparties. The credit worthiness of counterparties is subject to continuing review, including the use of master netting agreements to the extent practical, and full performance is anticipated. The following table sets forth quantitative information for the attributed forward currency contracts:
FAIR CARRYING RECORDED VALUE AMOUNT DEFERRED AGGREGATE ASSETS ASSETS GAIN OR CONTRACT (In millions) (LIABILITIES)(a) (LIABILITIES) (LOSS) VALUES(b) - ---------------------------------------------------------------------------------------------------------- DECEMBER 31, 1994: Forward currency contracts: - receivable $ 1.7 $ 1.6 $ - $ 4.2 - payable (.1) (.1) (.1) .7 ------ ------ ------- ------ Total currencies $ 1.6 $ 1.5 $ (.1) $ 4.9 - ---------------------------------------------------------------------------------------------------------- December 31, 1993: Forward currency contracts: - receivable $ 1.0 $ .9 $ - $ 4.2 - payable (.3) (.2) (.2) 1.0 ------ ------ ------- ------ Total currencies $ .7 $ .7 $ (.2) $ 5.2 - ----------------------------------------------------------------------------------------------------------
(a) The fair value amounts are based on dealer quoted market prices. (b) Contract amounts do not quantify risk exposure. D-16 128 - -------------------------------------------------------------------------------- 22. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. As described in Note 3, page D-9, the Delhi Group's specifically attributed financial instruments and the Delhi Group's portion of USX's financial instruments attributed to all groups are as follows:
1994 1993 -------------------- ------------------ CARRYING FAIR Carrying Fair (In millions) December 31 AMOUNT VALUE Amount Value - -------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS: Cash and cash equivalents $ .1 $ .1 $ 3.8 $ 3.8 Receivables 12.1 12.1 24.2 24.2 Long-term receivables and other investments - - 1.5 1.5 -------- -------- -------- -------- Total financial assets $ 12.2 $ 12.2 $ 29.5 $ 29.5 ======== ======== ======== ======== FINANCIAL LIABILITIES: Accounts payable $ 71.8 $ 71.8 $ 88.9 $ 88.9 Accrued interest 2.4 2.4 2.7 2.7 Long-term debt (including amounts due within one year) 107.5 104.0 110.5 113.5 -------- -------- -------- -------- Total financial liabilities $ 181.7 $ 178.2 $ 202.1 $ 205.1 - --------------------------------------------------------------------------------------------------------
Fair value of financial instruments classified as current assets or liabilities approximate carrying value due to the short-term maturity of the instruments. Fair value of long-term receivables and other investments was based on discounted cash flows or other specific instrument analysis. Fair value of long-term debt instruments was based on market prices where available or current borrowing rates available for financings with similar terms and maturities. In addition to certain derivative financial instruments disclosed in Note 21, page D-16, the Delhi Group's unrecognized financial instruments consist of accounts receivables sold subject to limited recourse. It is not practicable to estimate the fair value of this form of financial instrument obligation because there are no quoted market prices for transactions which are similar in nature. For details relating to sales of receivables see Note 16, page D-14. - ------------------------------------------------------------------------------- 23. CONTINGENCIES 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 as 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. ENVIRONMENTAL MATTERS - 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 1994 and 1993, such capital expenditures totaled approximately $4.6 million and $4.5 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. D-17 129 - -------------------------------------------------------------------------------- 24. PRO FORMA INCOME PER COMMON SHARE (UNAUDITED) Income per share data applicable to outstanding Delhi Stock is reported on a pro forma basis for the year 1992 to reflect the per share income as if the capital structure of the Delhi Group was in effect beginning January 1, 1992. The capital structure of the Delhi Group as of June 30, 1992, was determined by the Board of Directors pursuant to the USX Certificate of Incorporation. Historical income before the cumulative effect of the change in accounting principle was adjusted for the attribution of certain corporate activities (Note 3, page D-9). The pro forma data are not necessarily indicative of the results that would have occurred if the capital structure of the Delhi Group was in effect for the period indicated.
(In millions, except per share data) 1992 - -------------------------------------------------------------------------------------------------------- Historical income before the cumulative effect of the change in accounting principle $ 18.6 Pro forma adjustments(a): Net interest and other financial costs (7.3) Credit for estimated income taxes 2.5 -------- Pro forma income before the cumulative effect of the change in accounting principle $ 13.8 Pro forma dividends on preferred stock(a) (.1) Pro forma income applicable to Retained Interest(b) (4.9) -------- Pro forma income before the cumulative effect of the change in accounting principle applicable to outstanding Delhi Stock $ 8.8 Per share data: Pro forma income before the cumulative effect of the change in accounting principle applicable to outstanding Delhi Stock(c) $ .98 Pro forma average number of shares, in thousands 9,000 - --------------------------------------------------------------------------------------------------------
(a) The adjustment for net interest and other financial costs reflects the weighted average effects of all USX financial activities assumed to be attributed to the Delhi Group for the period prior to October 2, 1992. The adjustment for the provision for estimated income taxes reflects the change in total income before taxes due to recognition of these adjustments. The adjustment to dividends on preferred stock reflects the assumed effects of attributed preferred stock. (b) Pro forma income applicable to Retained Interest represents the pro forma income before the cumulative effect of the change in accounting principle less dividends on preferred stock, multiplied by the initial Retained Interest of approximately 36%. (c) Pro forma income per share before the cumulative effect of the change in accounting principle applicable to outstanding Delhi Stock is calculated by dividing the pro forma income before the cumulative effect of the change in accounting principle applicable to outstanding Delhi Stock by the pro forma average number of shares outstanding, which assumes 9,000,000 shares initially sold were outstanding for the period. Principal Unconsolidated Affiliates (Unaudited)
Company Country % Ownership(a) Activity - ----------------------------------------------------------------------------------------------------- Laredo-Nueces Pipeline Company United States 50% Natural Gas Transmission Ozark Gas Transmission System United States 25% Natural Gas Transmission - -----------------------------------------------------------------------------------------------------
(a) Economic interest as of December 31, 1994. D-18 130 Selected Quarterly Financial Data (Unaudited)
1994 1993 --------------------------------------------- --------------------------------------------------- (In millions except per share data) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. - --------------------------------------------------------------------------------------------------------------------------------- Sales $ 142.6 $ 133.7 $136.2 $ 154.4 $143.5 $131.3 $129.0 $131.0 Operating income (loss) 5.9 1.8 (46.0) 2.5 5.9 7.8 4.8 17.1 Operating costs include: Restructuring charges - - (37.4) - - - - - Net income (loss) 1.3 (1.0) (31.6) .4 2.1 (.7)(a) 2.1 8.7 - --------------------------------------------------------------------------------------------------------------------------------- DELHI STOCK DATA: Net income (loss) applicable to Delhi Stock $ .9 $ (.7) $(21.4) $ .3 $ 1.4 $ (.5) $ 1.3 $ 5.6 - Per share: primary and fully diluted .09 (.07) (2.27) .03 .15 (.05) .15 .62 Dividends paid per share .05 .05 .05 .05 .05 .05 .05 .05 Price range of Delhi Stock(b): - Low 9-5/8 12-1/4 12-7/8 13-1/2 15 18-3/4 16-1/2 15-1/4 - High 13-3/4 15 15-7/8 17-7/8 24 24-3/4 21-7/8 19-1/4 - ---------------------------------------------------------------------------------------------------------------------------------
(a) Includes a $4.1 million unfavorable effect associated with an increase in the federal income tax rate from 34% to 35%, reflecting remeasurement of deferred income tax liabilities as of January 1, 1993. (b) Composite tape. D-19 131 Five-Year Operating Summary
1994 1993 1992 1991 1990 - -------------------------------------------------------------------------------------------------------- SALES VOLUMES Natural gas throughput (billions of cubic feet) Natural gas sales 227.9 203.2 200.0 195.9 180.0 Transportation 99.1 117.6 103.4 81.0 99.3 ------------------------------------------ Total systems throughput 327.0 320.8 303.4 276.9 279.3 Trading sales 34.6 - - - - Partnerships - equity share(a) 7.1 6.5 10.2 14.5 19.9 ------------------------------------------ Total volumes 368.7 327.3 313.6 291.4 299.2 ------------------------------------------ Natural gas throughput (millions of cubic feet per day) Natural gas sales 624.5 556.7 546.4 536.7 493.1 Transportation 271.4 322.1 282.6 221.9 272.1 ------------------------------------------ Total systems throughput 895.9 878.8 829.0 758.6 765.2 Trading sales 94.7 - - - - Partnerships - equity share(a) 19.6 17.9 27.8 39.7 54.5 ------------------------------------------ Total volumes 1,010.2 896.7 856.8 798.3 819.7 NGLs sales Millions of gallons 275.8 282.0 261.4 214.7 144.4 Thousands of gallons per day 755.7 772.5 714.2 588.2 395.6 - -------------------------------------------------------------------------------------------------------- GROSS UNIT MARGIN ($/mcf) $0.26 $0.42 $0.44 $0.47 $0.43 - -------------------------------------------------------------------------------------------------------- PIPELINE MILEAGE (INCLUDING PARTNERSHIPS) Arkansas 349 362 377 377 377 Colorado(b) - - 91 91 91 Kansas(c) - 164 164 164 164 Louisiana(c) - 141 141 142 140 Oklahoma 2,990 2,908 2,795 2,819 2,800 Texas(a)(c) 4,060 4,544 4,811 4,764 4,739 ------------------------------------------ Total 7,399 8,119 8,379 8,357 8,311 - -------------------------------------------------------------------------------------------------------- PLANTS - OPERATING AT YEAR-END Gas processing 15 15 14 14 12 Sulfur 6 3 3 3 3 - -------------------------------------------------------------------------------------------------------- DEDICATED GAS RESERVES - YEAR-END (billions of cubic feet) Beginning of year 1,663 1,652 1,643 1,680 1,699 Additions 431 382 273 255 212 Production (334) (328) (307) (275) (280) Revisions/Asset Sales (110) (43) 43 (17) 49 ------------------------------------------ Total 1,650 1,663 1,652 1,643 1,680 - --------------------------------------------------------------------------------------------------------
(a) In January 1993, the Delhi Group sold its 25% interest in Red River Pipeline. (b) In 1993, the Delhi Group sold its pipeline systems located in Colorado. (c) In 1994, the Delhi Group sold certain pipeline systems associated with the planned disposition of nonstrategic assets. D-20 132 THE DELHI GROUP Management's Discussion and Analysis The Delhi Group includes Delhi Gas Pipeline Corporation ("DGP") and certain other subsidiaries of USX Corporation ("USX"), which are engaged in the purchasing, gathering, processing, transporting and marketing of natural gas. Management's Discussion and Analysis should be read in conjunction with the Delhi Group's Financial Statements and Notes to Financial Statements. The financial data presented for the periods prior to October 2, 1992, (with the exception of pro forma data) reflected the combined historical financial position, results of operations and cash flows for the businesses of the Delhi Group. Beginning October 2, 1992, the financial statements of the Delhi Group include the financial position, results of operations and cash flows for the businesses of the Delhi Group and the effects of the capital structure of the Delhi Group which includes a portion of the corporate assets and liabilities and related transactions which are not separately identified with the ongoing operations of USX. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INCOME Delhi Group sales for each of the last three years were:
(Dollars in millions) 1994 1993 1992 - ----------------------------------------------------------------- Gas sales $ 431.1 $ 447.9 $ 371.6 Transportation 11.7 14.2 14.8 ------- ------- ------- Total systems 442.8 462.1 386.4 Trading sales 59.8 - - Gas processing 64.1 72.6 70.4 Other .2 .1 1.0 ------- ------- ------- Total sales $ 566.9 $ 534.8 $ 457.8 - -----------------------------------------------------------------
TOTAL SALES in 1994 increased by 6% from 1993, mainly due to increased volumes from the Delhi Group's trading business and from short-term interruptible ("spot") market sales, partially offset by decreased revenues from Southwestern Electric Power Company ("SWEPCO") and other customers, and lower average prices for natural gas and natural gas liquids ("NGLs"). Total sales in 1993 increased by 17% from 1992, mainly due to increased revenues from premium services and higher average natural gas sales prices. The OPERATING LOSS for the Delhi Group was $35.8 million in 1994, compared with operating income of $35.6 million in 1993 and $32.6 million in 1992. The operating loss in 1994 included charges of $37.4 million for the planned disposition of certain non-strategic assets, expenses of $1.7 million related to a work force reduction program, other employment-related costs of $2.0 million and a $1.6 million favorable effect of the settlement of litigation related to a prior-year take-or-pay claim. Operating income in 1993 included favorable effects of $1.8 million for the reversal of a prior-period accrual related to a natural gas contract settlement, $0.8 million related to gas imbalance settlements and a net $0.6 million for a refund of prior years' sales taxes. Excluding the effects of these items, operating income in 1994 was $3.7 million, down $28.7 million from 1993 operating income of $32.4 million. This decrease was due particularly to a decline in gas sales premiums from SWEPCO, as well as lower margins from other customers, partially offset by higher natural gas throughput volumes, and lower depreciation expense due to the previously mentioned asset disposition plan. D-21 133 Management's Discussion and Analysis continued Operating income in 1992 included favorable effects totaling $1.5 million relating to the settlement of various lawsuits and third-party disputes. Excluding the effects of the items noted, operating income in 1993 improved by $1.3 million from 1992, primarily as a result of higher gas sales margin and lower operating and other expenses, partially offset by a 34% decline in gas processing margin from the extraction and sale of NGLs. See Management's Discussion and Analysis of Operations below for further discussion of operating income. OTHER LOSS of $0.9 million in 1994 included a $2.5 million restructuring charge, partially offset by a $0.8 million pretax gain on disposal of assets. Other income of $5.2 million in 1993 included a pretax gain of $2.9 million on disposal of assets and a $0.9 million favorable pretax effect recognizing the expiration of certain obligations related to an asset acquisition. The disposal of assets in 1993 included pretax gains of $0.8 million on the sale of non-strategic Colorado gas gathering systems and $1.6 million on the sale of the Delhi Group's interest in a natural gas transmission partnership. The 1993 U.S. income tax provision included a $2.9 million unfavorable tax effect associated with the sale of the transmission partnership interest, which resulted in a $1.3 million net loss on the transaction. INTEREST AND OTHER FINANCIAL COSTS increased by $1.3 million in 1994 and $5.9 million in 1993. The increase in 1994 primarily reflected higher expense associated with the sale of certain of the Delhi Group's accounts receivables, as the yield paid to the buyer increased with market interest rates. Interest and other financial costs in 1994 and 1993 included $8.3 million and $7.7 million, respectively, representing the Delhi Group's portion of USX's financial activities attributable to all three groups. Interest and other financial costs in 1992 included interest expense of $2.1 million, representing the Delhi Group's portion of USX's financial activities attributable to all three groups for the period October 2, 1992, through December 31, 1992. THE CREDIT FOR ESTIMATED INCOME TAXES was $17.6 million in 1994, compared with provisions of $18.1 million and $11.1 million in 1993 and 1992, respectively. In addition to the previously mentioned $2.9 million unfavorable tax effect associated with the sale of the Delhi Group's interest in a natural gas transmission partnership, the income tax provision for 1993 included a $4.1 million charge associated with an increase in the federal income tax rate from 34% to 35%, reflecting remeasurement of deferred federal income tax liabilities as of January 1, 1993. The Delhi Group had a NET LOSS of $30.9 million in 1994, compared with NET INCOME of $12.2 million in 1993 and $36.5 million in 1992. The 1994 net loss primarily reflected second quarter charges for the asset disposition plan and lower premiums from natural gas sales. Excluding the $17.9 million favorable cumulative effect of the 1992 adoption of Statement of Financial Accounting Standards No. 109, net income decreased by $6.4 million in 1993 from 1992. Net income presented for the portion of 1992 relating to the period prior to October 2, 1992, reflected the historical income for the businesses of the Delhi Group. Net income for this period does not reflect interest costs and related income tax amounts of the Delhi Group as it was capitalized in accordance with the USX Certificate of Incorporation effective October 2, 1992. However, pro forma income before the cumulative effect of the change in accounting principle of $13.8 million in 1992 is presented as if the capital structure of the Delhi Group was in effect beginning January 1, 1991. See Note 24 to the Delhi Group Financial Statements. D-22 134 Management's Discussion and Analysis continued MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION CURRENT ASSETS of $25.8 million at year-end 1994 were $14.6 million lower than the year-end 1993 balance due primarily to a decrease in receivables reflecting, in part, the collection in 1994 of amounts for gas sold to SWEPCO during 1993, related to a natural gas contract dispute which was settled in January 1994. The dispute precluded collection of these receivables in 1993. CURRENT LIABILITIES were $89.4 million at year-end 1994, $13.4 million lower than at year-end 1993 due primarily to a decline in accounts payable, mainly reflecting the timing of payments. TOTAL LONG-TERM DEBT AND NOTES PAYABLE at December 31, 1994, was $107.5 million. The $3.0 million decrease from year-end 1993 reflected, in part, a reduction of cash and cash equivalent balances. The amount of total long-term debt represented the Delhi Group's portion of USX debt attributed to all three groups. All of the debt is a direct obligation of, or is guaranteed by, USX. For a discussion of financial obligations, see Management's Discussion and Analysis of Cash Flows below. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CASH FLOWS NET CASH PROVIDED FROM OPERATING ACTIVITIES of $19.9 million in 1994 declined $13.3 million from 1993, primarily reflecting the decrease in income, partially offset by favorable working capital changes. These changes mainly reflected the payment of income taxes of $0.5 million in 1994 versus $22.7 million in 1993 and the collection of receivables relating to a natural gas contract dispute with SWEPCO. Cash provided from operating activities in 1993 declined $42.6 million from 1992, primarily reflecting the payment of income taxes totaling $22.7 million in 1993 versus $12.3 million in 1992, an increase in interest paid, a decline in cash realized from the sale of receivables and the delay in collection of receivables mentioned above. CAPITAL EXPENDITURES of $32.1 million in 1994 declined by 25% from 1993, following an increase of 60% in 1993 from 1992. Expenditures were primarily for the expansion of existing systems and the acquisition of pipeline systems enabling the Delhi Group to connect additional new dedicated natural gas reserves. Additions to the Delhi Group's dedicated gas reserves totaled 431 billion cubic feet ("bcf"), 382 bcf and 273 bcf in 1994, 1993 and 1992, respectively. Expenditures in all three years included amounts for improvements to and upgrades of existing facilities. Expenditures in 1994 included amounts for a pipeline construction project in western Oklahoma and the purchase of three gas treating facilities in east and west Texas, but were substantially below anticipated levels, primarily due to the termination of negotiations for the purchase of gathering and treating facilities in west Texas. Expenditures in 1993 included amounts for a multi-pipeline interconnection and compression project in the Carthage area of east Texas, the acquisition and connection of a 65-mile gas gathering system in west Texas and the purchase, connection and upgrade of a 30 million cubic feet per day ("mmcfd") cryogenic gas processing facility near existing systems in south Texas. D-23 135 Management's Discussion and Analysis continued Capital expenditures in 1995 are expected to be in the range of $35 million to $45 million. During 1995, the Delhi Group will continue to make capital expenditures to add new dedicated gas reserves, expand existing facilities and acquire new facilities as opportunities arise. CASH PROVIDED FROM DISPOSAL OF ASSETS in 1994 totaled $11.8 million, an increase of $7.6 million from 1993, primarily reflecting proceeds of $10.6 million from the sale of non-strategic assets (including the North Louisiana, Denton and Wharton systems) authorized for disposition in 1994. Cash provided from the disposal of assets in 1993 was $4.2 million, an increase of $3.3 million from 1992, primarily reflecting proceeds from the sale of the Delhi Group's interest in a natural gas transmission partnership and the sale of non-strategic gas gathering systems in Colorado. FINANCIAL OBLIGATIONS decreased by $0.8 million in 1994. These obligations consist of the Delhi Group's portion of USX debt and preferred stock of a subsidiary attributed to all three groups. The decrease in 1994 primarily reflected a reduction of cash and cash equivalent balances. For discussion of USX financing activities attributed to all three groups, see USX Consolidated Management's Discussion and Analysis of Cash Flows. PENSION PLAN ACTIVITY During 1994, the Delhi Group resumed funding of its pension plan in amounts totaling $0.2 million; funding in 1995 is expected to total approximately $1.1 million. RATING AGENCY ACTIVITY In September 1993, Standard and Poor's Corporation lowered its ratings on USX's and Marathon's senior debt to below investment grade (from BBB- to BB+) and on USX's subordinated debt, preferred stock and commercial paper. In October 1993, Moody's Investors Service, Inc. ("Moody's") confirmed its Baa3 investment grade ratings on USX's and Marathon's senior debt. Moody's also confirmed its ratings on USX's subordinated debt and commercial paper, but lowered its ratings on USX's preferred stock from ba1 to ba2. The ratings described above remain unchanged. HEDGING ACTIVITY The Delhi Group engages in hedging activities in the normal course of its businesses. New York Mercantile Exchange futures contracts and options are used to hedge exposure to price fluctuations relevant to the purchase or sale of natural gas. While hedging activities are generally used to reduce risks from unfavorable price movements, they may also limit the opportunity to benefit from favorable movements. The Delhi Group's hedging activities have not been significant in relation to its overall business activity. However, depending on management's ongoing assessment of market conditions and the associated exposure to price fluctuations, the level of hedging activity could increase in the future. Based on risk assessment procedures and internal controls in place, management believes that its use of hedging instruments will not have a material adverse effect on the financial position, liquidity or results of operations of the Delhi Group. See Notes 2 and 21 to the Delhi Group Financial Statements. D-24 136 Management's Discussion and Analysis continued LIQUIDITY For discussion of USX's liquidity and capital resources, see USX Consolidated Management's Discussion and Analysis of Cash Flows. MANAGEMENT'S DISCUSSION AND ANALYSIS OF ENVIRONMENTAL MATTERS, LITIGATION AND CONTINGENCIES The Delhi Group has incurred and will continue to incur capital and operating and maintenance expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the Delhi Group's products and services, operating results will be adversely affected. The Delhi Group believes that substantially all of its competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities and its production processes. Delhi Group environmental expenditures for each of the last three years were(a):
(Dollars in millions) 1994 1993 1992 - ------------------------------------------------------------------ Capital $ 4.6 $ 4.5 $ 3.0 Compliance Operating & Maintenance 5.5 5.3 4.9 ------- ------- ------- Total $ 10.1 $ 9.8 $ 7.9 - ------------------------------------------------------------------
(a) Estimated based on American Petroleum Institute survey guidelines. The Delhi Group's environmental capital expenditures accounted for 14% of total capital expenditures in 1994 and 11% in both 1993 and 1992. Compliance expenditures represented 1% of the Delhi Group's total operating costs in each of the last three years. Remediation expenditures were not material. Some environmental related expenditures, while benefiting the environment, also enhance operating efficiencies. New or expanded environmental requirements, which could increase the Delhi Group's environmental costs, may arise in the future. USX intends to comply with all legal requirements regarding the environment, but since many of them are not fixed or presently determinable (even under existing legislation) and may be affected by future legislation, it is not possible to accurately predict the ultimate cost of compliance, including remediation costs which may be incurred and penalties which may be imposed. However, based on presently available information, and existing laws and regulations as currently implemented, management does not anticipate that environmental compliance expenditures (including operating and maintenance and remediation) will materially increase in 1995. The Delhi Group's capital expenditures for environmental controls are expected to be approximately $5 million in 1995. Predictions beyond 1995 can only be broad-based estimates which have varied, and will continue to vary, due to the ongoing evolution of specific regulatory requirements, the possible imposition of more stringent requirements and the availability of new technologies, among other matters. Based upon currently identified projects, the Delhi Group anticipates that environmental capital expenditures will be approximately $5 million in 1996; however, actual expenditures may vary as the number and scope of environmental projects are revised as a result of improved technology or changes in regulatory requirements and could increase if additional projects are identified or additional requirements are imposed. D-25 137 Management's Discussion and Analysis continued 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 which are discussed in Note 23 to the Delhi Group Financial Statements. 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 USX Consolidated Management's Discussion and Analysis of Cash Flows. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS RESTRUCTURING AND REORGANIZATION ACTIVITY In June 1994, following a management review of the Delhi Group's overall cost structure and asset base, a plan was approved for the disposition of certain non-strategic assets in Arkansas, Kansas, Louisiana, Oklahoma and Texas, including pipeline systems comprised of approximately 1,500 miles of gas pipeline and four gas processing plants. The Delhi Group recorded noncash pretax restructuring charges totaling $39.9 million in the second quarter of 1994 for the write-down of these assets to estimated net realizable value. Charges of $37.4 million were included in operating costs and a charge of $2.5 million was included in other income (loss). Depreciation expense reductions related to the restructuring totaled $3.1 million in each of the third and fourth quarters of 1994; reductions are expected to total approximately $7.4 million in the year 1995. Proceeds from the sale of restructured assets totaled $10.6 million in 1994. The Delhi Group intends to complete the remaining asset disposals during 1995. At year-end 1994, actual proceeds exceeded estimated amounts by approximately $4.8 million; however, this potential favorable adjustment was not recognized, pending completion of the remaining disposals. In addition to the restructuring charges, the Delhi Group recorded pretax employee reorganization expenses of $1.7 million in the second quarter of 1994, primarily reflecting employee severance and relocation costs associated with a work force reduction program designed to realign the organization with current business conditions. The program resulted in a 15% work force reduction and affected regional and headquarters employees in various job functions. The program resulted in employment cost reductions of approximately $1.8 million during the last six months of 1994 and is expected to result in an annual cost reduction of approximately $5 million, following full implementation. OVERVIEW OF OPERATIONS The Delhi Group's operating results are affected by fluctuations in natural gas prices and demand levels in the markets that it serves. The level of gas sales margin is greatly influenced by the demand for premium services and the volatility of natural gas prices. Because the strongest demand for gas and the highest gas sales unit margins generally occur during the winter heating season, the Delhi Group has historically recognized the greatest portion of income from its gas sales business during the first and fourth quarters of the year. D-26 138 Management's Discussion and Analysis continued The Delhi Group buys natural gas from producers connected to its systems, often at prices based on market index prices. The Delhi Group attempts to sell all of the natural gas available on its systems each month. Natural gas volumes not sold to its premium markets are typically sold on the spot market, generally at lower average unit margins than those realized from premium sales. The Delhi Group's four largest customers accounted for 41%, 45% and 39% of its total gross margin and 25%, 18% and 14% of its total systems throughput in 1994, 1993 and 1992, respectively. In situations where one or more of the Delhi Group's largest customers reduce volumes taken under an existing contract, or choose not to renew such contract, the Delhi Group is adversely affected to the extent it is unable to find alternative customers to buy gas at the same level of profitability. Gas sales margin in 1994 declined from 1993 due mainly to lower premiums from SWEPCO, lower margins from Oklahoma Natural Gas Company, declining natural gas prices (which led to lower unit margins from other customers) and warm winter weather in the Delhi Group's prime service areas which shifted volumes normally sold to local distribution customers into the lower-margin spot market. Premiums from SWEPCO declined by $16.2 million in 1994 as compared with 1993, reflecting the renegotiation of a natural gas purchase agreement with provisions for market sensitive prices beginning in February 1994. The downward trend in natural gas prices during 1994 stemmed from the unseasonably mild weather, which led to a softening of demand. This trend could continue as natural gas wellhead deliveries compete with storage withdrawal for market share. Natural gas volumes from trading sales averaged 94.7 mmcfd in 1994 (148.5 mmcfd in the fourth quarter). The Delhi Group anticipates continued expansion of its trading business in the future. The trading business involves the purchase of natural gas from sources other than wells directly connected to the Delhi Group's systems, and the subsequent sale of like volumes. Unit margins earned in the trading business are significantly less than those earned on system premium sales. The Delhi Group monitors the economics of removing NGLs from the gas stream for processing on an ongoing basis to determine the appropriate level of each gas plant's operation. Unit margins from gas processing are a function of the sales prices for NGLs, which tend to fluctuate with changes in the price of crude oil, and the cost of natural gas feedstocks from which NGLs are extracted. Due to unfavorable economics in late 1993 and early 1994, the Delhi Group chose to curtail gas processing, resulting in a 22% decline in first quarter 1994 NGLs sales volumes as compared with the first quarter of 1993. During the final three quarters of 1994, average NGLs prices, sales volumes and gas processing gross margins improved significantly from the depressed first quarter 1994 levels. Despite this improvement, average gas processing gross margin in 1994 was 10% lower than in 1993. OPERATING INCOME (LOSS) The Delhi Group recorded an operating loss of $35.8 million in 1994 (which included a $37.4 million restructuring charge), compared with operating income of $35.6 million in 1993 and $32.6 million in 1992. The following discussion provides analyses of gross margin (by principal service) and operating expenses for each of the last three years. D-27 139 Management's Discussion and Analysis continued GAS SALES AND TRADING MARGIN, GAS SALES THROUGHPUT AND TRADING SALES VOLUMES for each of the last three years were:
(Dollars in millions) 1994 1993 1992 - ------------------------------------------------------------------- Gas sales and trading margin $ 70.3 $ 104.5 $ 96.1 Gas sales throughput (bcf) 227.9 203.2 200.0 Trading sales volumes (bcf) 34.6 - - - -------------------------------------------------------------------
Gas sales and trading margin decreased by 33% in 1994 from 1993, following an increase of 9% in 1993 from 1992. The decrease in 1994 mainly reflected a decline in premiums due to the renegotiation of a gas purchase agreement with SWEPCO, reduced demand from local distribution customers induced by mild weather in the Delhi Group's core service areas, and a downward trend in natural gas prices during 1994 which led to lower average unit margins. The improvement in 1993 mainly reflected increased sales to higher-margin customers. Margins on spot sales were affected by fluctuations in natural gas prices throughout most of 1994 and 1993 although overall average prices increased in 1993 from the prior year. Additions to dedicated natural gas reserves in 1994, 1993 and 1992 contributed to the increases in gas sales throughput. TRANSPORTATION MARGIN and THROUGHPUT for each of the last three years were:
1994 1993 1992 - ---------------------------------------------------------------------- Transportation margin (millions) $ 11.7 $ 14.2 $ 14.8 Transportation throughput (bcf) 99.1 117.6 103.4 - ----------------------------------------------------------------------
Transportation margin decreased by 18% to $11.7 million in 1994 and by 4% to $14.2 million in 1993. The decrease in 1994 was due primarily to lower throughput volumes, reflecting increased competition and natural declines in production on third-party wells. The decrease in 1993 was due primarily to lower average rates, which more than offset the favorable effect of higher average throughput volumes. The changes in transportation volumes and rates during 1993 and 1992 reflected a strategy of offering producers transportation rate incentives in order to increase the Delhi Group's dedicated natural gas reserve base and the supply of gas to its plants. The aggregation of transportation and processing services increased the Delhi Group's overall gross margin during these years, although the transportation rate was lower than the normal rate charged for transportation as a separate service. This rate incentive strategy was temporarily abandoned during much of 1994, due to the downturn in the economics for gas processing. GAS PROCESSING MARGIN, NGLS SALES VOLUME AND NGLS SALES PRICE for each of the last three years were:
1994 1993 1992 - ----------------------------------------------------------------------------- Gas processing margin (millions) $ 15.6 $ 17.3 $ 26.1 NGLs sales volume (millions of gallons) 275.8 282.0 261.4 NGLs sales price ($/Gallon) $ .23 $ .26 $ .27 - -----------------------------------------------------------------------------
The 10% decline in gas processing margin in 1994 resulted primarily from lower average NGLs prices, partially offset by a decline in average plant feedstock (natural gas) costs. The 34% decline in gas processing margin in 1993 resulted from higher average plant feedstock costs, primarily in the first nine months of 1993, and lower NGLs prices which trended downward with D-28 140 Management's Discussion and Analysis continued crude oil prices in the last half of 1993. NGLs volumes for 1993 increased by 8% from the prior year as the Delhi Group continued to add dedicated natural gas reserves, with the associated gas processing rights, to its systems. However, fourth quarter 1993 NGLs volumes declined by 17% from the third quarter of 1993 as the Delhi Group chose to curtail the extraction of certain NGLs due to a decline in NGLs prices. NGLs volumes declined further in the first quarter of 1994, but rebounded as prices improved during the last three quarters of the year. The Delhi Group will continue to monitor the economics of removing NGLs from the gas stream for processing on an ongoing basis to determine the appropriate level of each gas plant's operation. OTHER OPERATING COSTS (not included in gross margin) for each of the last three years were:
(Dollars in millions) 1994 1993 1992 - ------------------------------------------------------------------------------------ Operating expenses (included in cost of sales) $ 29.4 $ 28.0 $ 29.1 Selling, general and administrative expenses 28.7 28.6 28.8 Depreciation, depletion and amortization 30.1 36.3 40.2 Taxes other than income taxes 8.0 7.6 7.2 Restructuring charges 37.4 - - ------- ------- ------- Total $ 133.6 $ 100.5 $ 105.3 - ------------------------------------------------------------------------------------
Operating expenses of $29.4 million in 1994 increased by $1.4 million from 1993, due mainly to expenses associated with new gas treating facilities; 1994 operating expenses related to the work force reduction program were mostly offset by associated cost savings. Operating expenses of $28.0 million in 1993 declined by $1.1 million from 1992, due mainly to cost control procedures. Selling, general and administrative expenses of $28.7 million in 1994 reflected increased employment-related costs as compared with the prior year, partially offset by net cost savings associated with the work force reduction program and other cost control procedures. Depreciation, depletion and amortization of $30.1 million in 1994 declined from 1993 primarily due to the asset disposition plan implemented during the second quarter of 1994. Depreciation, depletion and amortization of $36.3 million in 1993 declined from 1992, mainly due to certain assets becoming fully depreciated during the prior year. Taxes other than income taxes in 1993 included a $0.8 million refund of prior-years' sales taxes. Restructuring charges reflected the previously mentioned write-down of certain non-strategic assets to estimated net realizable value in the second quarter of 1994 in connection with the asset disposition plan. OUTLOOK During 1995, the Delhi Group expects to complete the restructuring plan begun in the second quarter of 1994, allowing a more concentrated focus on the management of core assets in western Oklahoma and east, west and south Texas. The benefits of the restructuring plan and the 1994 work force reduction program, such as reduced depreciation, operating and other expenses, are expected to continue in 1995. D-29 141 Management's Discussion and Analysis continued The levels of gas sales margin for future periods are difficult to accurately project because of systemic fluctuations in customer demand for premium services, competition in attracting new premium customers and the volatility of natural gas prices. However, continued mild weather in the Delhi Group's core service areas during January 1995 reduced demand for premium services and gas sales margin in the summer of 1995 could be unfavorably affected by the expiration in August 1994 of the Delhi Group's premium service contract with Central Power and Light Company, a utility electric generator serving south Texas. If the mild weather persists, high natural gas inventory levels may continue to put pressure on prices during 1995, as wellhead deliveries compete with storage withdrawals for market share. The volume of trading sales is expected to expand significantly during 1995, although margins earned on trading sales are significantly less than those earned on system premium sales. The levels of gas processing margin for future periods are also difficult to project, due to fluctuations in the price and demand for NGLs and the volatility of natural gas prices (feedstock costs). However, management can reduce the volume of NGLs extracted and sold during periods of unfavorable economics by curtailing the extraction of certain NGLs. The Financial Accounting Standards Board intends to issue "Accounting for the Impairment of Long-Lived Assets" in the near future. This standard, which is expected to be effective for 1996, requires that operating assets be written down to fair value whenever an impairment review indicates that the carrying value cannot be recovered on an undiscounted cash flow basis. After any such noncash write-down of operating assets, results of operations would be favorably affected by reduced depreciation, depletion and amortization charges. USX will be initiating an extensive review to implement the anticipated standard and, at this time, cannot provide an assessment of either the impact or the timing of adoption, although it is possible that the Delhi Group may be required to recognize certain charges upon adoption. Under current accounting policy, USX generally has only impaired property, plant and equipment under the provisions of Accounting Principles Board Opinion No. 30 and its interpretations. D-30 EX-23 2 USX 8-K 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the prospectuses constituting part of the Registration Statements listed below of our reports dated February 14, 1995 relating to the Consolidated Financial Statements of USX Corporation, the Financial Statements of the Marathon Group, the Financial Statements of the U.S. Steel Group, and the Financial Statements of the Delhi Group, appearing on pages U-3, M-3, S-3 and D-3 respectively, of this Form 8-K: On Form S-3: Relating to: File No. 33-34703 Marathon Group Dividend Reinvestment Plan 33-43719 U.S. Steel Group Dividend Reinvestment Plan 33-60172 U.S. Steel Group Dividend Reinvestment Plan 33-51621 USX Corporation Debt Securities, Preferred Stock and Common Stock 33-60142 USX Corporation Debt Securities 33-50191 USX Corporation Debt Securities, Preferred Stock and Common Stock 33-52937 USX Debt Securities On Form S-8: Relating to: File No. 2-76726 USX Savings Plan 2-76917 USX 1976 Stock Option Plan 33-6248 USX 1986 Stock Option Plan 33-8669 Marathon Oil Company Thrift Plan 33-38025 USX 1990 Stock Plan 33-41864 USX 1990 Stock Plan 33-48116 Parity Investment Bonus 33-54333 Parity Investment Bonus 33-54760 Thrift Plan for Employees of Delhi Gas Pipeline Corporation 33-56828 Marathon Oil Company Thrift Plan PRICE WATERHOUSE LLP 600 Grant Street Pittsburgh, PA 15219-2794 March 3, 1995 -----END PRIVACY-ENHANCED MESSAGE-----