<PAGE> 1
FORM 10-K
1994
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM __________________ TO __________________
COMMISSION FILE NUMBER 1-5153
USX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 25-0996816
(State of Incorporation) (I.R.S. Employer Identification No.)
600 GRANT STREET, PITTSBURGH, PA 15219-4776
(Address of principal executive offices)
TEL. NO. (412) 433-1121
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:*
================================================================================
TITLE OF EACH CLASS
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
USX-MARATHON GROUP ZERO COUPON CONVERTIBLE SENIOR DEBENTURES
COMMON STOCK, PAR VALUE $1.00 DUE 2005
USX-U. S. STEEL GROUP 7% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2017
COMMON STOCK, PAR VALUE $1.00 5-3/4% CONVERTIBLE SUBORDINATED DEBENTURES
USX-DELHI GROUP COMMON STOCK, PAR VALUE $1.00 DUE 2001
ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK 4-5/8% SUBORDINATED DEBENTURES DUE 1996
(STATED VALUE $50.00 PER SHARE) 8-7/8% NOTES DUE 1997
6.50% CUMULATIVE CONVERTIBLE PREFERRED 8-3/4% CUMULATIVE MONTHLY INCOME PREFERRED SHARES,
(LIQUIDATION PREFERENCE $50.00 PER SHARE) SERIES A (LIQUIDATION PREFERENCE $25 PER SHARE)**
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
OBLIGATIONS OF MARATHON OIL COMPANY, A WHOLLY OWNED SUBSIDIARY OF THE REGISTRANT***
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
8-1/2% SINKING FUND DEBENTURES DUE 2000 9-3/4% GUARANTEED NOTES DUE 1999
8-1/2% SINKING FUND DEBENTURES DUE 2006 7% GUARANTEED NOTES DUE 2002
====================================================================================================================================
</TABLE>
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR AT LEAST THE PAST 90 DAYS. YES X NO
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K (Section 229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN,
AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X]
AGGREGATE MARKET VALUE OF COMMON STOCK HELD BY NON-AFFILIATES AS OF FEBRUARY
28, 1995: $7.3 BILLION. THE AMOUNT SHOWN IS BASED ON THE CLOSING PRICES OF THE
REGISTRANT'S COMMON STOCKS ON THE NEW YORK STOCK EXCHANGE COMPOSITE TAPE ON
THAT DATE. SHARES OF COMMON STOCK HELD BY EXECUTIVE OFFICERS AND DIRECTORS OF
THE REGISTRANT ARE NOT INCLUDED IN THE COMPUTATION. HOWEVER, THE REGISTRANT
HAS MADE NO DETERMINATION THAT SUCH INDIVIDUALS ARE "AFFILIATES" WITHIN THE
MEANING OF RULE 405 UNDER THE SECURITIES ACT OF 1933.
THERE WERE 287,185,912 SHARES OF USX-MARATHON GROUP COMMON STOCK, 76,206,339
SHARES OF USX-U. S. STEEL GROUP COMMON STOCK AND 9,437,891 SHARES OF USX-DELHI
GROUP COMMON STOCK OUTSTANDING AS OF FEBRUARY 28, 1995.
DOCUMENTS INCORPORATED BY REFERENCE:
PROXY STATEMENTS DATED APRIL 13, 1992 AND MARCH 10, 1995 FOR THE 1992 AND
1995 ANNUAL MEETINGS OF STOCKHOLDERS.
____________________
[FN]
* THESE SECURITIES ARE LISTED ON THE NEW YORK STOCK EXCHANGE. IN
ADDITION, THE COMMON STOCKS ARE LISTED ON THE CHICAGO STOCK EXCHANGE AND
THE PACIFIC STOCK EXCHANGE.
** ISSUED BY USX CAPITAL LLC, A WHOLLY OWNED SUBSIDIARY OF THE REGISTRANT.
*** ALL OF THE LISTED OBLIGATIONS OF MARATHON OIL COMPANY HAVE BEEN
GUARANTEED BY THE REGISTRANT.
<PAGE> 2
INDEX
<TABLE>
<S> <C> <C>
PART I
NOTE ON PRESENTATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Item 1. BUSINESS
USX CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . 3
MARATHON GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . 4
U. S. STEEL GROUP . . . . . . . . . . . . . . . . . . . . . . . . . 26
DELHI GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Item 3. LEGAL PROCEEDINGS
MARATHON GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . 50
U. S. STEEL GROUP . . . . . . . . . . . . . . . . . . . . . . . . . 51
DELHI GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . 57
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . 58
Item 6. SELECTED FINANCIAL DATA
USX CONSOLIDATED . . . . . . . . . . . . . . . . . . . . . . . . . 60
MARATHON GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . 62
U. S. STEEL GROUP . . . . . . . . . . . . . . . . . . . . . . . . . 63
DELHI GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
USX CONSOLIDATED . . . . . . . . . . . . . . . . . . . . . . . . . U-38
MARATHON GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . M-24
U. S. STEEL GROUP . . . . . . . . . . . . . . . . . . . . . . . . . S-23
DELHI GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . D-21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
USX CONSOLIDATED . . . . . . . . . . . . . . . . . . . . . . . . . U-1
MARATHON GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . M-1
U. S. STEEL GROUP . . . . . . . . . . . . . . . . . . . . . . . . . S-1
DELHI GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . D-1
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . 65
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . 67
Item 11. MANAGEMENT REMUNERATION . . . . . . . . . . . . . . . . . . . . . . . . . 68
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . 68
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
</TABLE>
1
<PAGE> 3
NOTE ON PRESENTATION
USX Corporation ("USX" or the "Corporation") is a diversified company
which is principally engaged in the energy business through its Marathon Group,
in the steel business through its U. S. Steel Group and in the gas gathering
and processing business through its Delhi Group. 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") (such three classes collectively, the "Common Stock"). Each
class of Common Stock is intended to provide stockholders of such class with a
separate security reflecting the performance of the related group.
USX continues to include consolidated financial information in its
periodic reports required by the Securities Exchange Act of 1934, in its annual
shareholder reports and in other financial communications. The consolidated
financial statements are supplemented with separate financial statements of the
Marathon Group, the U. S. Steel Group and the Delhi Group, together with the
related Management's Discussion and Analyses, descriptions of business and
other financial and business information to the extent such information is
required to be presented in the report being filed. The financial information
of the Marathon Group, the U. S. Steel Group and the Delhi Group, taken
together, includes all accounts which comprise the corresponding consolidated
financial information of USX.
For consolidated financial reporting purposes, USX's reportable
industry segments correspond with its three groups. The attribution of assets,
liabilities (including contingent liabilities) and stockholders' equity among
the Marathon Group, the U. S. Steel Group and the Delhi Group for the purpose
of preparing their respective financial statements does not affect legal title
to such assets and responsibility for such liabilities. Holders of Marathon
Stock, Steel Stock and Delhi Stock are holders of common stock of USX and
continue to be subject to all of the risks associated with an investment in USX
and all of its businesses and liabilities. Financial impacts arising from any
of the groups which affect the overall cost of USX's capital could affect the
results of operations and financial condition of all groups. 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 perferred 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 USX common stock. Accordingly, the USX consolidated
financial information should be read in connection with the Marathon Group,
the U. S. Steel Group and the Delhi Group financial information.
For information regarding accounting matters and policies affecting
the Marathon Group, the U. S. Steel Group and the Delhi Group financial
statements, see "Financial Statements and Supplementary Data - Notes to
Financial Statements - 1. Basis of Presentation and - 3. Corporate Activities"
for each respective group. For information regarding dividend limitations and
dividend policies affecting holders of Marathon Stock, Steel Stock and Delhi
Stock, see "Market for Registrant's Common Equity and Related Stockholder
Matters."
2
<PAGE> 4
PART I
ITEM 1. BUSINESS
USX CORPORATION
USX Corporation was incorporated in 1901 and is a Delaware
corporation. Executive offices are located at 600 Grant Street, Pittsburgh, PA
15219-4776. The terms "USX" and "Corporation" when used herein refer to USX
Corporation or USX Corporation and its subsidiaries, as required by the
context.
INDUSTRY SEGMENTS
For consolidated reporting purposes, USX's reportable industry
segments correspond with its three groups. A description of the groups and
their products and services is as follows:
- The Marathon Group is engaged in worldwide exploration,
production, transportation and marketing of crude oil and natural
gas; and domestic refining, marketing and transportation of
petroleum products.
- The U. S. Steel Group includes U. S. Steel, the largest integrated
steel producer in the United States, 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, and leasing and financing activities.
- The Delhi Group is engaged in the purchasing, gathering,
processing, transporting and marketing of natural gas. Data with
respect to the Delhi Group for periods prior to October 2, 1992,
represent the historical financial data of the businesses included
in the Delhi Group. Such data for periods prior to that date are
included in the Marathon Group.
The total number of active USX Headquarters employees not assigned to
a specific group at year-end was 276 in 1994, 292 in 1993 and 364 in 1992.
3
<PAGE> 5
Below is a three-year summary of financial highlights for the groups.
<TABLE>
<CAPTION>
OPERATING
INCOME ASSETS
SALES (LOSS)(a) (AT YEAR-END)
----- --------- -------------
(MILLIONS)
<S> <C> <C> <C>
Marathon Group (b)
1994 . . . . . . . . . . . . $12,757 $ 584 $10,951
1993 . . . . . . . . . . . . 11,962 169 10,822
1992 . . . . . . . . . . . . 12,782 304 11,141
U. S. Steel Group
1994 . . . . . . . . . . . . $ 6,066 $ 313 $ 6,480
1993 . . . . . . . . . . . . 5,612 (149) 6,629
1992 . . . . . . . . . . . . 4,919 (241) 6,251
Delhi Group (c)
1994 . . . . . . . . . . . . $ 567 $ (36) $ 521
1993 . . . . . . . . . . . . 535 36 583
1992 . . . . . . . . . . . . 458 33 565
<FN>
_________________
(a) Included the following: a charge of $342 million related to the Lower
Lake Erie Iron Ore Antitrust Litigation against a former USX subsidiary,
the Bessemer & Lake Erie Railroad ("B&LE"), for the U. S. Steel Group in
1993; 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; restructuring charges of $37
million for the Delhi Group in 1994; and inventory market valuation
charges (credits) for the Marathon Group of $(160) million, $241 million
and $(62) million in 1994, 1993 and 1992, respectively.
(b) Included sales and operating income for the businesses comprising the
Delhi Group for the period prior to October 2, 1992.
(c) Data presented for the period prior to October 2, 1992, reflect the
combined historical financial information for the businesses comprising
the Delhi Group. Data presented for periods beginning on or subsequent
to October 2, 1992, reflect the financial information for the businesses
of the Delhi Group as well as 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 the ongoing operating units of USX.
</TABLE>
MARATHON GROUP
The Marathon Group includes Marathon Oil Company ("Marathon") and
certain other subsidiaries of USX which are engaged in worldwide exploration,
production, transportation and marketing of crude oil and natural gas; and
domestic refining, marketing and transportation of petroleum products. Marathon
Group sales (excluding sales from businesses now included in the Delhi Group)
as a percentage of USX consolidated sales were 66% in each of 1994 and 1993 and
69% in 1992. Prior to October 2, 1992, the Marathon Group also included the
businesses of Delhi Gas Pipeline Corporation and certain other subsidiaries of
USX 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. For further
4
<PAGE> 6
discussion of the Retained Interest, see "Financial Statements and
Supplementary Data - Notes to Financial Statements - 3. Corporate
Activities - Common stock transactions" for the Marathon Group.
The following table summarizes Marathon Group sales for each of the
last three years:
<TABLE>
<CAPTION>
SALES
(MILLIONS) 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Refined Products and Merchandise . . . . . . . . $ 6,491 $ 6,561 $ 6,629
Crude Oil and Condensate . . . . . . . . . . . . 746 567 764
Natural Gas . . . . . . . . . . . . . . . . . . 670 607 581
Natural Gas Liquids . . . . . . . . . . . . . . 54 60 68
Transportation, Drilling and Other . . . . . . . 183 222 548
Matching Buy/Sell Transactions (a) . . . . . . . 2,071 2,018 2,537
Excise Taxes (b) . . . . . . . . . . . . . . . . 2,542 1,927 1,655
-------- --------- ---------
TOTAL SALES . . . . . . . . . . . . . . . . . . $ 12,757 $ 11,962 $ 12,782
======== ========= =========
<FN>
- ------------
(a) Consist of sales of crude oil and refined products which are offset in
cost of sales by costs of matching purchases of corresponding volumes,
resulting in no effect on income. Buy/sell transactions are settled in
cash.
(b) Included in both sales and operating costs, resulting in no effect on
income.
</TABLE>
The oil and gas industry is characterized by a large number of
companies, none of which is dominant within the industry, but a number of which
have greater resources than Marathon. Marathon must compete with these
companies for the rights to explore for oil and gas. Acquiring the more
attractive exploration opportunities frequently requires competitive bids
involving substantial front-end bonus payments or commitments to work programs.
Based on worldwide liquid hydrocarbon and natural gas production for 1993, the
most recent year for which such information has been compiled by Oil & Gas
Journal, Marathon ranked 13th among U.S. based petroleum corporations.
Marathon believes it has 28 primary U.S. based exploration and production
competitors, and a much larger number worldwide. Marathon must also compete
with these and many other companies to acquire crude oil for refinery
processing and in the distribution and marketing of a full array of petroleum
products. Based on the U. S. Department of Energy's Petroleum Supply Annual
for 1993, which is the most recent year for which such information is
available, Marathon ranked eighth among U. S. petroleum corporations on the
basis of crude oil refining capacity. In addition, based on 1993 data
published by National Petroleum News, Marathon ranked ninth in refined product
sales volumes. Marathon competes in three distinct markets for the sale of
refined products in the Midwest and Southeast, and believes that its primary
competitors in these markets include 43 companies in the wholesale distribution
of petroleum products to private brand marketers and large commercial and
industrial consumers; nine refiner/marketers in the supply of branded petroleum
products to dealers and jobbers; and over 1,000 petroleum product retailers in
the retail sale of petroleum products. Marathon also competes in the
convenience store industry through its retail outlets.
The Marathon Group's operating results are affected by price changes
in crude oil, natural gas and petroleum products as well as changes in
competitive conditions in the markets it serves. Generally, operating results
from production operations benefit from higher crude oil and natural gas prices
while refining and marketing margins may be adversely affected by crude oil
price increases. Market conditions in the oil industry are cyclical and
subject to global economic and political events.
5
<PAGE> 7
The following table sets forth the number of active Marathon Group
employees at year-end for each of the last three years:
NUMBER OF ACTIVE EMPLOYEES AT YEAR-END
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Marathon Group 20,711 21,914 22,509
Emro Marketing Company (included above) 11,972 11,862 11,750
</TABLE>
The reduction in the total number of employees between 1992 and 1994
primarily reflected implementation of work force reduction programs, the sale
of the assets of a propane marketing subsidiary, the temporary idling of
Marathon's Indianapolis refinery, the sale of the assets of a convenience store
distribution warehouse facility and the closing of a lubricants and accessory
supply facility. These factors were partially offset by the addition of
employees staffing retail marketing outlets acquired during 1993 and 1994.
Certain Marathon hourly employees at two of its four operating
refineries and various other locations are represented by labor unions. On
November 16, 1994, concurrent with the expiration of a labor agreement, 239
Detroit refinery and terminal employees represented by the International
Brotherhood of Teamsters ("Teamsters") went on strike. On March 4, 1995, these
employees ratified a new five-year labor agreement expiring on February 1,
2000. During the strike, the refinery and terminal were operated by salaried
personnel, with no adverse effect on operations or on Marathon's ability to
supply products to associated marketing areas. Certain hourly employees at the
Texas City refinery are represented by the Oil, Chemical and Atomic Workers
Union under a labor agreement which expires on March 31, 1996.
OIL AND NATURAL GAS EXPLORATION AND DEVELOPMENT
Marathon is currently conducting exploration and development
activities in 17 countries, including the United States. Principal exploration
activities are in the United States, the United Kingdom, Ireland, Bolivia,
China, Gabon, Egypt, Tunisia, the Netherlands and Argentina. Principal
development activities are in the United States, the United Kingdom, Indonesia,
the Netherlands, Ireland, Norway and Egypt. Marathon is also pursuing
potential long-term development opportunities in Russia and Syria.
Exploration activities during 1994 resulted in discoveries in the
United Kingdom and the United States (both onshore and in the Gulf of Mexico).
6
<PAGE> 8
The following table sets forth, by geographic area, the number of net
productive and dry development and exploratory wells completed in each of the
last three years (references to "net" wells or production indicate Marathon's
ownership interest or share as the context requires):
<TABLE>
<CAPTION>
NET PRODUCTIVE AND DRY WELLS COMPLETED (a)
1994 1993 1992
---- ---- ----
Development (b) PROD. DRY PROD. DRY PROD. DRY
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
United States (c) . . . . . 139 9 104 2 28 1
Europe . . . . . . . . . . . 3 - 1 - - 1
Middle East and Africa . . . - - 2 - 3 1
---- ---- ---- ---- ---- -----
TOTAL . . . . . . . . . . . . . . . . 142 9 107 2 31 3
==== ==== ==== ==== ==== =====
Exploratory
United States . . . . . . . 13 11 11 12 29 12
Europe . . . . . . . . . . . 2 1 1 1 1 1
Middle East and Africa . . . - 3 1 1 3 10
Other International . . . . - 1 - 4 - 4
---- ---- ---- ---- ---- -----
TOTAL . . . . . . . . . . . . . . . . 15 16 13 18 33 27
==== ==== ==== ===== ==== =====
<FN>
- -----------
(a) Includes the number of wells completed during the year regardless of when
drilling was initiated. Completion refers to the installation of
permanent equipment for the production of oil or gas or, in the case of a
dry well, the reporting of abandonment to the appropriate agency.
(b) Indicates wells drilled in the proved area of an oil or gas reservoir.
(c) The increases between years primarily reflected improved economics for
domestic natural gas drilling activity in 1993 and 1994.
</TABLE>
United States
In the United States Marathon completed 38 gross wildcat and
delineation ("exploratory") wells (24 net wells) during 1994, including 8 gross
wells (5 net wells) on which drilling began in prior years. Principal domestic
exploration and development activities were in the U. S. Gulf of Mexico and
the states of Texas, Louisiana, Oklahoma and Wyoming.
Exploration expenses during the three years ended December 31, 1994,
totaled $224 million in the United States, of which $84 million was incurred in
1994. Development expenditures during the three years ended December 31, 1994,
totaled $623 million in the United States, of which $276 million was incurred
in 1994.
The following is a summary of recent, significant exploration and
development activity in the United States including discussion, as deemed
appropriate, of completed wells, drilling wells and wells under evaluation.
The Ewing Bank 873 discovery well was drilled in the Gulf of Mexico in
early 1991. Installation of the Ewing Bank platform is complete, and
production began in August 1994 and is expected to peak at 45,000 gross barrels
per day ("bpd") of 21.5 degree American Petroleum Institute ("API") gravity
crude oil and 30 gross million cubic feet per day ("mmcfd") of gas. The
development is expected to ultimately produce an estimated 66 million gross
barrels of oil and 45 gross billion cubic feet ("bcf") of gas. Marathon is the
operator and holds a 66.67% working interest in this development which is
located in 775 feet of water.
In the South Pass Block 89 Field, delineation wells drilled in 1994
from the South Pass 87 template to bottom hole locations on West Delta Block
128 and South Pass Block 88 encountered gas/condensate pay. Fabrication of
"platform D" began in 1994, and first production is planned for mid-
7
<PAGE> 9
1995. Marathon is the operator and holds a 33.3% working interest in South
Pass 87, which is located offshore Louisiana in 375 feet of water, and a
50% working interest in West Delta 128 and South Pass 88.
In 1994, the Green Canyon 244 No. 1 discovery well encountered over
350 feet of net oil and gas pay, with most of the net oil pay in a single sand.
Fluid samples indicated a 36.5 degree API gravity crude oil. Marathon is the
operator and holds a 33.3% working interest in this discovery which is located
offshore Louisiana in 2,800 feet of water. Appraisal activity began in 1994
and will continue into 1995.
In 1992, Marathon announced that a discovery well drilled on South
Marsh Island Block 192, offshore Louisiana, encountered 65 feet of net gas pay.
Development is scheduled to begin in 1995. Marathon holds a 33.3% working
interest in this block which is located in 394 feet of water.
Development options are being evaluated for a 1993 exploratory well
drilled in 1,900 feet of water at Ewing Bank 1006, located ten miles south of
Ewing Bank 873. The well encountered 77 feet of oil sand and tested at a rate
of 1,200 gross bpd of oil and 0.7 gross mmcfd of natural gas. Marathon is the
operator and holds a 33.3% working interest in the well.
During 1994, the Nash No. 1 exploratory well encountered a 300 foot
reef section of the Cotton Valley formation in east Texas. A subsequent well,
which reached total depth in 1995, encountered a reef section in a separate
structure and is being evaluated. Marathon holds a 100% working interest in
these wells. The Cotton Valley program is expected to continue through 1995
with the drilling of up to five additional exploratory wells.
Contract Drilling-FWA Drilling Company, Inc. owns 28 onshore rotary
drilling rigs operating in the state of Texas.
International
Outside the United States during 1994, Marathon completed 14 gross
exploratory wells (7 net wells) in 6 countries, including 8 gross wells (4 net
wells) on which drilling began in prior years. Marathon drilled to total depth
8 gross exploratory wells (4 net wells) in 4 countries during 1994. Of the 8
wells, 2 wells in the United Kingdom encountered hydrocarbons and 6 were
completed, plugged and abandoned.
Marathon's expenses for international oil and natural gas exploration
activities during the three years ended December 31, 1994, totaled $250
million, of which $73 million was incurred in 1994. Marathon's international
development expenditures during the three years ended December 31, 1994,
totaled $912 million, of which $146 million was incurred in 1994. Development
expenditures during this three-year period included $718 million of the total
$1.109 billion expended by Marathon for the development of the East Brae Field
and construction of the Scottish Area Gas Evacuation ("SAGE") system. Marathon
plans continued expenditures on international projects.
The following is a summary of recent, significant exploration and
development activity outside the United States, including discussion, as deemed
appropriate, of completed wells, drilling wells and wells under evaluation.
United Kingdom-Marathon is continuing its development of the Brae area
in the United Kingdom sector of the North Sea where it is the operator and owns
a 41.6% revenue interest in the South, Central and North Brae Fields and a
38.5% revenue interest in the East Brae Field (as a result of a redetermination
of East Brae unit interest ownership, Marathon's net revenue interest in East
Brae was reduced from 39.1%). Marathon has interests in 24 blocks in the U.K.
North Sea and other offshore areas.
Formal U.K. Government approval to develop the Beinn Field was
received in February 1994. Production before that time had been subject to a
government approved extended test of a 1992 delineation
8
<PAGE> 10
well. A second delineation well was drilled, completed and began
production in 1993. Also during 1993, Marathon began drilling a third
delineation well which was completed and began production during 1994. The
latest delineation well commenced drilling in December 1994 and is scheduled for
completion in the first quarter of 1995. Marathon owns a 41.6% revenue interest
in this field.
East Brae is a gas condensate field and the largest field yet
discovered by Marathon in the Brae area. Liquid hydrocarbon production began
in late December 1993 and reached rates of up to 115,000 gross bpd during 1994.
Gross estimated reserves exceed 300 million barrels of liquids and 1.5 trillion
cubic feet ("tcf") of natural gas. East Brae platform commissioning was
completed in August 1994. Including completion of the development drilling
program, total investment, excluding capitalized interest, is estimated at $1.5
billion, of which Marathon's share is $620 million. See "Oil and Natural Gas
Production - International - North Sea" for a description of Brae production
operations.
Participation in the SAGE system provides pipeline transportation for
Brae gas. The Brae group owns 50% of SAGE, which has a total wet gas capacity
of 1.2 gross bcf per day. The other 50% is owned by the Beryl group which
operates the system. The 30-inch pipeline connects the Brae, Beryl and Scott
Fields to a gas processing terminal at St. Fergus in northeast Scotland. Gross
project costs, excluding capitalized interest, approximated $1.2 billion, of
which Marathon's share was approximately $280 million. Commissioning of the
gas processing facilities was concluded in June 1994, and contractual sales
began in October. Marathon, along with its Brae Group co-venturers, has
entered into agreements for the sale of more than 1.1 gross tcf of Brae area
gas. Marathon's share is 615 bcf. This includes approximately 205 gross mmcfd
(112 net mmcfd ) under two separate 15-year supply contracts to U.K. utilities.
During 1994, Marathon commenced drilling three wildcat wells,
including one well in Block 103/1 in the St. George's Channel near the
U.K./Irish offshore boundary which tested oil and gas in two intervals of the
Jurassic reservoirs below 7,500 feet. Additional seismic work and appraisal
drilling will be required to more fully assess whether the reservoirs contain
commercial quantities of oil and gas. A three- dimensional seismic program is
in progress, and a delineation well is planned for 1995. Marathon has a 60%
interest in this block which is located in 380 feet of water. The remaining
two wildcat wells commenced in the U.K. during 1994 have been completed,
plugged and abandoned.
Ireland-Marathon continues to work toward completion of a seven-well
exploratory drilling program required by a 1991 agreement between Marathon and
the Irish Government. Wells four and five are planned for 1995. None of the
wells drilled to date encountered commercial quantities of hydrocarbons. In the
first quarter of 1995, Marathon was awarded a license covering a total of
approximately 450,000 acres in seven blocks in the Porcupine Basin off the west
coast of Ireland. Marathon holds a 33.3% working interest in the license.
Indonesia-Activity continues in the Kakap KRA and KG oil fields in the
South China Sea to develop an estimated 40 million gross barrels of oil through
existing infrastructure. A contract was awarded in November 1993 for the
engineering, construction and installation of the platforms, facilities and
pipelines along with connection to existing production facilities in the Kakap
Block. First oil is anticipated in mid-1995, and production is expected to
peak at an estimated 50,000 gross bpd of oil later that year. Marathon is the
operator and holds a 37.5% working interest in this development.
Egypt-Marathon has completed a three-well drilling program in the Nile
Delta. The first of these wells was an exploratory well drilled and tested in
1993 on the Abu Madi West Development Lease seven miles northwest of Marathon's
joint-interest El Qar'a Gas Field. The well's production potential and
opportunities for delineation are being evaluated. Marathon has a 25% working
interest in the El Qar'a Northwest discovery. The remaining two wells in the
program were completed, plugged and abandoned in 1994. Also in the Nile Delta
area, Marathon was awarded the 840,000 acre El Manzala Block, pending Egyptian
Parliamentary ratification. Marathon has completed contract negotiations
calling for a one-well exploratory drilling program, planned for 1995.
Marathon holds a 100% working interest in this area. Marathon has successfully
tested a well drilled in January 1995 in the Gebel El Zeit concession. The
well
9
<PAGE> 11
encountered hydrocarbons in the Matulla and Nubia Formations. A delineation
well in the Nubia formation is planned for 1995. Marathon holds a 100%
interest in this concession.
Tunisia-Marathon has executed a farmout agreement requiring the
drilling of three exploratory wells, two on the Grombalia permit and one on the
Cap Bon permit. Drilling began in the fourth quarter of 1994, and the first
well was completed, plugged and abandoned in February 1995. Marathon is
drilling a 1995 delineation well on the Zarat Permit in the Gulf of Gabes in
Southern Tunisia. Marathon holds a 66.67% exploration working interest on this
permit and would retain an undivided 30% working interest in the development,
subsequent to full participation by the Tunisian National Oil Company.
Netherlands-Marathon, through its 50% equity interest in CLAM
Petroleum Company ("CLAM"), drilled one exploratory well (a gas discovery) and
two development wells in the Netherlands North Sea. Drilling activity planned
for 1995 consists of an exploratory well on Block E18 and two development wells
in the K8 block. Also during 1995, a plan of development ("POD") for two
fields in the K11 Block will be initiated. This development is ultimately
expected to include the drilling of four wells.
Russia-In June 1994, Sakhalin Energy Investment Company Ltd.
("Sakhalin Energy"), a joint venture company in which Marathon has a 30%
interest, joined with members 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 ("P-A") oil field located
offshore Sakhalin Island in the Russian Far East Region. The Sakhalin II PSC
is the first executed Russian PSC. 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.
These appraisal period activities include the finalizing of the development
plan and efforts to secure liquefied natural gas ("LNG") markets and financing
arrangements. According to estimates by Russian experts, the P-A and Lunskoye
fields contain combined proven reserves of 750 million barrels of oil and
condensate and 14 tcf of natural gas.
Syria-Marathon is awaiting approval of a POD submitted to the Syria
Petroleum Company in May 1993, for the development of Marathon's gas reserves
in the Palmyra Block. Negotiation of a gas sales agreement would be required
following approval of the POD.
China-In January 1995, Marathon signed a production sharing contract
covering Kaiping Block 27/35 in the South China Sea. The 1.2 million acre
block is located 180 miles south of Hong Kong. Marathon holds a 100% working
interest. The first exploratory well is scheduled for 1995.
Bolivia-Marathon holds a 50% working interest in a six million acre
concession. An exploratory well is scheduled for the first half of 1995.
Gabon-Marathon continues exploration work on the Kowe permit (offshore
block F-89) awarded in 1992. The first well in this permit is scheduled to be
drilled in the second half of 1995. Marathon holds a 75% working interest in
this block which is located approximately 90 miles southeast of Port Gentil.
Argentina-An exploratory well is planned for 1995 in the Rio
Desaguardero Block located approximately 500 miles west of Buenos Aires.
Marathon holds a 100% working interest in this concession.
Australia-During 1994, Marathon closed its Perth office and
discontinued activities in blocks in which it held operating interest, but
continues to hold non-operating interests in Blocks WA-191-P and WA-8-1,
offshore northwestern Australia.
10
<PAGE> 12
The following table sets forth, by geographic area, the developed and
undeveloped oil and gas acreage held as of December 31, 1994:
GROSS AND NET ACREAGE
<TABLE>
<CAPTION>
DEVELOPED &
DEVELOPED UNDEVELOPED UNDEVELOPED
--------- ----------- -----------
GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ---
(THOUSANDS OF ACRES)
<S> <C> <C> <C> <C> <C> <C>
United States . . . . . 2,626 1,012 2,509 1,481 5,135 2,493
Europe . . . . . . . . . 403 291 1,971 1,262 2,374 1,553
Middle East and Africa . 50 20 44,650 15,178 44,700 15,198
Other International . . 401 150 6,179 3,518 6,580 3,668
----- ----- ------- ------ ------ ------
TOTAL . . . . . . . . . . 3,480 1,473 55,309 21,439 58,789 22,912
===== ===== ======= ====== ====== ======
</TABLE>
Reserves
The table below sets forth estimated quantities of net proved oil and
gas reserves at the end of each of the last three years. Reports have been
filed with the U. S. Department of Energy ("DOE") for the years 1993 and 1992
disclosing the year-end estimated oil and gas reserves. A similar report will
be filed for 1994. The year-end estimates reported to the DOE are the same as
the estimates reported herein. For additional information regarding oil and
gas reserves, see "Consolidated Financial Statements and Supplementary Data -
Supplementary Information on Oil and Gas Producing Activities - Estimated
Quantities of Proved Oil and Gas Reserves."
ESTIMATED QUANTITIES OF NET PROVED OIL AND GAS RESERVES AT DECEMBER 31
<TABLE>
<CAPTION>
DEVELOPED DEVELOPED & UNDEVELOPED
-------------------------- --------------------------
1994 1993 1992 1994 1993 1992
---- ---- ---- ---- ---- ----
(MILLIONS OF BARRELS)
<S> <C> <C> <C> <C> <C> <C>
Crude Oil, Condensate and
Natural Gas Liquids
United States . . . . . . 493 494 495 553 573 576
Europe . . . . . . . . . . 202 221 97 211 230 230
Middle East and Africa (a) 16 22 19 16 22 26
Other International . . . 6 7 8 15 17 16
---- ---- ---- ----- ---- ----
TOTAL . . . . . . . . . . . . . 717 744 619 795 842 848
==== ==== ==== ==== ==== ====
(BILLIONS OF CUBIC FEET)
Natural Gas
United States . . . . . . 1,442 1,391 1,523 2,127 2,044 2,099
Europe . . . . . . . . . . 1,436 1,566 1,020 1,484 1,619 1,673
Middle East and Africa (a) 41 58 52 43 60 52
Other International . . . - 25 42 - 25 42
------ ------ ------- ------ ------ -------
Total Consolidated . . 2,919 3,040 2,637 3,654 3,748 3,866
Equity Share in CLAM (b) . 104 95 95 153 153 164
------ ------ ------- ------ ------ -------
TOTAL . . . . . . . . . . . . . 3,023 3,135 2,732 3,807 3,901 4,030
====== ====== ======= ====== ====== =======
<FN>
- -----------
(a) Proved developed reserves located in Libya have been excluded. See
"Financial Statements and Supplementary Data - Notes to Financial
Statements - 26. Contingencies and Commitments - Libyan operations" for the
Marathon Group.
(b) For a description of CLAM, see "Oil and Natural Gas Production -
International - North Sea."
</TABLE>
At December 31, 1994, the Marathon Group's estimated quantities of
combined net proved liquid hydrocarbons and natural gas reserves totaled 1.4
billion barrels of oil equivalent, of which 86% were
11
<PAGE> 13
proved developed reserves and 14% were proved undeveloped reserves.
(Natural gas reserves are converted to barrels of oil equivalent using a
conversion factor of six thousand cubic feet ("mcf") of natural gas to one
barrel of oil.) Net proved reserves are located principally in the United
States, the U.K. North Sea, the Irish Celtic Sea, the Norwegian North Sea, North
Africa and Southeast Asia. Liquid hydrocarbons represented 57% of combined net
proved reserves.
OIL AND NATURAL GAS PRODUCTION
The following tables set forth daily average net production of crude
oil, condensate and natural gas liquids, and natural gas by geographic area for
each of the last three years:
<TABLE>
<CAPTION>
NET CRUDE OIL, CONDENSATE AND NATURAL GAS LIQUIDS PRODUCTION
(THOUSANDS OF BARRELS PER DAY) 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
United States (a) . . . . . . . . . . . . . . . . . . . 110 111 118
International (b) - Europe . . . . . . . . . . . . . . 48 26 36
- Middle East and Africa . . . . . . 10 16 13
- Other . . . . . . . . . . . . . . . 4 3 7
----- ---- ---
Total International . . . . . . . . . . 62 45 56
----- ---- ---
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . 172 156 174
===== ==== ===
NET NATURAL GAS PRODUCTION (c)
(MILLIONS OF CUBIC FEET PER DAY)
United States (a) . . . . . . . . . . . . . . . . . . . 574 529 593
International (d) - Europe . . . . . . . . . . . . . . 382 356 326
- Middle East and Africa . . . . . . 18 17 12
----- ---- ---
Total International . . . . . . . . 400 373 338
----- ---- ---
Total Consolidated . . . . . . . . 974 902 931
Equity Share in CLAM (e) . . . . . . . . . . . . . . . 40 35 41
----- ---- ---
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . 1,014 937 972
===== ==== ===
<FN>
- -----------
(a) Amounts reflect production from leasehold and plant
ownership, after interest of others and after royalties.
(b) Amounts reflect equity tanker liftings, truck deliveries and direct
deliveries of liquid hydrocarbons before royalties. The amounts correspond
with the basis for fiscal settlements with governments. Crude oil
purchases, if any, from host governments are not included.
(c) Amounts reflect sales of equity production and exclude volumes purchased
from third parties for resale.
(d) Amounts reflect production before royalties.
(e) For a description of CLAM, see "International - North Sea."
</TABLE>
Marathon is currently producing crude oil and/or natural gas in eight
countries, including the United States. Marathon's worldwide liquid
hydrocarbon production averaged 172,400 net bpd in 1994, up 16,400 bpd, or 10%,
from 1993, due mainly to production from the East Brae Field in the U.K. North
Sea which began in late December 1993. Marathon's worldwide liquid hydrocarbon
production is expected to increase to an estimated 211,000 net bpd in 1995,
primarily reflecting increased production from the East Brae Field in the U.K.
North Sea, production from projects in the U.S. Gulf of Mexico (including a
full year of production from Ewing Bank 873) and new production from the Kakap
KRA and KG fields, offshore Indonesia.
Marathon's worldwide sales of equity natural gas production, including
Marathon's equity share of CLAM's production, averaged over 1 billion cubic
feet per day in 1994, up 77 net mmcfd, or 8%, from 1993. Average sales of
equity natural gas production in the U.S. increased by 45 net mmcfd, or 9%, in
1994 and is expected to increase by an additional 19% in 1995, as natural
production declines are more than offset by the effects of successful drilling
programs in Wyoming, Oklahoma and Texas. Average
12
<PAGE> 14
sales of equity natural gas production outside the U.S. increased by 32 net
mmcfd, or 8%, with further increases expected in 1995, primarily due to Brae
area gas sales which began in October 1994.
United States
Approximately 64% of Marathon's 1994 worldwide liquid hydrocarbon
production and equity liftings and 57% of worldwide natural gas production were
from domestic operations. The principal domestic producing areas are located
in Texas, Wyoming, the U.S. Gulf of Mexico and Alaska.
Texas-Marathon owns a 49.63% working interest in, and is the operator
of, the Yates Field Unit, one of the largest fields in the United States.
Marathon's 23,400 net bpd of 1994 liquid hydrocarbon production from the Yates
Field and Gas Plant accounted for 21% of Marathon's total U.S. production. The
field's average annual production increased by 7% in 1994, compared with
declines of 3% in 1993, 9% in 1992, 8% in 1991 and 19% in 1990.
Wyoming-Since operations began in 1912, Marathon has produced over one
billion gross barrels of liquid hydrocarbons in the state. Production for 1994
averaged 24,300 net bpd, representing 22% of Marathon's total U.S. liquid
hydrocarbon production. Production in 1993 averaged 27,200 net bpd.
Marathon continues to apply enhanced recovery and reservoir management
programs and cost containment efforts to maximize liquid hydrocarbon recovery
and profitability in maturing fields such as Yates and Oregon Basin.
Gulf of Mexico-During 1994, Marathon produced 11,800 net bpd of liquid
hydrocarbons and 79 net mmcfd of natural gas in the U.S. Gulf of Mexico.
Liquid hydrocarbon production increased by 20% from the prior year, as
production from Ewing Bank 873 began in August, following platform
installation. Natural gas production decreased by 19% from the prior year,
reflecting a full-year effect of 1993 dispositions. At year-end 1994, Marathon
held working interests in 12 fields producing from 29 platforms, 18 of which
Marathon operates.
Alaska-Marathon has interests in seven of the 15 drilling and
production platforms in the Cook Inlet. In December 1994, a property exchange
and realignment of operations designed to improve performance and efficiencies
of Marathon and the other joint-interest owners were completed. Marathon
acquired additional working interests in the Beaver Creek, Kenai and Cannery
Loop fields and now operates each of the fields. Marathon relinquished working
interest in the Swanson River Field and operatorship of the Trading Bay Unit,
which includes the Steelhead and Dolly Varden platforms and the onshore Trading
Bay Production Facility. Marathon's production from Alaska averaged 9,400 net
bpd of liquid hydrocarbons and 123 net mmcfd of natural gas in 1994, compared
with 8,800 net bpd and 118 net mmcfd in 1993. Average production in 1995 is
expected to increase slightly from 1994 levels.
International
Interests in liquid hydrocarbon and/or natural gas production are held
in the U.K. North Sea, Ireland, the Norwegian North Sea, Tunisia, Indonesia and
Egypt. In addition, Marathon has an equity interest in the Netherlands North
Sea.
13
<PAGE> 15
North Sea-The following table sets forth Marathon's average net liquid
hydrocarbon liftings for the Brae area, in each of the last three years:
<TABLE>
<CAPTION>
NET BRAE AREA LIQUID HYDROCARBON LIFTINGS
(BARRELS PER DAY)
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
East Brae . . . . . . . . . . . . 23,400 - -
North Brae . . . . . . . . . . . . 13,000 14,100 21,600
South Brae . . . . . . . . . . . . 4,800 4,200 5,200
Central Brae . . . . . . . . . . . 4,700 5,000 7,600
------ ------ ------
TOTAL . . . . . . . . . . . . . . 45,900 23,300 34,400
====== ====== ======
</TABLE>
Marathon's liquid hydrocarbon liftings from the East, North, South and
Central Brae Fields averaged 45,900 net bpd in 1994, compared with 23,300 net
bpd in 1993. The increase was due mainly to liftings from East Brae.
Production from East Brae commenced in late December 1993, and continued to
increase throughout 1994. Liftings averaged 23,400 net bpd in 1994 (38,700 net
bpd in December 1994).
North Brae is a gas condensate field and continues to be produced
using the gas cycling technique. This technique separates natural gas liquids
and returns the dry gas to the reservoir for pressure maintenance, increasing
the overall liquids recovery. Liftings include production from the previously
mentioned Beinn Field, processed by North Brae facilities.
The South Brae platform serves as a vital link in generating
third-party pipeline tariff revenue. To date, production from eight
third-party fields is contracted to the Brae pipeline system. Six of the
fields are currently onstream, one is expected to be brought onstream in 1995,
and another is scheduled to be brought onstream in 1996.
Central Brae is a multi-well subsea development tied to South Brae
facilities.
Marathon's total U.K. gas sales from all sources averaged 39 mmcfd in
1994. Contractual sales of Brae area gas through the SAGE pipeline system
began in October and averaged 82 net mmcfd for the fourth quarter of 1994.
Marathon owns an overall 6.14% revenue interest in the V-Fields gas
development in the Southern Basin of the U.K. North Sea. Marathon's sales from
the V-Fields averaged 13 net mmcfd in 1994, compared with 22 net mmcfd in 1993
and 18 net mmcfd in 1992. The changes in sales primarily reflected
fluctuations in customer demand.
In the Norwegian North Sea, Marathon holds a 24% working interest in
the Heimdal Field with sales of 81 net mmcfd of natural gas and 1,700 net bpd
of condensate in 1994. On June 11, 1994, Marathon issued notice of termination
on the two original gas sales agreements for the evacuation of Heimdal gas.
Marathon issued notice of termination based upon low gas prices and high
pipeline tariffs associated with the original agreements. 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.
Marathon's 50% equity interest in CLAM, a natural gas and gas liquids
producer in the Netherlands North Sea, provides a 7% entitlement in the
production of 16 gas fields which provided sales of 40 net mmcfd of natural gas
in 1994.
Ireland-Marathon owns a 100% working interest in the Kinsale Head and
Ballycotton Fields in the Celtic Sea. Combined sales of natural gas averaged
263 net mmcfd, 258 net mmcfd and 227 net
14
<PAGE> 16
mmcfd in 1994, 1993 and 1992, respectively. Four compressors were
installed at Kinsale Head, two in each of 1992 and 1993, to increase the
deliverability from the fields.
Tunisia-Marathon holds a 50% working interest in the Belli Field
located 30 miles southeast of Tunis and a 31% interest in the Ezzaouia Field,
located 220 miles south of Tunis. Liquid hydrocarbon liftings averaged 2,600
net bpd from these fields in 1994, compared with 8,200 net bpd in 1993 and
10,700 net bpd in 1992. The decreases primarily reflected natural declines.
Indonesia-Marathon holds a 37.5% working interest in two producing
fields (KH and KF) in the Kakap Block in the Natuna Sea. The fields produce
into a floating production, storage and off-loading vessel. Liquid hydrocarbon
liftings from Marathon's Kakap Block averaged 3,600 net bpd in 1994, compared
with 3,300 net bpd in 1993 and 5,100 net bpd in 1992. The decrease from 1992
reflected natural declines. Production in the KG and KRA Fields is expected to
begin in mid-1995.
Egypt-Marathon holds interests in three fields in Egypt. During 1994,
liquid hydrocarbon liftings from the Ashrafi Field, in which Marathon holds a
50% working interest, averaged 6,200 net bpd. Natural gas sales and liquid
hydrocarbon liftings from the El Qar'a Gas Field, in which Marathon holds a 25%
interest, averaged 18 net mmcfd and 500 net bpd, respectively. Liquid
hydrocarbon liftings from the Gazwarina Field, in which Marathon holds a 50%
working interest, averaged 200 net bpd.
15
<PAGE> 17
The following tables set forth productive wells and drilling wells as
of December 31, 1994, and average production costs and sales prices per unit of
production for each of the last three years:
GROSS AND NET WELLS
<TABLE>
<CAPTION>
PRODUCTIVE WELLS (a)
----------------------------------
OIL GAS DRILLING WELLS (b)
--------------- --------------- ------------------
GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
United States . . . . . . . 16,252 5,846 3,778 1,547 71 38
Europe . . . . . . . . . 27 11 70 28 3 1
Middle East and Africa (c) 16 7 7 2 1 0
Other International . . . . 23 9 - - 1 1
------- ------- ------ ------ --- ---
TOTAL . . . . . . . . . . . 16,318 5,873 3,855 1,577 76 40
======= ======= ====== ====== === ===
<FN>
(a) Included active wells and wells temporarily shut-in. Of the gross
productive wells, gross wells with multiple completions operated by
Marathon totaled 333. Information on wells with multiple completions
operated by other companies is not available to Marathon.
(b) Consisted of exploratory and development wells.
(c) Excluded Libya. See "Financial Statements and Supplementary Data - Notes to
Financial Statements - 26. Contingencies and Commitments - Libyan
operations" for the Marathon Group.
</TABLE>
<TABLE>
<CAPTION>
AVERAGE PRODUCTION COSTS (a) 1994 1993 1992
---- ---- ----
(DOLLARS PER EQUIVALENT BARREL)
<S> <C> <C> <C>
United States (b) . . . . . . . . . . . . . . $4.01 $5.02 $3.38
International - Europe . . . . . . . . . . . 5.12 5.99 6.62
- Middle East and Africa . . . 4.31 3.11 2.77
- Other . . . . . . . . . . . . 6.92 6.46 6.68
ALL SOURCES . . . . . . . . . . . . . . . . . $4.41 $5.17 $4.27
- CLAM . . . . . . . . . . . . $3.08 $4.44 $4.49
</TABLE>
<TABLE>
<CAPTION>
1994 1993 1992 1994 1993 1992
---- ---- ---- ---- ---- ----
AVERAGE SALES PRICES CRUDE OIL AND CONDENSATE NATURAL GAS LIQUIDS
------------------------ -------------------
(DOLLARS PER BARREL)
<S> <C> <C> <C> <C> <C> <C>
United States . . . . . . . . . . . . $14.02 $14.92 $16.89 $ 9.26 $10.98 $11.88
International - Europe . . . . . . . 16.05 16.80 19.34 12.11 13.41 15.44
- Middle East and Africa 14.68 15.55 18.46 11.47 13.65 14.67
- Other . . . . . . . . 16.44 18.46 20.32 - - -
ALL SOURCES . . . . . . . . . . . . . $14.69 $15.37 $17.66 $ 9.94 $11.57 $12.96
</TABLE>
<TABLE>
<CAPTION>
NATURAL GAS
-----------
(DOLLARS PER THOUSAND CUBIC FEET)
<S> <C> <C> <C>
United States . . . . . . . . . . . . $1.94 $1.94 $1.60
International - Europe . . . . . . . 1.57 1.51 1.76
- Middle East and Africa 1.84 1.67 2.02
ALL SOURCES . . . . . . . . . . . . . $1.79 $1.77 $1.66
- CLAM . . . . . . . . . $2.28 $2.36 $2.74
</TABLE>
(Footnotes presented on the following page)
16
<PAGE> 18
(a) Production costs are as defined by the Securities and Exchange Commission
and include property taxes, severance taxes and other costs, but exclude
depreciation, depletion and amortization of capitalized acquisition,
exploration and development costs. Prior year production costs have been
restated to conform to 1994 classifications and such costs exclude
administrative costs and costs associated with reorganization efforts.
Natural gas volumes were converted to barrels of oil equivalent using a
conversion factor of six mcf of natural gas to one barrel of oil.
(b) Production costs in 1992 were favorably affected by $1.50 per equivalent
barrel for the settlement of prior years' production taxes but excluded the
effect of a $115 million restructuring charge relating to the disposition
of certain domestic exploration and production properties.
REFINING, MARKETING AND TRANSPORTATION
Marathon's refining, marketing and transportation ("RM&T") operations
are geographically concentrated in the Midwest and Southeast. This regional
focus allows Marathon to achieve operating efficiencies between its integrated
refining and distribution systems and its marketing operations.
Refining
Marathon is a leading domestic petroleum refiner with 620,000 bpd of
combined crude oil refining capacity. Marathon's refining system operated at
86% of its in-use capacity in 1994.
The following table sets forth the location and throughput capacity of
each of Marathon's refineries at December 31, 1994:
<TABLE>
<CAPTION>
REFINING CAPACITY
(BARRELS PER DAY)
<S> <C>
Garyville, La. . . . . . . 255,000
Robinson, Ill. . . . . . . 175,000
Texas City, Texas . . . . . 70,000
Detroit, Mich. . . . . . . 70,000
--------
Total in-use . . . . . . . 570,000
Indianapolis, Ind. (a) . . 50,000
--------
TOTAL . . . . . . . . . . . 620,000
========
<FN>
- -----------
(a) Temporarily idle, see below for further discussion.
</TABLE>
Marathon's refineries are integrated via pipelines and barges to
maximize operating efficiency. The transportation links that connect the
refineries allow the movement of intermediate products to optimize operations
and the production of higher margin products. For example, naphtha is moved
from Texas City to Robinson where excess reforming capacity is available. Gas
oil is moved from Robinson to Detroit, which allows the Detroit refinery to
upgrade diesel fuel to gasoline, using excess fluid catalytic cracking unit
capacity. Light cycle oil is moved from Texas City to Robinson for sulfur
removal to produce low-sulfur diesel fuel.
In December 1994, in order to comply with provisions of the 1990
Amendments to the Clean Air Act ("CAA"), Marathon began selling reformulated
gasoline at wholesale distribution terminals serving ozone non-attainment areas
that require reformulated gasoline. In January 1995, Marathon's retail outlets
in these areas began selling reformulated gasoline. Of the nine metropolitan
areas requiring reformulated gasoline under the 1990 Amendments to the CAA,
only two, Chicago and Milwaukee, are in Marathon's marketing territory. In
addition, Louisville subsequently opted into the program. These markets are
supplied with reformulated gasoline or reformulated gasoline blend stocks
produced at Marathon's Robinson and Texas City refineries. Marathon blends
ethanol with reformulated gasoline blend stocks to supply the Chicago area.
Annual demand for Marathon reformulated gasoline is expected to average
approximately 50,000 bpd. As a result, an estimated 10-15% of Marathon's
gasoline yield will be
17
<PAGE> 19
reformulated. Marathon has the ability to produce additional volumes of
reformulated gasoline for sale should the opportunity arise. An insignificant
share of Marathon's sales are in carbon monoxide non-attainment areas where
oxygenated fuels were required effective November 1992.
Marathon's Detroit and Robinson refineries have oxygenate units
capable of producing the oxygenated ether which can be a primary component of
reformulated gasoline. Depending on the economics, the unit at Robinson can be
configured to use either methanol or ethanol as a feedstock to produce methyl
tertiary butyl ether ("MTBE") or ethyl tertiary butyl ether ("ETBE"),
respectively.
During 1993, Marathon completed installation of distillate
desulfurization facilities at its Detroit, Garyville and Robinson refineries,
which enable Marathon to meet the United States Environmental Protection
Agency's ("EPA") standards limiting the sulfur content of highway
transportation diesel fuels. Marathon's total capital investment in these
facilities was $339 million, including expenditures of $111 million in 1993 and
$184 million in 1992. To the extent these expenditures, as with all costs, are
not ultimately reflected in the prices of Marathon's products and services,
operating results will be adversely affected. During 1994, total U.S.
production of low-sulfur diesel fuels exceeded demand by an average of
approximately 200,000 bpd, putting downward pressure on the spread between low-
and high-sulfur fuel prices and limiting the ability of refiner/marketers to
recoup capital investments in desulfurization facilities. For further
discussion of environmental regulations, see "Environmental Matters."
In October 1993, Marathon temporarily idled its 50,000 bpd
Indianapolis refinery due to unfavorable plant economics and increased
environmental spending requirements. The costs related to the idling did not
have a material effect on Marathon's 1993 operating results. The idling had no
adverse impact on Marathon's supply of transportation fuels to its various
classes of trade in Indiana or the Midwest marketing area. 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.
Marketing
In 1994, Marathon had refined product sales volumes (excluding
matching buy/sell transactions) of 10.3 billion gallons (670,000 bpd).
Excluding sales related to matching buy/sell transactions, the wholesale
distribution of petroleum products to private brand marketers and to large
commercial and industrial consumers, primarily located in the Midwest and
Southeast, accounted for about 58% of Marathon's refined product sales volumes
in 1994. Approximately 41% of Marathon's gasoline volumes and 72% of its
distillate volumes were sold on a wholesale basis to independent unbranded
customers in 1994.
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<PAGE> 20
The following table sets forth the volume of consolidated refined
product sales by product group for each of the last three years:
<TABLE>
<CAPTION>
REFINED PRODUCT SALES
(THOUSANDS OF BARRELS PER DAY) 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Gasoline . . . . . . . . . . . . . . . . . . . 443 420 404
Distillates . . . . . . . . . . . . . . . . . . 183 179 169
Propane . . . . . . . . . . . . . . . . . . . . 16 18 19
Feedstocks & Special Products . . . . . . . . . 32 32 39
Heavy Fuel Oil . . . . . . . . . . . . . . . . 38 39 39
Asphalt . . . . . . . . . . . . . . . . . . . . 31 38 37
---- ---- ----
TOTAL . . . . . . . . . . . . . . . . . . . . . 743 726 707
==== ==== ====
Matching Buy/Sell Volumes included in above . . 73 47 56
</TABLE>
As of December 31, 1994, Marathon supplied petroleum products to 2,356
Marathon branded retail outlets located primarily in Ohio, Michigan, Indiana,
Kentucky and Illinois. Substantially all Marathon branded petroleum products
are sold to independent dealers and jobbers. In addition, Marathon branded
operations are being expanded into areas in proximity to Marathon's existing
terminal and transportation system where new accounts can be supplied at
minimal incremental cost. At December 31, 1994, Marathon supplied 212 stations
in states outside its traditional branded marketing territory including
Virginia, Tennessee, West Virginia, Wisconsin, North Carolina and Pennsylvania.
Retail sales of gasoline and diesel fuel are also made through limited
and self-service stations and truck stops operated in 15 states by a wholly
owned subsidiary, Emro Marketing Company ("Emro"). As of December 31, 1994,
this subsidiary had 1,659 retail outlets which sold petroleum products,
primarily under the brand names "Speedway," "Starvin' Marvin," "United" and
"Bonded," as well as convenience-store merchandise. Revenues from the sale of
convenience-store merchandise totaled $843 million, $757 million and $741
million in 1994, 1993 and 1992, respectively. Profits generated from these
sales serve as a buffer against the price volatility experienced in the retail
sale of refined products. The selection of merchandise varies among
outlets--1,183 of Emro's 1,659 outlets at December 31, 1994, had convenience
stores which sold a variety of food and merchandise, and the remaining outlets
sold selected convenience-store items such as cigarettes, candy and beverages.
In recent years, Emro has made substantial progress in streamlining
its operations, reducing costs and concentrating on its core businesses. To
enhance profitability, Emro closed 123 marginal outlets during the three-year
period ended December 31, 1994. In addition, Emro sold certain of its non-core
businesses. In 1993, Emro sold the assets of a subsidiary, Bosart Co., which
consisted primarily of a convenience store distribution warehouse facility. In
1994, Emro sold the assets of Emro Propane Company, a wholly owned subsidiary.
Emro Propane Company was a distributor of propane to residential heating and
industrial consumers in several midwestern states.
Emro has recently expanded its core business through several
acquisitions. In 1993, Emro acquired the remaining interest in Wake Up Oil Co.
which included 36 retail outlets marketing under the name "Wake Up." In May
1994, Emro completed the acquisition of 36 retail outlets in the Greater
Chicago and northern Indiana areas. Also during 1994, Emro acquired 38 retail
outlets in Florida, 36 retail outlets and a truck stop in Tennessee, 20 retail
outlets in Michigan, one retail outlet in Kentucky and a truck stop in South
Carolina.
Certain Marathon branded and Emro retail outlets feature on-premises
brand-name restaurants ("branded food service") as a means of increasing
overall unit profitability. Typically, Emro or the independent Marathon jobber
or dealer becomes a restaurant franchisee
19
<PAGE> 21
at these locations, although some sites are leased for food-service
management under different ownership. Both Marathon and Emro plan additional
branded food service locations in the future.
Supply and Transportation
Marathon obtains nearly 60% of its crude oil feedstocks from North and
South America and the balance primarily from the Middle East, the North Sea and
West Africa. In 1994, Marathon was a net purchaser of 380,000 bpd of crude oil
from both domestic and international sources, including approximately 145,000
bpd obtained from the Middle East.
Marathon's strategy in acquiring raw materials for its refineries is
to obtain supply from secure, long-term sources. Marathon generally sells its
international equity production into local markets, but has the ability to
satisfy about 75% of its requirements from a combination of its international
equity crude and current supply arrangements in the Western Hemisphere.
Marathon operates a system of terminals and pipelines to provide crude
oil to its refineries and refined products to its marketing areas. Fifty-one
terminals, including 45 light product and 6 asphalt terminals, are
strategically located throughout the Midwest and Southeast. In addition,
Marathon operates a fleet of trucks to deliver petroleum products to retail
marketing outlets.
During late 1993 and early 1994, Marathon installed automated fuel
dye-injection equipment at 30 of its terminals in order to facilitate the sale
of low-sulfur fuel oils for tax-exempt uses. The dye injection equipment was
installed in connection with a January 1, 1994 requirement that terminal
operators collect and remit federal excise taxes on all fuels suitable for use
as on-highway diesel fuel, unless the fuel is dyed to indicate its tax-exempt
status. Computerized in-line blenders installed during 1994 at Marathon's
Chicago-area terminals allow the blending of virtually any grade of gasoline
from three base inventory components--ethanol, and low- and high- octane
reformulated gasoline blend stocks. As a result, existing tankage will be
sufficient to handle demands for reformulated gasoline in the Chicago area.
In late 1994, Marathon began construction of a new asphalt terminal in
Mt. Vernon, Ind. which will allow Marathon to take advantage of favorable
winter asphalt production economics at its Garyville refinery. The terminal
will be completed in early 1995, prior to the summer asphalt sales season.
Also during 1994, Marathon reached agreement with a third party to
blend and package lubricants for sale through Marathon branded and
company-operated retail outlets. This resulted in the closing of Marathon's
Lubricants and Tires, Batteries and Accessories supply facility in Robinson,
Ill.
Marathon, through a wholly owned subsidiary, Marathon Pipe Line
Company ("MPLC"), owns and operates, as a common carrier, approximately 1,100
miles of crude oil gathering lines; 1,500 miles of crude oil trunk lines; and
1,500 miles of products trunk lines. MPLC also owns interests in various
pipeline systems, including 11.06% of the Capline system, a large diameter
crude pipeline extending from St. James, La. to Patoka, Ill., and a 66.67%
partnership interest in Block 873 Pipeline Company, which owns a 60-mile
pipeline connected to the Ewing Bank 873 production platform in the Gulf of
Mexico. Additionally, MPLC owns 32.1% of LOOP INC., which is the owner and
operator of the only U.S. deepwater oil port. LOOP is located 18 miles off
the coast of Louisiana. Marathon holds equity interests in a number of
pipeline companies, including 17.36% of the Explorer Pipeline Company, which
operates a light products pipeline system extending from the Gulf Coast to the
Midwest, and 2.5% of the Colonial Pipeline Company, which operates a light
products pipeline system extending from the Gulf Coast to the East Coast.
Domestic Natural Gas Marketing and Transportation
In addition to the sale of equity production of natural gas, Marathon
purchases gas from third-party producers and marketers for resale in order to
offer customers secure and source-flexible supplies.
20
<PAGE> 22
Marathon also manufactures LNG at a Kenai, Alaska gas liquefication
plant, in which Marathon holds a 30% interest. Feedstock is supplied to the
plant from a portion of Marathon's natural gas production in Alaska. LNG is
delivered via tankers to two Japanese utilities under a contract which was
renewed in April 1989 for a 15-year period. Marathon has a 30% participation in
this contract which calls for the sale of more than 900 gross bcf over the
contract life. During 1993, the LNG tankers used since deliveries began under
the original contract in 1969 were replaced by two new tankers with 22% greater
capacity. During 1994, LNG deliveries totaled 63.3 gross bcf (19.0 net bcf), up
from 56.5 gross bcf (17.2 net bcf) in 1993. The increased capacity of the new
tankers was not fully utilized in 1994, their first full year of operation, as
demand growth was constrained by high inventory levels resulting from mild
weather and a weak Japanese economy and by maintenance downtime at customer
power generation facilities.
Natural Gas Utilities
Carnegie Natural Gas Company ("Carnegie") is an interstate pipeline
company engaged in the transportation and sale-for-resale of natural gas in
interstate commerce. In addition, Carnegie functions as a local distribution
company serving residential, commercial and industrial customers in West
Virginia and western Pennsylvania. Carnegie is a supplier and transporter of
natural gas for U. S. Steel's Mon Valley Works near Pittsburgh. Apollo Gas
Company ("Apollo") is engaged in the distribution of natural gas to
residential, commercial and industrial customers in western Pennsylvania.
Both Carnegie and Apollo are regulated as public utilities by state
commissions within their service areas. Carnegie is also regulated by the
Federal Energy Regulatory Commission as an interstate pipeline. Total natural
gas throughput for Carnegie and Apollo was 28 bcf in 1994, 37 bcf in 1993 and
33 bcf in 1992.
HEDGING ACTIVITIES
The Marathon Group engages in hedging activity to help protect against
adverse market price changes related to the purchase or production and sale of
crude oil, natural gas and refined products. Although crude oil and refined
product prices generally move in tandem, futures contracts, commodity swaps and
options are used to supplement the natural marketplace in protecting overall
profitability. 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 Marathon Group's hedging activities have
not been significant in relation to its overall business activity. For
additional information regarding hedging activity, see "Financial Statements
and Supplementary Data - Notes to Financial Statements - 2. Summary of
Principal Accounting Policies - Hedging Transactions and - 24. Derivative
Financial Instruments and Management's Discussion and Analysis of Cash Flows -
Hedging Activity" for the Marathon Group.
21
<PAGE> 23
PROPERTY, PLANT AND EQUIPMENT ADDITIONS
The following table sets forth property, plant and equipment additions
for the Marathon Group for each of the last three years:
<TABLE>
<CAPTION>
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT 1994 1993 1992
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Exploration and Production
United States . . . . . . . . . . . . . . . . $ 351 $ 315 $ 206
International . . . . . . . . . . . . . . . . 185 359 545
----- ------ -------
Total Exploration and Production . . . . . . . 536 674 751
Refining, Marketing and Transportation . . . . 278 213 405
Other . . . . . . . . . . . . . . . . . . . . 8 23 39 (a)
----- ------ -------
TOTAL . . . . . . . . . . . . . . . . . . . . . $ 822 $ 910 $ 1,195
===== ====== =======
<FN>
- -----------
(a) Included $13 million representing the portion of 1992 property, plant and
equipment additions for the businesses of the Delhi Group prior to
October 2.
</TABLE>
Property, plant and equipment additions, including capital leases and
assets acquired by issuing stock or debt securities, have been primarily for
the replacement, modernization and expansion of facilities and production
capabilities including: development of the Brae Fields and the related SAGE
pipeline system in the U. K. North Sea; refinery modifications at Robinson,
Garyville and Detroit (including the construction of facilities required to
meet federal low-sulfur diesel requirements); expansion of Emro Marketing
Company's network of retail outlets; and environmental controls. For
information concerning capital expenditures for environmental controls in 1992,
1993 and 1994 and estimated capital expenditures for such purposes in 1995 and
1996, see "Environmental Matters."
Depreciation, depletion and amortization costs for the Marathon Group
were $721 million, $727 million and $793 million in 1994, 1993 and 1992,
respectively.
RESEARCH AND DEVELOPMENT
The research and development activities of the Marathon Group are
conducted mainly at Marathon's Petroleum Technology Center in Littleton,
Colorado. Expenditures by Marathon for research and development were $16
million in 1994 and $19 million in each of 1993 and 1992.
Activities at the Petroleum Technology Center are devoted primarily to
assisting Marathon's operating organizations in finding, producing and
processing oil and gas efficiently and economically. Current efforts include
new concepts in regional geological interpretation, enhanced seismic
interpretation, development of computer-based techniques for reservoir
description and performance modeling, methods to improve production and
injection well performance and enhanced oil recovery techniques. The staff at
the Petroleum Technology Center also provides a broad range of technical
assistance and consultation to Marathon's RM&T operating organizations,
including refinery process optimization.
ENVIRONMENTAL MATTERS
The Marathon Group maintains a comprehensive environmental policy
overseen by the Public Policy Committee of the USX Board of Directors. The
Environmental Affairs, Health and Safety organization has the responsibility to
ensure that the Marathon Group's operating organizations maintain environmental
compliance systems that are in accordance with applicable laws and regulations.
The Health, Environmental and Safety Management Committee, which is comprised
of officers of the group, is charged with reviewing its overall performance
with various environmental compliance programs. Also,
22
<PAGE> 24
the Marathon Group has formed the Emergency Management Team, composed of senior
management, which will oversee the response to any major emergency
environmental incident throughout the group.
The businesses of the Marathon Group are subject to numerous federal,
state and local laws and regulations relating to the protection of the
environment. These environmental laws and regulations include the Clean Air
Act ("CAA") with respect to air emissions, the Clean Water Act ("CWA") with
respect to water discharges, the Resource Conservation and Recovery Act
("RCRA") with respect to solid and hazardous waste treatment, storage and
disposal, the Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA") with respect to releases and remediation of hazardous
substances, and the Oil Pollution Act of 1990 ("OPA-90") with respect to oil
pollution and response. In addition, many states where the Marathon Group
operates have similar laws dealing with the same matters. These laws are
constantly evolving and becoming increasingly stringent. The ultimate impact
of complying with existing laws and regulations is not always clearly known or
determinable due in part to the fact that certain implementing regulations for
laws such as RCRA and the CAA have not yet been promulgated or in certain
instances are undergoing revision. These environmental laws and regulations,
particularly the 1990 Amendments to the CAA and new water quality standards,
could result in substantially increased capital, operating and compliance
costs. For a discussion of environmental expenditures, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Management's Discussion and Analysis of Environmental Matters, Litigation and
Contingencies" and "Legal Proceedings" for the Marathon Group.
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. Expenditures during 1992 and 1993 included
substantial amounts for product reformulation and process changes to meet CAA
requirements, in addition to ongoing compliance costs. 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.
Air
The 1990 Amendments to the CAA impose more stringent limits on air
emissions, establish a federally mandated operating permit program and allow
for enhanced civil and criminal enforcement sanctions. The principal impact of
the 1990 Amendments to the CAA on the Marathon Group is on RM&T operations.
The amendments establish attainment deadlines and control requirements based on
the severity of air pollution in a geographical area. For example, the
amendments required a reduction in the amount of sulfur in diesel fuel produced
for highway transportation use, effective October 1993, and the introduction of
reformulated gasoline in the nine metropolitan areas classified as severe or
extreme for ozone non-attainment, and other areas opting into the program,
effective January 1995.
Marathon has the capability of producing about 25% of its gasoline
output as reformulated fuels -- well above the estimated 10-15% required to
meet demand within Marathon's marketing area. A major cost of reformulation is
the mandated use of oxygenates in gasoline. As discussed under Refining,
Marketing and Transportation above, Marathon has constructed oxygenate units at
its Detroit and Robinson refineries.
In addition to the foregoing, refueling controls are required on fuel
dispensers (so called Stage II Recovery) at gasoline stations located in ozone
non-attainment areas classified as moderate, serious, severe and extreme. As
of December 31, 1994, Marathon had installed refueling controls at
approximately 500 of the potential 600 retail outlets requiring them, at an
estimated average cost of $40,000 per outlet.
23
<PAGE> 25
Water
The Marathon Group maintains numerous discharge permits as required
under the National Pollutant Discharge Elimination System program of the CWA,
and has implemented systems to oversee its compliance efforts. In addition,
the Marathon Group is regulated under OPA-90 which amended the CWA. Among
other requirements, OPA-90 requires the owner or operator of a tank vessel or a
facility to maintain an emergency plan to respond to discharges of oil or
hazardous substances. Also, in case of such spills, OPA-90 requires
responsible companies to pay removal costs and damages caused by them, provides
for substantial civil penalties, and imposes criminal sanctions for violations
of this law. Unlike many of its competitors within the oil industry, Marathon
does not operate tank vessels, and therefore, has significantly less exposure
under OPA-90 than competitors who do operate tank vessels. However, it does
operate facilities at which spills of oil and hazardous substances could occur.
Furthermore, several coastal states in which Marathon operates have passed or
are expected to pass state laws similar to OPA-90, but with expanded liability
provisions, including provisions for cargo owners as well as shipowners.
Marathon has implemented approximately 50 emergency oil response plans for all
its components and facilities covered by OPA-90, and it is an active member,
along with other oil companies, in the Marine Preservation Association, which
funds the Marine Spill Recovery Corporation, a major oil spill response
organization covering a number of U.S. coastal areas.
Solid Waste
The Marathon Group continues to seek methods to minimize the
generation of hazardous wastes in its operations. RCRA establishes standards
for the management of solid and hazardous wastes. Besides affecting current
waste disposal practices, RCRA also addresses the environmental effects of
certain past waste disposal operations, the recycling of wastes and the
regulation of underground storage tanks ("USTs") containing regulated
substances. Since the EPA has not yet promulgated implementing regulations for
all provisions of RCRA and has not yet made clear the practical application of
all the implementing regulations it has promulgated, the ultimate cost of
compliance cannot be accurately estimated. In addition, new laws are being
enacted and regulations are being adopted by various regulatory agencies on a
continuing basis, and the costs of compliance with these new rules can only be
broadly appraised until their implementation becomes more accurately defined.
Corrective action under RCRA related to past waste disposal activities is
discussed under "Remediation."
Remediation
The Marathon Group operates certain retail outlets where, during the
normal course of operations, releases of petroleum products from USTs have
occurred. Federal and state laws require that contamination caused by such
releases at these sites be assessed and remediated to meet applicable
standards. The enforcement of the UST regulations under RCRA has been
delegated to the states which administer their own UST programs. The Marathon
Group's obligation to remediate such contamination varies, depending upon the
extent of the releases and the stringency of the laws and regulations of the
states in which it operates. A portion of these remediation costs may be
recoverable from state UST reimbursement funds once the applicable deductibles
have been satisfied. Accruals for remediation expenses are established for
sites where contamination has been determined to exist and the amount of
associated costs is reasonably determinable.
The Marathon Group is involved with a potential corrective action at
its Robinson, Ill. refinery where the remediation costs have been estimated at
between $4 million and $18 million over 20 to 30 years. Remediation activities
might also be required at other Marathon Group sites under RCRA.
USX is also involved in a number of remedial actions under CERCLA and
similar state statutes related to the Marathon Group. It is possible that
additional matters relating to the Marathon Group may come to USX's attention
which may require remediation. For a discussion of remediation matters
relating to the Marathon Group, see "Legal Proceedings - Environmental
Proceedings."
24
<PAGE> 26
Capital Expenditures
The Marathon Group's capital expenditures for environmental controls
were $70 million, $123 million and $240 million in 1994, 1993 and 1992,
respectively. The declines in 1994 and 1993 primarily reflected the Marathon
Group's multi-year capital spending program for diesel fuel desulfurization
which began in 1990 and was substantially completed by year-end 1993. The
Marathon Group expects expenditures for environmental controls to approximate
$40 million in 1995. This projection includes amounts reflecting management's
latest estimate of expenditures for implementation of CAA requirements for
production of reformulated gasoline. 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.
25
<PAGE> 27
U. S. STEEL GROUP
The U. S. Steel Group includes U. S. Steel, the largest integrated
steel producer in the United States (referred to hereinafter as "U. S. Steel"),
which is primarily engaged in the production and sale of steel mill products,
coke and taconite pellets. The U. S. Steel Group also includes the management
of mineral resources, domestic coal mining, engineering and consulting services
and technology licensing (together with U. S. Steel, the "Steel and Related
Businesses"). Other businesses that are part of the U. S. Steel Group include
real estate development and management, and leasing and financing activities.
The U. S. Steel Group also participates in a number of joint ventures and other
investments. U. S. Steel Group sales as a percentage of USX consolidated sales
were 31% in each of 1994 and 1993 and 28% in 1992.
The following table sets forth the total sales of the U. S. Steel
Group for each of the last three years. Such information does not include
sales by joint ventures and other affiliates of USX accounted for by the equity
method.
<TABLE>
<CAPTION>
SALES
1994 1993 1992
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Steel and Related Businesses
Sheet and Tin Mill Products . . . . . . . . . . . . . . $3,806 $3,462 $2,994
Plate, Structural and Other Steel Mill Products . . . . 691 595 537
Taconite Pellets and Coke . . . . . . . . . . . . . . . 552 472 381
Tubular Products . . . . . . . . . . . . . . . . . . . 357 334 308
Coal . . . . . . . . . . . . . . . . . . . . . . . . . 202 268 294
All Other . . . . . . . . . . . . . . . . . . . . . . . 310 291 238
Other Businesses . . . . . . . . . . . . . . . . . . . . 148 190 167
------ ------ ------
TOTAL SALES . . . . . . . . . . . . . . . . . . . . . . . $6,066 $5,612 $4,919
====== ====== ======
- -----------------
</TABLE>
The total number of active U. S. Steel Group employees at year-end was
20,711 in 1994, 21,892 in 1993 and 21,183 in 1992. The reduction in the number
of active employees in 1994 from 1993 primarily reflected the exclusion of RMI
Titanium Company ("RMI") employees (in August 1994, USX adopted the equity
method of accounting for RMI), the idling of operations at Maple Creek coal
mine and the integration of operations at Shawnee coal mine with the No. 50
coal mine. Most hourly and certain salaried employees are represented by the
United Steelworkers of America ("USWA").
U. S. Steel entered into a new five and one-half year contract with
the USWA, 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. 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 competition will be
materially affected.
In January 1994, U. S. Steel Mining Co., Inc. ("U. S. Steel Mining")
entered into a five-year agreement with the United Mine Workers of America
covering approximately 1,700 employees.
26
<PAGE> 28
STEEL INDUSTRY BACKGROUND AND COMPETITION
The domestic steel industry is cyclical and highly competitive.
Despite significant reductions in raw steel production capability by major
domestic producers over the last decade, the domestic industry continues to be
adversely affected by excess world capacity. In certain years over the last
decade, extensive downsizings have necessitated costly restructuring charges
which, when combined with highly competitive market conditions, resulted in
substantial losses for most domestic integrated producers.
U. S. Steel is the largest integrated steel producer in the United
States and competes with many domestic and foreign steel producers. Domestic
competitors include integrated producers which, like U. S. Steel, use iron ore
and coke as primary raw materials for steel production, and minimills which use
steel scrap as a primary raw material. Minimills generally produce a narrower
range of steel products than integrated producers, but typically enjoy certain
competitive advantages such as lower capital expenditures for construction of
facilities and non-unionized work forces with lower employment costs and more
flexible work rules. One minimill company is currently operating facilities
which utilize thin slab casting technology to produce flat-rolled products. A
number of companies have announced plans for constructing similar facilities
having the additional capability to produce in excess of 10 million tons of
flat-rolled products by 1998. Depending on market conditions, the additional
production generated from minimills could have an adverse effect on
U. S. Steel's prices and shipment levels.
The domestic steel industry has, in the past, been adversely affected
by unfairly traded imports, and high levels of imported steel may ultimately
have an adverse effect on product prices and shipment levels. 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.
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. In December 1994 and January 1995, Commerce issued its preliminary
affirmative determinations of the applicable margins of dumping and subsidies
in the OCTG cases against producers in four countries. In June 1995, Commerce
is scheduled to make final determinations, and in July 1995 it is anticipated
that the ITC will render its final determinations as to whether the domestic
industry has been materially injured by these imports. 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.
In addition to competition from other domestic and foreign steel
producers, U. S. Steel faces competition from producers of materials such as
aluminum, cement, composites, glass, plastics and wood in many markets.
The U. S. Steel Group's businesses are subject to numerous federal,
state and local laws and regulations relating to the storage, handling,
emission and discharge of environmentally sensitive materials. U. S. Steel
believes that its major domestic integrated steel competitors are confronted by
substantially similar conditions and thus does not believe that its relative
position with regard to such other competitors is materially affected by the
impact of environmental laws and regulations. However, the costs and operating
restrictions necessary for compliance with environmental laws and regulations
may have an adverse effect on U. S. Steel's competitive position with regard to
domestic minimills and some foreign steel producers and producers of materials
which compete with steel, which may not be required to undertake equivalent
costs in their operations. For further information, see "Environmental
Matters."
27
<PAGE> 29
BUSINESS STRATEGY
U. S. Steel's raw steel production facilities are Gary Works in
Indiana, Mon Valley Works in Pennsylvania and Fairfield Works in Alabama.
Over the last ten years, U. S. Steel has responded to competition
resulting from excess steel industry capability by eliminating less efficient
facilities, modernizing those that remain and entering into joint ventures, all
with the objective of focusing production on higher value-added products, where
superior quality and special characteristics are of critical importance. These
products include bake hardenable steels and coated sheets for the automobile
industry, laminated sheets for the manufacture of motors and electrical
equipment, improved tin mill products for the container industry and oil
country tubular goods. In addition, U. S. Steel intends to pursue lower
manufacturing cost objectives through continuing cost improvement programs.
These initiatives include, but are not limited to, reduced production cycle
time, improved yields, continued customer orientation and improved process
control. For example, a Pulverized Coal Injection project at Gary Works has
resulted in reduced dependence on higher cost coke.
Since 1982, the number of U. S. Steel raw steel production facilities
has been reduced from ten to the three mentioned above, and annual raw steel
capability has been reduced from 33.0 million to 12.5 million tons. Steel
employment has been reduced from approximately 89,000 in 1982 to about 19,000
in 1995. As a result of downsizing its operations, the U. S. Steel Group
recognized restructuring charges aggregating $2.8 billion since 1982 as its
less efficient facilities have been shut down. During that period, U. S. Steel
also invested approximately $3.4 billion in capital facilities for its steel
operations. U. S. Steel believes that these expenditures have made its
remaining steel operations among the most modern, efficient and competitive in
the world. In both 1994 and 1993, U. S. Steel continuously cast nearly 100% of
its raw steel production. This method of producing steel has resulted in
higher quality steel at a lower cost than the previously used ingot method.
In addition to the modernization of its production facilities, USX has
entered into a number of joint ventures with domestic and foreign partners to
take advantage of market or manufacturing opportunities in the sheet, tin
plate, tubular, bar and plate consuming industries. See "Joint Ventures and
Other Investments."
STEEL AND RELATED BUSINESSES
U. S. Steel operates plants which produce steel mill products in a
variety of forms and grades. Gary Works, Mon Valley Works and Fairfield Works
accounted for 58%, 23% and 19%, respectively, of U. S. Steel's 1994 raw steel
production of 11.7 million tons. The annual raw steel production capability in
1994 of 12.0 million tons was increased through operating efficiencies to 12.5
million tons for 1995, including Gary Works - 7.4 million, Mon Valley Works -
2.8 million and Fairfield Works - 2.3 million.
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<PAGE> 30
The following tables set forth significant U. S. Steel shipment data
by major market and product for each of the last three years. Such data do not
include shipments by joint ventures and other affiliates of USX accounted for
by the equity method.
STEEL SHIPMENTS BY MARKET AND PRODUCT
<TABLE>
<CAPTION>
PLATES,
SHEETS & STRUCTURAL
MAJOR DOMESTIC AND EXPORT MARKET TIN MILL & OTHER(a) TUBULAR TOTAL
- -------------------------------- -------- ---------- ------- -----
(THOUSANDS OF NET TONS)
<S> <C> <C> <C> <C>
1994
Steel Service Centers . . . . . . . . . . . . . . . . 1,909 625 261 2,795
Further Conversion . . . . . . . . . . . . . . . . . . 1,956 428 6 2,390
Transportation (Including Automotive) . . . . . . . . 1,719 292 12 2,023
Containers . . . . . . . . . . . . . . . . . . . . . . 988 5 2 995
Construction . . . . . . . . . . . . . . . . . . . . . 540 190 8 738
Machinery . . . . . . . . . . . . . . . . . . . . . . 427 141 2 570
Oil and Gas Drilling . . . . . . . . . . . . . . . . . 21 48 365 434
All Other (Including Export and Appliances) (b) . . . 578 19 26 623
----- ----- --- ------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . 8,138 1,748 682 10,568
===== ===== === ======
1993
Steel Service Centers . . . . . . . . . . . . . . . . 1,967 615 255 2,837
Further Conversion . . . . . . . . . . . . . . . . . . 1,768 467 13 2,248
Transportation (Including Automotive) . . . . . . . . 1,558 239 8 1,805
Containers . . . . . . . . . . . . . . . . . . . . . . 833 4 3 840
Construction . . . . . . . . . . . . . . . . . . . . . 532 133 4 669
Machinery . . . . . . . . . . . . . . . . . . . . . . 391 91 - 482
Oil and Gas Drilling . . . . . . . . . . . . . . . . . 9 29 330 368
All Other (Including Export and Appliances) (b) . . . 659 43 18 720
----- ----- --- ------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . 7,717 1,621 631 9,969
===== ===== === ======
1992
Steel Service Centers . . . . . . . . . . . . . . . . 1,932 507 241 2,680
Further Conversion . . . . . . . . . . . . . . . . . . 1,147 394 24 1,565
Transportation (Including Automotive) . . . . . . . . 1,271 274 8 1,553
Containers . . . . . . . . . . . . . . . . . . . . . . 710 3 2 715
Construction . . . . . . . . . . . . . . . . . . . . . 492 104 2 598
Machinery . . . . . . . . . . . . . . . . . . . . . . 377 74 1 452
Oil and Gas Drilling . . . . . . . . . . . . . . . . . 1 22 233 256
All Other (Including Export and Appliances) (b) . . . 873 95 67 1,035
----- ----- --- ------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . 6,803 1,473 578 8,854
===== ===== === ======
<FN>
_________________
(a) U. S. Steel ceased production of structural products when South Works
closed in April 1992.
(b) Included steel export shipments of approximately 0.4 million tons in each
of 1994 and 1993 and 0.6 million tons in 1992.
</TABLE>
USX and its wholly owned subsidiary, U. S. Steel Mining Co., Inc. ("U.S.
Steel Mining") have domestic coal properties with demonstrated bituminous
coal reserves of approximately 928 million net tons at year-end 1994 compared
with approximately 945 million net tons at year-end 1993. The reserves are of
metallurgical and steam quality in approximately equal proportions. They are
located in Alabama, Pennsylvania, Virginia, West Virginia, Illinois and
Indiana. Approximately 80% of the reserves are owned, and the rest are leased.
Of the leased properties, 85% are renewable indefinitely and the balance are
covered by a lease which expires in 2005. U. S. Steel Mining's Maple Creek
coal mine and a related preparation plant located in Pennsylvania were idled in
January 1994, because unforeseen and
29
<PAGE> 31
unpredictable geologic conditions made continued mining economically
infeasible. Reserves associated with the Maple Creek coal mine were 21 million
net tons at December 31, 1994. In December 1994, the U. S. Steel Group signed a
letter of intent for the sale of the coal mine and preparation plant. The sale,
which is contingent on certain conditions, including financing and government
approval of the transfer of permits, is expected to be completed in the second
quarter of 1995. In September 1994, the Shawnee coal mine located in West
Virginia was integrated with the No. 50 coal mine for operational efficiencies.
USX controls domestic iron ore properties having demonstrated iron ore
reserves in grades subject to beneficiation processes in commercial use by U.
S. Steel of approximately 746 million tons at year-end 1994, substantially all
of which are iron ore concentrate equivalents available from low-grade
iron-bearing materials, and the rest are higher grade ore. All of these
demonstrated reserves are located in Minnesota. Approximately 40% of these
reserves are owned and the remaining 60% are leased. Most of the leased
reserves are covered by a lease expiring in 2058 and the remaining leases have
expiration dates ranging from 1996 to 2007. U. S. Steel's iron ore operations
at Mt. Iron, Minn. ("Minntac") produced 16.0 million net tons of taconite
pellets in each of 1994 and 1993 and 14.7 million net tons in 1992.
USX's Resource Management administers the remaining mineral lands and
timber lands of the U. S. Steel Group, and is responsible for the lease or sale
of these lands and their associated resources, which encompass approximately
300,000 acres of surface rights and 1,500,000 acres of mineral rights in 18
states.
USX Engineers and Consultants, Inc. sells technical services worldwide
to the steel, mining, chemical and related industries. Together with its
subsidiary companies, it provides engineering and consulting services for
facility expansions and modernizations, operating improvement projects,
integrated computer systems, coal and lubrication testing and environmental
projects.
30
<PAGE> 32
The following tables set forth significant production data for Steel
and Related Businesses for each of the last five years and products and
services by facility:
<TABLE>
<CAPTION>
PRODUCTION DATA 1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(THOUSANDS OF NET TONS, UNLESS OTHERWISE NOTED)
<S> <C> <C> <C> <C> <C>
RAW STEEL PRODUCTION
Gary . . . . . . . . . . . . . . . . . . . . . . . . . . 6,768 6,624 5,969 5,817 6,740
Mon Valley . . . . . . . . . . . . . . . . . . . . . . . 2,669 2,507 2,276 2,088 2,607
Fairfield . . . . . . . . . . . . . . . . . . . . . . . 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
TACONITE PELLETS
Shipments . . . . . . . . . . . . . . . . . . . . . . . . 16,174 15,911 14,822 14,897 14,922
Production as % of capacity . . . . . . . . . . . . . . . 90.3 90.1 82.8 84.0 85.1
COKE PRODUCTION . . . . . . . . . . . . . . . . . . . . . . 6,777 6,425 5,917 5,091 6,663
COAL PRODUCTION
Metallurgical coal (b) . . . . . . . . . . . . . . . . . 7,424 8,142 7,311 7,352 8,370
Steam coal (b) (c) . . . . . . . . . . . . . . . . . . . - 2,444 5,239 2,829 3,151
------ ------ ------ ------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . 7,424 10,586 12,550 10,181 11,521
Total production as % of capacity . . . . . . . . . . . . 93.7 95.6 93.6 76.1 85.9
<FN>
_________________
(a) In July 1991, U. S. Steel closed all iron and steel producing operations at
Fairless Works. In April 1992, U. S. Steel closed South Works.
(b) The Maple Creek coal mine, which was idled in January 1994 produced 1.0
million net tons of metallurgical coal and 0.7 million net tons of steam
coal in 1993.
(c) The Cumberland coal mine, which was sold in June 1993, produced 4.0 million
net tons in 1992 and 1.6 million net tons in 1993 prior to the sale.
</TABLE>
PRINCIPAL PRODUCTS AND SERVICES
<TABLE>
<S> <C>
Gary . . . . . . . . . . . . . . . . . . . . . Sheets & Tin Mill; Plates; Coke
Fairfield . . . . . . . . . . . . . . . . . . Sheets; Tubular Products
Mon Valley . . . . . . . . . . . . . . . . . . Sheets
Fairless (a) . . . . . . . . . . . . . . . . . Sheets & Tin Mill
Clairton . . . . . . . . . . . . . . . . . . . Coke
Minntac . . . . . . . . . . . . . . . . . . . Taconite Pellets
U. S. Steel Mining . . . . . . . . . . . . . . Coal
Resource Management . . . . . . . . . . . . . Administration of Mineral, Coal and Timber Properties
USX Engineers and Consultants . . . . . . . . Technical Services
<FN>
_________________
(a) In 1991, U. S. Steel closed all iron and steel producing operations and the
pipe mill facilities at Fairless Works. Operations at the Fairless sheet
and tin finishing facilities are sourced with hot-strip mill coils from
other U. S. Steel plants.
</TABLE>
31
<PAGE> 33
OTHER BUSINESSES
In addition to the Steel and Related Businesses, the U. S. Steel Group
includes various other businesses, the most significant of which are described
below in this section. Other businesses also included RMI prior to the
adoption of equity accounting in 1994. The other businesses that are included
in the U. S. Steel Group accounted for 2% of the U. S. Steel Group's sales in
1994 and 3% in 1993 and 1992.
USX Realty Development develops real estate for sale or lease and
manages retail and office space, business and industrial parks and residential
and recreational properties.
USX Credit operates in the leasing and financing industry, managing a
portfolio of real estate and equipment loans. Those loans are generally
secured by the real property or equipment financed, often with additional
security. USX Credit's portfolio is diversified as to types and terms of
loans, borrowers, loan sizes, sources of business and types and locations of
collateral. USX Credit is not actively making new loan commitments.
In March 1995, Cyclone Fence was sold.
JOINT VENTURES AND OTHER INVESTMENTS
USX participates directly and through subsidiaries in a number of
joint ventures included in the U. S. Steel Group. All of the joint ventures
are accounted for under the equity method. Certain of the joint ventures and
other investments are described below, all of which are at least 50% owned
except Transtar, Inc. ("Transtar"). For financial information regarding joint
ventures and other investments see "Financial Statements and Supplementary Data
- - Notes to Financial Statements - 14. Long-term Receivables and Other
Investments" for the U. S. Steel Group.
USX and Pohang Iron & Steel Co., Ltd. ("POSCO") of South Korea
participate in a joint venture ("USS-POSCO Industries") which owns and operates
the former U. S. Steel Pittsburg, Cal. Plant. The joint venture markets high
quality sheet and tin products, principally in the western United States market
area. USS-POSCO Industries produces cold-rolled sheets, galvanized sheets, tin
plate and tin-free steel. USS-POSCO Industries' annual shipment capacity is
approximately 1.4 million tons. Total shipments were approximately 1.4 million
tons in 1994.
USX and Kobe Steel Ltd. ("Kobe") of Japan participate in a joint
venture ("USS/Kobe Steel Company") which owns and operates the former U. S.
Steel Lorain, Ohio Works. The joint venture produces raw steel for the
manufacture of bar and tubular products. Bar products are sold by USS/Kobe
Steel Company while U. S. Steel retains sales and marketing responsibilities
for tubular products. Total shipments in 1994 were 1.6 million tons. USS/Kobe
Steel Company entered into a new five and one-half year labor contract with the
USWA, effective February 1, 1994, covering approximately 2,300 employees.
USS/Kobe Steel Company's annual raw steel capability is approximately 2.6
million tons. Raw steel production was approximately 2.1 million tons in 1994.
USX and Kobe participate in a joint venture ("PRO-TEC Coating
Company") which owns and operates a hot dip galvanizing line in Leipsic, Ohio.
The facility commenced operations in early 1993. Capacity is approximately
600,000 tons per year with substrate coils provided by U. S. Steel. PRO-TEC
Coating Company produced approximately 570,000 tons of galvanized steel in
1994.
USX and Worthington Industries Inc. participate in a joint venture
known as Worthington Specialty Processing which operates a steel processing
facility in Jackson, Mich. The plant is operated by Worthington Industries,
Inc. and is dedicated to serving U. S. Steel customers. The facility contains
state-of-the-art technology capable of processing master steel coils into both
slit coils and sheared first operation blanks including rectangles, trapezoids,
parallelograms and chevrons. It is designed to meet specifications for the
automotive, appliance, furniture and metal door industries. The joint venture
processes material
32
<PAGE> 34
sourced by U. S. Steel, with a processing capacity of 600,000 tons annually. In
1994, Worthington Specialty Processing processed approximately 425,000 tons.
USX and Rouge Steel Company participate in Double Eagle Steel Coating
Company ("DESCO"), a joint venture which operates an electrogalvanizing
facility located in Dearborn, Mich. This facility enables U. S. Steel to
further participate in the expanding automotive demand for steel with corrosion
resistant properties. The facility can coat both sides of sheet steel with
zinc or alloy coatings and has the capability to coat one side with zinc and
the other side with alloy. Capacity was 700,000 tons of galvanized steel
annually, with availability of the facility shared by the partners on an equal
basis. In 1994, DESCO produced 745,000 tons of galvanized steel. The increase
over capacity was due to improved operating efficiencies. The effective
capacity is being increased in 1995 to 900,000 tons.
National-Oilwell, a joint venture between a subsidiary of USX and
National Supply Company, Inc., a subsidiary of Armco Inc., operates in the oil
field service industry and has 3 manufacturing plants in the United States and
abroad that produce a broad line of drilling equipment and pumping units. In
the United States and abroad, it also operates 118 oil field supply stores, 6
service centers and 21 sales offices where it sells tubular goods, oil field
operating supplies manufactured by others and its own manufactured equipment.
The foreign manufacturing location is scheduled for closure in 1995.
USX owns a 46% interest in Transtar, which in 1988 purchased the
former domestic transportation businesses of USX including railroads, a dock
company, USS Great Lakes Fleet, Inc. and Warrior & Gulf Navigation Company.
Blackstone Transportation Partners, L.P. and Blackstone Capital Partners L.P.,
both affiliated with The Blackstone Group, together own 53% of Transtar, and
the senior management of Transtar owns the remaining 1%. For a discussion of
litigation related to Transtar, see "Legal Proceedings - U. S. Steel Group."
USX has an economic interest of 54% in RMI, a leading producer of
titanium metal products. In 1994, the U. S. Steel Group's voting interest in
RMI was reduced to 46%, and the investment is accounted for under the equity
method. RMI is a publicly traded company listed on the New York Stock
Exchange.
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.
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. For additional information regarding hedging activity, see
"Financial Statements and Supplementary Data - Notes to Financial Statements -
2. Summary of Principal Accounting Policies - Hedging Transactions and 24.
Derivative Financial Instruments and Management's Discussion and Analysis of
Cash Flows - Hedging Activity" for the U. S. Steel Group.
PROPERTY, PLANT AND EQUIPMENT ADDITIONS
During the years 1992-1994, the U. S. Steel Group made property, plant
and equipment additions, including capital leases, aggregating $764 million,
including $248 million, $198 million and $318 million in 1994, 1993 and 1992,
respectively. The additions have been primarily for the completion of the
continuous caster at Mon Valley Works in 1992, modernization of the hot-strip
mill and pickle line at Gary
33
<PAGE> 35
Works and environmental controls associated with steel production and other
facilities. Significant expenditures in 1994 included expenditures to complete
environmental projects, hot-strip mill and pickle line improvements and various
blast furnace improvements at Gary Works; and initial expenditures for a blast
furnace reline project and hot-strip mill improvements at Mon Valley Works.
Capital expenditures for 1995 are expected to be approximately $300 million and
will include spending on a degasser at Mon Valley Works, a granulated coal
injection facility at Fairfield Works' blast furnace, a galvanizing line in the
southern United States, as well as additional environmental expenditures.
Capital expenditures in 1996 and 1997 are currently expected to remain at a
level similar to that planned in 1995.
Depreciation, depletion and amortization costs for the U. S. Steel
Group were $314 million in each of 1994 and 1993 and $288 million in 1992.
RESEARCH AND DEVELOPMENT
The research and development activities of the U. S. Steel Group are
conducted mainly at the U. S. Steel Technical Center in Monroeville, Pa.
Expenditures for steel research and development were $23 million, $22 million
and $23 million in 1994, 1993 and 1992, respectively.
Steel research is devoted to developing new or improved processes for
the mining and beneficiation of raw materials such as coal and iron ore and for
the production of steel; developing new and improved products in steel and
other product lines; developing technology for meeting environmental
regulations and for achieving higher productivity in these areas; and serving
customers in the selection and use of U. S. Steel's products. Steel research
has contributed to current business performance through expanded use of on-site
plant improvement teams. In addition, several collaborative research programs
with technical projects directed at mid- to long-range research opportunities
have been continued at universities and in conjunction with other domestic
steel companies through the American Iron and Steel Institute and cooperative
research and development agreements.
ENVIRONMENTAL MATTERS
The U. S. Steel Group maintains a comprehensive environmental policy
overseen by the Public Policy Committee of the USX Board of Directors. The
Environmental Affairs organization has the responsibility to ensure that the
U.S. Steel Group's operating organizations maintain environmental compliance
systems that are in accordance with applicable laws and regulations. The
Executive Environmental Committee, which is comprised of officers of the group,
is charged with reviewing its overall performance with various environmental
compliance programs. Also, the U. S. Steel Group, largely through the American
Iron and Steel Institute, continues its involvement in the negotiation of
various air, water, and waste regulations with federal, state and local
governments to assure the implementation of cost effective pollution reduction
strategies, such as the innovative regulatory-negotiation activities for coke
plants, which are regulated under the Clean Air Act ("CAA").
The U. S. Steel Group has voluntarily participated in the Environmental
Protection Agency ("EPA") 33-50 program to reduce toxic releases and the EPA
Greenlights program to promote energy efficiency. The U. S. Steel Group has
also developed an award winning environmental education program (the Continuous
Improvement to the Environment program), a corporate program to reduce the
volume of wastes the U. S. Steel Group generates, and wildlife management
programs certified by the Wildlife Habitat Council at U. S. Steel Group
operating facilities. Additionally, over the past 5 years, it has reduced
the volume of toxic releases reported under the Superfund Amendments and
Reauthorization Act of 1986 (Section 313) by 75%, primarily through recycling
and process changes.
The businesses of the U. S. Steel Group are subject to numerous
federal, state and local laws and regulations relating to the protection of the
environment. These environmental laws and regulations include the CAA with
respect to air emissions, the Clean Water Act ("CWA") with respect to water
discharges, the Resource Conservation and Recovery Act ("RCRA") with respect to
solid and hazardous
34
<PAGE> 36
waste treatment, storage and disposal, and the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") with respect to releases
and remediation of hazardous substances. In addition, all states where the
U. S. Steel Group operates have similar laws dealing with the same matters.
These laws are constantly evolving and becoming increasingly stringent. The
ultimate impact of complying with existing laws and regulations is not always
clearly known or determinable due in part to the fact that certain implementing
regulations for laws such as RCRA and the CAA have not yet been promulgated or
in certain instances are undergoing revision. These environmental laws and
regulations, particularly the 1990 Amendments to the CAA and new water quality
standards, could result in substantially increased capital, operating and
compliance costs. For a discussion of environmental expenditures, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Management's Discussion and Analysis of Environmental Matters,
Litigation and Contingencies" and "Legal Proceedings" for the U. S. Steel
Group.
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 CAA
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.
Air
The 1990 Amendments to the CAA impose more stringent limits on air
emissions, establish a federally mandated operating permit program and allow
for enhanced civil and criminal enforcement sanctions. The principal impact of
the 1990 Amendments to the CAA on the U. S. Steel Group is on the coke-making
operations of U. S. Steel, as described below in this section. The coal mining
operations and sales of U. S. Steel Mining may also be affected.
The 1990 Amendments to the CAA specifically address the regulation and
control of hazardous air pollutants, including emissions from coke ovens.
Generally, emissions for existing coke ovens must comply with technology-based
limits by the end of 1995 and comply with a health risk-based standard by the
end of 2003. However, a coke oven will not be required to comply with the
health risk-based standard until January 1, 2020, if it complied with the
technology-based standard at the end of 1993 and also complies with additional
technology-based standards, by January 1, 1998, and by January 1, 2010. USX
believes that it met the 1993 requirement and will be able to meet the 1998 and
2010 compliance dates.
The 1990 Amendments to the CAA also mandate the nationwide reduction
of emissions of acid rain precursors (sulfur dioxide and nitrogen oxides) from
fossil fuel-fired electrical utility plants. Specified emission reductions are
to be achieved by 2000. Phase I begins on January 1, 1995, and applies to 110
utility plants specifically listed in the law. Phase II, which begins on
January 1, 2000, will apply to other utility plants which may be regulated
under the law. U. S. Steel, like all other electricity consumers, will be
impacted by increased electrical energy costs that are expected as electric
utilities seek rate increases to comply with the acid rain requirements.
In 1994, 100% of the coal production of U. S. Steel Mining was
metallurgical coal, which is primarily used in coke production. While USX
believes that the new environmental requirements for coke ovens will not have
an immediate effect on U. S. Steel Mining, the requirements may encourage
development of steelmaking processes that reduce the usage of coke.
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<PAGE> 37
Water
The U. S. Steel Group maintains the necessary discharge permits as
required under the National Pollutant Discharge Elimination System program of
the CWA and it is in compliance with such permits. U. S. Steel is currently
negotiating with the EPA to develop a sediment remediation plan for the section
of the Grand Calumet River that runs through Gary Works. The U. S. Steel Group
expects to reach a final agreement with the EPA concerning this sediment
remediation plan in 1995. As proposed, this project would require 5 to 6 years
to complete after approval and would be followed by an environmental recovery
validation. The estimated program cost, which has been accrued, is
approximately $30 million.
Solid Waste
The U. S. Steel Group continues to seek methods to minimize the
generation of hazardous wastes in its operations. RCRA establishes standards
for the management of solid and hazardous wastes. Besides affecting current
waste disposal practices, RCRA also addresses the environmental effects of
certain past waste disposal operations, the recycling of wastes and the
regulation of underground storage tanks containing regulated substances. Since
the EPA has not yet promulgated implementing regulations for all provisions of
RCRA and has not yet made clear the practical application of all the
implementing regulations it has promulgated, the ultimate cost of compliance
cannot be accurately estimated. In addition, new laws are being enacted and
regulations are being adopted by various regulatory agencies on a continuing
basis and the costs of compliance with these new rules can only be broadly
appraised until their implementation becomes more accurately defined.
Corrective action under RCRA related to past waste disposal activities is
discussed below under "Remediation."
Remediation
A significant portion of the U. S. Steel Group's currently identified
environmental remediation projects relate to the dismantlement and restoration
of former and present operating locations. These projects include continuing
remediation at an in situ uranium mining operation, the dismantling of former
coke-making facilities and the closure of permitted hazardous waste landfills.
The U. S. Steel Group is also involved in a number of remedial actions
under CERCLA, RCRA and other federal and state statutes, and it is possible
that additional matters may come to its attention which may require
remediation. For a discussion of remedial actions related to the U. S. Steel
Group, see "Legal Proceedings - U. S. Steel Group Environmental Proceedings."
36
<PAGE> 38
Capital Expenditures
The U. S. Steel Group's capital expenditures for environmental
controls were $57 million, $53 million and $52 million in 1994, 1993 and 1992,
respectively. The U. S. Steel Group currently expects such expenditures to
approximate $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.
37
<PAGE> 39
DELHI GROUP
The Delhi Group ("Delhi") consists of Delhi Gas Pipeline Corporation
("DGP") and certain other subsidiaries of USX which are engaged in the
purchasing, gathering, processing, transporting and marketing of natural gas.
Prior to establishment of the Delhi Group on October 2, 1992, these businesses
were included in the Marathon Group. Sales from the businesses included in the
Delhi Group as a percentage of USX consolidated sales were 3% in each of 1994,
1993 and 1992. See "Financial Statements and Supplementary Data - Notes to
Financial Statements - 1. Basis of Presentation" for the Delhi Group.
Delhi is an established natural gas merchant engaged in the
purchasing, gathering, processing, transporting and marketing of natural gas.
It uses its extensive pipeline systems to provide gas producers with a ready
purchaser for their gas or transportation to other pipelines and markets, and
to provide customers with an aggregated, reliable gas supply. Delhi has the
ability to offer a complete package of services to customers, relieving them of
the need to locate, negotiate for, purchase and arrange transportation of gas.
As a result, margins realized by Delhi, when providing premium supply
services, are generally higher than those realized when providing separate
gathering, processing or transporting services or those realized from
short-term, interruptible ("spot") market sales. Delhi provides premium supply
services to customers, such as local distribution companies ("LDCs") and
utility electric generators ("UEGs"). These services include providing
reliable supplies tailored to meet the peak demand requirements of customers.
Premium supply services range from standby service, where the customer has no
obligation to take any volumes but may immediately receive gas from Delhi upon
an increase in the customer's demand, to baseload firm service where delivery
of continuous volumes is assured by Delhi and the customer is obligated to take
the gas provided. Delhi attempts to structure its gas sales to balance the
peak demand requirements of LDCs during the winter heating season and of UEGs
during the summer air conditioning season. Gas supplies not sold under premium
service contracts are generally sold in the spot market.
Delhi also extracts and markets natural gas liquids ("NGLs") from
natural gas gathered on its pipeline systems. Delhi sells NGLs to a variety of
purchasers, including petrochemical companies, refiners, retailers, resellers
and trading companies. At February 28, 1995, Delhi owned interests in 17
natural gas processing facilities including 21 gas processing plants, 11 of
which were 50% owned and the remainder of which were wholly owned. Fifteen of
the plants were operating as of February 28, 1995. These facilities straddle
Delhi's pipelines and have been located to maximize utilization. During 1994,
four plants were written down to estimated net realizable value in accordance
with a plan for the disposition of certain non-strategic assets. As of
February 28, 1995, one of these plants had been sold.
Delhi faces competition in all of its businesses, including obtaining
additional dedicated gas reserves and providing premium supply services and gas
transportation services. Delhi's competitors include major integrated oil and
gas companies, more than 100 major intrastate and interstate pipelines, and
national and local gas gatherers, brokers, marketers, distributors and
end-users of varying size, financial resources and experience. Based on 1993
data published in the September 1994 Pipeline & Gas Journal, Delhi ranked
sixteenth among domestic pipeline companies in terms of total miles of gas
pipeline operated and third in terms of miles of gathering line operated. With
respect to competition in Delhi's gas processing business, Delhi estimates
there are approximately 400 gas processing plants in Texas and Oklahoma.
Certain competitors, including major integrated oil companies and some
intrastate and interstate pipeline companies, have substantially greater
financial resources and control larger supplies of gas than Delhi. Competition
for premium supply services varies for individual customers depending on the
number of other potential suppliers capable of providing the level of service
required by such customers.
38
<PAGE> 40
The following tables set forth the distribution of the Delhi Group's
sales and gross margin for each of the last three years:
<TABLE>
<CAPTION>
SALES AND GROSS MARGIN
(MILLIONS) 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Sales
Gas Sales (a) . . . . . . . . . . . . . . . . . . . . $431.1 $447.9 $371.6
Transportation . . . . . . . . . . . . . . . . . . . 11.7 14.2 14.8
------ ------ ------
Total Systems . . . . . . . . . . . . . . . . . . . . . 442.8 462.1 386.4
Trading . . . . . . . . . . . . . . . . . . . . . . . . 59.8 - -
Gas Processing . . . . . . . . . . . . . . . . . . . . 64.1 72.6 70.4
Other . . . . . . . . . . . . . . . . . . . . . . . . . .2 .1 1.0
------ ------ ------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . $566.9 $534.8 $457.8
====== ====== ======
Gross Margin (b)
Gas Sales and Trading Margin (a) . . . . . . . . . . $ 70.3 $104.5 $ 96.1
Transportation Margin . . . . . . . . . . . . . . . . 11.7 14.2 14.8
------ ------ ------
Systems and Trading Margin . . . . . . . . . . . . . . 82.0 118.7 110.9
Gas Processing Margin . . . . . . . . . . . . . . . . . 15.6 17.3 26.1
------ ------ ------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . $ 97.6 $136.0 $137.0
====== ====== ======
<FN>
_________________
(a) See "Natural Gas Sales" below for a discussion of a January 1994
settlement agreement affecting Gas Sales and Gas Sales and Trading Margin.
(b) Gas Sales and Trading Margin reflects revenues less associated gas
purchase costs. Transportation Margin reflects fees charged by Delhi for
the transportation of volumes owned by third parties. Gas Processing
Margin reflects (i) the sale of NGLs extracted from gas, less the cost of
gas purchased for feedstock and (ii) processing fees charged by Delhi to
third parties.
</TABLE>
The total number of Delhi employees at year-end was 681 in 1994, 805
in 1993 and 810 in 1992. The reduction in 1994 from 1993 reflected the effects
of a work force reduction program initiated in the second quarter of 1994 to
realign the organization with current business conditions. Delhi employees are
not represented by labor unions.
NATURAL GAS GATHERING AND SUPPLY
Delhi provides a valuable service to producers of natural gas by
providing a direct market for the sale of their natural gas. Following
discovery of commercial quantities of natural gas, producers generally must
either build their own gathering lines or negotiate with another party, such as
Delhi, to have gathering lines built to connect their wells to a pipeline for
delivery to market. Delhi typically aggregates natural gas production from
several wells in a gathering system where it may also provide additional
services for the producers by compressing and dehydrating the gas. Depending
on the quality of the gas stream, the gas may be treated to make it suitable
for market. Delhi's ability to offer producers treating services and its
willingness to purchase untreated gas give it an advantage in acquiring gas
supplies, particularly in east Texas, where much of the gas produced is not
pipeline quality gas. After processing, the residue gas flows through
pipelines for ultimate delivery to market.
Delhi owns and operates extensive gathering systems which are
strategically located primarily in the major gas producing areas of Texas and
Oklahoma, including east Texas, south Texas, the Permian Basin in west Texas
and the Anadarko Basin in Oklahoma. Delhi's principal intrastate natural gas
pipeline systems total approximately 6,900 miles and interconnect with other
intrastate and interstate pipelines at more than 110 points. Interests in two
partnerships, one of which operates a Federal Energy Regulatory Commission
("FERC") regulated interstate pipeline system, bring total systems miles to
approximately 7,400 at December 31, 1994, compared with approximately 8,100
miles at December 31, 1993. Total
39
<PAGE> 41
throughput, including Delhi's share of partnership volumes, was 334 billion
cubic feet ("bcf") in 1994, 327 bcf in 1993 and 314 bcf in 1992.
Pipeline systems comprised of approximately 1,500 miles of gas
pipeline in Arkansas, Kansas, Louisiana, Oklahoma and Texas were written down
to net realizable value in June 1994 in accordance with a plan for the
disposition of certain non-strategic assets. Systems comprised of
approximately 800 miles of pipeline were sold during 1994 and systems comprised
of approximately 200 miles were sold in January 1995. Agreements were signed
in early 1995 for the sale of substantially all of the remaining pipeline
systems included in the plan of disposition, including Delhi's partnership
interest in the previously mentioned FERC regulated interstate pipeline
company. For further discussion of the partnership interest, see "FERC
Regulation."
The following table sets forth the pipeline mileage for pipeline
systems, including partnerships, owned and operated by Delhi at December 31,
1994, and natural gas throughput volumes for pipeline systems operated during
1994:
PIPELINE MILEAGE AND THROUGHPUT VOLUMES
<TABLE>
<CAPTION>
AVERAGE
APPROXIMATE NATURAL GAS
MILES THROUGHPUT
----- ----------
(MILLIONS OF CUBIC FEET PER DAY)
<S> <C> <C>
Arkansas . . . . . . . . . . . . . . . . . . . . . . . . . . 72 14.2
Kansas (a) . . . . . . . . . . . . . . . . . . . . . . . . . - 2.9
Louisiana (a) . . . . . . . . . . . . . . . . . . . . . . . - 9.3
Oklahoma . . . . . . . . . . . . . . . . . . . . . . . . . . 2,848 334.6
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,022 534.9
----- -----
Total Systems . . . . . . . . . . . . . . . . . . . . . . . 6,942 895.9
Partnerships . . . . . . . . . . . . . . . . . . . . . . . . 457 19.6(b)
----- -----
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,399 915.5
===== =====
<FN>
_________________
(a) Delhi sold its Kansas and Louisiana gas gathering facilities (including
pipeline systems) during 1994.
(b) Reflects Delhi's interest in partnership throughput.
</TABLE>
Delhi obtains gas supplies from various sources, including major oil
and gas companies, other pipelines and independent producers. It offers
competitive prices for gas, a full range of pipeline services and stable,
year-round takes of production. Stable takes are particularly important to
small producers who may not have the financial capacity to withstand
significant variations in cash flow.
The services Delhi provides to producers include gathering,
dehydration, treating, compression, blending, processing and transportation.
Delhi's ability to provide this wide range of services, together with the
location of its gathering systems within major gas-producing basins, has
allowed it to build a large, flexible gas supply base.
Delhi generally buys gas from producers at prices based on a market
index. Gas purchase contracts generally include provisions for periodically
renegotiable prices. The majority of Delhi's contracts with producers are
"take-or-release" contracts under which Delhi has the right to purchase the gas
or, if it does not purchase minimum volumes of gas over a specified period, the
producer has the right to sell the gas to another party and may have it
transported on Delhi's system for a fee. Take-or-release contracts present
less risk to Delhi than the formerly prevalent take-or-pay contracts, while
affording producers an opportunity to protect their cash flow by selling to
other buyers. Delhi believes that its liability on take-or-pay contracts, if
any, is not material.
40
<PAGE> 42
Delhi must add dedicated gas reserves in order to offset the natural
declines in production from existing wells on its systems and to meet any
increase in demand. In the past, Delhi has successfully connected new sources
of supply to its pipeline systems. Management attributes this past success to
the strategic location of Delhi's gathering systems in major producing basins,
the quality of its service and its ability to adjust to changing market
conditions. Delhi's future ability to contract for additional dedicated gas
reserves also depends in part on the level and success of drilling by producers
in the areas in which Delhi operates.
The following table sets forth information concerning Delhi's
dedicated gas reserves for each of the last three years:
<TABLE>
<CAPTION>
DEDICATED GAS RESERVES (A) 1994 1993 1992
---- ---- ----
(BILLIONS OF CUBIC FEET)
<S> <C> <C> <C>
Beginning of year . . . . . . . . . . . . . . . . . . . . 1,663 1,652 1,643
Additions . . . . . . . . . . . . . . . . . . . . . . . 431 382 273
Production . . . . . . . . . . . . . . . . . . . . . . (334) (328) (307)
Revisions/Asset Sales . . . . . . . . . . . . . . . . . (110) (43) 43
----- ----- -----
TOTAL (at year-end) . . . . . . . . . . . . . . . . . . . 1,650 1,663 1,652
===== ===== =====
<FN>
(a) Reserves typically associated with third-party wells, to be purchased or
transported by Delhi.
</TABLE>
NATURAL GAS SALES
Delhi sells natural gas nationwide to LDCs, UEGs, pipeline companies,
various industrial end-users and marketers under both long- and short-term
contracts. As a result of Delhi's ability to offer a complete package of
services to customers, relieving them of the need to locate, negotiate for,
purchase and arrange transportation and processing of gas, margins realized by
Delhi when providing premium supply services are generally higher than those
realized when providing separate gathering, processing or transportation
services or those realized from spot market sales. In 1994, gas sales
represented approximately 70% of Delhi's total systems throughput and 71% of
Delhi's total gross margin. Delhi sells gas under both firm and interruptible
contracts at varying volumes, and in 1994 sold gas to over 180 customers.
When negotiating sales to customers directly connected to its pipeline
systems ("on system"), Delhi principally targets LDCs and UEGs. LDCs and UEGs
generally are willing to pay higher prices to gas suppliers who can provide
reliable gas supplies and adjust to rapid changes in their demand for gas
service. Fluctuations in demand for natural gas by LDCs and UEGs are
influenced by the seasonal requirements of purchasers using gas for space
heating and the generation of electricity for air conditioning. LDCs require
maximum deliveries during the winter heating season, while UEGs require maximum
deliveries during the summer air-conditioning season. Delhi serves over 43
LDCs and UEGs, and total sales to these customers in 1994 exceeded 108 bcf.
Delhi also sells gas to industrial end-users. These customers are generally
more price-sensitive, but diversify Delhi's customer base and provide a stable
market for natural gas.
Delhi primarily uses the spot market to balance its gas supply with
the demands for premium services. It attempts to sell all of its available gas
each month. Delhi typically estimates sales to its premium market, then places
the rest of its supply on the spot market. If the estimated premium load does
not materialize, spot market sales are increased. If the actual premium load
is greater than expected, spot market sales are interrupted to divert
additional gas to the premium market. Spot market sales allow Delhi to balance
its gas supply with its sales and to maximize throughput on its systems.
In order to increase flexibility for supplying gas to premium
customers, and in balancing its gas supply, Delhi has an arrangement with a
large LDC in Texas to store up to 2.5 bcf of natural gas in an east
41
<PAGE> 43
Texas storage facility, and continues to evaluate other storage options. As of
January 31, 1995, Delhi had 1.1 bcf of natural gas in storage pursuant to this
arrangement.
Because of prevailing industry conditions, most recent sales contracts
are for periods of one year or less, and many are for periods of 30 days or
less. Pricing mechanisms under Delhi's contracts result in gas sales primarily
at market sensitive prices with the unit margin fluctuating based on the sales
price and the cost of gas. Various contracts permit the customer or Delhi to
interrupt the gas purchased or sold, under certain circumstances. Other
contracts provide Delhi or the customer the right to renegotiate the gas sales
price at specified intervals, often monthly or annually. Sales under these
contracts may be terminated if the parties are unable to agree on a new price.
These contract provisions may make the specified term of a contract less
meaningful.
Delhi's four largest customers accounted for 30% of total sales in
each of 1994 and 1993 and 26% in 1992. In 1994, Delhi's four largest customers
were Oklahoma Natural Gas Company ("ONG"), the largest LDC in Oklahoma; Central
and Southwest, which includes UEGs primarily serving locations in Oklahoma,
Texas, Louisiana and Arkansas; Lone Star Gas Company ("Lone Star"), the largest
LDC in Texas, serving the north central part of the state; and Noram Energy
Corp., which includes Entex, the second largest LDC in Texas. Central and
Southwest includes Central Power and Light Company ("CP&L") and Southwestern
Electric Power Company ("SWEPCO"), which operate in different geographical
areas, but centralized their purchasing functions in 1994. For the years 1993
and 1992, Delhi's four largest customers were ONG, SWEPCO, CP&L and Lone Star.
Natural gas sales to Delhi's four largest customers accounted for 25%, 18% and
14% of total systems throughput and 41%, 45% and 39% of total gross margin in
1994, 1993 and 1992, respectively. Sales to two customers, ONG and Central and
Southwest, accounted for an aggregate of 31% of total gross margin in 1994.
Aggregate sales to two customers, ONG and SWEPCO, accounted for 34% and 30% of
total gross margin in 1993 and 1992, respectively. During each of these years,
one customer, ONG (discussed below), accounted for 10% or more of the Delhi
Group's total revenues. Sales to Central and Southwest aggregated $54.7
million, or just under 10% of total revenues, in 1994, $66.3 million, or 12%,
in 1993 and $63.2 million, or 14%, in 1992. In the event that one or more of
Delhi's large premium supply service customers reduce volumes taken under an
existing contract or choose not to renew such contract, Delhi would be
adversely affected to the extent it is unable to find alternative customers to
buy gas at the same level of profitability.
Delhi has maintained long-term sales relationships with many of its
customers and has done business with ONG since 1971. ONG accounted for 13%,
14% and 12% of total sales in 1994, 1993 and 1992, respectively. During 1992,
Delhi executed a 10-year contract with ONG which provides for annual
negotiation of contract prices. Delhi is currently in the third year of this
contract which includes specific pricing provisions for the 1995 and 1996
contract years.
Sales to SWEPCO accounted for 5% of total sales in 1994 and 7% in each
of 1993 and 1992. Sales to SWEPCO pursuant to one contract ("original
contract") were at prices substantially above spot market prices and, as a
result, this contract accounted for more than 10% of Delhi's total gross margin
in each of the year's 1990 through 1993. On January 26, 1994, a settlement
agreement was executed between DGP and SWEPCO, resolving litigation which began
in 1991 related to the original contract which was due to expire in April 1995.
The settlement agreement provided that SWEPCO pay Delhi the price under the
original contract through January 1994. Concurrent with the execution of the
settlement agreement, Delhi executed a new four-year agreement with SWEPCO
enabling Delhi to supply increased volumes of gas to two SWEPCO power plants in
east Texas, at market sensitive prices and premiums commensurate with the level
of service provided. The agreement provides for swing service and does not
require any minimum gas purchase volumes. Delhi's 1994 operating income and
cash flow were adversely affected by an estimated $16.2 million of premiums
lost under the original contract.
Delhi continues to pursue opportunities for long-term gas sales to
LDCs and UEGs. Delhi can sell gas to customers which are not directly
connected to its pipeline systems ("off-system") because of its numerous
interconnections with other pipelines and the availability of transportation
service from other
42
<PAGE> 44
pipelines. These interconnections give Delhi access to virtually every
significant interstate pipeline in the United States and permit it to take
advantage of regional pricing differentials. As a shipper, Delhi has both firm
and interruptible transportation agreements with certain of these pipelines,
including firm agreements that obligate Delhi to pay for transportation
services for periods of up to one year, regardless of whether or not Delhi uses
these services.
In a typical off-system sale transaction, Delhi sells gas to a
customer at an interconnection point with another pipeline, and the customer
arranges further pipeline transportation of the gas to the point of
consumption. Delhi's off-system sales in 1994 included sales to LDCs in
Arkansas, California, Indiana, Illinois, Kansas and Louisiana; UEGs in
California, Illinois, Kansas, Louisiana, Mississippi, Pennsylvania and
Tennessee; and industrial end-users in many of these same states. Margins
realized from off-system sales to LDCs and UEGs have traditionally been lower
than those realized from on-system sales to such customers, reflecting
increased competition and the lower level of service typically received by the
off-system customers. However, firm off-system sales to LDCs and UEGs
generally provide a premium over off-system industrial and spot market sales.
During 1994, Delhi negotiated four firm sales of gas moving to off-system
markets.
In 1994, Delhi initiated natural gas trading activity involving the
purchase of natural gas from sources other than wells directly connected to
Delhi's systems, and the subsequent sale of like volumes. Unit margins earned
in the trading business are significantly less than those earned from on-system
premium sales. The volume of trading activity in 1995 is expected to expand
significantly from 1994 levels.
The following table sets forth the distribution of Delhi's natural gas
volumes for each of the last three years:
<TABLE>
<CAPTION>
NATURAL GAS VOLUMES 1994 1993 1992
---- ---- ----
(BILLIONS OF CUBIC FEET)
<S> <C> <C> <C>
Natural Gas Throughput
Natural Gas Sales . . . . . . . . . . . . . . . . . . . . . 227.9 203.2 200.0
Transportation . . . . . . . . . . . . . . . . . . . . . . 99.1 117.6 103.4
----- ----- ------
Total Systems . . . . . . . . . . . . . . . . . . . . . . . . 327.0 320.8 303.4
Trading Sales . . . . . . . . . . . . . . . . . . . . . . . 34.6 - -
Partnerships - Equity Share . . . . . . . . . . . . . . . . 7.1 6.5 10.2
----- ----- -----
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . 368.7 327.3 313.6
===== ===== =====
</TABLE>
TRANSPORTATION
Delhi transports natural gas on its pipeline systems for third parties
at negotiated fees. When transporting gas for others, Delhi does not take
title but delivers equivalent amounts to designated locations. The core of
Delhi's transportation business is moving gas for on-system producers who
market their own gas. Delhi's transportation business complements its sales
and gas processing businesses by generating incremental revenues and margins.
Transportation volumes also may be available for purchase by Delhi during
periods of peak demand to increase Delhi's supply base. Delhi's more than 110
points of interconnection with both intrastate and interstate pipeline systems
facilitate its transportation business. Transportation services accounted for
approximately 30% of Delhi's total systems throughput and 12% of its total
gross margin in 1994, compared with 37% and 10%, in 1993.
HEDGING ACTIVITY
Delhi uses pricing mechanisms built into its natural gas purchase and
sales contracts or commodity based derivative instruments such as exchange
traded futures contracts and options to hedge exposure to changes in market
prices on its natural gas margins. While hedging activities are generally used
to reduce risks from unfavorable price movements, they also may limit the
opportunity to benefit
43
<PAGE> 45
from favorable movements. Delhi does not hedge against all such exposure,
depending on management's overall view of market conditions. Operating results
are thus subject to management's assessment of and response to changing market
prices. For additional information regarding hedging activity, see "Financial
Statements and Supplementary Data - Notes to Financial Statements - 2. Summary
of Principal Accounting Policies - Hedging Transactions and Management's
Discussion and Analysis of Cash Flows - Hedging Activity" for the Delhi Group.
GAS PROCESSING AND NGLS MARKETING
Natural gas processing involves the extraction of NGLs (ethane,
propane, isobutane, normal butane and/or natural gasoline) from the natural gas
stream, thereby removing some of the British thermal units ("Btus") from the
gas. Delhi processes most of the gas moved on its pipeline systems in its own
plants, which straddle its pipelines, and processes a smaller portion at
third-party plants. Delhi has the processing rights under a substantial
majority of its contracts with producers. By processing gas, Delhi captures
the differential between the price obtainable for the Btus if sold as NGLs and
the price obtainable for the Btus if left in the gas. Delhi has the ability to
take advantage of such price differentials by utilizing additional processing
capacity at operating plants, by choosing not to extract certain NGLs from the
gas stream or, to a lesser extent, by starting up or idling processing plants.
Delhi monitors the economics of removing NGLs from the gas stream for
processing on an ongoing basis to determine the appropriate level of each
plant's operation and the viability of starting up or idling individual plants.
At February 28, 1995, 15 of Delhi's 21 plants were operating. Four plants were
written down to estimated net realizable value in June 1994 in accordance with
a plan for the disposition of certain non-strategic assets. One of these plants
was sold during 1994. Delhi expanded its facilities in Custer County, Okla.
with the relocation, redesign and installation of the idled Cimmaron processing
plant and the installation of a two-mile pipeline. The plant (renamed Panther
Creek) began operations in March 1994. Delhi has a 50% interest in the plant
project. In 1994, Delhi completed a 21-mile system expansion to provide
additional system capacity to this plant.
44
<PAGE> 46
The following table sets forth the location, capacity and type of
Delhi's processing plants at December 31, 1994:
PROCESSING PLANTS
<TABLE>
<CAPTION>
GROSS GROSS
NATURAL GAS NGLS
THROUGHPUT PRODUCTION TYPE OF
LOCATION PLANT NAME CAPACITY CAPACITY PROCESS
-------- ---------- -------- -------- -------
(MILLIONS OF CUBIC (THOUSANDS OF
FEET PER DAY) GALLONS PER DAY)
<S> <C> <C> <C> <C>
Oklahoma(a) El Reno 75.0 248.0 Cryogenic
Custer Cryo 80.0 235.0 Cryogenic
Custer Lean Oil(b) 40.0 66.0 Refrig. oil absorption
Panther Creek 50.0 178.0 Cryogenic
Beaver 55.0 128.0 Cryogenic
Woodward 45.0 120.0 Cryogenic
Antelope Hills "B" 30.0 76.5 Cryogenic
Antelope Hills "A" 20.0 61.5 Cryogenic
Stephens 30.0 74.0 Cryogenic
Watonga "A" (b) 25.0 52.0 Cryogenic
Watonga "B" (b) 15.0 50.0 Cryogenic
East Texas Grapeland 165.0 200.0 Cryogenic
Longview 100.0 180.0 Cryogenic
East Texas 90.0 120.0 Cryogenic
West Texas Coyanosa 100.0 260.0 Cryogenic
Booker(b)(c) 6.0 12.0 Refrigeration
South Texas Three Rivers 30.0 100.0 Cryogenic
Pettus 30.0 80.0 Cryogenic
Laredo 25.0 40.0 Refrig. oil absorption
Louisiana Ruston "A" (b)(c) 16.0 18.0 Refrigeration
Ruston "B" (b)(c) 16.0 18.0 Refrigeration
------- -------
Total 1,043.0 2,317.0
======= =======
<FN>
_________________
(a) Plants in Oklahoma are 50% owned (plants in all other states are 100%
owned).
(b) Idle at December 31, 1994.
(c) Written down to net realizable value in June 1994 in accordance with a
plan of disposition.
</TABLE>
Delhi retains the rights to the NGLs on more than 90% of the gas it
processes. The remainder is shared with either producers or other pipelines.
For certain 50% owned plants, Delhi shares the retained NGLs equally with the
joint owner. Delhi pursues incremental processing business from third parties
with unprocessed gas accessible to Delhi's pipeline systems to take advantage
of excess capacity when processing economics are favorable.
Delhi also receives fees for providing treating services for producers
whose gas requires the removal of various impurities to make it marketable.
The impurities may include water, carbon dioxide or hydrogen sulfide. Delhi
owns and operates its own treating facilities, including six sulfur plants, and
also has contracts to treat gas at third-party plants. The ability to offer
treating services to producers gives Delhi a competitive advantage in acquiring
gas supplies in east Texas, where much of the gas produced is not
pipeline-quality gas.
Delhi markets NGLs either at the two major domestic marketing centers
for NGLs, Mont Belvieu, Texas and Conway, Kansas, or at the processing plant
sites. Delhi also markets NGLs for third parties for a fee. Condensate (free
liquids in the gas stream before processing) is very similar to crude oil and
is
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marketed to crude oil purchasers at various separation or collection facilities
located throughout Delhi's pipeline systems. Prices for NGLs and condensates
are closely related to the price of crude oil.
Delhi has transportation, fractionation and exchange agreements for
the movement of NGLs to market. Delhi sells NGLs to a variety of purchasers
including petrochemical companies, refiners, retailers, resellers and trading
companies. In 1994, Delhi marketed 276 million gallons ("mmgal") of NGLs to
over 53 different customers at spot market prices. In the past, Delhi has
entered into agreements with third parties to store NGLs, in order to provide
the flexibility to delay NGLs sales until demand and prices are higher.
Delhi's NGLs sales volumes totaled 276 mmgal, 282 mmgal and 261 mmgal
in 1994, 1993 and 1992, respectively. In addition, NGLs volumes which Delhi
processed for third parties for a fee totaled 30 mmgal, 46 mmgal and 41 mmgal
in 1994, 1993 and 1992, respectively. Gas processing unit margins averaged 6
cents per gallon in 1994 (10 cents per gallon in the fourth quarter), compared
with 6 cents per gallon in 1993 (1 cent per gallon in the fourth quarter) and
10 cents per gallon in 1992 (6 cents per gallon in the fourth quarter).
Average unit margins improved over the last half of 1994, reflecting improved
NGLs prices and lower feedstock (natural gas) costs.
PROPERTY, PLANT AND EQUIPMENT ADDITIONS
The following table sets forth property, plant and equipment additions
and dedicated natural gas reserve additions for the Delhi Group for each of the
last three years:
<TABLE>
<CAPTION>
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT
AND DEDICATED NATURAL GAS RESERVES 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Property, Plant and Equipment additions (MILLIONS) $32.1 $42.6 $ 26.6
Dedicated natural gas reserve additions (BILLIONS OF CUBIC FEET) 431 382 273
</TABLE>
During the three years 1992-1994, expenditures were primarily related
to the connection of new dedicated natural gas reserves, the purchase of new
facilities and the improvement and upgrading of existing facilities.
Expenditures in 1994 included amounts for a pipeline construction project in
western Oklahoma and the purchase and upgrade of three gas treating facilities
in east and west Texas. For information concerning capital expenditures for
environmental controls in 1992, 1993 and 1994 and estimated capital
expenditures for such purposes in 1995 and 1996, see "Environmental Matters."
Capital expenditures in 1995 are expected to be in the range of $35
million to $45 million as Delhi continues to pursue opportunities at attractive
prices to connect dedicated gas reserves by the expansion or acquisition of gas
gathering, processing and transmission assets, including those made available
as a result of current industry conditions and regulatory initiatives.
Depreciation, depletion and amortization costs for Delhi were $30.1
million, $36.3 million and $40.2 million in 1994, 1993 and 1992, respectively.
The decline in 1994 from 1993 primarily reflected effects of 1994 restructuring
activity.
REGULATORY MATTERS
Delhi's facilities and operations are subject to regulation by various
governmental agencies.
State Regulation
The Texas Railroad Commission ("RRC") has the authority to regulate
natural gas sales and transportation rates charged by intrastate pipelines in
Texas. The RRC requires tariff filings for certain of Delhi's transactions
and, under limited circumstances, could propose changes in such filed tariffs.
Rates
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charged for pipeline-to-pipeline transactions and rates charged to
transportation, industrial and other similar large volume contract customers
(other than LDCs) are presumed by the RRC to be just and reasonable where (i)
neither the supplier nor the customer had an unfair advantage during
negotiations, (ii) the rates are substantially the same as rates between the
gas utility and two or more of these customers for similar service or (iii)
competition does or did exist for the market with another supplier of natural
gas or an alternative form of energy. Competition generally exists in the
markets Delhi serves and rate cases have been infrequent.
Delhi's Texas pipeline systems are subject to the "ratable take rules"
of the RRC. Under ratable take rules, each purchaser of gas is generally
required first to take ratably certain high-priority gas (i.e., principally
casinghead gas from oil wells) produced from wells from which it purchases gas
and, if its sales volumes exceed available amounts of such high-priority gas,
thereafter to take gas well gas from wells from which it purchases gas on a
ratable basis, by categories, to the extent of demand. Under other RRC
regulations, large industrial customers are subject to curtailment or service
interruption during periods of peak demand. Certain Delhi customers in Texas
and Oklahoma may also be subject to state ratable take rules. Such rules have
affected purchases of gas from Delhi in the past and may affect such purchases
in the future.
The RRC has promulgated Statewide Rules which streamline the process
for determining gas demand and gas allowables in Texas. By setting allowables
to meet market demand, Delhi believes the RRC rules will foster more accurate
pricing signals between the wellhead and the burnertip. Although the ultimate
impact of these changes to the proration rules is uncertain, Delhi believes it
is well positioned to benefit from the new pricing structure.
Delhi generally does not engage in the type of sales or transportation
transactions that would subject it to cost of service regulation in the states
where it does business. Louisiana exercises limited jurisdiction over certain
facilities constructed in that state by Delhi.
FERC Regulation
As a gas gatherer and an operator primarily of intrastate pipelines,
Delhi is generally exempt from regulation under the Natural Gas Act of 1938
("NGA"). Delhi operates and owns a 25% interest in Ozark Gas Transmission
System ("Ozark"), an interstate pipeline providing transportation services in
western Arkansas and eastern Oklahoma. Ozark is subject to FERC regulation
under the NGA and the Natural Gas Policy Act of 1978 ("NGPA"). In February
1995, Delhi signed an agreement to sell its 25% interest in Ozark. The sale of
Ozark is expected to be completed in the second quarter of 1995, subject to
certain closing conditions and other government agency approvals. FERC also
exercises jurisdiction over transportation services provided by Delhi under
Section 311 of the NGPA. This jurisdiction is limited to a review of the
rates, terms and conditions of such services.
In April 1992, FERC issued Order No. 636, which makes significant
changes to the regulatory schedule applicable to the services provided by
interstate natural gas pipelines. The changes are intended to ensure that
pipelines provide transportation service that is equal in quality for all gas
supplies, whether the customer purchases the gas from the pipeline or from
another supplier.
ENVIRONMENTAL MATTERS
The Delhi Group maintains a comprehensive environmental policy
overseen by the Public Policy Committee of the USX Board of Directors. The
Safety and Environmental Affairs organization has the
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responsibility to ensure that the Delhi Group's operating organizations
maintain environmental compliance systems that are in accordance with
applicable laws and regulations.
The businesses of the Delhi Group are subject to numerous federal,
state and local laws and regulations relating to the protection of the
environment. These environmental laws and regulations include the Clean Air
Act ("CAA") with respect to air emissions, the Clean Water Act ("CWA") with
respect to water discharges, the Resource Conservation and Recovery Act
("RCRA") with respect to solid and hazardous waste treatment, storage and
disposal, and the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") with respect to releases and remediation of hazardous
substances. In addition, many states where the Delhi Group operates have
similar laws dealing with the same matters. These laws are constantly evolving
and becoming increasingly stringent. The ultimate impact of complying with
existing laws and regulations is not always clearly known or determinable due
in part to the fact that certain implementing regulations for laws such as RCRA
and the CAA have not yet been promulgated or in certain instances are
undergoing revision. These environmental laws and regulations, particularly
the 1990 Amendments to the CAA, could result in increased capital, operating
and compliance costs. For a discussion of environmental expenditures, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Management's Discussion and Analysis of Environmental Matters,
Litigation and Contingencies" for the Delhi Group.
The Delhi Group has incurred and will continue to incur capital and
operating and maintenance expenditures as a result of environmental laws and
regulations, although such expenditures have historically not been material.
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.
Air
The 1990 Amendments to the CAA impose more stringent limits on air
emissions, establish a federally mandated operating permit program and allow
for enhanced civil and criminal enforcement sanctions. The principal impact of
the 1990 Amendments to the CAA on the Delhi Group is on its compressor stations
and its processing plants. The amendments establish attainment deadlines and
control requirements based on the severity of air pollution in a geographical
area. All facilities that are major sources as defined by the CAA will require
Title V permits. Delhi anticipates that such permits will be required on 15
processing and treating plants by June 1996. The issuance of permits is
currently scheduled to begin in June 1995.
Water
The Delhi Group maintains the necessary discharge permits as required
under the National Pollutant Discharge Elimination System program of the CWA
and it is in compliance with such permits.
Solid Waste
The Delhi Group continues to seek methods to minimize the generation
of hazardous wastes in its operations. RCRA establishes standards for the
management of solid and hazardous wastes. Besides affecting current waste
disposal practices, RCRA also addresses the environmental effects of certain
past waste disposal operations, the recycling of wastes and the regulation of
underground storage tanks containing regulated substances. Since the EPA has
not yet promulgated implementing regulations for all provisions of RCRA and has
not yet made clear the practical application of all the implementing
regulations it has promulgated, the ultimate cost of compliance cannot be
accurately estimated. In addition, new laws are being enacted and regulations
are being adopted by various regulatory agencies on a
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<PAGE> 50
continuing basis, and the costs of compliance with these new rules can only be
broadly appraised until their implementation becomes more accurately defined.
Remediation
Minor remediation projects are done on a routine basis and related
expenditures have not been material.
Capital Expenditures
The Delhi Group's capital expenditures for environmental controls were
$4.6 million, $4.5 million and $3.0 million in 1994, 1993 and 1992,
respectively. The Delhi Group currently expects such expenditures to
approximate $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 about $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. Expenditures for
environmental controls include amounts for projects which, while benefitting
the environment, also enhance operating efficiencies.
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<PAGE> 51
ITEM 2. PROPERTIES
The location and general character of the principal oil and gas
properties, plants, mines, pipeline systems and other important physical
properties of USX are described in the Item 1. BUSINESS section of this
document. Except for oil and gas producing properties, which generally are
leased, or as otherwise stated, such properties are held in fee. The plants
and facilities have been constructed or acquired over a period of years and
vary in age and operating efficiency. At the date of acquisition of important
properties, titles were examined and opinions of counsel obtained, but no title
examination has been made specifically for the purpose of this document. The
properties classified as owned in fee generally have been held for many years
without any material unfavorably adjudicated claim.
Several steel production facilities and interests in two liquefied
natural gas tankers are leased. See "Financial Statements and Supplementary
Data - Notes to Consolidated Financial Statements - 15. Leases."
The basis for estimating oil and gas reserves is set forth in
"Consolidated Financial Statements and Supplementary Data - Supplementary
Information on Oil and Gas Producing Activities - Estimated Quantities of
Proved Oil and Gas Reserves."
USX believes that its surface and mineral rights covering reserves are
adequate to assure the basic legal right to extract the minerals, but may not
yet have obtained all governmental permits necessary to do so.
Unless otherwise indicated, all reserves shown are as of December 31,
1994.
ITEM 3. LEGAL PROCEEDINGS
USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments related to the Marathon
Group, the U. S. Steel Group and the Delhi Group involving a variety of
matters, including laws and regulations relating to the environment. Certain
of these matters are included below in this discussion. The ultimate
resolution of these contingencies could, individually or in the aggregate, be
material to the consolidated financial statements and/or to the financial
statements of the applicable group. However, management believes that USX will
remain a viable and competitive enterprise even though it is possible that
these contingencies could be resolved unfavorably.
MARATHON GROUP
Environmental Proceedings
The following is a summary of proceedings attributable to the Marathon
Group that were pending or contemplated as of December 31, 1994, under federal
and state environmental laws. Except as described herein, it is not possible
to accurately predict the ultimate outcome of these matters; however,
management's belief set forth in the first paragraph under "Item 3. LEGAL
PROCEEDINGS " above takes such matters into account.
Claims under the Comprehensive Environmental Response, Compensation,
and Liability Act ("CERCLA") and related state acts have been raised with
respect to the cleanup of various waste disposal and other sites. CERCLA is
intended to expedite the cleanup of hazardous substances without regard to
fault. Potentially responsible parties ("PRPs") for each site include present
and former owners and operators of, transporters to and generators of the
substances at the site. Liability is strict and can be joint and several.
Because of the ambiguity of the regulations, the difficulty of identifying the
responsible parties for any particular site, the complexity of determining the
relative liability among them, the uncertainty as to the most desirable
remediation techniques and the amount of damages and cleanup costs and the time
period during which such costs may be incurred, USX is unable to reasonably
estimate its ultimate cost of compliance with CERCLA.
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<PAGE> 52
At December 31, 1994, USX had been identified as a PRP at a total of
17 CERCLA sites related to the Marathon Group. Based on currently available
information, which is in many cases preliminary and incomplete, USX believes
that its liability for cleanup and remediation costs in connection with each of
these sites will be under $1 million per site and most will be under $100,000.
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 marketing outlets,
related to the Marathon Group where remediation is being sought under other
environmental statutes, both federal and state. Based on currently available
information, which is in many cases preliminary and incomplete, the Marathon
Group believes that its liability for cleanup and remediation costs in
connection with 32 of these sites will be under $100,000 per site, another 29
sites have potential costs between $100,000 and $1 million per site and 7 sites
may involve remediation costs between $1 million and $5 million per site.
There is one location which involves a remediation program in cooperation
with the Michigan Department of Natural Resources at a closed and dismantled
refinery site located near Muskegon, Mich. The Marathon Group anticipates
spending between $9 million and $12 million over the next 10 to 20 years at
this site. Anticipated expenditures for 1995 are $1.6 million.
Additionally, the Marathon Group is involved with a potential
corrective action at its Robinson, Ill. refinery where the remediation costs
have been estimated at between $4 million and $18 million over 20 to 30 years.
Anticipated expenditures for 1995 are $3.8 million.
In January 1994, the U.S. Environmental Protection Agency ("EPA")
(Region 5, Chicago) served Marathon with a Complaint and Compliance Order for
Resource Conservation and Recovery Act ("RCRA") violations at the Robinson
refinery seeking a penalty of $298,990. The Complaint alleges that the
refinery violated RCRA for failure to properly characterize the waste water
from a truck rinse pad and to maintain records of such characterization and
failure to file a Class I permit modification and to implement the Contingency
Plan. Marathon has filed its Answer denying liability.
On February 9, 1995, the EPA notified Marathon that it proposed to
assess penalties in the amount of $526,100 for violating the Clean Water Act
general NPDES Permit for the Cook Inlet, Alaska. This amount is based
primarily on clerical reporting errors and minor permit exceedances during the
period of 1990 through 1994. Before the EPA proposed to assess the fine,
Marathon conducted a comprehensive and voluntary self-evaluation of its permit
compliance status for the 1990-1994 period for all of its Cook Inlet
discharges. All findings were reported to the EPA along with actions taken or
planned by Marathon. There is no evidence that these permit exceedances have
harmed the environment. Marathon is negotiating with the EPA concerning these
penalties.
U. S. STEEL GROUP
B&LE Litigation
In 1994, judgments against the Bessemer & Lake Erie Railroad ("B&LE")
in the amount of approximately $498 million, plus interest, in the Lower Lake
Erie Iron Ore Antitrust Litigation were upheld. In connection with that
litigation, claims of two plaintiffs for retrial of their damage awards remain
to be heard (Toledo World Terminal, Inc. v. B&LE). At trial these plaintiffs
asserted claims of approximately $8 million, but were awarded only nominal
damages by the jury. A new trial date has not been set. Any damages awarded
in a new trial may be more or less than $8 million and would be subject to
trebling.
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A further related lawsuit (Pacific Great Lakes Corporation v. B&LE)
filed under the Ohio Valentine Act has been set for trial in the Cuyahoga
County (Ohio) Court of Common Pleas in September 1995. Formal discovery
commenced in late 1994, following unsuccessful efforts to reach settlement.
Plaintiffs unsubstantiated claims are approximately $21.6 million and are
subject to doubling under the Valentine Act.
The B&LE was a wholly owned subsidiary of USX throughout the period
the conduct occurred. It is now a subsidiary of Transtar, Inc. ("Transtar")
in which USX has a 46% equity interest. USX is obligated to reimburse Transtar
for judgments paid by the B&LE.
Fairfield Agreement Litigation
In 1989, USX and two former officials of the USWA were indicted by a
federal grand jury in Birmingham, Ala. which alleged that USX granted leaves of
absence and pensions to the union officials with intent to influence their
approval, implementation and interpretation of the 1983 Fairfield labor
agreement which resulted in reopening USX's Fairfield Works. In 1990, USX and
the union officials were convicted, and the District Court imposed a $4.1
million fine on USX and ordered restitution to the U. S. Steel and Carnegie
Pension Fund of approximately $300,000. The verdicts were affirmed by the
Court of Appeals for the 11th Circuit on May 10, 1994, and a petition for Writ
of Certiorari to the U. S. Supreme Court was denied on March 6, 1995. A former
executive officer of USX who was also subsequently indicted has pleaded not
guilty and has not yet been tried. A related civil action (Cox v. USX),
which was dismissed by the trial court, was reversed by the U. S. Court of
Appeals for the 11th Circuit on April 5, 1994 and has been returned to the
trial court for further proceedings. The plaintiffs' complaint asserted five
causes of action arising out of conduct relating to the negotiation of the 1983
Fairfield labor agreement. The causes of action include claims asserted under
the Racketeer Influenced and Corrupt Organization Act and Employee Retirement
Income Security Act based on allegations that union negotiators had agreed to
concessions in the agreement in exchange for pension payments to which they
were not entitled.
Pickering Litigation
On November 3, 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 and, pending the court's
determinations, USX may appeal. Plaintiffs' counsel has been reported as
estimating plaintiffs' recovery to be in excess of $100 million. USX believes
any such damages will likely be substantially less than the plaintiff's
estimate. In 1994, USX entered into settlement agreements with 227 plaintiffs
providing for releases of liability against USX and the aggregate payment by
USX of approximately $1 million.
Aloha Stadium Litigation
A jury trial commenced in late June 1993, in a case filed in the
Circuit Court of the First Circuit of Hawaii by the State of Hawaii alleging,
among other things, that the weathering steel, including USS COR-TEN Steel,
which was incorporated into the Aloha Stadium was unsuitable for the purpose
used. The State sought damages of approximately $97 million for past and
future repair costs and also sought treble damages and punitive damages for
deceptive trade practices and fraud, respectively. On October 1, 1993, the
jury returned a verdict finding no liability on the part of U. S. Steel. In
January 1994, the State appealed the decision to the Supreme Court of Hawaii.
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Inland Steel Patent Litigation
In July 1991, Inland Steel Company ("Inland") filed an action against
USX and another domestic steel producer in the U. S. District Court for the
Northern District of Illinois, Eastern Division, alleging defendants had
infringed two of Inland's steel-related patents. Inland seeks monetary damages
of up to approximately $50 million and an injunction against future
infringement. USX in its answer and counterclaim alleges the patents are
invalid and not infringed and seeks a declaratory judgment to such effect. In
May 1993, a jury found USX to have infringed the patents. The District Court
has yet to rule on the validity of the patents. In July 1993, the U. S. Patent
Office rejected the claims of the two Inland patents upon a reexamination at
the request of USX and the other steel producer. A further request was
submitted by USX to the Patent Office in October 1993, presenting additional
questions as to patentability which was granted and consolidated for
consideration with the original request. In 1994, the Patent Office issued a
decision rejecting all claims of the Inland patents. Inland has appealed this
decision to the Patent Office Board of Appeals.
Securities Litigation
In July 1993, a class action was filed in the U.S. District Court for
the Western District of Pennsylvania (Finkel v. Lehman Brothers, et al.) naming
as defendants USX, Messrs. C.A. Corry, R.M. Hernandez and L.B. Jones, officers
of the Corporation, and the underwriters in a public offering of 10 million
shares of Steel Stock completed on July 29, 1993. The complaint alleges that
the Corporation's prospectus and registration statement was false and
misleading with respect to the effect of unfairly traded imports on the
domestic steel industry and the then pending ITC proceedings and seeks as
damages the difference between the public offering price and the value of the
shares at the time the action was brought or the price at which shares were
disposed of prior to filing the suit. Two additional actions (Snyder v. USX,
et al. and Erenberg v. USX, et al.) involving essentially the same issues were
filed in August 1993 in the same court and added Mr. T.J. Usher, also an
officer, as a defendant. These cases have been consolidated, and discovery is
proceeding.
Environmental Proceedings
The following is a summary of the proceedings attributable to the U.
S. Steel Group that were pending or contemplated as of December 31, 1994, under
federal and state environmental laws. Except as described herein, it is not
possible to accurately predict the ultimate outcome of these matters; however,
management's belief set forth in the first paragraph under "Item 3. LEGAL
PROCEEDINGS" above takes such matters into account.
Claims under CERCLA and related state acts have been raised with
respect to the cleanup of various waste disposal and other sites. CERCLA is
intended to expedite the cleanup of hazardous substances without regard to
fault. PRP's for each site include present and former owners and operators of,
transporters to and generators of the substances at the site. Liability is
strict and can be joint and several. Because of the ambiguity of the
regulations, the difficulty of identifying the responsible parties for any
particular site, the complexity of determining the relative liability among
them, the uncertainty as to the most desirable remediation techniques and the
amount of damages and cleanup costs and the time period during which such costs
may be incurred, USX is unable to reasonably estimate its ultimate cost of
compliance with CERCLA.
At December 31, 1994, USX had been identified as a PRP at a total of
28 CERCLA sites related to the U. S. Steel Group. Based on currently available
information, which is in many cases preliminary and incomplete, USX believes
that its liability for cleanup and remediation costs in connection with 12 of
these sites will be between $100,000 and $1 million per site and ten will be
under $100,000. At one site, U. S. Steel's former Duluth, Minn. Works, USX has
spent approximately $5.4 million and currently estimates that it will spend
another $1.6 million. However, USX was directed in 1993 to develop alternative
methods of remediation for this site, the cost of which is presently unknown
and indeterminable
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and, as a result, future costs may be more or less than previously estimated.
At the remaining five sites, USX has no reason to believe that its share in the
remaining cleanup costs at any single site will exceed $5 million, although it
is not possible to accurately predict the amount of USX's share in any final
allocation of such costs. Following is a summary of the status of the five
sites:
In 1988, USX and three other PRPs agreed to the issuance of an
administrative order by the EPA to undertake emergency removal work at
the Municipal & Industrial Disposal Co. site in Elizabeth, Pa. The cost
of such removal, which has been completed, was approximately $3 million,
of which USX paid $2.5 million. The EPA has indicated that further
remediation of this site may be required in the future, but it has not
conducted any assessment or investigation to support what remediation
would be required. In October 1991, the Pennsylvania Department of
Environmental Resources ("PaDER") placed the site on the Pennsylvania
State Superfund list and began a Remedial Investigation and Feasibility
Study ("RI/FS") which is expected to be completed in 1995. It is not
possible to estimate accurately the cost of any remediation or USX's
share in any final allocation formula; however, based on presently
available information, USX may have been responsible for approximately
70% of the waste material deposited at the site. The EPA has demanded
reimbursement for approximately $400,000 in past costs. USX is
negotiating with the agency.
In 1989, a consent decree negotiated between the EPA and USX was entered
in the U.S. District Court of New Jersey requiring USX to undertake
remedial work at the Tabernacle Drum Dump site in Tabernacle, N.J. USX
has expended $3.5 million in completing the remedial design and in
constructing the treatment system. Additionally, the Department of
Justice filed a complaint in 1990 against USX and a waste disposal firm
seeking recovery of $1.7 million expended by the EPA in conducting a
RI/FS for the site. USX cross claimed against the waste disposal firm,
and its successor in ownership, which improperly disposed of the waste
material. On June 14, 1994, a settlement was reached with the
codefendant waste disposal firm requiring it to pay $1.7 million to
settle the EPA's cost claims and to pay USX $300,000. The EPA has not
released USX from future liability.
USX participated with thirty-five other PRPs in performing removal work
at the Ekotek/Petrochem site in Salt Lake City, Utah under the terms of a
1991 administrative order negotiated with the EPA. The removal work was
completed in 1992 at a cost of over $9 million. In July 1992, the PRP
Remediation Committee negotiated an administrative order on consent to
perform a RI/FS of the site. It is expected the RI/FS will be completed
in early 1995 and a Record of Decision issued by the end of 1995. USX
has contributed approximately $550,000 through 1994 towards completing
the removal work and performing the RI/FS. USX's proportionate share of
costs presently being used by the PRP Remediation Committee is
approximately 5% of the participating PRPs, but a final determination has
not yet been made and it is expected that the percentage may decrease as
a result of the participation of additional PRPs. The PRP Remediation
Committee has commenced cost recovery litigation against approximately
1,100 non-participating PRPs.
USX has a 54% economic interest in RMI Titanium Company ("RMI") which has
been identified as a PRP (together with 31 other companies) at the Fields
Brook Superfund site in Ashtabula, Ohio. In 1986, the EPA estimated the
cost of remediation at $48 million. However, recent studies show the
volume of sediment to be substantially lower than projected in 1986.
These studies, together with improved remediation technology and
redefined cleanup standards have resulted in a more recent estimate of
the remediation cost of approximately $25 million. The actual cost of
remediation may vary from the estimate depending upon any number of
factors. The EPA, in March 1989, ordered 22 of the PRP's to conduct a
design phase study for the sediment operable unit and a source control
study, which studies are currently estimated to cost $19 million. RMI,
working cooperatively with fourteen others in accordance with two
separate agreements, is complying with the order. RMI has accrued and
has been paying its
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portion of the cost of complying with the EPA's order, which includes the
studies. It is anticipated that the studies will be completed no
earlier than mid 1996. Actual cleanup would not commence prior to that time.
It is not possible to determine accurately RMI's cost or share of any final
allocation formula with respect to the actual cleanup; however, based on the
results of the allocation of the study costs which have been agreed to by
the fifteen cooperating companies, RMI believes its share of the cleanup
costs will be approximately 10%.
The Buckeye Reclamation Landfill, near St. Clairsville, Ohio, has been
used at various times as a disposal site for coal mine refuse and
municipal and industrial waste. USX is one of fifteen PRPs that have
indicated a willingness to enter into an agreed order with the EPA to
perform a remediation of the site. Until there is a final determination
of each PRP's proportionate share at the site, USX has agreed to accept a
share of 9.26% under an interim allocation agreement among all fifteen
PRPs. Since 1992, USX has spent approximately $250,000 at the site,
primarily on remedial design work estimated to total $2.5 million.
Implementation of the remedial design plan, resulting in a long-term
cleanup of the site, is expected to cost approximately $21.5 million.
One of the PRPs filed suit against the EPA, the Ohio EPA, and 13 PRPs
including USX. The EPA, in turn, has filed suit against the PRPs to
recover $1.3 million in oversight costs.
At the Arrowhead Refinery site in Hermantown, Minn., USX was one of 17
defendants named in a complaint filed by the EPA in 1989 in which the agency
was seeking to recover past and future clean-up costs. A settlement agreement
was reached between the EPA and the PRP's which was embodied in a consent
decree entered by the court in 1994. USX's liability under the agreement was
$444,000, which has been paid.
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. Based on currently available information, which is in many
cases preliminary and incomplete, the U. S. Steel Group believes that its
liability for cleanup and remediation costs in connection with nine of these
sites will be under $100,000 per site, another ten sites have potential costs
between $100,000 and $1 million per site, and seven sites may involve
remediation costs between $1 million and $5 million. Potential costs
associated with remediation at sixteen of the sites are not presently
determinable.
Two sites, USX's Gary Works and Clairton Works, are expected to have
costs of cleanup and remediation in excess of $5 million.
Gary
In 1988, the United States filed an action in the United States
District Court, Northern District of Indiana, for alleged violations of its
National Pollutant Discharge Elimination System ("NPDES") permit effluent
limitations and proposed including Gary Works on the EPA's List of Violating
Facilities under Section 508 of the Clean Water Act based upon the EPA's
allegations of continuing or recurring noncompliance with clean water
standards at the facility. A consent decree signed by USX and approved by the
court in 1990 requires USX to pay a civil penalty of $1.6 million, to spend up
to $7.5 million to study and implement a program to remediate the sediment in a
portion of the Grand Calumet River and to comply with specified wastewater
control requirements entailing up to $25 million for new control equipment. In
addition, the EPA withdrew the proposal to include Gary Works on the List of
Violating Facilities. USX is currently negotiating with the EPA to develop a
sediment remediation plan for the section of the Grand Calumet River that
runs through Gary Works. USX expects to reach a final agreement with the
EPA concerning this sediment remediation plan in 1995. As proposed, this
55
<PAGE> 57
project would require five to six years to complete after approval and would be
followed by an environmental recovery validation. The estimated program cost,
which has been accrued, is approximately $30 million. In September 1994, the
EPA informed USX of its intent to demand civil penalties of $12 million for
alleged violations of the Clean Water Act at Gary Works. USX is negotiating a
consent decree which will provide for the expanded sediment remediation program
and will resolve alleged violations of the prior consent decree and NPDES
permit since 1990.
In 1990, USX received a Notice of Violation issued by the Indiana
Department of Environmental Management ("IDEM") alleging the violation of
regulations concerning hazardous wastes at Gary Works. After several
unsuccessful discussions with the agency in an attempt to resolve the issues
raised in the Notice of Violation, including the amount of any penalty,
the agency issued an Order assessing a civil penalty of $180,225. USX and IDEM
have entered into a settlement of the matters alleged in the Order which
requires USX to implement a plant-wide ground water assessment at Gary Works,
consistent with the possibility of a future RCRA corrective action by EPA. In
addition, USX paid the penalty amount in October 1994. USX expects to enter
into an agreement with the EPA in 1995 concerning the initiation of a RCRA
facility investigation and a corrective measure study at Gary Works.
On November 16, 1994, USX received a Notice of Violation from IDEM
alleging violations of regulations concerning the management of hazardous
wastes at USX's Gary Works. With the Notice of Violation, IDEM included a
proposed settlement agreement which would require Gary Works to initiate
certain remediation and study programs and pay a civil penalty of $1.8 million.
USX submitted a detailed response in rebuttal of the allegations and has
requested an opportunity to meet with IDEM.
The IDEM has issued Notices of Violation to USX's Gary Works alleging
violations of air pollution requirements, including allegations that one source
was not in compliance from 1982 to 1994. USX and IDEM have been involved in
negotiations since the fall of 1994 in an attempt to resolve these matters.
Those discussions are continuing. At a meeting between USX and IDEM in
November 1994, the IDEM representatives orally conveyed an initial penalty
demand of $52 million which reflects their calculation of the economic benefit
that IDEM alleges USX received by not complying with the statutory
requirements. USX has entered into discussions with IDEM in an attempt to
resolve these issues, including the amount of any penalty. It is USX's
expectation that a significant portion of any agreed to penalty amount would
be resolved through additional environmental capital projects at Gary Works.
Clairton
In 1987, USX and the PaDER entered into a consent order to resolve an
incident in January 1985 involving the alleged unauthorized discharge of
benzene and other organic pollutants from Clairton Works in Clairton, Pa.
That consent order required USX to pay a penalty of $50,000 and a monthly
payment of $2,500 for five years. In 1990, USX and the PaDER reached
agreement to amend the consent order. Under the amended order, USX has agreed
to continue paying the prior $2,500 monthly penalty until February 1997; to
cleanup and close a former coke plant waste disposal site over a period of 15
years; to pay a penalty of $300,000; and to pay a monthly penalty of up to
$1,500 each month until the former disposal site is closed. A study is
underway to determine cleanup and closure requirements which are currently
estimated to cost $5.3 million.
On October 5, 1994, USX received an administrative complaint issued by
the EPA alleging that USX's Clairton Works and Mon Valley Works were in
violation of regulations requiring the installation and operation of Continuous
Emission Monitoring ("CEM") equipment on certain air emission sources. USX has
reached an agreement in principle with the EPA to resolve the allegations. The
agreement requires USX to install, maintain, and operate CEM equipment which
USX is already in the process of installing. In addition, USX will be required
to pay a civil penalty of $125,000.
56
<PAGE> 58
Other Sites
In January 1992, USX commenced negotiations with the EPA regarding the
terms of an administrative order on consent, pursuant to the RCRA, under which
USX would perform a RCRA Facility Investigation ("RFI") and a Corrective
Measure Study ("CMS") at USX's Fairless Works. During 1993, USX commenced the
RFI/CMS which will require over three years to complete at an approximate cost
ranging from $2 million to $3 million. The RFI/CMS will determine whether
there is a need for, and the scope of, any remedial activities at Fairless
Works.
On October 9, 1992, the EPA filed a complaint against RMI alleging
certain RCRA violations at RMI's closed sodium plant in Ashtabula, Ohio. The
EPA's determination is based on information gathered during inspections of the
facility in 1991. Under the complaint, the EPA proposed to assess a civil
penalty of approximately $1.4 million for alleged failure to comply with RCRA.
RMI is contesting the complaint. It is RMI's position that it has complied
with the provisions of RCRA and that the EPA's assessment of penalties is
inappropriate. A formal hearing has been requested and informal discussions
with the EPA to settle this matter are ongoing. Based on the preliminary
nature of the proceedings, RMI is currently unable to determine the ultimate
liability, if any, that may arise from this matter.
DELHI GROUP
Environmental Regulation
Delhi is subject to federal, state and local laws and regulations
relating to the environment. Based on procedures currently in place, including
routine reviews of existing and proposed environmental laws and regulations and
unannounced environmental inspections performed periodically at company
facilities, and the associated expenditures for environmental controls, Delhi
believes that its facilities and operations are in general compliance with
environmental laws and regulations. However, because some of these
requirements presently are not fixed, Delhi is unable to accurately predict the
eventual cost of compliance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
57
<PAGE> 59
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The principal market on which Marathon Stock, Steel Stock and Delhi Stock
are traded is the New York Stock Exchange. Information concerning the high and
low sales prices for the common stocks as reported in the consolidated
transaction reporting system and the frequency and amount of dividends paid
during the last two years is set forth in "Consolidated Financial Statements
and Supplementary Data - Selected Quarterly Financial Data (Unaudited)."
As of February 28, 1995, there were 109,148 registered holders of Marathon
Stock, 80,514 registered holders of Steel Stock and 157 registered holders of
Delhi Stock.
The Board of Directors intends to declare and pay dividends on Marathon
Stock, Steel Stock and Delhi Stock based on the financial condition and results
of operations of the Marathon Group, the U. S. Steel Group and the Delhi Group,
respectively, although it has no obligation under Delaware law to do so. In
determining its dividend policy with respect to Marathon Stock, Steel Stock and
Delhi Stock, the Board will rely on the separate financial statements of the
Marathon Group, the U. S. Steel Group and the Delhi Group, respectively. The
method of calculating earnings per share for Marathon Stock, Steel Stock and
Delhi Stock reflects the Board's intent that separately reported earnings and
the surplus of the Marathon Group, the U. S. Steel Group and the Delhi Group,
as determined consistent with the 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. Dividends on all classes of
preferred stock and USX common stock are limited to legally available funds of
USX, which are determined on the basis of the entire Corporation.
Distributions on Marathon Stock, Steel Stock and Delhi Stock would be precluded
by a failure to pay dividends on any series of preferred stock of USX. In
addition, net losses of any group, as well as dividends or distributions on any
class of USX common stock or series of preferred stock and repurchases of any
class of USX common stock or preferred stock at prices in excess of par or
stated value, will reduce the funds of USX legally available for payment of
dividends on the three classes of USX common stock as well as any preferred
stock.
Dividends on Steel Stock are further limited to the Available Steel
Dividend Amount. Net losses of the Marathon Group and the Delhi Group and
distributions on Marathon Stock, Delhi Stock and on any preferred stock
attributed to the Marathon Group or the Delhi Group will not reduce the funds
available for declaration and payment of dividends on Steel Stock unless the
legally available funds of USX are less than the Available Steel Dividend
Amount. Dividends on Delhi Stock are further limited to the Available Delhi
Dividend Amount. Net losses of the Marathon Group and the U. S. Steel Group
and distributions on Marathon Stock, Steel Stock and on any preferred stock
attributed to the Marathon Group or the U. S. Steel Group will not reduce the
funds available for declaration and payment of dividends on Delhi Stock unless
the legally available funds of USX are less than the Available Delhi Dividend
Amount. See "Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements - 20. Dividends."
The Board has adopted certain policies with respect to the Marathon Group,
the U. S. Steel Group and the Delhi Group, including, without limitation, the
intention to: (i) limit capital expenditures of the U. S. Steel Group over the
long term to an amount equal to the internally generated cash flow of the U. S.
Steel Group, including funds generated by sales of assets of the U. S. Steel
Group, (ii) sell assets and provide services between any of the Marathon Group,
the U. S. Steel Group and the Delhi Group only on an arm's-length basis and
(iii) treat funds generated by sales of Marathon Stock, Steel Stock or Delhi
Stock (except for sales of Delhi Stock deemed to represent the Retained
Interest) and securities convertible into such stock as assets of the Marathon
Group, the U. S. Steel Group, or the Delhi Group, as the case may be, and apply
such funds to acquire assets or reduce liabilities of the Marathon Group, the
U. S. Steel Group or the Delhi Group, respectively. These policies may be
modified or rescinded by action of the Board, or the
58
<PAGE> 60
Board may adopt additional policies, without the approval of holders of the
three classes of USX common stock, although the Board has no present intention
to do so.
Fiduciary Duties of the Board; Resolution of Conflicts
Under Delaware law, the Board must act with due care and in the best
interest of all the stockholders, including the holders of the shares of each
class of USX common stock. The interests of the holders of any class of USX
common stock may, under some circumstances, diverge or appear to diverge.
Examples include the determination of whether shares of Delhi Stock offered for
sale will be deemed to represent either part of the Retained Interest or an
additional equity interest in the Delhi Group; the optional exchange of Steel
Stock for Marathon Stock at the 10% premium or of Delhi Stock for Marathon
Stock or Steel Stock at the 10% premium or 15% premium, as the case may be, the
determination of the record date of any such exchange or for the redemption of
any Steel Stock or Delhi Stock; the establishing of the date for public
announcement of the liquidation of USX and the commitment of capital among the
Marathon Group, the U. S. Steel Group and the Delhi Group.
Because the Board owes an equal duty to all common stockholders regardless
of class, the Board is the appropriate body to deal with these matters. In
order to assist the Board in this regard, USX has formulated policies to serve
as guidelines for the resolution of matters involving a conflict or a potential
conflict, including policies dealing with the payment of dividends, limiting
capital investment in the U. S. Steel Group over the long term to its
internally generated cash flow and allocation of corporate expenses and other
matters. The Board has been advised concerning the applicable law relating to
the discharge of its fiduciary duties to the common stockholders in the context
of the separate classes of USX common stock and has delegated to the Audit
Committee of the Board the responsibility to review matters which relate to
this subject and report to the Board. While the classes of USX common stock
may give rise to an increased potential for conflicts of interest, established
rules of Delaware law would apply to the resolution of any such conflicts.
Under Delaware law, a good faith determination by a disinterested and
adequately informed Board with respect to any such matter would be a defense to
any claim of liability made on behalf of the holders of any class of USX common
stock. USX is aware of no precedent concerning the manner in which such rules
of Delaware law would be applied in the context of its capital structure.
59
<PAGE> 61
ITEM 6. SELECTED FINANCIAL DATA
USX - CONSOLIDATED
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS (EXCEPT AS NOTED)
-------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales . . . . . . . . . . . . . . . . . $19,341 $18,064 $17,813 $18,825 $20,659
Operating income (loss) . . . . . . . . 861 56 70 (259) 1,556
Operating income includes:
Inventory market valuation charges
(credits) . . . . . . . . . . . . . (160) 241 (62) 260 (140)
Restructuring charges . . . . . . . . 37 42 125 426 -
Total income (loss) before cumulative
effect of changes in accounting
principles. . . . . . . . . . . . . . 501 (167) (160) (578) 818
Net income (loss) . . . . . . . . . . . $ 501 $ (259) $(1,826) $ (578) $ 818
Dividends on preferred stock . . . . . (31) (27) (9) (9) (18)
------- ------- ------- ------- -------
Net income (loss) applicable to
common stocks . . . . . . . . . . . . $ 470 $ (286) $(1,835) $ (587) $ 800
- -------------------------------------------------------------------------------------------------
COMMON SHARE DATA
MARATHON STOCK:
Total income (loss) before cumulative
effect of changes in accounting
principles applicable to Marathon
Stock . . . . . . . . . . . . . . . . $ 315 $ (12) $ 103 $ (78) $ 494
Per share (a)-primary (in dollars) . . 1.10 (.04) .37 (.31) 1.94
-fully diluted (in dollars) . . . . . 1.10 (.04) .37 (.31) 1.92
Net income (loss) applicable to
Marathon Stock . . . . . . . . . . . 315 (35) (228) (78) 494
Per share (a)-primary (in dollars) . . 1.10 (.12) (.80) (.31) 1.94
-fully diluted (in dollars) . . . . . 1.10 (.12) (.80) (.31) 1.92
Dividends paid (b) (in dollars) . . . . .68 .68 1.22 1.31 1.22
Book value (in dollars) . . . . . . . . 11.01 10.58 11.37 12.45 13.92
STEEL STOCK:
Total income (loss) before cumulative
effect of changes in accounting
principles applicable to Steel
Stock . . . . . . . . . . . . . . . . $ 176 $ (190) $ (274) $ (509) $ 306
Per share (a)-primary (in dollars) . . 2.35 (2.96) (4.92) (10.00) 6.00
-fully diluted (in dollars) . . . . . 2.33 (2.96) (4.92) (10.00) 5.83
Net income (loss) applicable to Steel
Stock . . . . . . . . . . . . . . . . 176 (259) (1,609) (509) 306
Per share (a)-primary (in dollars) . . 2.35 (4.04) (28.85) (10.00) 6.00
-fully diluted (in dollars) . . . . . 2.33 (4.04) (28.85) (10.00) 5.83
Dividends paid (b) (in dollars) . . . . 1.00 1.00 1.00 .94 .88
Book value (in dollars) . . . . . . . . 12.01 8.32 3.72 32.68 43.59
</TABLE>
(Footnotes presented on the following page.)
60
<PAGE> 62
SELECTED FINANCIAL DATA (CONTD.)
USX - CONSOLIDATED (CONTD.)
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS (EXCEPT AS NOTED)
-------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
DELHI STOCK OUTSTANDING SINCE OCTOBER 2, 1992:
Net income (loss) applicable to outstanding
Delhi Stock . . . . . . . . . . . . . . . . . $ (21) $ 8 $ 2
Per common share-primary and fully diluted
(in dollars) . . . . . . . . . . . . . . . . (2.22) .86 .22
Dividends paid (in dollars) . . . . . . . . . . .20 .20 .05
Book value (in dollars) . . . . . . . . . . . . 12.09 14.50 13.83
<FN>
_________________
(a) For purposes of computing Marathon Stock per share data for periods prior
to May 7, 1991, the numbers of shares are assumed to be the same as the
corresponding numbers of shares of USX common stock. For computing Steel
Stock per share data for periods prior to May 7, 1991, the number of
shares are assumed to be one-fifth of the corresponding number of shares
of USX common stock.
(b) The initial dividends on the Marathon Stock and Steel Stock were paid on
September 10, 1991; dividends paid prior to that date on the common
stock were attributed to the Marathon Group and the U. S. Steel Group
based upon the relationship of the initial dividends on Marathon Stock
and Steel Stock.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA-DECEMBER 31:
Capital expenditures-for year . . . . . . . . . $ 1,033 $ 1,151 $ 1,505 $ 1,392 $ 1,391
Total assets . . . . . . . . . . . . . . . . . 17,517 17,414 17,252 17,039 17,268
Capitalization:
Notes payable . . . . . . . . . . . . . . . . $ 1 $ 1 $ 47 $ 79 $ 138
Total long-term debt . . . . . . . . . . . . 5,599 5,970 6,302 6,438 5,527
Total proceeds from production
agreements . . . . . . . . . . . . . . . . - - - 17 142
Minority interest including preferred
stock of subsidiary . . . . . . . . . . . . 250 5 16 37 67
Preferred stock . . . . . . . . . . . . . . . 112 112 105 105 108
Common stockholders' equity . . . . . . . . . 4,190 3,752 3,604 4,882 5,761
------- ------- ------- ------- -------
Total capitalization . . . . . . . . $10,152 $ 9,840 $10,074 $11,558 $11,743
======= ======= ======= ======= =======
Ratio of earnings to fixed charges . . . . . . 2.08 (a) (a) (a) 2.80
Ratio of earnings to combined fixed
charges and preferred stock dividends . . . . 1.92 (b) (b) (b) 2.69
<FN>
_________________
(a) Earnings did not cover fixed charges by $281 million in 1993, $197
million in 1992 and $681 million in 1991.
(b) Earnings did not cover combined fixed charges and preferred stock
dividends by $325 million in 1993, $211 million in 1992 and $696 million
in 1991.
</TABLE>
61
<PAGE> 63
SELECTED FINANCIAL DATA (CONTD.)
USX - MARATHON GROUP
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS (EXCEPT AS NOTED)
-------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales . . . . . . . . . . . . . . . . . . . . $12,757 $11,962 $12,782 $13,975 $14,616
Operating income . . . . . . . . . . . . . . 584 169 304 358 1,081
Operating income includes:
Inventory market valuation charges (credits) (160) 241 (62) 260 (140)
Restructuring charges . . . . . . . . . . . - - 115 24 -
Total income (loss) before cumulative effect
of changes in accounting principles . . . . 321 (6) 109 (71) 508
Net income (loss) . . . . . . . . . . . . . . $ 321 $ (29) $ (222) $ (71) $ 508
Dividends on preferred stock . . . . . . . . (6) (6) (6) (7) (14)
------- ------- ------- ------- -------
Net income (loss) applicable to Marathon
Stock . . . . . . . . . . . . . . . . . . . $ 315 $ (35) $ (228) $ (78) $ 494
- ----------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA (IN DOLLARS) (a)
Total income (loss) before cumulative effect
of changes in accounting principles
- primary . . . . . . . . . . . . . . . . . $ 1.10 $ (.04) $ .37 $ (.31) $ 1.94
- fully diluted . . . . . . . . . . . . . . 1.10 (.04) .37 (.31) 1.92
Net income (loss)-primary . . . . . . . . . . 1.10 (.12) (.80) (.31) 1.94
-fully diluted . . . . . . . . . . . . . . . 1.10 (.12) (.80) (.31) 1.92
Dividends paid (b) . . . . . . . . . . . . . .68 .68 1.22 1.31 1.22
Book value . . . . . . . . . . . . . . . . . 11.01 10.58 11.37 12.45 13.92
- ----------------------------------------------------------------------------------------------------
BALANCE SHEET DATA-DECEMBER 31:
Capital expenditures-for year . . . . . . . . $ 753 $ 910 $ 1,193 $ 960 $ 1,000
Total assets . . . . . . . . . . . . . . . . 10,951 10,822 11,141 11,644 11,931
Capitalization:
Notes payable . . . . . . . . . . . . . . . $ 1 $ 1 $ 31 $ 56 $ 106
Total long-term debt . . . . . . . . . . . . 4,038 4,297 3,945 4,419 4,059
Total proceeds from production
agreements . . . . . . . . . . . . . . . . - - - 17 142
Preferred stock of subsidiary . . . . . . . 182 - - - -
Preferred stock . . . . . . . . . . . . . . 78 78 78 80 83
Common stockholders' equity . . . . . . . . 3,163 3,032 3,257 3,215 3,542
------- ------- ------- ------- -------
Total capitalization . . . . . . . . . $ 7,462 $ 7,408 $ 7,311 $ 7,787 $ 7,932
======= ======= ======= ======= =======
<FN>
_________________
(a) For purposes of computing Marathon Stock per share data for
periods prior to May 7, 1991, the numbers of shares are assumed to be the
same as the corresponding numbers of shares of USX common stock.
(b) The initial dividends on Marathon Stock were paid on September 10, 1991;
dividends paid prior to that date on the common stock were attributed to
the Marathon Group based upon the relation of the initial dividends on
Marathon Stock and Steel Stock.
</TABLE>
62
<PAGE> 64
SELECTED FINANCIAL DATA (CONTD.)
USX - U. S. STEEL GROUP
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS (EXCEPT AS NOTED)
-------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales . . . . . . . . . . . . . . . . . $6,066 $5,612 $ 4,919 $ 4,864 $6,073
Operating income (loss) . . . . . . . . 313 (149) (241) (617) 475
Operating income includes:
Restructuring charges . . . . . . . . - 42 10 402 -
Total income (loss) before cumulative
effect of changes in accounting
principles . . . . . . . . . . . . . 201 (169) (271) (507) 310
Net income (loss) . . . . . . . . . . . $ 201 $ (238) $(1,606) $ (507) $ 310
Dividends on preferred stock . . . . . (25) (21) (3) (2) (4)
------ ------ ------- ------- ------
Net income (loss) applicable to Steel
Stock . . . . . . . . . . . . . . . . $ 176 $ (259) $(1,609) $ (509) $ 306
- ------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA (IN DOLLARS) (a)
Total income (loss) before cumulative effect
of changes in accounting principles
-primary . . . . . . . . . . . . . . $ 2.35 $(2.96) $ (4.92) $(10.00) $ 6.00
-fully diluted . . . . . . . . . . . 2.33 (2.96) (4.92) (10.00) 5.83
Net income (loss)-primary . . . . . . . 2.35 (4.04) (28.85) (10.00) 6.00
-fully diluted . . . . . . . . . . . 2.33 (4.04) (28.85) (10.00) 5.83
Dividends paid (b) . . . . . . . . . . 1.00 1.00 1.00 .94 .88
Book value . . . . . . . . . . . . . . 12.01 8.32 3.72 32.68 43.59
- ------------------------------------------------------------------------------------------------
BALANCE SHEET DATA-DECEMBER 31:
Capital expenditures-for year . . . . . $ 248 $ 198 $ 298 $ 432 $ 391
Total assets . . . . . . . . . . . . . 6,480 6,629 6,251 5,627 5,582
Capitalization:
Notes payable . . . . . . . . . . . . $ - $ - $ 15 $ 23 $ 32
Total long-term debt . . . . . . . . 1,453 1,562 2,259 2,019 1,468
Minority interest including preferred
stock of subsidiary . . . . . . . . 64 5 16 37 67
Preferred stock . . . . . . . . . . . 32 32 25 25 25
Common stockholders' equity . . . . . 913 585 222 1,667 2,219
------ ------ ------- ------- ------
Total capitalization . . . $2,462 $2,184 $ 2,537 $ 3,771 $3,811
====== ====== ======= ======= ======
<FN>
_________________
(a) For purposes of computing Steel Stock per share data for periods prior to
May 7, 1991, the numbers of shares are assumed to be one-fifth of the
corresponding numbers of shares of USX common stock.
(b) The initial dividends on Steel Stock were paid on September 10, 1991;
dividends paid prior to that date on the common stock were attributed to
the U. S. Steel Group based upon the relationship of the initial
dividends on Steel Stock and Marathon Stock.
</TABLE>
63
<PAGE> 65
SELECTED FINANCIAL DATA (CONTD.)
USX - DELHI GROUP (a)
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS (EXCEPT AS NOTED)
-------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales . . . . . . . . . . . . . . . . $566.9 $534.8 $457.8 $423.2 $405.2
Operating income (loss) . . . . . . . (35.8) 35.6 32.6 31.0 25.1
Operating income includes:
Restructuring charges . . . . . . . 37.4 - - - -
Total income (loss) before cumulative
effect of change in accounting
principle . . . . . . . . . . . . . . (30.9) 12.2 18.6 7.2 15.2
Net income (loss) . . . . . . . . . . . (30.9) 12.2 36.5 7.2 15.2
Dividends on preferred stock . . . . . (.1) (.1)
Net (income) loss applicable to
the Retained Interest . . . . . . . . 10.1 (4.3)
------ ------
Net income (loss) applicable to
Delhi Stock . . . . . . . . . . . . . $(20.9) $ 7.8
- -------------------------------------------------------------------------------------------
PER COMMON SHARE DATA SINCE OCTOBER 2, 1992 (IN DOLLARS)
Net income (loss)-primary and
fully diluted . . . . . . . . . . . $(2.22) $ .86 $ .22
Dividends paid . . . . . . . . . . . . .20 .20 .05
Book value . . . . . . . . . . . . . . 12.09 14.50 13.83
- -------------------------------------------------------------------------------------------
BALANCE SHEET DATA-DECEMBER 31:
Capital expenditures-for year . . . . . $ 32.1 $ 42.6 $ 26.6 $ 18.6 $ 15.3
Total assets . . . . . . . . . . . . . 521.2 583.4 564.5 583.8 678.9
Capitalization:
Notes payable . . . . . . . . . . . $ - $ - $ .7
Total long-term debt . . . . . . . . 107.5 110.5 97.6
Preferred stock of subsidiary . . . 3.8 - -
Preferred stock . . . . . . . . . . 2.5 2.5 2.5
Common stockholders' equity . . . . 169.3 203.0 193.6
------ ------- -------
Total capitalization . . . . . . $283.1 $ 316.0 $ 294.4
====== ======= =======
<FN>
_________________
(a) The Delhi Group was established on October 2, 1992. The financial data for
the periods prior to that date include the businesses of the Delhi Group,
which were included in the Marathon Group.
</TABLE>
64
<PAGE> 66
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Indexes to Financial Statements, Supplementary Data and Management's
Discussion and Analysis of USX Consolidated, the Marathon Group, the U. S.
Steel Group and the Delhi Group, are presented on pages U-1, M-1, S-1 and D-1,
respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Indexes to Financial Statements, Supplementary Data and Management's
Discussion and Analysis for USX Consolidated, the Marathon Group, the U. S.
Steel Group and the Delhi Group, are presented on pages U-1, M-1, S-1 and D-1,
respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
65
<PAGE> 67
THIS PAGE IS INTENTIONALLY LEFT BLANK
66
<PAGE> 68
USX
Index to Consolidated Financial Statements, Supplementary
Data and Management's Discussion and Analysis
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
U-1
<PAGE> 69
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
<PAGE> 70
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
<PAGE> 71
Consolidated Statement of Operations
<TABLE>
<CAPTION>
(Dollars in millions) 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
U-4
<PAGE> 72
Income Per Common Share
<TABLE>
<CAPTION>
(Dollars in millions, except per share data) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Outstanding
since Oct. 2,
1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 73
Consolidated Balance Sheet
<TABLE>
<CAPTION>
(Dollars in millions) December 31 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
U-6
<PAGE> 74
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
(Dollars in millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 75
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.
<TABLE>
<CAPTION>
Shares in thousands Dollars in millions
----------------------------- ----------------------------
1994 1993 1992 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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>
(Table continued on next page)
U-8
<PAGE> 76
<TABLE>
<CAPTION>
Shares in thousands Dollars in millions
----------------------------- -------------------------------
1994 1993 1992 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
U-9
<PAGE> 77
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
<PAGE> 78
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:
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 79
- --------------------------------------------------------------------------------
3. OTHER ITEMS
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
- -----------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 80
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
Sales (a) Depreciation,
------------------------------------- Operating Depletion
Unaffiliated Between Income and Capital
(In millions) Year Customers Groups Total (Loss) Assets Amortization Expenditures
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 81
The information below summarizes the operations in different geographic
areas. Transfers between geographic areas are at prices which approximate
market.
<TABLE>
<CAPTION>
Sales
----------------------------------------------
Within Between Operating
GEOGRAPHIC AREA: Geographic Geographic Income
Year Areas Areas Total (Loss) Assets
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
U-14
<PAGE> 82
- --------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(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.
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
U-15
<PAGE> 83
- --------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
(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:
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
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)
- --------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 84
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
1994 1993 1992
---------------------------- --------------------------- --------------------------
(In millions) CURRENT DEFERRED TOTAL Current Deferred Total Current Deferred Total
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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):
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<C> <C> <C>
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)
- --------------------------------------------------------------------------------------------------------
</TABLE>
(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:
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 85
- --------------------------------------------------------------------------------
10. LONG-TERM RECEIVABLES AND OTHER INVESTMENTS
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The following financial information summarizes USX's share in investments
accounted for by the equity method:
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 86
- --------------------------------------------------------------------------------
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
<PAGE> 87
- -------------------------------------------------------------------------------
13. LONG-TERM DEBT
<TABLE>
<CAPTION>
Interest December 31
(In millions) Rates - % Maturity 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 88
- --------------------------------------------------------------------------------
14. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
Capital Operating
(In millions) Leases Leases
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
Operating lease rental expense:
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rental $ 213 $ 208 $ 225
Contingent rental 50 52 45
Sublease rentals (7) (9) (10)
-------- ------- -------
Net rental expense $ 256 $ 251 $ 260
- --------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 89
- --------------------------------------------------------------------------------
16. INVENTORIES
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
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
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 -
- --------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
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
<PAGE> 90
- -------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
Marathon Stock Steel Stock Delhi Stock
--------------------------- ----------------------- -------------------------
Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(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:
<TABLE>
<CAPTION>
Marathon Stock Shares Steel Stock Shares Delhi Stock Shares
---------------------------- -------------------------- ------------------
1994 1993 1992 1994 1993 1992 1994 1993
- ---------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------
</TABLE>
U-23
<PAGE> 91
- --------------------------------------------------------------------------------
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
<PAGE> 92
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
- --------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
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
<PAGE> 93
- --------------------------------------------------------------------------------
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
<PAGE> 94
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
FAIR CARRYING RECORDED
VALUE AMOUNT DEFERRED AGGREGATE
ASSETS ASSETS GAIN OR CONTRACT
(In millions) (LIABILITIES)(a) (LIABILITIES) (LOSS) VALUES(b)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 95
- -------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
1994 1993
--------------------- -------------------
CARRYING FAIR Carrying Fair
(In millions) December 31 AMOUNT VALUE Amount Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 96
Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1994 1993
--------------------------------------------- -----------------------------------------------
(In millions,
except per share data) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1994 1993
--------------------------------------------- -----------------------------------------------
(In millions,
except per share data) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Composite tape.
<TABLE>
<CAPTION>
1994 1993
--------------------------------------------- -----------------------------------------------
(In millions,
except per share data) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
<TABLE>
<CAPTION>
1994 1993
-------------------------------------------- ------------------------------------------------
(In millions,
except per share data) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Composite tape.
U-29
<PAGE> 97
Principal Unconsolidated Affiliates (Unaudited)
<TABLE>
<CAPTION>
Company Country % Ownership(a) Activity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Economic interest as of December 31, 1994.
Supplementary Information on Mineral Reserves (Unaudited)
MINERAL RESERVES (OTHER THAN OIL AND GAS)
<TABLE>
<CAPTION>
Reserves (a) at December 31 Production
--------------------------- ------------------------
(Million tons) 1994 1993 1992 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 98
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)
<TABLE>
<CAPTION>
UNITED MIDDLE EAST OTHER
(In millions) STATES EUROPE AND AFRICA INTERNATIONAL TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(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
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------
</TABLE>
U-31
<PAGE> 99
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) CONTINUED
COSTS INCURRED FOR PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT -
INCLUDING CAPITAL EXPENDITURES(a)
<TABLE>
<CAPTION>
UNITED MIDDLE EAST OTHER
(In millions) STATES EUROPE AND AFRICA INTERNATIONAL TOTAL
- -----------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
<TABLE>
<CAPTION>
UNITED MIDDLE EAST OTHER
(Millions of barrels) STATES EUROPE AND AFRICA(a) INTERNATIONAL TOTAL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excluded reserves located in Libya. See Note 25, page U-26, for current
status.
U-32
<PAGE> 100
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) CONTINUED
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES (CONTINUED)
<TABLE>
<CAPTION>
UNITED MIDDLE EAST OTHER
(Billions of cubic feet) STATES EUROPE AND AFRICA(a) INTERNATIONAL TOTAL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 101
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
<TABLE>
<CAPTION>
UNITED MIDDLE EAST OTHER
(In millions) STATES EUROPE AND AFRICA INTERNATIONAL TOTAL
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------
</TABLE>
SUMMARY OF CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED OIL AND GAS RESERVES(a)
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Certain reclassifications of prior years' data have been made to conform
to 1994 reporting practices.
U-34
<PAGE> 102
Five-Year Operating Summary - Marathon Group
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes the Indianapolis Refinery which was temporarily idled in October
1993.
U-35
<PAGE> 103
FIVE-YEAR OPERATING SUMMARY - U. S. STEEL GROUP
<TABLE>
<CAPTION>
(Thousands of net tons, unless otherwise noted) 1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 104
FIVE-YEAR OPERATING SUMMARY - DELHI GROUP
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 105
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
<PAGE> 106
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
<PAGE> 107
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 and a galvanizing line in the
southern United States. 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
<PAGE> 108
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
<PAGE> 109
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
<PAGE> 110
Management's Discussion and Analysis continued
The following table summarizes USX's environmental expenditures for each of
the last three years(a):
<TABLE>
<CAPTION>
(Dollars in millions) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 111
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
<PAGE> 112
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, 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. Additional price increases for
sheet products have been announced effective July 2, 1995.
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
<PAGE> 113
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
<PAGE> 114
MARATHON GROUP
Index to Financial Statements, Supplementary Data and Management's Discussion
and Analysis
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
M-1
<PAGE> 115
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
<PAGE> 116
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
<PAGE> 117
Statement of Operations
<TABLE>
<CAPTION>
(Dollars in millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
- --------------------------------------------------------------------------------------------------------
</TABLE>
Income Per Common Share of Marathon Stock
<TABLE>
<CAPTION>
1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 118
Balance Sheet
<TABLE>
<CAPTION>
(Dollars in millions) December 31 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- -------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
M-5
<PAGE> 119
Statement of Cash Flows
<TABLE>
<CAPTION>
(Dollars in millions) 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See Note 7, page M-11, for supplemental cash flow information.
The accompanying notes are an integral part of these financial statements.
M-6
<PAGE> 120
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
<PAGE> 121
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
<PAGE> 122
- --------------------------------------------------------------------------------
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
<PAGE> 123
- --------------------------------------------------------------------------------
4. SALES
The items below were included in both sales and operating costs, resulting in
no effect on income:
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
(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.
<TABLE>
<CAPTION>
Marathon Group Consolidated USX(a)
-------------------- -------------------
(In millions) December 31 1994 1993 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Marathon Group(c) Consolidated USX
----------------------- -----------------------
(In millions) Year ended December 31 1994 1993 1992 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest and other financial
costs (Note 8, page M-12) $(346) $(338) $(311) $(471) $(471) $(458)
- -------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 124
6. LONG-TERM DEBT
The Marathon Group's portion of USX's consolidated long-term debt is as
follows:
<TABLE>
<CAPTION>
Marathon Group Consolidated USX(a)
------------------- -------------------
(In millions) December 31 1994 1993 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
(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
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------
</TABLE>
M-11
<PAGE> 125
- --------------------------------------------------------------------------------
8. OTHER ITEMS
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
- -------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 126
- --------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
- --------------------------------------------------------------------------------------------------------
</TABLE>
(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.
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
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)
- --------------------------------------------------------------------------------------------------------
</TABLE>
M-13
<PAGE> 127
- --------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
(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:
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
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)
- --------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 128
- -------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
1994 1993 1992
---------------------------- --------------------------- --------------------------
(In millions) CURRENT DEFERRED TOTAL Current Deferred Total Current Deferred Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------------
</TABLE>
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):
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(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:
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 129
- --------------------------------------------------------------------------------
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
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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):
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992(a)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(a) For period from October 2, 1992 to December 31, 1992.
(b) Delhi Group's loss included restructuring charges of $40 million.
M-16
<PAGE> 130
- -------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
Capital Operating
(In millions) Leases Leases
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
Operating lease rental expense:
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rental $ 105 $ 97 $ 111
Contingent rental 10 9 10
Sublease rentals (5) (6) (7)
-------- ------- ------
Net rental expense $ 110 $ 100 $ 114
- --------------------------------------------------------------------------------------------------------
</TABLE>
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
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 131
- -------------------------------------------------------------------------------
17. INVENTORIES
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------
</TABLE>
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
<TABLE>
<CAPTION>
(In millions, except per share data) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 132
- -------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
- --------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
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
<PAGE> 133
The following table sets forth quantitative information by class of derivative
financial instrument:
<TABLE>
<CAPTION>
FAIR CARRYING RECORDED
VALUE AMOUNT DEFERRED AGGREGATE
ASSETS ASSETS GAIN OR CONTRACT
(In millions) (LIABILITIES)(a) (LIABILITIES) (LOSS) VALUES(b)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(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:
<TABLE>
<CAPTION>
1994 1993
------------------- -------------------
CARRYING FAIR Carrying Fair
(In millions) December 31 AMOUNT VALUE Amount Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 134
- --------------------------------------------------------------------------------
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
<PAGE> 135
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1994 1993
-------------------------------------------- ----------------------------------------------
(IN MILLIONS,
EXCEPT PER SHARE DATA) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Composite tape.
PRINCIPAL UNCONSOLIDATED AFFILIATES (UNAUDITED)
<TABLE>
<CAPTION>
Company Country % Ownership(a) Activity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 136
FIVE-YEAR OPERATING SUMMARY
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes the Indianapolis Refinery which was temporarily idled in October
1993.
M-23
<PAGE> 137
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
<PAGE> 138
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
<PAGE> 139
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
<PAGE> 140
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):
<TABLE>
<CAPTION>
(Dollars in millions) 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital $ 70 $ 123 $ 240
Compliance
Operating & Maintenance 106 92 109
Remediation(b) 25 38 21
----- ----- -----
Total $ 201 $ 253 $ 370
- --------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 141
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
<PAGE> 142
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)
<TABLE>
<CAPTION>
(Dollars in millions) 1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------
</TABLE>
*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
<TABLE>
<CAPTION>
1994 1993 1992
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
(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
- ------------------------------------------------------------------------------
</TABLE>
*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
<PAGE> 143
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
<PAGE> 144
Management's Discussion and Analysis continued
On November 16, 1994, 239 employees at the Detroit refinery and terminal
represented by the International Brotherhood of Teamsters ("Teamsters") went on
strike. On March 4, 1995, these employees ratified a new five-year labor
agreement expiring on February 1, 2000. During the strike, the refinery
and terminal were operated by salaried personnel, so the strike
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
<PAGE> 145
THIS PAGE IS INTENTIONALLY LEFT BLANK
M-32
<PAGE> 146
U.S. STEEL GROUP
INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA AND
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
S-1
<PAGE> 147
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
<PAGE> 148
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
<PAGE> 149
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(Dollars in millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
- --------------------------------------------------------------------------------------------------------
</TABLE>
INCOME PER COMMON SHARE OF STEEL STOCK
<TABLE>
<CAPTION>
1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 150
BALANCE SHEET
<TABLE>
<CAPTION>
(Dollars in millions) December 31 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-5
<PAGE> 151
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
See Note 9, page S-11, for supplemental cash flow information.
The accompanying notes are an integral part of these financial statements.
S-6
<PAGE> 152
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
<PAGE> 153
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
<PAGE> 154
- --------------------------------------------------------------------------------
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
<PAGE> 155
- --------------------------------------------------------------------------------
6. OTHER ITEMS
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
- --------------------------------------------------------------------------------------------------------
</TABLE>
(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.
<TABLE>
<CAPTION>
U. S. Steel Group Consolidated USX(a)
----------------- -------------------
(In millions) December 31 1994 1993 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
U. S. Steel Group(c) Consolidated USX
--------------------- --------------------
(In millions) Year ended December 31 1994 1993 1992 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest and other financial costs (Note 6, page S-10) $(117) $(125) $(145) $(471) $(471) $(458)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 156
- --------------------------------------------------------------------------------
8. LONG-TERM DEBT
The U. S. Steel Group's portion of USX's consolidated long-term debt is as
follows:
<TABLE>
<CAPTION>
U. S. Steel Group Consolidated USX(a)
------------------- -------------------
(In millions) December 31 1994 1993 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(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
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 - -
- ---------------------------------------------------------------------------------------------------------
</TABLE>
S-11
<PAGE> 157
- --------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
- --------------------------------------------------------------------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
S-12
<PAGE> 158
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(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:
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
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)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 159
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
1994 1993 1992
---------------------------- ------------------------- ------------------------
(In millions) CURRENT DEFERRED TOTAL Current Deferred Total Current Deferred Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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)
- --------------------------------------------------------------------------------------------------------
</TABLE>
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):
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
- --------------------------------------------------------------------------------------------------------
</TABLE>
Deferred tax assets and liabilities resulted from the following:
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 160
- --------------------------------------------------------------------------------
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
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
The following financial information summarizes U. S. Steel Group's share
in investments accounted for by the equity method:
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
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
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 44 $ 108
Semi-finished products 336 329
Finished products 128 125
Supplies and sundry items 87 67
--------- ----------
Total $ 595 $ 629
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 161
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
Capital Operating
(In millions) Leases Leases
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
Operating lease rental expense:
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rental $ 103 $ 106 $ 112
Contingent rental 39 41 35
Sublease rentals (2) (3) (3)
--------- --------- ---------
Net rental expense $ 140 $ 144 $ 144
- --------------------------------------------------------------------------------------------------------
</TABLE>
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
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 162
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
<TABLE>
<CAPTION>
(In millions, except per share data) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 163
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
- --------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
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
<PAGE> 164
The following table sets forth quantitative information by class of
derivative financial instrument:
<TABLE>
<CAPTION>
FAIR CARRYING RECORDED
VALUE AMOUNT DEFERRED AGGREGATE
ASSETS ASSETS GAIN OR CONTRACT
(In millions) (LIABILITIES)(a) (LIABILITIES) (LOSS) VALUES(b)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(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:
<TABLE>
<CAPTION>
1994 1993
----------------- -------------------
CARRYING FAIR Carrying Fair
(In millions) December 31 AMOUNT VALUE Amount Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 165
- --------------------------------------------------------------------------------
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
<PAGE> 166
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1994 1993
----------------------------------------------- ---------------------------------------------
(In millions, except
per share data) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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)
<TABLE>
<CAPTION>
Company Country % Ownership(a) Activity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 167
FIVE-YEAR OPERATING SUMMARY
<TABLE>
<CAPTION>
(Thousands of net tons, unless otherwise noted) 1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 168
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, 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
<PAGE> 169
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
<PAGE> 170
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, a granulated coal injection facility at
Fairfield Works' blast furnace, a galvanizing line in the southern United
States, 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
<PAGE> 171
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:
<TABLE>
<CAPTION>
(Dollars in millions) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital $ 57 $ 53 $ 52
Compliance(a)
Operating & Maintenance 202 168 157
Remediation(b) 32 19 11
------- ------- -------
Total U. S. Steel Group $ 291 $ 240 $ 220
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 172
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
<PAGE> 173
Management's Discussion and Analysis continued
included restructuring charges of $42 million and $10 million, respectively,
which are discussed below.
<TABLE>
<CAPTION>
OPERATING INCOME (LOSS)
(Dollars in millions) 1994 1993* 1992*
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Steel and Related Businesses $ 239 $ 123 $ (140)
Administrative and Other Businesses 74 (230) (91)
Restructuring - (42) (10)
------ ------ ------
Total $ 313 $ (149) $ (241)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* 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
<PAGE> 174
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 it is anticipated that the
ITC will render its 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
<PAGE> 175
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. Additional price increases for
sheet products have been announced effective July 2, 1995.
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
<PAGE> 176
DELHI GROUP
Index to Financial Statements, Supplementary Data and
Management's Discussion and Analysis
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
D-1
<PAGE> 177
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
<PAGE> 178
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
<PAGE> 179
Statement of Operations
<TABLE>
<CAPTION>
(Dollars in millions, except per share data) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
========= =========
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Income Per Common Share of Delhi Stock
<TABLE>
<CAPTION>
(Dollars in millions, except per share data) 1994 1993 1992(a)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(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)
<TABLE>
<CAPTION>
(Dollars in millions, except per share data) 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C>
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
- ----------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 180
Balance Sheet
<TABLE>
<CAPTION>
(Dollars in millions) December 31 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-5
<PAGE> 181
Statement of Cash Flows
<TABLE>
<CAPTION>
(Dollars in millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
See Note 7, page D-11, for supplemental cash flow information.
The accompanying notes are an integral part of these financial statements.
D-6
<PAGE> 182
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
<PAGE> 183
- -------------------------------------------------------------------------------
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
<PAGE> 184
- -------------------------------------------------------------------------------
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
<PAGE> 185
- -------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
Delhi Group Consolidated USX(a)
------------------- ------------------
(In millions) December 31 1994 1993 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Delhi Group(c) Consolidated USX
--------------------------- --------------------------
(In millions) 1994 1993 1992 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest and other
financial costs (Note 8, page D-11) $ (8.3) $ (7.7) $ (2.1) $ (471) $ (471) $ (458)
- --------------------------------------------------------------------------------------------------------
</TABLE>
(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:
<TABLE>
<CAPTION>
Delhi Group Consolidated USX(a)
-------------------- --------------------
(In millions) December 31 1994 1993 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 186
- --------------------------------------------------------------------------------
7. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
8. OTHER ITEMS
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 187
- -------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
(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.
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
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%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
D-12
<PAGE> 188
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------- ------------------------- ----------------------
(In millions) CURRENT DEFERRED TOTAL Current Deferred Total Current Deferred Total
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Reconciliation of federal statutory tax rate (35% in 1994 and 1993, and
34% in 1992) to total provisions (credits):
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Deferred tax liabilities primarily relate to property, plant and equipment:
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets $ 9.6 $ 7.7
Deferred tax liabilities 145.5 164.4
--------- ---------
Net deferred tax liabilities $ 135.9 $ 156.7
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
Operating
(In millions) Leases
- --------------------------------------------------------------------------------------------------------
<S> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
Operating lease rental expense:
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rental $ 5.0 $ 5.4 $ 8.0
Contingent rental 1.1 1.7 2.0
---------- ------- -------
Rental expense $ 6.1 $ 7.1 $ 10.0
- --------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 189
- --------------------------------------------------------------------------------
13. LONG-TERM RECEIVABLES AND OTHER INVESTMENTS
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(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:
<TABLE>
<CAPTION>
(In millions) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
14. INVENTORIES
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
15. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
(In millions) December 31 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 190
- -------------------------------------------------------------------------------
17. EQUITY
<TABLE>
<CAPTION>
(In millions, except per share data) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 191
- -------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
FAIR CARRYING RECORDED
VALUE AMOUNT DEFERRED AGGREGATE
ASSETS ASSETS GAIN OR CONTRACT
(In millions) (LIABILITIES)(a) (LIABILITIES) (LOSS) VALUES(b)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(a) The fair value amounts are based on dealer quoted market prices.
(b) Contract amounts do not quantify risk exposure.
D-16
<PAGE> 192
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
1994 1993
-------------------- ------------------
CARRYING FAIR Carrying Fair
(In millions) December 31 AMOUNT VALUE Amount Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 193
- --------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
(In millions, except per share data) 1992
- --------------------------------------------------------------------------------------------------------
<S> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
(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)
<TABLE>
<CAPTION>
Company Country % Ownership(a) Activity
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Laredo-Nueces Pipeline Company United States 50% Natural Gas Transmission
Ozark Gas Transmission System United States 25% Natural Gas Transmission
- -----------------------------------------------------------------------------------------------------
</TABLE>
(a) Economic interest as of December 31, 1994.
D-18
<PAGE> 194
Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1994 1993
--------------------------------------------- ---------------------------------------------------
(In millions except
per share data) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes a $4.1 million unfavorable effect associated with an increase in
the federal income tax rate from 34% to 35%, reflecting remeasurement of
deferred income tax liabilities as of January 1, 1993.
(b) Composite tape.
D-19
<PAGE> 195
Five-Year Operating Summary
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SALES VOLUMES
Natural gas throughput (billions of cubic feet)
Natural gas sales 227.9 203.2 200.0 195.9 180.0
Transportation 99.1 117.6 103.4 81.0 99.3
------------------------------------------
Total systems throughput 327.0 320.8 303.4 276.9 279.3
Trading sales 34.6 - - - -
Partnerships - equity share(a) 7.1 6.5 10.2 14.5 19.9
------------------------------------------
Total volumes 368.7 327.3 313.6 291.4 299.2
------------------------------------------
Natural gas throughput (millions of cubic feet per day)
Natural gas sales 624.5 556.7 546.4 536.7 493.1
Transportation 271.4 322.1 282.6 221.9 272.1
------------------------------------------
Total systems throughput 895.9 878.8 829.0 758.6 765.2
Trading sales 94.7 - - - -
Partnerships - equity share(a) 19.6 17.9 27.8 39.7 54.5
------------------------------------------
Total volumes 1,010.2 896.7 856.8 798.3 819.7
NGLs sales
Millions of gallons 275.8 282.0 261.4 214.7 144.4
Thousands of gallons per day 755.7 772.5 714.2 588.2 395.6
- --------------------------------------------------------------------------------------------------------
GROSS UNIT MARGIN ($/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
- --------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 196
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:
<TABLE>
<CAPTION>
(Dollars in millions) 1994 1993 1992
- -----------------------------------------------------------------
<S> <C> <C> <C>
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
- -----------------------------------------------------------------
</TABLE>
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
<PAGE> 197
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
<PAGE> 198
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
<PAGE> 199
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
<PAGE> 200
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):
<TABLE>
<CAPTION>
(Dollars in millions) 1994 1993 1992
- ------------------------------------------------------------------
<S> <C> <C> <C>
Capital $ 4.6 $ 4.5 $ 3.0
Compliance
Operating & Maintenance 5.5 5.3 4.9
------- ------- -------
Total $ 10.1 $ 9.8 $ 7.9
- ------------------------------------------------------------------
</TABLE>
(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
<PAGE> 201
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
<PAGE> 202
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
<PAGE> 203
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:
<TABLE>
<CAPTION>
(Dollars in millions) 1994 1993 1992
- -------------------------------------------------------------------
<S> <C> <C> <C>
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 - -
- -------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
1994 1993 1992
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Transportation margin (millions) $ 11.7 $ 14.2 $ 14.8
Transportation throughput (bcf) 99.1 117.6 103.4
- ----------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
1994 1993 1992
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -----------------------------------------------------------------------------
</TABLE>
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
<PAGE> 204
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:
<TABLE>
<CAPTION>
(Dollars in millions) 1994 1993 1992
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 205
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
<PAGE> 206
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors of USX required by this item is
incorporated by reference to the material appearing under the headings
"Election of Directors" in USX's Proxy Statement for the 1995 Annual Meeting of
Stockholders.
The executive officers of USX and their ages as of February 1, 1995
are as follows:
<TABLE>
<S> <C> <C>
USX - CORPORATE
Charles A. Corry . . . 62 Chairman of the Board of Directors & Chief Executive Officer
Gretchen R. Haggerty . 39 Vice President & Treasurer
Robert M. Hernandez . . 50 Vice Chairman & Chief Financial Officer
Lewis B. Jones . . . . 51 Vice President & Comptroller
Dan D. Sandman . . . . 46 General Counsel & Secretary
Thomas J. Usher . . . . 52 President & Chief Operating Officer
Louis A. Valli . . . . 62 Senior Vice President-Employee Relations
USX - MARATHON GROUP
Victor G. Beghini . . 60 Vice Chairman-Marathon Group and President-Marathon Oil Company
J. Louis Frank . . . . 58 Executive Vice President-Refining, Marketing & Transportation-Marathon
Oil Company
Carl P. Giardini . . . 59 Executive Vice President-Exploration & Production-Marathon Oil Company
Jimmy D. Low . . . . . 57 Senior Vice President-Finance & Accounting-Marathon Oil Company
William F. Madison . . 52 Vice President-Administration & Services-Marathon Oil Company
William F. Schwind, Jr. 50 General Counsel & Secretary-Marathon Oil Company
USX - U. S. STEEL GROUP
Charles G. Carson, III 52 Vice President-Environmental Affairs
Roy G. Dorrance . . . . 49 Vice President-Operations
Charles C. Gedeon . . . 54 Executive Vice President-Raw Materials & Diversified Businesses
Edward F. Guna . . . . 46 Vice President-Accounting & Finance-U. S. Steel Group
Bruce A. Haines . . . . 50 Vice President-Technology & Management Services
Donald M. Laws . . . . 59 General Counsel
Reuben L. Perin, Jr. . 56 Executive Vice President-Commercial
Thomas W. Sterling, III 47 Vice President-Employee Relations
Paul J. Wilhelm . . . . 52 President-U. S. Steel Group
USX - DELHI GROUP
Charles R. Evans . . . 41 Vice President-Business Development-Delhi Gas Pipeline
Corporation
Grover G. Gradick . . . 49 Executive Vice President-Supply-Delhi Gas Pipeline Corporation
David A. Johnson . . . 48 Senior Vice President-Sales, Transportation & Exchange-Delhi Gas Pipeline
Corporation
David M. Kihneman . . . 46 President-Delhi Group and President-Delhi Gas Pipeline Corporation
Laurence K. Maguire . . 51 Vice President-Finance & Administration-Delhi Gas Pipeline Corporation
Kenneth J. Orlowski . . 45 Senior Vice President, General Counsel & Secretary-Delhi Gas Pipeline
Corporation
</TABLE>
All of the executive officers have held responsible management or
professional positions with USX or its subsidiaries for more than the past five
years.
67
<PAGE> 207
ITEM 11. MANAGEMENT REMUNERATION
Information required by this item is incorporated by reference to the
material appearing under the heading "Executive Compensation and Other
Information" in USX's Proxy Statement dated March 10, 1995, for the 1995 Annual
Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the
material appearing under the headings, "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Directors and Executive Officers"
in USX's Proxy Statement dated March 10, 1995, for the 1995 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the
material appearing under the heading "Transactions" in USX's Proxy Statement
dated March 10, 1995, for the 1995 Annual Meeting of Stockholders.
68
<PAGE> 208
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. DOCUMENTS FILED AS PART OF THE REPORT
1. Financial Statements
Financial Statements filed as part of this report are listed on the
Index to Financial Statements, Supplementary Data and Management's
Discussion and Analysis of USX Consolidated on page U-1, of the
Marathon Group on Page M-1, of the U. S. Steel Group on page S-1 and
of the Delhi Group on Page D-1.
2. Financial Statement Schedules and Supplementary Data
Financial Statement Schedules are omitted because they are not
applicable or the required information is contained in the
applicable financial statements or notes thereto.
Supplementary Data -
Summarized Financial Information of Marathon Oil Company . . 73
B. REPORTS ON FORM 8-K
1.1 None
C. EXHIBITS
Exhibit No.
<TABLE>
<S> <C> <C>
3. Articles of Incorporation and By-Laws
(a) USX's Restated Certificate of
Incorporation dated November 1, 1993 . . . . . Incorporated by reference to Exhibit 3.1
to USX's Quarterly Report on
Form 10-Q for the Quarter
Ended September 30, 1993.
(b) USX's By-Laws, effective
as of June 28, 1994 . . . . . . . . . . . . . Incorporated by reference to Exhibit 4.2
to Amendment No. 3 to
Registration Statement on
Form S-3, File No. 33-50191.
4. Instruments Defining the Rights of Security Holders,
Including Indentures
(a) $2,325,000,000 Credit Agreement
dated as of August 18, 1994 . . . . . . . . . Incorporated by reference to Exhibit 4(a)
to USX's Report on Form 10-Q
for the period ended
September 30, 1994.
(b) Amended and Restated Rights Agreement . . . . Incorporated by reference to Form 8
Amendment to Form 8-A filed
on October 5, 1992.
</TABLE>
69
<PAGE> 209
<TABLE>
<S> <C> <C>
(c) Pursuant to 17 CFR 229.601(b)(4)(iii), instruments
with respect to long-term debt issues have been
omitted where the amount of securities authorized
under such instruments does not exceed 10% of the
total consolidated assets of USX. USX hereby
agrees to furnish a copy of any such instrument
to the Commission upon its request.
10. Material Contracts
(a) 1976 Stock Option Incentive Plan, As Amended
May 28, 1991 . . . . . . . . . . . . . . . . . Incorporated by reference to Exhibit 10(a)
to USX's Form 10-K for the
year ended December 31, 1991.
(b) 1986 Stock Option Incentive Plan, As Amended
May 28, 1991 . . . . . . . . . . . . . . . . . Incorporated by reference to Exhibit 10(b)
to USX's Form 10-K for the
year ended December 31, 1991.
(c) 1990 Stock Plan, As Amended May 4, 1992 . . . Incorporated by reference to Annex III to
the USX Proxy Statement dated
April 13, 1992.
(d) USX Corporation Annual Incentive Compensation
Plan, As Amended March 26, 1991 . . . . . . . Incorporated by reference to Exhibit 10(d)
to USX's Form 10-K for the
year ended December 31, 1991.
(e) USX Corporation Senior Executive Officer Annual
Incentive Compensation Plan, as amended
January 30, 1995 . . . . . . . . . . . . . . .
(f) Annual Incentive Compensation Plan of
Marathon Oil Company . . . . . . . . . . . . . Incorporated by reference to Exhibit 10(f)
to USX's Form 10-K for the
year ended December 31, 1992.
(g) USX Corporation Executive Management
Supplemental Pension Program, As Amended
January 1, 1991 . . . . . . . . . . . . . . . Incorporated by reference to Exhibit 10(f)
to USX's Form 10-K for the
year ended December 31, 1991.
(h) USX Supplemental Thrift Program, As Amended
November 10, 1994 . . . . . . . . . . . . . .
(i) Agreements Between the Corporation and
Various Officers . . . . . . . . . . . . . . . Incorporated by reference to Exhibit 10(g)
to USX's 1989 Report on Form 10-K.
</TABLE>
70
<PAGE> 210
12.1 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
12.2 Computation of Ratio of Earnings to Fixed Charges
21. List of Significant Subsidiaries
23. Consent of Independent Accountants
27. Financial Data Schedule
71
<PAGE> 211
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacity indicated on March 20, 1995.
USX CORPORATION
By /s/ Lewis B. Jones
-----------------------------
LEWIS B. JONES
VICE PRESIDENT & COMPTROLLER
Signature Title
--------- -----
Chairman of the Board of Directors,
/s/ Charles A. Corry Chief Executive Officer and Director
- ------------------------------------
CHARLES A. CORRY
Vice Chairman & Chief Financial Officer
/s/ Robert M. Hernandez and Director
- ------------------------------------
ROBERT M. HERNANDEZ
/s/ Lewis B. Jones Vice President & Comptroller
- ------------------------------------
LEWIS B. JONES
/s/ Neil A. Armstrong
- ------------------------------------ Director
NEIL A. ARMSTRONG
/s/ Victor G. Beghini Director
- ------------------------------------
VICTOR G. BEGHINI
/s/ Jeanette G. Brown Director
- ------------------------------------
JEANETTE G. BROWN
/s/ James A. D. Geier Director
- ------------------------------------
JAMES A. D. GEIER
/s/ Charles R. Lee Director
- ------------------------------------
CHARLES R. LEE
/s/ Paul E. Lego Director
- ------------------------------------
PAUL E. LEGO
/s/ Ray Marshall Director
- ------------------------------------
RAY MARSHALL
/s/ John F. McGillicuddy Director
- ------------------------------------
JOHN F. MCGILLICUDDY
/s/ John M. Richman Director
- ------------------------------------
JOHN M. RICHMAN
/s/ Seth E. Schofield Director
- ------------------------------------
SETH E. SCHOFIELD
/s/ John W. Snow Director
- ------------------------------------
JOHN W. SNOW
/s/ Thomas J. Usher Director
- ------------------------------------
THOMAS J. USHER
/s/ Douglas C. Yearley Director
- ------------------------------------
DOUGLAS C. YEARLY
72
<PAGE> 212
SUPPLEMENTARY DATA
SUMMARIZED FINANCIAL INFORMATION OF MARATHON OIL COMPANY
Included below is the summarized financial information of Marathon Oil
Company, a wholly owned subsidiary of USX Corporation.
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
YEAR ENDED DECEMBER 31
----------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
INCOME DATA:
Net sales . . . . . . . . . . . . . . . . . $12,685 $11,851 $12,365
Operating income . . . . . . . . . . . . . . 612 192 315
Total income (loss) before cumulative
effect of changes in accounting principles 291 (59) 46
Net Income (loss) . . . . . . . . . . . . . 291 (82) (259)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1994 1993
---- ----
<S> <C> <C>
BALANCE SHEET DATA:
Assets:
Current assets . . . . . . . . . . . . . . $ 2,340 $ 1,959
Noncurrent assets . . . . . . . . . . . . 8,974 9,015
------- -------
Total assets . . . . . . . . . . . . . . $11,314 $10,974
======= =======
Liabilities and stockholder's equity:
Current liabilities . . . . . . . . . . . $ 1,591 $ 1,554
Noncurrent liabilities . . . . . . . . . . 8,324 8,312
Stockholder's equity . . . . . . . . . . . 1,399 1,108
------- -------
Total liabilities and stockholder's equity $11,314 $10,974
======= =======
</TABLE>
73
<PAGE> 1
EXHIBIT 10(e)
USX CORPORATION SENIOR EXECUTIVE OFFICER
ANNUAL INCENTIVE COMPENSATION PLAN
----------------------------------------
(As Amended by the Compensation Committee on January 30, 1995)
1. Purpose
-------
The objectives of the Senior Executive Officer Annual Incentive
Compensation Plan (the "Plan") are to advance the interests of the
Corporation by providing Plan Participants with annual incentive
opportunities linked directly to specific results. It is intended that
the Plan will:
(a) reinforce the Corporation's goal-setting and strategic planning
process,
(b) recognize the efforts of senior executive officers in achieving
objectives, and
(c) aid in attracting and retaining competent senior executive
officers, thus ensuring the long-range success of the Corporation.
2. Definitions
-----------
The following definitions will apply:
Award -- An award granted under the Senior Executive Officer
Annual Incentive Compensation Plan.
Board -- The Board of Directors of USX Corporation.
Committee -- The Compensation Committee of the Board of
Directors of USX Corporation, which will consist of
not less than three directors of the Corporation
who are appointed by the Board of Directors and who
will not be and will not have been an officer or
an employee of the Corporation. In addition, in
order to be a member of the Committee, a director
must be an "outside director" within the meaning
of Section 162(m) of the Internal Revenue Code of
1986, as amended, and the regulations thereunder.
Corporation -- USX Corporation, together with any 80% or more
owned subsidiary companies.
Group -- One of the Corporation's three Groups -- Marathon
Group, U.S. Steel Group or Delhi Group.
Participant -- A senior executive officer who is eligible to
receive incentive compensation under the Plan.
Performance Year -- The calendar year during which the Participant
performed services and for which the Award is made.
<PAGE> 2
-2-
3. Administration
--------------
The Committee will administer the Plan and will make all other
determinations necessary under the Plan. Determinations made by the
Committee will be final and binding upon Participants and their legal
representatives and, in the case of deceased Participants, upon their
executors, administrators, estates, beneficiaries, heirs and legatees. The
terms and provisions of the Plan will be construed under and controlled by
the law of the Commonwealth of Pennsylvania.
4. Participants
------------
Participants in the Plan are those who served in one of the positions
listed below for at least a portion of the year for which Awards are made:
USX Corporation Chief Executive Officer
USX Corporation Chief Operating Officer
USX Corporation Chief Financial Officer
USX Corporation General Counsel
USX Corporation Senior Vice Presidents
Marathon Oil Company President
Marathon Oil Company Executive Vice Presidents
U.S. Steel Group President
U.S. Steel Group Executive Vice Presidents
Delhi Group President
Awards made to individuals who die (in which case the Award will be made
to the estate of the Participant) or retire during the year, will be
prorated based on the period of active employment. An employee who is a
participant in any other cash incentive plan for a year or portion thereof
may not participate in the Plan for the same year or portion thereof.
5. Determination of Awards
-----------------------
Each Award granted under this Plan will be based upon the performance of
the Corporation and/or a Group. Performance will be evaluated using the
specific business criteria outlined in the table below. The Committee has
adopted a target level under each of the business criteria or performance
measures which must be attained in order for the Participants to be
eligible to receive the portion of the total Award specified for that
performance measure.
The Committee reserves the right to reduce the amount of an Award or
eliminate an Award that would otherwise be payable to a Participant under
the Plan. In no event will the amount of an Award payable to a Participant
for a year exceed 150 percent of such Participant's salary for the
performance year, capped at $1,420,000.
<PAGE> 3
-3-
<TABLE>
<CAPTION> Eligible Positions
-----------------------------------------------------------------------------------------
USX Corporation
U.S. Steel Group Marathon Oil Company Chief Executive Officer,
President President Chief Operating Officer,
Applicable and and Chief Financial Officer,
Performance Executive Executive Delhi Group General Counsel and
Measures Vice Presidents Vice Presidents President Senior Vice Presidents
- -------------------------------------- ---------------- --------------------- ------------- ------------------------
<S> <C> <C> <C> <C>
Profit From Operations
U.S. Steel Group x x
Marathon Group x x
Delhi Group x x
Steel Shipments x x
Oil and Natural Gas Production
Liquid Hydrocarbon x x
Natural Gas x x
Increases in Reserves in
Excess of Annual Production
Liquid Hydrocarbon x x
Natural Gas x x
Refined Products
Sales x x
Margins x x
Natural Gas
Throughput x x
Sales x x
Worker Safety
U.S. Steel Group-Injury
Frequency Rate x x
Marathon Group - Lost-Time
Accidents x x
Delhi Group - Lost-Time
Accidents x x
Toxic Emissions Improvements
U.S. Steel Group x x
Marathon Group x x
Delhi Group x x
Work Force Diversity x
Common Stock Performance
U.S. Steel Group x x
Marathon Group x x
Delhi Group x x
</TABLE>
6. Payment of Awards
-----------------
Awards can be paid under the Plan only after the Committee certifies in
writing that the applicable performance measures have been satisfied.
The Compensation Committee may permit deferral of receipt of all or any
portion of an Award granted under the Plan for such period and under such
conditions as the Committee may determine, including the payment of Interest
at a reasonable rate.
<PAGE> 4
-4-
No Award will be paid to a Participant who quits or is discharged prior to
payment of an Award.
Unless receipt is deferred, an Award will be paid in cash as soon as
practicable following the determination of Awards. Awards are subject to income
and payroll tax withholding.
(A) For Participants who are (or were prior to death or retirement
during the year) employees of USX Corporation (Headquarters) or
U.S. Steel Group, Awards will not be considered as part of the
Participant's salary and will not be used in the calculation of
any other pay, allowance or benefit except for provisions as stated
under the Supplemental Pension Program.
(B) For Participants who are (or were prior to death or retirement
during the year) employees of Marathon Group or Delhi Group, Awards
are included in "gross pay" for purposes of benefit calculations
under the respective retirement plans and for purposes of the
respective thrift plans unless the Award is paid after a Participant
retires.
7. Effective Date
--------------
This Plan will become effective, upon approval by a majority of votes cast
by the shareholders, on May 2, 1994, but will relate to performance beginning
January 1, 1994 and apply each calendar year thereafter.
1/30/95
<PAGE> 1
EXHIBIT 10(h)
USX SUPPLEMENTAL THRIFT PROGRAM
Effective April 1, 1983
As Amended November 1, 1994
The term "Member" as used herein means an employee of USX Corporation
(the "Corporation") or a subsidiary company who is eligible to participate
in the USX Corporation Savings Fund Plan for Salaried Employees and who (1) is a
member of the Executive Management Group or (2) has covered compensation
(eligible salary) for the current year that is greater than the compensation
limits of Section 401(a)(17) of the Internal Revenue Code.
With respect to a Member who is a member of the Executive Management
Group such Member may elect, as of the start of the next calendar year, to have
the matching company contribution amount which would otherwise have been
deposited in the USX Corporation Savings Fund Plan for Salaried Employees (the
Plan) placed into the USX Supplemental Thrift Program ("Program").
With respect to any Member whose ability to save on both a pre- and
after-tax basis under the Plan at a rate at least equal to the maximum rate of
company contributions applicable to his service is restricted by law (including
the limitations under Internal Revenue Code Sections 401(a)(17), 401(k), 402(g)
and 415) or where such Member's ability to save on an after-tax basis under the
Plan at a rate at least equal to the maximum rate of company contributions
applicable to his service is restricted by Section 401(m) of the Internal
Revenue Code, the full matching company contributions will be credited each
month to such Member's account under the Program regardless of the rate of
savings under the Plan.
The amount placed in the Program will be credited to each Member's
account (book entry only) in the same manner as if the amount had been deposited
in the Plan for investment in Corporation stock. For purposes of this Program,
Corporation stock shall mean, with respect to Members who are employed in the
steel and diversified businesses of the Corporation, USX-U. S. Steel Group
Common Stock ("Steel Stock") and, with respect to all other Members, a
combination of USX-Marathon Group Common Stock ("Marathon Stock") and Steel
Stock having the same ratio to each other as the ratio of the Market
Capitalization of the Marathon Stock to the Market Capitalization of the Steel
Stock as of the last day of the month preceding the date on which such amounts
are credited to Member's account. "Market Capitalization" shall mean, on any
day, the product of the total number of shares of Marathon Stock or Steel Stock,
as the case may be, outstanding on such day, times the closing market price on
the New York Stock Exchange of a share of Marathon Stock or Steel Stock, as the
case may be, on such day. The Plan rules for eligibility, Corporation stock
values, share determination, beneficiary designation and vesting except as
hereinafter provided, will be applicable to this Program. At death, termination
of employment with five or more years of continuous service, or termination of
employment prior to attaining five years of continuous service with the consent
of the Corporation, the total value of the Member's account will be paid to the
Member at that time. Upon termination of employment under conditions other than
those described in the preceding sentence, the payment to the Member shall be
limited to the value of the Member's account which has vested.
<PAGE> 2
- 2 -
The value of the Member's account payable at death or retirement,
except in the case of a Member who terminates employment prior to age 60
without the consent of the Corporation, will be increased, where applicable, to
an amount which will provide the Member with an amount necessary to produce the
net after-tax distribution (based on the maximum individual tax rate in effect
at date of distribution) which would have been realized had the value of the
company contributions credited to the Member's account been included with the
Member's account under the Plan and the total combined value been distributed
in cash. This increase will be limited to Members who are eligible for
favorable tax treatment (5/10-year forward averaging) on a distribution from a
tax-qualified plan. In determining the amount of increase, any favorable tax
treatment the Member would be entitled to receive will be based solely on the
total combined distribution from the Plan, while the effects, if any, of the
additional early withdrawal tax or the excise tax on excess distributions from
the Plan will be disregarded.
Benefits provided by this Program shall be paid in cash out of general
assets of the Member's employing company.
The Vice President-Administration of the United States Steel and
Carnegie Pension Fund is responsible for administration of this Program.
USX Corporation reserves the right to make any changes in this Program
or to terminate this Program as to any or all groups of employees covered under
this Program. Any amendment to this Program which changes this Program
(including any amendment which increases, reduces or alters the benefits of
this Program) or any action which terminates this Program to any or all groups
shall be made by a resolution of the USX Corporation Board of Directors (or any
authorized committee of such Board) adopted in accordance with the bylaws of
USX Corporation and the corporation law of the state of Delaware.
<PAGE> 1
EXHIBIT 12.1
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS--UNAUDITED
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Portion of rentals representing interest . . . . . $ 85 $ 84 $ 87 $ 91 $ 88
Capitalized interest . . . . . . . . . . . . . . . 58 105 78 63 50
Other interest and fixed charges . . . . . . . . . 464 372 408 474 554
Pretax earnings which would be required to
cover preferred stock dividend requirements
of parent . . . . . . . . . . . . . . . . . . . 49 44 14 15 28
------ ---- ---- ---- ------
Combined fixed charges and preferred stock
dividends (A) . . . . . . . . . . . . . . . . . $ 656 $605 $587 $643 $ 720
====== ==== ==== ==== ======
Earnings-pretax income (loss) with
applicable adjustments (B) . . . . . . . . . . $1,263 $280 $376 $(53) $1,935
====== ==== ==== ==== ======
Ratio of (B) to (A) . . . . . . . . . . . . . . . . 1.92 (a) (a) (a) 2.69
====== ==== ==== ==== ======
<FN>
- -----------------
(a) Earnings did not cover fixed charges and preferred stock dividends by $325
million for 1993, by $211 million for 1992 and by $696 million for 1991.
</TABLE>
<PAGE> 1
EXHIBIT 12.2
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS--UNAUDITED
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Portion of rentals representing interest . . . . . $ 85 $ 84 $ 87 $ 91 $ 88
Capitalized interest . . . . . . . . . . . . . . . 58 105 78 63 50
Other interest and fixed charges . . . . . . . . . 464 372 408 474 554
------ ---- ---- ---- ------
Total fixed charges (A) . . . . . . . . . . . . . . $ 607 $561 $573 $628 $ 692
====== ==== ==== ==== ======
Earnings-pretax income (loss) with
applicable adjustments (B) . . . . . . . . . . $1,263 $280 $376 $(53) $1,935
====== ==== ==== ==== ======
Ratio of (B) to (A) . . . . . . . . . . . . . . . . 2.08 (a) (a) (a) 2.80
====== ==== ==== ==== ======
<FN>
- -----------------
(a) Earnings did not cover fixed charges by $281 million for
1993, by $197 million for 1992 and by $681 million for 1991.
</TABLE>
<PAGE> 1
EXHIBIT 21. LIST OF SIGNIFICANT SUBSIDIARIES
The following subsidiaries were 100 percent owned and were consolidated by
the Corporation at December 31, 1994:
<TABLE>
<CAPTION>
STATE OR OTHER JURISDICTION
NAME OF SUBSIDIARY IN WHICH INCORPORATED
---------------------------------------- ---------------------------
<S> <C>
Carnegie Natural Gas Company Pennsylvania
Delhi Gas Pipeline Corporation Delaware
Emro Marketing Company Delaware
Marathon Exploration Tunisia, Ltd. Delaware
Marathon International Oil Company Delaware
Marathon Oil Company Ohio
Marathon Oil U.K., Ltd. Delaware
Marathon Petroleum Company (Norway) Delaware
Marathon Petroleum Egypt, Ltd. Delaware
Marathon Petroleum Grombalia, Ltd. Delaware
Marathon Petroleum Indonesia, Ltd. Delaware
Marathon Petroleum Investment, Ltd. Delaware
Marathon Petroleum Ireland, Ltd. Delaware
Marathon Petroleum Netherlands, Ltd. Delaware
Marathon Petroleum Syria, Ltd. Delaware
Marathon Petroleum Tunisia, Ltd. Delaware
Marathon Pipe Line Company Delaware
United States Steel International, Inc. New Jersey
U. S. Steel Mining Co., Inc. Delaware
USX Capital LLC Turks & Caicos Islands
USX Engineers and Consultants, Inc. Delaware
USX Portfolio Delaware, Inc. Delaware
</TABLE>
<PAGE> 2
EXHIBIT 21. (CONTD.)
The following companies or joint ventures were not consolidated at
December 31, 1994:
<TABLE>
<CAPTION>
COMPANY COUNTRY % OWNERSHIP (a) ACTIVITY
------- ------- --------------- --------
<S> <C> <C> <C>
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 Company United States 54% Titanium Metal Products
Sakhalin Energy Investment Company
Ltd. Russia 30% Oil & Gas Development
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
<FN>
(a) Economic interest as of December 31, 1994.
</TABLE>
The names of other subsidiaries, both consolidated and unconsolidated,
have been omitted as these unnamed subsidiaries, considered in the aggregate as
a single subsidiary, do not constitute a significant subsidiary.
<PAGE> 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 10-K:
On Form S-3: Relating to:
File No. 33-34703 Marathon Group Dividend Reinvestment Plan
33-57997 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 Corporation Debt Securities
On Form S-8: Relating to:
File No. 2-76726 USX Savings Plan
33-52917 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
33-52921 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 20, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 48
<SECURITIES> 0
<RECEIVABLES> 1,121
<ALLOWANCES> 9
<INVENTORY> 1,742
<CURRENT-ASSETS> 3,322
<PP&E> 25,586
<DEPRECIATION> 14,211
<TOTAL-ASSETS> 17,517
<CURRENT-LIABILITIES> 2,852
<BONDS> 5,521
<COMMON> 372<F1>
0
112
<OTHER-SE> 3,818
<TOTAL-LIABILITY-AND-EQUITY> 17,517
<SALES> 19,341
<TOTAL-REVENUES> 19,341
<CGS> 18,259
<TOTAL-COSTS> 18,259
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 461
<INCOME-PRETAX> 685
<INCOME-TAX> 184
<INCOME-CONTINUING> 501
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 501
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F3>
<FN>
<F1>Consists of Marathon Stock issued, $287; Steel Stock issued, $76; Delhi
Stock issued, $9.
<F2>Primary earnings (loss) per share applicable to Marathon Stock, $1.10;
Steel Stock, $2.35; Delhi Stock $(2.22).
<F3>Fully diluted earnings (loss) per share applicable to Marathon Stock,
$1.10; Steel Stock, $2.33; Delhi Stock, $(2.22).
</FN>
</TABLE>
