<PAGE> 1
FORM 10-K 1995
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, 1995
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:*
<TABLE>
<CAPTION>
==================================================================================================================
Title of Each Class
- - ------------------------------------------------------------------------------------------------------------------
<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
6.50% Cumulative Convertible Preferred 4-5/8% Subordinated Debentures Due 1996
(Liquidation Preference $50.00 per share) 8-7/8% Notes Due 1997
8-3/4% Cumulative Monthly Income Preferred Shares,
Series A (Liquidation Preference $25 per share)**
- - ------------------------------------------------------------------------------------------------------------------
Obligations of Marathon Oil Company, a wholly owned subsidiary of the registrant***
- - ------------------------------------------------------------------------------------------------------------------
8-1/2% Sinking Fund Debentures Due 2006 9-3/4% Guaranteed Notes Due 1999
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. [ ]
Aggregate market value of Common Stock held by non-affiliates as of February
29, 1996: $8.1 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 287,399,738 shares of USX-Marathon Group Common Stock, 83,214,496
shares of USX-U. S. Steel Group Common Stock and 9,446,769 shares of USX-Delhi
Group Common Stock outstanding as of February 29, 1996.
Documents Incorporated By Reference:
Proxy Statements dated April 13, 1992 and March 8, 1996 for the 1992
and 1996 Annual Meetings of Stockholders.
- - -------------
* 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
PART I
NOTE ON PRESENTATION............................................. 2
Item 1. BUSINESS
USX CORPORATION.............................................. 3
MARATHON GROUP............................................... 4
U. S. STEEL GROUP............................................ 25
DELHI GROUP.................................................. 36
Item 2. PROPERTIES....................................................... 47
Item 3. LEGAL PROCEEDINGS
MARATHON GROUP............................................... 47
U. S. STEEL GROUP............................................ 49
DELHI GROUP.................................................. 55
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 55
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................ 56
Item 6. SELECTED FINANCIAL DATA
USX CONSOLIDATED............................................. 58
MARATHON GROUP............................................... 60
U. S. STEEL GROUP............................................ 61
DELHI GROUP.................................................. 62
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-24
DELHI GROUP..................................................D-20
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............................ 63
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............. 65
Item 11. MANAGEMENT REMUNERATION......................................... 66
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................ 66
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 66
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.....................................................67
SIGNATURES...................................................................70
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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 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 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
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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.
The total number of active USX Headquarters employees not assigned to a
specific group at year-end was 276 in 1995 and in 1994, and 292 in 1993.
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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
1995 ................ $13,871 $ 105 $10,109
1994 ................ 12,757 584 10,951
1993 ................ 11,962 169 10,822
U. S. Steel Group
1995 ................ $ 6,456 $ 481 $ 6,521
1994 ................ 6,066 313 6,480
1993 ................ 5,612 (149) 6,629
Delhi Group
1995 ................ $ 654 $ 18 $ 624
1994 ................ 567 (36) 521
1993 ................ 535 36 583
<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 for the U. S. Steel Group in 1993;
restructuring charges (credits) of $(6) million and $37 million for the
Delhi Group in 1995 and 1994, respectively; inventory market valuation
charges (credits) for the Marathon Group of $(70) million, $(160) million
and $241 million in 1995, 1994 and 1993, respectively; and in 1995,
impairment of long-lived assets charges of $659 million for the Marathon
Group and $16 million for the U. S. Steel Group.
</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 as a percentage of USX consolidated sales were 66% in each
of 1995, 1994 and 1993.
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The following table summarizes Marathon Group sales for each of the
last three years:
<TABLE>
<CAPTION>
Sales
(Millions) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Refined Products and Merchandise ............ $ 7,068 $ 6,491 $ 6,561
Crude Oil and Condensate .................... 811 746 567
Natural Gas ................................. 950 670 607
Natural Gas Liquids ......................... 70 54 60
Transportation and Other .................... 197 183 222
------- ------- -------
Subtotal .................................... $ 9,096 $ 8,144 $ 8,017
Matching Buy/Sell Transactions (a) .......... 2,067 2,071 2,018
Excise Taxes (a) ............................ 2,708 2,542 1,927
------- ------- -------
Total Sales ............................... $13,871 $12,757 $11,962
======= ======= =======
<FN>
- - -------------
(a) Included in both sales and operating costs, resulting in no effect on
income.
</TABLE>
For financial information about industry segments, see Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements
- - - 8. Operations and Segment Information - Industry Segment.
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 1994, 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 approximately 30 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 1994, which is the most recent year for which such information is
available, Marathon ranked ninth among U. S. petroleum corporations on the
basis of crude oil refining capacity. In addition, based on 1994 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 48 companies in the wholesale distribution
of petroleum products to private brand marketers and large commercial and
industrial consumers; ten refiner/marketers in the supply of branded petroleum
products to dealers and jobbers; and nearly 700 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.
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<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>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Marathon Group 20,510 20,711 21,914
Emro Marketing Company (included in above) 12,267 11,972 11,862
</TABLE>
The reduction in the total number of employees between 1993 and 1995
primarily reflected implementation of work force reduction programs, the sale
of the stock of a contract drilling subsidiary, the sale of the assets of a
retail propane marketing subsidiary, 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 employee
additions at Emro Marketing Company, primarily part-time employees at recently
acquired retail marketing outlets.
Certain Marathon hourly employees at two of its four operating
refineries and various other locations are represented by labor unions.
Certain hourly employees at the Texas City refinery are represented by the Oil,
Chemical and Atomic Workers Union ("OCAW") under a labor agreement which
expires on March 31, 1996. During February 1996, OCAW reached a "pattern"
settlement with the oil industry on national issues such as wages and benefits.
During March, Marathon expects to begin negotiations with OCAW on local issues
relating to the Texas City refinery agreement. Certain hourly employees at the
Detroit refinery are represented by the International Brotherhood of Teamsters
under a labor agreement which expires on February 1, 2000.
OIL AND NATURAL GAS EXPLORATION AND DEVELOPMENT
Marathon is currently conducting exploration and development activities
in 15 countries, including the United States. Principal exploration activities
are in the United States, the United Kingdom, Egypt, Ireland, Gabon, Tunisia,
the Netherlands and Indonesia. Principal development activities are in the
United States, the United Kingdom, Ireland, Egypt, and the Netherlands.
Marathon is also pursuing potential long-term development opportunities in
Russia and Syria.
Exploration activities during 1995 resulted in discoveries in Egypt,
Gabon, Ireland and the United States (both onshore and in the Gulf of Mexico).
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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):
NET PRODUCTIVE AND DRY WELLS COMPLETED (a)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
Development (b) PROD. DRY PROD. DRY PROD. DRY
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
United States ............. 159 3 139 9 104 2
Europe .................... 2 1 3 - 1 -
Middle East and Africa .... 1 - - - 2 -
Other International ....... 3 - - - - -
--- -- --- -- --- --
TOTAL ......................... 165 4 142 9 107 2
=== == === == === ==
Exploratory
United States ............. 11 12 13 11 11 12
Europe .................... - 4 2 1 1 1
Middle East and Africa .... - 3 - 3 1 1
Other International ....... 2 2 - 1 - 4
--- -- --- -- --- --
TOTAL ......................... 13 21 15 16 13 18
=== == === == === ==
<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.
</TABLE>
United States
In the United States during 1995, Marathon completed 31 gross wildcat
and delineation ("exploratory") wells (23 net wells). Marathon drilled to
total depth 36 gross (24 net) exploratory wells of which 23 gross (14 net)
wells encountered hydrocarbons. Of these 23 wells, 8 gross (4 net) wells were
temporarily suspended, and will be reported in the Net Productive and Dry Wells
Completed table when completed. Principal domestic exploration and development
activities were in the U. S. Gulf of Mexico and the states of Texas, Wyoming,
Oklahoma, New Mexico and Louisiana.
Exploration expenditures during the three-year period ended December
31, 1995, totaled $308 million in the United States, of which $100 million was
incurred in 1995. Development expenditures during the three-year period ended
December 31, 1995, totaled $732 million in the United States, of which $223
million was incurred in 1995.
Marathon's exploration and development activities have been aided by
recent advances in technology, including improved three-dimensional seismic
data processing techniques, that help identify exploration and development
opportunities in areas such as the Gulf of Mexico and the Cotton Valley
formation in East Texas. 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.
Gulf of Mexico-Marathon considers the Gulf of Mexico a core area in its
domestic growth strategy, and has committed significant resources towards
exploitation of available opportunities.
During 1995, Marathon completed development activities at its Ewing
Bank 873 Field with the drilling of four production and two injection wells.
Production from the Ewing Bank 873 Platform A ("Ewing Bank Platform") reached
27,000 net barrels per day ("bpd") and 19 net million cubic feet per day
("mmcfd") in 1995. Marathon considers the Ewing Bank Platform to be an
important deep water facility
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<PAGE> 9
and plans to test three prospects in the immediate vicinity during 1996.
Marathon is the operator and holds a 66.7% working interest in Blocks 873 and
874.
During the second quarter of 1995, Marathon completed fabrication of
and commenced production from Platform D, located in South Pass Block 87 of the
South Pass Block 89 Field. Production averaged 2,000 net bpd and 10.8 net
mmcfd during the last eight months of 1995, and reached rates of 2,600 net bpd
and 17.4 net mmcfd during 1995. This includes volumes produced through
Platform D facilities from reservoirs on the adjacent South Pass 88 and West
Delta 128 blocks. Marathon operates the development and holds a 33.3% working
interest in Block 87 and 50% working interests in South Pass 88 and West Delta
128.
In 1994, Marathon and its co-venturers drilled the Green Canyon 244
wildcat discovery well which encountered over 350 feet of net oil and gas pay
in 2,800 feet of water, offshore Louisiana. Appraisal activity began in 1994
and continued into 1995 with two successful delineation wells in Blocks 200 and
245. The wells established estimated reserves of 200 million gross barrels of
oil equivalent. The plan of development ("POD") for the field calls for subsea
well completions with production tied back to a co-venturer's existing
platform production facilities. Production is scheduled to begin in late 1997.
Marathon holds a 33.3% working interest in this four-block unit.
In 1995, Marathon and a co-venturer drilled an oil and gas wildcat
discovery well on Viosca Knoll Block 786, 120 miles south of Mobile, Alabama in
1,750 feet of water. A production test of the well confirmed the commerciality
of the field. Development plans are underway, with first production
tentatively scheduled in 1998. Marathon holds a 50% working interest in Block
786. Exploration drilling of an additional prospect in this area is planned
for 1996.
Texas-In the Cotton Valley Formation in east Texas, application of
three-dimensional seismic technology has led to five natural gas discoveries to
date. Four exploratory wildcat wells were drilled during 1995, including the
Riley Trust No. 1 and Brounkowski No. 1 discovery wells. Marathon holds
working interests of 75% and 100%, respectively, in these wells. Marathon has
leased over 40,000 acres in this area and has a large inventory of prospects to
drill. Six exploratory wildcat wells are planned for 1996.
New Mexico-Production in the 30-year old Indian Basin Field increased
by 2,700 net bpd and 20 net mmcfd in 1995 from 1994 as a result of an
acquisition and new development drilling. Marathon owns an 84% working
interest in new development activities in this field.
Contract Drilling-The stock of FWA Drilling Company, Inc. was sold
during 1995.
International
Outside the United States during 1995, Marathon completed 17 gross
exploratory wells (11 net wells). Marathon drilled to total depth 20 gross (14
net) exploratory wells in nine countries. Of these 20 wells, 9 gross (6 net)
wells encountered hydrocarbons, one each in the United Kingdom, Ireland, Gabon
and Tunisia, two in Egypt and three in the Kakap Block in Indonesia. These 9
wells were temporarily suspended, pending completion. In February 1996,
Marathon entered into an agreement to sell its interests in the Kakap Block.
Marathon's expenditures for international oil and natural gas
exploration activities during the three-year period ended December 31, 1995,
totaled $258 million, of which $94 million was incurred in 1995. Marathon's
international development expenditures during the three-year period ended
December 31, 1995, totaled $546 million, of which $81 million was incurred in
1995.
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.
8
<PAGE> 10
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. Marathon has interests in 24
blocks in the U.K. North Sea and other offshore areas.
Development of the Beinn Field continued in 1995 with the drilling of a
fourth development well. A fifth development well is planned for 1996.
Further drilling is contingent upon the results of this well. Marathon owns a
41.6% revenue interest in this field.
East Brae development continued through 1995 with the drilling and
completion of seven development wells. One additional development well was
being drilled at year end. See "Oil and Natural Gas Production - International
- - - North Sea" for a description of Brae production operations.
During 1995, the 1985 Braemar gas condensate exploratory discovery well
was re-entered, and a deeper hydrocarbon interval within the Upper Jurassic
Brae formation was encountered. Following tests of both intervals, the well
was suspended for possible future use as a development well. A
three-dimensional seismic survey was conducted in 1995 to further evaluate
development potential. Marathon is the operator and owns a 26% revenue
interest in this well.
During 1995, Marathon drilled two U.K. wildcat wells - 41/10-1 in the
southern area of the North Sea and 106/18-1 in the St. George's Channel, near
the U.K./Irish offshore boundary. The wells were completed (plugged and
abandoned) in 1995. Marathon has a 60% interest in each of these blocks.
Isle of Man-In 1995, Marathon was awarded a license to explore for
hydrocarbons on Isle of Man block 112/29 and is negotiating for rights to
explore an adjacent block. An exploratory wildcat well is planned for 1996.
Egypt-During 1995, Marathon successfully tested one exploratory well
and one delineation well in the Gebel El Zeit concession, located in the
southern Gulf of Suez. The wells were directionally drilled from onshore
surface locations to offshore targeted locations. Both wells were completed
and production began in January 1996 from the Ras El Ush Field. Production
from these wells is expected to average approximately 700 net bpd. Three wells
are planned for 1996 to evaluate additional exploration prospects in this area.
The planned 1996 wells, like those drilled in 1995, are near existing
production facilities, and can be brought on production rapidly. In late 1995,
Marathon drilled the Basarta exploratory well on the El Manzala concession.
The well was completed (plugged and abandoned) in January 1996. Marathon holds
100% working interests in the Gebel El Zeit and El Manzala concessions.
Gabon-In 1995, the Tchatamba Marine No. 1 exploratory wildcat well
discovered oil in the Kowe permit in 151 feet of water, 18 miles offshore
Gabon. Additional seismic work is planned to further evaluate this permit, and
a delineation well is scheduled for the third quarter of 1996. Marathon holds
a 75% working interest in this block, which is located approximately 100 miles
southeast of Port Gentil.
Tunisia-In November 1995, Marathon was advised by the Tunisian
Government that an offer for the rights to explore approximately 470,000 acres
in the Jenein area of Southern Tunisia had been accepted. Formal ratification
of this permit is expected in the first half of 1996. Marathon will hold a
100% exploration working interest in the permit. Marathon's working interest
in any subsequent development would be reduced by a percentage participation by
the National Tunisian Oil Company ("ETAP").
Results from a 1995 delineation well drilled on the Zarat Permit in the
Gulf of Gabes in Southern Tunisia were similar to those detected by a 1992
discovery well. The well was suspended and a POD providing for a
multiple-phase development of this field was submitted to Tunisian authorities.
In January
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<PAGE> 11
1996, Marathon entered into a definitive agreement to sell its 66.7%
exploration working interest on this permit.
Netherlands-Marathon, through its 50% equity interest in CLAM Petroleum
Company ("CLAM"), drilled one exploratory well (a dry well) and three
development wells in the Netherlands North Sea. Three new fields began
producing during the second half of 1995. Five development wells and one
exploratory well are planned for 1996.
Indonesia-In February 1996, Marathon entered into an agreement to sell
Marathon Petroleum Indonesia, Ltd. ("MPIL"), which owns a 37.5% interest in the
Kakap production sharing contract encompassing the Kakap Block in the Natuna
Sea, offshore Indonesia. Marathon will retain exploration interests in other
areas of Indonesia, with one exploratory well planned for 1996.
Ireland-During 1995, Marathon completed testing an exploratory
delineation well 48/25-3, located 4.5 miles southwest of the Kinsale Head
Facilities in the Celtic Sea, confirming the presence of a natural gas
accumulation. The well was temporarily suspended and a subsea development for
a tie-back of the well to existing facilities is planned. Marathon holds a
100% working interest in this well.
Marathon also drilled three wells associated with a seven-well
exploratory drilling program required by a 1991 agreement between Marathon and
the Irish Government. None of the six wells drilled to date encountered
commercial quantities of hydrocarbons. Preparatory work is underway for a
seventh and final well planned for 1997. 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 this license.
Russia-The Marathon Group has a 30% interest in Sakhalin Energy
Investment Company Ltd. ("Sakhalin Energy") an incorporated joint venture
company responsible for overall management of the Sakhalin II Project. The
Sakhalin II Production Sharing Contract ("PSC") was signed in June 1994 for
development of the Piltun-Astokhskoye ("PA") oil field and the Lunskoye gas
field located offshore Sakhalin Island in the Russian Far East Region. During
December 1995, the Russian State Duma (lower house of Parliament) and the
Federation Council (upper house of parliament) approved an amended version of a
Production Sharing Agreement Law. It was formally signed by Russian President
Yeltsin on December 30, 1995. Adoption of the Production Sharing Agreement Law
was a significant step toward stabilization of the PSC. However, other Russian
laws and normative acts ("regulations") at the Federation and local levels need
to be brought into compliance with the Production Sharing Agreement Law.
Additional appraisal period activities include the finalizing of development
plans. According to estimates by Russian experts, the PA and Lunskoye fields
contain combined proven reserves of 750 million barrels of oil and condensate
and 14 trillion cubic feet ("tcf") of natural gas.
Syria-Marathon is awaiting approval of a revised POD submitted to the
Syria Petroleum Company in July 1995, 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-During 1995, Marathon drilled the Kaiping 6-1-1 wildcat well in
Block 27/35 in the South China Sea. The well reached targeted depth and was
completed (plugged and abandoned). Marathon relinquished its 75% working
interest in this block as of February 29, 1996.
Bolivia-During 1995, Marathon and a co-venturer drilled the Toledo-1
exploratory wildcat well in the Poopo South block located in the Altiplano
Basin, approximately 130 miles south-southeast of the capital city of La Paz.
The well was completed (plugged and abandoned). Marathon relinquished its 50%
working interest in the Poopo North and Poopo South blocks as of January 1996.
10
<PAGE> 12
Argentina-During 1995, Marathon drilled the Rio Desaguadero #1 well in
the Rio Desaguadero block, located approximately 500 miles west of Buenos
Aires. The well was completed (plugged and abandoned). Marathon relinquished
its 100% working interest in this block as of December 1995.
The following table sets forth, by geographic area, the developed and
undeveloped oil and gas acreage held as of December 31, 1995:
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 ................ 2,655 1,026 2,381 1,404 5,036 2,430
Europe ....................... 377 263 2,079 1,289 2,456 1,552
Middle East and Africa ....... 127 39 45,317 15,921 45,444 15,960
Other International .......... 401 150 11,037 5,048 11,438 5,198
----- ----- ------ ------ ------ ------
TOTAL ........................ 3,560 1,478 60,814 23,662 64,374 25,140
===== ===== ====== ====== ====== ======
</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 1994 and 1993
disclosing the year-end estimated oil and gas reserves. A similar report will
be filed for 1995. 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
------------------------ ------------------------
1995 1994 1993 1995 1994 1993
(MILLIONS OF BARRELS) ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Crude Oil, Condensate and
Natural Gas Liquids
United States ............................ 470 493 494 558 553 573
Europe ................................... 182 202 221 183 211 230
Middle East and Africa ................... 12 16 22 12 16 22
Other International ........................ 9 6 7 11 15 17
----- ----- ----- ----- ----- -----
TOTAL ...................................... 673 717 744 764 795 842
===== ===== ===== ===== ===== =====
(BILLIONS OF CUBIC FEET)
Natural Gas
United States ............................ 1,517 1,442 1,391 2,210 2,127 2,044
Europe ................................... 1,300 1,436 1,566 1,344 1,484 1,619
Middle East and Africa ................... 35 41 58 35 43 60
Other International ...................... - - 25 - - 25
----- ----- ----- ----- ----- -----
Total Consolidated ..................... 2,852 2,919 3,040 3,589 3,654 3,748
Equity Share in CLAM (a) ................. 105 104 95 131 153 153
----- ----- ----- ----- ----- -----
TOTAL ...................................... 2,957 3,023 3,135 3,720 3,807 3,901
===== ===== ===== ===== ===== =====
<FN>
- - -------------
(a) For a description of CLAM, see "Oil and Natural Gas Production -
International - North Sea."
</TABLE>
11
<PAGE> 13
At December 31, 1995, 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 84% were proved developed reserves
and 16% 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.)
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:
NET CRUDE OIL, CONDENSATE AND NATURAL GAS LIQUIDS PRODUCTION
<TABLE>
<CAPTION>
(THOUSANDS OF BARRELS PER DAY) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
United States (a) ................................ 132 110 111
International (b) - Europe ....................... 56 48 26
- Middle East and Africa ....... 7 10 16
- Indonesia (c) ................ 10 4 3
----- ----- ---
Total International ............ 73 62 45
----- ----- ---
TOTAL ............................................ 205 172 156
===== ===== ===
NET NATURAL GAS PRODUCTION (d)
(MILLIONS OF CUBIC FEET PER DAY)
United States (a) ................................ 634 574 529
International (e) - Europe ....................... 448 382 356
- Middle East and Africa ....... 15 18 17
----- ----- ---
Total International ............ 463 400 373
----- ----- ---
Total Consolidated ............. 1,097 974 902
Equity Share in CLAM (f) ......................... 44 40 35
----- ----- ---
TOTAL ............................................ 1,141 1,014 937
===== ===== ===
<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 production from the Kakap Block; in February 1996,
Marathon entered into an agreement to sell its interests in this Block.
(d) Amounts reflect sales of equity production and exclude volumes
purchased from third parties for resale.
(e) Amounts reflect production before royalties.
(f) For a description of CLAM, see "International - North Sea."
</TABLE>
At year-end 1995, Marathon was producing crude oil and/or natural gas
in eight countries, including the United States. Marathon's worldwide liquid
hydrocarbon production averaged 204,500 net bpd in 1995, up 32,100 bpd, or 19%,
from 1994, due mainly to a full year of production from the Ewing Bank 873
Field in the Gulf of Mexico, increased production from the U.K. North Sea, and
new production from the Kakap Block in Indonesia. Marathon's worldwide liquid
hydrocarbon production is expected to average approximately 190,000 net bpd in
1996, an estimated decline of 8% from 1995, mainly reflecting disposition of
the Illinois Basin properties (sold in late 1995) and the Kakap Block in
Indonesia (projected for sale in early 1996).
Marathon's worldwide sales of equity natural gas production, including
Marathon's equity share of CLAM's production, averaged over 1.1 billion cubic
feet ("bcf") per day in 1995, up 13% from 1994.
12
<PAGE> 14
Average sales of equity natural gas production in the U.S. increased by 60 net
mmcfd, or 10%, in 1995 and is expected to increase further in 1996 as a result
of successful drilling programs. Average sales of equity natural gas
production outside the U.S. increased by 67 net mmcfd, or 15%, primarily due to
a full-year effect of Brae-area gas sales which began in October 1994. In
addition to sales of 507 net mmcfd of international equity natural gas
production, Marathon sold 35 net mmcfd of natural gas acquired for injection
and resale during 1995.
United States
Approximately 64% of Marathon's 1995 worldwide liquid hydrocarbon
production and equity liftings and 56% 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. Marathon's ongoing
domestic growth strategy is to apply its technical expertise in fields with
undeveloped potential, and to dispose of interests in non-core properties with
limited upside potential and high production costs.
Marathon continues to apply enhanced recovery and reservoir management
programs and cost containment efforts to maximize liquid hydrocarbon recovery
and profitability in mature fields such as the Yates Field in Texas and the
Oregon Basin Field in Wyoming. Enhanced recovery efforts for the Yates Field
include an ongoing feasibility study of thermal recovery techniques.
Texas-Marathon owns a 49.6% working interest in, and is the operator
of, the Yates Field Unit, one of the largest fields in the United States.
Marathon's 24,600 net bpd of 1995 liquid hydrocarbon production from the Yates
Field and Gas Plant accounted for 19% of Marathon's total U.S. liquids
production. The field's average annual production increased by 5% in 1995, and
by 7% in 1994 compared with a decline of 3% in 1993.
Wyoming-Production for 1995 averaged 24,600 net bpd, representing 19%
of Marathon's total U.S. liquid hydrocarbon production. Production in 1994
averaged 24,300 net bpd.
Gulf of Mexico-During 1995, Marathon produced 32,500 net bpd of liquid
hydrocarbons and 93 net mmcfd of natural gas in the U.S. Gulf of Mexico.
Liquid hydrocarbon production increased by 20,700 net bpd from the prior year
and natural gas production increased by 14 net mmcfd, mainly reflecting a full
year of production from Ewing Bank 873 and new production from the South Pass
87 D platform. At year-end 1995, Marathon held working interests in 12 fields
producing from 30 platforms, 20 of which Marathon operates.
Alaska-Marathon's production from Alaska averaged 8,800 net bpd of
liquid hydrocarbons and 131 net mmcfd of natural gas in 1995, compared with
9,400 net bpd and 123 net mmcfd in 1994. 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 these fields. Marathon relinquished
working interest in the Swanson River Field and operator status of facilities
in the Trading Bay Unit, which includes the Steelhead and Dolly Varden
platforms and the onshore Trading Bay Production Facility.
Illinois-In December 1995, Marathon sold its interests in properties in
the Illinois Basin. Production from these mature properties averaged 4,000 net
bpd in 1995. Marathon's refining, marketing and transportation operations in
the Illinois area will not be affected by the sale.
International
Interests in liquid hydrocarbon and/or natural gas production are held
in the U.K. North Sea, Ireland, the Norwegian North Sea and Egypt. In
addition, Marathon has an interest through an equity
13
<PAGE> 15
affiliate in the Netherlands North Sea. In early 1996, Marathon entered into
agreements to sell its interests in the Kakap Block in Indonesia and most of
its producing and undeveloped assets in Tunisia. However, Marathon retains
exploration interests in each of these countries.
North Sea-The following table sets forth Marathon's average net liquid
hydrocarbon liftings in the Brae area, for each of the last three years:
BRAE-AREA AVERAGE NET LIQUID HYDROCARBON LIFTINGS
<TABLE>
<CAPTION>
(NET BARRELS PER DAY)
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
East Brae .......................... 32,700 23,400 -
North Brae ......................... 11,400 13,000 14,100
South Brae ......................... 5,000 4,800 4,200
Central Brae ....................... 4,800 4,700 5,000
------ ------ ------
TOTAL .............................. 53,900 45,900 23,300
====== ====== ======
</TABLE>
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 averaged 86,300 gross bpd during 1995. The increase
in East Brae production from the prior year was tempered by lower than
anticipated reservoir sweep efficiency associated with the gas injection
program.
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 processing and pipeline tariff revenue. Processing of production
from the Birch Field began during the third quarter of 1995, marking the first
time that third-party production was processed at the Brae facilities in
addition to being transported through the pipeline system. To date, production
from 11 third-party fields is contracted to the Brae pipeline system. Seven of
the fields are currently onstream and the remaining four are scheduled to be
brought onstream in 1996 and 1997.
Central Brae is a multi-well subsea development tied to South Brae
facilities.
Participation in the Scottish Area Gas Evacuation ("SAGE") system
provides pipeline transportation for Brae-Area gas. The Brae group owns 50% of
SAGE, which has a total wet gas capacity of approximately 1 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. Principal natural gas sales began in
October 1994.
Marathon's total U.K. gas sales from all sources averaged 133 net mmcfd
in 1995. Primary sales of Brae-area gas through the SAGE pipeline system began
in October 1994 and averaged 124 net mmcfd for the year 1995. Of that total,
89 mmcfd was Brae-area equity gas and 35 mmcfd was gas acquired for injection
and subsequent resale.
Marathon owns an overall 6.1% 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 5 net mmcfd in 1995, compared with 13 net mmcfd in 1994
and 22 net mmcfd in 1993. The declines in sales primarily reflected reductions
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 1,900 net bpd
of condensate in 1995. On June 11, 1994,
14
<PAGE> 16
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 with the original gas buyers and transporters to
raise prices and lower tariffs for current and post-June 1996 sales have to
date been unsuccessful. The effective date of termination under the original
gas sales agreements is June 11, 1996. At that time, unless otherwise agreed,
Heimdal gas will be sold to alternative customers. In the fourth quarter of
1995, Marathon wrote off its investment in the Heimdal Field upon adoption of
Statement of Financial Accounting Standards No. 121-Accounting for the
Impairment of Long-Lived assets and for Long-Lived Assets to Be Disposed Of
("SFAS No. 121"). SFAS No. 121 requires that long-lived assets and associated
goodwill be written down to fair value whenever an impairment review indicates
that the carrying value cannot be recovered on an undiscounted cash flow basis.
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 21 gas fields which provided sales of 44 net mmcfd of natural gas
in 1995.
Ireland-In June 1995, Marathon completed renegotiation of its natural
gas sales agreement covering post-1996 production from the Kinsale Head and
Ballycotton Fields in the Irish Celtic Sea. The agreement provides for a
higher composite gas price, and accordingly, extends the economic production
lives of the fields. Natural gas sales from these maturing fields averaged
approximately 300 net mmcfd during each of the last three years and are
expected to decrease in succeeding years as a result of natural production
declines. Marathon holds a 100% working interest in each of these fields.
Indonesia-With commencement of production from the KG and KRA Fields
during 1995, Marathon's equity liquid hydrocarbon production from the Kakap
Block in the Natuna Sea averaged 9,300 net bpd in 1995, compared with 3,500 net
bpd in 1994 and 3,400 net bpd in 1993. In February 1996, Marathon entered into
an agreement to sell MPIL, which includes its interests in the Kakap Block.
Tunisia-Marathon holds a 31% interest in the Ezzaouia Field, located 220
miles south of Tunis. Liquid hydrocarbon production from this field averaged
1,400 net bpd, 1,500 net bpd and 2,200 net bpd in 1995, 1994 and 1993
respectively. The decreases primarily reflected natural declines. In July 1995,
Marathon shut in its production on the Belli Field located 30 miles southeast of
Tunis. Production from this field averaged 300 net bpd in the first
six-and-one-half months of 1995 and 1,000 net bpd and 5,900 net bpd in the years
1994 and 1993, respectively. In early 1996, Marathon entered into a definitive
agreement to sell most of its producing and undeveloped properties in Tunisia.
Egypt-Marathon holds interests in four fields in Egypt. During 1995,
liquid hydrocarbon production from the Ashrafi Field, in which Marathon holds a
50% working interest, averaged 5,400 net bpd. Natural gas sales and liquid
hydrocarbon production from the Nile Delta Concession, in which Marathon holds
a 25% interest, averaged 15 net mmcfd and 400 net bpd, respectively. Liquid
hydrocarbon production from the Gazwarina Field, in which Marathon holds a 75%
working interest, averaged 200 net bpd. Production is expected to increase in
1996 as a result of production from the Ras El Ush Field.
15
<PAGE> 17
The following tables set forth productive wells and drilling wells as
of December 31, 1995, 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 11,944 4,242 3,860 1,637 73 54
Europe 28 12 74 30 2 1
Middle East and Africa 15 7 9 2 3 2
Other International 30 11 - - 1 -
------ ----- ----- ----- -- --
TOTAL 12,017 4,272 3,943 1,669 79 57
====== ===== ===== ===== == ==
<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.
</TABLE>
<TABLE>
<CAPTION>
AVERAGE PRODUCTION COSTS (a) 1995 1994 1993
---- ---- ----
(DOLLARS PER EQUIVALENT BARREL)
<S> <C> <C> <C> <C>
United States $3.49 $4.01 $5.02
International - Europe 4.40 5.12 5.99
- Middle East and Africa 3.04 4.31 3.11
- Indonesia 3.59 6.92 6.46
ALL SOURCES $3.78 $4.41 $5.17
- CLAM $5.06 $3.10 $4.49
</TABLE>
<TABLE>
<CAPTION>
1995 1994 1993 1995 1994 1993
---- ---- ---- ---- ---- ----
AVERAGE SALES PRICES CRUDE OIL AND CONDENSATE NATURAL GAS LIQUIDS
------------------------ -------------------
(DOLLARS PER BARREL)
<S> <C> <C> <C> <C> <C> <C>
United States $15.02 $14.02 $14.92 $10.34 $ 9.26 $10.98
International - Europe 17.10 16.05 16.80 13.94 12.11 13.41
- Middle East and Africa 16.08 14.68 15.55 14.62 11.47 13.65
- Indonesia 16.06 16.44 18.46 - - -
ALL SOURCES $15.68 $14.69 $15.37 $11.35 $ 9.94 $11.57
</TABLE>
<TABLE>
<CAPTION>
NATURAL GAS
(DOLLARS PER THOUSAND CUBIC FEET) -----------
<S> <C> <C> <C>
United States $1.63 $1.94 $1.94
International - Europe 1.78 1.57 1.51
- Middle East and Africa 2.11 1.84 1.67
ALL SOURCES $1.70 $1.79 $1.77
- CLAM $2.60 $2.28 $2.36
<FN>
- - ----------
(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. Production 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.
</TABLE>
16
<PAGE> 18
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 570,000 bpd of
combined in-use crude oil refining capacity. Marathon's refining system
operated at 88% of its in-use capacity in 1995.
The following table sets forth the location and throughput capacity of
each of Marathon's refineries at December 31, 1995:
<TABLE>
<CAPTION>
IN-USE REFINING CAPACITY (a)
(BARRELS PER DAY)
<S> <C>
Garyville, La. 255,000
Robinson, Ill. 175,000
Texas City, Texas 70,000
Detroit, Mich. 70,000
-------
TOTAL 570,000
=======
<FN>
- - --------
(a) Marathon's 50,000 bpd Indianapolis refinery was temporarily idled in
October 1993.
</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.
During 1995, Marathon's sales of reformulated gasoline averaged 47,000 bpd, or
14% of Marathon's gasoline yield. Marathon has the ability to produce
additional volumes of reformulated gasoline for sale should profitable
opportunities arise.
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.
Maintenance activities requiring temporary shutdown of certain refinery
operating units ("turnarounds") are periodically performed at each of
Marathon's operating refineries. Turnarounds are
17
<PAGE> 19
currently scheduled for the fourth quarter of 1996 at the Robinson refinery,
and for the first quarter of 1997 at the Texas City and Robinson refineries.
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. 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. 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 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. Upon
adoption of SFAS No. 121 in the fourth quarter of 1995, Marathon wrote down the
recorded value of the Indianapolis refinery. As of February 29, 1996, the
refinery remained temporarily idled.
Marketing
In 1995, Marathon's refined product sales volumes (excluding matching
buy/sell transactions) totaled 10.7 billion gallons (699,500 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 59% of Marathon's refined product sales volumes in 1995.
Approximately 41% of Marathon's gasoline volumes and 71% of its distillate
volumes were sold on a wholesale basis to independent unbranded customers in
1995.
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) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Gasoline 445 443 420
Distillates 180 183 179
Propane 12 16 18
Feedstocks & Special Products 44 32 32
Heavy Fuel Oil 31 38 39
Asphalt 35 31 38
--- --- ---
TOTAL 747 743 726
=== === ===
Matching Buy/Sell Volumes included in above 47 73 47
</TABLE>
As of December 31, 1995, Marathon supplied petroleum products to 2,380
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. During 1995, Marathon signed a
definitive agreement with an independent jobber that will expand the Marathon
branded presence in Indiana and Kentucky. 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, 1995, Marathon supplied over 200
stations in states outside its traditional branded marketing territory
including Virginia, Tennessee, West Virginia, Wisconsin, North Carolina and
Pennsylvania.
18
<PAGE> 20
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, 1995,
this subsidiary had 1,627 retail outlets which sold petroleum products and
convenience-store merchandise, primarily under the brand names "Speedway,"
"Starvin' Marvin," "United" and "Bonded". Revenues from the sale of
convenience-store merchandise totaled $928 million, $843 million and $757
million in 1995, 1994 and 1993, respectively. Profits generated from these
sales tend to moderate the margin volatility experienced in the retail sale of
refined products. The selection of merchandise varies among outlets--1,229 of
Emro's 1,627 outlets at December 31, 1995, 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.
Emro continually monitors its operations in order to reduce costs and
focus concentration on its core businesses. To enhance profitability, Emro
closed 129 marginal outlets and sold certain of its non-core businesses during
the three-year period ended December 31, 1995. 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 that distributed 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 profitability. Typically, Emro or the independent Marathon jobber or
dealer becomes a restaurant franchisee 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 over 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 1995, Marathon was a net purchaser of 387,000 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
and domestic equity crude production 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
light product and 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.
In 1995, Marathon completed construction of a new asphalt facility at
the existing Mt. Vernon, Ind. light-products terminal, allowing Marathon to
take advantage of favorable winter asphalt production economics at its
Garyville refinery. Also in 1995, Marathon expanded its existing Tampa, Fla.
light-products terminal by purchasing an adjacent third-party terminal.
19
<PAGE> 21
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 11.1% of the Capline system, a large diameter crude pipeline
extending from St. James, La. to Patoka, Ill., and a 66.7% 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
17.4% 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. In February 1996, Marathon
sold its 25% stock ownership in Platte Pipeline Company ("Platte"). Platte
owned a crude pipeline system extending from the Rocky Mountain area of Wyoming
to Wood River, Ill.
Domestic Natural Gas Marketing and Transportation
In addition to the sale of domestic 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. During 1995, the
Marathon Group, along with two co-venturers, formed Inventory Management and
Distribution Company, LLC ("IMD"), a new limited liability company. IMD will
provide asset management and economic optimization services to natural gas
distribution utilities and pipeline companies, and natural gas inventory
management services to natural gas producers and end-users in North America.
The Marathon Group owns a 42.5% profit participation in IMD.
Marathon has a 30% ownership in a Kenai, Alaska, natural gas
liquefication plant and two 87,500 cubic meter tankers used to transport
liquefied natural gas ("LNG") to customers in Japan. Feedstock for the plant
is supplied from a portion of Marathon's equity natural gas production in the
Cook Inlet. LNG is sold under a long-term contract with two of Japan's largest
utility companies which calls for the sale of more than 900 gross bcf over the
term of the contract. Marathon has a 30% participation in this contract which
is effective through March 31, 2004, and provides an option for a five-year
extension. During 1995 LNG deliveries totaled 65.3 gross bcf (19.6 net bcf),
up from 62.7 gross bcf (18.8 net bcf) in 1994.
Natural Gas Utilities
Carnegie Interstate Pipeline Company ("CIPCO") is an interstate
pipeline company engaged in the transportation of natural gas in interstate
commerce. Carnegie Production and Marketing, a division of CIPCO, produces and
sells natural gas. Carnegie Natural Gas Company ("Carnegie") functions as a
local distribution company serving residential, commercial and industrial
customers in West Virginia and western Pennsylvania. CIPCO and Carnegie
transport 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. CIPCO is also regulated by the Federal
Energy Regulatory Commission as an interstate pipeline. Total natural gas
throughput for CIPCO and Apollo was 34 bcf, 28 bcf and 37 bcf in 1995, 1994 and
1993, respectively.
Power Generation-During 1995, Marathon formed a new business unit,
Marathon Power Company, Ltd. ("Marathon Power"), to pursue development,
construction and operation of independent electric power projects in the global
electrical power market. The unit will have a geographic focus in Latin
America and the Asia Pacific Region. During early 1996, Marathon Power and a
co-venturer formed ElectroGen International, L.L.C., a joint venture company
which will pursue electric power generation projects in the Asia Pacific
Region.
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<PAGE> 22
DERIVATIVE INSTRUMENTS
In the normal course of its business, the Marathon Group is exposed to
market risk, or price fluctuations related to the purchase, production or sale
of crude oil, natural gas and refined products. The Marathon Group uses
commodity-based derivative instruments such as exchange-traded futures
contracts and options and over-the-counter commodity swaps and options to
manage exposure to market risk. The Marathon Group's strategic approach is to
limit the use of these instruments principally to hedging activities.
Accordingly, gains and losses on futures contracts and swaps generally offset
the effects of price changes in the underlying commodity. However, certain
derivative instruments have the effect of converting fixed price equity natural
gas production volumes to variable market-based prices. These instruments are
used as part of Marathon's overall risk management programs.
While commodity-based derivative instruments are generally used to
reduce risks from unfavorable commodity price movements, they also may limit
the opportunity to benefit from favorable movements. Marathon's
exchange-traded derivative activities are conducted primarily on the New York
Mercantile Exchange ("NYMEX").
Based on a strategic approach of limiting its use of derivative
instruments principally to hedging activities, combined with risk assessment
procedures and internal controls in place, management believes that its use of
derivative instruments does not expose the Marathon Group to material risk, and
that such use will not have a material adverse effect on the financial
position, liquidity or results of operations of the Marathon Group. For
additional information regarding derivative instruments, see "Financial
Statements and Supplementary Data - Notes to Financial Statements - 2. Summary
of Principal Accounting Policies - Derivative Instruments and - 25. Derivative
Instruments" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Management's Discussion and Analysis of Cash Flows
- - - Derivative Instruments" for the Marathon Group.
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 1995 1994 1993
(MILLIONS) ---- ---- ----
<S> <C> <C> <C>
Exploration and Production
United States $322 $351 $315
International 141 185 359
---- ---- ----
Total Exploration and Production 463 536 674
Refining, Marketing and Transportation 170 278 213
Other 9 8 23
---- ---- ----
TOTAL $642 $822 $910
==== ==== ====
</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 1993,
1994 and 1995 and estimated capital expenditures for such purposes in 1996 and
1997, see "Environmental Matters."
Depreciation, depletion and amortization costs for the Marathon Group
were $817 million, $721 million and $727 million in 1995, 1994 and 1993,
respectively. Depreciation, depletion and amortization
21
<PAGE> 23
expense in future periods will reflect reductions as a result of the fourth
quarter 1995 write-down of long-lived assets associated with the adoption of
SFAS No. 121.
RESEARCH AND DEVELOPMENT
The research and development activities of the Marathon Group are
conducted mainly by Marathon's Engineering and Technology organization in
Littleton, Colorado and Houston, Texas. Expenditures by Marathon for research
and development were $13 million in 1995, $16 million in 1994 and $19 million
in 1993.
Activities within the Engineering & Technology group 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 deepwater developments and optimization of facilities;
development of computer-based techniques for reservoir description and
performance modeling; methods to improve drilling, production and injection
well performance and enhanced oil recovery techniques. The staff also provides
a broad range of technical assistance and consultation to Marathon's downstream
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, 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 and their
associated regulations 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 finalized 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 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 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
22
<PAGE> 24
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 imposed more stringent limits on air
emissions, established a federally mandated operating permit program and
allowed 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 established 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 cleaner burning reformulated gasoline ("RFG") in the
nine metropolitan areas classified as severe or extreme for ozone
non-attainment, and other areas opting into the program, effective January
1995. The standards for RFG become even more stringent in the year 2000, when
Phase II RFG will be required.
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, 1995, Marathon had installed refueling controls at virtually
all of the 553 retail outlets requiring them, at an estimated average cost of
$40,000 per outlet.
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
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
23
<PAGE> 25
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.
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 and associated
reimbursements are established for sites where contamination has been
determined to exist and the amount of associated costs is reasonably
determinable.
USX is also involved in a number of remedial actions under RCRA, 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."
Capital Expenditures
The Marathon Group's capital expenditures for environmental controls
were $50 million, $70 million and $123 million in 1995, 1994 and 1993,
respectively. These expenditures are returning to historical levels following
completion of major projects such as the multi-year capital spending program
for diesel fuel desulfurization which began in 1990 and was substantially
completed by the end of 1993. The Marathon Group expects expenditures for
environmental controls to approximate $65 million in 1996. Predictions beyond
1996 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
remain at about 1996 levels; however, actual expenditures beyond 1996 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.
24
<PAGE> 26
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 1995, 1994 and 1993.
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
(MILLIONS) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Steel and Related Businesses
Sheet and Tin Mill Products $4,022 $3,806 $3,462
Plate, Tubular and Other Steel Mill Products 1,279 1,048 929
Taconite Pellets and Coke 525 552 472
Coal 206 202 268
All Other 359 310 291
Other Businesses 65 148 190
------ ------ ------
TOTAL SALES $6,456 $6,066 $5,612
====== ====== ======
</TABLE>
The total number of active U. S. Steel Group employees at year-end was
20,391 in 1995, 20,711 in 1994 and 21,892 in 1993. 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 five and one-half year contract with the
USWA, effective February 1, 1994, covering approximately 15,000 employees. The
contract provides for the renegotiation of certain compensation issues in 1996,
subject to arbitration. Any renegotiated provisions would become effective in
1997 and would continue until the expiration of the contract.
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.
STEEL INDUSTRY BACKGROUND AND COMPETITION
The domestic steel industry is cyclical and highly competitive.
Despite significant reductions in raw steel production capability by major
integrated domestic producers since the early 1980's, the domestic industry
continues to be adversely affected by excess world capacity. In certain years
since 1982, 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
primarily use steel scrap as a raw material. Minimills generally produce a
narrower range of steel products than integrated producers, but typically enjoy
certain competitive advantages such as lower capital
25
<PAGE> 27
expenditures for construction of facilities and non-unionized work forces with
lower employment costs and more flexible work rules. Several minimills utilize
thin slab casting technology to produce flat-rolled products, and several
additional flat-rolled minimill plants are under construction, some of which
will commence operations in 1996. Depending on market conditions, the
additional production generated by flat-rolled minimills could have an adverse
effect on U. S. Steel's selling 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 21%, 25% and 19% of the domestic
steel market in 1995, 1994 and 1993, respectively.
Oil country tubular goods ("OCTG") accounted for 4.0% of U. S. Steel
Group shipments in 1995. 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. In June 1995, Commerce
issued its final affirmative determinations of the applicable margins of
dumping and/or subsidies in the OCTG cases against producers in all seven
countries. On July 24, 1995, the ITC rendered determinations that there had
been material injury to domestic producers by reason of illegal dumping of
imported products. Determinations favorable to domestic producers were
rendered with respect to OCTG imports from Argentina, Japan, Korea and Mexico
and with respect to imports of drill pipe from Argentina, Japan and Mexico.
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."
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.
Beginning in the early 1980's, 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 continues 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.
26
<PAGE> 28
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 12.8 million tons. Steel
employment has been reduced from approximately 89,000 in 1982 to about 19,000
at the beginning of 1996. 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 $3.7 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 1995, 1994 and 1993, U. S. Steel continuously cast
substantially all of its raw steel production.
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 59%, 22% and 19%, respectively, of U. S. Steel's 1995 raw steel
production of 12.2 million tons. The annual raw steel production capability
for 1996 of 12.8 million tons represents an increase from 1995 of 0.3 million
tons resulting from operating efficiencies, and includes 7.7 million at Gary
Works, 2.8 million at Mon Valley Works and 2.3 million at Fairfield Works.
27
<PAGE> 29
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 & TUBULAR
MAJOR MARKET-1995 TIN MILL & OTHER TOTAL
(Thousands of Net Tons) -------- ------- -----
<S> <C> <C> <C>
Steel Service Centers 1,954 610 2,564
Further Conversion:
Trade Customers 971 113 1,084
Joint Ventures 1,332 0 1,332
Transportation (Including Auto) 1,447 189 1,636
Export 1,296 219 1,515
Containers 857 0 857
Oil, Gas and Petrochemicals 1 747 748
Construction and Construction Products 565 106 671
All Other 844 127 971
----- ----- ------
TOTAL 9,267 2,111 11,378
===== ===== ======
MAJOR MARKET-1994
(Thousands of Net Tons)
Steel Service Centers 2,008 772 2,780
Further Conversion:
Trade Customers 1,008 50 1,058
Joint Ventures 1,308 0 1,308
Transportation (Including Auto) 1,721 231 1,952
Export 275 80 355
Containers 955 7 962
Oil, Gas and Petrochemicals 0 367 367
Construction and Construction Products 533 189 722
All Other 920 144 1,064
----- ----- ------
TOTAL 8,728 1,840 10,568
===== ===== ======
MAJOR MARKET-1993
(Thousands of Net Tons)
Steel Service Centers 2,097 734 2,831
Further Conversion:
Trade Customers 1,065 85 1,150
Joint Ventures 1,074 0 1,074
Transportation (Including Auto) 1,615 156 1,771
Export 279 48 327
Containers 828 7 835
Oil, Gas and Petrochemicals 1 341 342
Construction and Construction Products 535 132 667
All Other 870 102 972
----- ----- ------
TOTAL 8,364 1,605 9,969
===== ===== ======
</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 863 million net tons at year-end 1995
compared with approximately 928 million net tons at year-end 1994. 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
28
<PAGE> 30
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 and sold in June 1995. Reserves
associated with the Maple Creek coal mine were 21 million net tons at December
31, 1994. In September 1994, the Shawnee coal mine located in West Virginia
was integrated with the No. 50 coal mine for operational efficiencies. Other
reductions in reserves were mainly due to the sale and leasing of properties in
Pennsylvania, West Virginia and Alabama.
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 731 million tons at year-end 1995, substantially all
of which are iron ore concentrate equivalents available from low-grade
iron-bearing materials. All demonstrated reserves are located in Minnesota.
Approximately 35% of these reserves are owned and the remaining 65% are leased.
Most of the leased reserves are covered by a lease expiring in 2058 and the
remaining leases have expiration dates ranging from 2021 to 2026. U. S.
Steel's iron ore operations at Mt. Iron, Minn. ("Minntac") produced 15.3
million net tons of taconite pellets in 1995 and 16.0 million net tons in each
of 1994 and 1993.
USX's Resource Management administers the remaining mineral lands and
timber lands of U. S. Steel 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 16 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.
29
<PAGE> 31
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 1995 1994 1993 1992 1991
(THOUSANDS OF NET TONS, UNLESS OTHERWISE NOTED) ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
RAW STEEL PRODUCTION
Gary 7,163 6,768 6,624 5,969 5,817
Mon Valley 2,740 2,669 2,507 2,276 2,088
Fairfield 2,260 2,240 2,203 2,146 1,969
All other plants (a) - - - 44 648
------ ------ ------ ------ ------
Total raw steel production 12,163 11,677 11,334 10,435 10,522
Total cast production 12,120 11,606 11,295 8,695 7,088
Continuous cast as % of total production 99.6 99.4 99.7 83.3 67.4
RAW STEEL CAPABILITY (AVERAGE)
Continuous Cast 12,500 11,990 11,850 9,904 8,057
Ingots - - - 2,240 6,919
------ ------ ------ ------ ------
Total 12,500 11,990 11,850 12,144 14,976
Total Production as % of total capability 97.3 97.4 95.6 85.9 70.3
Continuous cast as % of total capability 100.0 100.0 100.0 81.6 53.8
HOT METAL PRODUCTION 10,521 10,328 9,972 9,270 8,941
TACONITE PELLETS
Shipments 15,218 16,174 15,911 14,822 14,897
Production as % of capacity 86.2 90.3 90.1 82.8 84.0
COKE PRODUCTION 6,770 6,777 6,425 5,917 5,091
COAL PRODUCTION
Metallurgical coal (b) 7,509 7,424 8,142 7,311 7,352
Steam coal (b) (c) - - 2,444 5,239 2,829
------ ------ ------ ------ ------
Total 7,509 7,424 10,586 12,550 10,181
Total production as % of capacity 93.3 93.7 95.6 93.6 76.1
<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 and sold in June
1995, 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 primarily with hot-strip mill coils
from other U. S. Steel plants.
</TABLE>
30
<PAGE> 32
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
in this section. Financial information with respect to other businesses
included the consolidated results of RMI prior to the adoption of equity
accounting for RMI in 1994. The other businesses that are included in the U.
S. Steel Group accounted for 1% of the U. S. Steel Group's sales in 1995, 2% in
1994 and 3% in 1993.
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 - 16. 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, CA 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
1.4 million tons. Total shipments were slightly above 1.4 million tons in
1995.
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 1995 were 1.8 million tons. USS/Kobe
Steel Company entered into a 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 2.6 million tons. Raw
steel production was 2.3 million tons in 1995.
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 600,000 tons per year
with substrate coils provided by U. S. Steel. PRO-TEC Coating Company produced
650,000 tons of galvanized steel in 1995.
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
31
<PAGE> 33
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 sourced by U. S.
Steel, with a processing capacity of 600,000 tons annually. In 1995,
Worthington Specialty Processing processed 420,000 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 is 870,000 tons of galvanized steel
annually, with availability of the facility shared by the partners on an equal
basis. In 1995, DESCO produced 830,000 tons of galvanized steel.
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 owns a 51% economic interest in RMI, a leading producer of titanium
metal products. RMI is a publicly traded company listed on the New York Stock
Exchange.
National-Oilwell, a joint venture between USX and National Supply
Company, Inc., a subsidiary of Armco Inc., operates in the oil field service
industry. In January 1996, National-Oilwell was sold.
DERIVATIVE INSTRUMENTS
In the normal course of its business, the U. S. Steel Group is exposed
to market risk, or price fluctuations related to the purchase of natural gas
and certain metals used as raw materials. The U. S. Steel Group uses
commodity-based derivative instruments (over-the-counter ("OTC") commodity
swaps) to manage exposure to market risk related to the purchase of natural
gas; however, its use of these instruments has not been significant in relation
to the U. S. Steel Group's overall business activity. While they are generally
used to reduce risks from unfavorable commodity price movements, they also may
limit the opportunity to benefit from favorable movements. For quantitative
information relating to derivative instruments, including aggregate contract
values and fair values, where appropriate, see "Financial Statements and
Supplementary Data - Notes to Financial Statements - 26. Derivative
Instruments" for the U. S. Steel Group.
Based on a strategic approach of limiting its use of derivative
instruments to hedging activities, combined with risk assessment procedures and
internal controls in place, management believes that its use of derivative
instruments does not expose the U. S. Steel Group to material risk, and that
such use will not have a material adverse effect on the financial position,
liquidity or results of operations of the U. S. Steel Group. For a summary of
accounting policies related to derivative instruments, see "Financial
Statements and Supplementary Data - Notes to Financial Statements - 2. Summary
of Principal Accounting Policies" for the U. S. Steel Group.
PROPERTY, PLANT AND EQUIPMENT ADDITIONS
During the years 1993-1995, the U. S. Steel Group made property, plant
and equipment additions, including capital leases, aggregating $770 million,
including $324 million, $248 million and $198 million in 1995, 1994 and 1993,
respectively. Significant expenditures in 1995 included certain spending
related to the Gary Works' No. 8 blast furnace explosion as well as
expenditures for emissions controls at Gary Works' steel-making facilities, a
new galvanizing line and a granulated coal injection facility at Fairfield
32
<PAGE> 34
Works, and a degasser at Mon Valley Works. Capital expenditures for 1996 are
expected to be approximately $320 million and will include spending on a blast
furnace reline and continued spending on a new galvanizing line at Fairfield
Works, as well as additional environmental expenditures primarily at Gary
Works.
Depreciation, depletion and amortization costs for the U. S. Steel
Group were $318 million in 1995 and $314 million in each of 1994 and 1993.
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 $22 million, $23 million
and $22 million in 1995, 1994 and 1993, 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 U. S.
Steel 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 seven years, it has reduced
the volume of toxic releases reported under the Superfund Amendments and
Reauthorization Act of 1986 (Section 313) by 60%, primarily through recycling
and process changes, and reduced EPA 33-50 Program chemicals by more than 90%.
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 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
33
<PAGE> 35
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 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 began 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 1995, all 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.
34
<PAGE> 36
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 has reached
preliminary agreement with the EPA for a sediment remediation plan for the
section of the Grand Calumet River that runs through Gary Works. As proposed,
this 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.
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 storage tanks. Since the EPA has not yet promulgated
implementing regulations relating to past disposal or handling operations, 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
cannot be 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 and non-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."
Capital Expenditures
The U. S. Steel Group's capital expenditures for environmental controls
were $55 million, $57 million and $53 million in 1995, 1994 and 1993,
respectively. The U. S. Steel Group currently expects such expenditures to
approximate $100 million in 1996. These amounts will primarily be spent on
projects at Gary Works. Predictions beyond 1996 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 $75
million in 1997; 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.
35
<PAGE> 37
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.
Sales from the businesses included in the Delhi Group as a percentage of USX
consolidated sales were 3% in each of 1995, 1994 and 1993. 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 29, 1996, Delhi owned interests in 16
natural gas processing facilities including 20 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 29, 1996. These facilities straddle
Delhi's pipelines and have been located to maximize utilization.
Delhi faces intense 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 1994 data published in the September 1995 Pipeline & Gas Journal,
Delhi ranked eighteenth among domestic pipeline companies in terms of total
miles of gas pipeline operated and fourth 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.
The total number of Delhi active employees at year-end was 634 in 1995,
681 in 1994 and 805 in 1993. The reduction during this three-year period
mainly reflected the effects of the 1994 asset disposition plan and work force
reduction program. Delhi employees are not represented by labor unions.
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<PAGE> 38
The following tables summarize the Delhi Group's sales and gross margin
for each of the last three years:
<TABLE>
<CAPTION>
SALES AND GROSS MARGIN
(MILLIONS) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Gas Sales and Trading (a) $572.0 $490.9 $447.9
Transportation 11.7 11.7 14.2
Gas Processing 70.4 64.1 72.6
Other - .2 .1
------ ------ ------
TOTAL $654.1 $566.9 $534.8
====== ====== ======
Gross Margin (b)
Gas Sales and Trading Margin (a) $ 56.0 $ 70.3 $104.5
Transportation Margin 11.7 11.7 14.2
------ ------ ------
Systems and Trading Margin 67.7 82.0 118.7
Gas Processing Margin 24.7 15.6 17.3
------ ------ ------
TOTAL $ 92.4 $ 97.6 $136.0
====== ====== ======
<FN>
- - ------------
(a) See "Natural Gas Sales" below for a discussion of a January 1994
settlement agreement affecting Gas Sales.
(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>
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 100 points. Including its
interest in a partnership, total system miles were 6,930 at December 31, 1995,
compared with approximately 7,400 at December 31, 1994. Pipeline systems,
including Delhi's partnership interest in Ozark Gas Transmission System
("Ozark"), a Federal Energy Regulatory Commission ("FERC") regulated interstate
pipeline company, which totaled about 700 miles of gas pipeline in Arkansas,
Oklahoma and Texas, were included in the 1994 asset disposition plan and were
sold in the first half of 1995. Total throughput, including Delhi's share of
partnership volumes, was 319 billion cubic feet ("bcf") in 1995, 334 bcf in
1994 and 327 bcf in 1993.
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<PAGE> 39
The following table sets forth the pipeline mileage for pipeline
systems owned and operated by Delhi at December 31, 1995, and natural gas
throughput volumes for pipeline systems operated during 1995:
PIPELINE MILEAGE AND THROUGHPUT VOLUMES
<TABLE>
<CAPTION>
AVERAGE
APPROXIMATE NATURAL GAS
MILES THROUGHPUT
----- ----------
(Millions of Cubic Feet per Day)
<S> <C> <C>
Oklahoma 2,820 327.2
Texas 4,072 540.3
----- -----
Total Systems 6,892 867.5
Partnership 38 5.2 (a)
----- -----
TOTAL 6,930 872.7
===== =====
<FN>
- - -----------
(a) Reflects Delhi's interest in Ozark throughput. Delhi sold its
partnership interest in Ozark in 1995.
</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 ("index-based"). 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.
During 1996, Delhi intends to renegotiate, where applicable, the
pricing provisions of certain index-based purchase contracts because of an
anomaly in market conditions which occurred in the first quarter of 1996. The
anomaly relates to basis differentials, which are the differences between gas
prices in various locations. For further discussion of this anomaly, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Management's Discussion and Analysis of Operations - Outlook."
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.
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<PAGE> 40
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) 1995 1994 1993
---- ---- ----
(BILLIONS OF CUBIC FEET)
<S> <C> <C> <C>
Beginning of year 1,650 1,663 1,652
Additions 455 431 382
Production (317) (334) (328)
Revisions/Asset Sales (45) (110) (43)
----- ----- -----
TOTAL (at year-end) 1,743 1,650 1,663
===== ===== =====
<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 1995, gas sales
represented approximately 65% of Delhi's total systems throughput and 61% of
Delhi's total gross margin. Delhi sells gas under both firm and interruptible
contracts at varying volumes, and in 1995 sold gas to over 235 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 45
LDCs and UEGs, and total sales to these customers in 1995 exceeded 88 bcf.
Delhi also sells gas to industrial end-users. Although these customers are
generally more price-sensitive, they 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 Texas
storage facility, and has, from time to time, entered into various other
storage agreements. As of January 31, 1996, Delhi had 3.6 bcf of natural gas
in storage pursuant to these arrangements.
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
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<PAGE> 41
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 19% of total sales in 1995
and 30% of total sales in each of 1994 and 1993. For the years 1995 and 1994,
Delhi's four largest customers were Oklahoma Natural Gas Company ("ONG"), the
largest LDC in Oklahoma; Central and South West Corporation ("CSW"), 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. CSW 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. In 1993, Delhi's four largest customers were ONG, SWEPCO,
CP&L and Lone Star.
Excluding spot and trading sales volumes, natural gas sales to Delhi's
four largest customers accounted for 11%, 15% and 18% of total systems
throughput and 23%, 28% and 45% of total gross margin in 1995, 1994 and 1993,
respectively. When aggregated, sales to two customers, ONG and Lone Star in
1995, ONG and CSW in 1994 and ONG and SWEPCO in 1993, after excluding spot and
trading sales, accounted for 19%, 22% and 34%, respectively, of total gross
margin. During 1994 and 1993, one customer, ONG (discussed below), accounted
for 10% or more of the Delhi Group's total revenues. Sales to CSW aggregated
$27.5 million, or 4% of total revenues, in 1995, $54.7 million, or just under
10% in 1994 and $66.3 million, or 12%, in 1993. 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 7%, 13%
and 14% of total sales in 1995, 1994 and 1993, respectively. Delhi executed a
10-year contract with ONG in 1992 which provided for annual negotiation of
contract prices. During the 1995 negotiation process, Delhi and ONG agreed to
pricing terms and volume commitments for the next two contract years with
options for the following year. Annual renegotiation rights become effective
with the 1997-1998 contract year, or the sixth year of the contract.
Sales to SWEPCO accounted for 5% of total sales in 1994 and 7% in 1993.
In January 1994, Delhi executed a four-year agreement with SWEPCO concurrent
with the settlement of litigation relating to the previous contract between the
two companies. Under the new agreement, Delhi supplies gas to two SWEPCO power
plants in east Texas at market sensitive prices and premiums commensurate with
the level of service provided. The agreement does not require any minimum gas
purchase volumes and provides for swing service, which enables SWEPCO to
request higher volumes from Delhi whenever it needs them.
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
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, when not limited by the
availability of downstream pipeline capacity.
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 1995 included sales to LDCs in Arkansas,
California, Indiana, Illinois, Kansas, Louisiana, Massachusetts, Missouri and
Ohio; 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
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<PAGE> 42
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 1995, Delhi
negotiated 14 firm sales of gas moving to off-system markets.
In 1995, Delhi expanded its natural gas trading operations
significantly in order to increase its customer base and provide greater
opportunities for attracting off-system customers requiring firm supply
services. The trading business, which began in 1994, involves the purchase of
natural gas from sources other than wells directly connected to Delhi's
systems, and the subsequent sale of like volumes. Even though unit margins
earned in the trading business are significantly less than those earned on firm
system sales, the increased volumes provide more flexibility in reacting to
changes in on- and off-system market demands.
With the deregulation of the gas industry, LDCs are opening their
systems to transportation, allowing companies like Delhi to sell gas to
customers downstream of the LDCs. To pursue these downstream markets, Delhi
opened a marketing office in the Chicago area in late 1995 and will open
another in Pittsburgh in early 1996. These offices will serve those industrial
and commercial end-users behind the LDCs in the Midwest and Northeast where
unit margins exceed those on the spot market. In addition to on-system
supplies, Delhi intends to use volumes from its trading operations to supply
these downstream markets.
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 1995 1994 1993
---- ---- ----
(BILLIONS OF CUBIC FEET)
<S> <C> <C> <C>
Natural Gas Sales 206.9 227.9 203.2
Transportation 109.7 99.1 117.6
----- ----- -----
Total Systems 316.6 327.0 320.8
Trading Sales 154.7 34.6 -
Partnership - equity share (a) 1.9 7.1 6.5
----- ----- -----
TOTAL 473.2 368.7 327.3
===== ===== =====
<FN>
- - ----------
(a) Related to an investment in Ozark, which was sold in 1995.
</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 100
points of interconnection with both intrastate and interstate pipeline systems
facilitate its transportation business. Transportation services accounted for
approximately 35% of Delhi's total systems throughput and 13% of its total
gross margin in 1995, compared with 30% and 12%, in 1994.
GAS PROCESSING, NGLS MARKETING AND OTHER SERVICES
Gas Processing
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
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<PAGE> 43
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 29, 1996, 15 of Delhi's 20 plants were operating.
The following table sets forth information about Delhi's processing
plants as of December 31, 1995:
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
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 1,037.0 2,305.0
======= =======
<FN>
- - -----------
(a) Plants in Oklahoma are 50% owned (plants in all other states are 100%
owned).
(b) Idle at December 31, 1995.
(c) Written down to net realizable value in June 1994 as part of the asset
disposition plan.
</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
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<PAGE> 44
hydrogen sulfide. Delhi owns and operates its own treating facilities,
including six sulfur 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.
NGLs Marketing
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 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 1995, Delhi marketed 289 million gallons ("mmgal") of NGLs to
over 45 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 289 mmgal, 276 mmgal and 282 mmgal
in 1995, 1994 and 1993, respectively. In addition, NGLs volumes which Delhi
processed for third parties for a fee totaled 29 mmgal, 30 mmgal and 46 mmgal
in 1995, 1994 and 1993, respectively. Gas processing unit margins averaged 9
cents per gallon in 1995 (7 cents per gallon in the fourth quarter), compared
with 6 cents per gallon in 1994 (10 cents per gallon in the fourth quarter) and
6 cents per gallon in 1993 (1 cent per gallon in the fourth quarter).
Other Services
In June 1995, Delhi received FERC approval to market wholesale electric
power and began limited trading in December. Management believes that the
electric power business is a natural extension of and a complement to its
existing energy services. This added service should eventually enable Delhi to
offer both gas and electric services to those industrial and commercial
customers who can readily switch energy sources. Delhi also intends to pursue
opportunities to convert its gas into electricity to capture summer peaking
premiums.
DERIVATIVE INSTRUMENTS
In the normal course of its business, Delhi is exposed to market risk,
or uncertainty in operating results from fluctuating prices of natural gas
purchases or sales. Delhi uses commodity-based derivative instruments such as
exchange-traded futures contracts and options and over-the-counter commodity
swaps and options to manage its exposure to market risk. These instruments are
utilized mainly on a short-term basis, with most positions opened and closed
within a month's business. While derivative instruments are generally used to
reduce risks from unfavorable price movements, they may also limit the
opportunity to benefit from favorable movements. Delhi's strategic approach is
to limit its use of derivative instruments to hedging activities. Accordingly,
changes in the fair value of these instruments are generally offset by price
changes in the underlying natural gas transactions. For additional information
regarding derivative instruments, see "Financial Statements and Supplementary
Data - Notes to Financial Statements - 2. Summary of Principal Accounting
Policies - Derivative Instruments and - 22. Derivative Instruments" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Management's Discussion and Analysis of Cash Flows - Derivative
Instruments" for the Delhi Group.
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<PAGE> 45
PROPERTY, PLANT AND EQUIPMENT ADDITIONS
Property, plant and equipment additions for the Delhi Group were $50.0
million, $32.1 million and $42.6 million in 1995, 1994 and 1993, respectively.
During the three years 1993-1995, 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 1995 included amounts for pipeline construction projects in
east Texas and southern Oklahoma and the purchase of gathering lines in
Oklahoma and south Texas. For information concerning capital expenditures for
environmental controls in 1993, 1994 and 1995 and estimated capital
expenditures for such purposes in 1996 and 1997, see "Environmental Matters."
Capital expenditures in 1996 are expected to be approximately $75
million. Projects include a major expansion of treating, gathering and
transmission facilities in east Texas to primarily service the rapidly
developing Pinnacle Reef gas play and an expansion of gathering systems in
Oklahoma. During 1996, Delhi will continue to target additional expenditures
to connect dedicated gas reserves by the expansion or acquisition of gas
gathering, processing and transmission assets.
Depreciation, depletion and amortization costs for Delhi were $24.8
million, $30.1 million and $36.3 million in 1995, 1994 and 1993, respectively.
The decline during this three-year period primarily reflected effects of the
1994 asset disposition plan.
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 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.
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.
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<PAGE> 46
FERC Regulation
As a gas gatherer and an operator of intrastate pipelines, Delhi is
generally exempt from regulation under the Natural Gas Act of 1938 ("NGA"). In
the second quarter of 1995, Delhi sold its 25% partnership interest in Ozark,
which was subject to FERC regulations under the NGA and the Natural Gas Policy
Act of 1978 ("NGPA"). The FERC 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
addition, Delhi is able to make sales for resale in interstate commerce at
market-based rates pursuant to blanket authority issued by the FERC under Order
No. 547.
ENVIRONMENTAL MATTERS
The Delhi Group maintains a comprehensive environmental policy overseen
by the Public Policy Committee of the USX Board of Directors. The
Environmental Affairs and Safety organization has the 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
approximately 15 processing and treating plants located in Oklahoma and Texas
beginning in mid-1996.
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<PAGE> 47
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 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
$5.5 million, $4.6 million and $4.5 million in 1995, 1994 and 1993,
respectively. The Delhi Group currently expects such expenditures to
approximate $8 million in 1996 with the increase over 1995 primarily a
consequence of the planned increase in total capital spending. Predictions
beyond 1996 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 $9 million in 1997; 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> 48
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 - 17. 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,
1995.
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, 1995, under federal
and state environmental laws. Except as described herein, it is not possible
to predict accurately 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> 49
At December 31, 1995, USX had been identified as a PRP at a total of 19
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 10 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 36 of these sites will be under $100,000 per site, another 26
sites have potential costs between $100,000 and $1 million per site and 6 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. During the next 10 to 20
years, the Marathon Group anticipates spending between $8 million and $12
million at this site. Anticipated expenditures for 1996 are $320,000.
Additionally, the Marathon Group is involved with a voluntary
corrective action program at its Robinson, Ill. refinery to remediate five
Solid Waste Management Units at a total estimated cost of $5.5 million. As of
December 31, 1995, $1.2 million of this amount remains to be spent. This
program is expected to be completed during 1996.
In September 1995, the Marathon Group was informed that the U. S.
Environmental Protection Agency had referred two Notices of Violations ("NOVs")
under the Clean Air Act to the U.S. Department of Justice for possible
enforcement. The NOVs, which pertain to a boiler at the Marathon Group's
Robinson, Illinois refinery, arise from alleged noncompliance with the State's
opacity, particulate and carbon monoxide ("CO") air emission standards, and the
operation of that unit without a permit. The Marathon Group contends that it
is currently in compliance with the opacity, particulate and CO air emission
standards, and that it operated the facility with a permit.
The Illinois State Attorney General's ("AG") Office is challenging the
integrity of the sewer system at the Marathon Group's Robinson refinery based,
in part, on a release to the sewer that occurred in April 1993, and has
recommended a civil penalty of $228,000. In October 1995, the Marathon Group
notified the AG's Office that a compatibility study of the sewer system has
been performed indicating that the system is compatible for the types of
material which are discharged into it. This study was done in connection with
a commitment the Marathon Group has made in its draft of the sewer inspection
and repair program that also has been submitted to the AG's office. Marathon
Group is negotiating with the AG's office regarding this program.
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. This preceding has been settled for a fine of less than $100,000, and
the Marathon Group has agreed to a supplemental environmental project.
In February 1995, the EPA notified Marathon that it proposed to assess
penalties in the amount of $526,100 for violating the general National Pollutant
Discharge Elimination System ("NPDES") Permit under the Clean Water Act ("CWA")
for the Cook Inlet,
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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. In addition, in June, 1995,
Greenpeace, the Trustees for Alaska and the Alaska Center for the Environment
filed a Complaint against Marathon and Unocal seeking an injunction against
discharging pollutants from their facilities, a declaratory judgment finding
that Marathon and Unocal violated the NPDES permit and the CWA, and civil
penalties. These cases have been settled whereby Marathon paid a civil penalty
of $65,000 to the U. S. government and made a contribution of $348,000 to an
environmental program sponsored by the Cook Inlet Keeper.
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 and have been paid. In
addition, claims of two plaintiffs were remanded for retrial of their damages
(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.
A trial in a further related lawsuit (Pacific Great Lakes Corporation
v. B&LE) filed under the Ohio Valentine Act in the Cuyahoga County (Ohio) Court
of Common Pleas in September 1995 was concluded in February 1996 with a jury
verdict finding no injury to the plaintiffs.
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 against the B&LE in these matters.
Fairfield Agreement Litigation
In 1990, USX and two former officials of the United Steelworkers of
America ("USWA") were convicted of violating Section 302 of the Taft-Hartley Act
by reason of USX's grant of retroactive leaves of absence to union officials,
which qualified them to receive pensions from USX. In addition, USX was
convicted of mail fraud in the same proceedings. The U. S. District Court
imposed a $4.1 million fine on USX and ordered USX to make restitution to the
United States Steel and Carnegie Pension Fund of approximately $300,000. The
verdict was affirmed on appeal and, in 1995, the fine and the restitution were
paid. In a separate proceeding, a former executive officer of USX pleaded
guilty to a related misdemeanor.
A related civil class action was commenced against USX and USWA in 1989
(Cox, et al. v. USX, et al.) and was dismissed by the trial court by entry of
summary judgment in favor of USX and USWA in 1991. The summary judgment was
reversed by the U. S. Court of Appeals for the 11th Circuit in 1994 and the
matter reinstated and returned to the trial court. In that civil class action,
the plaintiffs' complaint asserts five causes of action arising out of conduct
that was the subject of USX's 1990 criminal conviction and that allegedly
relates to the negotiation of a 1983 local labor agreement which resulted in
the reopening of USX's Fairfield Works in 1984. The causes of action include
claims asserted under the Racketeer Influenced and Corrupt Organization Act
("RICO") and the Employee Retirement Income Security Act ("ERISA"), specifically
alleging that USX granted leaves of absence and pensions to union officials
with intent to influence their approval, implementation and interpretation of
the 1983 Fairfield Agreement. Plaintiffs' claims seek damages in excess of
$276 million, which may be subject to trebling. USX and USWA have denied any
liability to the plaintiffs and are vigorously defending these claims. A jury
trial is
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currently scheduled to begin on September 30, 1996, in the U. S. District Court
for the Northern District of Alabama.
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.
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. In January, 1996, these consolidated cases were
settled for the payment of $8.5 million, subject to approval of the Court. A
fairness hearing is scheduled in March 1996.
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, 1995, 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,
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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, 1995, 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 ten of
these sites will be between $100,000 and $1 million per site and nine will be
under $100,000.
At one site, U. S. Steel's former Duluth, Minn. Works, USX has spent
approximately $6 million and currently estimates that it will spend another $4
million. The Duluth Works was listed by the Minnesota Pollution Control Agency
("MPCA") under the Minnesota Environmental Response and Liability Act (MERLA) on
its Permanent List of Priorities. USX signed a Response Order by Consent
(Order) with the MPCA in 1985 under which USX agreed to perform a Remedial
Investigation and Feasibility Study ("RI/FS") for a portion of Duluth Works,
primarily focusing on the coke plant area. After completion of the RI/FS, the
Order required USX to conduct the selected response action. The RI/FS was
completed in 1988, and the response actions for various operable units of the
Duluth Works site were selected in the MPCA's 1989 Record of Decision ("ROD").
The EPA has consolidated and included the Duluth Works site with the St. Louis
River and Interlake sites on the EPA's National Priorities List. The Duluth
Works cleanup has proceeded since 1989. As a result of negotiations with EPA
in October of 1995, USX has agreed to consider an engineering study of the
estuary sediments and the construction of a breakwater in the estuary.
Depending upon the method and extent of remediation at this site, future costs,
which are presently unknown and indeterminable, may exceed existing estimates.
At the remaining eight 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 eight sites:
1. 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. ("MIDC") 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 RI/FS which is continuing.
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. On October 10, 1995,
the U.S. Department of Justice ("DOJ") filed a complaint in the U.S.
District Court for Western Pennsylvania against USX and other MIDC
defendants to recover alleged costs incurred at the site. USX's share
of such costs is approximately $400,000.
2. 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
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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.
3. USX participated with 35 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. The RI/FS was completed in 1995. A
remediation plan estimated to cost $16.6 million was proposed by the EPA
in 1995. The PRP's are proposing a remedy estimated to cost $6 million.
A ROD is expected to be issued in 1996. USX has contributed
approximately $550,000 through 1995 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. The PRP Remediation Committee commenced
cost recovery litigation against approximately 1,100 non-participating
PRPs. A number of these defendants have settled their liability or
joined the PRP Remediation Committee. There are approximately 375
defendants remaining in the case.
4. USX owns a 51% 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. Recent studies,
together with improved remediation technology and redefined cleanup
standards have resulted in an 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, beginning 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 14 others, is complying with the
order and has accrued and has been paying its portion of the cost of
such compliance. It is anticipated that the studies will be completed
no earlier than late 1996. Actual cleanup is not expected to commence
prior to mid-1997. RMI's share of the study costs has been established
at 9.95%. In June 1995, RMI and 12 others entered into a Phase 2
(actual cleanup) allocation agreement which assigns 9.44% of the cost to
RMI. However, actual percentages may be more or less based on
contributions from other parties which are not currently participating
in the Phase 2 allocation agreement.
5. 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 15 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 15
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 estimated to cost approximately $21.5 million.
The PRPs have proposed an alternative remedy that is estimated to cost
$10 to $12 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 $1.5 million in oversight costs.
6. The Berks Associates/Douglassville Site ("Site") is situated on a 50
acre parcel located on the Schuylkill River in Berks County,
Pennsylvania. Used oil and solvent reprocessing operations were
conducted on the Site between 1941 and 1986. The EPA undertook the
dismantling of the Site's former processing area and instituted a cost
recovery suit in July 1991 against 30 former Site customers, as
potentially responsible parties to recover $8 million it
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expended in the process area dismantling. The 30 PRPs targeted by
the EPA joined over 400 additional PRPs in the EPA's cost
recovery litigation. On June 30, 1993, the EPA issued a unilateral
administrative order to the original 30 PRPs ordering remediation
which the EPA estimates will cost over $70 million. USX has received a
settlement proposal from the EPA to settle all claims for past and
future costs against USX for $1.1 million.
7. The Helen Kramer Landfill in New Jersey is a hazardous waste site
that has been remediated at a cost of $117 million. Operation and
maintenance of this landfill are estimated to cost an additional $63
million. Wastes from USX's former New Haven Works are alleged to have
been taken to the site. There are about 265 defendants in this case
with a motion pending to add another 30. All litigation proceedings
have been stayed pending the completion of a comprehensive database for
allocating liability shares. U. S. Steel has fully participated in the
information gathering of this database and the allocation sessions. On
February 2, 1996, USX was informed that it had been allocated a 0.4%
share.
8. In 1987 the California Department of Health Services ("DHS") issued
a remedial action order for the GBF/Pittsburg landfill near
Pittsburg, California. Records indicate that from 1972 through 1974,
Pittsburg Works arranged for the disposal of approximately 2.6 million
gallons of waste oil, sludge, caustic mud and acid which were
eventually taken to this landfill for disposal. The DHS recently
requested that an interim remediation of one of the plumes of site
contamination be carried out as soon as possible. The Generators'
Cooperative Group has agreed to fund the interim remediation which is
expected to cost approximately $400,000, of which U. S. Steel paid
$43,175. U. S. Steel's allocated share among all PRPs at this site is
10%. Total remediation costs could exceed $20 million.
In addition, there are 25 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 41 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 seven of these
sites will be under $100,000 per site, another nine sites have potential costs
between $100,000 and $1 million per site, and five sites may involve
remediation costs between $1 million and $5 million. Potential costs
associated with remediation at 15 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. Following is a
discussion of activities at these two sites.
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Gary
In 1988, the United States filed an action in the U.S. District Court,
Northern District of Indiana, for alleged violations of its 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 has agreed to develop a sediment remediation plan for
the section of the Grand Calumet River that runs through Gary Works. As
proposed, this 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.
USX is negotiating a consent decree with the EPA which will provide for the
expanded sediment remediation program and will resolve alleged violations of the
prior consent decree and NPDES permit since 1990. USX has reached an agreement
in principle with the EPA to pay civil penalties of $2.9 million for alleged
violations of the Clean Water Act 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.
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. 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 reached an agreement in
principle with the IDEM to pay a $6 million penalty and to install additional
pollution control equipment and programs costing approximately $75 million over
a period of several years.
USX reached an agreement in principle with the EPA in January 1996 to
pay $178,500 for penalties for failure to report the use of several chemicals
at Gary Works in 1991 to 1993 pursuant to the Emergency Planning and Community
Right-to-Know law.
In April 1995, U. S. Steel began negotiations with the EPA on a RCRA
Corrective Action Order for Gary Works. The parties have reached an agreement
in principle on the language for the Order which will require USX to perform a
RCRA Facility Investigation ("RFI") and a Corrective Measures Study ("CMS") 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 clean up 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
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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 with the EPA to resolve the allegations under which USX
was required to install, maintain, and operate CEM equipment. In addition, USX
paid a civil penalty of $125,000 in April 1995 in satisfaction of the
settlement agreement.
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 RFI and a 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.
In December 1995, USX reached an agreement in principle with the EPA
and the DOJ with respect to alleged RCRA violations at the Fairfield Works.
Under the agreement, USX will pay a civil penalty of $1 million, design and
implement two Supplemental Environmental Projects costing not less than $1.5
million in the aggregate as well as implementing RCRA corrective action at the
facility.
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.
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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 29, 1996, there were 99,744 registered holders of
Marathon Stock, 75,614 registered holders of Steel Stock and 152 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 - 22. 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 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
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or rescinded by action of the Board, or the 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 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.
57
<PAGE> 59
ITEM 6. SELECTED FINANCIAL DATA
USX - Consolidated
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS (EXCEPT AS NOTED)
-----------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales $20,922 $19,330 $18,057 $17,813 $18,825
Operating income (loss) 604 861 56 70 (259)
Operating income includes:
Inventory market valuation charges (credits) (70) (160) 241 (62) 260
Restructuring charges (credits) (6) 37 42 125 426
Impairment of long-lived assets 675 - - - -
Total income (loss) before extraordinary loss
and cumulative effect of changes in
accounting principles 221 501 (167) (160) (578)
Net income (loss) $ 214 $ 501 $ (259) $(1,826) $ (578)
Dividends on preferred stock (28) (31) (27) (9) (9)
------- ------- ------- ------- -------
Net income (loss) applicable to
common stocks $ 186 $ 470 $ (286) $(1,835) $ (587)
- - --------------------------------------------------------------------------------------------------------------------------------
COMMON SHARE DATA
MARATHON STOCK:
Total income (loss) before extraordinary loss and
cumulative effect of changes in accounting
principles applicable to Marathon Stock $ (87) $ 315 $ (12) $ 103 $ (78)
Per share (a)-primary and fully diluted
(in dollars) (.31) 1.10 (.04) .37 (.31)
Net income (loss) applicable to
Marathon Stock (92) 315 (35) (228) (78)
Per share (a)-primary and fully diluted
(in dollars) (.33) 1.10 (.12) (.80) (.31)
Dividends paid (b) (in dollars) .68 .68 .68 1.22 1.31
Book value (in dollars) 9.99 11.01 10.58 11.37 12.45
STEEL STOCK:
Total income (loss) before extraordinary loss and
cumulative effect of changes in accounting
principles applicable to Steel Stock $ 279 $ 176 $ (190) $ (274) $ (509)
Per share (a) -primary (in dollars) 3.53 2.35 (2.96) (4.92) (10.00)
-fully diluted (in dollars) 3.43 2.33 (2.96) (4.92) (10.00)
Net income (loss) applicable to Steel Stock 277 176 (259) (1,609) (509)
Per share (a) -primary (in dollars) 3.51 2.35 (4.04) (28.85) (10.00)
-fully diluted (in dollars) 3.41 2.33 (4.04) (28.85) (10.00)
Dividends paid (b) (in dollars) 1.00 1.00 1.00 1.00 .94
Book value (in dollars) 16.10 12.01 8.32 3.72 32.68
</TABLE>
(Footnotes presented on the following page.)
58
<PAGE> 60
SELECTED FINANCIAL DATA (CONTD.)
USX - CONSOLIDATED (CONTD.)
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS (EXCEPT AS NOTED)
-----------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
DELHI STOCK OUTSTANDING SINCE OCTOBER 2, 1992:
Net income (loss) applicable to outstanding
Delhi Stock $ 1 $ (21) $ 8 $ 2
Per common share-primary and fully diluted
(in dollars) .12 (2.22) .86 .22
Dividends paid (in dollars) .20 .20 .20 .05
Book value (in dollars) 11.88 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>
<CAPTION>
BALANCE SHEET DATA-DECEMBER 31:
<S> <C> <C> <C> <C> <C>
Capital expenditures-for year $ 1,016 $ 1,033 $ 1,151 $ 1,505 $ 1,392
Total assets 16,743 17,517 17,414 17,252 17,039
Capitalization:
Notes payable $ 40 $ 1 $ 1 $ 47 $ 79
Total long-term debt 4,937 5,599 5,970 6,302 6,438
Total proceeds from production
agreements - - - - 17
Minority interest including preferred
stock of subsidiary 250 250 5 16 37
Preferred stock 7 112 112 105 105
Common stockholders' equity 4,321 4,190 3,752 3,604 4,882
------- ------- ------- ------- -------
Total capitalization $ 9,555 $10,152 $ 9,840 $10,074 $11,558
======= ======= ======= ======= =======
Ratio of earnings to fixed charges 1.63 2.08 (a) (a) (a)
Ratio of earnings to combined fixed
charges and preferred stock dividends 1.50 1.92 (b) (b) (b)
<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>
59
<PAGE> 61
SELECTED FINANCIAL DATA (CONTD.)
USX - MARATHON GROUP
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS (EXCEPT AS NOTED)
-----------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales $13,871 $12,757 $11,962 $12,782 $13,975
Operating income 105 584 169 304 358
Operating income includes:
Inventory market valuation charges (credits) (70) (160) 241 (62) 260
Restructuring charges - - - 115 24
Impairment of long-lived assets 659 - - - -
Total income (loss) before extraordinary loss
and cumulative effect of changes in
accounting principles (83) 321 (6) 109 (71)
Net income (loss) $ (88) $ 321 $ (29) $ (222) $ (71)
Dividends on preferred stock (4) (6) (6) (6) (7)
------- ------- ------- ------- -------
Net income (loss) applicable to Marathon
Stock $ (92) $ 315 $ (35) $ (228) $ (78)
- - --------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA (IN DOLLARS) (a)
Total income (loss) before extraordinary loss
and cumulative effect of changes in
accounting principles
- primary and fully diluted $ (.31) $ 1.10 $ (.04) $ .37 $ (.31)
Net income (loss)-primary and fully diluted (.33) 1.10 (.12) (.80) (.31)
Dividends paid (b) .68 .68 .68 1.22 1.31
Book value 9.99 11.01 10.58 11.37 12.45
- - --------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA-DECEMBER 31:
Capital expenditures-for year $ 642 $ 753 $ 910 $ 1,193 $ 960
Total assets 10,109 10,951 10,822 11,141 11,644
Capitalization:
Notes payable $ 31 $ 1 $ 1 $ 31 $ 56
Total long-term debt 3,720 4,038 4,297 3,945 4,419
Total proceeds from production
agreements - - - - 17
Preferred stock of subsidiary 182 182 - - -
Preferred stock - 78 78 78 80
Common stockholders' equity 2,872 3,163 3,032 3,257 3,215
------- ------- ------- ------- -------
Total capitalization $ 6,805 $ 7,462 $ 7,408 $ 7,311 $ 7,787
======= ======= ======= ======= =======
<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>
60
<PAGE> 62
SELECTED FINANCIAL DATA (CONTD.)
USX - U. S. STEEL GROUP
<TABLE>
<CAPTION>
DOLLARS IN MILLIONS (EXCEPT AS NOTED)
-----------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales $6,456 $6,066 $5,612 $ 4,919 $ 4,864
Operating income (loss) 481 313 (149) (241) (617)
Operating income includes:
Restructuring charges - - 42 10 402
Impairment of long-lived assets 16 - - - -
Total income (loss) before extraordinary loss
and cumulative effect of changes in
accounting principles 303 201 (169) (271) (507)
Net income (loss) $ 301 $ 201 $ (238) $(1,606) $ (507)
Dividends on preferred stock (24) (25) (21) (3) (2)
------ ------ ------ ------- -------
Net income (loss) applicable to Steel Stock $ 277 $ 176 $ (259) $(1,609) $ (509)
- - -------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA (IN DOLLARS) (a)
Total income (loss) before extraordinary loss
and cumulative effect of changes in
accounting principles
-primary $ 3.53 $ 2.35 $(2.96) $ (4.92) $(10.00)
-fully diluted 3.43 2.33 (2.96) (4.92) (10.00)
Net income (loss)-primary 3.51 2.35 (4.04) (28.85) (10.00)
-fully diluted 3.41 2.33 (4.04) (28.85) (10.00)
Dividends paid (b) 1.00 1.00 1.00 1.00 .94
Book value 16.10 12.01 8.32 3.72 32.68
- - -------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA-DECEMBER 31:
Capital expenditures-for year $ 324 $ 248 $ 198 $ 298 $ 432
Total assets 6,521 6,480 6,629 6,251 5,627
Capitalization:
Notes payable $ 8 $ - $ - $ 15 $ 23
Total long-term debt 1,016 1,453 1,562 2,259 2,019
Minority interest including preferred
stock of subsidiary 64 64 5 16 37
Preferred stock 7 32 32 25 25
Common stockholders' equity 1,337 913 585 222 1,667
------ ------ ------ ------- -------
Total capitalization $2,432 $2,462 $2,184 $ 2,537 $ 3,771
====== ====== ====== ======= =======
<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>
61
<PAGE> 63
SELECTED FINANCIAL DATA (CONTD.)
USX - DELHI GROUP (a)
<TABLE>
<CAPTION>
Dollars in millions (except as noted)
-----------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales $654.1 $566.9 $534.8 $457.8 $423.2
Operating income (loss) 18.3 (35.8) 35.6 32.6 31.0
Operating income includes:
Restructuring charges (credits) (6.2) 37.4 - - -
Total income (loss) before extraordinary loss
and cumulative effect of changes in
accounting principle 4.0 (30.9) 12.2 18.6 7.2
Net income (loss) $ 3.7 $(30.9) $ 12.2 $ 36.5 $ 7.2
Dividends on preferred stock (.2) (.1) (.1)
Net (income) loss applicable to the Retained
Interest (b) (2.4) 10.1 (4.3)
------ ------ ------
Net income (loss) applicable to Delhi Stock $ 1.1 $(20.9) $ 7.8
- - -------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA SINCE OCTOBER 2, 1992 (IN DOLLARS)
Net income (loss)-primary and fully diluted $ .12 $(2.22) $ .86 $ .22
Dividends paid .20 .20 .20 .05
Book value 11.88 12.09 14.50 13.83
- - -------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA-DECEMBER 31:
Capital expenditures-for year $ 50.0 $ 32.1 $ 42.6 $ 26.6 $ 18.6
Total assets 624.3 521.2 583.4 564.5 583.8
Capitalization:
Notes payable $ 1.6 $ - $ - $ .7
Total long-term debt 200.8 107.5 110.5 97.6
Preferred stock of subsidiary 3.8 3.8 - -
Preferred stock - 2.5 2.5 2.5
Common stockholders' equity 112.2 169.3 203.0 193.6
------ ------ ------ ------
Total capitalization $318.4 $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.
(b) On June 15, 1995, USX eliminated the Marathon Group Retained Interest in
the Delhi Group (equivalent to 4,564,814 shares of USX-Delhi Group
Common Stock).
</TABLE>
62
<PAGE> 64
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.
63
<PAGE> 65
THIS PAGE IS INTENTIONALLY LEFT BLANK
64
<PAGE> 66
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> 67
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> 68
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.
Thomas J. Usher 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,
1995 and 1994, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995, 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 4, page U-12, in 1995 USX adopted a new accounting
standard for the impairment of long-lived assets. As discussed in Note 1, page
U-11, in 1993 USX adopted new accounting standards for postemployment benefits
and for retrospectively rated insurance contracts.
Price Waterhouse LLP
600 Grant Street, Pittsburgh, Pennsylvania 15219-2794
February 13, 1996
U-3
<PAGE> 69
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(Dollars in millions) 1995 1994 1993
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES (Note 2, page U-11) $ 20,922 $ 19,330 $ 18,057
OPERATING COSTS:
Cost of sales (excludes items shown below) (Note 5, page U-12) 15,103 14,186 13,887
Inventory market valuation charges (credits) (Note 18, page U-22) (70) (160) 241
Selling, general and administrative expenses 187 221 246
Depreciation, depletion and amortization 1,160 1,065 1,077
Taxes other than income taxes 3,120 2,963 2,363
Exploration expenses 149 157 145
Restructuring charges (credits) (Note 3, page U-11) (6) 37 42
Impairment of long-lived assets (Note 4, page U-12) 675 - -
-------- ------- -------
Total operating costs 20,318 18,469 18,001
-------- ------- -------
OPERATING INCOME 604 861 56
Other income (Note 6, page U-12) 128 261 257
Interest and other financial income (Note 6, page U-12) 38 24 78
Interest and other financial costs (Note 6, page U-12) (501) (461) (630)
-------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY LOSS
AND CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES 269 685 (239)
Less provision (credit) for estimated income taxes
(Note 11, page U-17) 48 184 (72)
-------- ------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS AND CUMULATIVE
EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES 221 501 (167)
Extraordinary loss (Note 7, page U-13) (7) - -
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)
------- ------- --------
NET INCOME (LOSS) 214 501 (259)
Dividends on preferred stock (28) (31) (27)
------- ------ -------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKS $ 186 $ 470 $ (286)
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
U-4
<PAGE> 70
INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
(Dollars in millions, except per share data) 1995 1994 1993
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
APPLICABLE TO MARATHON STOCK:
Income (loss) before extraordinary loss and cumulative
effect of changes in accounting principles $ (87) $ 315 $ (12)
Extraordinary loss (5) - -
Cumulative effect of changes in accounting principles - - (23)
--------- -------- --------
Net income (loss) $ (92) $ 315 $ (35)
PRIMARY AND FULLY DILUTED PER SHARE:
Income (loss) before extraordinary loss and cumulative
effect of changes in accounting principles $ (.31) $ 1.10 $ (.04)
Extraordinary loss (.02) - -
Cumulative effect of changes in accounting principles - - (.08)
--------- -------- --------
Net income (loss) $ (.33) $ 1.10 $ (.12)
Weighted average shares, in thousands
- primary 287,271 286,722 286,594
- fully diluted 287,271 286,725 286,594
- - ------------------------------------------------------------------------------------------------------------------
APPLICABLE TO STEEL STOCK:
Income (loss) before extraordinary loss and cumulative
effect of change in accounting principle $ 279 $ 176 $ (190)
Extraordinary loss (2) - -
Cumulative effect of change in accounting principle - - (69)
--------- -------- --------
Net income (loss) $ 277 $ 176 $ (259)
PRIMARY PER SHARE:
Income (loss) before extraordinary loss and cumulative
effect of change in accounting principle $ 3.53 $ 2.35 $ (2.96)
Extraordinary loss (.02) - -
Cumulative effect of change in accounting principle - - (1.08)
--------- -------- --------
Net income (loss) $ 3.51 $ 2.35 $ (4.04)
FULLY DILUTED PER SHARE:
Income (loss) before extraordinary loss and cumulative
effect of change in accounting principle $ 3.43 $ 2.33 $ (2.96)
Extraordinary loss (.02) - -
Cumulative effect of change in accounting principle - - (1.08)
--------- -------- --------
Net income (loss) $ 3.41 $ 2.33 $ (4.04)
Weighted average shares, in thousands
- primary 79,088 75,184 64,370
- fully diluted 89,438 78,624 64,370
- - ------------------------------------------------------------------------------------------------------------------
APPLICABLE TO OUTSTANDING DELHI STOCK:
Income (loss) before extraordinary loss $ 1.4 $ (20.9) $ 7.8
Extraordinary loss (.3) - -
--------- -------- --------
Net income (loss) $ 1.1 $ (20.9) $ 7.8
PRIMARY AND FULLY DILUTED PER SHARE:
Income (loss) before extraordinary loss $ .15 $ (2.22) $ .86
Extraordinary loss (.03) - -
--------- -------- --------
Net income (loss) $ .12 $ (2.22) $ .86
Weighted average shares, in thousands
- primary and fully diluted 9,442 9,407 9,067
- - ------------------------------------------------------------------------------------------------------------------
</TABLE>
See Note 23, 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> 71
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(Dollars in millions) December 31 1995 1994
- - -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 131 $ 48
Receivables, less allowance for doubtful accounts of
$22 and $9 (Note 12, page U-18) 1,203 1,112
Inventories (Note 18, page U-22) 1,764 1,742
Deferred income tax benefits (Note 11, page U-17) 76 339
Other current assets 66 81
------- -------
Total current assets 3,240 3,322
Long-term receivables and other investments, less reserves
of $23 and $22 (Note 13, page U-19) 836 898
Property, plant and equipment - net (Note 16, page U-21) 10,535 11,482
Prepaid pensions (Note 9, page U-15) 1,820 1,485
Other noncurrent assets 312 330
------- -------
Total assets $16,743 $17,517
- - -------------------------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Notes payable $ 40 $ 1
Accounts payable 2,157 1,873
Payroll and benefits payable 473 442
Accrued taxes 263 330
Accrued interest 122 128
Long-term debt due within one year (Note 15, page U-20) 465 78
------- -------
Total current liabilities 3,520 2,852
Long-term debt (Note 15, page U-20) 4,472 5,521
Long-term deferred income taxes (Note 11, page U-17) 898 1,249
Employee benefits (Note 10, page U-16) 2,772 2,822
Deferred credits and other liabilities 503 521
Preferred stock of subsidiary (Note 26, page U-25) 250 250
------- -------
Total liabilities 12,415 13,215
------- -------
STOCKHOLDERS' EQUITY (Details on pages U-8 and U-9)
Preferred stocks (Note 20, page U-22):
Adjustable Rate Cumulative issued - 2,099,970 shares in 1994 - 105
6.50% Cumulative Convertible issued - 6,900,000 shares
($345 liquidation preference) 7 7
Common stocks:
Marathon Stock issued - 287,398,342 shares and 287,185,916 shares
(par value $1 per share, authorized 550,000,000 shares) 287 287
Steel Stock issued - 83,042,305 shares and 75,969,771 shares
(par value $1 per share, authorized 200,000,000 shares) 83 76
Delhi Stock issued - 9,446,769 shares and 9,437,891 shares
(par value $1 per share, authorized 50,000,000 shares) 9 9
Additional paid-in capital 4,094 4,168
Accumulated deficit (116) (330)
Other equity adjustments (36) (20)
------- -------
Total stockholders' equity 4,328 4,302
------- -------
Total liabilities and stockholders' equity $16,743 $17,517
- - -------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
U-6
<PAGE> 72
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in millions) 1995 1994 1993
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income (loss) $ 214 $ 501 $ (259)
Adjustments to reconcile to net cash provided
from operating activities:
Extraordinary loss and accounting principle changes 7 - 92
Depreciation, depletion and amortization 1,160 1,065 1,077
Exploratory dry well costs 64 68 48
Inventory market valuation charges (credits) (70) (160) 241
Pensions (338) (132) (221)
Postretirement benefits other than pensions 12 76 121
Deferred income taxes (68) 188 (150)
Gain on disposal of assets (30) (188) (253)
Payment of amortized discount on zero coupon debentures (129) - -
Restructuring charges (credits) (6) 37 42
Impairment of long-lived assets 675 - -
Changes in: Current receivables - sold (10) 10 50
- operating turnover (74) (207) (72)
Inventories 40 (26) 57
Current accounts payable and accrued expenses 195 (508) 192
All other items - net (10) 93 (13)
------- ------- -------
Net cash provided from operating activities 1,632 817 952
------- ------- -------
INVESTING ACTIVITIES:
Capital expenditures (1,016) (1,033) (1,151)
Disposal of assets 157 293 469
All other items - net 4 (14) (19)
------- ------- -------
Net cash used in investing activities (855) (754) (701)
------- ------- -------
FINANCING ACTIVITIES:
Commercial paper and revolving credit arrangements - net (117) (151) (914)
Other debt - borrowings 52 513 803
- repayments (446) (821) (347)
Issuance of preferred stock of subsidiary - 242 -
Issuance of common stock of subsidiary - 11 -
Preferred stock - issued - - 336
- redeemed (105) - -
Common stock - issued 218 223 372
- repurchased (1) - (1)
Dividends paid (295) (301) (288)
------- ------- -------
Net cash used in financing activities (694) (284) (39)
------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - 1 (1)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 83 (220) 211
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 48 268 57
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 131 $ 48 $ 268
- - -------------------------------------------------------------------------------------------------
</TABLE>
See Note 19, page U-22, for supplemental cash flow information.
The accompanying notes are an integral part of these consolidated financial
statements.
U-7
<PAGE> 73
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
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. (See Note 8, page U-13 for a description of the three groups.)
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
---------------------------------- --------------------------
1995 1994 1993 1995 1994 1993
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PREFERRED STOCKS (Note 20, page U-22):
Adjustable Rate Cumulative:
Outstanding at beginning of year 2,100 2,100 2,100 $ 105 $105 $105
Redeemed (2,100) - - (105) - -
------- ------- ------- ----- ---- ----
Outstanding at end of year - 2,100 2,100 $ - $105 $105
- - -----------------------------------------------------------------------------------------------------------
6.50% Cumulative Convertible:
Outstanding at beginning of year 6,900 6,900 - $ 7 $ 7 $ -
Issued in public offering - - 6,900 - - 7
------- ------- ------- ----- ---- ----
Outstanding at end of year 6,900 6,900 6,900 $ 7 $ 7 $ 7
- - -----------------------------------------------------------------------------------------------------------
COMMON STOCKS:
Marathon Stock:
Outstanding at beginning of year 287,186 286,613 286,563 $ 287 $287 $286
Issued for:
Acquisition of assets - 573 - - - -
Employee stock plans 212 - 38 - - 1
Dividend Reinvestment Plan - - 12 - - -
------- ------- ------- ----- ---- ----
Outstanding at end of year 287,398 287,186 286,613 $ 287 $287 $287
- - -----------------------------------------------------------------------------------------------------------
Steel Stock:
Outstanding at beginning of year 75,970 70,329 59,743 $ 76 $ 70 $ 60
Issued in public offering 5,000 5,000 10,000 5 5 10
Issued for:
Employee stock plans 1,681 562 511 2 1 -
Dividend Reinvestment Plan 391 79 75 - - -
------- ------- ------- ----- ---- ----
Outstanding at end of year 83,042 75,970 70,329 $ 83 $ 76 $ 70
- - -----------------------------------------------------------------------------------------------------------
Delhi Stock:
Outstanding at beginning of year 9,438 9,283 9,005 $ 9 $ 9 $ 9
Issued for employee stock plans 9 155 278 - - -
------- ------- ------- ----- ---- ----
Outstanding at end of year 9,447 9,438 9,283 $ 9 $ 9 $ 9
- - -----------------------------------------------------------------------------------------------------------
</TABLE>
(Table continued on next page)
U-8
<PAGE> 74
<TABLE>
<CAPTION>
Shares in thousands Dollars in millions
------------------------------ --------------------------------
1995 1994 1993 1995 1994 1993
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TREASURY COMMON STOCKS, AT COST:
Marathon Stock:
Balance at beginning of year - (31) - $ - $ (1) $ -
Repurchased (40) (16) (31) (1) - (1)
Reissued for:
Acquisition of assets - 46 - - 1 -
Employee stock plans 40 1 - 1 - -
--- --- --- ------ ------ ------
Balance at end of year - - (31) $ - $ - $ (1)
- - ---------------------------------------------------------------------------------------------------------------
Steel Stock:
Balance at beginning of year - - - $ - $ - $ -
Repurchased (15) - (6) - - -
Reissued for employee stock plans 15 - 6 - - -
--- --- --- ------ ------ ------
Balance at end of year - - - $ - $ - $ -
- - ---------------------------------------------------------------------------------------------------------------
Delhi Stock:
Balance at beginning of year - - - $ - $ - $ -
Repurchased (2) - - - - -
Reissued for employee stock plans 2 - - - - -
--- --- --- ------ ------ ------
Balance at end of year - - - $ - $ - $ -
- - ---------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year $4,168 $4,240 $3,834
Marathon Stock issued 4 10 1
Steel Stock issued 227 219 360
Delhi Stock issued - 2 5
6.50% Convertible Preferred Stock issued - - 329
Dividends on preferred stock (28) (31) (27)
Dividends on Marathon Stock (per share $.68) (195) (195) (195)
Dividends on Steel Stock (per share $1.00) (80) (75) (65)
Dividends on Delhi Stock (per share $.20) (2) (2) (2)
------ ------ ------
Balance at end of year $4,094 $4,168 $4,240
- - ---------------------------------------------------------------------------------------------------------------
ACCUMULATED DEFICIT:
Balance at beginning of year $ (330) $ (831) $ (572)
Net income (loss) 214 501 (259)
------ ------ ------
Balance at end of year $ (116) $ (330) $ (831)
- - ---------------------------------------------------------------------------------------------------------------
OTHER EQUITY ADJUSTMENTS:
Foreign currency adjustments (Note 24, page U-25) $ (8) $ (9) $ (7)
Deferred compensation adjustments (Note 21, page U-23) (5) - (1)
Minimum pension liability adjustments (Note 9, page U-15) (23) (11) (14)
------ ------ ------
Total other equity adjustments $ (36) $ (20) $ (22)
- - ---------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $4,328 $4,302 $3,864
- - ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
U-9
<PAGE> 75
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, if any, are carried at
lower of cost or market and investments in other companies are carried at
cost, with income recognized when dividends are received.
USE OF ESTIMATES - Generally accepted accounting principles require
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at year-end and the reported amounts of revenues and expenses during the year.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand
and on deposit and highly liquid debt instruments with maturities generally
of three months or less.
INVENTORIES - Inventories are carried at lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
DERIVATIVE INSTRUMENTS - USX engages in commodity and currency risk
management activities within the normal course of its businesses (Note 29, page
U-28). Management is authorized to manage exposure to price fluctuations
related to the purchase, production 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. Derivative instruments relating to fixed price sales of equity
production are marked-to-market in the current period and the related income
effects are included within operating income. All other changes in the market
value of derivative instruments are deferred, including both closed and open
positions, and are subsequently recognized in income, as sales or cost of
sales, in the same period as the underlying transaction. OTC swaps in general
are off-balance-sheet instruments. The effect of changes in the market indices
related to OTC swaps are recorded upon settlement and recognized in income with
the underlying transaction. The margin receivable accounts required for open
commodity contracts reflect changes in the market prices of the underlying
commodity and are settled on a daily basis. Premiums on all commodity-based
option contracts are initially recorded based on the amount paid or received;
the options' market value is subsequently recorded as a receivable or payable,
as appropriate.
Forward currency contracts are used to manage currency risks related to
anticipated revenues and operating costs, firm commitments for capital
expenditures and existing assets or liabilities denominated in a foreign
currency. Gains or losses related to firm commitments are deferred and
included with the underlying transaction; all other gains or losses are
recognized in income in the current period as sales, cost of sales, interest
income or expense, or other income, as appropriate. Net contract values are
included in receivables or payables, as appropriate.
Recorded deferred gains or losses are reflected within other noncurrent
assets or deferred credits and other liabilities. Cash flows from the use of
derivative instruments are reported in the same category as the hedged item
in the statement of cash flows.
EXPLORATION AND DEVELOPMENT - 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.
U-10
<PAGE> 76
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.
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. If recoveries of remediation costs from
third parties are probable, a receivable is recorded. Estimated abandonment
and dismantlement costs of offshore production platforms are accrued based on
production of estimated proved oil and gas reserves.
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.
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 and
related periodic costs are measured using actuarial techniques and assumptions
including appropriate discount rates and amortization of actuarial adjustments
over future periods. 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. 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 1995 classifications.
- - ------------------------------------------------------------------------------
2. SALES
The items below are included in sales and operating costs, with no
effect on income.
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consumer excise taxes on petroleum products
and merchandise $ 2,708 $ 2,542 $ 1,927
Matching crude oil and refined product
buy/sell transactions settled in cash 2,067 2,071 2,018
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
- - ------------------------------------------------------------------------------
3. RESTRUCTURING CHARGES (CREDITS)
In 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 was
completed in 1995 at higher than anticipated sales proceeds, resulting in a $6
million credit to operating income and a $5 million credit to other income.
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. The coal mine, which was
closed in 1994, was sold in 1995 with immaterial financial effects.
U-11
<PAGE> 77
- - ------------------------------------------------------------------------------
4. IMPAIRMENT OF LONG-LIVED ASSETS
At the beginning of the fourth quarter of 1995, USX adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121).
SFAS No. 121 requires that long-lived assets, including related goodwill, be
reviewed for impairment and written down to fair value whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable.
Adoption of SFAS No. 121 resulted in an impairment charge
included in operating costs of $675 million. The impaired assets primarily
include certain domestic and international oil and gas properties, an idled
refinery, surplus real estate and related goodwill.
USX assessed impairment of its oil and gas properties based
primarily on a field-by-field approach. The predominant method used to
determine fair value was a discounted cash flow approach and where available,
comparable market values were used. The impairment provision reduced
capitalized costs of oil and gas properties by $533 million.
In addition, the Indianapolis, Indiana refinery, which was
temporarily idled in October 1993, was impaired by $126 million, including
related goodwill. The impairment was based on a discounted cash flow approach
and comparable market value analysis.
Other long-lived assets written down included certain iron ore
mineral rights and surplus real estate holdings. The impairment charge
recognized for these assets was $16 million.
- - ------------------------------------------------------------------------------
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). 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).
- - ------------------------------------------------------------------------------
6. OTHER ITEMS
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OTHER INCOME:
Gain on disposal of assets $ 30 $ 188 (a) $ 253 (b)
Income (loss) from affiliates - equity method 89 64 (1)
Other income 9 9 5
----- ---- ----
Total $ 128 $ 261 $ 257
- - --------------------------------------------------------------------------------------------------------------------
INTEREST AND OTHER FINANCIAL INCOME:
Interest income $ 23 $ 18 $ 71 (b)
Other 15 6 7
---- ---- ----
Total 38 24 78
---- ---- ----
INTEREST AND OTHER FINANCIAL COSTS:
Interest incurred (406) (428) (455)
Less interest capitalized 13 58 105
---- ---- ----
Net interest (393) (370) (350)
Interest on litigation - (1) (170)(c)
Interest on tax issues (6)(d) 12 (e) (41)
Financial costs on preferred stock of subsidiary (22) (18) -
Amortization of discounts (28) (44) (37)
Expenses on sales of accounts receivable (Note 12, page U-18) (48) (35) (26)
Other (4) (5) (6)
---- ---- ----
Total (501) (461) (630)
NET INTEREST AND OTHER FINANCIAL COSTS $ (463) $ (437) $ (552)
- - ------------------------------------------------------------------------------------------------------------------
<FN>
(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) Includes $164 million related to the B&LE litigation (Note 5,
page U-12).
(d) Includes $20 million benefit related to refundable federal
income taxes paid in prior years.
(e) Includes a $35 million benefit related to the settlement of
various state tax issues.
</TABLE>
U-12
<PAGE> 78
- - -------------------------------------------------------------------------------
7. EXTRAORDINARY LOSS
In 1995, USX extinguished $553 million of debt prior to maturity, primarily
consisting of Zero Coupon Convertible Senior Debentures, with a carrying
value of $393 million, and $83 million of 8-1/2% Sinking Fund Debentures,
which resulted in an extraordinary loss of $7 million, net of a $4 million
income tax benefit.
- - -------------------------------------------------------------------------------
8. OPERATIONS AND 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 operations and
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. Marathon Group sales as a percentage of total
consolidated USX sales were 66% in 1995, 1994 and 1993. See five-year
operating data on page U-35.
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 and leasing and financing activities. U. S.
Steel Group sales as a percentage of total consolidated USX sales were
31% in 1995, 1994 and 1993. See five-year operating data on page U-36.
DELHI GROUP - The Delhi Group is engaged in the purchasing, gathering,
processing, transporting and marketing of natural gas. Delhi Group sales
as a percentage of total USX consolidated sales were 3% in 1995, 1994 and
1993. See five-year operating data on page U-37.
INDUSTRY SEGMENT:
<TABLE>
<CAPTION>
Sales (b) Depreciation,
------------------------------------- Operating Depletion
Unaffiliated Between Income and Capital
(In millions) Year Customers Groups(a) Total (Loss) Assets Amortization Expenditures
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Marathon Group: 1995 $13,817 $ 54 $13,871 $ 105 $10,109 $ 817 $ 642
1994 12,702 55 12,757 584 10,951 721 753
1993 11,915 47 11,962 169 10,822 727 910
- - ----------------------------------------------------------------------------------------------------------------------------------
U. S. Steel Group: 1995 6,456 - 6,456 481 6,521 318 324
1994 6,065 1 6,066 313 6,480 314 248
1993 5,611 1 5,612 (149) 6,629 314 198
- - ----------------------------------------------------------------------------------------------------------------------------------
Delhi Group: 1995 649 5 654 18 624 25 50
1994 563 4 567 (36) 521 30 32
1993 531 4 535 36 583 36 43
- - ----------------------------------------------------------------------------------------------------------------------------------
Eliminations: 1995 - (59) (59) - (511) - -
1994 - (60) (60) - (435) - -
1993 - (52) (52) - (620) - -
- - ----------------------------------------------------------------------------------------------------------------------------------
Total USX Corporation: 1995 $20,922 $ - $20,922 $ 604 $16,743 $1,160 $1,016
1994 19,330 - 19,330 861 17,517 1,065 1,033
1993 18,057 - 18,057 56 17,414 1,077 1,151
- - ----------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Intergroup sales and transfers were conducted on an arm's-length basis.
(b) Operating income (loss) includes 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 for the U. S. Steel Group
in 1993 and restructuring charges (credits) of $(6) million and $37 million
in 1995 and 1994, respectively, for the Delhi Group (Note 3, page U-11);
inventory market valuation charges (credits) for the Marathon Group of $(70)
million, $(160) million and $241 million in 1995, 1994 and 1993,
respectively (Note 18, page U-22); and in 1995, impairment of long-lived
asset charges of $659 million for the Marathon Group and $16 million for the
U. S. Steel Group (Note 4, page U-12).
</TABLE>
EXPORT SALES:
The information below summarizes export sales by geographic area for
the U. S. Steel Group. Export sales from domestic operations for the Marathon
Group and the Delhi Group were not material.
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - ------------------------------------------------------------
<S> <C> <C> <C>
Far East $338 $ 52 $ 38
Europe 142 107 117
Other 224 195 191
---- ---- ----
Total export sales $704 $354 $346
- - ------------------------------------------------------------
</TABLE>
U-13
<PAGE> 79
GEOGRAPHIC AREA:
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 Geographic Income
(In millions) Year Areas Areas Total (Loss) Assets
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Marathon Group:
United States 1995 $13,128 $ - $13,128 $ 121 $ 6,791
1994 12,270 - 12,270 525 7,533
1993 11,507 - 11,507 206 7,647
Europe 1995 718 12 730 109 2,372
1994 456 74 530 96 2,646
1993 371 - 371 16 2,511
Middle East and Africa 1995 21 32 53 (72) 205
1994 28 38 66 6 277
1993 77 31 108 13 313
Other International 1995 4 53 57 (53) 741
1994 3 20 23 (43) 495
1993 7 17 24 (66) 351
Eliminations 1995 - (97) (97) - -
1994 - (132) (132) - -
1993 - (48) (48) - -
Total Marathon Group 1995 $13,871 $ - $13,871 $ 105 $10,109
1994 12,757 - 12,757 584 10,951
1993 11,962 - 11,962 169 10,822
- - --------------------------------------------------------------------------------------------------------------------
U.S. Steel Group:
United States 1995 $ 6,437 $ 4 $ 6,441 $ 482 $ 6,492
1994 5,989 - 5,989 311 6,435
1993 5,489 - 5,489 (151) 6,563
International 1995 19 - 19 (1) 29
1994 77 - 77 2 45
1993 123 - 123 2 66
Eliminations 1995 - (4) (4) - -
1994 - - - - -
1993 - - - - -
Total U. S. Steel Group 1995 $ 6,456 $ - $ 6,456 $ 481 $ 6,521
1994 6,066 - 6,066 313 6,480
1993 5,612 - 5,612 (149) 6,629
- - --------------------------------------------------------------------------------------------------------------------
Delhi Group:
United States 1995 $ 654 $ - $ 654 $ 18 $ 624
1994 567 - 567 (36) 521
1993 535 - 535 36 583
- - --------------------------------------------------------------------------------------------------------------------
USX Corporation:
Intergroup Eliminations 1995 $ (59) $ - $ (59) $ - $ (511)
1994 (60) - (60) - (435)
1993 (52) - (52) - (620)
Total USX Corporation 1995 $20,922 $ - $20,922 $ 604 $16,743
1994 19,330 - 19,330 861 17,517
1993 18,057 - 18,057 56 17,414
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
U-14
<PAGE> 80
- - -----------------------------------------------------------------------------
9. 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, pension benefits under the
contributory benefit provisions cover certain participating salaried employees
and are based upon a percent of total career pensionable 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. During 1995, USX funded the U. S. Steel
Group's principal pension plan by selling Steel Stock to the public for net
proceeds of $169 million.
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
1995, 1994 and 1993 was determined assuming an expected long-term rate of
return on plan assets of 10%, 9% and 10%, respectively, and was as follows:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
USX major plans:
Cost of benefits earned during the period $ 85 $ 103 $ 90
Interest cost on projected benefit obligation
(8% for 1995; 6.5% for 1994; and 7% for 1993) 607 575 595
Return on assets - actual loss (return) (2,047) 10 (765)
- deferred gain (loss) 1,205 (818) (126)
Net amortization of unrecognized (gains) losses - 4 (12)
------ ------ -----
Total major plans (150) (126) (218)
Multiemployer and other USX plans 6 6 7
----- ----- -----
Total periodic pension credit (144) (120) (211)
Curtailment losses(a) 2 4 -
----- ----- -----
Total pension credit $ (142) $ (116) $ (211)
- - --------------------------------------------------------------------------------------------------------------------
<FN>
(a) The curtailment loss in 1995 resulted from the final
disposition of FWA Drilling Company, Inc., by the Marathon Group. The
curtailment loss in 1994 resulted from work force reduction programs
in the Marathon and Delhi Groups.
</TABLE>
FUNDS' STATUS - The assumed discount rate used to measure the benefit
obligations of major plans was 7% at December 31, 1995, and 8% at December 31,
1994. The assumed rate of future increases in compensation levels was 4% at
both year-ends. 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 1995 1994
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of funds' status to reported amounts:
Projected benefit obligation (PBO)(b) $ (8,536) $ (7,994)
Plan assets at fair market value(c) 9,523 8,210
-------- --------
Assets in excess of PBO(d) 987 216
Unrecognized net gain from transition (400) (476)
Unrecognized prior service cost 739 811
Unrecognized net loss 474 910
Additional minimum liability(e) (90) (76)
-------- --------
Net pension asset included in balance sheet $ 1,710 $ 1,385
- - --------------------------------------------------------------------------------------------------------------------
(b) PBO includes:
Accumulated benefit obligation (ABO) $ 7,934 $ 7,522
Vested benefit obligation 7,422 7,049
(c) Types of assets held:
USX stocks 1% 1%
Stocks of other corporations 55% 55%
U.S. Government securities 19% 22%
Corporate debt instruments and other 25% 22%
(d) Includes several small plans that have ABOs in excess of plan assets:
PBO $ (139) $ (159)
Plan assets 13 38
------- -------
PBO in excess of plan assets $ (126) $ (121)
(e) Additional minimum liability recorded was offset by the following:
Intangible asset $ 54 $ 59
Stockholders' equity adjustment - net of deferred income tax 23 11
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
U-15
<PAGE> 81
- - -------------------------------------------------------------------------------
10. 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, most
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 union agreement. In 1995, USX funded the initial $25 million
contribution and an additional $10 million, which is the minimum requirement in
each succeeding contract year.
POSTRETIREMENT BENEFIT COST - Postretirement benefit cost for defined benefit
plans for 1995, 1994 and 1993 was determined assuming discount rates of 8%, 6.5%
and 7%, respectively, and an expected return on plan assets of 10% for 1995, 9%
for 1994 and 10% for 1993:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost of benefits earned during the period $ 26 $ 37 $ 36
Interest on accumulated postretirement benefit obligation (APBO) 198 199 202
Return on assets - actual return (11) (8) (7)
- deferred loss (1) (2) (5)
Amortization of unrecognized (gains) losses (1) 16 12
---- ---- ----
Total defined benefit plans 211 242 238
Multiemployer plans(a) 15 21 9
---- ---- ----
Total periodic postretirement benefit cost 226 263 247
Curtailment and settlement gains(b) - (4) (24)
---- ---- ----
Total postretirement benefit cost $226 $259 $223
- - ----------------------------------------------------------------------------------------------------------------------------
<FN>
(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 $129 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, a settlement gain resulted from the sale of the
Cumberland coal mine.
</TABLE>
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 1995 1994
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reconciliation of funds' status to reported amounts:
Fair value of plan assets $ 116 $ 97
------- ------
APBO attributable to:
Retirees (1,938) (1,881)
Fully eligible plan participants (260) (238)
Other active plan participants (481) (476)
------- ------
Total APBO (2,679) (2,595)
------- ------
APBO in excess of plan assets (2,563) (2,498)
Unrecognized net (gain) loss 44 (9)
Unamortized prior service cost (6) (6)
------ ------
Accrued liability included in balance sheet $(2,525) $(2,513)
- - ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The assumed discount rate used to measure the APBO was 7% and 8% at
December 31, 1995, and December 31, 1994, 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 1996 is approximately 9%,
declining to an ultimate rate in 2003 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 1995 net periodic postretirement benefit cost by $28 million and would
have increased the APBO as of December 31, 1995, by $282 million.
U-16
<PAGE> 82
- - -----------------------------------------------------------------------------
11. INCOME TAXES
Provisions (credits) for estimated income taxes were:
<TABLE>
<CAPTION>
1995 1994 1993
----------------------------- ------------------------------ ---------------------------
(In millions) Current Deferred Total Current Deferred Total Current Deferred Total
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal $ 81 $ (68) $ 13 $ (16) $ 186 $ 170 $ 49 $(221) $ (172)
State and local 20 (31) (11) - (9) (9) 9 7 16
Foreign 15 31 46 12 11 23 20 64 84
----- ----- ---- ----- ----- ----- ---- ------ -----
Total $ 116 $ (68) $ 48 $ (4) $ 188 $ 184 $ 78 $ (150) $ (72)
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
In 1995, the extraordinary loss on extinguishment of debt
includes a tax benefit of $4 million (Note 7, page U-13).
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).
A reconciliation of federal statutory tax rate (35%) to total
provisions (credits) follows:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate applied to income (loss) before taxes $ 94 $ 240 $ (84)
Effects of foreign operations(a) (35) 9 (1)
Effects of partially-owned companies (14) (37) -
Nondeductible business expenses 9 6 2
Excess percentage depletion (8) (7) (8)
Goodwill 8 2 1
State and local income taxes after federal income tax effects (7) (5) 10
Dispositions of subsidiary investments (5) - (21)
Remeasurement of deferred income taxes for statutory rate increase - - 29
Adjustment of prior years' federal income taxes 1 (1) 8
Adjustment of valuation allowances 6 (24) (12)
Other (1) 1 4
---- ---- ----
Total provisions (credits) $ 48 $ 184 $ (72)
- - --------------------------------------------------------------------------------------------------------------------
<FN>
(a) Includes incremental tax benefits of $39 million in 1995 and
$64 million in 1993 resulting from USX's election to credit, rather
than deduct, certain foreign income taxes for federal income tax purposes.
</TABLE>
Deferred tax assets and liabilities resulted from the following:
<TABLE>
<CAPTION>
(In millions) December 31 1995 1994
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Federal tax loss carryforwards $ - $ 311
State tax loss carryforwards (expiring in 1996 through 2010) 138 152
Foreign tax loss carryforwards (portion of which expire in 2000 through 2010) 556 545
Minimum tax credit carryforwards 396 307
Foreign tax credit carryforwards (expiring in 1996 through 2000) 85 -
General business credit carryforwards (expiring in 1996 through 2010) 26 30
Employee benefits 1,233 1,229
Receivables, payables and debt 91 107
Expected federal benefit for:
Crediting certain foreign deferred income taxes 169 142
Deducting state and other foreign deferred income taxes 33 46
Contingency and other accruals 175 180
Other 122 120
Valuation allowances (424) (280)
------- -------
Total deferred tax assets 2,600 2,889
------- -------
Deferred tax liabilities:
Property, plant and equipment 2,230 2,733
Prepaid pensions 727 612
Inventory 240 219
Other 185 180
------- -------
Total deferred tax liabilities 3,382 3,744
------- -------
Net deferred tax liabilities $ 782 $ 855
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
USX expects to generate sufficient future taxable income to realize the
benefit of its net deferred tax assets. In addition, the ability to realize the
benefit of foreign tax credits is based upon certain assumptions concerning
future operating conditions (particularly as related to prevailing oil prices),
income generated from foreign sources and USX's tax profile in the years that
such credits may be claimed.
The consolidated tax returns of USX for the years 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 $(50) million, $14 million and $(53) million
attributable to foreign sources in 1995, 1994 and 1993, respectively.
U-17
<PAGE> 83
- - -------------------------------------------------------------------------------
12. SALES OF RECEIVABLES
USX has agreements (the programs) to sell an undivided interest in certain
accounts receivable subject to limited recourse. Payments are collected from the
sold accounts receivable; the collections are reinvested in new accounts
receivable for the buyers; and a yield, based on defined short-term market
rates, is transferred to the buyers. At December 31, 1995, the amount sold under
the programs that had not been collected was $740 million, which will be
forwarded to the buyers at the end of the agreements, or in the event of earlier
contract termination. If USX does not have a sufficient quantity of eligible
accounts receivable to reinvest in for the buyers, the size of the programs will
be reduced accordingly. The amounts sold under the programs averaged $744
million, $737 million and $733 million for years 1995, 1994 and 1993,
respectively. To facilitate collection, the buyers have rights to a pool of
receivables that must be maintained at a level of 110% to 115% of the programs'
size. 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 one of the agreements, USX may be required to forward to the buyers,
payments collected on sold accounts receivable of $350 million.
Prior to 1993, USX Credit, a division of USX, sold certain of
its loans receivable subject to limited recourse. 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 1995, 1994 and 1993,
USX Credit net repurchases of loans receivable totaled $5 million, $38 million
and $50 million, respectively. At December 31, 1995, the balance of sold loans
receivable subject to recourse was $72 million. Estimated credit losses under
the recourse provisions for loans receivable were recognized when the
receivables were sold consistent with bad debt experience. USX Credit is not
actively seeking new loans at this time, but is subject to market risk through
fluctuations in short term market rates on sold loans which pay fixed interest
rates. USX Credit significantly reduced credit risk through a credit policy,
which required 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 diversified 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, 1995, and December 31, 1994, USX Credit had outstanding loan
commitments of $2 million and $26 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.
As of December 31, 1995, and December 31, 1994, the total balance of USX
Credit real estate and equipment loans subject to impairment was $88 million
and $110 million, prior to recognizing allowance for credit losses of $32
million and $21 million, respectively. During 1995, 1994 and 1993, USX Credit
recognized additional credit losses of $15 million, $11 million and $11
million, respectively, which are included in operating costs.
U-18
<PAGE> 84
- - -------------------------------------------------------------------------------
13. LONG-TERM RECEIVABLES AND OTHER INVESTMENTS
<TABLE>
<CAPTION>
(In millions) December 31 1995 1994
- - -------------------------------------------------------------------------------
<S> <C> <C>
Receivables due after one year $ 76 $104
Forward currency contracts 28 70
Equity method investments 581 570
Cost method investments 33 33
Other 118 121
---- ----
Total $836 $898
- - -------------------------------------------------------------------------------
</TABLE>
Summarized financial information of affiliates accounted for by the
equity method of accounting follows:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Income data - year:
Sales $3,531 $3,237 $3,042
Operating income 339 333 212
Net income 187 156 21
- - --------------------------------------------------------------------------------
Balance sheet data - December 31:
Current assets $1,068 $1,072
Noncurrent assets 2,631 2,713
Current liabilities 784 942
Noncurrent liabilities 1,745 1,595
- - -------------------------------------------------------------------------------
</TABLE>
Dividends and partnership distributions received from equity affiliates
were $85 million in 1995, $44 million in 1994 and $22 million in 1993.
USX purchases from equity affiliates totaled $458 million, $431 million and
$390 million in 1995, 1994 and 1993, respectively. USX sales to equity
affiliates totaled $769 million, $681 million and $547 million in 1995, 1994 and
1993, respectively.
- - -------------------------------------------------------------------------------
14. SHORT-TERM CREDIT AGREEMENTS
USX had short-term credit agreements totaling $175 million at December 31, 1995.
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 $200 million
which require maintenance of compensating balances of 3%. No amounts were
outstanding under these agreements at December 31, 1995.
U-19
<PAGE> 85
- - -----------------------------------------------------------------------------
15. LONG-TERM DEBT
<TABLE>
<CAPTION>
Interest December 31
(In millions) Rates - % Maturity 1995 1994
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
USX Corporation:
Revolving credit(a) 5.97 1999 $ 60 $ -
Commercial paper(a) 6.22 133 350
Senior Notes 9 7/20 1996 100 100
Notes payable 6 3/8 - 9 4/5 1996 - 2023 2,548 2,550
Foreign currency obligations(b) 8 3/8 - 8 7/10 1996 - 1998 261 290
Zero Coupon Convertible Senior
Debentures(c) (Note 7, page U-13) 7 7/8 2005 37 409
Convertible Subordinated Debentures(d) 5 3/4 1997 - 2001 200 214
Convertible Subordinated Debentures(e) 7 1997 - 2017 227 238
Obligations relating to Industrial Development and
Environmental Improvement Bonds and Notes(f) 3 7/10 - 6 7/8 1996 - 2024 483 485
All other obligations, including sale-leaseback
financing and capital leases 1996 - 2012 110 114
Consolidated subsidiaries:
Guaranteed Notes 7 2002 135 135
Guaranteed Notes(a)(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 1996 - 2001 11 17
Sinking Fund Debentures (Note 7, page U-13) 8 1/2 1998 - 2006 140 223
All other obligations, including capital leases 1996 - 2009 78 82
------- ------
Total (i)(j)(k) 4,984 5,668
Less unamortized discount 47 69
Less amount due within one year 465 78
------- -------
Long-term debt due after one year $ 4,472 $ 5,521
- - --------------------------------------------------------------------------------------------------------------------
</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
Guaranteed Notes called in 1996 (Note (g)) were supported by the $2,265
million in unused and available credit at December 31, 1995, and,
accordingly, were classified as long-term debt.
(b) Foreign currency exchange agreements were executed in connection with
the Swiss franc obligations, which effectively fixed the principal repayment
at $160 million at December 31, 1995, and interest in U.S. dollars, thereby
eliminating currency exchange risks (Note 29, page U-28).
(c) At the option of the holders, USX purchased $393 million Zero Coupon
Convertible Senior Debentures in 1995. The outstanding debentures have a
principal at maturity of $79 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 $54 million on August 9, 2000; 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.
(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 1996 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, 1995, USX had outstanding obligations relating to
Environmental Improvement Bonds in the amount of $256 million, which were
supported by letter of credit arrangements that could become short-term
obligations under certain circumstances.
(g) The notes, which were called on January 18, 1996, will be redeemed at
par by USX on 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, for the
years 1997-2000 are $253 million, $528 million, $332 million (includes $161
million in Note (g)) and $90 million, respectively.
(j) In the event of a change in control of USX, as defined in the related
agreements, debt obligations totaling $3,618 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;
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 $113 million or provide a letter of credit to
secure the remaining obligation.
(k) At December 31, 1995, $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> 86
- - -------------------------------------------------------------------------------
16. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
(In millions) December 31 1995 1994
- - -------------------------------------------------------------------------------
<S> <C> <C>
Marathon Group $16,411 $16,268
U. S. Steel Group 8,421 8,490
Delhi Group 936 935
------- -------
Total 25,768 25,693
Less accumulated depreciation, depletion and amortization 15,233 14,211
------- -------
Net $10,535 $11,482
- - -------------------------------------------------------------------------------
</TABLE>
Property, plant and equipment includes gross assets acquired under
capital leases (including sale-leasebacks accounted for as financings) of
$154 million at December 31, 1995, and $155 million at December 31, 1994;
related amounts in accumulated depreciation, depletion and amortization were
$91 million and $82 million, respectively.
During the fourth quarter of 1995, USX adopted SFAS No. 121, resulting
in $650 million impairment charges relating to the write-down of property,
plant and equipment (Note 4, page U-12).
- - -------------------------------------------------------------------------------
17. 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>
1996 $ 14 $ 160
1997 14 138
1998 15 118
1999 13 81
2000 13 156
Later years 169 367
Sublease rentals - (20)
---- ------
Total minimum lease payments 238 $1,000
======
Less imputed interest costs 105
----
Present value of net minimum lease payments
included in long-term debt $133
- - --------------------------------------------------------------------
</TABLE>
Operating lease rental expense:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - -------------------------------------------------------------
<S> <C> <C> <C>
Minimum rental $196 $213 $208
Contingent rental 47 50 52
Sublease rentals (8) (7) (9)
---- ---- ----
Net rental expense $235 $256 $251
- - -------------------------------------------------------------
</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 $166 million may be declared immediately due and payable.
U-21
<PAGE> 87
- - -------------------------------------------------------------------------------
18. INVENTORIES
<TABLE>
<CAPTION>
(In millions) December 31 1995 1994
- - -------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 609 $ 568
Semi-finished products 300 336
Finished products 901 930
Supplies and sundry items 163 187
------ ------
Total (at cost) 1,973 2,021
Less inventory market valuation reserve 209 279
------ ------
Net inventory carrying value $1,764 $1,742
- - -------------------------------------------------------------------------------
</TABLE>
At December 31, 1995, and December 31, 1994, the LIFO method accounted
for 90% and 88%, respectively, of total inventory value. Current acquisition
costs were estimated to exceed the above inventory values at December 31
by approximately $320 million and $260 million in 1995 and 1994, 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 result in charges or
credits to operating income.
Cost of sales was reduced and operating income was increased $13 million
and $11 million in 1994 and 1993, respectively, as a result of liquidations
of LIFO inventories (immaterial in 1995).
- - -------------------------------------------------------------------------------
19. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED FROM (USED IN) OPERATING ACTIVITIES INCLUDED:
Interest and other financial costs paid
(net of amount capitalized) $ (605) $ (577) $ (501)
Income taxes (paid) refunded (170) 16 (78)
- - -------------------------------------------------------------------------------
COMMERCIAL PAPER AND REVOLVING CREDIT ARRANGEMENTS - NET:
Commercial paper - issued $ 2,434 $ 1,515 $ 2,229
- repayments (2,651) (1,166) (2,598)
Credit agreements - borrowings 4,719 4,545 1,782
- repayments (4,659) (5,045) (2,282)
Other credit arrangements - net 40 - (45)
------- ------- -------
Total $ (117) $ (151) $ (914)
- - -------------------------------------------------------------------------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for dividend reinvestment
and employee stock option plans $ 21 $ 4 $ 5
Contribution of assets to an equity affiliate - 26 -
Acquisition of assets - stock issued - 11 -
- debt issued - 58 -
Disposal of assets - notes and common
stock received 9 3 9
- liabilities assumed
by buyers - - 47
Decrease in debt resulting from the adoption of
equity method accounting for RMI - 41 -
Debt exchanged for debt - 58 77
- - -------------------------------------------------------------------------------
</TABLE>
- - -------------------------------------------------------------------------------
20. PREFERRED STOCK
USX is authorized to issue 40,000,000 shares of preferred stock, without par
value:
ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK - In 1995, all of the outstanding
shares of this preferred stock were redeemed at $50 per share or $105 million.
In 1995, dividend rates on an annualized basis ranged from 7.50% to 8.35% during
the period the stock was outstanding.
6.50% CUMULATIVE CONVERTIBLE PREFERRED STOCK (6.50% CONVERTIBLE PREFERRED STOCK)
- - - As of December 31, 1995, 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> 88
- - -------------------------------------------------------------------------------
21. 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 may 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. Certain options contain 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. Those restrictions 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, 1995, 5,621,367 Marathon Stock shares, 1,676,218 Steel Stock shares and
75,606 Delhi Stock shares were available for grants in 1996.
The following table presents a summary of stock option 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, 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 5,178,350 $17.00-29.88 720,300 $14.77-44.19 192,800 $15.44-20.00
Granted 577,950 19.44-19.50 361,750 31.69-33.81 67,100 10.25-12.69
Exercised (22,700) 17.00-18.63 (8,680) 14.77-24.97 - -
Canceled (677,050) 17.00-29.88 (16,720) 14.77-44.19 - -
--------- ------------ --------- ------------ ------- ------------
Balance December 31, 1995(a) 5,056,550 $17.00-29.88 1,056,650 $14.77-44.19 259,900 $10.25-20.00
- - ----------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Virtually all outstanding options are exercisable.
</TABLE>
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
------------------------------- ------------------------------- ---------------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January 1 84,214 150,301 227,050 34,108 50,803 71,050 2,500 3,000 -
Granted 232,828 9,998 7,915 146,054 10,457 7,145 10,000 500 3,000
Earned (64,963) (75,385) (63,364) (30,089) (27,012) (22,812) (1,500) (1,000) -
Canceled (19,251) (700) (21,300) (4,019) (140) (4,580) (1,000) - -
------- ------- ------- ------- ------ ------ ------ ----- -----
Balance December 31 232,828 84,214 150,301 146,054 34,108 50,803 10,000 2,500 3,000
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
U-23
<PAGE> 89
- - -------------------------------------------------------------------------------
22. 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, 1995, the Available Steel Dividend Amount was at
least $2,588 million, and the Available Delhi Dividend Amount was at least
$102 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.
- - -------------------------------------------------------------------------------
23. 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, prior to June 15, 1995, had designated
14,003,205 shares of Delhi Stock to represent 100% of the common stockholders'
equity value of USX attributable to the Delhi Group. The Delhi Fraction was
the percentage interest in the Delhi Group represented by the shares of Delhi
Stock that were outstanding at any particular time and, based on 9,438,391
outstanding shares at June 14, 1995, was approximately 67%. The Marathon Group
financial statements reflected a percentage interest in the Delhi Group of
approximately 33% (Retained Interest) through June 14, 1995. On June 15, 1995,
USX eliminated the Marathon Group's Retained Interest in the Delhi Group
(equivalent to 4,564,814 shares of Delhi Stock). This was accomplished through
a reallocation of assets and a corresponding adjustment to debt and equity
attributed to the Marathon and Delhi Groups. The reallocation was made at a
price of $12.75 per equivalent share of Delhi Stock, or an aggregate of $58
million, resulting in a corresponding reduction of the Marathon Group debt.
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 (loss) applicable to the Retained Interest prior to June
15, 1995; and is based on the weighted average number of common shares
outstanding plus common stock equivalents, provided they are not antidilutive.
Common stock equivalents result from assumed exercise of stock options, where
applicable.
Fully diluted net income (loss) per share assumes conversion of
convertible securities for the applicable periods outstanding and assumes
exercise of stock options, provided in each case, the effect is not
antidilutive.
U-24
<PAGE> 90
- - -------------------------------------------------------------------------------
24. 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 1995, 1994 and 1993, respectively, the aggregate
foreign currency transaction gains (losses) included in determining net income
were $3 million, $(6) million and $(3) million. An analysis of changes in
cumulative foreign currency translation adjustments follows:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative adjustments at January 1 $(9) $(7) $(8)
Aggregate adjustments for the year:
Foreign currency translation adjustments 1 (2) -
Amount related to disposition of investments - - 1
--- --- ---
Cumulative adjustments at December 31 $(8) $(9) $(7)
- - -------------------------------------------------------------------------------
</TABLE>
- - -------------------------------------------------------------------------------
25. 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.
- - -------------------------------------------------------------------------------
26. 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.
- - -------------------------------------------------------------------------------
27. 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
Two remaining plaintiffs in this litigation 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.
See Note 5, page U-12.
U-25
<PAGE> 91
Fairfield Agreement litigation
In 1990, USX and two former officials of the United Steelworkers of
America (USWA) were convicted of violating Section 302 of the Taft-Hartley
Act by reason of USX's grant of retroactive leaves of absence to
union officials, which qualified them to receive pensions from USX. In
addition, USX was convicted of mail fraud in the same proceedings. The U.S.
District Court imposed a $4.1 million fine on USX and ordered USX to make
restitution to the United States Steel and Carnegie Pension Fund of
approximately $300,000. The verdict was affirmed on appeal and, in 1995, the
fine and the restitution were paid. In a separate proceeding, a former
executive officer of USX pleaded guilty to a related misdemeanor.
A related civil class action was commenced against USX and the
USWA in 1989 (Cox, et al. v. USX, et al.) and was dismissed by the trial court
by entry of summary judgment in favor of USX and USWA in 1991. The summary
judgment was reversed by the U.S. Court of Appeals for the 11th Circuit in
1994, and the matter reinstated and returned to the trial court. In that civil
class action, the plaintiffs' complaint asserts five causes of action arising
out of conduct that was the subject of USX's 1990 criminal conviction and that
allegedly relates to the negotiation of a 1983 local labor agreement, which
resulted in the reopening of USX's Fairfield Works in 1984. The causes of
action include claims asserted under the Racketeer Influenced and Corrupt
Organization Act (RICO) and the Employee Retirement Income Security Act
(ERISA), specifically alleging that USX granted leaves of absence and pensions
to union officials with intent to influence their approval, implementation and
interpretation of the 1983 Fairfield Agreement. Plaintiffs' claims seek
damages in excess of $276 million, which may be subject to trebling. USX and
USWA have denied any liability to the plaintiffs and are vigorously defending
these claims. A jury trial is currently scheduled to begin on September 30,
1996, in the U.S. District Court for the Northern District of Alabama.
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 December 31, 1995, and December 31, 1994,
accrued liabilities for remediation totaled $153 million and $186 million,
respectively. It is not presently possible to estimate the ultimate amount of
all remediation costs that might be incurred or the penalties that may be
imposed. Receivables for recoverable costs from certain states, under
programs to assist companies in cleanup efforts related to underground
storage tanks at retail marketing outlets, were $22 million at December 31,
1995, and $7 million at December 31, 1994.
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 1995 and 1994, such capital expenditures totaled $111 million
and $132 million, respectively. USX anticipates making additional such
expenditures in the future; however, the exact amounts and timing of such
expenditures are uncertain because of the continuing evolution of specific
regulatory requirements.
At December 31, 1995, and December 31, 1994, accrued liabilities for
platform abandonment and dismantlement totaled $128 million and $127 million,
respectively.
GUARANTEES -
Guarantees by USX of the liabilities of affiliated and other entities
totaled $68 million at December 31, 1995, and $190 million at December
31, 1994. 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
potential losses resulting from these guarantees. As of December 31, 1995, the
largest guarantee for a single affiliate was $31 million.
At December 31, 1995, and December 31, 1994, USX's pro rata share of
obligations of LOOP INC. and various pipeline affiliates secured by throughput
and deficiency agreements totaled $187 million and $197 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.
U-26
<PAGE> 92
COMMITMENTS -
At December 31, 1995, and December 31, 1994, contract commitments for
capital expenditures for property, plant and equipment totaled $299 million
and $283 million, respectively.
USX entered into a 15-year take-or-pay arrangement in 1993, which
requires USX to accept pulverized coal each month or pay a minimum
monthly charge of approximately $1.3 million. Charges for deliveries of
pulverized coal in 1995 and 1994 totaled $24 million in each year. If USX
elects to terminate the contract early, a maximum termination payment of $122
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 $72 million in 1995
and $70 million in 1994, 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.
- - -------------------------------------------------------------------------------
28. 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 29, page U-28, by individual balance
sheet account:
<TABLE>
<CAPTION>
1995 1994
----------------- -----------------
FAIR CARRYING Fair Carrying
(In millions) December 31 VALUE AMOUNT Value Amount
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 131 $ 131 $ 48 $ 48
Receivables 1,131 1,131 1,100 1,100
Long-term receivables and other investments 154 118 180 146
------ ------ ------ ------
Total financial assets $1,416 $1,380 $1,328 $1,294
====== ====== ====== ======
FINANCIAL LIABILITIES:
Notes payable $ 40 $ 40 $ 1 $ 1
Accounts payable 2,157 2,157 1,873 1,873
Accrued interest 122 122 128 128
Long-term debt (including amounts due within one year) 5,103 4,803 5,369 5,462
------ ------ ------ ------
Total financial liabilities $7,422 $7,122 $7,371 $7,464
- - ----------------------------------------------------------------------------------------------------------------------------
</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 12, page U-18. For
details relating to financial guarantees see Note 27, page U-25.
U-27
<PAGE> 93
- - -----------------------------------------------------------------------------
29. DERIVATIVE INSTRUMENTS
USX uses commodity-based derivative instruments to manage exposure to price
fluctuations related to the anticipated purchase or production and sale of crude
oil, natural gas and refined products. The derivative instruments used, as a
part of its overall risk management program, include exchange-traded futures
contracts and options, and instruments which require settlement in cash such
as OTC commodity swaps and OTC options. While risk management activities
generally reduce market risk exposure due to unfavorable commodity price
changes for raw material purchases and products sold, such activities can
also encompass strategies which assume certain price risk in isolated
transactions.
USX uses forward currency contracts to eliminate the exposure to currency
price fluctuations relating to Swiss franc debt obligations. The forward
currency contracts effectively fix the principal and interest payments in U.S.
dollars at the time of maturity.
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 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, 1995:
Exchange-traded commodity futures $ - $ - $ (5) $ 79
Exchange-traded commodity options - - - 8
OTC commodity swaps(c) 3 (d) (1) (4) 184
OTC commodity options - - - 6
----- ----- ------ -----
Total commodities $ 3 $ (1) $ (9) $ 277
===== ===== ====== =====
Forward currency contracts(e):
- receivable $ 104 $ 100 $ - $ 160
- payable 1 1 - 24
----- ----- ------ -----
Total currencies $ 105 $ 101 $ - $ 184
- - --------------------------------------------------------------------------------------------------------------------
December 31, 1994:
Exchange-traded commodity futures $ - $ - $ - $ 80
Exchange-traded commodity options - - - 43
OTC commodity swaps - (d) - 1 263
----- ----- ------ -----
Total commodities $ - $ - $ 1 $ 386
===== ===== ====== =====
Forward currency contracts:
- receivable $ 84 $ 81 $ - $ 215
- payable (4) (4) (3) 37
----- ----- ------ -----
Total currencies $ 80 $ 77 $ (3) $ 252
- - --------------------------------------------------------------------------------------------------------------------
<FN>
(a) The fair value amounts for OTC positions are based on various indices or
dealer quotes. The fair value amounts for currency contracts are based on
dealer quotes of forward prices covering the remaining duration of the
foreign exchange contract. The exchange-traded instruments do not have a
corresponding fair value since changes in the market prices of futures or
option contracts are settled on a daily basis.
(b) Contract or notional amounts do not quantify risk exposure, but are used
in the calculation of cash settlements under the contracts. The contract
or notional amounts do not reflect the extent to which positions may
offset one another.
(c) The OTC swap arrangements vary in duration with certain contracts
extending up to one year.
(d) Includes fair values as of December 31, 1995 and 1994, for assets of $10
million and $11 million and for liabilities of $(7) million and $(11)
million, respectively.
(e) The forward currency contracts mature in 1996-1998.
</TABLE>
U-28
<PAGE> 94
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
--------------------------------------- ---------------------------------------------
(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 $5,369 $5,237 $5,278 $5,038 $5,173 $5,123 $4,761 $4,273
Operating income (loss) (436) 303 383 354 234 225 198 204
Operating costs include:
Inventory market valuation
charges (credits) (35) 51 2 (88) (2) 63 (93) (128)
Restructuring charges
(credits) - - (6) - - - 37 -
Impairment of long-lived
assets 675 - - - - - - -
Income (loss) before
extraordinary loss (302) 179 190 154 128 191 107 75
NET INCOME (LOSS) (304) 174 190 154 128 191 107 75
- - --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1995 1994
--------------------------------------- ---------------------------------------------
(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:
Income (loss) before
extraordinary loss
applicable to
Marathon Stock $ (365) $ 96 $ 107 $ 75 $ 35 $ 101 $ 70 $ 109
-Per share: primary and
fully diluted (1.27) .33 .37 .26 .12 .35 .25 .38
Dividends paid per share .17 .17 .17 .17 .17 .17 .17 .17
Price range of Marathon Stock(a):
-Low 17-1/2 19-1/4 17-1/8 15-3/4 16-3/8 16-3/4 15-5/8 16-3/8
-High 20-1/8 21-1/2 20-1/4 17-5/8 19-1/8 18-3/8 18 18-5/8
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1995 1994
--------------------------------------- ------------------------------------------
(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:
Income (loss) before
extraordinary loss
applicable to Steel Stock $ 57 $ 80 $ 74 $ 68 $ 84 $ 84 $ 49 $ (41)
-Per share: primary .68 .99 .99 .89 1.11 1.11 .65 (.56)
fully diluted .68 .95 .95 .86 1.05 1.05 .64 (.56)
Dividends paid per share .25 .25 .25 .25 .25 .25 .25 .25
Price range of Steel Stock(a):
-Low 29-1/8 30-5/8 29-1/4 30 32-7/8 32-7/8 30-1/4 36-1/8
-High 33-5/8 39 34-3/4 39-1/8 42-3/8 43 38-1/2 45-5/8
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1995 1994
--------------------------------------- ------------------------------------------
(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:
Income (loss) before
extraordinary loss
applicable to Delhi Stock $ 1 $ (4) $ 1 $ 3 $ 1 $ (1) $ (21) $ -
-Per share: primary and
fully diluted .17 (.44) .12 .30 .09 (.07) (2.27) .03
Dividends paid per share .05 .05 .05 .05 .05 .05 .05 .05
Price range of Delhi Stock(a):
-Low 8-5/8 9-3/4 9-1/4 8 9-5/8 12-1/4 12-7/8 13-1/2
-High 10-5/8 11-7/8 13-1/8 10-1/8 13-3/4 15 15-7/8 17-7/8
- - -----------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Composite tape.
</TABLE>
U-29
<PAGE> 95
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(b) United States 50% Oilwell Equipment, Supplies
PRO-TEC Coating Company United States 50% Steel Processing
RMI Titanium Co. United States 51% 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, 1995.
(b) Sold in January 1996.
</TABLE>
Supplementary Information on Mineral Reserves (Unaudited)
MINERAL RESERVES (OTHER THAN OIL AND GAS)
<TABLE>
<CAPTION>
Reserves at December 31(a) Production
------------------------------------ ------------------------------------
(Million tons) 1995 1994 1993 1995 1994 1993
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Iron(b) 730.9 746.4 790.5 15.5 16.0 14.2
Coal(c) 862.8 928.1 945.1 7.5 7.5 8.9
- - -------------------------------------------------------------------------------------------------------------
<FN>
(a) Commercially recoverable reserves include demonstrated (measured and
indicated) quantities which are expressed in recoverable net product tons.
(b) In 1994, iron ore reserves were reduced 28.1 million tons as a result
of lease activity.
(c) In addition to production of reserves in 1995, coal reserves were
reduced by an additional 57.8 million tons consisting of 3.1 million
tons due to changes in estimate of recoverable amounts; 33.1 million
tons due to sales to other parties; and 21.6 million tons as a result
of lease activity and other changes. In 1994, coal reserves were
reduced 12.3 million tons as a result of lease activity, partially
offset by reserve revisions of 3.9 million tons.
</TABLE>
U-30
<PAGE> 96
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES, EXCLUDING
CORPORATE OVERHEAD AND INTEREST COSTS
<TABLE>
<CAPTION>
UNITED MIDDLE EAST OTHER
(In millions) STATES EUROPE AND AFRICA INTERNATIONAL TOTAL
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995: Revenues:
Sales $ 393 $ 646 $ 20 $ 4 $ 1,063
Transfers 706 - 32 52 790
------ ----- ---- ---- -------
Total revenues 1,099 646 52 56 1,853
Expenses:
Production costs (303) (202) (11) (12) (528)
Exploration expenses (68) (37) (13) (26) (144)
Depreciation, depletion and amortization(a) (361) (204) (29) (25 (619)
Other expenses (29) (5) (1) (3) (38)
------- ----- ---- ---- ------
Total expenses (761) (448) (54) (66) (1,329)
Gain (loss) on sale of assets - (2) - - (2)
------- ----- ---- ---- ------
Results before income taxes 338 196 (2) (10) 522
Income taxes (credits) 124 78 (2) (3) 197
------- ----- ---- ---- ------
Results of operations $ 214 $ 118 $ - $ (7) $ 325
- - --------------------------------------------------------------------------------------------------------------------
USX's share of equity investee's operations $ - $ 9 $ - $ - $ 9
- - --------------------------------------------------------------------------------------------------------------------
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 (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 (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
- - --------------------------------------------------------------------------------------------------------------------
<FN>
(a) Excludes charges of $465 million related to impairment of
long-lived assets.
</TABLE>
CAPITALIZED COSTS AND ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
<TABLE>
<CAPTION>
(In millions) December 31 1995 1994
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Capitalized costs:
Proved properties $12,423 $12,280
Unproved properties 429 448
------- -------
Total 12,852 12,728
------- -------
Accumulated depreciation, depletion and amortization:
Proved properties 7,143 6,301
Unproved properties 121 95
------- -------
Total 7,264 6,396
------- -------
Net capitalized costs $5,588 $6,332
- - --------------------------------------------------------------------------------------------------------------------
USX's share of equity investee's net capitalized costs $ 81 $ 85
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
U-31
<PAGE> 97
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) CONTINUED
COSTS INCURRED FOR PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT -
INCLUDING CAPITAL EXPENDITURES
<TABLE>
<CAPTION>
UNITED MIDDLE EAST OTHER
(In millions) STATES EUROPE AND AFRICA INTERNATIONAL TOTAL
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995: Property acquisition: Proved $ 13 $ - $ 1 $ - $ 14
Unproved 24 - - - 24
Exploration 100 42 22 30 194
Development 223 44 6 31 304
USX's share of equity investee's costs incurred - 9 - - 9
- - -------------------------------------------------------------------------------------------------------------
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
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
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 INTERNATIONAL TOTAL
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Liquid Hydrocarbons
Proved developed and undeveloped reserves:
Beginning of year - 1993 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
Purchase of reserves in place 2 - - - 2
Revisions of previous estimates (5) (8) (4) (1) (18)
Improved recovery 4 - - - 4
Extensions, discoveries and other additions 67 - 3 - 70
Production (48) (20) (3) (3) (74)
Sales of reserves in place (15) - - - (15)
--- --- -- -- ---
End of year - 1995 558 183 12 11 764
- - ------------------------------------------------------------------------------------------------------
Proved developed reserves:
Beginning of year - 1993 495 97 19 8 619
End of year - 1993 494 221 22 7 744
End of year - 1994 493 202 16 6 717
End of year - 1995 470 182 12 9 673
- - ------------------------------------------------------------------------------------------------------
</TABLE>
U-32
<PAGE> 98
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 INTERNATIONAL TOTAL
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Natural Gas
Proved developed and undeveloped reserves:
Beginning of year - 1993 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
Purchase of reserves in place 24 - - - 24
Revisions of previous estimates (17) (12) (3) - (32)
Improved recovery 1 - - - 1
Extensions, discoveries and other additions 313 26 - - 339
Production (231) (154) (5) - (390)
Sales of reserves in place (7) - - - (7)
----- ----- --- --- -----
End of year - 1995 2,210 1,344 35 - 3,589
- - ----------------------------------------------------------------------------------------------------------------------------------
Proved developed reserves:
Beginning of year - 1993 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
End of year - 1995 1,517 1,300 35 - 2,852
- - ----------------------------------------------------------------------------------------------------------------------------------
USX's share in proved developed and undeveloped
reserves of equity investee (CLAM):
End of year - 1993 - 153 - - 153
End of year - 1994 - 153 - - 153
End of year - 1995 - 131 - - 131
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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> 99
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, 1995:
Future cash inflows $12,944 $ 6,204 $268 $ 192 $19,608
Future production costs (4,397) (2,537) (60) (88) (7,082)
Future development costs (535) (74) (10) (12) (631)
Future income tax expenses (2,253) (901) (67) (19) (3,240)
------- ------- ---- ----- -------
Future net cash flows 5,759 2,692 131 73 8,655
10% annual discount for estimated
timing of cash flows (2,608) (1,039) (32) (14) (3,693)
------- ------- ---- ----- -------
Standardized measure of discounted
future net cash flows relating to
proved oil and gas reserves $ 3,151 $ 1,653 $ 99 $ 59 $ 4,962
- - ----------------------------------------------------------------------------------------------------------------------------------
USX's share of equity investee's
standardized measure of discounted
future net cash flows $ - $ 75 $ - $ - $ 75
- - ----------------------------------------------------------------------------------------------------------------------------------
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
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SUMMARY OF CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH
FLOWS RELATING TO PROVED OIL AND GAS RESERVES
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales and transfers of oil and gas produced, net of production costs $(1,325) $ (985) $ (852)
Net changes in prices and production costs related to future production 93 1,400 (1,656)
Extensions, discoveries and improved recovery, less related costs 852 316 443
Development costs incurred during the period 304 422 552
Changes in estimated future development costs (56) (265) (61)
Revisions of previous quantity estimates (116) (27) 19
Net change in purchases and sales of minerals in place (21) (39) (20)
Accretion of discount 624 497 608
Net change in income taxes 186 (300) 682
Other (155) (162) (319)
------- ------ -------
Net increase (decrease) in discounted future net cash flows 386 857 (604)
Beginning of year 4,576 3,719 4,323
------- ------ -------
End of year $ 4,962 $4,576 $ 3,719
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
U-34
<PAGE> 100
FIVE-YEAR OPERATING SUMMARY - MARATHON GROUP
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET LIQUID HYDROCARBON PRODUCTION (thousands of barrels per day)
United States 132 110 111 118 127
International - Europe 56 48 26 36 44
- Other 17 14 19 20 24
--------------------------------------------------
Total Worldwide 205 172 156 174 195
- - -----------------------------------------------------------------------------------------------------------------------
NET NATURAL GAS PRODUCTION (millions of cubic feet per day)
United States 634 574 529 593 689
International - Europe 483(a) 382 356 326 336
- Other 15 18 17 12 -
--------------------------------------------------
Total Consolidated 1,132 974 902 931 1,025
Equity production - CLAM Petroleum Co. 44 40 35 41 49
--------------------------------------------------
Total Worldwide 1,176 1,014 937 972 1,074
- - -----------------------------------------------------------------------------------------------------------------------
AVERAGE SALES PRICES
Liquid Hydrocarbons (dollars per barrel)
United States $14.59 $13.53 $14.54 $16.47 $17.43
International 16.66 15.61 16.22 18.95 19.38
Natural Gas (dollars per thousand cubic feet)
United States $ 1.63 $ 1.94 $ 1.94 $ 1.60 $ 1.57
International 1.80 1.58 1.52 1.77 2.18
- - -----------------------------------------------------------------------------------------------------------------------
NET PROVED RESERVES - YEAR-END
Liquid Hydrocarbons (millions of barrels)
Beginning of year 795 842 848 868 846
Extensions, discoveries and other additions 70 13 21 27 58
Improved recovery 4 6 24 12 27
Revisions of previous estimates (18) (6) 4 5 10
Net purchase (sale) of reserves in place (13) 2 2 (3) (3)
Production (74) (62) (57) (61) (70)
--------------------------------------------------
Total 764 795 842 848 868
- - -----------------------------------------------------------------------------------------------------------------------
Natural Gas (billions of cubic feet)
Beginning of year 3,654 3,748 3,866 4,077 4,265
Extensions, discoveries and other additions 339 303 248 147 167
Improved recovery 1 - 33 6 6
Revisions of previous estimates (32) (7) (23) 58 24
Net purchase (sale) of reserves in place 17 (45) (59) (84) (22)
Production (390) (345) (317) (338) (363)
-------------------------------------------------
Total 3,589 3,654 3,748 3,866 4,077
- - -----------------------------------------------------------------------------------------------------------------------
U.S. REFINERY OPERATIONS (thousands of barrels per day)
In-use crude oil capacity - year-end(b) 570 570 570 620 620
Refinery runs - crude oil refined 503 491 549 546 542
- other charge and blend stocks 94 107 102 79 85
In-use capacity utilization rate 88% 86% 90% 88% 87%
- - -----------------------------------------------------------------------------------------------------------------------
U.S. REFINED PRODUCT SALES (thousands of barrels per day)
Gasoline 445 443 420 404 403
Distillates 180 183 179 169 173
Propane 12 16 18 19 17
Feedstocks and special products 44 32 32 39 37
Heavy fuel oil 31 38 39 39 44
Asphalt 35 31 38 37 35
------------------------------------------------
Total 747 743 726 707 709
- - -----------------------------------------------------------------------------------------------------------------------
U.S. REFINED PRODUCT MARKETING OUTLETS - YEAR-END
Marathon operated terminals 51 51 51 52 53
Retail - Marathon Brand 2,380 2,356 2,331 2,290 2,106
- Emro Marketing Company 1,627 1,659 1,571 1,549 1,596
- - -----------------------------------------------------------------------------------------------------------------------
<FN>
(a) Includes gas acquired for injection and subsequent resale of 35 million
cubic feet per day.
(b) The 50,000 barrel per day Indianapolis Refinery was temporarily idled in
October 1993.
</TABLE>
U-35
<PAGE> 101
FIVE-YEAR OPERATING SUMMARY - U.S. STEEL GROUP
<TABLE>
<CAPTION>
(Thousands of net tons, unless otherwise noted) 1995 1994 1993 1992 1991
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RAW STEEL PRODUCTION
Gary, IN 7,163 6,768 6,624 5,969 5,817
Mon Valley, PA 2,740 2,669 2,507 2,276 2,088
Fairfield, AL 2,260 2,240 2,203 2,146 1,969
All other plants(a) - - - 44 648
---------------------------------------------------
Total Raw Steel Production 12,163 11,677 11,334 10,435 10,522
Total Cast Production 12,120 11,606 11,295 8,695 7,088
Continuous cast as % of total production 99.6 99.4 99.7 83.3 67.4
- - ----------------------------------------------------------------------------------------------------------------------------
RAW STEEL CAPABILITY (average)
Total capability 12,500 11,990 11,850 12,144 14,976
Total production as % of total capability 97.3 97.4 95.6 85.9 70.3
- - ----------------------------------------------------------------------------------------------------------------------------
HOT METAL PRODUCTION 10,521 10,328 9,972 9,270 8,941
- - ----------------------------------------------------------------------------------------------------------------------------
COKE PRODUCTION 6,770 6,777 6,425 5,917 5,091
- - ----------------------------------------------------------------------------------------------------------------------------
IRON ORE PELLETS - MINNTAC, MN
Production as % of capacity 86 90 90 83 84
Shipments 15,218 16,174 15,911 14,822 14,897
- - ----------------------------------------------------------------------------------------------------------------------------
COAL SHIPMENTS(b) 7,502 7,698 10,980 12,164 10,020
- - ----------------------------------------------------------------------------------------------------------------------------
STEEL SHIPMENTS BY PRODUCT
Sheet and tin mill products 9,267 8,728 8,364 7,514 7,592
Plate, tubular, structural and other
steel mill products(c) 2,111 1,840 1,605 1,340 1,254
---------------------------------------------------
Total 11,378 10,568 9,969 8,854 8,846
Total as % of domestic steel industry 11.7 11.1 11.3 10.8 11.2
- - ----------------------------------------------------------------------------------------------------------------------------
STEEL SHIPMENTS BY MARKET
Steel service centers 2,564 2,780 2,831 2,676 2,195
Further conversion:
Trade customers 1,084 1,058 1,150 1,104 930
Joint ventures 1,332 1,308 1,074 449 424
Transportation 1,636 1,952 1,771 1,553 1,282
Export 1,515 355 327 584 1,235
Containers 857 962 835 715 753
Oil, gas and petrochemicals 748 367 342 255 201
Construction 671 722 667 598 662
All other 971 1,064 972 920 1,164
---------------------------------------------------
Total 11,378 10,568 9,969 8,854 8,846
- - ----------------------------------------------------------------------------------------------------------------------------
<FN>
(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 1995, U. S.
Steel sold the Maple Creek coal mine, which was closed in 1994.
(c) U. S. Steel ceased production of structural products when South Works closed
in April 1992.
</TABLE>
U-36
<PAGE> 102
FIVE-YEAR OPERATING SUMMARY - DELHI GROUP
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SALES VOLUMES
Natural gas throughput (billions of cubic feet)
Natural gas sales 206.9 227.9 203.2 200.0 195.9
Transportation 109.7 99.1 117.6 103.4 81.0
---------------------------------------------------------
Total systems throughput 316.6 327.0 320.8 303.4 276.9
Trading sales 154.7 34.6 - - -
Partnerships - equity share(a)(b) 1.9 7.1 6.5 10.2 14.5
---------------------------------------------------------
Total sales volumes 473.2 368.7 327.3 313.6 291.4
---------------------------------------------------------
Natural gas throughput (millions of cubic feet per day)
Natural gas sales 567.0 624.5 556.7 546.4 536.7
Transportation 300.5 271.4 322.1 282.6 221.9
----------------------------------------------------------
Total systems throughput 867.5 895.9 878.8 829.0 758.6
Trading sales 423.9 94.7 - - -
Partnerships - equity share(a)(b) 5.2 19.6 17.9 27.8 39.7
----------------------------------------------------------
Total sales volumes 1,296.6 1,010.2 896.7 856.8 798.3
NGLs sales
Millions of gallons 289.2 275.8 282.0 261.4 214.7
Thousands of gallons per day 792.5 755.7 772.5 714.2 588.2
- - --------------------------------------------------------------------------------------------------------------------
GROSS UNIT MARGIN ($/mcf) $0.20 $0.26 $0.42 $0.44 $0.47
- - --------------------------------------------------------------------------------------------------------------------
PIPELINE MILEAGE (INCLUDING PARTNERSHIPS)
Arkansas(a) - 349 362 377 377
Colorado(c) - - - 91 91
Kansas(d) - - 164 164 164
Louisiana(d) - - 141 141 142
Oklahoma(a)(d) 2,820 2,990 2,908 2,795 2,819
Texas(b)(d) 4,110 4,060 4,544 4,811 4,764
--------------------------------------------------------
Total 6,930 7,399 8,119 8,379 8,357
- - --------------------------------------------------------------------------------------------------------------------
PLANTS - OPERATING AT YEAR-END
Gas processing 15 15 15 14 14
Sulfur 6 6 3 3 3
- - --------------------------------------------------------------------------------------------------------------------
DEDICATED GAS RESERVES - YEAR-END (billions of cubic feet)
Beginning of year 1,650 1,663 1,652 1,643 1,680
Additions 455 431 382 273 255
Production (317) (334) (328) (307) (275)
Revisions/Asset Sales (45) (110) (43) 43 (17)
-------------------------------------------------------
Total 1,743 1,650 1,663 1,652 1,643
- - --------------------------------------------------------------------------------------------------------------------
<FN>
(a) In 1995, the Delhi Group sold its 25% interest in Ozark Gas Transmission
System.
(b) In 1993, the Delhi Group sold its 25% interest in Red River Pipeline.
(c) In 1993, the Delhi Group sold its pipeline systems located in Colorado.
(d) In 1994, the Delhi Group sold certain pipeline systems associated with
the planned disposition of nonstrategic assets.
</TABLE>
U-37
<PAGE> 103
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 in 1995 increased $1,592 million or 8% versus 1994. The improvement
in 1995 reflected increases of 12% (excluding matching buy/sell transactions and
excise taxes), 6% and 15% in sales for the Marathon Group, U. S. Steel Group and
the Delhi Group, respectively. Sales in 1994 increased $1,273 million or 7%
versus 1993. In 1994 sales for the Marathon Group (excluding matching buy/sell
transactions and excise taxes), U. S. Steel Group and the Delhi Group increased
2%, 8% and 6%, respectively.
OPERATING INCOME decreased $257 million versus 1994. The 1995 results
included a $675 million fourth quarter noncash charge related to adoption of
Statement of Financial Accounting Standards No. 121 - Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
("SFAS No. 121"). Results in 1995 also included a $27 million charge related to
the settlement of Pickering v. USX litigation, a $34 million charge for the
repair of the Gary Works' No. 8 blast furnace, which was damaged by an explosion
on April 5, 1995, and $17 million in charges related to other litigation
accruals. These charges were partially offset by a $70 million favorable noncash
effect resulting from a decrease in the inventory market valuation reserve, $33
million of favorable adjustments pertaining to expected environmental
remediation recoveries and certain employee-related costs, and a $6 million
favorable adjustment related to the completion of the planned disposition of
certain Delhi Group nonstrategic gas gathering and processing assets. Results in
1994 included a $160 million favorable noncash effect resulting from a decrease
in the inventory market valuation reserve and a favorable $13 million related to
the sale of coal seam methane gas royalty interests, partially offset by $44
million of charges related to utility curtailments and other severe winter
weather complications, a caster fire at the Mon Valley Works and planned outages
for the modernization of the Gary Works' hot strip mill and pickle line and a
$37 million charge related to the planned disposition of certain Delhi Group
nonstrategic gas gathering and processing assets. Excluding the effect of these
items, operating income increased $479 million versus 1994. This reflected
increases of $255 million, $213 million and $11 million in operating results for
the Marathon Group, U. S. Steel Group and Delhi Group, respectively. See
Management's Discussion and Analysis of Operations by Industry Segment below.
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 effects of these items and
the 1994 items previously discussed, operating income increased $88 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.
Net pension credits included in operating income totaled $142 million in
1995, compared to $116 million in 1994 and $211 million in 1993. The increase in
1995 reflects an increase in the expected long-term rate of return on plan
assets, partially offset by an increase in the assumed discount rate and a
decline in the market-related value of plan assets. In 1996, net pension credits
are expected to increase by approximately $20 million. See Note 9 to the
Consolidated Financial Statements.
OTHER INCOME in 1995 decreased $133 million versus 1994. The decrease in
1995 was mainly due to lower gains from the disposal of assets, partially offset
by higher income from equity affiliates primarily at the U. S. Steel Group.
Other income in 1994 increased $4 million versus 1993. The slight increase in
1994 was mainly due to increased income from equity affiliates, partly offset by
lower gains from the disposal of assets.
Other income in 1993 included 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.
INTEREST AND OTHER FINANCIAL INCOME was $38 million in 1995, compared with
$24 million in 1994 and $78 million in 1993. The 1993 amount included $37
million of interest income resulting from collection of the Transtar note.
Excluding this item, interest and other financial income was $38 million in
1995, compared with $24 million in 1994 and $41 million in 1993.
INTEREST AND OTHER FINANCIAL COSTS increased $40 million in 1995 versus
1994. Interest and other financial costs in 1995 were reduced by $20 million for
interest on refundable federal income taxes paid in prior years. Interest and
other financial costs in 1994 included a $35 million favorable effect resulting
from settlement of various state tax issues. Excluding these items, interest and
other
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
financial costs increased $25 million in 1995, primarily due to lower
capitalized interest at the Marathon Group.
Interest and other financial costs in 1994 decreased $169 million versus
1993. Excluding the $35 million favorable effect previously mentioned, 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 Scottish Area Gas Evaluation System
("SAGE") in the United Kingdom ("U.K.") sector of the North Sea.
THE PROVISION FOR ESTIMATED INCOME TAXES in 1995 included a $39 million
incremental U.S. income tax benefit for foreign income tax payments. This
benefit results from USX Corporation's ("USX") election to credit, rather than
deduct, foreign income taxes for U.S. federal income tax purposes in 1995 and
certain prior years. The 1994 provision included a $32 million deferred tax
benefit related to an excess of tax over book basis in an equity affiliate, and
a $24 million credit for the reversal of a deferred tax valuation allowance. 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 U.S. foreign tax credit election 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 11 to the
Consolidated Financial Statements.
EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT of $7 million was recorded in
1995, representing the unfavorable aftertax effect of the early extinguishment
of debt. See discussion of Cash Flows herein.
NET INCOME of $214 million was recorded in 1995, compared with net income
of $501 million in 1994 and a net loss of $259 million in 1993. Excluding the
aftertax effect of charges for the adoption of SFAS No. 121 of $430 million in
1995 and the unfavorable cumulative effect of changes in accounting principles
which totaled $92 million in 1993, net income increased $143 million in 1995
from 1994, compared with an increase of $668 million in 1994 from 1993. The
changes in net income primarily reflect the factors discussed above.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
CURRENT ASSETS decreased $82 million from year-end 1994 primarily
reflecting a reduction in deferred income tax benefits, partially offset by
higher cash and cash equivalents and trade receivables balances. The decrease in
deferred income tax benefits primarily resulted from the utilization of federal
tax loss carryforwards and the effects of the temporary differences related to
the inventory market valuation reserve. The increase in cash and cash
equivalents resulted from higher cash from operating activities. The increase in
receivables primarily resulted from higher foreign currency contracts and notes
receivable.
PROPERTY, PLANT AND EQUIPMENT-NET decreased $947 million from year-end 1994
primarily reflecting the adoption of SFAS No. 121 which resulted in the
impairment of long-lived assets, as well as depreciation, asset sales and dry
well write-offs, partially offset by property additions.
PREPAID PENSIONS increased $335 million from year-end 1994 primarily due to
the funding of the U. S. Steel Group's principal pension plan and periodic
pension credits.
CURRENT LIABILITIES were $668 million higher at year-end 1995 mainly due to
the reclassification of various debt instruments from long-term debt to debt due
within one year and increases in accounts payable. The increase in accounts
payable primarily resulted from higher trade payables for all three groups.
TOTAL LONG-TERM DEBT AND NOTES PAYABLE decreased $623 million from year-end
1994. In 1995, USX extinguished $553 million of debt prior to maturity,
primarily consisting of Zero Coupon Debentures due 2005, with a carrying value
of $393 million ($264 million in original proceeds and $129 million of amortized
discount) and $83 million of 8-1/2% Sinking Fund Debentures, which resulted in
an extraordinary loss of $7 million, net of $4 million income tax effect.
At December 31, 1995, USX had outstanding borrowings of $60 million against
its long-term revolving credit agreement, leaving $2.265 billion of available
unused credit agreements. In addition, USX had short-term lines of credit
totaling $375 million, of which $175 million requires a commitment fee and the
other $200 million generally requires maintenance of compensating balances of
3%. For a discussion of these activities, see Management's Discussion and
Analysis of Cash Flows below.
LONG-TERM DEFERRED INCOME TAXES decreased $351 million from year-end 1994
primarily due to the effect of adoption of SFAS No. 121.
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
STOCKHOLDERS' EQUITY increased by $26 million from year-end 1994 mainly
reflecting 1995 net income and the issuance of additional common equity,
partially offset by dividend payments and the redemption of the Adjustable Rate
Cumulative Preferred Stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CASH FLOWS
NET CASH PROVIDED FROM OPERATING ACTIVITIES totaled $1,632 million in 1995,
compared with $817 million in 1994 and $952 million in 1993. The 1995 period
included payments of $169 million to fund the U. S. Steel Group's principal
pension plan and the $129 million portion of zero coupon debentures extinguished
representing amortized discount. The 1994 period was negatively affected by
payments of $367 million related to the B&LE litigation and payments of $124
million to settle various state tax issues. Excluding these items, net cash
provided from operating activities was $1,930 million in 1995, compared with
$1,308 million in 1994. The increase primarily reflected improved profitability
and favorable working capital changes.
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 and 1994 items discussed above, net cash
provided from operating activities was $1,308 million in 1994, compared with
$1,266 million in 1993.
CAPITAL EXPENDITURES were $1,016 million in 1995, compared with $1,033
million in 1994 and $1,151 million in 1993. 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 was largely due to decreased expenditures for the East Brae
Field and SAGE system in the U.K. and the substantial completion in 1993 of the
distillate hydrotreater complex at the Robinson, Illinois refinery. The $50
million increase for the U. S. Steel Group primarily reflected spending on a
degasser at Mon Valley Works and a granulated coal injection facility at
Fairfield Works' blast furnace, as well as spending related to the Gary Works'
No. 8 blast furnace. Contract commitments for capital expenditures at year-end
1995 were $299 million, compared with $283 million at year-end 1994.
Capital expenditures in 1996 are expected to total approximately $1.2
billion. The Marathon Group's capital expenditures are expected to increase
approximately $140 million to $800 million, reflecting downstream and domestic
upstream projects. The U. S. Steel Group's capital expenditures are expected to
remain at approximately the same level as 1995 at $320 million. The Delhi
Group's capital expenditures are expected to increase approximately $25 million
to $75 million, reflecting expansion of treating, gathering and transmission
facilities.
CASH FROM THE DISPOSAL OF ASSETS was $157 million in 1995, compared with
$293 million in 1994 and $469 million in 1993. The 1995 proceeds primarily
reflected sales of certain domestic oil and gas production properties and real
estate sales. 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.
FINANCIAL OBLIGATIONS decreased by $511 million in 1995, compared with a
decrease of $217 million in 1994 and a decrease of $458 million in 1993. These
amounts represent changes in balances outstanding of commercial paper, revolving
credit agreements, lines of credit, preferred stock of subsidiary and other
debt. In 1995, USX extinguished $553 million of debt, primarily consisting of
Zero Coupon Debentures due 2005, with a carrying value of $393 million ($264
million in original proceeds and $129 million of amortized discount) and $83
million of 8-1/2% Sinking Fund Debentures, which resulted in an extraordinary
loss of $7 million, net of $4 million income tax effect.
During 1995, USX issued $53 million of Variable Rate Environmental
Improvement Revenue Refunding Bonds due 2015 and 2017 to refinance Environmental
Improvement Bonds.
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%
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
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
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.
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
26 to the Consolidated Financial Statements.
USX currently has three effective shelf registration statements with the
Securities and Exchange Commission aggregating slightly more than $1 billion, of
which $750 million is dedicated to offer and issue debt securities, only. The
balance allows USX to offer and issue debt and/or equity securities.
In the event of a change of control of USX, debt and guaranteed obligations
totaling $4.2 billion at year-end 1995 may be declared immediately due and
payable or required to be collateralized. See Notes 12, 14, 15 and 17 to the
Consolidated Financial Statements.
PREFERRED STOCK REDEEMED totaled $105 million in 1995. USX redeemed
2,099,970 shares (stated value $50 per share) of its Adjustable Rate Cumulative
Preferred Stock for $50 per share.
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 $217 million in 1995,
compared with $223 million in 1994 and $371 million in 1993. The 1995 amount
mainly resulted from the sale of 5,000,000 shares of Steel Stock to the public
for net proceeds of $169 million. 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.
DIVIDEND PAYMENTS decreased slightly in 1995 primarily due to the third
quarter redemption of the Adjustable Rate Cumulative Preferred Stock, partially
offset by the additional shares of Steel Stock. Dividend payments increased in
1994 from 1993 primarily due to the first quarter sale of additional shares of
Steel Stock. This was 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 1995, net proceeds of $169 million from the public offering of 5,000,000
shares of Steel Stock were used to fund the U. S. Steel Group's principal
pension plan for the 1994 and a portion of the 1995 plan years. The funding for
the remainder of the 1995 plan year and the funding of all or a portion of the
1996 plan year, if any, will take place in 1996.
DEBT AND PREFERRED STOCK RATINGS
Moody's Investors Services, Inc. currently rates USX's and Marathon's
senior debt as investment grade at Baa3 and USX's subordinated debt and
preferred stock as Ba2. Duff & Phelps Credit Rating Co. currently rates USX's
senior notes as investment grade at BBB and USX's subordinated debt as BBB-.
Standard & Poor's Corp.'s ratings on USX's and Marathon's senior debt are
currently BB+. Their ratings on USX's subordinated debt and preferred stock are
BB-.
DERIVATIVE INSTRUMENTS
In the normal course of its business, USX is exposed to market risk, or
price fluctuations related to the purchase, production or sale of crude oil,
natural gas and refined products. USX uses commodity-based derivative
instruments such as exchange-traded futures contracts and options and
over-the-counter ("OTC") commodity swaps and options to manage exposure to
market risk. USX's strategic approach is to limit the use of these instruments
principally to hedging activities. Accordingly, gains and losses on futures
contracts and swaps generally offset the effects of price changes in the
underlying commodity. However, certain derivative instruments have the effect of
converting fixed price equity natural gas production volumes to variable
market-based pricing. These instruments are used as part of USX's overall risk
management programs.
While commodity-based derivative instruments are generally used to reduce
risks from unfavorable commodity price movements, they also may limit the
opportunity to benefit from favorable movements. USX's exchange-traded
derivative activities are conducted primarily on the New York Mercantile
Exchange ("NYMEX"). For quantitative information relating to derivative
instruments, including aggregate contract values and fair values, where
appropriate, see Note 29 to the Consolidated Financial Statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
USX is subject to basis risk, caused by factors that affect the
relationship between commodity futures prices reflected in derivative
instruments and the cash market price of the underlying commodity. Natural gas
transaction prices are frequently based on industry reference prices that may
vary from prices experienced in local markets. For example, NYMEX contracts for
natural gas are priced at Louisiana's Henry Hub, while the underlying quantities
of natural gas may be produced and sold in the Western United States at prices
that do not move in strict correlation with futures prices. To the extent that
commodity price changes in one region are not reflected in other regions,
derivative instruments may no longer provide the expected hedge, resulting in
increased exposure to basis risk. These regional price differences could yield
favorable or unfavorable results. OTC transactions are being used to manage
exposure to a portion of basis risk.
USX is also subject to currency risk, or price fluctuations related to
anticipated revenues and operating costs, firm commitments for capital
expenditures and existing assets or liabilities denominated in currencies other
than U.S. dollars. USX uses forward currency contracts to manage exposure to
currency price fluctuations relating to Swiss Franc debt obligations. These
contracts effectively fix the principal and interest payments in U.S. dollars at
the time of maturity. While derivative instruments are generally used to reduce
risks from unfavorable currency rate movements, they also may limit the
opportunity to benefit from favorable movements. For quantitative information
relating to forward currency contracts, see Note 29 to the Consolidated
Financial Statements.
USX is subject to liquidity risk, caused by timing delays in liquidating
contract positions due to a potential inability to identify a counterparty
willing to accept an offsetting position. Liquidity risk is relatively low for
exchange-traded transactions due to the large number of active participants.
USX is exposed to the credit risk of nonperformance by counterparties in
derivative transactions. Internal controls used to manage credit risk include
ongoing reviews of credit worthiness of counterparties and the use of master
netting agreements, to the extent practicable, and full performance is
anticipated.
Based on a strategic approach of limiting its use of derivative instruments
principally to hedging activities, combined with risk assessment procedures and
internal controls in place, management believes that its use of derivative
instruments does not expose USX to material risk, and that such use will not
have a material adverse effect on the financial position, liquidity or results
of operations of USX. See Note 1 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, 1995, and to complete currently
authorized capital spending programs. Future requirements for USX's business
needs, including the funding of capital expenditures and debt maturities 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 $465 million matures within one year. See Note 15 to the
Consolidated Financial Statements.
In January 1996, National-Oilwell, a joint venture between a subsidiary of
USX and National Supply Company, Inc., a subsidiary of Armco Inc., was sold. The
sale will not have a material impact on the U. S. Steel Group's income. USX's
share of the proceeds totaled $90 million, of which $83 million was received in
cash.
On January 18, 1996, USX announced that its Marathon Oil Company subsidiary
called for redemption of all the outstanding Marathon Oil Company 9-3/4 percent
Guaranteed Notes Due March 1, 1999 for approximately $161 million on March 1,
1996.
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. 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.
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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) 1995 1994 1993
- - ------------------------------------------------------------------------
<S> <C> <C> <C>
Capital
Marathon Group $ 50 $ 70 $123
U. S. Steel Group 55 57 53
Delhi Group 6 5 5
---- ---- ----
Total Capital $111 $132 $181
- - ------------------------------------------------------------------------
Compliance
Operating & Maintenance
Marathon Group $108 $106 $ 92
U. S. Steel Group 195 202 168
Delhi Group 4 6 5
---- ---- ----
Total Operating & Maintenance 307 314 265
Remediation(b)
Marathon Group 31 25 38
U. S. Steel Group 35 32 19
---- ---- ----
Total Remediation 66 57 57
Total Compliance $373 $371 $322
- - ------------------------------------------------------------------------
</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, net of recoveries.
USX's environmental capital expenditures accounted for 11%, 13% and 16% of
total consolidated capital expenditures in 1995, 1994 and 1993, respectively.
The decline over the three-year period was primarily the result of the Marathon
Group's multi-year capital spending program for refined product reformulation
and process changes in order to meet Clean Air Act obligations which began in
1990 and was substantially completed in 1993.
During 1993 through 1995, 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 continues to seek methods to minimize the generation of hazardous
wastes in its operations. The Resource Conservation and Recovery Act ("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 storage tanks. Since the EPA has not yet
promulgated implementing regulations relating to past disposal or handling
operations, 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 cannot be appraised until their implementation becomes more
accurately defined.
A significant portion of the USX'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, a closed and dismantled refinery site and the closure of permitted
hazardous and non-hazardous waste landfills.
USX has been notified that it is a potentially responsible party ("PRP") at
47 waste sites under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") as of December 31, 1995. In addition, there are 35
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 111 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 27 to the Consolidated Financial Statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
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 predict accurately the
ultimate cost of compliance, including remediation costs which may be incurred
and penalties which may be imposed. However, based on presently available
information, and existing laws and regulations as currently implemented, USX
does not anticipate that environmental compliance expenditures (including
operating and maintenance and remediation) will materially increase in 1996. USX
expects environmental capital expenditures to approximate $175 million in 1996
or approximately 15% of total estimated consolidated capital expenditures.
Predictions beyond 1996 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, USX anticipates that environmental capital expenditures in
1997 will total approximately $150 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 27 to the Consolidated Financial Statements. Included among these
actions is a jury trial in a civil class action (Cox, et al. v. USX, et al.)
related to the Fairfield Agreement Litigation which is currently scheduled to
begin on September 30, 1996, in the U.S. District Court for the Northern
District of Alabama. Plaintiffs' claims seek damages in excess of $276 million,
which may be subject to trebling.
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.
Sales of $13.9 billion in 1995 increased $1.1 billion from 1994 mainly due
to increased volumes and higher average prices for domestic refined products,
worldwide liquid hydrocarbons, and international natural gas, and increased
volumes for domestic natural gas, partially offset by lower average prices for
domestic natural gas. 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. 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 $105 million in 1995,
compared with $584 million in 1994 and $169 million in 1993. The 1995 results
included a $659 million fourth quarter noncash charge related to adoption of
SFAS No. 121, partially offset by a $15 million favorable adjustment pertaining
to environmental remediation recoveries. Results also included a $70 million
favorable effect in 1995, a $160 million favorable effect in 1994 and a $241
million unfavorable effect in 1993 resulting from noncash adjustments to the
inventory market valuation reserve. Excluding the effects of these items,
operating income was $679 million in 1995, $424 million in 1994 and $410 million
in 1993. The increase in 1995 was primarily due to increased volumes for
worldwide liquid hydrocarbons and natural gas, and higher average prices for
worldwide liquid hydrocarbons and international natural gas, partially offset by
lower average prices for domestic natural gas. 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 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.
U-44
<PAGE> 110
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Worldwide liquid hydrocarbon volumes are expected to decline by
approximately 7% in 1996, primarily reflecting decreased production from Ewing
Bank 873 in the U.S. Gulf of Mexico, the sale of Marathon's interests in
Illinois Basin properties and the expected sale of interests in the Kakap Block
in the Natuna Sea, offshore Indonesia, partially offset by new production in
Egypt. Worldwide natural gas volumes are expected to increase approximately 6%
in 1996, primarily reflecting successful 1995 domestic drilling programs.
Marathon's U.K. natural gas sales include sales under long-term contracts
with annual cash flow protection under take-or-pay provisions. In the context of
the restructuring of the U.K. gas market, which has resulted in lower "spot
market" prices, one large gas purchaser has approached its suppliers, including
Marathon, requesting in general terms certain amendments to all of its long-term
contracts. Marathon believes that its existing long-term sales contracts are
legally binding.
Future results of operations will reflect reduced depreciation, depletion
and amortization ("DD&A") charges as a result of the fourth quarter write-down
of long-lived assets associated with the adoption of SFAS No. 121. However, the
total amount of DD&A expense in future periods will also be affected by ongoing
changes in production volumes and reserve estimates, and capital spending.
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 $6.5 billion in 1995, compared with $6.1 billion in 1994 and
$5.6 billion in 1993. The $400 million increase in 1995 from 1994 resulted from
higher steel shipment prices and volumes, partially offset by lower revenues
from engineering and consulting services. 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 U. S. Steel Group reported operating income of $481 million in 1995,
compared with operating income of $313 million in 1994 and an operating loss of
$149 million in 1993. The 1995 operating income included $27 million of charges
related to the settlement of Pickering v. USX litigation, a $34 million charge
for the repair of the Gary Works' No. 8 blast furnace, which was damaged by an
explosion on April 5, 1995, a $17 million charge related to litigation accruals
and a $16 million fourth quarter noncash charge related to adoption of SFAS No.
121, partially offset by an $18 million favorable accrual adjustment for certain
employee-related costs. The 1994 operating income included $44 million of
charges related to utility curtailments and other severe winter weather
complications, a caster fire at the Mon Valley Works and planned outages for the
modernization of the Gary Works' hot strip mill and pickle line, partially
offset by $13 million related to the sale of coal seam methane gas royalty
interest. 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. Excluding the
effects of these items, operating income increased $213 million in 1995,
compared with an increase of $109 million from 1993 to 1994. The improvement in
1995 was mainly due to higher steel prices and shipment volumes, partially
offset by a less favorable product mix which includes increased exports of lower
value-added products, higher iron ore and coke costs and increased accruals for
profit sharing plans. The improvement in 1994 was primarily due to higher steel
prices and shipment volumes. These effects 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.
U. S. Steel Group anticipates that steel demand will remain relatively
strong in 1996, although domestic industry shipment levels for 1996 are expected
to decline slightly from the 1995 level of approximately 97 million tons. In
January 1996, price increases were announced for sheet, plate and tubular
products with effective dates ranging from February 4, 1996, to April 1, 1996.
However, increasing production capability for flat-rolled products may
negatively impact market prices for steel as companies attempt to gain or retain
market share.
Steel imports to the United States accounted for an estimated 21%, 25% and
19% of the domestic steel market in the first eleven months of 1995, and for the
years 1994 and 1993, 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 1996 are expected to be
lower than the fourth quarter of 1995, which is consistent with prior years.
Export shipments for the year 1996 are expected to decline significantly from
the 1995 level of 1.5 million tons. During the second quarter of 1996, raw steel
production will be reduced by a planned blast furnace outage at Fairfield Works.
U-45
<PAGE> 111
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
The U. S. Steel Group has certain profit sharing plans in place that will
require payments of approximately $35 million to be made in 1996 based on 1995
results.
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.
Sales of $654 million in 1995 increased $87 million from 1994 primarily
reflecting increases in trading volumes, partly offset by lower average prices
for natural gas. Sales of $567 million in 1994 increased $32 million from 1993
primarily reflecting increased trading volumes and 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'').
The Delhi Group reported operating income of $18 million, compared with an
operating loss of $36 million in 1994 and operating income of $36 million in
1993. The 1995 operating income included a $6 million favorable adjustment
relating to the completion of the 1994 asset disposition plan. The 1994
operating loss included charges of $37 million for the planned disposition of
certain nonstrategic assets. Excluding the effects of these items, operating
income in 1995 was $12 million, up $11 million from 1994, mainly due to reduced
operating costs, excluding gas purchase costs, and improved gas processing
operations, partly offset by a lower gas sales and trading margin. 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 $1 million, down $31 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.
The Delhi Group's operating results are mainly affected by fluctuations in
natural gas prices and demand levels in the markets that it serves. The levels
of gas sales margin for future periods are difficult to accurately project
because of fluctuations in customer demand for premium services, competition in
attracting new premium customers 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 its income from its gas sales
business during the first and fourth quarters of the year.
Based on current market conditions and estimated volumes, the Delhi Group's
gas sales and trading margin is expected to be negatively impacted by
approximately $2-3 million (pretax) during the first quarter of 1996 due to an
anomaly in market conditions. The anomaly relates to basis differentials, which
are the differences between gas prices in various locations. In January 1996,
the basis differential to the Delhi Group's east Texas market area was
significantly higher than the historical norm. The anomaly was caused by extreme
winter weather in the eastern United States and the inability to move Texas gas
to this market due to transportation constraints. Two of the pipeline indexes
which the Delhi Group uses to determine the purchase price under some gas
purchase contracts reflected prices much higher than the east Texas market area
because the index zones for these pipelines included areas outside of Texas
which were affected by the market anomaly. This disparity resulted in gas
purchase costs that exceeded the market price for such gas and is expected to
result in the unfavorable impact noted above. Measures are currently being
implemented by the Delhi Group to mitigate the negative impact of any such
future anomalies including, but not limited to, renegotiation of certain gas
purchase contracts.
Since the adoption of Federal Energy Regulatory Commission ("FERC") Order
No. 636 in 1992, competition has increased significantly in the domestic gas
industry and is expected to remain highly competitive in the future. On the
supply side, gas producers now have easier access to end-user sales markets,
which, at times, has resulted in the conversion of their contracts with
midstream gathering and distribution companies, like the Delhi Group, from sales
to transportation agreements. On the sales side, securing new premium service
agreements has become increasingly difficult. However, management believes that
its increased focus on core operating areas, an emphasis on sour gas gathering
and treating services and its ability to maintain a long-term dedicated reserve
base and to provide reliable sales services will enable the Delhi Group to
remain a competitive entity in the markets that it serves.
OUTLOOK
In October 1995, the Financial Accounting Standards Board issued Financial
Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," which establishes a fair value based method of accounting for
employee stock-based compensation plans but allows companies to continue to
apply the provisions of Accounting Principles Board Opinion No. 25, provided
certain pro forma disclosures are made. USX intends to adopt SFAS No. 123 by
disclosure only in its 1996 financial statements, as permitted by the Standard.
U-46
<PAGE> 112
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> 113
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> 114
MANAGEMENT'S REPORT
The accompanying financial statements of the Marathon Group are the
responsibility of and have been prepared by USX Corporation (USX) in conformity
with generally accepted accounting principles. They necessarily include some
amounts that are based on best judgments and estimates. The Marathon Group
financial information displayed in other sections of this report is consistent
with these financial statements.
USX seeks to assure the objectivity and integrity of its financial records
by careful selection of its managers, by organizational arrangements that
provide an appropriate division of responsibility and by communications programs
aimed at assuring that its policies and methods are understood throughout the
organization.
USX has a comprehensive formalized system of internal accounting controls
designed to provide reasonable assurance that assets are safeguarded and that
financial records are reliable. Appropriate management monitors the system for
compliance, and the internal auditors independently measure its effectiveness
and recommend possible improvements thereto. In addition, as part of their audit
of the financial statements, USX's independent accountants, who are elected by
the stockholders, review and test the internal accounting controls selectively
to establish a basis of reliance thereon in determining the nature, extent and
timing of audit tests to be applied.
The Board of Directors pursues its oversight role in the area of financial
reporting and internal accounting control through its Audit Committee. This
Committee, composed solely of nonmanagement directors, regularly meets (jointly
and separately) with the independent accountants, management and internal
auditors to monitor the proper discharge by each of its responsibilities
relative to internal accounting controls and the consolidated and group
financial statements.
Thomas J. Usher Robert M. Hernandez 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, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, 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 6, page M-11, in 1995 USX adopted a new accounting
standard for the impairment of long-lived assets. As discussed in Note 2, page
M-8, in 1993 USX adopted new accounting standards for postemployment benefits
and for retrospectively rated insurance contracts.
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 13, 1996
M-3
<PAGE> 115
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(Dollars in millions) 1995 1994 1993
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES (Note 4, page M-10) $ 13,871 $ 12,757 $ 11,962
OPERATING COSTS:
Cost of sales (excludes items shown below) 9,011 8,405 8,209
Inventory market valuation charges (credits) (Note 18, page M-18) (70) (160) 241
Selling, general and administrative expenses 297 313 325
Depreciation, depletion and amortization 817 721 727
Taxes other than income taxes 2,903 2,737 2,146
Exploration expenses 149 157 145
Impairment of long-lived assets (Note 6, page M-11) 659 - -
-------- -------- --------
Total operating costs 13,766 12,173 11,793
-------- -------- --------
OPERATING INCOME 105 584 169
Other income (Note 5, page M-10) 23 177 46
Interest and other financial income (Note 5, page M-10) 31 15 22
Interest and other financial costs (Note 5, page M-10) (349) (300) (292)
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES (190) 476 (55)
Less provision (credit) for estimated income taxes (Note 13, page M-15) (107) 155 (49)
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS AND CUMULATIVE
EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES (83) 321 (6)
Extraordinary loss (Note 7, page M-11) (5) - -
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)
-------- -------- --------
NET INCOME (LOSS) (88) 321 (29)
Dividends on preferred stock (4) (6) (6)
-------- -------- --------
NET INCOME (LOSS) APPLICABLE TO MARATHON STOCK $ (92) $ 315 $ (35)
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
INCOME PER COMMON SHARE OF MARATHON STOCK
<TABLE>
<CAPTION>
1995 1994 1993
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRIMARY AND FULLY DILUTED:
Income (loss) before extraordinary loss and cumulative effect of
changes in accounting principles applicable to Marathon Stock $ (.31) $ 1.10 $ (.04)
Extraordinary loss (.02) - -
Cumulative effect of changes in accounting principles - - (.08)
-------- -------- --------
Net income (loss) applicable to Marathon Stock $ (.33) $ 1.10 $ (.12)
Weighted average shares, in thousands
- primary 287,271 286,722 286,594
- fully diluted 287,271 286,725 286,594
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Note 22, 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> 116
BALANCE SHEET
<TABLE>
<CAPTION>
(Dollars in millions) December 31 1995 1994
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 77 $ 28
Receivables, less allowance for doubtful accounts
of $3 and $3 (Note 19, page M-18) 541 438
Receivable from other groups (Note 15, page M-17) 11 -
Inventories (Note 18, page M-18) 1,152 1,137
Other current assets 107 134
------- -------
Total current assets 1,888 1,737
Long-term receivables and other investments (Note 14, page M-16) 215 269
Property, plant and equipment - net (Note 17, page M-17) 7,521 8,471
Prepaid pensions (Note 11, page M-13) 274 261
Other noncurrent assets 211 213
------- -------
Total assets $10,109 $10,951
- - --------------------------------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Notes payable $ 31 $ 1
Accounts payable 1,210 1,129
Payable to other groups (Note 15, page M-17) 35 44
Payroll and benefits payable 80 84
Accrued taxes 68 133
Deferred income taxes (Note 13, page M-15) 154 171
Accrued interest 94 95
Long-term debt due within one year (Note 9, page M-12) 353 55
------- -------
Total current liabilities 2,025 1,712
Long-term debt (Note 9, page M-12) 3,367 3,983
Long-term deferred income taxes (Note 13, page M-15) 1,072 1,270
Employee benefits (Note 12, page M-14) 338 317
Deferred credits and other liabilities 253 246
Preferred stock of subsidiary (Note 8, page M-11) 182 182
------- -------
Total liabilities 7,237 7,710
------- -------
STOCKHOLDERS' EQUITY (Note 20, page M-18)
Preferred stock - 78
Common stockholders' equity 2,872 3,163
------- -------
Total stockholders' equity 2,872 3,241
------- -------
Total liabilities and stockholders' equity $10,109 $10,951
- - --------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
M-5
<PAGE> 117
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in millions) 1995 1994 1993
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income (loss) $ (88) $ 321 $ (29)
Adjustments to reconcile to net cash provided
from operating activities:
Extraordinary loss and accounting principle changes 5 - 23
Depreciation, depletion and amortization 817 721 727
Exploratory dry well costs 64 68 48
Inventory market valuation charges (credits) (70) (160) 241
Pensions (16) 1 (6)
Postretirement benefits other than pensions 12 10 24
Deferred income taxes (204) 116 (116)
Gain on disposal of assets (8) (175) (34)
Payment of amortized discount on zero coupon debentures (96) - -
Impairment of long-lived assets 659 - -
Changes in: Current receivables - sold 8 - -
- operating turnover (120) (105) 189
Inventories 55 3 44
Current accounts payable and accrued expenses (27) (122) (313)
All other items - net 53 42 32
------ ------ ------
Net cash provided from operating activities 1,044 720 830
------ ------ ------
INVESTING ACTIVITIES:
Capital expenditures (642) (753) (910)
Disposal of assets 77 263 174
Elimination of Retained Interest in Delhi Group 58 - -
Issuance of Delhi Stock - 2 5
All other items - net (4) 7 (8)
------ ------ ------
Net cash used in investing activities (511) (481) (739)
------ ------ ------
FINANCING ACTIVITIES (Note 3, page M-9):
Change in Marathon Group's share of USX consolidated debt (204) (371) 261
Specifically attributed debt - repayments (2) (1) -
Preferred stock redeemed (78) - -
Marathon Stock repurchased (1) - (1)
Marathon Stock issued - - 1
Attributed preferred stock of subsidiary - 176 -
Dividends paid (199) (201) (201)
------ ------ ------
Net cash provided from (used in) financing activities (484) (397) 60
------ ------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - 1 (1)
------ ------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 49 (157) 150
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 28 185 35
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 77 $ 28 $ 185
- - ------------------------------------------------------------------------------------------------------------------
</TABLE>
See Note 10, page M-12, for supplemental cash flow information.
The accompanying notes are an integral part of these financial statements.
M-6
<PAGE> 118
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.
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 (loss) represented by the Retained
Interest (Note 3, page M-9) in the Delhi Group prior to June 15, 1995, is
included in other income (Note 5, page M-10).
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.
USE OF ESTIMATES - Generally accepted accounting principles require management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at year-end and
the reported amounts of revenues and expenses during the year.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand and
on deposit and highly liquid debt instruments with maturities generally of three
months or less.
INVENTORIES - Inventories are carried at lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO) method.
DERIVATIVE INSTRUMENTS - The Marathon Group engages in commodity and currency
risk management activities within the normal course of its business (Note 25,
page M-19). Management is authorized to manage exposure to price fluctuations
related to the purchase, production 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
M-7
<PAGE> 119
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. Derivative instruments relating to fixed price
sales of equity production are marked-to-market in the current period and the
related income effects are included within operating income. All other changes
in the market value of derivative instruments are deferred, including both
closed and open positions, and are subsequently recognized in income, as sales
or cost of sales, in the same period as the underlying transaction. OTC swaps in
general are off-balance-sheet instruments. The effect of changes in the market
indices related to OTC swaps are recorded upon settlement and recognized in
income with the underlying transaction. The margin receivable accounts required
for open commodity contracts reflect changes in the market prices of the
underlying commodity and are settled on a daily basis. Premiums on all
commodity-based option contracts are initially recorded based on the amount paid
or received; the options' market value is subsequently recorded as a receivable
or payable, as appropriate.
Forward currency contracts are used to manage currency risks related to
anticipated revenues and operating costs, firm commitments for capital
expenditures and existing assets or liabilities denominated in a foreign
currency. Gains or losses related to firm commitments are deferred and included
with the underlying transaction; all other gains or losses are recognized in
income in the current period as sales, cost of sales, interest income or
expense, or other income, as appropriate. Net contract values are included in
receivables or payables, as appropriate.
Recorded deferred gains or losses are reflected within other noncurrent
assets or deferred credits and other liabilities. Cash flows from the use of
derivative instruments are reported in the same category as the hedged item in
the statement of cash flows.
EXPLORATION AND DEVELOPMENT - The Marathon Group follows the successful efforts
method of accounting for oil and gas exploration and development.
GAS BALANCING - The Marathon Group follows the sales method of accounting for
gas production imbalances.
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. If recoveries of remediation costs from
third parties are probable, a receivable is recorded. Estimated abandonment and
dismantlement costs of offshore production platforms are accrued based upon
estimated proved oil and gas reserves on a units-of-production method.
INSURANCE - The Marathon Group is insured for catastrophic casualty and certain
property 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.
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
Marathon Group is affected primarily by disability-related claims covering
indemnity and medical payments. The obligation for these claims and related
periodic costs are measured using actuarial techniques and assumptions including
appropriate discount rates and amortization of actuarial adjustments over future
periods. The cumulative effect of the change in accounting principle determined
as of January 1, 1993, reduced net income $17 million, net of $10 million income
tax. 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 1995 classifications.
M-8
<PAGE> 120
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 8, page M-11, for the Marathon Group's
portion of USX's financial activities attributed to all three groups. However,
transactions such as leases, certain collaterized 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 $30 million, $29 million and $28 million in 1995, 1994 and 1993,
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 Board of Directors, prior to June 15, 1995,
had designated 14,003,205 shares of Delhi Stock to represent 100% of the common
stockholders' equity value of USX attributable to the Delhi Group. The Delhi
Fraction was the percentage interest in the Delhi Group represented by the
shares of Delhi Stock that were outstanding at any particular time and, based on
9,438,391 outstanding shares at June 14, 1995, was approximately 67%. The
Marathon Group financial statements reflected a percentage interest in the Delhi
Group of approximately 33% (Retained Interest) through June 14, 1995. The
financial position, results of operations and cash flows of the Delhi Group were
reflected in the financial statements of the Marathon Group only to the extent
of the Retained Interest. The shares deemed to represent the Retained Interest
were not outstanding shares of Delhi Stock and could not be voted by the
Marathon Group. As additional shares of Delhi Stock deemed to represent the
Retained Interest were sold, the Retained Interest decreased. When a dividend
was paid in respect to the outstanding Delhi Stock, the Marathon Group financial
statements were credited, and the Delhi Group financial statements were charged,
with the aggregate transaction amount times the quotient of the Retained
Interest divided by the Delhi Fraction.
On June 15, 1995, USX eliminated the Marathon Group's Retained Interest in
the Delhi Group (equivalent to 4,564,814 shares of Delhi Stock). This was
accomplished through a reallocation of assets and a corresponding adjustment to
debt and equity attributed to the Marathon and Delhi Groups. The reallocation
was made at a price of $12.75 per equivalent share of Delhi Stock, or an
aggregate of $58 million, resulting in a corresponding reduction of the Marathon
Group debt.
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 and various tax credits), 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. To the extent
that one of the three groups is allocated a consolidated tax attribute which, as
a result of expiration or otherwise, is not ultimately utilized on the
consolidated tax return, the prior years' allocation of such attribute is
adjusted such that the effect of the expiration is borne by the group that
generated the attribute. Also, if a tax attribute cannot be utilized on a
consolidated basis in the year generated or in a carryback year, the prior
years' allocation of such consolidated tax effects is adjusted in a subsequent
year to the extent necessary to allocate the tax benefits to the group that
would have realized the tax benefits on a separate return basis. As a result,
the allocated group amounts of taxes payable or refundable are not necessarily
comparable to those that would have resulted if the groups had filed separate
tax returns.
M-9
<PAGE> 121
- - -------------------------------------------------------------------------------
4. SALES
The items below are included in sales and operating costs, with no
effect on income.
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consumer excise taxes on petroleum products and merchandise $ 2,708 $ 2,542 $ 1,927
Matching crude oil and refined product
buy/sell transactions settled in cash 2,067 2,071 2,018
----------------------------------------------------------------------------------------------------------
</TABLE>
- - -------------------------------------------------------------------------------
5. OTHER ITEMS
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OTHER INCOME:
Gain on disposal of assets $ 8 $ 175 (a) $ 34 (b)
Income from affiliates - equity method 9 4 9
Income (loss) from Retained Interest in the Delhi Group 2 (c) (10)(d) 4
Other income (loss) 4 8 (1)
------ ------ ------
Total $ 23 $ 177 $ 46
- - ----------------------------------------------------------------------------------------------------------
INTEREST AND OTHER FINANCIAL INCOME(e):
Interest income $ 16 $ 10 $ 11
Other 15 5 11
------ ------ ------
Total 31 15 22
------ ------ ------
INTEREST AND OTHER FINANCIAL COSTS(e):
Interest incurred (297) (305) (315)
Less interest capitalized 8 50 97
------ ------ ------
Net interest (289) (255) (218)
Interest on litigation - - (6)
Interest on tax issues 5 (f) 24 (g) (25)
Financial cost on preferred stock of subsidiary (16) (13) -
Amortization of discounts (21) (32) (26)
Expenses on sales of accounts receivable (Note 19, page M-18) (24) (19) (14)
Other (4) (5) (3)
------ ------ ------
Total (349) (300) (292)
------ ------ ------
NET INTEREST AND OTHER FINANCIAL COSTS(e) $ (318) $ (285) $ (270)
- - ----------------------------------------------------------------------------------------------------------
<FN>
(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) Retained Interest in the Delhi Group was eliminated on June 15, 1995.
(d) Delhi Group's loss included restructuring charges.
(e) See Note 3, page M-9, for discussion of USX net interest and other
financial costs attributable to the Marathon Group.
(f) Includes $17 million benefit related to refundable federal income taxes
paid in prior years.
(g) Includes a $34 million benefit related to the settlement of various
state tax issues.
</TABLE>
M-10
<PAGE> 122
- - --------------------------------------------------------------------------------
6. IMPAIRMENT OF LONG-LIVED ASSETS
At the beginning of the fourth quarter of 1995, USX adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of " (SFAS No. 121).
SFAS No. 121 requires that long-lived assets, including related goodwill, be
reviewed for impairment and written down to fair value whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable.
Adoption of SFAS No. 121 resulted in an impairment charge included in
operating costs of $659 million. The impaired assets primarily include certain
domestic and international oil and gas properties, an idled refinery and related
goodwill.
The Marathon Group assessed impairment of its oil and gas properties based
primarily on a field-by-field approach. The predominant method used to determine
fair value was a discounted cash flow approach and where available, comparable
market values were used. The impairment provision reduced capitalized costs of
oil and gas properties by $533 million.
In addition, the Indianapolis, Indiana refinery, which was temporarily
idled in October 1993, was impaired by $126 million, including related goodwill.
The impairment was based on a discounted cash flow approach and comparable
market value analysis.
- - --------------------------------------------------------------------------------
7. EXTRAORDINARY LOSS
In 1995, USX extinguished $553 million of debt prior to maturity, resulting in
an extraordinary loss to the Marathon Group of $5 million, net of a $3 million
income tax benefit.
- - --------------------------------------------------------------------------------
8. 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 9, page M-12.
<TABLE>
<CAPTION>
Marathon Group Consolidated USX(a)
--------------- ------------------
(In millions) December 31 1995 1994 1995 1994
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 36 $ 3 $ 47 $ 4
Receivables(b) 56 8 73 11
Long-term receivables(b) 22 51 29 70
Other noncurrent assets(b) 6 8 8 11
------ ------ ------ ------
Total assets $ 120 $ 70 $ 157 $ 96
- - -------------------------------------------------------------------------------------------------
Notes payable $ 31 $ - $ 40 $ -
Accounts payable 35 2 46 3
Accrued interest 91 90 119 123
Long-term debt due within one year (Note 9, page M-12) 352 54 460 74
Long-term debt (Note 9, page M-12) 3,303 3,917 4,303 5,346
Deferred credits and other liabilities(b) - 2 - 3
Preferred stock of subsidiary 182 182 250 250
------ ------ ------ ------
Total liabilities $3,994 $4,247 $5,218 $5,799
- - -------------------------------------------------------------------------------------------------
Preferred stock $ - $ 78 $ - $ 105
- - -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Marathon Group(c) Consolidated USX
-------------------- --------------------
(In millions) 1995 1994 1993 1995 1994 1993
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest and other financial
costs (Note 5, page M-10) $(329) $(346) $(338) $(439) $(471) $(471)
- - -------------------------------------------------------------------------------------------------
<FN>
(a) For details of USX long-term debt, preferred stock of subsidiary and
preferred stock, see Notes 15, page U-20; 26, page U-25; and 20 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.
</TABLE>
M-11
<PAGE> 123
- - --------------------------------------------------------------------------------
9. 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 1995 1994 1995 1994
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Specifically attributed debt(b):
Sale-leaseback financing and capital leases $ 24 $ 25 $ 133 $ 137
Seller-provided financing 41 42 41 42
------ ------ ------ ------
Total 65 67 174 179
Less amount due within one year 1 1 5 4
------ ------ ------ ------
Total specifically attributed long-term debt $ 64 $ 66 $ 169 $ 175
- - -------------------------------------------------------------------------------------------------
Debt attributed to all three groups(c) $3,691 $4,022 $4,810 $5,489
Less unamortized discount 36 51 47 69
Less amount due within one year 352 54 460 74
------ ------ ------ ------
Total long-term debt attributed to all three groups $3,303 $3,917 $4,303 $5,346
- - -------------------------------------------------------------------------------------------------
Total long-term debt due within one year $ 353 $ 55 $ 465 $ 78
Total long-term debt due after one year 3,367 3,983 4,472 5,521
- - -------------------------------------------------------------------------------------------------
<FN>
(a) See Note 15, 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; 8, page M-11; and 10, page M-12).
</TABLE>
- - --------------------------------------------------------------------------------
10. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH USED IN OPERATING ACTIVITIES INCLUDED:
Interest and other financial costs paid (net of amount capitalized) $ (431) $ (380) $ (237)
Income taxes paid, including settlements with other groups (163) (31) (86)
- - ---------------------------------------------------------------------------------------------------
USX DEBT ATTRIBUTED TO ALL THREE GROUPS - NET:
Commercial paper:
Issued $ 2,434 $ 1,515 $ 2,229
Repayments (2,651) (1,166) (2,598)
Credit agreements:
Borrowings 4,719 4,545 1,782
Repayments (4,659) (5,045) (2,282)
Other credit arrangements - net 40 - (45)
Other debt:
Borrowings 52 509 791
Repayments (440) (791) (318)
------- ------- -------
Total $ (505) $ (433) $ (441)
======= ======= =======
Marathon Group activity $ (204) $ (371) $ 261
U. S. Steel Group activity (399) (57) (713)
Delhi Group activity 98 (5) 11
------- ------- -------
Total $ (505) $ (433) $ (441)
- - ---------------------------------------------------------------------------------------------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Marathon Stock issued for employee stock option plans $ 5 $ - $ 1
Contribution of assets to an equity affiliate - 26 -
Disposal of assets - common stock received 5 - -
Acquisition of assets - stock issued - 11 -
- debt issued - 58 -
- - ---------------------------------------------------------------------------------------------------
</TABLE>
M-12
<PAGE> 124
- - --------------------------------------------------------------------------------
11. PENSIONS
The Marathon Group has noncontributory defined benefit plans covering
substantially all employees. Benefits under these plans are based primarily upon
years of service and the highest three years earnings during the last ten years
before retirement. Certain subsidiaries provide benefits for employees covered
by other plans based primarily upon employees' service and career earnings. The
funding policy for all plans provides that payments to the pension trusts shall
be equal to the minimum funding requirements of ERISA plus such additional
amounts as may be approved.
PENSION COST (CREDIT) - The defined benefit cost for major plans for 1995, 1994
and 1993 was determined assuming an expected long-term rate of return on plan
assets of 10%, 9% and 10%, respectively, and was as follows:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Major plans:
Cost of benefits earned during the period $ 26 $ 36 $ 33
Interest cost on projected benefit obligation
(8% for 1995; 6.5% for 1994; and 7% for 1993) 41 45 43
Return on assets - actual return (197) (1) (38)
- deferred gain (loss) 116 (81) (48)
Net amortization of unrecognized gains (4) (5) (5)
----- ---- ----
Total major plans (18) (6) (15)
Other plans 4 4 4
----- ---- ----
Total periodic pension credit (14) (2) (11)
Curtailment losses(a) 2 4 -
----- ---- ----
Total pension cost (credit) $ (12) $ 2 $(11)
- - ---------------------------------------------------------------------------------------------------
<FN>
(a) The curtailment loss in 1995 resulted from the final disposition of FWA
Drilling Company, Inc. The curtailment loss in 1994 resulted from a work
force reduction program.
</TABLE>
FUNDS' STATUS - The assumed discount rate used to measure the benefit
obligations of major plans was 7% at December 31, 1995, and 8% at December 31,
1994. The assumed rate of future increases in compensation levels was 5% at both
year-ends. The following table sets forth the plans' funded status and the
amounts reported in the Marathon Group's balance sheet:
<TABLE>
<CAPTION>
(In millions) December 31 1995 1994
- - -------------------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of funds' status to reported amounts:
Projected benefit obligation (PBO)(b) $(664) $(542)
Plan assets at fair market value(c) 904 761
----- -----
Assets in excess of PBO(d) 240 219
Unrecognized net gain from transition (50) (57)
Unrecognized prior service cost 8 9
Unrecognized net loss 58 73
Additional minimum liability(e) (13) (1)
----- -----
Net pension asset included in balance sheet $ 243 $ 243
- - -------------------------------------------------------------------------------------------
(b) PBO includes:
Accumulated benefit obligation (ABO) $ 492 $ 416
Vested benefit obligation 434 368
(c) Types of assets held:
Stocks of other corporations 66% 66%
U.S. Government securities 11% 14%
Corporate debt instruments and other 23% 20%
(d) Includes several small plans that have ABOs in excess of plan assets:
PBO $ (63) $ (45)
Plan assets 13 11
----- -----
PBO in excess of plan assets $ (50) $ (34)
(e) Additional minimum liability recorded was offset by the following:
Intangible asset $ 4 $ 1
Stockholders' equity adjustment - net of deferred income tax 6 -
- - -------------------------------------------------------------------------------------------
</TABLE>
M-13
<PAGE> 125
- - --------------------------------------------------------------------------------
12. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Marathon Group has defined benefit retiree health and life insurance plans
covering most employees upon their retirement. Health benefits are provided, for
the most part, through comprehensive hospital, surgical and major medical
benefit provisions subject to various cost sharing features. Life insurance
benefits are provided to nonunion and most union represented retiree
beneficiaries primarily based on employees' annual base salary at retirement.
Benefits have not been prefunded.
POSTRETIREMENT BENEFIT COST - Postretirement benefit cost for defined benefit
plans for 1995, 1994 and 1993 was determined assuming discount rates of 8%, 6.5%
and 7%, respectively, and was as follows:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost of benefits earned during the period $ 7 $10 $10
Interest on accumulated postretirement benefit obligation (APBO) 22 20 23
Amortization of unrecognized (gains) losses (3) (3) 2
--- --- ---
Total periodic postretirement benefit cost 26 27 35
Curtailment gain(a) - (4) -
--- --- ---
Total postretirement benefit cost $26 $23 $35
- - ---------------------------------------------------------------------------------------------------
<FN>
(a) The curtailment gain resulted from a workforce reduction program.
</TABLE>
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 1995 1994
- - -------------------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of APBO to reported amounts:
APBO attributable to:
Retirees $(169) $(159)
Fully eligible plan participants (51) (42)
Other active plan participants (101) (80)
----- -----
Total APBO (321) (281)
Unrecognized net loss 44 19
Unamortized prior service cost (25) (28)
----- -----
Accrued liability included in balance sheet $(302) $(290)
- - -------------------------------------------------------------------------------------------
</TABLE>
The assumed discount rate used to measure the APBO was 7% and 8% at
December 31, 1995, and December 31, 1994, respectively. The assumed rate of
future increases in compensation levels was 5% at both year-ends. The weighted
average health care cost trend rate in 1996 is approximately 8%, gradually
declining to an ultimate rate in 2003 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 1995 net periodic postretirement benefit cost by $5 million and would
have increased the APBO as of December 31, 1995, by $47 million.
M-14
<PAGE> 126
- - --------------------------------------------------------------------------------
13. 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).
Provisions (credits) for estimated income taxes were:
<TABLE>
<CAPTION>
1995 1994 1993
----------------------------- ------------------------- ------------------------
(In millions) CURRENT DEFERRED TOTAL Current Deferred Total Current Deferred Total
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal $72 $(221) $(149) $29 $106 $135 $38 $(162) $(124)
State and local 10 (14) (4) (2) (1) (3) 9 (18) (9)
Foreign 15 31 46 12 11 23 20 64 84
--- ----- ----- --- ---- ---- --- ----- -----
Total $97 $(204) $(107) $39 $116 $155 $67 $(116) $ (49)
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
In 1995, the extraordinary loss on extinguishment of debt includes a tax
benefit of $3 million (Note 7, page M-11).
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).
A reconciliation of federal statutory tax rate (35%) to total provisions
(credits) follows:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate applied to income (loss) before taxes $ (67) $166 $(19)
Effects of foreign operations(a) (36) 13 1
Goodwill 8 2 1
Effects of partially-owned companies (7) (5) (7)
Dispositions of subsidiary investments (6) - (23)
State and local income taxes after federal income tax effects (3) (2) (6)
Effect of Retained Interest (1) 4 (1)
Remeasurement of deferred income taxes for statutory rate increase - - 40
Adjustment of prior years' federal income taxes (1) - (13)
Adjustment of valuation allowances 4 (24) (22)
Other 2 1 -
----- ---- ----
Total provisions (credits) $(107) $155 $(49)
- - ---------------------------------------------------------------------------------------------------
<FN>
(a) Includes incremental tax benefits of $44 million in 1995 and $64 million in
1993 resulting from USX's election to credit, rather than deduct, certain
foreign income taxes for federal income tax purposes.
</TABLE>
Deferred tax assets and liabilities resulted from the following:
<TABLE>
<CAPTION>
(In millions) December 31 1995 1994
- - -------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
State tax loss carryforwards (expiring in 1996 through 2010) $ 34 $ 36
Foreign tax loss carryforwards (portion of which expire in 2000 through 2010) 556 545
Minimum tax credit carryforwards 93 235
Foreign tax credit carryforwards (expiring in 1996 through 2000) 81 -
Employee benefits 148 144
Expected federal benefit for:
Crediting certain foreign deferred income taxes 169 142
Deducting state and other foreign deferred income taxes 48 55
Contingency and other accruals 95 104
Other 76 48
Valuation allowances (344) (150)
------ ------
Total deferred tax assets 956 1,159
------ ------
Deferred tax liabilities:
Property, plant and equipment 1,676 2,114
Inventory 226 202
Prepaid pensions 116 110
Other 120 118
------ ------
Total deferred tax liabilities 2,138 2,544
------ ------
Net deferred tax liabilities $1,182 $1,385
- - -------------------------------------------------------------------------------------------------
</TABLE>
The Marathon Group expects to generate sufficient future taxable income to
realize the benefit of its net deferred tax assets. In addition, the ability to
realize the benefit of foreign tax credits is based upon certain assumptions
concerning future operating conditions (particularly as related to prevailing
oil prices), income generated from foreign sources and USX's tax profile in the
years that such credits may be claimed.
The consolidated tax returns of USX for the years 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 $(50) million, $14 million and $(55) million
attributable to foreign sources in 1995, 1994 and 1993, respectively.
M-15
<PAGE> 127
- - --------------------------------------------------------------------------------
14. LONG-TERM RECEIVABLES AND OTHER INVESTMENTS
<TABLE>
<CAPTION>
(In millions) December 31 1995 1994
- - -------------------------------------------------------------------------------
<S> <C> <C>
Receivables due after one year $ 32 $ 14
Forward currency contracts 22 51
Equity method investments 111 99
Cost method investments 30 30
Retained Interest in the Delhi Group (Note 3, page M-9) - 55
Other 20 20
---- ----
Total $215 $269
- - -------------------------------------------------------------------------------
</TABLE>
The following represents summarized financial information of affiliates
accounted for by the equity method of accounting, except for the Retained
Interest in the Delhi Group:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Income data - year:
Sales $255 $277 $383
Operating income 77 105 125
Net income 24 35 46
- - -------------------------------------------------------------------------------
Balance sheet data - December 31:
Current assets $ 86 $ 75
Noncurrent assets 957 966
Current liabilities 116 105
Noncurrent liabilities 703 725
- - -------------------------------------------------------------------------------
</TABLE>
Dividends and partnership distributions received from equity affiliates
were $14 million in 1995, $10 million in 1994 and $15 million in 1993.
Marathon Group purchases from equity affiliates totaled $52 million, $71
million and $77 million in 1995, 1994 and 1993, respectively. Marathon Group
sales to equity affiliates were immaterial in 1995 and 1994 and $21 million in
1993.
Summarized financial information of the Delhi Group, which was accounted
for by the equity method of accounting follows:
<TABLE>
<CAPTION>
(In millions) 1995(a) 1994 1993
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Income data - year:
Sales $276 $567 $535
Operating income (loss) 14 (36) 36
Net income (loss) 7 (31)(b) 12
- - -------------------------------------------------------------------------------
Balance sheet data - December 31:
Current assets $ - $ 26
Noncurrent assets - 495
Current liabilities - 89
Noncurrent liabilities - 260
- - -------------------------------------------------------------------------------
<FN>
(a) Retained Interest in the Delhi Group was eliminated on June 15, 1995.
(b) Delhi Group's loss includes restructuring charges of $40 million.
</TABLE>
M-16
<PAGE> 128
- - -------------------------------------------------------------------------------
15. INTERGROUP TRANSACTIONS
SALES AND PURCHASES - Marathon Group sales to the U. S. Steel Group
totaled $17 million, $13 million and $17 million in 1995, 1994 and 1993,
respectively. Marathon Group sales to the Delhi Group totaled $37 million in
1995, $42 million in 1994 and $30 million in 1993. Marathon Group purchases
from the Delhi Group totaled $5 million in 1995 and $4 million in both 1994 and
1993. These transactions were conducted on an arm's-length basis.
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 3, page M-9. Tax settlements between the
groups are generally made in the year succeeding that in which such amounts are
accrued.
- - -------------------------------------------------------------------------------
16. 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>
1996 $ 1 $ 89
1997 1 83
1998 2 73
1999 2 44
2000 2 126
Later years 32 212
Sublease rentals - (17)
--- ----
Total minimum lease payments 40 $610
====
Less imputed interest costs 16
---
Present value of net minimum lease payments
included in long-term debt $24
- - -------------------------------------------------------------------------------
</TABLE>
Operating lease rental expense:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rental $ 97 $105 $ 97
Contingent rental 10 10 9
Sublease rentals (5) (5) (6)
---- ---- ----
Net rental expense $102 $110 $100
- - -------------------------------------------------------------------------------
</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 $114 million may be
declared immediately due and payable.
- - -------------------------------------------------------------------------------
17. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
(In millions) December 31 1995 1994
- - -------------------------------------------------------------------------------
<S> <C> <C>
Production $12,830 $12,774
Refining 1,555 1,502
Marketing 1,258 1,189
Transportation 491 479
Other 277 324
------ ------
Total 16,411 16,268
Less accumulated depreciation, depletion and amortization 8,890 7,797
------ -------
Net $ 7,521 $ 8,471
- - -------------------------------------------------------------------------------
</TABLE>
Property, plant and equipment includes gross assets acquired under
capital leases of $37 million at December 31, 1995, and $39 million at
December 31, 1994; the related amount for both years in accumulated
depreciation, depletion and amortization was $33 million.
During the fourth quarter of 1995, the Marathon Group adopted
SFAS No. 121, resulting in $639 million impairment charges relating to the
write-down of property, plant and equipment (Note 6, page M-11).
M-17
<PAGE> 129
- - --------------------------------------------------------------------------------
18. INVENTORIES
<TABLE>
<CAPTION>
(In millions) December 31 1995 1994
- - -------------------------------------------------------------------------------
<S> <C> <C>
Crude oil and natural gas liquids $ 510 $ 516
Refined products and merchandise 758 801
Supplies and sundry items 93 99
------ ------
Total (at cost) 1,361 1,416
Less inventory market valuation reserve 209 279
------ ------
Net inventory carrying value $1,152 $1,137
- - -------------------------------------------------------------------------------
</TABLE>
Inventories of crude oil and refined products are valued by the LIFO
method. The LIFO method accounted for 91% and 90% of total inventory value
at December 31, 1995, and December 31, 1994, 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 result in charges or
credits to operating income.
- - -------------------------------------------------------------------------------
19. SALES OF RECEIVABLES
The Marathon Group participates in an agreement (the program) to sell an
undivided interest in certain accounts receivable subject to limited recourse.
Payments are collected from the sold accounts receivable; the collections are
reinvested in new accounts receivable for the buyers; and a yield, based on
defined short-term market rates, is transferred to the buyers. At December 31,
1995, the amount sold under the program that had not been collected was $340
million, which will be forwarded to the buyers at the end of the agreement in
1996, or in the event of earlier contract termination. If the Marathon Group
does not have a sufficient quantity of eligible accounts receivable to
reinvest in for the buyers, the size of the program will be reduced
accordingly. The amount sold under the program averaged $361 million in 1995.
Prior to entering into the new program in 1995, sales of the Marathon Group
accounts receivable, which averaged $400 million in 1994 and 1993, included
accounts receivable purchased from the Delhi Group. To facilitate collection,
the buyers have rights to a pool of receivables that must be maintained at a
level of at least 110% of the program size. 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.
- - --------------------------------------------------------------------------------
20. STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In millions, except per share data) 1995 1994 1993
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK:
Balance at beginning of year $ 78 $ 78 $ 78
Redeemed (78) - -
------ ------ ------
Balance at end of year $ - $ 78 $ 78
- - ----------------------------------------------------------------------------------------------------------------------------
COMMON STOCKHOLDERS' EQUITY (Note 3, page M-9):
Balance at beginning of year $3,163 $3,032 $3,257
Net income (loss) (88) 321 (29)
Marathon Stock issued 5 11 1
Marathon Stock repurchased (1) - (1)
Dividends on preferred stock (4) (6) (6)
Dividends on Marathon Stock (per share $.68) (195) (195) (195)
Foreign currency translation adjustments (Note 23, page M-19) 1 - -
Deferred compensation adjustments (3) 1 3
Minimum pension liability adjustment (6) - -
Other - (1) 2
------ ------ ------
Balance at end of year $2,872 $3,163 $3,032
- - ----------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $2,872 $3,241 $3,110
- - ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
M-18
<PAGE> 130
- - -------------------------------------------------------------------------------
21. 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.
- - -------------------------------------------------------------------------------
22. 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, where applicable.
Fully diluted net income (loss) per share assumes conversion of
convertible securities for the applicable periods outstanding and assumes
exercise of stock options, provided in each case, the effect is not
antidilutive.
- - -------------------------------------------------------------------------------
23. 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 1995, 1994 and 1993, respectively, the aggregate
foreign currency transaction gains (losses) included in determining net income
were $3 million, $(7) million and $1 million. An analysis of changes in
cumulative foreign currency translation adjustments follows:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative adjustments at January 1 $(6) $(6) $(6)
Aggregate adjustments for the year 1 - -
--- --- ---
Cumulative adjustments at December 31 $(5) $(6) $(6)
- - -------------------------------------------------------------------------------
</TABLE>
- - -------------------------------------------------------------------------------
24. STOCK PLANS AND STOCKHOLDER RIGHTS PLAN
USX Stock Plans and Stockholder Rights Plan are discussed in Note 21,
page U-23, and Note 25, page U-25, respectively, to the USX consolidated
financial statements.
- - -------------------------------------------------------------------------------
25. DERIVATIVE INSTRUMENTS
The Marathon Group uses commodity-based derivative instruments to manage
exposure to price fluctuations related to the anticipated purchase or
production and sale of crude oil, natural gas and refined products. The
derivative instruments used, as a part of its overall risk management program,
include exchange-traded futures contracts and options, and instruments which
require settlement in cash such as OTC commodity swaps and OTC options. While
risk management activities generally reduce market risk exposure due to
unfavorable commodity price changes for raw material purchases and products
sold, such activities can also encompass strategies which assume certain price
risk in isolated transactions.
USX has used forward currency contracts to hedge foreign
denominated debt, a portion of which has been attributed to the Marathon Group.
The Marathon Group remains at risk for possible changes in the
market value of the derivative instrument; however, such risk should be
mitigated by price changes in the underlying hedged item. The Marathon Group is
also exposed to credit risk in the event of nonperformance by counterparties.
The credit worthiness of counterparties is subject to continuing review,
including the use of master netting agreements to the extent practical, and
full performance is anticipated.
M-19
<PAGE> 131
The following table sets forth quantitative information by
class of derivative 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, 1995:
Exchange-traded commodity futures $ - $ - $ (3) $ 75
Exchange-traded commodity options - - - 8
OTC commodity swaps(c) (3)(d) (1) (4) 125
OTC commodity options - - - 6
--- --- --- ---
Total commodities $(3) $(1) $(7) $214
=== === === ===
Forward currency contracts(e):
- receivable $80 $77 $ - $123
- payable 1 1 - 18
--- --- --- ---
Total currencies $81 $78 $ - $141
- - ----------------------------------------------------------------------------------------------------------------------------
December 31, 1994:
Exchange-traded commodity futures $ - $ - $ - $ 78
Exchange-traded commodity options - - - 38
OTC commodity swaps 10(d) - 1 184
--- --- --- ---
Total commodities $10 $ - $ 1 $300
=== === === ===
Forward currency contracts:
- receivable $62 $59 $ - $158
- payable (3) (2) (2) 27
--- --- --- ---
Total currencies $59 $57 $(2) $185
- - ----------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The fair value amounts for OTC positions are based on various indices or
dealer quotes. The fair value amounts for currency contracts are based on
dealer quotes of forward prices covering the remaining duration of the foreign
exchange contract. The exchange-traded instruments do not have a corresponding
fair value since changes in the market prices of futures or option contracts are
settled on a daily basis.
(b) Contract or notional amounts do not quantify risk exposure, but are used in
the calculation of cash settlements under the contracts. The contract or
notional amounts do not reflect the extent to which positions may offset one
another.
(c) The OTC swap arrangements vary in duration with certain contracts extending
up to one year.
(d) Includes fair values as of December 31, 1995 and 1994, for assets of $4
million and $11 million and for liabilities of $(7) million and $(1)
million, respectively.
(e) The forward currency contracts mature in 1996-1998.
</TABLE>
- - -------------------------------------------------------------------------------
26. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value of the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor
does the fair value amount consider the tax consequences of realization or
settlement. 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>
1995 1994
-------------------- -------------------
FAIR CARRYING Fair Carrying
(In millions) December 31 VALUE AMOUNT Value Amount
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 77 $ 77 $ 28 $ 28
Receivables 485 485 429 429
Long-term receivables and other investments 98 62 79 44
------ ------ ------ ------
Total financial assets $ 660 $ 624 $ 536 $ 501
====== ====== ====== ======
FINANCIAL LIABILITIES:
Notes payable $ 31 $ 31 $ 1 $ 1
Accounts payable 1,210 1,210 1,129 1,129
Accrued interest 94 94 95 95
Long-term debt (including amounts due within one year) 3,926 3,696 3,945 4,013
------ ------ ------ ------
Total financial liabilities $5,261 $5,031 $5,170 $5,238
- - -------------------------------------------------------------------------------------------------------------------------------
</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
25, 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 19, page M-18. For details relating to financial
guarantees see Note 27, page M-21.
M-20
<PAGE> 132
- - -------------------------------------------------------------------------------
27. CONTINGENCIES AND COMMITMENTS
USX is the subject of, or party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the Marathon Group
involving a variety of matters, including laws and regulations relating to the
environment. Certain of these matters are discussed below. The ultimate
resolution of these contingencies could, individually or in the aggregate, be
material to the Marathon Group financial statements. However, management
believes that USX will remain a viable and competitive enterprise even though
it is possible that these contingencies could be resolved unfavorably to the
Marathon Group.
ENVIRONMENTAL MATTERS -
The Marathon Group is subject to federal, state, local and foreign laws
and regulations relating to the environment. These laws generally provide for
control of pollutants released into the environment and require responsible
parties to undertake remediation of hazardous waste disposal sites. Penalties
may be imposed for noncompliance. At December 31, 1995, and December
31, 1994, accrued liabilities for remediation totaled $37 million and $45
million, respectively. It is not presently possible to estimate the ultimate
amount of all remediation costs that might be incurred or the penalties that
may be imposed. Receivables for recoverable costs from certain states, under
programs to assist companies in cleanup efforts related to underground storage
tanks at retail marketing outlets, were $22 million at December 31, 1995, and
$7 million at December 31, 1994.
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 1995 and 1994, such capital expenditures
totaled $50 million and $70 million, respectively. The Marathon Group
anticipates making additional such expenditures in the future; however, the
exact amounts and timing of such expenditures are uncertain because of the
continuing evolution of specific regulatory requirements.
At December 31, 1995, and December 31, 1994, accrued liabilities for
platform abandonment and dismantlement totaled $128 million and $127 million,
respectively.
GUARANTEES -
Guarantees by USX of the liabilities of affiliated and other entities of
the Marathon Group totaled $18 million and $19 million at December 31, 1995,
and December 31, 1994, respectively.
At December 31, 1995, and December 31, 1994, the Marathon Group's pro rata
share of obligations of LOOP INC. and various pipeline affiliates secured by
throughput and deficiency agreements totaled $187 million and $197 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, 1995, and December 31, 1994, contract commitments for the
Marathon Group's capital expenditures for property, plant and equipment
totaled $112 million and $158 million, respectively.
M-21
<PAGE> 133
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
--------------------------------------- -------------------------------------------
(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 $3,514 $3,492 $3,528 $3,337 $3,408 $3,497 $3,105 $2,747
Operating income (loss) (526) 171 249 211 85 117 156 226
Operating costs include:
Inventory market valuation
charges (credits) (35) 51 2 (88) (2) 63 (93) (128)
Impairment of
long-lived assets 659 - - - - - - -
Income (loss) before
extraordinary loss (365) 97 108 77 37 102 72 110
NET INCOME (LOSS) (366) 93 108 77 37 102 72 110
- - -------------------------------------------------------------------------------------------------------------------------------
MARATHON STOCK DATA:
Income (loss) before extraordinary
loss applicable to
Marathon Stock $ (365) $ 96 $ 107 $ 75 $ 35 $ 101 $ 70 $ 109
-Per share: primary and
fully diluted (1.27) .33 .37 .26 .12 .35 .25 .38
Dividends paid per share .17 .17 .17 .17 .17 .17 .17 .17
Price range of Marathon Stock(a):
-Low 17-1/2 19-1/4 17-1/8 15-3/4 16-3/8 16-3/4 15-5/8 16-3/8
-High 20-1/8 21-1/2 20-1/4 17-5/8 19-1/8 18-3/8 18 18-5/8
- - -------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Composite tape.
</TABLE>
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 Ltd. Russia 30% Oil & Gas Development
- - ---------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Economic interest as of December 31, 1995.
</TABLE>
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> 134
FIVE-YEAR OPERATING SUMMARY
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET LIQUID HYDROCARBON PRODUCTION (thousands of barrels per day)
United States 132 110 111 118 127
International - Europe 56 48 26 36 44
- Other 17 14 19 20 24
------------------------------------------------
Total Worldwide 205 172 156 174 195
- - ----------------------------------------------------------------------------------------------------------------------------------
NET NATURAL GAS PRODUCTION (millions of cubic feet per day)
United States 634 574 529 593 689
International - Europe 483(a) 382 356 326 336
- Other 15 18 17 12 -
-------------------------------------------------
Total Consolidated 1,132 974 902 931 1,025
Equity production - CLAM Petroleum Co. 44 40 35 41 49
-------------------------------------------------
Total Worldwide 1,176 1,014 937 972 1,074
- - ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE SALES PRICES
Liquid Hydrocarbons (dollars per barrel)
United States $14.59 $13.53 $14.54 $16.47 $17.43
International 16.66 15.61 16.22 18.95 19.38
Natural Gas (dollars per thousand cubic feet)
United States $ 1.63 $ 1.94 $ 1.94 $ 1.60 $ 1.57
International 1.80 1.58 1.52 1.77 2.18
- - ----------------------------------------------------------------------------------------------------------------------------------
NET PROVED RESERVES - YEAR-END
Liquid Hydrocarbons (millions of barrels)
Beginning of year 795 842 848 868 846
Extensions, discoveries and other additions 70 13 21 27 58
Improved recovery 4 6 24 12 27
Revisions of previous estimates (18) (6) 4 5 10
Net purchase (sale) of reserves in place (13) 2 2 (3) (3)
Production (74) (62) (57) (61) (70)
-------------------------------------------------
Total 764 795 842 848 868
- - ----------------------------------------------------------------------------------------------------------------------------------
Natural Gas (billions of cubic feet)
Beginning of year 3,654 3,748 3,866 4,077 4,265
Extensions, discoveries and other additions 339 303 248 147 167
Improved recovery 1 - 33 6 6
Revisions of previous estimates (32) (7) (23) 58 24
Net purchase (sale) of reserves in place 17 (45) (59) (84) (22)
Production (390) (345) (317) (338) (363)
-------------------------------------------------
Total 3,589 3,654 3,748 3,866 4,077
- - ----------------------------------------------------------------------------------------------------------------------------------
U.S. REFINERY OPERATIONS (thousands of barrels per day)
In-use crude oil capacity - year-end(b) 570 570 570 620 620
Refinery runs - crude oil refined 503 491 549 546 542
- other charge and blend stocks 94 107 102 79 85
In-use capacity utilization rate 88% 86% 90% 88% 87%
- - ----------------------------------------------------------------------------------------------------------------------------------
U.S. REFINED PRODUCT SALES (thousands of barrels per day)
Gasoline 445 443 420 404 403
Distillates 180 183 179 169 173
Propane 12 16 18 19 17
Feedstocks and special products 44 32 32 39 37
Heavy fuel oil 31 38 39 39 44
Asphalt 35 31 38 37 35
-------------------------------------------------
Total 747 743 726 707 709
- - ----------------------------------------------------------------------------------------------------------------------------------
U.S. REFINED PRODUCT MARKETING OUTLETS - YEAR-END
Marathon operated terminals 51 51 51 52 53
Retail - Marathon Brand 2,380 2,356 2,331 2,290 2,106
- Emro Marketing Company 1,627 1,659 1,571 1,549 1,596
- - ----------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Includes gas acquired for injection and subsequent resale of 35
million cubic feet per day.
(b) The 50,000 barrel per day Indianapolis Refinery was temporarily
idled in October 1993.
</TABLE>
M-23
<PAGE> 135
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INCOME
SALES (excluding matching buy/sell transactions and excise taxes) increased
by $952 million, or 12%, in 1995 from 1994 and by $127 million, or 2%, in 1994
from 1993. The increase in 1995 was mainly due to increased volumes and higher
average prices for domestic refined products, international natural gas and
worldwide liquid hydrocarbons, and increased volumes for domestic natural gas,
partially offset by lower average prices for domestic natural gas. Sales in 1995
included revenues of $130 million related to domestic natural gas purchased for
resale ("trading sales") for which costs of purchased gas are reflected in
operating costs. Trading sales in prior years were reflected in sales on a
margin basis, and were not significant. The increase in 1994 was mainly due to
increased volumes for worldwide liquid hydrocarbons, partially offset by
decreased volumes for refined products and lower average prices for worldwide
liquid hydrocarbons. Excise taxes increased in 1994 from 1993 largely due to a
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. Sales for each of the last three years are summarized in the
following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1995 1994 1993
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Refined Products and Merchandise $ 7,068 $ 6,491 $ 6,561
Crude Oil and Condensate 811 746 567
Natural Gas 950 670 607
Natural Gas Liquids 70 54 60
Transportation and Other 197 183 222
------- ------- -------
Subtotal $ 9,096 $ 8,144 $ 8,017
------- ------- -------
Matching Buy/Sell Transactions(a) 2,067 2,071 2,018
Excise Taxes(a) 2,708 2,542 1,927
------- ------- -------
Total Sales $13,871 $12,757 $11,962
- - -------------------------------------------------------------------------------
<FN>
(a) Included in both sales and operating costs, resulting in no effect on
income.
</TABLE>
OPERATING INCOME was $105 million in 1995, reflecting a decline of $479
million from 1994, following an increase of $415 million in 1994 from 1993. The
decline in 1995 was due to a $659 million fourth quarter pretax noncash charge
($419 million aftertax) related to the adoption of Statement of Financial
Accounting Standards No. 121 - Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of ("SFAS No. 121"). This charge
primarily reflected impairment of certain domestic and international oil and gas
properties (including the Heimdal Gas Field in the Norwegian North Sea), and the
temporarily idled Indianapolis refinery. Operating income also included a $70
million favorable effect in 1995, compared with a $160 million favorable effect
in 1994, and a $241 million unfavorable effect in 1993, for noncash adjustments
to the inventory market valuation reserve. Excluding the effects of these items,
operating income increased by $270 million in 1995 from 1994, and by $14 million
in 1994 from 1993. The increase in 1995 was primarily due to increased volumes
for worldwide liquid hydrocarbons and natural gas, higher average prices for
worldwide liquid hydrocarbons and international natural gas, and reduced
employee reorganization charges, partially offset by lower average prices for
domestic natural gas. The increase in 1994 was primarily due to reduced
operating expenses and increased volumes for international liquid hydrocarbons
and worldwide natural gas, predominantly offset by lower average margins for
domestic refined products, lower prices for liquid hydrocarbons, and 1994
employee reorganization charges of $42 million.
M-24
<PAGE> 136
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
OTHER INCOME was $23 million in 1995, $177 million in 1994, and $46 million
in 1993. Other income in 1995 included gains of $8 million on disposal of
assets, mainly reflecting the sale of certain downstream assets. Other income in
1994 included gains of $175 million on disposal of assets, primarily the assets
of a retail propane marketing subsidiary, and certain domestic oil and gas
production properties. Other income in 1994 also included a $10 million
unfavorable effect applicable to the Marathon Group's 33% Retained Interest in
the Delhi Group. The Retained Interest was eliminated in June 1995. Other income
in 1993 included gains of $34 million on the disposal of assets, including the
assets of a convenience store wholesale distributor subsidiary, two product
tug/barge units and various domestic oil and gas production properties.
INTEREST AND OTHER FINANCIAL COSTS were $349 million in 1995, compared with
$300 million in 1994 and $292 million in 1993. The increase in 1995 from 1994
was due primarily to a $42 million decrease in capitalized interest following
completion during 1994 of the East Brae project and Scottish Area Gas Evacuation
System in the U.K. sector of the North Sea. Interest and other financial costs
in 1995 were reduced by $17 million for interest on refundable federal income
taxes paid in prior years (described further in the following paragraph).
Interest and other financial costs in 1994 included a $34 million favorable
effect resulting from settlement of various state tax issues. Excluding the
effect of this item, the increase in 1994 from 1993 was primarily due to lower
capitalized interest following completion of previously mentioned projects in
the U.K. North Sea.
PROVISION (CREDIT) FOR ESTIMATED INCOME TAXES was a credit of $107 million
in 1995, compared with a provision of $155 million in 1994 and a credit of $49
million in 1993. The credits for estimated income taxes in 1995 and 1993
included incremental tax benefits of $44 million and $64 million, respectively,
resulting from USX's election to credit, rather than deduct, foreign income
taxes for U.S. federal income tax purposes. A credit of $24 million included in
the 1994 income tax provision reflected the reversal of a valuation allowance
related to deferred tax assets. Charges of $40 million included in the 1993
income tax credit were due to 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. For reconciliation of the federal statutory
tax rate to total provisions (credits), see Note 13 to the Marathon Group
Financial Statements.
An EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT of $5 million, or $.02 per
share, in 1995 represents the portion of the loss on early extinguishment of USX
debt attributed to the Marathon Group. For additional information, see USX
Consolidated Management's Discussion and Analysis of Cash Flows.
A NET LOSS of $88 million was recorded in 1995, compared with net income of
$321 million in 1994 and a net loss of $29 million in 1993. The changes in net
income and loss between years primarily reflect the factors discussed above.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
CURRENT ASSETS increased by $151 million from year-end 1994 primarily due
to increases in receivables and cash and cash equivalents. The increase in
accounts receivable primarily resulted from a net increase in foreign currency
contracts and higher sales of crude oil. The increase in cash and cash
equivalents primarily reflected cash provided from operating activities, asset
sales and elimination of the Retained Interest, partially offset by cash used
for capital expenditures and financing activities.
CURRENT LIABILITIES increased by $313 million in 1995, primarily due to a
reclassification of certain long-term debt to debt due within one year, and
increased accounts payable, partially offset by a reduction in accrued taxes.
The increase in accounts payable mainly reflected increases in trade payables.
The reduction in accrued taxes primarily relates to expected refunds from
foreign tax credit benefits.
TOTAL LONG-TERM DEBT AND NOTES PAYABLE at December 31, 1995, was $3.8
billion. The $288 million decrease from December 31, 1994, mainly reflected cash
provided from operating activities in excess of amounts required for capital
expenditures and dividends. 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.
M-25
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CASH FLOWS
THE MARATHON GROUP'S NET CASH PROVIDED FROM OPERATING ACTIVITIES totaled
$1,044 million in 1995, compared with $720 million in 1994 and $830 million in
1993. Cash provided from operating activities in 1994 included payments of $123
million related to the settlement of various state tax issues. In addition to
this item, the increase in 1995 from 1994 reflected increased volumes for
worldwide liquid hydrocarbons and natural gas, higher average prices for
worldwide liquid hydrocarbons and international natural gas and collections
under take-or-pay contracts for U.K. natural gas. These factors were partially
offset by payments of $96 million in 1995, representing the Marathon Group's
share of the amortized discount on USX's zero coupon debentures. (For further
discussion, see USX Consolidated Management's Discussion and Analysis of Cash
Flows.) Excluding the effects of the previously mentioned $123 million payment
in 1994, net cash provided from operating activities increased by $13 million in
1994 from 1993.
CAPITAL EXPENDITURES were $642 million in 1995, a decline of
$111 million from 1994, following a decline of $157 million from 1993. The
decline in 1995 mainly reflected completion in 1994 of the East Brae Field and
SAGE system in the U.K. The decline in 1994 was largely due to decreased
expenditures for the East Brae Field and SAGE system and the substantial
completion in 1993 of the distillate hydrotreater complex at the Robinson,
Illinois refinery. Contract commitments for capital expenditures at year-end
1995 were $112 million, compared with $158 million at year-end 1994.
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 related to acquisitions of 89 retail marketing outlets from
independent petroleum retailers.
Capital expenditures in 1996 are expected to increase to approximately $780
million, with actual spending remaining responsive to conditions affecting the
petroleum industry and the worldwide economic climate. Expenditures in 1996 will
be primarily for domestic projects including retail marketing expansion,
development of the Green Canyon 244 area in the U.S. Gulf of Mexico and various
other exploration and production, and refining, marketing and transportation
projects.
CASH FROM DISPOSAL OF ASSETS was $77 million in 1995, compared with $263
million in 1994 and $174 million in 1993. Proceeds in 1995 mainly reflected
sales of certain domestic production properties, mainly in the Illinois Basin,
the stock of FWA Drilling Company, Inc., and certain downstream assets. Proceeds
in 1994 mainly reflected sales of the assets of a retail propane marketing
subsidiary and certain domestic oil and gas production properties. Proceeds in
1993 mainly reflected the sale/leaseback of interests in two liquefied natural
gas ("LNG") tankers and the sales of various domestic oil and gas production
properties, the assets of a convenience store wholesale distributor subsidiary
and two product tug/barge units.
FINANCIAL OBLIGATIONS decreased by $206 million in 1995, mainly reflecting
cash provided from operating activities and the elimination of the Marathon
Group's Retained Interest in the Delhi Group, partially offset by cash used for
capital expenditures, dividend payments and redemption of preferred stock.
Financial obligations consist of the Marathon Group's portion of USX debt and
preferred stock of a subsidiary attributed to all three groups, as well as debt
specifically attributed to the Marathon Group. For discussion of USX financing
activities attributed to all three groups, see USX Consolidated Management's
Discussion and Analysis of Cash Flows.
PREFERRED STOCK REDEEMED of $78 million represents the Marathon Group's
portion of USX's Adjustable Rate Cumulative Preferred Stock which was redeemed
on September 29, 1995. For additional details, see USX Consolidated Management's
Discussion and Analysis of Cash Flows.
DERIVATIVE INSTRUMENTS
In the normal course of its business, the Marathon Group is exposed to
market risk, or price fluctuations related to the purchase, production or sale
of crude oil, natural gas and refined products. The Marathon Group uses
commodity-based derivative instruments such as exchange-traded futures contracts
and options and over-the-counter ("OTC") commodity swaps and options to manage
exposure to market risk. The Marathon Group's strategic approach is to limit the
use of these instruments principally to hedging activities. Accordingly, gains
and losses on futures contracts and swaps generally offset the effects of price
changes in the underlying commodity. However, certain derivative instruments
have the effect of converting fixed price equity natural
M-26
<PAGE> 138
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
gas production volumes to variable market-based prices. These instruments are
used as part of Marathon's overall risk management programs.
While commodity-based derivative instruments are generally used to reduce
risks from unfavorable commodity price movements, they also may limit the
opportunity to benefit from favorable movements. Marathon's exchange-traded
derivative activities are conducted primarily on the New York Mercantile
Exchange ("NYMEX"). For quantitative information relating to derivative
instruments, including aggregate contract values, and fair values where
appropriate, see Note 25 to the Marathon Group Financial Statements.
The Marathon Group is subject to basis risk, caused by factors that affect
the relationship between commodity futures prices reflected in derivative
instruments and the cash market price of the underlying commodity. Natural gas
transaction prices are frequently based on industry reference prices that may
vary from prices experienced in local markets. For example, NYMEX contracts for
natural gas are priced at Louisiana's Henry Hub, while the underlying quantities
of natural gas may be produced and sold in the Western United States at prices
that do not move in strict correlation with futures prices. To the extent that
commodity price changes in one region are not reflected in other regions,
derivative instruments may no longer provide the expected hedge, resulting in
increased exposure to basis risk. These regional price differences could yield
favorable or unfavorable results. OTC transactions are being used to manage
exposure to a portion of basis risk.
The Marathon Group is also subject to currency risk, or price fluctuations
related to anticipated revenues and operating costs, firm commitments for
capital expenditures and existing assets or liabilities denominated in
currencies other than U.S. dollars. For quantitative information relating to
forward currency contracts, see Note 25 to the Marathon Group Financial
Statements.
The Marathon Group is subject to liquidity risk, caused by timing delays in
liquidating contract positions due to a potential inability to identify a
counterparty willing to accept an offsetting position. Liquidity risk is
relatively low for exchange-traded transactions due to the large number of
active participants.
The Marathon Group is exposed to the credit risk of nonperformance by
counterparties in derivative transactions. Internal controls used to manage
credit risk include ongoing reviews of credit worthiness of counter-parties and
the use of master netting agreements, to the extent practicable, and full
performance is anticipated.
Based on a strategic approach of limiting its use of derivative instruments
principally to hedging activities, combined with risk assessment procedures and
internal controls in place, management believes that its use of derivative
instruments does not expose the Marathon Group to material risk, and that such
use will not have a material adverse effect on the financial position, liquidity
or results of operations of the Marathon Group. For a summary of accounting
policies related to derivative instruments, see Note 2 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. 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.
M-27
<PAGE> 139
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Marathon Group environmental expenditures for each of the last three years
were(a):
<TABLE>
<CAPTION>
(Dollars in millions) 1995 1994 1993
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital $ 50 $ 70 $123
Compliance
Operating & Maintenance 108 106 92
Remediation(b) 31 25 38
---- ---- ----
Total $189 $201 $253
- - -------------------------------------------------------------------------------
<FN>
(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, net of recoveries.
</TABLE>
The Marathon Group's environmental capital expenditures accounted for 8%,
9% and 14% of total capital expenditures in 1995, 1994 and 1993, respectively.
These expenditures are returning to historical levels following completion of
major projects such as the multi-year capital spending program for diesel fuel
desulfurization which began in 1990 and was substantially completed by the end
of 1993.
During 1993 through 1995, compliance expenditures represented 1% of the
Marathon Group's total operating costs. Remediation spending during this period
was primarily related to retail marketing outlets which incur ongoing clean-up
costs for soil and groundwater contamination associated with underground storage
tanks and piping.
USX has been notified that it is a potentially responsible party ("PRP") at
19 waste sites related to the Marathon Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of December
31, 1995. In addition, there are 10 sites related to the Marathon Group where
USX has received information requests or other indications that USX may be a PRP
under CERCLA but where sufficient information is not presently available to
confirm the existence of liability. There are also 70 additional sites,
excluding retail marketing outlets, related to the Marathon Group where
remediation is being sought under other environmental statutes, both federal and
state. At many of these sites, USX is one of a number of parties involved and
the total cost of remediation, as well as USX's share thereof, is frequently
dependent upon the outcome of investigations and remedial studies. The Marathon
Group accrues for environmental remediation activities when the responsibility
to remediate is probable and the amount of associated costs is reasonably
determinable. As environmental remediation matters proceed toward ultimate
resolution or as additional remediation obligations arise, charges in excess of
those previously accrued may be required. See Note 27 to the Marathon Group
Financial Statements.
New or expanded environmental requirements, which could increase the
Marathon Group's environmental costs, may arise in the future. USX intends to
comply with all legal requirements regarding the environment, but since many of
them are not fixed or presently determinable (even under existing legislation)
and may be affected by future legislation, it is not possible to predict
accurately the ultimate cost of compliance, including remediation costs which
may be incurred and penalties which may be imposed. However, based on presently
available information, and existing laws and regulations as currently
implemented, the Marathon Group does not anticipate that environmental
compliance expenditures (including operating and maintenance and remediation)
will materially increase in 1996. The Marathon Group's capital expenditures for
environmental controls are expected to be approximately $65 million in 1996.
Predictions beyond 1996 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 $65 million in 1997; 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
M-28
<PAGE> 140
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Note 27 to the Marathon Group Financial Statements. The ultimate resolution of
these contingencies could, individually or in the aggregate, be material to the
Marathon Group financial statements. However, management believes that USX will
remain a viable and competitive enterprise even though it is possible that
these contingencies could be resolved unfavorably to the Marathon Group. See
USX Consolidated Management's Discussion and Analysis of Cash Flows.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
The Marathon Group had operating income of $105 million in 1995 compared
with $584 million in 1994 and $169 million in 1993. Excluding noncash charges
for impairment of long-lived assets related to adoption of SFAS No. 121 and
effects of noncash adjustments to the inventory market valuation reserve,
operating income was $694 million in 1995, $424 million in 1994 and $410 million
in 1993.
OPERATING INCOME (LOSS)
<TABLE>
<CAPTION>
(Dollars in millions) 1995 1994 1993
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Exploration and Production ("Upstream")
Domestic $ 306 $ 151 $ 117
International 174 59 (37)
------ ------ ------
Total Exploration and Production 480 210 80
Refining, Marketing and Transportation ("Downstream") 298 287 407
Gas Gathering and Processing 2 - -
Administrative(a) (86) (73) (77)
------ ------ ------
694 424 410
Impairment of Long-Lived Assets(b) (659) - -
Inventory Market Valuation Reserve Adjustment 70 160 (241)
------ ------ ------
Total $ 105 $ 584 $ 169
- - --------------------------------------------------------------------------------------
<FN>
(a) 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.
(b) Reflects adoption of SFAS No. 121, effective October 1, 1995. Consists
of $(343) million related to Domestic Exploration and Production; $(190)
million related to International Exploration and Production; and $(126)
million related to Downstream.
</TABLE>
AVERAGE VOLUMES AND SELLING PRICES
<TABLE>
<CAPTION>
1995 1994 1993
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(thousands of barrels per day)
Net Liquids Production(a) - U.S. 132 110 111
- International(b) 72 62 45
------ ------ ------
- Total Consolidated 204 172 156
(millions of cubic feet per day)
Net Natural Gas Production - U.S. 634 574 529
- International - Equity 463 400 373
- International - Other(c) 35 - -
------ ------ ------
- Total Consolidated 1,132 974 902
- - ----------------------------------------------------------------------------------------------
(dollars per barrel)
Liquid Hydrocarbons(a) - U.S. $14.59 $13.53 $14.54
- International 16.66 15.61 16.22
(dollars per mcf)
Natural Gas - U.S. $ 1.63 $ 1.94 $ 1.94
- International(d) 1.80 1.58 1.52
- - ----------------------------------------------------------------------------------------------
<FN>
(a) Includes Crude Oil, Condensate and Natural Gas Liquids.
(b) Represents equity tanker liftings, truck deliveries and direct
deliveries.
(c) Represents gas acquired for injection and subsequent resale.
(d) Applicable to International - Equity volumes.
</TABLE>
UPSTREAM operating income increased by $270 million in 1995, following an
increase of $130 million in 1994. The increase in 1995 was due primarily to
increased volumes for worldwide liquid hydrocarbons and natural gas, higher
average prices for worldwide liquid hydrocarbons and international natural gas,
lower charges for employee reorganization, and reduced depreciation, depletion
and amortization ("DD&A") expense following the adoption of SFAS No. 121 at the
M-29
<PAGE> 141
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
beginning of the fourth quarter. These factors were partially offset by lower
average prices for domestic natural gas. The increase in 1994 primarily
reflected reduced worldwide operating expenses and increased volumes for
international liquid hydrocarbons and worldwide natural gas, partially offset
by lower prices for worldwide liquid hydrocarbons and 1994 charges for employee
reorganization.
DOMESTIC UPSTREAM operating income increased by $155 million in 1995 from
1994, following an increase of $34 million in 1994 from 1993. The increase in
1995 mainly reflected increased volumes for liquid hydrocarbons and natural gas,
higher average prices for liquid hydrocarbons and reduced DD&A expense following
adoption of SFAS No. 121. In addition, operating income in 1994 included
employee reorganization charges of $18 million that were non-recurring in 1995.
The previously mentioned factors were partially offset by lower average prices
for natural gas. The volume increases in 1995 mainly reflected production in the
Gulf of Mexico from the Ewing Bank 873 Field and South Pass 87D platform, which
began production in August 1994, and May 1995, respectively, and increased
production in New Mexico from the Indian Basin Field.
The increase in domestic upstream operating income in 1994, from 1993
mainly reflected reduced operating expenses and higher volumes for natural gas,
partially offset by lower average prices for liquid hydrocarbons, increased dry
well expenses, and 1994 charges for employee reorganization.
INTERNATIONAL UPSTREAM operating income increased by $115 million in 1995
from 1994, following an increase of $96 million in 1994 from 1993. The increase
in 1995 was due mainly to increased volumes and higher average prices for liquid
hydrocarbons and natural gas and reduced DD&A expense following adoption of SFAS
No. 121. In addition, operating income in 1994 included employee reorganization
charges of $9 million. The increase in international liquid hydrocarbon volumes
in 1995 from 1994 mainly reflected increased production from the U.K. North Sea,
and new production in Indonesia. Brae-Area liftings increased from 45,900 net
barrels per day ("bpd") in 1994 to 53,900 net bpd in 1995, principally
reflecting increased production at East Brae. The increase in East Brae
production was tempered by lower than anticipated reservoir sweep efficiency
associated with the gas injection program. The increase in international natural
gas volumes mainly reflected a full year of Brae-Area gas sales.
The increase in international upstream operating income in 1994, from 1993,
was due mainly to increased liquid hydrocarbon liftings, reduced operating and
exploration expenses and increased natural gas volumes, partially offset by
lower liquid hydrocarbon prices and the previously mentioned 1994 employee
reorganization charges.
DOWNSTREAM operating income increased by $11 million in 1995, following a
decrease of $120 million in 1994. The increase in 1995 was primarily due to
lower maintenance expense for refinery turnaround activity and a $15 million
favorable noncash effect for expected environmental remediation recoveries. In
addition, downstream operating income in 1994 included employee reorganization
charges of $14 million. These factors were partially offset by increased raw
material costs that were not completely recovered by increases in refined
product prices. In addition, operating income in 1994 included $11 million from
Emro Propane Company, the assets of which were sold in September 1994.
The decrease in downstream operating income in 1994 from 1993 was
predominantly due to lower refined product margins from refining and wholesale
marketing, and to the previously mentioned 1994 employee reorganization charges,
partially offset by a decline in charges for environmental remediation which
totaled $17 million in 1993.
ADMINISTRATIVE expense increased by $13 million in 1995 from 1994,
primarily reflecting the 1995 funding of the USX Foundation (which was not
funded in 1994), a 1994 curtailment gain related to postretirement benefits
other than pensions, and lower 1995 general administrative expense allocations
to the upstream and downstream operating components.
M-30
<PAGE> 142
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
OUTLOOK
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. These developments tend to be cyclical as well as subject to a
wide range of global political events. For example, in addition to industry
supply and demand conditions, changes in production policy by the Organization
of Petroleum Exporting Countries, or in the status of United Nations sanctions
against Iraq, as well as ongoing structural changes in European gas markets,
could affect industry prices in the future.
Marathon's worldwide liquid hydrocarbon volumes are expected to decline by
approximately 7% in 1996, primarily reflecting an anticipated decline in
production from Ewing Bank 873 in the U.S. Gulf of Mexico, the sale of
Marathon's interests in Illinois Basin properties and the expected sale of
interests in the Kakap Block in the Natuna Sea, offshore Indonesia, partially
offset by projected new production in Egypt. Marathon's worldwide natural gas
volumes are expected to increase by approximately 6% in 1996, primarily
reflecting successful 1995 domestic drilling programs.
Marathon's U.K. natural gas sales include sales under long-term contracts
with annual cash flow protection under take-or-pay provisions. In the context of
the restructuring of the U.K. gas market, which has resulted in lower "spot
market" prices, one large gas purchaser has approached its suppliers, including
Marathon, requesting in general terms certain amendments to all of its long-term
contracts. Marathon believes that its existing long-term sales contracts are
legally binding.
The Marathon Group has a 30% interest in Sakhalin Energy Investment Company
Ltd. ("Sakhalin Energy"), an incorporated joint venture company responsible for
overall management of the Sakhalin II Project. The Sakhalin II Production
Sharing Contract ("PSC") was signed in June 1994 for development of the
Piltun-Astokhskoye oil field and the Lunskoye gas field located offshore
Sakhalin Island in the Russian Far East Region. During December 1995, the
Russian State Duma (lower house of parliament) and the Federation Council (upper
house of parliament) approved an amended version of a Production Sharing
Agreement Law. It was formally signed by Russian President Yeltsin on December
30, 1995. Adoption of the Production Sharing Agreement Law was a significant
step toward stabilization of the PSC. However, other Russian laws and normative
acts ("regulations") at the Federation and local levels need to be brought into
compliance with the Production Sharing Agreement Law. Additional appraisal
period activities include the finalizing of development plans.
Marathon's future results of operations will reflect reduced DD&A charges
as a result of the write-down of long-lived assets associated with the adoption
of SFAS No. 121. However, the total amount of DD&A expense in future periods
will also be affected by ongoing changes in production volumes and reserve
estimates, and capital spending.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which establishes a fair value
based method of accounting for employee stock-based compensation plans but
allows companies to continue to apply the provisions of Accounting Principles
Board Opinion No. 25, provided certain pro forma disclosures are made. USX
intends to adopt SFAS No. 123 by disclosure only in its 1996 financial
statements, as permitted by the standard.
M-31
<PAGE> 143
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-22
Principal Unconsolidated Affiliates S-22
Supplementary Information S-22
Five-Year Operating Summary S-23
Management's Discussion and Analysis S-24
</TABLE>
S-1
<PAGE> 144
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> 145
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.
Thomas J. Usher 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-21 present fairly, in all material respects, the financial
position of the U. S. Steel Group at December 31, 1995 and 1994, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1995, 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 5, page S-10, in 1995 USX adopted a new accounting
standard for the impairment of long-lived assets. As discussed in Note 2,
page S-9, in 1993 USX adopted a new accounting standard for postemployment
benefits.
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 13, 1996
S-3
<PAGE> 146
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(Dollars in millions) 1995 1994 1993
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES $ 6,456 $ 6,066 $ 5,612
OPERATING COSTS:
Cost of sales (excludes items shown below) (Note 6, page S-10) 5,565 5,342 5,304
Selling, general and administrative expenses (Note 12, page S-13) (134) (121) (108)
Depreciation, depletion and amortization 318 314 314
Taxes other than income taxes 210 218 209
Restructuring charges (Note 4, page S-10) - - 42
Impairment of long-lived assets (Note 5, page S-10) 16 - -
------- ------- -------
Total operating costs 5,975 5,753 5,761
------- ------- -------
OPERATING INCOME (LOSS) 481 313 (149)
Other income (Note 8, page S-11) 101 75 210
Interest and other financial income (Note 8, page S-11) 8 12 59
Interest and other financial costs (Note 8, page S-11) (137) (152) (330)
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 453 248 (210)
Less provision (credit) for estimated income taxes (Note 14, page S-15) 150 47 (41)
------- ------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 303 201 (169)
Extraordinary loss (Note 7, page S-10) (2) - -
Cumulative effect of change in accounting
principle (Note 2, page S-9) - - (69)
------- ------ -------
NET INCOME (LOSS) 301 201 (238)
Dividends on preferred stock (24) (25) (21)
------- ------- -------
NET INCOME (LOSS) APPLICABLE TO STEEL STOCK $ 277 $ 176 $ (259)
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
INCOME PER COMMON SHARE OF STEEL STOCK
<TABLE>
<CAPTION>
1995 1994 1993
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRIMARY:
Income (loss) before extraordinary loss and cumulative effect
of change in accounting principle applicable to Steel Stock $ 3.53 $ 2.35 $ (2.96)
Extraordinary loss (.02) - -
Cumulative effect of change in accounting principle - - (1.08)
------- ------ --------
Net income (loss) applicable to Steel Stock $ 3.51 $ 2.35 $ (4.04)
Fully Diluted:
Income (loss) before extraordinary loss and cumulative effect
of change in accounting principle applicable to Steel Stock $ 3.43 $ 2.33 $ (2.96)
Extraordinary loss (.02) - -
Cumulative effect of change in accounting principle - - (1.08)
------- ------- --------
Net income (loss) applicable to Steel Stock $ 3.41 $ 2.33 $ (4.04)
Weighted average shares, in thousands
- primary 79,088 75,184 64,370
- fully diluted 89,438 78,624 64,370
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
See Note 23, page S-19, for a description of net income per common share.
The accompanying notes are an integral part of these financial statements.
S-4
<PAGE> 147
BALANCE SHEET
<TABLE>
<CAPTION>
(Dollars in millions) December 31 1995 1994
- - --------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 52 $ 20
Receivables, less allowance for doubtful accounts
of $18 and $5 (Note 20, page S-17) 579 672
Receivables from other groups (Note 15, page S-16) 35 44
Inventories (Note 17, page S-16) 601 595
Deferred income tax benefits (Note 14, page S-15) 177 449
------ ------
Total current assets 1,444 1,780
Long-term receivables and other investments,
less reserves of $23 and $22 (Note 16, page S-16) 613 667
Property, plant and equipment - net (Note 19, page S-17) 2,512 2,536
Long-term deferred income tax benefits (Note 14, page S-15) 362 223
Prepaid pensions (Note 12, page S-13) 1,546 1,224
Other noncurrent assets 44 50
------ ------
Total assets $6,521 $6,480
- - --------------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Notes payable $ 8 $ -
Accounts payable 815 678
Payable to other groups (Note 15, page S-16) 11 -
Payroll and benefits payable 389 354
Accrued taxes 180 183
Accrued interest 23 31
Long-term debt due within one year (Note 10, page S-12) 93 21
------ ------
Total current liabilities 1,519 1,267
Long-term debt (Note 10, page S-12) 923 1,432
Employee benefits (Note 13, page S-14) 2,424 2,496
Deferred credits and other liabilities 247 276
Preferred stock of subsidiary (Note 9, page S-11) 64 64
------ ------
Total liabilities 5,177 5,535
------ ------
STOCKHOLDERS' EQUITY (Note 21, page S-18)
Preferred stock 7 32
Common stockholders' equity 1,337 913
------ ------
Total stockholders' equity 1,344 945
------ ------
Total liabilities and stockholders' equity $6,521 $6,480
- - --------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-5
<PAGE> 148
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in millions) 1995 1994 1993
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income (loss) $ 301 $ 201 $(238)
Adjustments to reconcile to net cash provided
from operating activities:
Extraordinary loss and accounting principle change 2 - 69
Depreciation, depletion and amortization 318 314 314
Pensions (323) (136) (216)
Postretirement benefits other than pensions - 66 97
Deferred income taxes 133 93 (38)
Gain on disposal of assets (21) (12) (216)
Payment of amortized discount on zero coupon debentures (28) - -
Restructuring charges - - 42
Impairment of long-lived assets 16 - -
Changes in: Current receivables - sold - 10 50
- operating turnover 107 (145) (214)
Inventories (14) (29) 14
Current accounts payable and accrued expenses 160 (344) 469
All other items - net (64) 60 (43)
----- ----- -----
Net cash provided from operating activities 587 78 90
----- ----- -----
INVESTING ACTIVITIES:
Capital expenditures (324) (248) (198)
Disposal of assets 67 19 291
All other items - net 5 (22) (13)
----- ----- -----
Net cash provided from (used in) investing activities (252) (251) 80
----- ----- -----
FINANCING ACTIVITIES (Note 3, page S-9):
Change in U. S. Steel Group's share of USX consolidated debt (399) (57) (713)
Specifically attributed debt:
Borrowings - 4 12
Repayments (4) (29) (29)
Attributed preferred stock of subsidiary - 62 -
Issuance of common stock of subsidiary - 11 -
Preferred stock:
Issued - - 336
Redeemed (25) - -
Steel Stock issued 218 221 366
Dividends paid (93) (98) (85)
----- ----- -----
Net cash provided from (used in) financing activities (303) 114 (113)
----- ----- -----
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 32 (59) 57
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 20 79 22
----- ----- -----
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 52 $ 20 $ 79
- - -----------------------------------------------------------------------------------------------------
</TABLE>
See Note 11, page S-12, for supplemental cash flow information.
The accompanying notes are an integral part of these financial statements.
S-6
<PAGE> 149
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 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, if any, are carried at lower
of cost or market and investments in other companies are carried at cost, with
income recognized when dividends are received.
USE OF ESTIMATES - Generally accepted accounting principles require management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at year-end and
the reported amounts of revenues and expenses during the year.
S-7
<PAGE> 150
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand and
on deposit and highly liquid debt instruments with maturities generally of three
months or less.
INVENTORIES - Inventories are carried at lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO) method.
DERIVATIVE INSTRUMENTS - The U. S. Steel Group engages in commodity risk
management activities within the normal course of its business (Note 26, page
S-19). Management is authorized to manage exposure to price fluctuations related
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, including
both closed and open positions, and are subsequently recognized in income as
cost of sales in the same period as the underlying transaction. OTC swaps are
off-balance-sheet instruments. The effect of changes in the market indices
related to OTC swaps are recorded upon settlement and recognized in income with
the underlying transaction. The margin receivable accounts required for open
commodity contracts reflect changes in the market prices of the underlying
commodity and are settled on a daily basis. Premiums on all commodity-based
option contracts are initially recorded based on the amount paid or received;
the options' market value is subsequently recorded as a receivable or payable,
as appropriate.
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 underlying transaction; all
other gains or losses are recognized in income in the current period as interest
income or expense, as appropriate. Net contract values are included in
receivables or payables, as appropriate.
Recorded deferred gains or losses are reflected within other noncurrent
assets or deferred credits and other liabilities. Cash flows from the use of
derivative instruments are reported in the same category as the hedged item in
the statement of cash flows.
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.
S-8
<PAGE> 151
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 and related
periodic costs are measured using actuarial techniques and assumptions including
appropriate discount rates and amortization of actuarial adjustments over future
periods. 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. 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 1995 classifications.
- - --------------------------------------------------------------------------------
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 9, page S-11, 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,
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 $42 million in 1995, $36 million in 1994 and $33 million in 1993, 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 and various tax credits), 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. To the extent
that one of the three groups is allocated a consolidated tax attribute which, as
a result of expiration or otherwise, is not ultimately utilized on the
consolidated tax return, the prior years' allocation of such attribute is
adjusted such that the effect of the expiration is borne by the group that
generated the attribute. Also, if a tax attribute cannot be utilized on a
consolidated basis in the year generated or in a carryback year, the prior
years' allocation of such consolidated tax effects is adjusted in a subsequent
year to the extent necessary to allocate the tax benefits to the group that
would have realized the tax benefits on a separate return basis. As a result,
the allocated group amounts of taxes payable or refundable are not necessarily
comparable to those that would have resulted if the groups had filed separate
tax returns.
S-9
<PAGE> 152
- - -------------------------------------------------------------------------------
4. RESTRUCTURING CHARGES
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. The coal mine, which was
closed in 1994, was sold in 1995 with immaterial financial effects.
- - -------------------------------------------------------------------------------
5. IMPAIRMENT OF LONG-LIVED ASSETS
At the beginning of the fourth quarter of 1995, USX adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121).
SFAS No. 121 requires that long-lived assets, including related goodwill, be
reviewed for impairment and written down to fair value whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. The impaired assets include certain iron ore mineral rights and
surplus real estate holdings. The predominant method used to determine fair
value was comparable market value analysis. The impairment charge recognized in
operating costs for these assets was $16 million.
- - -------------------------------------------------------------------------------
6. 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). 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).
- - -------------------------------------------------------------------------------
7. EXTRAORDINARY LOSS
In 1995, USX extinguished $553 million of debt prior to maturity, resulting in
an extraordinary loss to the U. S. Steel Group of $2 million, net of a $1
million income tax benefit.
S-10
<PAGE> 153
- - -------------------------------------------------------------------------------
8. OTHER ITEMS
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OTHER INCOME:
Gain on disposal of assets $ 21 $ 12 $ 216 (a)
Income (loss) from affiliates - equity method 80 59 (11)
Other income - 4 5
----- ----- -----
Total $ 101 $ 75 $ 210
- - --------------------------------------------------------------------------------------------------------
INTEREST AND OTHER FINANCIAL INCOME(b):
Interest income $ 8 $ 11 $ 63 (a)
Other - 1 (4)
----- ----- -----
Total 8 12 59
----- ----- -----
INTEREST AND OTHER FINANCIAL COSTS(b):
Interest incurred (98) (115) (133)
Less interest capitalized 5 8 8
----- ----- -----
Net interest (93) (107) (125)
Interest on B&LE litigation - (1) (164)
Interest on tax issues (11) (12) (16)
Financial cost on preferred stock of subsidiary (5) (5) -
Amortization of discounts (6) (11) (11)
Expenses on sales of accounts receivable (Note 20, page S-17) (22) (16) (12)
Other - - (2)
----- ----- -----
Total (137) (152) (330)
----- ----- -----
NET INTEREST AND OTHER FINANCIAL COSTS(b) $(129) $(140) $(271)
- - --------------------------------------------------------------------------------------------------------
<FN>
(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.
</TABLE>
- - -------------------------------------------------------------------------------
9. 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 10, page S-12.
<TABLE>
<CAPTION>
U. S. Steel Group Consolidated USX(a)
----------------- -------------------
(In millions) December 31 1995 1994 1995 1994
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 9 $ 1 $ 47 $ 4
Receivables(b) 14 3 73 11
Long-term receivables(b) 6 17 29 70
Other noncurrent assets(b) 2 3 8 11
------ ------ ------ ------
Total assets $ 31 $ 24 $ 157 $ 96
- - ---------------------------------------------------------------------------------------------------------
Notes payable $ 8 $ - $ 40 $ -
Accounts payable 9 1 46 3
Accrued interest 23 31 119 123
Long-term debt due within one year (Note 10, page S-12) 89 18 460 74
Long-term debt (Note 10, page S-12) 818 1,323 4,303 5,346
Deferred credits and other liabilities(b) - 1 - 3
Preferred stock of subsidiary 64 64 250 250
------ ------ ------ ------
Total liabilities $1,011 $1,438 $5,218 $5,799
- - ---------------------------------------------------------------------------------------------------------
Preferred stock $ - $ 25 $ - $ 105
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
U. S. Steel Group(c) Consolidated USX
-------------------- --------------------
(In millions) 1995 1994 1993 1995 1994 1993
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest and other financial costs (Note 8, page S-11) $(98) $(117) $(125) $(439) $(471) $(471)
- - ------------------------------------------------------------------------------------------------------------
<FN>
(a) For details of USX long-term debt, preferred stock of subsidiary and
preferred stock, see Notes 15, page U-20; 26, page U-25; and 20, 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.
</TABLE>
S-11
<PAGE> 154
- - --------------------------------------------------------------------------------
10. 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 1995 1994 1995 1994
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Specifically attributed debt(b):
Sale-leaseback financing and capital leases $ 109 $ 112 $ 133 $ 137
Seller-provided financing - - 41 42
------ ------ ------ ------
Total 109 112 174 179
Less amount due within one year 4 3 5 4
------ ------ ------ ------
Total specifically attributed long-term debt $ 105 $ 109 $ 169 $ 175
- - ------------------------------------------------------------------------------------------------------
Debt attributed to all three groups(c) $ 916 $1,358 $4,810 $5,489
Less unamortized discount 9 17 47 69
Less amount due within one year 89 18 460 74
------ ------ ------ ------
Total long-term debt attributed to all three groups $ 818 $1,323 $4,303 $5,346
- - ------------------------------------------------------------------------------------------------------
Total long-term debt due within one year $ 93 $ 21 $ 465 $ 78
Total long-term debt due after one year 923 1,432 4,472 5,521
- - ------------------------------------------------------------------------------------------------------
<FN>
(a) See Note 15, 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; 9, page S-11; and 11, page S-12).
</TABLE>
- - --------------------------------------------------------------------------------
11. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED FROM (USED IN) OPERATING ACTIVITIES INCLUDED:
Interest and other financial costs paid (net of
amount capitalized) $ (159) $ (189) $ (257)
Income taxes (paid) refunded, including settlements
with other groups (4) 48 31
- - ------------------------------------------------------------------------------------------------------
USX DEBT ATTRIBUTED TO ALL THREE GROUPS - NET:
Commercial paper:
Issued $ 2,434 $ 1,515 $ 2,229
Repayments (2,651) (1,166) (2,598)
Credit agreements:
Borrowings 4,719 4,545 1,782
Repayments (4,659) (5,045) (2,282)
Other credit arrangements - net 40 - (45)
Other debt:
Borrowings 52 509 791
Repayments (440) (791) (318)
------- ------- -------
Total $ (505) $ (433) $ (441)
======= ======= =======
U. S. Steel Group activity $ (399) $ (57) $ (713)
Marathon Group activity (204) (371) 261
Delhi Group activity 98 (5) 11
------- ------- -------
Total $ (505) $ (433) $ (441)
- - ------------------------------------------------------------------------------------------------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Steel Stock issued for Dividend Reinvestment Plan and
employee stock option plans $ 16 $ 4 $ 4
Disposal of assets - notes received 4 3 9
- liabilities assumed by buyers - - 47
Decrease in debt resulting from the adoption of equity
method accounting for RMI - 41 -
- - ------------------------------------------------------------------------------------------------------
</TABLE>
S-12
<PAGE> 155
- - --------------------------------------------------------------------------------
12. 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, pension benefits under the
contributory benefit provisions cover certain participating salaried employees
and are based upon a percent of total career pensionable 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. 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). During 1995, USX funded the U.
S. Steel Group's principal pension plan by selling Steel Stock to the public for
net proceeds of $169 million.
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 1995, 1994
and 1993 was determined assuming an expected long-term rate of return on plan
assets of 10%, 9% and 10%, respectively. The total pension credit is primarily
included in selling, general and administrative expenses.
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Major plans:
Cost of benefits earned during the period $ 57 $ 65 $ 55
Interest cost on projected benefit obligation
(8% for 1995; 6.5% for 1994; and 7% for 1993) 563 527 549
Return on assets - actual loss (return) (1,842) 11 (725)
- deferred gain (loss) 1,084 (734) (77)
Net amortization of unrecognized (gains) losses 4 9 (7)
------- ----- -----
Total major plans (134) (122) (205)
Multiemployer and other plans 2 2 3
------- ----- -----
Total periodic pension cost (credit) $ (132) $(120) $(202)
- - -------------------------------------------------------------------------------
</TABLE>
FUNDS' STATUS - The assumed discount rate used to measure the benefit
obligations of major plans was 7% at December 31, 1995, and 8% at December 31,
1994. The assumed rate of future increases in compensation levels was 4% at both
year-ends. 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 1995 1994
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Reconciliation of funds' status to reported amounts:
Projected benefit obligation (PBO)(a) $(7,828) $(7,417)
Plan assets at fair market value(b) 8,588 7,422
------- -------
Assets in excess of PBO(c) 760 5
Unrecognized net gain from transition (347) (416)
Unrecognized prior service cost 728 799
Unrecognized net loss 411 835
Additional minimum liability(d) (77) (75)
------- -------
Net pension asset included in balance sheet $ 1,475 $ 1,148
- - -------------------------------------------------------------------------------
(a) PBO includes:
Accumulated benefit obligation (ABO) $ 7,408 $ 7,078
Vested benefit obligation 6,955 6,654
(b) Types of assets held:
USX stocks 1% 1%
Stocks of other corporations 54% 54%
U.S. Government securities 19% 23%
Corporate debt instruments and other 26% 22%
(c) Includes several small plans that have
ABOs in excess of plan assets:
PBO $ (75) $ (79)
Plan assets - -
------- -------
PBO in excess of plan assets $ (75) $ (79)
(d) Additional minimum liability recorded was
offset by the following:
Intangible asset $ 50 $ 58
Stockholders' equity adjustment - net of
deferred income tax 17 11
- - -------------------------------------------------------------------------------
</TABLE>
S-13
<PAGE> 156
13. 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. 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). 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, most 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 union agreement. In 1995, USX funded the initial $25 million
contribution and an additional $10 million, which is the minimum requirement in
each succeeding contract year.
POSTRETIREMENT BENEFIT COST - Postretirement benefit cost for defined
benefit plans for 1995, 1994 and 1993 was determined assuming discount rates of
8%, 6.5% and 7%, respectively, and an expected return on plan assets of 10% for
1995, 9% for 1994 and 10% in 1993:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost of benefits earned during the period $ 19 $ 27 $ 26
Interest on accumulated postretirement benefit
obligation (APBO) 176 179 179
Return on assets - actual return (11) (8) (7)
- deferred loss (1) (2) (5)
Amortization of unrecognized losses 2 19 10
------ ------ ------
Total defined benefit plans 185 215 203
Multiemployer plans(a) 15 21 9
------ ------ ------
Total periodic postretirement benefit cost 200 236 212
Settlement gain(b) - - (24)
------ ------ ------
Total postretirement benefit cost $ 200 $ 236 $ 188
- - ---------------------------------------------------------------------------------------------------------------
<FN>
(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 $129 million, including the effects of
future medical inflation, and this amount could increase if additional
beneficiaries are assigned.
(b) In 1993, a settlement gain resulted from the sale of the
Cumberland coal mine.
</TABLE>
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 1995 1994
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of funds' status to reported amounts:
Fair value of plan assets $ 116 $ 97
------- -------
APBO attributable to:
Retirees (1,769) (1,722)
Fully eligible plan participants (209) (196)
Other active plan participants (380) (396)
------- -------
Total APBO (2,358) (2,314)
------- -------
APBO in excess of plan assets (2,242) (2,217)
Unrecognized net gain - (28)
Unamortized prior service cost 19 22
-------- --------
Accrued liability included in balance sheet $(2,223) $(2,223)
- - ------------------------------------------------------------------------------------------------------------------
</TABLE>
The assumed discount rate used to measure the APBO was 7% and
8% at December 31, 1995, and December 31, 1994, 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 1996 is approximately 9%,
declining to an ultimate rate in 2003 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 1995 net periodic postretirement benefit cost by $23 million and would
have increased the APBO as of December 31, 1995, by $235 million.
S-14
<PAGE> 157
14. 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).
Provisions (credits) for estimated income taxes were:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------- ------------------------------ --------------------------------
(In millions) CURRENT DEFERRED TOTAL Current Deferred Total Current Deferred Total
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal $ 8 $150 $158 $(48) $98 $50 $(1) $(63) $(64)
State and local 9 (17) (8) 2 (5) (3) (2) 25 23
--- ---- ---- ----- --- --- --- ---- ----
Total $17 $133 $150 $(46) $93 $47 $(3) $(38) $(41)
- - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
In 1995, the extraordinary loss on extinguishment of debt
includes a tax benefit of $1 million (Note 7, page S-10).
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-9).
A reconciliation of federal statutory tax rate (35%) to total
provisions (credits) follows:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate applied to income (loss) before taxes $159 $ 87 $(74)
Effects of partially-owned companies (8) (32) 7
Excess percentage depletion (8) (7) (8)
State and local income taxes after federal income tax effects (5) (1) 15
Effects of foreign operations 1 (4) (2)
Remeasurement of deferred income taxes for statutory rate increase - - (15)
Adjustment of prior years' federal income taxes 3 (2) 21
Adjustment of valuation allowances 2 - 10
Other 6 6 5
------ ------ ------
Total provisions (credits) $150 $ 47 $(41)
- - -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Deferred tax assets and liabilities resulted from the following:
<TABLE>
<CAPTION>
(In millions) December 31 1995 1994
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Federal tax loss carryforwards $ - $ 311
State tax loss carryforwards (expiring in 1996 through 2010) 104 116
Minimum tax credit carryforwards 299 70
Foreign tax credit carryforwards (expiring in 1996 through 2000) 4 -
General business credit carryforwards (expiring in 1996 through 2010) 26 30
Employee benefits 1,084 1,083
Receivables, payables and debt 91 107
Contingency and other accruals 80 76
Other 76 111
Valuation allowances (80) (130)
------ ------
Total deferred tax assets 1,684 1,774
------ ------
Deferred tax liabilities:
Property, plant and equipment 408 478
Prepaid pensions 611 502
Inventory 14 17
Federal effect of state deferred tax assets 19 13
Other 96 98
------ ------
Total deferred tax liabilities 1,148 1,108
------ ------
Net deferred tax assets $ 536 $ 666
- - ------------------------------------------------------------------------------------------------------------------------
</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.
S-15
<PAGE> 158
- - ------------------------------------------------------------------------------
15. INTERGROUP TRANSACTIONS
PURCHASES - U. S. Steel Group purchases from the Marathon Group totaled
$17 million, $13 million and $17 million in 1995, 1994 and 1993, respectively.
These transactions were conducted on an arm's-length basis.
RECEIVABLES 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 3, page S-9. Tax settlements between the
groups are generally made in the year succeeding that in which such amounts are
accrued.
- - -------------------------------------------------------------------------------
16. LONG-TERM RECEIVABLES AND OTHER INVESTMENTS
<TABLE>
<CAPTION>
(In millions) December 31 1995 1994
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Receivables due after one year $ 39 $ 85
Forward currency contracts 5 17
Equity method investments 468 460
Cost method investments 3 3
Other 98 102
---- ----
Total $613 $667
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
Summarized financial information of affiliates accounted for by
the equity method of accounting follows:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income data - year:
Sales $3,268 $2,940 $2,638
Operating income 259 222 81
Net income (loss) 161 117 (27)
- - ---------------------------------------------------------------------------------------------------------------
Balance sheet data - December 31:
Current assets $ 981 $ 981
Noncurrent assets 1,670 1,692
Current liabilities 668 818
Noncurrent liabilities 1,042 870
- - ----------------------------------------------------------------------------------------------------------------
</TABLE>
Dividends and partnership distributions received from equity
affiliates were $67 million in 1995, $34 million in 1994 and $6 million in
1993.
U. S. Steel Group purchases of transportation services and
semi-finished steel from equity affiliates totaled $406 million, $360 million
and $313 million in 1995, 1994 and 1993, respectively. At December 31, 1995
and 1994, U. S. Steel Group payables to these affiliates totaled $20 million
and $22 million, respectively. U. S. Steel Group sales of steel and raw
materials to equity affiliates totaled $768 million, $680 million and $526
million in 1995, 1994 and 1993, respectively. At December 31, 1995 and 1994,
U. S. Steel Group receivables from these affiliates were $163 million and $198
million, respectively. Generally, these transactions were conducted under
long-term, market-based contractual arrangements.
- - ------------------------------------------------------------------------------
17. INVENTORIES
<TABLE>
<CAPTION>
(In millions) December 31 1995 1994
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 89 $ 44
Semi-finished products 300 336
Finished products 143 128
Supplies and sundry items 69 87
---- ----
Total $601 $595
- - ------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1995, and December 31, 1994, respectively, the
LIFO method accounted for 89% and 86% of total inventory value. Current
acquisition costs were estimated to exceed the above inventory values at
December 31 by approximately $320 million and $260 million in 1995 and 1994,
respectively.
Cost of sales was reduced by $13 million in 1994 and $11 million
in 1993 as a result of liquidations of LIFO inventories (immaterial in
1995).
S-16
<PAGE> 159
18. 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>
1996 $ 13 $ 68
1997 13 53
1998 13 43
1999 11 35
2000 11 28
Later years 137 152
Sublease rentals - (3)
---- ----
Total minimum lease payments 198 $376
====
Less imputed interest costs 89
----
Present value of net minimum lease payments
included in long-term debt $109
- - -------------------------------------------------------------------------
</TABLE>
Operating lease rental expense:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - -------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rental $ 94 $103 $106
Contingent rental 36 39 41
Sublease rentals (3) (2) (3)
---- ---- ----
Net rental expense $127 $140 $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 $52 million may be declared immediately due and payable.
- - -------------------------------------------------------------------------------
19. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
(In millions) December 31 1995 1994
- - -------------------------------------------------------------------------
<S> <C> <C>
Land and depletable property $ 151 $ 155
Buildings 491 513
Machinery and equipment 7,663 7,706
Leased assets 116 116
------ ------
Total 8,421 8,490
Less accumulated depreciation, depletion
and amortization 5,909 5,954
------ ------
Net $2,512 $2,536
- - -------------------------------------------------------------------------
</TABLE>
Amounts in accumulated depreciation, depletion and amortization for
assets acquired under capital leases (including sale-leasebacks accounted
for as financings) were $57 million and $49 million at December 31, 1995,
and December 31, 1994, respectively.
- - -------------------------------------------------------------------------------
20. SALES OF RECEIVABLES
The U. S. Steel Group participates in an agreement (the program) to sell an
undivided interest in certain accounts receivable subject to limited recourse.
Payments are collected from the sold accounts receivable; the collections are
reinvested in new accounts receivable for the buyers; and a yield, based on
defined short-term market rates, is transferred to the buyers. At December 31,
1995, the amount sold under the program that had not been collected was
$350 million, which will be forwarded to the buyers at the end of the
agreement in 1996, or in the event of earlier contract termination. If the
U. S. Steel Group does not have a sufficient quantity of eligible accounts
receivable to reinvest in for the buyers, the size of the program will be
reduced accordingly. The amount sold under the program averaged $350 million in
1995, $337 million in 1994 and $333 million in 1993. To facilitate collection,
the buyers have rights to a pool of receivables that must be maintained at a
level of at least 115% of the program size. Recognized liabilities for future
recourse obligations of sold receivables were $3 million at December 31, 1995
and 1994. 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-17
<PAGE> 160
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 1995, 1994 and 1993,
USX Credit net repurchases of loans receivable totaled $5 million, $38 million
and $50 million, respectively. At December 31, 1995, the balance of sold loans
receivable subject to recourse was $72 million. Estimated credit losses under
the recourse provisions for loans receivable were recognized when the
receivables were sold consistent with bad debt experience. USX Credit is not
actively seeking new loans at this time, but is subject to market risk through
fluctuations in short-term market rates on sold loans which pay fixed interest
rates. USX Credit significantly reduced credit risk through a credit policy,
which required 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
diversified 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, 1995, and December 31, 1994, USX Credit had outstanding loan
commitments of $2 million and $26 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.
As of December 31, 1995, and December 31, 1994, the total
balance of USX Credit real estate and equipment loans subject to impairment was
$88 million and $110 million, prior to recognizing allowance for credit losses
of $32 million and $21 million, respectively. During 1995, 1994 and 1993, USX
Credit recognized additional credit losses of $15 million, $11 million and $11
million, respectively, which are included in operating costs.
- - -------------------------------------------------------------------------------
21. STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In millions, except per share data) 1995 1994 1993
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK:
Balance at beginning of year $ 32 $ 32 $ 25
Issued(a) - - 7
Redeemed (25) - -
------ ------ ------
Balance at end of year $ 7 $ 32 $ 32
- - ----------------------------------------------------------------------------------------------------------
COMMON STOCKHOLDERS' EQUITY:
Balance at beginning of year $ 913 $ 585 $ 222
Net income (loss) 301 201 (238)
Steel Stock issued 234 225 370
Preferred stock issued(a) - - 329
Dividends on preferred stock (24) (25) (21)
Dividends on Steel Stock (per share $1.00) (80) (75) (65)
Foreign currency translation adjustments (Note 24, page S-19) - (2) 1
Deferred compensation adjustments (2) - 1
Minimum pension liability adjustment (Note 12, page S-13) (6) 3 (14)
Other 1 1 -
------ ------ ------
Balance at end of year $1,337 $ 913 $ 585
- - ----------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $1,344 $ 945 $ 617
- - ----------------------------------------------------------------------------------------------------------
<FN>
(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 20, page U-22 to the USX consolidated
financial statements.
</TABLE>
- - -------------------------------------------------------------------------------
22. 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, 1995, the Available Steel Dividend Amount
was at least $2,588 million. 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-18
<PAGE> 161
- - -------------------------------------------------------------------------------
23. 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, where applicable.
Fully diluted net income (loss) per share assumes conversion of
convertible securities for the applicable periods outstanding and assumes
exercise of stock options, provided in each case, the effect is not
antidilutive.
- - -------------------------------------------------------------------------------
24. 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 1995, 1994 and 1993, respectively, the aggregate
foreign currency transaction gains (losses) included in determining net income
were none, $1 million and $(4) million. An analysis of changes in cumulative
foreign currency translation adjustments follows:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative adjustments at January 1 $ (3) $ (1) $ (2)
Aggregate adjustments for the year:
Foreign currency translation adjustments - (2) -
Amount related to disposition of investments - - 1
---- ---- ----
Cumulative adjustments at December 31 $ (3) $ (3) $ (1)
- - -------------------------------------------------------------------------------
</TABLE>
- - -------------------------------------------------------------------------------
25. STOCK PLANS AND STOCKHOLDER RIGHTS PLAN
USX Stock Plans and Stockholder Rights Plan are discussed in Note 21,
page U-23, and Note 25, page U-25, respectively, to the USX consolidated
financial statements.
- - -------------------------------------------------------------------------------
26. DERIVATIVE INSTRUMENTS
The U. S. Steel Group uses derivative instruments, such as commodity
swaps, to manage exposure to price fluctuations relevant to the cost of natural
gas used in steel operations.
USX has used forward currency contracts to hedge foreign denominated
debt, 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 derivative 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.
The following table sets forth quantitative information by class of
derivative 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, 1995:
OTC commodity swaps(c) $ 6 $ - $ - $ 50
----- ----- ----- -----
Forward currency contracts:
- receivable $ 20 $ 19 $ - $ 31
- payable - - - 5
----- ----- ----- -----
Total currencies $ 20 $ 19 $ - $ 36
- - ----------------------------------------------------------------------------------------------------
DECEMBER 31, 1994:
OTC commodity swaps $ (10) $ - $ - $ 79
----- ----- ----- -----
Forward currency contracts:
- receivable $ 21 $ 20 $ - $ 53
- payable (1) (1) (1) 9
----- ----- ----- -----
Total currencies $ 20 $ 19 $ (1) $ 62
- - ----------------------------------------------------------------------------------------------------
<FN>
(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.
</TABLE>
S-19
<PAGE> 162
- - -------------------------------------------------------------------------------
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.
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>
1995 1994
------------------- -------------------
FAIR CARRYING Fair Carrying
(In millions) December 31 VALUE AMOUNT Value Amount
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 52 $ 52 $ 20 $ 20
Receivables 565 565 668 668
Long-term receivables and other investments 56 56 101 102
------ ------ ------ ------
Total financial assets $ 673 $ 673 $ 789 $ 790
====== ====== ====== ======
FINANCIAL LIABILITIES:
Notes payable $ 8 $ 8 $ - $ -
Accounts payable 815 815 678 678
Accrued interest 23 23 31 31
Long-term debt (including amounts due within one year) 964 907 1,319 1,341
------ ------ ------ ------
Total financial liabilities $1,810 $1,753 $2,028 $2,050
- - --------------------------------------------------------------------------------------------------------------
</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 26, page S-19, 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 20,
page S-17. For details relating to financial guarantees see Note 28, page S-21.
- - --------------------------------------------------------------------------------
28. 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
Two remaining plaintiffs in this litigation 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. See Note 6, page S-10.
Fairfield Agreement litigation
In 1990, USX and two former officials of the United Steelworkers of
America (USWA) were convicted of violating Section 302 of the Taft-Hartley Act
by reason of USX's grant of retroactive leaves of absence to union officials,
which qualified them to receive pensions from USX. In addition, USX was
convicted of mail fraud in the same proceedings. The U.S. District Court
imposed a $4.1 million fine on USX and ordered USX to make restitution to
the United States Steel and Carnegie Pension Fund of approximately $300,000.
The verdict was affirmed on appeal and, in 1995, the fine and the restitution
were paid. In a separate proceeding, a former executive officer of USX pleaded
guilty to a related misdemeanor.
S-20
<PAGE> 163
A related civil class action was commenced against USX and the
USWA in 1989 (Cox, et al. v. USX, et al.) and was dismissed by the trial court
by entry of summary judgment in favor of USX and USWA in 1991. The summary
judgment was reversed by the U.S. Court of Appeals for the 11th Circuit in
1994, and the matter reinstated and returned to the trial court. In that civil
class action, the plaintiffs' complaint asserts five causes of action arising
out of conduct that was the subject of USX's 1990 criminal conviction and that
allegedly relates to the negotiation of a 1983 local labor agreement, which
resulted in the reopening of USX's Fairfield Works in 1984. The causes of
action include claims asserted under the Racketeer Influenced and Corrupt
Organization Act (RICO) and the Employee Retirement Income Security Act
(ERISA), specifically alleging that USX granted leaves of absence and pensions
to union officials with intent to influence their approval, implementation and
interpretation of the 1983 Fairfield Agreement. Plaintiffs' claims seek damages
in excess of $276 million, which may be subject to trebling. USX and USWA have
denied any liability to the plaintiffs and are vigorously defending these
claims. A jury trial is currently scheduled to begin on September 30, 1996, in
the U.S. District Court for the Northern District of Alabama.
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
$116 million and $141 million at December 31, 1995, and December 31, 1994,
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 1995 and 1994, such capital expenditures
totaled $55 million and $57 million, respectively. The U. S. Steel Group
anticipates making additional such expenditures in the future; however,
the exact amounts and timing of such expenditures are uncertain because of
the continuing evolution of specific regulatory requirements.
GUARANTEES -
Guarantees by USX of the liabilities of affiliated entities of the
U. S. Steel Group totaled $50 million at December 31, 1995, and $171 million
at December 31, 1994. In the event that any defaults of guaranteed liabilities
occur, USX has access to its interest in the assets of the affiliates to
reduce potential U. S. Steel Group losses resulting from these guarantees.
As of December 31, 1995, the largest guarantee for a single affiliate was
$31 million.
COMMITMENTS -
At December 31, 1995, and December 31, 1994, contract commitments for
the U. S. Steel Group's capital expenditures for property, plant and equipment
totaled $178 million and $125 million, respectively.
USX entered into a 15-year take-or-pay arrangement in 1993, which
requires the U. S. Steel Group to accept pulverized coal each month or pay a
minimum monthly charge of approximately $1.3 million. Charges for deliveries
of pulverized coal in 1995 and 1994 totaled $24 million in each year. If USX
elects to terminate the contract early, a maximum termination payment of $122
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 $72 million in 1995 and $70 million in 1994, 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-21
<PAGE> 164
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
----------------------------------------- -----------------------------------------
(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 $1,647 $1,609 $1,623 $1,577 $1,643 $1,505 $1,534 $1,384
Operating income(loss) 84 134 129 134 143 106 88 (24)
Income (loss) before
extraordinary loss 62 86 81 74 90 90 56 (35)
NET INCOME (LOSS) 61 85 81 74 90 90 56 (35)
- - ------------------------------------------------------------------------------------------------------------------------------------
STEEL STOCK DATA:
Income (loss) before
extraordinary loss
applicable to Steel Stock $ 57 $ 80 $ 74 $ 68 $ 84 $ 84 $ 49 $ (41)
- Per share: primary .68 .99 .99 .89 1.11 1.11 . 65 (.56)
fully diluted .68 .95 .95 .86 1.05 1.05 .64 (.56)
Dividends paid per share .25 .25 .25 .25 .25 .25 .25 .25
Price range of Steel Stock(a):
- Low 29-1/8 30-5/8 29-1/4 30 32-7/8 32-7/8 30-1/4 36-1/8
- High 33-5/8 39 34-3/4 39-1/8 42-3/8 43 38-1/2 45-5/8
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Composite tape.
</TABLE>
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(b) United States 50% Oilwell Equipment, Supplies
PRO-TEC Coating Company United States 50% Steel Processing
RMI Titanium Company United States 51% 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
- - ---------------------------------------------------------------------------------------------------------
<FN>
(a) Economic interest as of December 31, 1995.
(b) Sold in January 1996.
</TABLE>
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-22
<PAGE> 165
FIVE-YEAR OPERATING SUMMARY
<TABLE>
<CAPTION>
(Thousands of net tons, unless otherwise noted) 1995 1994 1993 1992 1991
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RAW STEEL PRODUCTION
Gary, IN 7,163 6,768 6,624 5,969 5,817
Mon Valley, PA 2,740 2,669 2,507 2,276 2,088
Fairfield, AL 2,260 2,240 2,203 2,146 1,969
All other plants(a) - - - 44 648
--------------------------------------------------
Total Raw Steel Production 12,163 11,677 11,334 10,435 10,522
Total Cast Production 12,120 11,606 11,295 8,695 7,088
Continuous cast as % of total production 99.6 99.4 99.7 83.3 67.4
- - ----------------------------------------------------------------------------------------------------------
RAW STEEL CAPABILITY (average)
Total capability 12,500 11,990 11,850 12,144 14,976
Total production as % of total capability 97.3 97.4 95.6 85.9 70.3
- - ----------------------------------------------------------------------------------------------------------
HOT METAL PRODUCTION 10,521 10,328 9,972 9,270 8,941
- - ----------------------------------------------------------------------------------------------------------
COKE PRODUCTION 6,770 6,777 6,425 5,917 5,091
- - ----------------------------------------------------------------------------------------------------------
IRON ORE PELLETS - MINNTAC, MN
Production as % of capacity 86 90 90 83 84
Shipments 15,218 16,174 15,911 14,822 14,897
- - ----------------------------------------------------------------------------------------------------------
COAL SHIPMENTS(b) 7,502 7,698 10,980 12,164 10,020
- - ----------------------------------------------------------------------------------------------------------
STEEL SHIPMENTS BY PRODUCT
Sheet and tin mill products 9,267 8,728 8,364 7,514 7,592
Plate, tubular, structural and other
steel mill products(c) 2,111 1,840 1,605 1,340 1,254
--------------------------------------------------
Total 11,378 10,568 9,969 8,854 8,846
Total as % of domestic steel industry 11.7 11.1 11.3 10.8 11.2
- - ----------------------------------------------------------------------------------------------------------
STEEL SHIPMENTS BY MARKET
Steel service centers 2,564 2,780 2,831 2,676 2,195
Further conversion:
Trade customers 1,084 1,058 1,150 1,104 930
Joint ventures 1,332 1,308 1,074 449 424
Transportation 1,636 1,952 1,771 1,553 1,282
Export 1,515 355 327 584 1,235
Containers 857 962 835 715 753
Oil, gas and petrochemicals 748 367 342 255 201
Construction 671 722 667 598 662
All other 971 1,064 972 920 1,164
--------------------------------------------------
Total 11,378 10,568 9,969 8,854 8,846
- - ----------------------------------------------------------------------------------------------------------
<FN>
(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 1995, U. S. Steel
sold the Maple Creek coal mine, which was closed in 1994.
(c) U. S. Steel ceased production of structural products when South Works
closed in April 1992.
</TABLE>
S-23
<PAGE> 166
THE U. S. 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 & 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 for the last three years were:
<TABLE>
<CAPTION>
(Dollars in millions) 1995 1994 1993
- - ------------------------------------------------------------------------------
<S> <C> <C> <C>
Steel & Related Businesses $6,391 $5,918 $5,422
Other Businesses 65 148 190
------ ------ ------
Total Sales $6,456 $6,066 $5,612
- - ------------------------------------------------------------------------------
</TABLE>
TOTAL SALES increased by $390 million in 1995 from 1994 following an
increase of $454 million in 1994 from 1993. The increase in 1995 resulted
primarily from an increase in steel shipment volumes of approximately 0.8
million tons and higher average steel prices, partially offset by lower revenues
from engineering and consulting services. In addition, sales in 1994 included
revenues from a consolidated entity for which the equity method of accounting
was subsequently adopted. 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 U. S. Steel Group's operating income (loss) for the last three years is
as follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1995 1994 1993
- - ------------------------------------------------------------------------------
<S> <C> <C> <C>
Steel & Related Businesses $ 403 $ 239 $ 123
Administrative & Other Businesses 94 74 (230)
Impairment of Long-Lived Assets (16) - -
Restructuring - - (42)
------ ------ ------
Total Operating Income $ 481 $ 313 $ (149)
- - ------------------------------------------------------------------------------
</TABLE>
OPERATING INCOME for the U. S. Steel Group increased by $168 million in
1995 from 1994. The increase mainly reflected improved results from Steel &
Related Businesses. Results in 1993 included a $342 million charge for the B&LE
litigation (see Note 6 to the U. S. Steel Group Financial Statements). Excluding
this item, operating income for the U. S. Steel Group increased by $120 million
in 1994 from 1993, due primarily to improved results from Steel & Related
Businesses.
Steel & Related Businesses operating income improved $164 million in 1995
compared with 1994. Results in 1995 included $34 million of charges related to
repairs of the Gary Works' No. 8 blast furnace which was damaged by an explosion
on April 5, 1995, $27 million of charges related to the settlement of the
Pickering v. USX litigation, an $18 million favorable accrual adjustment for
certain employee-related costs, and $10 million in charges related to various
litigation accruals. Results in 1994 included $44 million of charges related to
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. Results for 1994 also included $13 million
related to the sale of coal seam methane gas royalty interests. Excluding these
items, operating income increased $186 million in 1995 compared to 1994. The
increase is primarily due
S-24
<PAGE> 167
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
to higher steel prices and shipment volumes, partially offset by a less
favorable product mix which included increased exports of lower value-added
products, higher costs for purchased iron ore and coke and increased accruals
for profit sharing plans.
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 and those mentioned
above, operating results for 1994 improved by $186 million over 1993 primarily
due to higher steel prices and shipment volumes. These positive factors were
partially offset by higher pension, labor and purchased steel scrap costs.
ADMINISTRATIVE AND OTHER BUSINESSES includes the portion of pension
credits, postretirement benefit costs and certain other expenses principally
attributable to the former businesses of the U. S. Steel Group as well as USX
corporate general and administrative costs allocated to the U. S. Steel Group.
The 1993 operating loss included a $342 million charge for the B&LE litigation
(see Note 6 to the U. S. Steel Group Financial Statements). Excluding this item,
operating income increased $20 million in 1995 from 1994 following a decrease of
$38 million in 1994 from 1993, mainly reflecting the effects of net pension
credits referred to below. USX Credit recognized credit losses of $15 million in
1995, $11 million in 1994 and $11 million in 1993.
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 $132
million, $120 million and $202 million in 1995, 1994 and 1993, respectively. The
increase in 1995 from 1994 primarily reflected an increase in the expected
long-term rate of return on plan assets, partially offset by an increase in the
assumed discount rate and a decline in the market-related value of plan assets.
The decrease in 1994 from 1993 was primarily due to a lower expected long-term
rate of return on plan assets. In 1996, net pension credits are expected to
increase by approximately $30 million from 1995. See Note 12 to the U. S. Steel
Group Financial Statements.
The U. S. Steel Group's operating income for 1995 included a $16 million
noncash charge related to the adoption of Statement of Financial Accounting
Standards No. 121 # "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." See Note 5 to the U. S. Steel Group
Financial Statements for further details.
The U. S. Steel Group's 1993 operating loss included restructuring charges
of $42 million related to the closure of the Maple Creek coal mine and
preparation plant. In June 1995, the Maple Creek mine and preparation plant were
sold.
The U. S. Steel Group's other income for the last three years was as
follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1995 1994 1993
- - --------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from equity affiliates $ 80 $59 $ (11)
Gain on disposal of assets 21 12 216
Other income - 4 5
---- --- ----
Total Other Income $101 $75 $210
- - --------------------------------------------------------------------------
</TABLE>
OTHER INCOME increased $26 million in 1995 compared with 1994, following a
decrease of $135 million in 1994 compared with 1993. The improvement in 1995
results was primarily due to increased income from equity affiliates and higher
gains from the disposal of assets mainly due to equipment sales. 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 company. Excluding these items,
results in 1994 improved by $50 million over 1993 mainly due to increased income
from equity affiliates.
S-25
<PAGE> 168
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
INTEREST AND OTHER FINANCIAL INCOME was $8 million in 1995 compared with
$12 million in 1994 and $59 million in 1993. 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 $137 million in 1995 compared with
$152 million in 1994 and $330 million in 1993. The decrease in 1995 compared to
1994 was mainly due to lower average debt levels. The 1993 amount included $164
million of interest expense related to the B&LE litigation.
THE PROVISION FOR ESTIMATED INCOME TAXES in 1995 was $150 million, compared
with $47 million in 1994 and credits of $41 million in 1993. The provision for
1994 included a $32 million deferred tax benefit related to an excess of tax
over book basis in an equity affiliate. 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. See Note 14 to the U. S. Steel Group Financial
Statements.
AN EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT of $2 million, or $.02 per
share, in 1995 represents the portion of the loss on early extinguishment of USX
debt attributed to the U. S. Steel Group. For additional information, see USX
Consolidated Management's Discussion and Analysis of Cash Flows.
NET INCOME in 1995 was $301 million, compared with net income of $201
million in 1994 and a net loss of $238 million in 1993. Excluding the
extraordinary loss on extinguishment of debt, which totaled $2 million in 1995
and the unfavorable cumulative effect of changes in accounting principles, which
totaled $69 million in 1993, net income increased $102 million in 1995 from
1994, compared with an increase of $370 million in 1994 from 1993. The changes
in net income primarily reflect the factors discussed above.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
CURRENT ASSETS at year-end 1995 decreased $336 million from year-end 1994
primarily due to a decrease in deferred income tax benefits and trade
receivables partially offset by an increase in cash and cash equivalent
balances. The decrease in deferred income tax benefits in 1995 was mainly due to
the complete utilization of USX's net operating loss carryforward, which was
reflected in the U. S. Steel Group's deferred tax assets. 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 14 to the U. S. Steel Group Financial
Statements.
CURRENT LIABILITIES in 1995 increased $252 million from 1994 primarily due
to an increase in accounts payable and long-term debt due within one year. The
increase in accounts payable was mainly due to greater trade payables. The
increase in long-term debt due within one year was primarily due to
reclassification of various USX debt instruments from long-term debt.
TOTAL LONG-TERM DEBT AND NOTES PAYABLE at December 31, 1995 was $1,024
million. The $429 million decrease from year-end 1994 reflected increased cash
from operating activities in 1995. 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.
S-26
<PAGE> 169
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
management'S DISCUSSION AND ANALYSIS OF CASH FLOWS
THE U. S. STEEL GROUP'S NET CASH PROVIDED FROM OPERATING ACTIVITIES in 1995
was $587 million compared with $78 million in 1994. The 1995 period reflects
payments of $169 million to fund the U. S. Steel Group's principal pension plan,
$35 million to the Voluntary Employee Benefit Trust, $28 million representing U.
S. Steel's share of the amortized discount on USX's zero coupon debentures (see
USX Consolidated Management's Discussion and Analysis of Cash Flows for further
details) and $20 million as partial settlement in the Pickering v. USX
litigation (with a final payment of $27 million required in the first quarter of
1996). The 1994 period reflects payments of $367 million related to the B&LE
litigation. Excluding these items, net cash provided from operating activities
improved by $394 million in 1995 due mainly to favorable working capital changes
and increased profitability.
The U. S. Steel Group's net cash provided from operating activities in 1993
was negatively affected by payments of $219 million related to the B&LE
litigation and $95 million related 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 for 1993 and the
previously mentioned items for 1994, net cash provided from operating activities
was $445 million in 1994 compared with $301 million in 1993. The $144 million
increase mainly reflected improved profitability.
CAPITAL EXPENDITURES totaled $324 million in 1995 compared with $248
million in 1994 and $198 million in 1993. Increased spending in 1995 compared
with 1994 reflected spending on a degasser at Mon Valley Works and a granulated
coal injection facility at the Fairfield Works' blast furnace, spending related
to the Gary Works' No. 8 blast furnace, spending on a new galvanizing line at
Fairfield Works and emissions controls at the Gary Works' steelmaking
facilities. Increased spending in 1994 compared with 1993 reflected
modernization of a 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 1995 were $178 million, compared with $125 million at
year-end 1994. Capital expenditures for 1996 are expected to be approximately
$320 million and will include spending on a blast furnace reline and continued
spending on a new galvanizing line at Fairfield Works and additional
environmental expenditures primarily at Gary Works.
CASH FROM DISPOSAL OF ASSETS totaled $67 million in 1995, compared with $19
million in 1994 and $291 million in 1993. The 1995 proceeds mainly reflected
property sales. 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 $403 million in 1995, compared with a
decrease of $20 million in 1994 and a decrease of $730 million in 1993. 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. The
decrease in 1995 primarily reflected the net effects of cash from operating,
investing and other financing activities. 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 REDEEMED of $25 million represents the U. S. Steel Group's
portion of USX's Adjustable Rate Cumulative Preferred Stock which was redeemed
on September 29, 1995. For additional information, see USX Consolidated
Management's Discussion and Analysis of Cash Flows.
STEEL STOCK ISSUED totaled $218 million in 1995, $221 million in 1994 and
$366 million in 1993. This included public offerings of 5,000,000 shares in 1995
for net proceeds of $169 million, 5,000,000 shares in 1994 for net proceeds of
$201 million, and 10,000,000 shares in 1993 for net proceeds of $350 million.
These amounts were reflected in their entirety in the U. S. Steel Group
financial statements.
S-27
<PAGE> 170
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
PENSION ACTIVITY
In 1995, net proceeds of $169 million from the public offering of 5,000,000
shares of Steel Stock were used to fund the U. S. Steel Group's principal
pension plan for the 1994 plan year and a portion of the 1995 plan year. The
funding for the remainder of the 1995 plan year and the funding of all or a
portion of the 1996 plan year, if any, may take place in 1996.
DERIVATIVE INSTRUMENTS
In the normal course of its business, the U. S. Steel Group is exposed to
market risk, or price fluctuations related to the purchase of natural gas and
certain metals used as raw materials. The U. S. Steel Group uses commodity-based
derivative instruments (over-the-counter ("OTC") commodity swaps) to manage
exposure to market risk related to the purchase of natural gas; however, its use
of these instruments has not been significant in relation to the U. S. Steel
Group's overall business activity. While they are generally used to reduce risks
from unfavorable commodity price movements, they also may limit the opportunity
to benefit from favorable movements. For quantitative information relating to
derivative instruments, including aggregate contract values and fair values,
where appropriate, see Note 26 to the U. S. Steel Group Financial Statements.
Based on a strategic approach of limiting its use of derivative instruments
to hedging activities, combined with risk assessment procedures and internal
controls in place, management believes that its use of derivative instruments
does not expose the U. S. Steel Group to material risk, and that such use will
not have a material adverse effect on the financial position, liquidity or
results of operations of the U. S. Steel Group. For a summary of accounting
policies related to derivative instruments, see Note 2 to the U. S. Steel Group
Financial Statements.
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
production methods.
The U. S. Steel Group's environmental expenditures for the last three years
were:
<TABLE>
<CAPTION>
(Dollars in millions) 1995 1994 1993
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital $ 55 $ 57 $ 53
Compliance(a)
Operating & Maintenance 195 202 168
Remediation(b) 35 32 19
---- ---- ----
Total U. S. Steel Group $285 $291 $240
- - -------------------------------------------------------------------------------
<FN>
(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, net of recoveries.
</TABLE>
The U. S. Steel Group's environmental capital expenditures accounted for
17%, 23% and 27% of total capital expenditures in 1995, 1994 and 1993,
respectively.
Compliance expenditures represented 4% of the U. S. Steel Group's total
operating costs in 1995 and 1994 and 3% in 1993. Remediation spending during
1993 to 1995 was mainly related to dismantlement and restoration activities at
former and present operating locations.
S-28
<PAGE> 171
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
The U. S. Steel Group continues to seek methods to minimize the generation
of hazardous wastes in its operations. The Resource Conservation and Recovery
Act ("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 storage tanks. Since the EPA has not
yet promulgated implementing regulations relating to past disposal or handling
operations, 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 cannot be appraised until their implementation becomes more
accurately defined.
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 and non-hazardous
waste landfills.
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, 1995. In addition, there are 25 sites related to the U. S. Steel
Group where USX has received information requests or other indications that USX
may be a PRP under CERCLA but where sufficient information is not presently
available to confirm the existence of liability or make any judgment as to the
amount thereof. There are also 41 additional sites related to the U. S. Steel
Group where remediation is being sought under other environmental statutes, both
federal and state, or where private parties are seeking remediation through
discussions or litigation. At many of these sites, USX is one of a number of
parties involved and the total cost of remediation, as well as USX's share
thereof, is frequently dependent upon the outcome of investigations and remedial
studies. The U. S. Steel Group accrues for environmental remediation activities
when the responsibility to remediate is probable and the amount of associated
costs is reasonably determinable. As environmental remediation matters proceed
toward ultimate resolution or as additional remediation obligations arise,
charges in excess of those previously accrued may be required. See Note 28 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 predict
accurately the ultimate cost of compliance, including remediation costs which
may be incurred and penalties which may be imposed. However, based on presently
available information, and existing laws and regulations as currently
implemented, the U. S. Steel Group does not anticipate that environmental
compliance expenditures (including operating and maintenance and remediation)
will materially increase in 1996. The U. S. Steel Group's capital expenditures
for environmental controls are expected to be approximately $100 million in
1996. These amounts will primarily be spent on projects at Gary Works.
Predictions beyond 1996 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 $75 million in 1997; 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 28 to the U. S. Steel Group
Financial Statements. Included among these actions is a jury trial in a civil
class action (Cox, et al. v. USX, et al.) related to the Fairfield Agreement
Litigation which is currently scheduled to begin on September 30, 1996, in the
U.S. District Court for the
S-29
<PAGE> 172
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Northern District of Alabama. Plaintiffs' claims seek damages in excess of $276
million, which may be subject to trebling.
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
Average realized steel prices improved $7 per ton in 1995 compared with a
$19 per ton improvement in 1994.
Steel shipments were 11.4 million tons in 1995, compared with 10.6 million
tons in 1994 and 10.0 million tons in 1993. U. S. Steel Group shipments
comprised approximately 12% of the domestic steel market in 1995. Exports
accounted for approximately 13% of U. S. Steel Group shipments in 1995, compared
with 4% in both 1994 and 1993.
Raw steel production was 12.2 million tons in 1995, compared with 11.7
million tons in 1994 and 11.3 million tons in 1993. Raw steel produced was
nearly 100% continuous cast in 1995, 1994 and 1993. Raw steel production
averaged 97% of capability in 1995 and 1994, compared with 96% of capability in
1993. As a result of improvements in operating efficiency, U. S. Steel has
increased its stated annual raw steel production capability by 0.3 million tons
to 12.8 million tons for 1996, following an increase of 0.5 million tons in 1995
to 12.5 million tons.
Oil country tubular goods ("OCTG") accounted for 4.0% of U. S. Steel Group
shipments in 1995. 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. In June 1995, Commerce issued its
final affirmative determinations of the applicable margins of dumping and/or
subsidies in the OCTG cases against producers in all seven countries. On July
24, 1995, the ITC rendered determinations that there had been material injury to
domestic producers by reason of illegal dumping of imported products.
Determinations favorable to domestic producers were rendered with respect to
OCTG imports from Argentina, Italy, Japan, Korea and Mexico and with respect to
imports of drill pipe from Argentina, Japan and Mexico. 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
discussion of Outlook below.
The U. S. Steel Group maintains physical damage and business interruption
insurance applicable to the Gary Works' No. 8 blast furnace explosion, subject
to a $50 million deductible for recoverable items. The claims process has
commenced; however, an estimate of the amount or timing of potential recoveries
cannot be made at this time.
The U. S. Steel Group has certain profit sharing plans in place that will
require payments of approximately $35 million to be made in 1996 based on 1995
results.
The U. S. Steel Group entered into a five and one-half year contract with
the United Steelworkers of America, effective February 1, 1994. The contract
provides for the renegotiation of certain compensation issues in 1996, subject
to arbitration. Any renegotiated provisions would become effective in 1997 and
would continue until the expiration of the contract.
The U. S. Steel Group depreciates steel assets by modifying straight-line
depreciation based on the level of production. Depreciation charges for 1995,
1994, and 1993 were 102%, 102%, and 100%, respectively, of straight-line
depreciation based on production levels for each of the years. In 1996, the
modification factors used in the depreciation of steel assets will reflect the
increase in raw steel production capability discussed above. See Note 2 to the
U. S. Steel Group Financial Statements.
S-30
<PAGE> 173
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
In January 1996, National-Oilwell, a joint venture between a subsidiary of
USX and National Supply Company, Inc., a subsidiary of Armco Inc., was sold. The
sale will not have a material impact on the income of the U. S. Steel Group.
USX's share of the proceeds totaled $90 million, of which $83 million was
received in cash and will be reflected in its entirety in the U. S. Steel Group
Financial Statements.
OUTLOOK FOR 1996
The U. S. Steel Group anticipates that steel demand will remain relatively
strong in 1996, although domestic industry shipment levels for 1996 are expected
to decline slightly from the 1995 level of approximately 97 million tons. In
January 1996, price increases were announced for sheet, plate and tubular
products with effective dates ranging from February 4, 1996 to April 1, 1996.
However, increasing production capability for flat-rolled products may
negatively impact market prices for steel as companies attempt to gain or retain
market share.
Steel imports to the United States accounted for an estimated 21%, 25% and
19% of the domestic steel market in the first eleven months of 1995, and for the
years 1994 and 1993, 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 1996 are expected to be
lower than in the fourth quarter of 1995, which is consistent with prior years.
Export shipments for the year 1996 are expected to decline significantly from
the 1995 level of 1.5 million tons. During the third quarter of 1996, raw steel
production will be reduced by a planned blast furnace outage at Fairfield Works.
In October 1995, the Financial Accounting Standards Board issued Financial
Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
which establishes a fair value based method of accounting for employee
stock-based compensation plans but allows companies to continue to apply the
provisions of Accounting Principles Board Opinion No. 25, provided certain pro
forma disclosures are made. USX intends to adopt SFAS No. 123 by disclosure only
in its 1996 financial statements, as permitted by the Standard.
S-31
<PAGE> 174
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
Selected Quarterly Financial Data...................... D-18
Principal Unconsolidated Affiliate..................... D-18
Five-Year Operating Summary............................ D-19
Management's Discussion and Analysis................... D-20
</TABLE>
D-1
<PAGE> 175
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 - U.S. 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> 176
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.
Thomas J. Usher 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-17 present fairly, in all material respects, the financial
position of the Delhi Group at December 31, 1995 and 1994, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1995, 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.
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 13, 1996
D-3
<PAGE> 177
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(Dollars in millions) 1995 1994 1993
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES (Note 1, page D-7) $654.1 $566.9 $534.8
OPERATING COSTS:
Cost of sales (excludes items shown below) (Note 5, page D-10) 585.8 498.5 426.7
Selling, general and administrative expenses 24.1 28.7 28.6
Depreciation, depletion and amortization 24.8 30.1 36.3
Taxes other than income taxes 7.3 8.0 7.6
Restructuring charges (credits) (Note 4, page D-10) (6.2) 37.4 -
------ ------ ------
Total operating costs 635.8 602.7 499.2
------ ------ ------
OPERATING INCOME (LOSS) 18.3 (35.8) 35.6
Other income (loss) (Note 5, page D-10) 5.9 (.9) 5.2
Interest and other financial costs (Note 5, page D-10) (15.7) (11.8) (10.5)
------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 8.5 (48.5) 30.3
Less provision (credit) for estimated income taxes (Note 11, page D-13) 4.5 (17.6) 18.1
------ ------ ------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 4.0 (30.9) 12.2
Extraordinary loss (Note 6, page D-10) (.3) - -
------ ------ ------
NET INCOME (LOSS) 3.7 (30.9) 12.2
Dividends on preferred stock (.2) (.1) (.1)
Net loss (income) applicable to Retained Interest (Note 1, page D-7) (2.4) 10.1 (4.3)
------ ------ ------
NET INCOME (LOSS) APPLICABLE TO OUTSTANDING DELHI STOCK $ 1.1 $(20.9) $ 7.8
- - ------------------------------------------------------------------------------------------------------------
</TABLE>
INCOME PER COMMON SHARE OF DELHI STOCK
<TABLE>
<CAPTION>
(Dollars in millions, except per share data) 1995 1994 1993
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before extraordinary loss applicable
to outstanding Delhi Stock $ 1.4 $(20.9) $ 7.8
Extraordinary loss (.3) - -
------ ------ ------
Net income (loss) applicable to outstanding Delhi Stock $ 1.1 $(20.9) $ 7.8
PRIMARY AND FULLY DILUTED PER SHARE:
Income (loss) before extraordinary loss applicable
to outstanding Delhi Stock $ .15 $(2.22) $ .86
Extraordinary loss (.03) - -
------ ------ ------
Net income (loss) applicable to outstanding Delhi Stock $ .12 $(2.22) $ .86
Weighted average shares, in thousands
- primary and fully diluted 9,442 9,407 9,067
- - ------------------------------------------------------------------------------------------------------------
</TABLE>
See Note 1, page D-7, for basis of presentation and Note 20, page D-16,
for a description of net income per common share.
The accompanying notes are an integral part of these financial statements.
D-4
<PAGE> 178
BALANCE SHEET
<TABLE>
<CAPTION>
(Dollars in millions) December 31 1995 1994
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1.9 $ .1
Receivables less allowance for doubtful accounts
of $.8 and $.7 (Note 17, page D-15) 93.2 12.5
Receivable from other groups (Note 16, page D-14) .3 .2
Inventories (Note 14, page D-14) 10.7 9.9
Other current assets 3.2 3.1
------ ------
Total current assets 109.3 25.8
Long-term receivables and other investments (Note 13, page D-14) 8.3 17.0
Property, plant and equipment - net (Note 15, page D-14) 502.3 475.6
Other noncurrent assets 4.4 2.8
------ ------
Total assets $624.3 $521.2
- - ---------------------------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Notes payable $ 1.6 $ -
Accounts payable 137.7 71.8
Payable to other groups (Note 16, page D-14) .1 1.4
Payroll and benefits payable 3.8 4.7
Accrued taxes 7.0 7.6
Accrued interest 4.9 2.4
Long-term debt due within one year (Note 7, page D-10) 18.8 1.5
------ ------
Total current liabilities 173.9 89.4
Long-term debt (Note 7, page D-10) 182.0 106.0
Long-term deferred income taxes (Note 11, page D-13) 135.9 135.4
Deferred credits and other liabilities 16.5 14.8
Preferred stock of subsidiary (Note 8, page D-11) 3.8 3.8
------ ------
Total liabilities 512.1 349.4
------ ------
STOCKHOLDERS' EQUITY (Note 18, page D-15)
Preferred stock - 2.5
Common stockholders' equity 112.2 169.3
------ ------
Total stockholders' equity 112.2 171.8
------ ------
Total liabilities and stockholders' equity $624.3 $521.2
- - ---------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-5
<PAGE> 179
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in millions) 1995 1994 1993
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income (loss) $ 3.7 $(30.9) $ 12.2
Adjustments to reconcile to net cash provided from
operating activities:
Extraordinary loss .3 - -
Depreciation, depletion and amortization 24.8 30.1 36.3
Pensions .7 2.5 1.5
Deferred income taxes 3.1 (20.9) 4.5
Gain on disposal of assets (.5) (.8) (2.9)
Payment of amortized discount on zero coupon debentures (4.4) - -
Restructuring charges (credits) (6.2) 37.4 -
Changes in: Current receivables - sold (18.3) (5.4) 3.5
- operating turnover (62.5) 16.8 (15.2)
Inventories (.8) (.3) (1.2)
Current accounts payable and accrued expenses 64.8 (11.6) (.5)
All other items - net (3.6) 3.4 (3.7)
------ ------ ------
Net cash provided from operating activities 1.1 20.3 34.5
------ ------ ------
INVESTING ACTIVITIES:
Capital expenditures (50.0) (32.1) (42.6)
Disposal of assets 12.7 11.8 4.2
All other items - net 3.6 - (.1)
------ ------ ------
Net cash used in investing activities (33.7) (20.3) (38.5)
------ ------ ------
FINANCING ACTIVITIES (Note 3, page D-9):
Change in Delhi Group's share of USX consolidated debt 97.6 (4.5) 10.6
Elimination of Marathon Group Retained Interest (58.2) - -
Preferred stock redeemed (2.5) - -
Attributed preferred stock of subsidiary - 3.7 -
Dividends paid (2.0) (1.9) (1.9)
Payment attributed to Retained Interest (.5) (1.0) (1.0)
------ ------ ------
Net cash provided from (used in) financing activities 34.4 (3.7) 7.7
------ ------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1.8 (3.7) 3.7
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .1 3.8 .1
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1.9 $ .1 $ 3.8
- - ---------------------------------------------------------------------------------------------------
</TABLE>
See Note 9, page D-11, for supplemental cash flow information.
The accompanying notes are an integral part of these financial statements.
D-6
<PAGE> 180
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
USX Corporation (USX) has three classes of common stock: USX - Delhi
Group Common Stock (Delhi Stock), USX - Marathon Group Common Stock (Marathon
Stock) and USX - U. S. Steel Group Common Stock (Steel Stock), which are
intended to reflect the performance of the Delhi Group, the Marathon Group and
the U. S. Steel Group, respectively.
The financial statements of the Delhi Group include the financial
position, results of operations and cash flows for the businesses of the
Delhi Gas Pipeline Corporation and certain other subsidiaries of USX. The
Delhi Group is engaged in the purchasing, gathering, processing, transporting
and marketing of natural gas. The Delhi Group financial statements are prepared
using the amounts included in the USX consolidated financial statements.
The USX Board of Directors, prior to June 15, 1995, had 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. The Delhi Fraction was the
percentage interest in the Delhi Group represented by the shares of Delhi Stock
that were outstanding at any particular time and, based on 9,438,391
outstanding shares at June 14, 1995, was approximately 67%. The Marathon Group
financial statements reflected a Retained Interest in the earnings and equity
of the Delhi Group of approximately 33% through June 14, 1995. The Retained
Interest was subject to reduction as shares of Delhi Stock attributed to the
Retained Interest were sold. (See Note 3, page D-9, for a description of
common stock transactions.)
USX eliminated the Marathon Group Retained Interest in the Delhi Group
(equivalent to 4,564,814 shares of Delhi Stock) on June 15, 1995. This was
accomplished through a reallocation of assets and a corresponding adjustment
to debt and equity attributed to the Delhi and Marathon Groups. The
reallocation was made at a price of $12.75 per equivalent share of Delhi Stock,
or an aggregate of $58.2 million. Assuming the elimination had occurred as of
January 1, 1995, Delhi Group net income per share for the year 1995 would have
been $.23 per share, compared to reported results of $.12 per share. The above
unaudited supplemental per share data are not necessarily indicative of future
results, which will be dependent upon future operating results relative to the
cost of the incremental debt.
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 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 and 1993, sales to one customer who accounted for 10 percent
or more of the Delhi Group's total revenues, were $71.7 million and $76.4
million, respectively. In addition, sales to several customers having a
common parent aggregated $54.7 million and $66.3 million during 1994 and 1993,
respectively.
D-7
<PAGE> 181
- - -------------------------------------------------------------------------------
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
PRINCIPLES APPLIED IN CONSOLIDATION - These financial statements include
the accounts of the businesses comprising the Delhi Group. 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, if any, are carried at
lower of cost or market.
USE OF ESTIMATES - Generally accepted accounting principles require management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities
at year-end and the reported amounts of revenues and expenses during the year.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand and
on deposit and highly liquid debt instruments with maturities generally of
three months or less.
INVENTORIES - Inventories are carried at lower of average cost or market.
DERIVATIVE INSTRUMENTS - The Delhi Group engages in commodity risk
management activities within the normal course of its business (Note 22, page
D-16). Management is authorized to manage exposure to price fluctuations
related 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,
including both closed and open positions, and are subsequently recognized in
income, as sales or cost of sales, in the same period as the underlying
transaction. OTC swaps are off-balance-sheet instruments. The effect of
changes in the market indices related to OTC swaps are recorded upon settlement
and recognized in income with the underlying transaction. The margin receivable
accounts required for open commodity contracts reflect changes in the market
prices of the underlying commodity and are settled on a daily basis. Premiums
on all commodity-based option contracts are initially based on the amount paid
or received; the options' market value is subsequently recorded as a receivable
or 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 underlying
transaction; all other gains or losses are recognized in income in the
current period as interest income or expense, as appropriate. Net contract
values are included in receivables or payables, as appropriate.
Recorded deferred gains or losses are reflected within other noncurrent
assets or deferred credits and other liabilities. Cash 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.
RECLASSIFICATIONS - Certain reclassifications of prior years' data have been
made to conform to 1995 classifications.
D-8
<PAGE> 182
- - -------------------------------------------------------------------------------
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 Delhi Group,
the Marathon Group and the U. S. Steel 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 8, page D-11 for the Delhi
Group's portion of USX's financial activities attributed to all three groups.
However, transactions such as leases, certain collateralized 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. The costs allocated to
the Delhi Group were $2.0 million, $1.7 million and $1.4 million in 1995, 1994
and 1993, 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, prior to June 15,
1995, were 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, prior to June 15, 1995, was 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 were credited, and the Delhi
Group financial statements were charged, with the aggregate transaction amount
times the quotient of the Retained Interest divided by the Delhi Fraction.
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 and various tax
credits), 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.
To the extent that one of the three groups is allocated a consolidated tax
attribute which, as a result of expiration or otherwise, is not ultimately
utilized on the consolidated tax return, the prior years' allocation of such
attribute is adjusted such that the effect of the expiration is borne by the
group that generated the attribute. Also, if a tax attribute cannot be utilized
on a consolidated basis in the year generated or in a carryback year, the prior
years' allocation of such consolidated tax effects is adjusted in a subsequent
year to the extent necessary to allocate the tax benefits to the group that
would have realized the tax benefits on a separate return basis. As a result,
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.
D-9
<PAGE> 183
- - -------------------------------------------------------------------------------
4. RESTRUCTURING CHARGES (CREDITS)
In 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 was completed in 1995 at higher than anticipated sales proceeds,
resulting in a $6.2 million credit to operating income and a $5.0 million
credit to other income.
- - -------------------------------------------------------------------------------
5. OTHER ITEMS
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COST OF SALES INCLUDED:
Gas purchases $561.7 $469.1 $398.7
Operating expenses 24.1 29.4 28.0
------ ------ ------
Total $585.8 $498.5 $426.7
- - ---------------------------------------------------------------------------------------------------
OTHER INCOME (LOSS):
Gain on disposal of assets $ .5 $ .8 $ 2.9(a)
Income from affiliates - equity method .4 .7 1.0
Restructuring (charge) credit (Note 4, page D-10) 5.0 (2.5) -
Other - .1 1.3
------ ------ ------
Total $ 5.9 $ (.9) $ 5.2
- - ---------------------------------------------------------------------------------------------------
INTEREST AND OTHER FINANCIAL COSTS(b):
Interest incurred $(10.8) $ (7.2) $ (7.0)
Financial cost of preferred stock of subsidiary (.6) (.3) -
Expenses on sales of accounts receivable (Note 17, page D-15) (3.7) (3.3) (2.5)
Amortization of discounts (.2) (.8) (.7)
Other (.4) (.2) (.3)
------ ------ ------
Total $(15.7) $(11.8) $(10.5)
- - ---------------------------------------------------------------------------------------------------
<FN>
(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.
</TABLE>
- - -------------------------------------------------------------------------------
6. EXTRAORDINARY LOSS
In 1995, USX extinguished $553 million of debt prior to maturity,
resulting in an extraordinary loss to the Delhi Group of $.3 million, net of a
$.1 million income tax benefit.
- - -------------------------------------------------------------------------------
7. 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 1995 1994 1995 1994
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt attributed to all three groups(b) $202.7 $108.9 $4,810 $5,489
Less unamortized discount 1.9 1.4 47 69
Less amount due within one year 18.8 1.5 460 74
------ ------ ------ ------
Total long-term debt attributed to all three groups $182.0 $106.0 $4,303 $5,346
- - ----------------------------------------------------------------------------------------------------------
<FN>
(a) See Note 15, 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; 8, page D-11; and 9, page D-11).
</TABLE>
D-10
<PAGE> 184
- - -------------------------------------------------------------------------------
8. 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 1995 1994 1995 1994
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1.9 $ .1 $ 47 $ 4
Receivables(b) 3.0 .2 73 11
Long-term receivables(b) 1.2 1.4 29 70
Other noncurrent assets(b) .3 .2 8 11
------ ------ ------ ------
Total assets $ 6.4 $ 1.9 $ 157 $ 96
- - -------------------------------------------------------------------------------------------------------------
Notes payable $ 1.6 $ - $ 40 $ -
Accounts payable 1.9 .1 46 3
Accrued interest 4.9 2.4 119 123
Long-term debt due within one year (Note 7, page D-10) 18.7 1.5 460 74
Long-term debt (Note 7, page D-10) 182.1 106.0 4,303 5,346
Deferred credits and other liabilities(b) - .1 - 3
Preferred stock of subsidiary 3.8 3.8 250 250
------ ------ ------ ------
Total liabilities $213.0 $113.9 $5,218 $5,799
- - -------------------------------------------------------------------------------------------------------------
Preferred stock $ - $ 2.5 $ - $ 105
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Delhi Group(c) Consolidated USX
--------------------------- --------------------------
(In millions) 1995 1994 1993 1995 1994 1993
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest and other
financial costs (Note 5, page D-10) $(11.6) $(8.3) $(7.7) $(439) $(471) $(471)
- - ------------------------------------------------------------------------------------------------
<FN>
(a) For details of USX long-term debt, preferred stock of
subsidiary and preferred stock, see Notes 15, page U-20; 26, page U-25;
and 20, 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.
</TABLE>
- - -------------------------------------------------------------------------------
9. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH USED IN OPERATING ACTIVITIES INCLUDED:
Interest and other financial costs paid $(17.2) $(11.2) $ (9.2)
Income taxes paid, including settlements with other groups (3.0) (.5) (22.7)
- - ----------------------------------------------------------------------------------------------------
USX DEBT ATTRIBUTED TO ALL THREE GROUPS - NET:
Commercial paper:
Issued $2,434 $1,515 $2,229
Repayments (2,651) (1,166) (2,598)
Credit agreements:
Borrowings 4,719 4,545 1,782
Repayments (4,659) (5,045) (2,282)
Other credit arrangements - net 40 - (45)
Other debt:
Borrowings 52 509 791
Repayments (440) (791) (318)
------ ------ ------
Total $ (505) $ (433) $ (441)
====== ====== ======
Delhi Group activity $ 98 $ (5) $ 11
Marathon Group activity (204) (371) 261
U. S. Steel Group activity (399) (57) (713)
------ ------ ------
Total $ (505) $ (433) $ (441)
- - -----------------------------------------------------------------------------------------------------
</TABLE>
D-11
<PAGE> 185
- - -------------------------------------------------------------------------------
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.
PENSION COST (credit) - The defined benefit cost for 1995, 1994 and 1993 was
determined assuming an expected long-term rate of return on plan assets of
9.5%, 9% and 10%, respectively.
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost of benefits earned during the period $ 1.6 $ 1.9 $ 1.7
Interest cost on projected benefit obligation
(8% for 1995; 6.5% for 1994; and 7% for 1993) 2.8 2.8 2.6
Return on assets - actual loss (return) (7.5) .2 (2.0)
- deferred gain (loss) 4.8 (2.9) (.9)
Net amortization of unrecognized losses - .2 .1
----- ----- -----
Total periodic pension cost 1.7 2.2 1.5
Curtailment loss(a) - .2 -
----- ----- -----
Total pension cost $ 1.7 $ 2.4 $ 1.5
- - -------------------------------------------------------------------------------
<FN>
(a) The curtailment loss in 1994 resulted from a work force reduction program.
</TABLE>
FUNDS' STATUS - The assumed discount rate used to measure the benefit
obligations was 7% at December 31, 1995, and 8% at December 31, 1994. The
assumed rate of future increases in compensation levels was 4.5% at both
year-ends. The following table sets forth the plans' funded status and the
amounts reported in the Delhi Group's balance sheet:
<TABLE>
<CAPTION>
(In millions) December 31 1995 1994
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Reconciliation of funds' status to reported amounts:
Projected benefit obligation (PBO)(b) $(43.7) $(35.8)
Plan assets at fair market value(c) 30.5 27.3
------ ------
Assets less than PBO (13.2) (8.5)
Unrecognized net gain from transition (2.7) (2.9)
Unrecognized prior service cost 2.9 3.2
Unrecognized net loss 5.5 1.9
Additional minimum liability (.1) (.1)
------ ------
Net pension liability included in balance sheet $ (7.6) $ (6.4)
- - -------------------------------------------------------------------------------
(b) PBO includes:
Accumulated benefit obligation $ 33.6 $ 27.8
Vested benefit obligation 32.7 27.0
(c) Types of assets held:
Stocks of other corporations 69% 65%
U.S. Government securities 17% 20%
Corporate debt instruments and other 14% 15%
- - -------------------------------------------------------------------------------
</TABLE>
D-12
<PAGE> 186
- - -------------------------------------------------------------------------------
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).
Provisions (credits) for estimated income taxes were:
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------- ------------------------------- -----------------------------
(In millions) CURRENT DEFERRED TOTAL Current Deferred Total Current Deferred Total
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal $ .3 $3.3 $3.6 $2.7 $(17.3) $(14.6) $11.8 $4.8 $16.6
State and local 1.1 (.2) .9 .6 (3.6) (3.0) 1.8 (.3) 1.5
---- ---- ---- ---- ------ ------ ----- ---- -----
Total $1.4 $3.1 $4.5 $3.3 $(20.9) $(17.6) $13.6 $4.5 $18.1
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
In 1995, the extraordinary loss on extinguishment of debt includes a tax
benefit of $.1 million (Note 6, page D-10).
A reconciliation of federal statutory tax rate (35%) to total provisions
(credits) follows:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate applied to income (loss) before taxes $3.0 $(17.0) $10.6
Dispositions of subsidiary investments 1.6 - 2.3
State and local income taxes after federal income tax effect .6 (2.0) 1.0
Officers' life insurance (.3) (.2) (.2)
Remeasurement of deferred income taxes for statutory rate increase - - 4.1
Adjustment of prior years' federal income taxes (.5) 1.2 -
Other .1 .4 .3
---- ------ -----
Total provisions (credits) $4.5 $(17.6) $18.1
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
Deferred tax assets and liabilities were:
<TABLE>
<CAPTION>
(In millions) December 31 1995 1994
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets $12.5 $10.1
Deferred tax liabilities (primarily relate to property, plant and equipment) 148.3 146.0
------ ------
Net deferred tax liabilities $135.8 $135.9
- - ----------------------------------------------------------------------------------------------------
</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>
1996 $ 3.5
1997 2.5
1998 2.0
1999 1.8
2000 1.6
Later years 3.1
-----
Total minimum lease payments $14.5
- - ------------------------------------------------------------
</TABLE>
Operating lease rental expense:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - -----------------------------------------------------------
<S> <C> <C> <C>
Minimum rental $4.6 $5.0 $5.4
Contingent rental 1.2 1.1 1.7
---- ---- ----
Rental expense $5.8 $6.1 $7.1
- - -----------------------------------------------------------
</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> 187
- - -------------------------------------------------------------------------------
13. LONG-TERM RECEIVABLES AND OTHER INVESTMENTS
<TABLE>
<CAPTION>
(In millions) December 31 1995 1994
- - -----------------------------------------------------------
<S> <C> <C>
Receivables due after one year $4.8 $ 4.5
Forward currency contracts 1.2 1.4
Equity method investments(a) 2.2 11.0
Other .1 .1
---- -----
Total $8.3 $17.0
- - -----------------------------------------------------------
<FN>
(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 was completed in the second quarter of 1995.
</TABLE>
Summarized financial information of affiliates accounted for by the
equity method of accounting follows:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- - -----------------------------------------------------------------
<S> <C> <C> <C>
Income data - year:
Sales $8.2 $20.4 $20.8
Operating income 2.8 6.3 6.3
Net income 2.1 3.6 2.5
- - -----------------------------------------------------------------
Balance sheet data - December 31:
Current assets $ .5 $16.0
Noncurrent assets 3.9 55.0
Current liabilities - 18.5
- - -----------------------------------------------------------------
</TABLE>
Partnership distributions received from equity affiliates were $3.6
million in 1995, $.4 million in 1994 and $1.3 million in 1993.
- - -------------------------------------------------------------------------------
14. INVENTORIES
<TABLE>
<CAPTION>
(In millions) December 31 1995 1994
- - -------------------------------------------------------------------------------
<S> <C> <C>
Natural gas in storage $ 9.4 $8.2
Natural gas liquids (NGLs) in storage .2 .4
Materials and supplies 1.1 1.3
----- ----
Total $10.7 $9.9
- - -------------------------------------------------------------------------------
</TABLE>
- - -------------------------------------------------------------------------------
15. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
(In millions) December 31 1995 1994
- - -------------------------------------------------------------------------------
<S> <C> <C>
Gas gathering systems $799.4 $796.1
Gas processing plants 119.0 120.5
Other 17.8 18.5
------ ------
Total 936.2 935.1
Less accumulated depreciation, depletion and amortization 433.9 459.5
------ ------
Net $502.3 $475.6
- - -------------------------------------------------------------------------------
</TABLE>
- - -------------------------------------------------------------------------------
16. INTERGROUP TRANSACTIONS
SALES AND PURCHASES - Delhi Group sales to the Marathon Group totaled $4.7
million, $4.1 million and $4.3 million in 1995, 1994 and 1993, respectively.
Delhi Group purchases from the Marathon Group totaled $37.0 million, $41.6
million and $30.3 million in 1995, 1994 and 1993, respectively. These
transactions were conducted on an arm's-length basis.
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 3, page D-9. Tax settlements between the groups are
generally made in the year succeeding that in which such amounts are accrued.
D-14
<PAGE> 188
- - -------------------------------------------------------------------------------
17. SALES OF RECEIVABLES
The Delhi Group participates in an agreement (the program) to sell an
undivided interest in certain accounts receivable subject to limited recourse.
Payments are collected from the sold accounts receivable; the collections are
reinvested in new accounts receivable for the buyers; and a yield, based on
short-term market rates, is transferred to the buyers. At December 31, 1995,
the amount sold under the program that had not been collected was $50.0
million, which will be forwarded to the buyers at the end of the agreement in
1996, or in the event of earlier contract termination. If the Delhi Group does
not have a sufficient quantity of eligible accounts receivable to reinvest in
for the buyers, the size of the program will be reduced accordingly. The amount
sold under the current and prior programs averaged $56.5 million, $72.5 million
and $69.1 million for the years 1995, 1994 and 1993, respectively. To
facilitate collection, the buyers have rights to a pool of receivables that
must be maintained at a level of at least 110% of the program size. 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.
- - -------------------------------------------------------------------------------
18. STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In millions, except per share data) 1995 1994 1993
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK:
Balance at beginning of year $ 2.5 $ 2.5 $ 2.5
Redeemed (2.5) - -
------ ------ ------
Balance at end of year $ - $ 2.5 $ 2.5
- - -------------------------------------------------------------------------------------------------------------
COMMON STOCKHOLDERS' EQUITY (Note 3, page D-9):
Balance at beginning of year $169.3 $203.0 $193.6
Net income (loss) 3.7 (30.9) 12.2
Elimination of Marathon Group Retained Interest (Note 1, page D-7) (58.2) - -
Dividends on Delhi Stock (per share $.20) (1.8) (1.8) (1.8)
Dividends on preferred stock (.2) (.1) (.1)
Payment attributed to Retained Interest (Note 3, page D-9) (.5) (1.0) (1.0)
Deferred compensation adjustments (.1) .1 .1
------ ------ ------
Balance at end of year $112.2 $169.3 $203.0
- - -------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $112.2 $171.8 $205.5
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
- - -------------------------------------------------------------------------------
19. 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, 1995, the Available Delhi Dividend Amount
was at least $102.7 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> 189
- - -------------------------------------------------------------------------------
20. 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.
Primary net income (loss) per share is calculated by adjusting net
income (loss) for dividend requirements of preferred stock and income
(loss) that was applicable to the Retained Interest and is based on the
weighted average number of common shares outstanding plus common stock
equivalents, provided they are not antidilutive. Common stock equivalents
result from assumed exercise of stock options, where applicable.
Fully diluted net income (loss) per share assumes exercise of stock
options, provided in each case, the effect is not antidilutive.
- - -------------------------------------------------------------------------------
21. STOCK PLANS AND STOCKHOLDER RIGHTS PLAN
USX Stock Plans and Stockholder Rights Plan are discussed in Note 21,
page U-23, and Note 25, page U-25, respectively, to the USX consolidated
financial statements.
- - -------------------------------------------------------------------------------
22. DERIVATIVE INSTRUMENTS
The Delhi Group uses commodity-based derivative instruments to manage
exposure to price fluctuations related to the anticipated purchase and sale of
natural gas. The derivative instruments used, as a part of its overall risk
management program, include exchange-traded futures contracts and options, and
instruments which require settlement in cash such as OTC commodity swaps and
OTC options. While risk management activities generally reduce market risk
exposure due to unfavorable commodity price changes for raw material purchases
and products sold, such activities can also encompass strategies which assume
certain price risk in isolated transactions.
USX has used forward currency contracts to hedge foreign denominated
debt, a portion of which has been attributed to the Delhi Group.
The Delhi Group remains at risk for possible changes in the market
value of the derivative instrument; however, such risk should be mitigated
by price changes in the underlying hedged item. The 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 by class of
derivative 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, 1995:
Exchange-traded commodity futures $ - $ - $(2.2) $ 4.1
OTC commodity swaps(c) (.3) - - 9.1
---- ---- ----- -----
Total commodities $(.3) $ - $(2.2) $13.2
==== ==== ===== =====
Forward currency contracts(d):
- receivable $4.2 $4.1 $ - $ 6.5
- payable - - - 1.0
---- ---- ----- -----
Total currencies $4.2 $4.1 $ - $ 7.5
- - -----------------------------------------------------------------------------------------------------------
December 31, 1994:
Exchange-traded commodity futures $ - $ - $ .2 $ 1.7
Exchange-traded commodity options - - (.1) 4.8
---- ---- ----- -----
Total commodities $ - $ - $ .1 $ 6.5
==== ==== ===== =====
Forward currency contracts:
- receivable $1.7 $1.6 $ - $ 4.2
- payable (.1) (.1) (.1) .7
---- ---- ----- -----
Total currencies $1.6 $1.5 $ (.1) $ 4.9
- - -----------------------------------------------------------------------------------------------------------
<FN>
(a) The fair value amounts for OTC positions are based on various
indices or dealer quotes. The fair value amounts for currency contracts are
based on dealer quotes of forward prices covering the remaining duration
of the foreign exchange contract. The exchange-traded instruments do not
have a corresponding fair value since changes in the market prices of
futures or option contracts are settled on a daily basis.
(b) Contract or notional amounts do not quantify risk exposure, but
are used in the calculation of cash settlements under the contracts. The
contract or notional amounts do not reflect the extent to which positions
may offset one another.
(c) The OTC swap arrangements vary in duration with certain
contracts extending up to one year.
(d) The forward currency contracts mature in 1996-1998.
</TABLE>
D-16
<PAGE> 190
- - -------------------------------------------------------------------------------
23. 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>
1995 1994
------------------- ------------------
FAIR CARRYING Fair Carrying
(In millions) December 31 VALUE AMOUNT Value Amount
<S> <C> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and cash equivalents $ 1.9 $ 1.9 $ .1 $ .1
Receivables 90.2 90.2 12.3 12.3
------ ------ ------ ------
Total financial assets $ 92.1 $ 92.1 $ 12.4 $ 12.4
====== ====== ====== ======
FINANCIAL LIABILITIES:
Notes payable $ 1.6 $ 1.6 $ - $ -
Accounts payable 137.6 137.6 71.8 71.8
Accrued interest 4.9 4.9 2.4 2.4
Long-term debt (including amounts due within one year) 213.3 200.8 105.7 107.5
------ ------ ------ ------
Total financial liabilities $357.4 $344.9 $179.9 $181.7
- - ----------------------------------------------------------------------------------------------------------------------
</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 22, 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 17, page D-15.
- - -------------------------------------------------------------------------------
24. 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 1995 and 1994, such capital expenditures totaled
$5.5 million and $4.6 million, respectively. The Delhi Group anticipates
making additional such expenditures in the future; however, the exact amounts
and timing of such expenditures are uncertain because of the continuing
evolution of specific regulatory requirements.
COMMITMENTS -
At December 31, 1995, contract commitments for the Delhi Group's capital
expenditures for property, plant and equipment totaled $9.3 million.
D-17
<PAGE> 191
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
------------------------------------------- -------------------------------------------
(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 $228.8 $149.0 $139.4 $136.9 $142.6 $133.7 $136.2 $154.4
Operating income (loss) 6.3 (2.0) 4.9 9.1 5.9 1.8 (46.0) 2.5
Operating costs include:
Restructuring charges
(credits) - - (6.2) - - - 37.4 -
Income (loss) before
extraordinary loss 1.6 (4.1) 2.3 4.2 1.3 (1.0) (31.6) .4
Net income (loss) 1.5 (4.3) 2.3 4.2 1.3 (1.0) (31.6) .4
- - -----------------------------------------------------------------------------------------------------------------------------------
DELHI STOCK DATA:
- - ----------------
Income (loss) before
extraordinary loss
applicable to Delhi Stock $ 1.6 $ (4.2) $ 1.2 $ 2.8 $ .9 $ (.7) $ (21.4) $ .3
- Per share: primary and
fully diluted .17 (.44) .12 .30 .09 (.07) (2.27) .03
Dividends paid per share .05 .05 .05 .05 .05 .05 .05 .05
Price range of Delhi Stock(a):
- Low 8-5/8 9-3/4 9-1/4 8 9-5/8 12-1/4 12-7/8 13-1/2
- High 10-5/8 11-7/8 13-1/8 10-1/8 13-3/4 15 15-7/8 17-7/8
- - ----------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Composite tape.
</TABLE>
PRINCIPAL UNCONSOLIDATED AFFILIATE (UNAUDITED)
<TABLE>
<CAPTION>
Company Country % Ownership(a) Activity
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Laredo-Nueces Pipeline Company United States 50% Natural Gas Transmission
- - ----------------------------------------------------------------------------------------------------
<FN>
(a) Economic interest as of December 31, 1995.
</TABLE>
D-18
<PAGE> 192
FIVE-YEAR OPERATING SUMMARY
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SALES VOLUMES
Natural gas throughput (billions of cubic feet)
Natural gas sales 206.9 227.9 203.2 200.0 195.9
Transportation 109.7 99.1 117.6 103.4 81.0
--------------------------------------------------------
Total systems throughput 316.6 327.0 320.8 303.4 276.9
Trading sales 154.7 34.6 - - -
Partnerships - equity share(a)(b) 1.9 7.1 6.5 10.2 14.5
-------------------------------------------------------
Total sales volumes 473.2 368.7 327.3 313.6 291.4
-------------------------------------------------------
Natural gas throughput (millions of cubic feet per day)
Natural gas sales 567.0 624.5 556.7 546.4 536.7
Transportation 300.5 271.4 322.1 282.6 221.9
-------------------------------------------------------
Total systems throughput 867.5 895.9 878.8 829.0 758.6
Trading sales 423.9 94.7 - - -
Partnerships - equity share(a)(b) 5.2 19.6 17.9 27.8 39.7
-------------------------------------------------------
Total sales volumes 1,296.6 1,010.2 896.7 856.8 798.3
NGLs sales
Millions of gallons 289.2 275.8 282.0 261.4 214.7
Thousands of gallons per day 792.5 755.7 772.5 714.2 588.2
- - --------------------------------------------------------------------------------------------------------------------------
GROSS UNIT MARGIN ($/mcf) $0.20 $0.26 $0.42 $0.44 $0.47
- - --------------------------------------------------------------------------------------------------------------------------
PIPELINE MILEAGE (INCLUDING PARTNERSHIPS)
Arkansas(a) - 349 362 377 377
Colorado(c) - - - 91 91
Kansas(d) - - 164 164 164
Louisiana(d) - - 141 141 142
Oklahoma(a)(d) 2,820 2,990 2,908 2,795 2,819
Texas(b)(d) 4,110 4,060 4,544 4,811 4,764
-------------------------------------------------------
Total 6,930 7,399 8,119 8,379 8,357
- - --------------------------------------------------------------------------------------------------------------------------
PLANTS - OPERATING AT YEAR-END
Gas processing 15 15 15 14 14
Sulfur 6 6 3 3 3
- - --------------------------------------------------------------------------------------------------------------------------
DEDICATED GAS RESERVES - YEAR-END (billions of cubic feet)
Beginning of year 1,650 1,663 1,652 1,643 1,680
Additions 455 431 382 273 255
Production (317) (334) (328) (307) (275)
Revisions/Asset Sales (45) (110) (43) 43 (17)
-------------------------------------------------------
Total 1,743 1,650 1,663 1,652 1,643
- - --------------------------------------------------------------------------------------------------------------------------
<FN>
(a) In 1995, the Delhi Group sold its 25% interest in Ozark Gas Transmission System.
(b) In 1993, the Delhi Group sold its 25% interest in Red River Pipeline.
(c) In 1993, the Delhi Group sold its pipeline systems located in Colorado.
(d) In 1994, the Delhi Group sold certain pipeline systems associated with
the planned disposition of nonstrategic assets.
</TABLE>
D-19
<PAGE> 193
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INCOME
SALES for each of the past three years are summarized in the following
table:
<TABLE>
<CAPTION>
(Dollars in millions) 1995 1994 1993
- - ------------------------------------------------------------------------------
<S> <C> <C> <C>
Gas Sales and Trading $572.0 $490.9 $447.9
Transportation 11.7 11.7 14.2
Gas Processing 70.4 64.1 72.6
Other - .2 .1
------ ------ ------
Total Sales $654.1 $566.9 $534.8
- - ------------------------------------------------------------------------------
</TABLE>
The increase in 1995 sales from 1994 primarily reflected increased trading
sales volumes, partly offset by lower average prices for natural gas. The
increase in 1994 from 1993 was mainly due to increased volumes from the 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").
OPERATING INCOME of $18.3 million was recorded in 1995, compared with an
operating loss of $35.8 million in 1994 and operating income of $35.6 million in
1993. Operating income in 1995 included a $6.2 million favorable adjustment
related to the completion of the nonstrategic asset disposition plan which was
initiated in mid-1994 and resulted in higher than anticipated sales proceeds.
The operating loss in 1994 included charges of $37.4 million for the asset
disposition plan, 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. Excluding the effects of these items, operating results
increased by $8.4 million from 1994, mainly due to reduced operating costs,
excluding gas purchase costs, and improved gas processing operations, partly
offset by a lower gas sales and trading margin. The reduction in operating
expenses primarily reflected the effects of the 1994 asset disposition plan and
work force reduction program.
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 and
previously mentioned items, 1994 operating income was down $28.7 million from
1993, particularly due to a decline in gas sales premiums from SWEPCO, as well
as lower margins from
D-20
<PAGE> 194
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
other customers, partially offset by higher natural gas throughput volumes, and
lower depreciation expense due to the previously mentioned asset disposition
plan. See Management's Discussion and Analysis of Operations below for further
discussion of operating income.
OTHER INCOME of $5.9 million in 1995 included a $5.0 million favorable
adjustment on the sale of the Delhi Group's 25% partnership interest in Ozark
Gas Transmission System ("Ozark") which was included in the 1994 asset
disposition plan. Other loss of $0.9 million in 1994 included a $2.5 million
restructuring charge relating to Ozark, 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, mainly related to the sale
of the Delhi Group's interest in a natural gas transmission partnership, and a
$0.9 million favorable pretax effect recognizing the expiration of certain
obligations related to an asset acquisition.
INTEREST AND OTHER FINANCIAL COSTS increased by $3.9 million in 1995 and
$1.3 million in 1994. The increase in 1995 was mainly due to increased debt
levels, primarily reflecting the incremental debt associated with the second
quarter 1995 elimination of the Marathon Group's Retained Interest, as discussed
below. The increase in 1994 mainly reflected higher expenses associated with the
sale of certain of the Delhi Group's accounts receivable.
THE PROVISION FOR ESTIMATED INCOME TAXES was $4.5 million in 1995, compared
with a credit of $17.6 million in 1994 and a provision of $18.1 million in 1993.
The 1995 income tax provision included an unfavorable effect associated with the
sale of the Delhi Group's partnership interest in Ozark, and the 1993 provision
included an unfavorable effect associated with the sale of an interest in
another natural gas transmission partnership.
An EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT of $0.3 million, or $.03
per share, was recorded in 1995, representing the portion of the loss on early
extinguishment of USX debt attributed to the Delhi Group. For additional
details, see USX Consolidated Management's Discussion and Analysis of Cash
Flows.
The Delhi Group had NET INCOME of $3.7 million in 1995, compared with a net
loss of $30.9 million in 1994 and net income of $12.2 million in 1993. The
changes in net results primarily reflect the factors discussed above. On a
per-share basis, results for 1995 were also affected by the elimination of the
Marathon Group's Retained Interest, as discussed in the following paragraph.
On June 15, 1995, USX eliminated the Marathon Group's Retained Interest in
the Delhi Group (equivalent to 4,564,814 shares of USX - Delhi Group Common
Stock). This was accomplished through a reallocation of assets and a
corresponding adjustment to debt and equity attributed to the Marathon and Delhi
Groups. The transfer was made at a price of $12.75 per equivalent share, or an
aggregate of $58.2 million. The Audit Committee of the USX Board of Directors
approved the transaction with the advice of two nationally recognized investment
banking firms who negotiated the per-share price and rendered opinions to the
Audit Committee that such price was fair from a financial point of view to the
respective groups and shareholders. As a result of the elimination, the Delhi
Group's debt was increased by $58.2 million, and its equity was decreased by the
same amount. For further discussion, see Management's Discussion and Analysis of
Cash Flows below and Note 1 to the Delhi Group Financial Statements.
D-21
<PAGE> 195
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
CURRENT ASSETS of $109.3 million at year-end 1995 were $83.5 million higher
than the year-end 1994 balance due primarily to an increase in receivables,
reflecting increased trading business activity, a decrease in sold accounts
receivable and higher natural gas sales prices at year-end. The increase in
receivables resulting from the trading business is largely offset by a related
increase in accounts payable.
CURRENT LIABILITIES were $173.9 million at year-end 1995, $84.5 million
higher than at year-end 1994 due primarily to an increase in payables, mainly
reflecting increased trading business activity and higher natural gas purchase
prices at year-end.
TOTAL LONG-TERM DEBT AND NOTES PAYABLE at December 31, 1995, was $202.4
million. The $94.9 million increase from year-end 1994 mainly reflects the
incremental USX attributed debt associated with the elimination of the Marathon
Group's Retained Interest and additional debt necessary to finance capital
expenditures. The amount of total long-term debt represents 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 was $1.1 million in 1995, a
decrease of $19.2 million from 1994. Cash flows in 1995 included a $4.4 million
payment, representing the Delhi Group's share of the amortized discount on USX's
zero coupon debentures (see USX Consolidated Management's Discussion and
Analysis of Cash Flows for further details). Excluding this item, 1995 operating
cash flows declined $14.8 million from 1994, mainly due to a decrease in cash
realized from the sale of receivables. Cash provided from operating activities
in 1994 declined $14.2 million from 1993 mainly due to a decrease in income,
partially offset by favorable working capital changes.
CAPITAL EXPENDITURES were $50.0 million in 1995, compared with $32.1
million in 1994 and $42.6 million in 1993. Expenditures in 1995 included the
purchase of gathering systems in Oklahoma and an interchange header in west
Texas and the expansion of existing systems, which enabled the Delhi Group to
connect additional new dedicated natural gas reserves. Additions to the Delhi
Group's dedicated gas reserves totaled 455 billion cubic feet ("bcf"), 431 bcf
and 382 bcf in 1995, 1994 and 1993, 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. Contract commitments for capital expenditures at year-end 1995 were
$9.3 million.
D-22
<PAGE> 196
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Capital expenditures for 1996 are expected to be approximately $75 million
and will include a major expansion of treating, gathering and transmission
facilities in east Texas to service the rapidly developing Pinnacle Reef gas
play. Additional spending is planned for expansion of gathering systems in
Oklahoma, primarily to service the Knox Field area. The Delhi Group will
continue to target additional expenditures to add new dedicated gas reserves,
expand existing facilities and acquire new facilities as opportunities arise in
its core operating areas.
CASH FROM DISPOSAL OF ASSETS was $12.7 million in 1995, compared with $11.8
million in 1994 and $4.2 million in 1993. Proceeds in 1995 included $11.0
million from the sales of remaining assets in the 1994 asset disposition plan
(such as the Delhi Group's interest in Ozark and properties in Arkansas and
Oklahoma). In 1995, the Delhi Group also received a partnership distribution of
$3.0 million from Ozark prior to the sale, which is also reflected in investing
activities. The 1994 amount primarily reflected proceeds of $10.6 million from
sales of nonstrategic assets included in the 1994 asset disposition plan (such
as the North Louisiana, Denton and Wharton systems).
FINANCIAL OBLIGATIONS increased by $97.6 million in 1995. These obligations
consist of the Delhi Group's portion of USX debt and preferred stock of a
subsidiary attributed to all three groups. The increase in 1995 primarily
reflected the $58.2 million increase in attributed USX debt associated with the
elimination of the Marathon Group's Retained Interest and net cash used in
investing activities. The increase in financial obligations resulting from
elimination of the Retained Interest is offset by a corresponding decrease in
equity. For discussion of USX financing activities attributed to all three
groups, see USX Consolidated Management's Discussion and Analysis of Cash Flows.
PREFERRED STOCK REDEEMED of $2.5 million represents the Delhi Group's
portion of USX's Adjustable Rate Cumulative Preferred Stock, which was redeemed
on September 29, 1995. For additional details, see USX Consolidated Management's
Discussion and Analysis of Cash Flows.
DERIVATIVE INSTRUMENTS
In the normal course of its business, the Delhi Group is exposed to market
risk, or uncertainty in operating results from fluctuating prices of natural gas
purchases or sales. The Delhi Group uses commodity-based derivative instruments
such as exchange-traded futures contracts and options and over-the-counter
("OTC") commodity swaps and options to manage its exposure to market risk. These
instruments are utilized mainly on a short-term basis, with most positions
opened and closed within a month's business. The Delhi Group engages in
derivative activities only as a hedging mechanism to protect margins and does
not engage in speculative trading. As a result, changes in the fair value of
derivative instruments are generally offset by price changes in the underlying
natural gas transaction.
D-23
<PAGE> 197
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
While commodity-based derivative instruments are generally used to reduce
risks from unfavorable natural gas price movements, they may also limit the
opportunity to benefit from favorable movements. The Delhi Group's
exchange-traded derivative activities are conducted primarily on the New York
Mercantile Exchange ("NYMEX") and Kansas City Board of Trade. For quantitative
information relating to derivative instruments, including aggregate contract
values, and fair values where appropriate, see Note 22 to the Delhi Group
Financial Statements.
The Delhi Group is subject to basis risk, caused by factors that affect the
relationship between commodity futures prices reflected in derivative
instruments and the cash market price of the underlying commodity. Natural gas
transaction prices are frequently based on industry reference prices that may
vary from prices experienced in local markets. For example, NYMEX contracts for
natural gas are priced at Louisiana's Henry Hub, while the underlying quantities
of natural gas may be sold elsewhere at prices that do not move in strict
correlation with futures prices. To the extent that natural gas price changes in
one region of the United States are not reflected in other regions, the
derivative instrument may no longer provide the expected hedge, resulting in
increased exposure to basis risk. These regional price differences could yield
favorable or unfavorable results. OTC transactions are currently being used to
manage exposure to a portion of basis risk. The Delhi Group believes that
substantially all of its competitors are subject to this type of risk.
The Delhi Group is also subject to liquidity risk, caused by timing delays
in liquidating contract positions due to a potential inability to identify a
counterparty willing to accept an offsetting position. Liquidity risk is
relatively low for exchange-traded transactions due to the large number of
active participants.
The Delhi Group is exposed to credit risk for nonperformance of
counterparties in derivative transactions. This risk is primarily managed
through ongoing reviews of the credit worthiness of counterparties, including
the use of master netting agreements to the extent practicable, and full
performance is anticipated.
Based on a strategic approach of limiting its use of derivative instruments
to hedging activities, combined with risk assessment procedures and internal
controls in place, management believes that its use of derivative instruments
does not expose the Delhi Group to material risk, and that such use will not
have a material adverse effect on the financial position, liquidity or results
of operations of the Delhi Group. For a summary of accounting policies related
to derivative instruments, see Note 2 to the Delhi Group Financial Statements.
LIQUIDITY
For discussion of USX's liquidity and capital resources, see USX
Consolidated Management's Discussion and Analysis of Cash Flows.
D-24
<PAGE> 198
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
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) 1995 1994 1993
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital $5.5 $ 4.6 $4.5
Compliance
Operating & Maintenance 4.3 5.5 5.3
---- ----- ----
Total $9.8 $10.1 $9.8
- - -------------------------------------------------------------------------------
<FN>
(a) Estimated based on American Petroleum Institute survey guidelines.
</TABLE>
The Delhi Group's environmental capital expenditures accounted for 11% of
total capital expenditures in each of 1995 and 1993 and 14% in 1994. 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 predict accurately the
ultimate cost of compliance, including remediation costs which may be incurred
and penalties which may be imposed. However, based on presently available
information, and existing laws and regulations as currently implemented,
management does not anticipate that environmental compliance expenditures
(including operating and maintenance and remediation) will materially increase
in 1996. The Delhi Group's capital expenditures for environmental controls are
expected to be approximately $8 million in 1996, with the increase over 1995
primarily a consequence of the planned increase in total capital spending.
Predictions beyond 1996 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 $9 million in 1997; 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> 199
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 24 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
The Delhi Group recorded operating income of $18.3 million in 1995,
compared with an operating loss of $35.8 million in 1994 and operating income of
$35.6 million in 1993. The following discussion provides analyses of gross
margin (by principal service) and operating expenses for each of the last three
years.
GAS SALES AND TRADING MARGIN, GAS SALES THROUGHPUT AND TRADING SALES
VOLUMES for each of the last three years were:
<TABLE>
<CAPTION>
1995 1994 1993
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Gas sales and trading margin (millions) $ 56.0 $ 70.3 $104.5
Gas sales throughput (bcf) 206.9 227.9 203.2
Trading sales volumes (bcf) 154.7 34.6 -
- - --------------------------------------------------------------------------------
</TABLE>
Gas sales and trading margin decreased by 20% in 1995 from 1994, following
a decrease of 33% in 1994 from 1993. The decrease in 1995 was primarily due to
lower average natural gas prices and the August 1994 expiration of the premium
service contract with Central Power and Light Company, a utility electric
generator serving south Texas. The decrease in 1994 mainly reflected lower
premiums from SWEPCO, reduced demand from local distribution companies ("LDCs")
induced by mild weather in the Delhi Group's prime service areas which shifted
volumes normally sold to LDCs into the lower-margin spot market, and a downward
trend in natural gas prices during 1994 which led to lower average unit margins.
Premiums from SWEPCO declined by $16.2 million in 1994 as compared with 1993,
reflecting the renegotiation of a natural gas sales agreement with provisions
for market sensitive prices beginning in February 1994.
The decrease in gas sales throughput in 1995 from 1994 primarily resulted
from the conversion of sales volumes to transportation volumes due to contract
renegotiations with certain producers, along with some natural production
declines being replaced with reserves under transportation agreements, and the
sale of properties included in the 1994 asset disposition plan. Additions to
dedicated natural gas reserves in 1994 and 1993 mainly contributed to the
increase in gas sales throughput in 1994.
Natural gas volumes from trading sales averaged 423.9 million cubic feet
per day ("mmcfd") in 1995 (683.7 mmcfd in the fourth quarter), compared with
94.7 mmcfd in 1994 (148.5 mmcfd in the fourth quarter). The trading business,
which began in the first quarter of 1994, involves the
D-26
<PAGE> 200
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
purchase of natural gas from sources other than wells directly connected to the
Delhi Group's systems, and the subsequent sale of like volumes. The Delhi
Group's trading business was expanded substantially during 1995 in order to
increase its customer base and provide greater opportunities for attracting
off-system customers requiring firm supply services. Even though unit margins
earned on trading sales are significantly less than those earned on firm system
sales, the increased volumes also provide more flexibility in reacting to
changes in on- and off-system market demands.
TRANSPORTATION MARGIN AND THROUGHPUT for each of the last three years were:
<TABLE>
<CAPTION>
1995 1994 1993
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Transportation margin (millions) $ 11.7 $11.7 $ 14.2
Transportation throughput (bcf) 109.7 99.1 117.6
- - -------------------------------------------------------------------------------
</TABLE>
Transportation margin in 1995 was unchanged from 1994, following an 18%
decrease in 1994 from 1993. Compared with 1994, an increase in 1995
transportation throughput was offset by a reduction in average transportation
rates. The increase in throughput volumes was primarily due to the conversion of
gas sales volumes to transportation during 1995 and additions to dedicated
reserves, partially offset by the sale of properties included in the 1994 asset
disposition plan. The decrease in 1994 transportation margin was due primarily
to lower throughput volumes, reflecting increased competition and natural
declines in production on third-party wells.
GAS PROCESSING MARGIN, NGLS SALES VOLUME AND NGLS SALES PRICE for each of
the last three years were:
<TABLE>
<CAPTION>
1995 1994 1993
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Gas processing margin (millions) $ 24.7 $ 15.6 $ 17.3
NGLs sales volume (millions of gallons) 289.2 275.8 282.0
NGLs sales price ($/gallon) $ .24 $ .23 $ .26
- - -------------------------------------------------------------------------------
</TABLE>
The increase in gas processing margin in 1995 mainly reflected lower
average plant feedstock (natural gas) costs and a slight increase in average
NGLs prices. Favorable economics in 1995, particularly in the first quarter,
resulted in a 5% net increase in NGLs sales volumes from 1994. During the last
half of 1995, sales volumes declined, primarily because the Delhi Group chose to
partially curtail the extraction of ethane volumes due to depressed ethane
prices. The 10% decline in gas processing margin in 1994 from 1993 resulted
primarily from lower average NGLs prices, partially offset by a decline in
average plant feedstock costs.
OTHER OPERATING COSTS (not included in gross margin) for each of the last
three years were:
<TABLE>
<CAPTION>
(Dollars in millions) 1995 1994 1993
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating expenses (included in cost of sales) $24.1 $ 29.4 $ 28.0
Selling, general and administrative expenses 24.1 28.7 28.6
Depreciation, depletion and amortization 24.8 30.1 36.3
Taxes other than income taxes 7.3 8.0 7.6
Restructuring charges (credits) (6.2) 37.4 -
----- ------ ------
Total $74.1 $133.6 $100.5
- - -------------------------------------------------------------------------------
</TABLE>
D-27
<PAGE> 201
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Operating expenses decreased by $5.3 million in 1995, following a $1.4
million increase in 1994 from 1993. The decrease in 1995 primarily reflected
benefits of 1994 cost reduction programs. The increase in 1994 was due mainly to
expenses associated with new gas treating facilities. Employee reorganization
expenses related to the work force reduction program implemented in mid-1994
were mostly offset by associated cost savings.
Selling, general and administrative ("SG&A") expenses decreased by $4.6
million in 1995, mainly reflecting cost savings associated with the 1994 work
force reduction program. SG&A 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 decreased by $5.3 million in 1995
from 1994, following a $6.2 million decrease in 1994 from 1993. The reductions
primarily reflect the asset disposition plan initiated in the second quarter of
1994.
The restructuring credit of $6.2 million in 1995 represents the favorable
adjustment recorded in the second quarter following completion of the 1994 asset
disposition plan with higher than anticipated sales proceeds. Restructuring
charges of $37.4 million in 1994 reflect the initial write-down of certain
nonstrategic assets to estimated net realizable value in connection with the
asset disposition plan.
PRINCIPAL CUSTOMERS
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. Excluding spot and trading sales, the Delhi
Group's four largest customers accounted for 23%, 28% and 45% of its total gross
margin and 11%, 15% and 18% of its total systems throughput in 1995, 1994 and
1993, 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.
OUTLOOK
The Delhi Group's operating results are mainly affected by fluctuations in
natural gas prices and demand levels in the markets that it serves. The levels
of gas sales margin for future periods are difficult to accurately project
because of fluctuations in customer demand for premium services, competition in
attracting new premium customers 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-28
<PAGE> 202
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Based on current market conditions and estimated volumes, the Delhi Group's
gas sales and trading margin is expected to be negatively impacted by
approximately $2-3 million (pretax) during the first quarter of 1996 due to an
anomaly in market conditions. The anomaly relates to basis differentials, which
are the differences between gas prices in various locations. In January 1996,
the basis differential to the Delhi Group's east Texas market area was
significantly higher than the historical norm. The anomaly was caused by extreme
winter weather in the eastern United States and the inability to move Texas gas
to this market due to transportation constraints. Two of the pipeline indexes
which the Delhi Group uses to determine the purchase price under some gas
purchase contracts reflected prices much higher than the east Texas market area
because the index zones for these pipelines included areas outside of Texas
which were affected by the market anomaly. This disparity resulted in gas
purchase costs that exceeded the market price for such gas and is expected to
result in the unfavorable impact noted above. Measures are currently being
implemented by the Delhi Group to mitigate the negative impact of any such
future anomalies including, but not limited to, renegotiation of certain gas
purchase contracts.
Since the adoption of Federal Energy Regulatory Commission ("FERC") Order
No. 636 in 1992, competition has increased significantly in the domestic gas
industry and is expected to remain highly competitive in the future. On the
supply side, gas producers now have easier access to end-user sales markets,
which, at times, has resulted in the conversion of their contracts with
midstream gathering and distribution companies, like DGP, from sales to
transportation agreements. On the sales side, securing new premium service
agreements has become increasingly difficult. However, management believes that
its increased focus on core operating areas, an emphasis on sour gas gathering
and treating services and its ability to maintain a long-term dedicated reserve
base and to provide reliable sales services will enable the Delhi Group to
remain a competitive entity in the markets that it serves.
The Delhi Group monitors the economics of removing NGLs from the gas stream
for processing on an ongoing basis to determine the appropriate level of each
gas plant's operation. The levels of gas processing margin for future periods
are 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.
To pursue downstream natural gas markets, those end-users behind LDCs, the
Delhi Group opened a marketing office in the Chicago area in November 1995 and
will open another in Pittsburgh in early 1996. These offices will serve
industrial and commercial end-users in the Midwest and Northeast where unit
margins exceed those on the spot market.
In June 1995, the Delhi Group received FERC approval to market wholesale
electric power and began limited trading in December. Management believes that
the electric power business is a natural extension of and a complement to its
existing energy services. This added service should eventually enable the Delhi
Group to offer both gas and electric services to those industrial and commercial
customers who can readily switch energy sources. The Delhi Group will also
pursue opportunities to convert its gas into electricity to capture summer
peaking premiums.
D-29
<PAGE> 203
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
In October 1995, the Financial Accounting Standards Board issued Financial
Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation,"
which establishes a fair value based method of accounting for employee
stock-based compensation plans but allows companies to continue to apply the
provisions of Accounting Principles Board Opinion No. 25, provided certain pro
forma disclosures are made. USX intends to adopt SFAS No. 123 by disclosure only
in its 1996 financial statements, as permitted by the Standard.
D-30
<PAGE> 204
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 1996 Annual Meeting of
Stockholders.
The executive officers of USX and their ages as of February 1, 1996 are
as follows:
<TABLE>
<S> <C>
USX - CORPORATE
Gretchen R. Haggerty 40 Vice President & Treasurer
Robert M. Hernandez 51 Vice Chairman & Chief Financial Officer
Lewis B. Jones 52 Vice President & Comptroller
Dan D. Sandman 47 General Counsel & Secretary
Thomas J. Usher 53 Chairman of the Board of Directors & Chief Executive Officer
Louis A. Valli 63 Senior Vice President-Employee Relations
USX - MARATHON GROUP
Victor G. Beghini 61 Vice Chairman-Marathon Group and President-Marathon Oil Company
J. Louis Frank 59 Executive Vice President-Refining, Marketing & Transportation-Marathon Oil Company
Carl P. Giardini 60 Executive Vice President-Exploration & Production-Marathon Oil Company
Kevin M. Henning 48 Vice President-Supply and Transportation
Ron S. Keisler 49 Vice President-Worldwide Exploration
Jimmy D. Low 58 Senior Vice President-Finance & Accounting-Marathon Oil Company
William F. Madison 53 Vice President-Technology & Business Resources-Marathon Oil Company
John V. Parziale 55 Vice President-Production, United Kingdom
William F. Schwind, Jr. 51 General Counsel & Secretary-Marathon Oil Company
Riad N. Yammine 61 President-Emro Marketing Company
USX - U. S. STEEL GROUP
Charles G. Carson, III 53 Vice President-Environmental Affairs
Roy G. Dorrance 50 Vice President-Operations
Charles C. Gedeon 55 Executive Vice President-Raw Materials & Diversified Businesses
Edward F. Guna 47 Vice President-Accounting & Finance-U. S. Steel Group
Bruce A. Haines 51 Vice President-Technology & Management Services
Donald M. Laws 60 General Counsel
Reuben L. Perin, Jr. 57 Executive Vice President-Commercial
Thomas W. Sterling, III 48 Vice President-Employee Relations
Paul J. Wilhelm 53 President-U. S. Steel Group
USX - DELHI GROUP
Grover G. Gradick 50 Executive Vice President-Supply & Operations-Delhi Gas Pipeline Corporation
David A. Johnson 49 Senior Vice President-Marketing-Delhi Gas Pipeline Corporation
David M. Kihneman 47 President-Delhi Group and President-Delhi Gas Pipeline Corporation
Laurence K. Maguire 52 Vice President-Finance & Administration-Delhi Gas Pipeline Corporation
Kenneth J. Orlowski 46 Senior Vice President-Administration, 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.
65
<PAGE> 205
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 8, 1996, for the 1996 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 8, 1996, for the 1996 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 8, 1996, for the 1996 Annual Meeting of Stockholders.
66
<PAGE> 206
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
B. REPORTS ON FORM 8-K
1.1 None
C. EXHIBITS
Exhibit No.
<TABLE>
<S> <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>
67
<PAGE> 207
<TABLE>
<S> <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) 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.
(b) 1990 Stock Plan, As Amended May 4, 1992 Incorporated by reference to Annex III to
the USX Proxy Statement dated April 13, 1992.
(c) 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.
(d) USX Corporation Senior Executive Officer Annual
Incentive Compensation Plan, as amended
January 30, 1995 Incorporated by reference to Exhibit
10(e) to USX's Form 10-K for the year
ended December 31, 1994.
(e) 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.
(f) 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.
(g) USX Supplemental Thrift Program, As Amended
November 1, 1994 Incorporated by reference to Exhibit
10(h) to USX's Form 10-K for the year
ended December 31, 1994.
(h) Form of agreements Between the Corporation and
Various Officers
(i) Annual Incentive Compensation Plan of Delhi
Gas Pipeline Corporation
12.1 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
</TABLE>
68
<PAGE> 208
<TABLE>
<S> <C>
12.2 Computation of Ratio of Earnings to Fixed Charges
21. List of Significant Subsidiaries
23. Consent of Independent Accountants
27. Financial Data Schedule
</TABLE>
69
<PAGE> 209
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 6, 1996.
USX CORPORATION
By /s/ LEWIS B. JONES
-----------------------------------
Lewis B. Jones
Vice President & Comptroller
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ THOMAS J. USHER Chairman of the Board of Directors,
- - ----------------------------- Chief Executive Officer and Director
Thomas J. Usher
/s/ ROBERT M. HERNANDEZ Vice Chairman & Chief Financial Officer
- - ----------------------------- 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/ CHARLES A. CORRY Director
- - -----------------------------
Charles A. Corry
/s/ CHARLES R. LEE Director
- - -----------------------------
Charles R. Lee
/s/ PAUL E. LEGO Director
- - -----------------------------
Paul E. Lego
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/ PAUL J. WILHELM Director
- - -----------------------------
Paul J. Wilhelm
/s/ DOUGLAS C. YEARLEY Director
- - -----------------------------
Douglas C. Yearley
</TABLE>
70
<PAGE> 210
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
--------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
INCOME DATA:
Net sales $13,800 $12,685 $11,851
Operating income 138 612 192
Total income (loss) before extraordinary loss
and cumulative effect of changes in
accounting principles (145) 291 (59)
Net Income (loss) (150) 291 (82)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1995 1994
---- ----
<S> <C> <C>
BALANCE SHEET DATA:
Assets:
Current assets $ 2,656 $ 2,340
Noncurrent assets 8,088 8,974
------- -------
Total assets $10,744 $11,314
======= =======
Liabilities and stockholder's equity:
Current liabilities $ 1,659 $ 1,591
Noncurrent liabilities 7,842 8,324
Stockholder's equity 1,243 1,399
------- -------
Total liabilities and stockholder's equity $10,744 $11,314
======= =======
</TABLE>
71
<PAGE> 1
EXHIBIT 10. (h)
February 1, 1996
Dear Mr. :
USX Corporation (the "Corporation") recognizes that your contribution to
the growth and success of the Corporation has been substantial and desires to
assure the Corporation of your continued employment. In this connection, the
Board of Directors of the Corporation (the "Board") recognizes that, as is the
case with many publicly held corporations, the possibility of a change in
control may exist and that such possibility, and the uncertainty and questions
which it may raise among management, may result in the departure or distraction
of management personnel to the detriment of the Corporation and its
stockholders.
The Board has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of members of the
Corporation's management, including yourself, to their assigned duties without
distraction in the face of potentially disturbing circumstances arising from the
possibility of a change in control of the Corporation.
In order to induce you to remain in the employ of the Corporation, the
Corporation agrees that you shall receive the severance benefits set forth in
this letter agreement ("Agreement") in the event your employment with the
Corporation is terminated subsequent to a "Change in Control of the
<PAGE> 2
EXHIBIT 10. (h)(CONTD.)
Mr.
Page 2
February 1, 1996
Corporation" (as defined in Section 2 hereof) under the circumstances described
below.
1. TERM OF AGREEMENT. This Agreement will commence on the date
hereof and shall continue in effect until December 31, 1996; provided,
however, that commencing on January 1, 1997 and each January 1 thereafter, the
term of this Agreement shall automatically be extended for one additional year
unless, not later than September 1 of the preceding year, the Corporation shall
have given notice that it does not wish to extend this Agreement; provided,
further, if a Change in Control of the Corporation shall have occurred during
the original or extended term of this Agreement, this Agreement shall continue
in effect for a period of twenty-four (24) months beyond the month in which
such Change in Control of the Corporation occurred.
2. CHANGE IN CONTROL OF THE CORPORATION.
(i) No benefits shall be payable hereunder unless there shall have
been a Change in Control of the Corporation, as set forth below. For purposes
of this Agreement, a "Change in Control of the Corporation" shall mean a change
in control of a nature that would be required to be reported in response to
Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the
Corporation is then subject to such reporting requirement; provided, that,
without limitation, such a change in control shall be deemed to have occurred
if
<PAGE> 3
EXHIBIT 10. (h)(CONTD.)
Mr.
Page 3
February 1, 1996
(A) any person (as defined in Sections 13(d) and 14(d) of
the Exchange Act) (a "Person") is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly,
of securities of the Corporation representing twenty percent (20%) or
more of the combined voting power of the Corporation's then outstanding
voting securities; provided, however, that for purposes of this
Agreement the term "Person" shall not include (i) the Corporation or
any of its subsidiaries, (ii) a trustee or other fiduciary holding
securities under an employee benefit plan of the Corporation or any of
its subsidiaries, (iii) an underwriter temporarily holding securities
pursuant to an offering of such securities, or (iv) a corporation
owned, directly or indirectly, by the stockholders of the Corporation
in substantially the same proportions as their ownership of stock of
the Corporation; or
(B) the following individuals cease for any reason to
constitute a majority of the number of directors then serving:
individuals who, on the date hereof, constitute the Board and any new
director (other than a director whose initial assumption of office is
in connection with an actual or threatened election contest including
but not limited to a consent solicitation, relating to the election of
directors of the Corporation) whose appointment or election by the
Board or nomination for election by the Corporation's stockholders was
approved by a vote of at least two-thirds (2/3) of the directors then
still in office who either were directors on the
<PAGE> 4
EXHIBIT 10. (h)(CONTD.)
Mr.
Page 4
February 1, 1996
date hereof or whose appointment, election or nomination for election
was previously so approved; or
(C) there is consummated a merger or consolidation of the
Corporation or a subsidiary thereof with any other corporation, other
than a merger or consolidation which would result in the holders of the
voting securities of the Corporation outstanding immediately prior
thereto holding securities which represent immediately after such
merger or consolidation at least 50% of the combined voting power of
the voting securities of the entity surviving the merger or
consolidation, (or the parent of such surviving entity) or the
shareholders of the Corporation approve a plan of complete liquidation
of the Corporation, or there is consummated the sale or other
disposition of all or substantially all of the Corporation's assets.
(ii) You agree that, subject to the terms and conditions of this
Agreement, in the event of a Change in Control of the Corporation, you will
remain in the employ of the Corporation for a period of three (3) months from
the occurrence of such Change in Control of the Corporation; provided, however,
that if during such three-month period (A) your employment is involuntarily
terminated by the Corporation other than for Cause, or (B) you terminate your
employment during such three-month period for Good Reason, you shall not be
required to remain in the Corporation's employ. The foregoing shall in no
event limit or otherwise affect your rights under any other provision of this
Agreement,
<PAGE> 5
EXHIBIT 10. (h)(CONTD.)
Mr.
Page 5
February 1, 1996
(iii) For purposes of this Agreement, a "potential Change in
Control of the Corporation" shall be deemed to have occurred if
(A) the Corporation enters into an agreement, the
consummation of which would result in the occurrence of a Change in
Control of the Corporation;
(B) any person (including the Corporation) publicly
announces an intention to take or to consider taking actions which if
consummated would constitute a Change in Control of the Corporation;
(C) any Person, who is or becomes the beneficial owner,
directly or indirectly, of securities of the Corporation representing
9.5% or more of the combined voting power of the Corporation's then
outstanding securities, increases his beneficial ownership of such
securities by 5% or more over the percentage so owned by such person on
the date hereof; or
(D) the Board adopts a resolution to the effect that, for
purposes of this Agreement, a potential Change in Control of the
Corporation has occurred.
You agree that, subject to the terms and conditions of this Agreement, in the
event of a potential Change in Control of the Corporation, you will remain in
the employ of the Corporation until the earliest of (i) a date which is six (6)
months from the occurrence of such potential Change in Control of the
Corporation, (ii) the termination by you of your employment by reason of your
death or Disability,
<PAGE> 6
EXHIBIT 10. (h)(CONTD.)
Mr.
Page 6
February 1, 1996
as defined in Subsection 3(a), or (iii) a date which is three (3) months from
the occurrence of a Change in Control of the Corporation.
3. TERMINATION FOLLOWING A CHANGE IN CONTROL OF THE CORPORATION.
If any of the events described in section 2(i) hereof constituting a Change in
Control of the Corporation shall have occurred, you shall be entitled to the
benefits provided in Section 4(d) hereof upon the termination of your
employment during the term of this Agreement unless such termination is (i)
because of your death or Disability, (ii) by the Corporation for Cause, (iii)
by you other than for Good Reason or (iv) on or after the date that you attain
age sixty-five (65). Notwithstanding the foregoing, if the Corporation shall
have terminated your employment at any time during the term of this Agreement
for Cause, then you shall be entitled only to the normal base salary and other
employee benefits provided in Section 4(b). In the event your employment with
the Corporation is terminated for any reason prior to the occurrence of a
Change in Control, you shall not be entitled to any benefits hereunder;
provided, however, that if your employment is terminated prior to a Change in
Control without Cause at the direction of a person who has entered into an
agreement with the Corporation, the consummation of which will constitute a
Change in Control, your employment shall be deemed to have terminated following
a Change in Control. Your entitlement to benefits under any of the
Corporation's retirement plans will not adversely affect your rights to receive
payments hereunder.
<PAGE> 7
EXHIBIT 10. (h)(CONTD.)
Mr.
Page 7
February 1, 1996
(a) DISABILITY. If, as a result of your incapacity due to
physical or mental illness which in the opinion of a licensed physician renders
you incapable of performing your assigned duties with the Corporation, you
shall have been absent from the full-time performance of your duties with the
Corporation for six (6) consecutive months, and within thirty (30) days after
written notice of termination is given you shall not have returned to the
full-time performance of your duties, the Corporation may terminate your
employment for "Disability."
(b) CAUSE. Termination by the Corporation of your
employment for "Cause" shall mean termination upon (i) the willful and
continued failure by you to substantially perform your duties with the
Corporation (other than any such failure resulting from termination by you for
Good Reason), after a demand for substantial performance is delivered to you
that specifically identifies the manner in which the Corporation believes that
you have not substantially performed your duties, and you have failed to resume
substantial performance of your duties on a continuous basis within fourteen
(14) days of receiving such demand, (ii) the willful engaging by you in conduct
which is demonstrably and materially injurious to the Corporation, monetarily
or otherwise or (iii) your conviction of a felony or conviction of a
misdemeanor which impairs your ability substantially to perform your duties
with the Corporation. For purposes of this Subsection, no act, or failure to
act, on your part shall be deemed "willful" unless
<PAGE> 8
EXHIBIT 10. (h)(CONTD.)
Mr.
Page 8
February 1, 1996
done, or omitted to be done, by you not in good faith and without reasonable
belief that your action or omission was in the best interest of the
Corporation.
(c) GOOD REASON. You shall be entitled to terminate your
employment for Good Reason. For purposes of this Agreement, "Good Reason"
shall mean, without your express written consent, the occurrence after a Change
in Control of the Corporation of any one or more of the following:
(i) the assignment to you of duties inconsistent with your
position immediately prior to the Change in Control or a reduction or
alteration in the nature of your position, duties, status or responsibilities
from those in effect immediately prior to the Change in Control;
(ii) a reduction by the Corporation in your base salary as
in effect on the date hereof (without regard to any temporary reduction
effected by the Corporation prior to a Change in Control) or as the same shall
be increased from time to time ("Base Salary") except for across-the-board
temporary salary reductions similarly affecting all senior executives of the
Corporation and all senior executives of any person in control of the
Corporation;
(iii) the Corporation's requiring you to be based at a
location in excess of seventy-five (75) miles from the location where you are
based immediately prior to the Change in Control;
(iv) the failure by the Corporation to continue in effect
any of the Corporation's employee benefit plans, programs, policies, practices
or
<PAGE> 9
EXHIBIT 10. (h)(CONTD.)
Mr.
Page 9
February 1, 1996
arrangements in which you participate (or substantially equivalent successor
or replacement employee benefit plans, programs, policies, practices or
arrangements) or the failure by the Corporation to continue your participation
therein on substantially the same basis, both in terms of the amount of
benefits provided and the level of your participation relative to other
participants, as existed immediately prior to the Change in Control;
(v) the failure of the Corporation to obtain a satisfactory
agreement from any successor to the Corporation to assume and agree to perform
this Agreement, as contemplated in Section 5 hereof; and
(vi) any purported termination by the Corporation of your
employment that is not effected pursuant to a Notice of Termination satisfying
the requirements of subparagraph (d) below, and for purposes of this Agreement,
no such purported termination shall be effective. Your right to terminate your
employment pursuant to this Subsection shall not be affected by your incapacity
due to physical or mental illness. Your continued employment shall not
constitute consent to, or a waiver of rights with respect to, any circumstance
constituting Good Reason hereunder.
(d) NOTICE OF TERMINATION. Any termination by the
Corporation for Cause or by you for Good Reason shall be communicated by Notice
of Termination to the other party hereto. For purposes of this Agreement, a
"Notice of Termination" shall mean a written notice which shall indicate the
specific termination provision in this Agreement relied upon and shall set
forth in
<PAGE> 10
EXHIBIT 10. (h)(CONTD.)
Mr.
Page 10
February 1, 1996
reasonable detail the facts and circumstances claimed to provide a basis for
termination of your employment under the provision so indicated.
(e) DATE OF TERMINATION. "Date of Termination" shall mean
the date specified in the Notice of Termination where required or in any other
case upon ceasing to perform services to the Corporation; provided that if
within thirty (30) days after any Notice of Termination one party notifies the
other party that a dispute exists concerning the termination, the Date of
Termination shall be the date finally determined to be the Date of Termination,
either by mutual written agreement of the parties or by a binding and final
arbitration award.
4. COMPENSATION UPON TERMINATION OR DURING DISABILITY. Following
a Change in Control of the Corporation, as defined in Section 2 hereof, upon
termination of your employment or during a period of disability you shall be
entitled to the following benefits:
(a) During any period that you fail to perform your
full-time duties with the Corporation as a result of incapacity due to physical
or mental illness, you shall continue to receive your Base Salary at the rate
in effect at the commencement of any such period, until your employment is
terminated pursuant to Section 3(a) hereof. Thereafter, your benefits shall be
determined in accordance with the Corporation's retirement, insurance and other
applicable programs and plans then in effect.
<PAGE> 11
EXHIBIT 10. (h)(CONTD.)
Mr.
Page 11
February 1, 1996
(b) If your employment shall be terminated by the
Corporation for Cause or by you other than for Good Reason, the Corporation
shall pay you your full Base Salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given or on the Date of
Termination if no Notice of Termination is required hereunder, plus all other
amounts to which you are entitled under any compensation plan of the
Corporation at the time such payments are due, and the Corporation shall have
no further obligations to you under this Agreement.
(c) If your employment terminates by reason of your death,
your benefits shall be determined in accordance with the Corporation's
retirement, survivor's benefits, insurance and other applicable programs and
plans, then in effect.
(d) If your employment by the Corporation shall be
terminated (i) by the Corporation other than for Cause or Disability or (ii) by
you for Good Reason, you shall be entitled to the benefits (the "Severance
Payments") provided below:
(A) the Corporation shall pay you your full Base
Salary through the Date of Termination at the rate in effect at the
time Notice of Termination is given, or the Date of Termination where
no Notice of Termination is required hereunder;
(B) the Corporation will pay as severance benefits
to you, not later than the fifth day following the Date of Termination,
a
<PAGE> 12
EXHIBIT 10. (h)(CONTD.)
Mr.
Page 12
February 1, 1996
lump sum severance payment (the "Severance Payment") equal to the
product of (1) a fraction, the numerator of which is equal to the lesser
of (x) thirty-six (36) or (y) the number of full and partial months
existing between the Date of Termination and your sixty-fifth (65th)
birthday and the denominator of which is equal to twelve (12), and (2)
the sum of (x) your annual Base Salary in effect immediately prior to
the occurrence of the circumstances giving rise to such termination, and
(y) the amount, if any, of the highest annual bonus awarded to you under
any annual bonus plan of the Corporation in the three (3) years
immediately preceding the Date of Termination;
(C) in lieu of shares of the class of common stock
of the Corporation ("Option Shares") issuable to you upon exercise of
outstanding options ("Options"), granted to you under any option or
incentive plan of the Corporation (which Options shall be cancelled upon
the making of the payment referred to below), you shall receive an
amount in cash equal to the product of (i) the higher of the closing
price of Option Shares reported on the New York Stock Exchange on the
Date of Termination or the highest per share price for Option Shares
actually paid in connection with any Change in Control of the
Corporation, less the per share exercise price of each Option held by
you, times (ii) the number of Option Shares covered by each such Option;
<PAGE> 13
EXHIBIT 10. (h)(CONTD.)
Mr.
Page 13
February 1, 1996
(D) for a twenty-four (24) month period after such
termination, the Corporation will arrange to provide you at the
Corporation's expense with life, disability, accident and health
insurance benefits substantially similar to those which you were
receiving immediately prior to the Notice of Termination; but benefits
otherwise receivable by you pursuant to this Subsection (D) shall be
reduced to the extent comparable benefits are actually received by you
during the twenty-four (24) month period following your termination, and
any such benefits actually received by you shall be reported to the
Corporation;
(E) in addition to the retirement benefits to which
you are entitled under the United States Steel Corporation Plan for
Employee Pension Benefits, the Excess Benefits Plan, and the
Supplemental Pension Program or any successor plan or plans thereto (the
"Pension Plans") and the retiree medical, life and other similar
benefits to which you are entitled under the Corporation's welfare
benefit plans or any successor plan or plans thereto (the "Welfare
Plans"), the Corporation shall pay you not later than the fifth day
following the Date of Termination, a lump sum, in cash, equal to the
actuarial equivalent of the excess of (x) the retirement pension and the
medical, life and other benefits that would be payable to you if (i) you
were terminated under conditions that entitled you to the highest
benefit available under the Pension and Welfare Plans given your age,
service and salary as of the
<PAGE> 14
EXHIBIT 10. (h)(CONTD.)
Mr.
Page 14
February 1, 1996
Date of Termination and (ii) you had been absent due to layoff for a
one-year period ending on the Date of Termination without regard to any
amendment to the Pension or Welfare Plans made subsequent to a Change in
Control of the Corporation and on or prior to the Date of Termination,
which amendment adversely affects in any manner the computation of
retirement or welfare benefits thereunder over (y) the retirement
pension that you are entitled to receive under the Pension Plans and the
medical, life and other benefits that you are entitled to receive under
the Welfare Plans (for purposes of this Subsection, "actuarial
equivalent" shall be determined using the same methods and assumptions
utilized under the United States Steel Corporation Plan for Employee
Pension Benefits immediately prior to the Change in Control of the
Corporation); and
(F) In addition to the benefits you are entitled to
under the Savings Fund Plan for Salaried Employees and the
Supplemental Thrift Program, the Corporation shall pay you not later
than the fifth day following the Date of Termination, a lump sum, in
cash, equal to the excess of (x) the amount you would have been entitled
to under the Savings Fund Plan for Salaried Employees and the
Supplemental Thrift Program determined as if you were fully vested
thereunder on the Date of Termination, over (y) the amount you are
entitled to under the Savings
<PAGE> 15
EXHIBIT 10. (h)(CONTD.)
Mr.
Page 15
February 1, 1996
Fund Plan for Salaried Employees and the Supplemental Thrift Program on
the Date of Termination.
(e) In the event that you become entitled to the Severance
Payments, if any of the Severance Payments or other portion of the Total
Payments (as defined below) will be subject to the tax (the "Excise Tax")
imposed by section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), the Corporation shall pay to you at the time specified in paragraph
(f), below, an additional amount (the "Gross-Up Payment") such that the net
amount retained by you, after deduction of any Excise Tax on the Severance
Payments and such other Total Payments and any federal, state and local income
tax, FICA-Health Insurance tax, and Excise Tax upon the payment provided for by
this paragraph, shall be equal to the Severance Payments and such other Total
Payments. For purposes of determining whether any of the payments will be
subject to the Excise Tax and the amount of such Excise Tax, (i) any other
payments or benefits received or to be received by you in connection with a
Change in Control of the Corporation or your termination of employment whether
pursuant to the terms of this Agreement or any other plan, arrangement or
agreement with the Corporation, any person whose actions result in a Change in
Control of the Corporation or any person affiliated with the Corporation or
such person (together with the Severance Payment, the "Total Payments") shall
be treated as "parachute payments" within the meaning of section 280G(b)(2) of
the Code, and all "excess parachute payments" within the
<PAGE> 16
EXHIBIT 10. (h)(CONTD.)
Mr.
Page 16
February 1, 1996
meaning of section 280G(b)(1) shall be treated as subject to the Excise Tax,
except to the extent that in the opinion of tax counsel selected by the
Corporation's independent auditors and acceptable to you such other payments or
benefits (in whole or in part) do not constitute parachute payments, or such
excess parachute payments (in whole or in part) represent reasonable
compensation for services actually rendered within the meaning of section
280G(b)(4) of the Code in excess of the base amount within the meaning of
Section 280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax,
(ii) the amount of the Total Payments which shall be treated as subject to the
Excise Tax shall be equal to the lesser of (A) the total amount of the Total
Payments or (B) the amount of excess parachute payments within the meaning of
section 280G(b)(1) (after applying clause (i), above), and (iii) the value of
any non-cash benefits or any deferred payment or benefit shall be determined by
the Corporation's independent auditors in accordance with the principles of
sections 280G(d)(3) and (4) of the Code. For purposes of determining the
amount of the Gross-Up Payment, you shall be deemed to pay federal income taxes
at the highest marginal rate of federal income taxation in the calendar year in
which the Gross-Up Payment is to be made and state and local income taxes at
the highest marginal rate of taxation in the state and locality of your
residence on the Date of Termination, net of the maximum reduction in federal
income taxes which could be obtained from deduction of such state and local
taxes. In the event that the Excise Tax is subsequently determined to be less
than the amount
<PAGE> 17
EXHIBIT 10. (h)(CONTD.)
Mr.
Page 17
February 1, 1996
taken into account hereunder at the time of termination of your employment, you
shall repay to the Corporation at the time that the amount of such reduction in
Excise Tax is finally determined the portion of the Gross-Up Payment
attributable to such reduction (plus the portion of the Gross-Up Payment
attributable to the Excise Tax and federal and state and local income tax
imposed on the Gross-Up Payment being repaid by you if such repayment results
in a reduction in Excise Tax and/or a federal and state and local income tax
deduction) plus interest on the amount of such repayment at the rate provided
in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is
determined to exceed the amount taken into account hereunder at the time of the
termination of your employment (including by reason of any payment the
existence or amount of which cannot be determined at the time of the Gross-Up
Payment), the Corporation shall make an additional gross-up payment in respect
of such excess (plus any interest payable with respect to such excess) at the
time that the amount of such excess is finally determined.
(f) The payments provided for in paragraphs (d) and (e)
above shall be made not later than the fifth day following the Date of
Termination; provided, however, that if the amounts of such payments cannot be
finally determined on or before such day, the Corporation shall pay to you on
such day an estimate as determined in good faith by the Corporation of the
minimum amount of such payments and shall pay the remainder of such payments
(together with interest at the rate provided in Section 1274(b)(2)(B) of
<PAGE> 18
EXHIBIT 10. (h)(CONTD.)
Mr.
Page 18
February 1, 1996
the Code) as soon as the amount thereof can be determined but in no event later
than the thirtieth day after the Date of Termination. In the event that the
amount of the estimated payments exceeds the amount subsequently determined to
have been due, such excess shall constitute a loan by the Corporation to you
payable on the fifth day after demand by the Corporation (together with
interest at the rate provided in Section 1274(b)(2)(B) of the Code).
(g) The Corporation shall also pay to you all legal fees
and expenses incurred by you as a result of such termination of employment
(including all such fees and expenses, if any, incurred in contesting or
disputing any such termination or in seeking to obtain or enforce any right or
benefit provided by this Agreement or in connection with any tax audit or
proceeding to the extent attributable to the application of section 4999 of the
Code to any payment or benefit provided hereunder).
(h) You shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this Section 4
be reduced by any compensation earned by you as the result of employment by
another employer after the Date of Termination, or otherwise.
5. SUCCESSORS; BINDING AGREEMENT.
(a) The Corporation will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Corporation or of any
<PAGE> 19
EXHIBIT 10. (h)(CONTD.)
Mr.
Page 19
February 1, 1996
division or subsidiary thereof employing you to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Corporation would be required to perform it if no such succession had taken
place. Failure of the Corporation to obtain such assumption and agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle you to compensation from the Corporation in the
same amount and on the same terms as you would be entitled hereunder if you
terminate your employment for Good Reason, except that for purposes of
implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the Date of Termination.
(b) This Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If you
should die while any amount would still be payable to you hereunder if you had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement, to your devisee, legatee
or other designee or, if there is not such designee, to your estate.
6. NOTICE. For the purpose of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid, addressed to
the respective addresses set forth on the first page of this Agreement.
<PAGE> 20
EXHIBIT 10. (h)(CONTD.)
Mr.
Page 20
February 1, 1996
7. MISCELLANEOUS. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by you and such officer as may be specifically designated
by the Board. The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of Delaware.
8. VALIDITY. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
9. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
10. CLAIMS AND ARBITRATION. Any dispute or controversy arising
under or in connection with this Agreement shall be settled exclusively by
arbitration in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award
in any court having jurisdiction; provided, however, that you shall be entitled
to seek specific performance of your right to be paid until the Date of
Termination during the pendency of any dispute or controversy arising under or
in connection with this Agreement.
<PAGE> 21
EXHIBIT 10. (h)(CONTD.)
Mr.
Page 21
February 1, 1996
11. ENTIRE AGREEMENT. This Agreement supersedes any other
agreement or understanding between the parties hereto with respect to the
issues that are the subject matter of this Agreement.
12. EFFECTIVE DATE. This Agreement shall become effective as of
the date set forth above. If this letter sets forth our agreement on the
subject matter hereof, kindly sign and return to the Corporation the enclosed
copy of this letter which will then constitute our agreement on this subject.
Sincerely,
USX CORPORATION
By
-----------------------
Louis A. Valli
Senior Vice President-
Employee Relations
Agreed to this day of
------
February, 1996.
By
-----------------------
<PAGE> 1
EXHIBIT 10.(i)
DELHI GAS PIPELINE CORPORATION
ANNUAL INCENTIVE COMPENSATION PLAN
----------------------------------
1. Purpose
-------
The objectives of the Plan are to advance the interests of the Company
by providing officers and key employees incentive opportunities in
order that the Company might attract, retain and motivate outstanding
personnel by:
(a) providing compensation opportunities which are competitive with
those of other major corporations of comparable size in similar
businesses;
(b) supporting the Company's goal-setting and strategic planning
process; and
(c) motivating officers and key employees to achieve annual
business goals and contribute to team performance by allowing
them to share in the risks and rewards of the business.
2. Definitions
-----------
The following definitions shall be applicable:
Award - An award granted under the Annual Incentive Compensation Plan.
Board - The Board of Directors of Delhi Gas Pipeline Corporation.
Committee - The Executive Committee of Delhi Gas Pipeline Corporation
to which is delegated the responsibility of administering the Program.
Company - Delhi Gas Pipeline Corporation, together with its affiliated
companies comprising the Delhi Group.
Participant - An officer or key employee of the Company designated by
the Committee to be eligible to receive incentive compensation under
the Plan.
<PAGE> 2
EXHIBIT 10.(i) (CONTD.)
ANNUAL INCENTIVE COMPENSATION PLAN
Page 2
3. Administration
--------------
The Plan will be administered by the Committee which will interpret the
Plan, establish administrative rules, select officers or key employees
for participation in the Plan and take other necessary action.
Determinations and actions by the Committee shall 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.
4. Amount Available for Plan
-------------------------
The Compensation Committee of USX Corporation, upon the recommendation
of the Committee, shall determine the aggregate amount which may be
awarded with respect to each year. Any amount not so awarded with
respect to a year may be carried forward for awards in subsequent years.
5. Incentive Awards
----------------
Within the limits of the Plan, the Committee may annually make
incentive awards stated in U.S. dollars to eligible Participants.
Incentive awards may be granted to those Participants who have
contributed substantially to the success of the Company or its
affiliates. In making its determination the Committee, or its
delegates, shall consider the positions, responsibilities and
accomplishments of the eligible employees; the performance of the
respective individuals; and the overall performance and best interests
of the Company. The guidelines established by the Committee shall
provide that no Participant, unless a member of the USX Corporate Policy
Committee, shall receive an incentive award in excess of 62.5 percent of
annual salary range midpoint for the year or such portion of the year
the employee was a Participant. If a Participant retires during the
year with respect to which the awards are made, the Committee may grant
him an award, but it shall be prorated based on the number of months of
active employment. If a Participant dies during the year, the Committee
may grant a prorated award to the employee's estate. The Committee
reserves the right to grant, deny, or limit the amount of an Award to
any Participant. Further, the Board may, from time to time, amend,
suspend or terminate the Plan in whole or in part. If it is suspended
or terminated, the Board may reinstate any or all of the provisions of
the Plan.
<PAGE> 3
EXHIBIT 10.(i) (CONTD.)
ANNUAL INCENTIVE COMPENSATION PLAN
Page 3
6. Payment of Incentive Awards
---------------------------
Each participant in the Plan will be paid the award in cash as soon as
practicable following the grant of the award by the Committee. Awards
are subject to income and payroll tax withholding and are included in
"gross pay" for purposes of benefit calculations under the Retirement
Plan and for purposes of Thrift Plan contributions (unless the Award is
paid after the Participant retires). No award will be paid to a person
who terminates or is discharged prior to payment of the award.
7. Effective Date
--------------
This Plan shall become effective January 1, 1992.
<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
-----------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Portion of rentals representing interest . . . . . $ 78 $ 85 $ 84 $ 87 $ 91
Capitalized interest . . . . . . . . . . . . . . . 13 58 105 78 63
Other interest and fixed charges . . . . . . . . . 464 464 372 408 474
Pretax earnings which would be required to
cover preferred stock dividend requirements
of parent . . . . . . . . . . . . . . . . . . . 46 49 44 14 15
---- ------ ---- ---- ----
Combined fixed charges and preferred stock
dividends (A) . . . . . . . . . . . . . . . . . $601 $ 656 $605 $587 $643
==== ====== ==== ==== ====
Earnings-pretax income (loss) with
applicable adjustments (B) . . . . . . . . . . $902 $1,263 $280 $376 $(53)
==== ====== ==== ==== ====
Ratio of (B) to (A) . . . . . . . . . . . . . . . . 1.50 1.92 (a) (a) (a)
==== ====== ==== ==== ====
<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
-------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C>
Portion of rentals representing interest . . . . . $ 78 $ 85 $ 84 $ 87 $ 91
Capitalized interest . . . . . . . . . . . . . . . 13 58 105 78 63
Other interest and fixed charges . . . . . . . . . 464 464 372 408 474
---- ------ ---- ---- ----
Total fixed charges (A) . . . . . . . . . . . . . . $555 $ 607 $561 $573 $628
==== ====== ==== ==== ====
Earnings-pretax income (loss) with
applicable adjustments (B) . . . . . . . . . . $902 $1,263 $280 $376 $(53)
==== ====== ==== ==== ====
Ratio of (B) to (A) . . . . . . . . . . . . . . . . 1.63 2.08 (a) (a) (a)
==== ====== ==== ==== ====
<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, 1995:
<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 International Petroleum Ireland Cayman Islands
Marathon Oil Company Ohio
Marathon Oil U.K., Ltd. Delaware
Marathon Petroleum Company (Norway) Delaware
Marathon Petroleum Egypt, Ltd. Delaware
Marathon Petroleum Indonesia, Ltd. Delaware
Marathon Petroleum Investment, Ltd. Delaware
Marathon Petroleum Ireland, Ltd. Delaware
Marathon Petroleum Netherlands, Ltd. Delaware
Marathon Petroleum Nile Delta, 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, 1995:
<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
PRO-TEC Coating Company United States 50% Steel Processing
RMI Titanium Company United States 51% Titanium Metal Products
Sakhalin Energy Investment Company
Ltd. 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
<FN>
(a) Economic interest as of December 31, 1995.
</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 13, 1996 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:
<TABLE>
<CAPTION>
On Form S-3: Relating to:
<S> <C>
File No. 33-34703 Marathon Group Dividend Reinvestment Plan
33-43719 U. S. Steel Group Dividend Reinvestment Plan
33-50191 USX Corporation Debt Securities, Preferred
Stock and Common Stock
33-51621 USX Corporation Debt Securities, Preferred
Stock and Common Stock
33-52937 USX Debt Securities
33-56659 Marathon Group Common Stock
33-57997 Marathon Group Dividend Reinvestment Plan
33-60142 USX Corporation Debt Securities
33-60172 U. S. Steel Group Dividend Reinvestment Plan
On Form S-8: Relating to:
File No. 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 1990 Stock Plan
33-48116 Parity Investment Bonus
33-54333 Parity Investment Bonus
33-60667 Parity Investment Bonus
33-54760 Thrift Plan for Employees of Delhi Gas
Pipeline Corporation
33-56828 Marathon Oil Company Thrift Plan
33-52917 USX Savings Plan
333-00429 USX Savings Fund Plan
</TABLE>
PRICE WATERHOUSE LLP
600 Grant Street
Pittsburgh, PA 15219-2794
March 6, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 131
<SECURITIES> 0
<RECEIVABLES> 1,225
<ALLOWANCES> 22
<INVENTORY> 1,764
<CURRENT-ASSETS> 3,240
<PP&E> 25,768
<DEPRECIATION> 15,233
<TOTAL-ASSETS> 16,743
<CURRENT-LIABILITIES> 3,520
<BONDS> 4,472
<COMMON> 379<F1>
0
7
<OTHER-SE> 3,942
<TOTAL-LIABILITY-AND-EQUITY> 16,743
<SALES> 20,922
<TOTAL-REVENUES> 20,922
<CGS> 20,131
<TOTAL-COSTS> 20,131
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 501
<INCOME-PRETAX> 269
<INCOME-TAX> 48
<INCOME-CONTINUING> 221
<DISCONTINUED> 0
<EXTRAORDINARY> 7
<CHANGES> 0
<NET-INCOME> 214
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F3>
<FN>
<F1>Consists of Marathon Stock issued, $287; Steel Stock issued, $83; Delhi
Stock issued, $9.
<F2>Primary earnings (loss) per share applicable to Marathon Stock, $(.33);
Steel Stock, $3.51; Delhi Stock $.12.
<F3>Fully diluted earnings (loss) per share applicable to Marathon Stock,
$(.33); Steel Stock, $3.41; Delhi Stock, $.12.
</FN>
</TABLE>
