<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ------------ to ------------
USX CORPORATION
- --------------------------------------------------------------------------------
----
(Exact name of registrant as specified in its charter)
Delaware 1-5153 25-0996816
--------------- ------------ -------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
600 Grant Street, Pittsburgh, PA 15219-4776
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(412) 433-1121
------------------------------
(Registrant's telephone number,
including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes..X..No.....
Common stock outstanding at April 30, 1996 follows:
USX-Marathon Group - 287,428,286 shares
USX-U. S. Steel Group - 83,491,507 shares
USX-Delhi Group - 9,446,769 shares
<PAGE> 2
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED MARCH 31, 1996
--------------------------------
INDEX Page
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PART I - FINANCIAL INFORMATION
A. Consolidated Corporation
Item 1. Financial Statements:
Consolidated Statement of Operations 4
Consolidated Balance Sheet 6
Consolidated Statement of Cash Flows 8
Selected Notes to Consolidated
Financial Statements 9
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends and Ratio of
Earnings to Fixed Charges 14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 15
Financial Statistics 19
B. Marathon Group
Item 1. Financial Statements:
Marathon Group Statement of Operations 20
Marathon Group Balance Sheet 21
Marathon Group Statement of Cash Flows 22
Selected Notes to Financial Statements 23
Item 2. Marathon Group Management's Discussion and
Analysis of Financial Condition and
Results of Operations 27
Supplemental Statistics 32
<PAGE> 3
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED MARCH 31, 1996
----------------------------
INDEX Page
----- ----
PART I - FINANCIAL INFORMATION (Continued)
C. U. S. Steel Group
Item 1. Financial Statements:
U. S. Steel Group Statement of Operations 33
U. S. Steel Group Balance Sheet 34
U. S. Steel Group Statement of Cash Flows 35
Selected Notes to Financial Statements 36
Item 2. U. S. Steel Group Management's Discussion
and Analysis of Financial Condition
and Results of Operations 41
Supplemental Statistics 45
D. Delhi Group
Item 1. Financial Statements:
Delhi Group Statement of Operations 46
Delhi Group Balance Sheet 47
Delhi Group Statement of Cash Flows 48
Selected Notes to Financial Statements 49
Item 2. Delhi Group Management's Discussion and
Analysis of Financial Condition
and Results of Operations 53
Supplemental Statistics 57
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 58
Item 5. Other Information 59
Item 6. Exhibits and Reports on Form 8-K 60
<PAGE> 4
Part I - Financial Information
A. Consolidated Corporation
<TABLE>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
------------------------------------------------
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1996 1995*
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUES $5,469 $5,042
OPERATING COSTS:
Cost of sales (excludes items shown below) 4,072 3,658
Inventory market valuation credits (155) (88)
Selling, general and administrative expenses 44 42
Depreciation, depletion and amortization 267 290
Taxes other than income taxes 742 756
Exploration expenses 33 26
------ ------
Total operating costs 5,003 4,684
------ ------
OPERATING INCOME 466 358
Other income 34 20
Interest and other financial income 5 4
Interest and other financial costs (120) (133)
------ ------
INCOME BEFORE INCOME TAXES 385 249
Less provision for estimated income taxes 120 95
------ ------
NET INCOME 265 154
Dividends on preferred stock (6) (8)
------ ------
NET INCOME APPLICABLE TO COMMON STOCKS $259 $146
====== ======
<FN>
*Certain amounts have been reclassified to conform to 1996 classifications.
Selected notes to financial statements appear on pages 9-13.
</TABLE>
<PAGE> 5
<TABLE>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Continued) (Unaudited)
INCOME PER COMMON SHARE
------------------------------------------------------------
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions, except per share amounts) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
APPLICABLE TO MARATHON STOCK:
Net income $216 $75
- Per share - primary .75 .26
- fully diluted .74 .26
Dividends paid per share .17 .17
Weighted average shares, in thousands
- Primary 287,460 287,187
- Fully diluted 297,251 287,189
APPLICABLE TO STEEL STOCK:
Net income $40 $68
- Per share - primary .49 .89
- fully diluted .48 .86
Dividends paid per share .25 .25
Weighted average shares, in thousands
- Primary 83,197 76,173
- Fully diluted 85,030 87,092
APPLICABLE TO OUTSTANDING DELHI STOCK:
Net income $2 $3
- Per share - primary and fully diluted .25 .30
Dividends paid per share .05 .05
Weighted average shares, in thousands
- Primary and fully diluted 9,447 9,438
<FN>
Selected notes to financial statements appear on pages 9-13.
</TABLE>
<PAGE> 6
<TABLE>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Unaudited)
----------------------------------------
<CAPTION>
ASSETS
March 31 December 31
(Dollars in millions) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $120 $131
Receivables, less allowance for doubtful
accounts of $22 and $22 1,218 1,203
Inventories 1,897 1,764
Deferred income tax benefits 58 76
Other current assets 64 66
------ ------
Total current assets 3,357 3,240
Long-term receivables and other investments,
less reserves of $25 and $23 768 836
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$15,264 and $15,233 10,361 10,535
Prepaid pensions 1,870 1,820
Other noncurrent assets 290 312
------ ------
Total assets $16,646 $16,743
====== ======
<FN>
Selected notes to financial statements appear on pages 9-13.
</TABLE>
<PAGE> 7
<TABLE>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Continued) (Unaudited)
--------------------------------------------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31 December 31
(Dollars in millions) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES
Current liabilities:
Notes payable $150 $40
Accounts payable 2,020 2,157
Payroll and benefits payable 486 473
Accrued taxes 256 263
Accrued interest 85 122
Long-term debt due within one year 410 465
------ ------
Total current liabilities 3,407 3,520
Long-term debt, less unamortized discount 4,250 4,472
Long-term deferred income taxes 955 898
Employee benefits 2,769 2,772
Deferred credits and other liabilities 489 503
Preferred stock of subsidiary 250 250
------ ------
Total liabilities 12,120 12,415
------ ------
STOCKHOLDERS' EQUITY
Preferred stock -
6.50% Cumulative Convertible issued - 6,900,000 shares
($345 liquidation preference) 7 7
Common stocks:
Marathon Stock issued - 287,404,972 shares and
287,398,342 shares 288 287
Steel Stock issued - 83,287,793 shares and
83,042,305 shares 83 83
Delhi Stock issued - 9,446,769 shares 9 9
Additional paid-in capital 4,026 4,094
Retained earnings (deficit) 149 (116)
Other equity adjustments (36) (36)
------ ------
Total stockholders' equity 4,526 4,328
------ ------
Total liabilities and stockholders' equity $16,646 $16,743
====== ======
<FN>
Selected notes to financial statements appear on pages 9-13.
</TABLE>
<PAGE> 8
<TABLE>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------------------
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $265 $154
Adjustments to reconcile to net cash provided
from operating activities:
Depreciation, depletion and amortization 267 290
Exploratory dry well costs 14 9
Inventory market valuation credits (155) (88)
Pensions (46) (41)
Postretirement benefits other than pensions 6 (20)
Deferred income taxes 74 36
Gain on disposal of assets (25) (4)
Changes in:
Current receivables (20) 99
Inventories 21 60
Current accounts payable and accrued expenses (130) (177)
All other items - net (6) 1
------ ------
Net cash provided from operating activities 265 319
------ ------
INVESTING ACTIVITIES:
Capital expenditures (178) (159)
Disposal of assets 175 37
All other items - net (2) 2
------ ------
Net cash used in investing activities (5) (120)
------ ------
FINANCING ACTIVITIES:
Commercial paper and revolving credit arrangements-net 60 (66)
Other debt - repayments (263) (11)
Common stock issued 7 12
Dividends paid (75) (76)
------ ------
Net cash used in financing activities (271) (141)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - 1
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11) 59
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 131 48
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $120 $107
====== =====
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(170) $(156)
Income taxes paid (23) (10)
<FN>
Selected notes to financial statements appear on pages 9-13.
</TABLE>
<PAGE> 9
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited but,
in the opinion of management, reflects all adjustments necessary for a fair
presentation of the results for the periods covered. All such adjustments
are of a normal recurring nature unless disclosed otherwise. These
financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Additional information is contained in the USX Annual Report
on Form 10-K for the year ended December 31, 1995.
In 1996, USX will adopt Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123), which
establishes a fair value based method of accounting for employee stock-
based compensation plans. The Standard permits companies to continue to
apply the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, provided certain pro forma
disclosures are made. USX intends to comply with SFAS No. 123 by
disclosure only in its 1996 annual financial statements.
2. The method of calculating net income per share for the Marathon Stock,
Steel Stock and Delhi Stock reflects the USX Board of Directors' intent
that the separately reported earnings and surplus of the Marathon Group,
the U. S. Steel Group and the Delhi Group, as determined consistent with
the USX Certificate of Incorporation, are available for payment of
dividends on the respective classes of stock, although legally available
funds and liquidation preferences of these classes of stock do not
necessarily correspond with these amounts. The financial statements of the
Marathon Group, the U. S. Steel Group and the Delhi Group, taken together,
include all accounts which comprise the corresponding consolidated
financial statements of USX.
Primary net income per share is calculated by adjusting net income for
dividend requirements of preferred stock and, in the case of Delhi Stock,
for the income applicable to the Retained Interest prior to June 15, 1995,
the date USX eliminated the Marathon Group's Retained Interest in the Delhi
Group; and is based on the weighted average number of common shares
outstanding plus common stock equivalents, provided they are not
antidilutive. Common stock equivalents result from assumed exercise of
stock options, where applicable.
Fully diluted net income per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of
stock options, provided in each case, the effect is not antidilutive.
3. The items below are included in both revenues and operating costs,
resulting in no effect on income.
<TABLE>
<CAPTION>
(In millions)
-------------------
First Quarter Ended
March 31
1996 1995
---- ----
<S> <C> <C>
Consumer excise taxes on petroleum products and
merchandise $633 $647
Matching crude oil and refined product buy/sell
transactions settled in cash 599 561
</TABLE>
<PAGE> 10
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. Operating income includes net periodic pension credits of $37 million and
$36 million in the first quarter of 1996 and 1995, respectively. These
pension credits are primarily noncash and for the most part are included in
selling, general and administrative expenses. The expected long-term rate
of return on plan assets, which is reflected in the calculation of net
periodic pension credits, is 10% for both 1996 and 1995.
5. Other income in the first quarter of 1996 included a gain of $21 million,
primarily related to sales of investments in equity affiliates.
6. The provision for estimated income taxes for the periods reported is based
on tax rates and amounts which recognize management's best estimate of
current and deferred tax assets and liabilities.
7. Inventories are carried at lower of cost or market. Cost of inventories is
determined primarily under the last-in, first-out (LIFO) method.
<TABLE>
<CAPTION>
(In millions)
----------------------
March 31 December 31
1996 1995
-------- -----------
<S> <C> <C>
Raw materials $565 $609
Semi-finished products 319 300
Finished products 914 901
Supplies and sundry items 153 163
------ ------
Total (at cost) 1,951 1,973
Less inventory market valuation reserve 54 209
------ ------
Net inventory carrying value $1,897 $1,764
====== ======
</TABLE>
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.
8. At March 31, 1996, USX had $100 million of borrowings against its
$2,325 million long-term revolving credit agreement. At March 31, 1996,
$43 million of commercial paper is included in long-term debt, since the
unused portion of the long-term credit agreement is available for
refinancing, if needed.
USX had no outstanding borrowings at March 31, 1996, against its short-term
lines of credit totaling $200 million, which require maintenance of
compensating balances of 3%. In addition, USX had other outstanding short-
term borrowings of $150 million.
In the event of a change in control of USX, debt obligations totaling
$3,501 million at March 31, 1996, may be declared immediately due and
payable.
<PAGE> 11
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
9. 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 March 31, 1996, the
amount sold under the programs that had not been collected was $740
million, which will be forwarded to the buyers at the end of the
agreements, or in the event of earlier contract termination. If USX does
not have a sufficient quantity of eligible accounts receivable to reinvest
in for the buyers, the size of the programs will be reduced accordingly.
The buyers have rights to a pool of receivables that must be maintained at
a level of 110% to 115% of the programs' size. In the event of a change in
control of USX, as defined in one of the agreements, USX may be required to
forward to the buyers, payments collected on sold accounts receivable of
$350 million.
Prior to 1993, USX Credit, a division of USX, sold certain of its loans
receivable subject to limited recourse. USX Credit continues to collect
payments from the loans and transfer to the buyers principal collected plus
yield based on defined short-term market rates. At March 31, 1996, the
balance of sold loans receivable subject to recourse was $62 million. USX
Credit is not actively seeking new loans at this time. In the event of a
change in control of USX, as defined in the agreement, USX may be required
to provide cash collateral in the amount of the uncollected loans
receivable to assure compliance with the limited recourse provisions.
10. USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments involving a variety of
matters, including laws and regulations relating to the environment.
Certain of these matters are discussed below. The ultimate resolution of
these contingencies could, individually or in the aggregate, be material to
the consolidated financial statements. However, management believes that
USX will remain a viable and competitive enterprise even though it is
possible that these contingencies could be resolved unfavorably. See
discussion of Liquidity and Capital Resources in USX Consolidated
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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
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
<PAGE> 12
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
10. (Continued)
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.
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 March 31, 1996, and December 31, 1995,
accrued liabilities for remediation totaled $150 million and $153 million,
respectively. It is not presently possible to estimate the ultimate amount
of all remediation costs that might be incurred or the penalties that may
be imposed. Receivables for recoverable costs from certain states, under
programs to assist companies in cleanup efforts related to underground
storage tanks at retail marketing outlets, were $23 million at March 31,
1996, and $22 million at December 31, 1995.
For a number of years, USX has made substantial capital expenditures to
bring existing facilities into compliance with various laws relating to the
environment. In the first quarter of 1996 and for the years 1995 and 1994,
such capital expenditures totaled $26 million, $111 million and $132
million, respectively. USX anticipates making additional such expenditures
in the future; however, the exact amounts and timing of such expenditures
are uncertain because of the continuing evolution of specific regulatory
requirements.
At March 31, 1996, and December 31, 1995, accrued liabilities for platform
abandonment and dismantlement totaled $130 million and $128 million,
respectively.
<PAGE> 13
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
10. (Continued)
Guarantees by USX of the liabilities of affiliated entities totaled $50
million at March 31, 1996. In the event that any defaults of guaranteed
liabilities occur, USX has access to its interest in the assets of most of
the affiliates to reduce losses resulting from these guarantees. As of
March 31, 1996, the largest guarantee for a single affiliate was $23
million.
At March 31, 1996, USX's pro rata share of obligations of LOOP INC. and
various pipeline affiliates secured by throughput and deficiency agreements
totaled $185 million. Under the agreements, USX is required to advance
funds if the affiliates are unable to service debt. Any such advances are
prepayments of future transportation charges.
Contract commitments for capital expenditures for property, plant and
equipment at March 31, 1996, totaled $417 million compared with $299
million at December 31, 1995.
<PAGE> 14
<TABLE>
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS - (Unaudited)
----------------------------------------------------------
<CAPTION>
First Quarter Ended
March 31 Year Ended December 31
- --------------------- -------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<C> <C> <C> <C> <C> <C> <C>
3.68 2.56 1.50 1.92 (a) (a) (a)
==== ==== ==== ==== ==== ==== ====
<FN>
(a) Earnings did not cover combined fixed charges and preferred stock
dividends by $325 million for 1993, by $211 million for 1992 and by $696
million for 1991.
</TABLE>
<TABLE>
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS - (Unaudited)
-------------------------------------------------
<CAPTION>
First Quarter Ended
March 31 Year Ended December 31
- --------------------- -------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<C> <C> <C> <C> <C> <C> <C>
3.93 2.78 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> 15
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The following discussion should be read in conjunction with the first
quarter 1996 USX consolidated financial statements and selected notes. For
Group results, see Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Marathon Group, the U. S. Steel Group and the
Delhi Group. For operating statistics, see Supplemental Statistics following
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the respective Groups.
Results of Operations
- ---------------------
See Consolidated Statement of Operations - Income per Common Share for
amounts applicable to each of USX's three classes of common stock (Marathon
Stock, Steel Stock and Delhi Stock).
Sales increased by $427 million, or 8%, in the first quarter of 1996 as
compared with the first quarter of 1995. The improvement reflected increases of
12% for the Marathon Group (excluding matching buy/sell transactions and excise
taxes), 98% for the Delhi Group (due mainly to higher prices related to gas
sales and trading, and increased trading volumes), and 1% for the U. S. Steel
Group. Matching buy/sell transactions and excise taxes are included in both
sales and operating costs, resulting in no effect on operating income.
Operating income increased by $108 million in the first quarter of 1996 as
compared with the first quarter of 1995. First quarter operating income
included favorable noncash pretax effects of $155 million in 1996 and $88
million in 1995, resulting from decreases in the inventory market valuation
reserve. This reserve reflects the extent to which the recorded costs of crude
oil and refined product inventories exceed net realizable value. Excluding the
effects of these items, operating income increased by $41 million, or 15%, in
the first quarter of 1996 as compared with the first quarter of 1995, due
primarily to an increase of $98 million for the Marathon Group, partially offset
by a decline of $56 million for the U. S. Steel Group.
Other income was $34 million in the first quarter of 1996, compared with
$20 million in the first quarter of 1995. Other income in the first quarter of
1996 included gains of $21 million, mainly related to the sale of the Marathon
Group's interest in a domestic pipeline company.
Net interest and other financial costs decreased by $14 million in the
first quarter of 1996 as compared with the first quarter of 1995, primarily due
to lower average debt levels.
Provision for estimated income taxes for the periods reported is based on
tax rates and amounts which recognize management's best estimate of current and
deferred tax assets and liabilities.
Net income increased by $111 million, or 72%, in the first quarter of 1996
as compared with the first quarter of 1995.
Outlook
- -------
On April 2, 1996, a hearth break-out idled the Gary Work's No. 13 blast
furnace, U.S. Steel's largest furnace, which provides about 9,000 tons per day
of
<PAGE> 16
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
molten iron, or about one-half of Gary Work's total iron production and about
one-fourth of the U. S. Steel Group's total iron output. Repairs are in
progress and are expected to take as much as five days more than
the 50 to 55 days previously reported. The furnace is expected to return to
production in late May 1996. Production is expected to increase throughout
the month of June as the furnace returns to normal operation. The
U. S. Steel Group is purchasing molten iron as well as steel slabs to
offset some of the production loss during the outage. The outage will have
a significant negative impact on the U. S. Steel Group's shipments, results
of operations and cash flows in 1996, primarily in the second quarter.
USX maintains physical damage and business interruption insurance coverage
for events of this nature for certain steel facilities, subject to a $50
million deductible for recoverable items.
Dividends to Stockholders
- -------------------------
On April 30, 1996, USX's Board of Directors (the "Board") declared
dividends of 17 cents per share on Marathon Stock, 25 cents per share on Steel
Stock and five cents per share on Delhi Stock, all payable June 10, 1996, to
stockholders of record at the close of business on May 16, 1996.
The Board also declared a dividend of $0.8125 per share on USX
Corporation's 6.50% Cumulative Convertible Preferred Stock, payable June 28,
1996, to stockholders of record at the close of business on May 29, 1996.
Cash Flows
- ----------
At March 31, 1996, cash and cash equivalents totaled $120 million, compared
with $131 million at December 31, 1995.
Net cash provided from operating activities totaled $265 million in the
first quarter of 1996, compared with $319 million in the first quarter of 1995.
The 1996 period reflected payments of $39 million related to certain state tax
issues, $28 million for final settlement of the Pickering v. USX litigation and
$10 million to the Voluntary Employee Benefit Association ("VEBA") Trust. The
1995 period reflected payments of $35 million to the VEBA Trust. Excluding the
effects of these items, cash provided from operating activities decreased by $12
million mainly due to unfavorable working capital changes and lower average
steel prices, partially offset by higher average margins for refined products
and higher average prices for worldwide liquid hydrocarbons and domestic natural
gas.
Cash from the disposal of assets totaled $175 million in the first quarter
of 1996, compared with $37 million in the first quarter of 1995. The 1996
proceeds primarily reflected the sale of the U. S. Steel Group's investment in
an oil field service joint venture and sales of the Marathon Group's interests
in oil and gas production properties in Indonesia and its interest in a domestic
pipeline company. The 1995 proceeds primarily reflected property sales.
Capital expenditures for property, plant and equipment in the first quarter
of 1996 were $178 million, compared with $159 million in the first quarter of
1995. For further details, see USX Corporation - Financial Statistics,
following Management's Discussion and Analysis of Financial Condition and
Results of Operations.
<PAGE> 17
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
For the year 1996, capital expenditures are expected to total approximately
$1.2 billion. For details, see discussion of Capital Expenditures for the
Marathon Group, the U. S. Steel Group and the Delhi Group.
Contract commitments for capital expenditures were $417 million at March
31, 1996, compared with $299 million at December 31, 1995.
At March 31, 1996, USX's total long-term debt, preferred stock of
subsidiary and notes payable, was $5,060 million, down $167 million from
December 31, 1995, primarily due to the redemption of $161 million of Marathon 9
- -3/4% Guaranteed Notes due 1999. At March 31, 1996, USX had outstanding
borrowings of $100 million against its long-term revolving credit facility,
leaving $2,225 million of availability. At March 31, 1996, USX had no
outstanding borrowings against its short-term credit agreements of $175 million
which require commitment fees, and no outstanding borrowings against its short-
term lines of credit of $200 million which require maintenance of compensating
balances of 3%. USX had other outstanding short-term borrowings of $150 million
of non-committed credit lines.
On May 2, 1996, an aggregate of 6.9 million shares of RMI Titanium Company
("RMI") Common Stock was sold in a public offering. Included in the offering
were 2.3 million shares sold by USX for net proceeds of $40 million. Following
this transaction, USX owns approximately 27% of the outstanding common stock of
RMI. USX will recognize a pretax gain in the second quarter of 1996 of
approximately $50 million, a portion of which is attributable to a change in
interest gain resulting from the shares sold by RMI.
Liquidity
- ---------
USX believes that its short-term and long-term liquidity is adequate to
satisfy its obligations as of March 31, 1996, and to complete currently
authorized capital spending programs. Future requirements for USX's business
needs, including the funding of capital expenditures and debt maturities for the
balance of 1996 and years 1997 and 1998, are expected to be financed by a
combination of internally generated funds, proceeds from the sale of stock,
borrowings and other external financing sources.
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
USX has incurred and will continue to incur substantial capital, operating
and maintenance, and remediation expenditures as a result of environmental laws
and regulations. To the extent these expenditures, as with all costs, are not
ultimately reflected in the prices of USX's products and services, operating
results will be adversely affected. USX believes that domestic competitors of
the U. S. Steel Group and substantially all the competitors of the Marathon
Group and the Delhi Group are subject to similar environmental laws and
regulations. However, the specific impact on each competitor may vary depending
on a number of factors, including the age and location of its operating
facilities, marketing areas, production processes and the specific products and
services it provides.
USX has been notified that it is a potentially responsible party ("PRP") at
45 waste sites under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") as of March 31, 1996. In addition, there are 33 sites
<PAGE> 18
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
where USX has received information requests or other indications that USX may be
a PRP under CERCLA but where sufficient information is not presently available
to confirm the existence of liability. There are also 106 additional sites,
excluding retail marketing outlets, where remediation is being sought under
other environmental statutes, both federal and state. At many of these sites,
USX is one of a number of parties involved and the total cost of remediation, as
well as USX's share thereof, is frequently dependent upon the outcome of
investigations and remedial studies. USX accrues for environmental remediation
activities when the responsibility to remediate is probable and the amount of
associated costs is reasonably determinable. As environmental remediation
matters proceed toward ultimate resolution or as additional remediation
obligations arise, charges in excess of those previously accrued may be
required. See Note 10 to the Consolidated Financial Statements.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments involving a variety of matters,
including laws and regulations relating to the environment, certain of which are
discussed in Note 10 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 discussion of Cash Flows and Liquidity herein.
<PAGE> 19
<TABLE>
USX CORPORATION
FINANCIAL STATISTICS
--------------------
<CAPTION>
First Quarter
Ended
March 31
----------------
(Dollars in Millions) 1996 1995
- --------------------------------------------------------------------------------
SALES
<S> <C> <C>
Marathon Group $3,627 $3,338
U. S. Steel Group 1,591 1,580
Delhi Group 273 137
Eliminations (22) (13)
------- -------
Total $5,469 $5,042
OPERATING INCOME (LOSS)
Marathon Group $377 $212
U. S. Steel Group 81 137
Delhi Group 8 9
----- -----
Total $466 $358
CAPITAL EXPENDITURES
Marathon Group $100 $97
U. S. Steel Group 56 56
Delhi Group 22 6
----- -----
Total $178 $159
</TABLE>
<PAGE> 20
Part I - Financial Information (Continued):
<TABLE>
B. Marathon Group
MARATHON GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions, except per share amounts) 1996 1995*
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUES $3,627 $3,338
OPERATING COSTS:
Cost of sales (excludes items shown below) 2,430 2,209
Inventory market valuation credits (155) (88)
Selling, general and administrative expenses 78 73
Depreciation, depletion and amortization 182 207
Taxes other than income taxes 682 699
Exploration expenses 33 26
------ ------
Total operating costs 3,250 3,126
------ ------
OPERATING INCOME 377 212
Other income 25 4
Interest and other financial income 4 3
Interest and other financial costs (86) (91)
------ ------
INCOME BEFORE INCOME TAXES 320 128
Less provision for estimated income taxes 104 51
------ ------
NET INCOME 216 77
Dividends on preferred stock - (2)
------ ------
NET INCOME APPLICABLE TO MARATHON STOCK $216 $75
====== ======
MARATHON STOCK DATA:
Net income per share - primary $.75 $.26
- fully diluted .74 .26
Dividends paid per share .17 .17
Weighted average shares, in thousands
- Primary 287,460 287,187
- Fully diluted 297,251 287,189
<FN>
*Certain amounts have been reclassified to conform to 1996 classifications.
Selected notes to financial statements appear on pages 23-26.
</TABLE>
<PAGE> 21
<TABLE>
MARATHON GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
---------------------------------
<CAPTION>
March 31 December 31
(Dollars in millions) 1996 1995
- --------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $89 $77
Receivables, less allowance for doubtful
accounts of $2 and $3 575 541
Receivable from other groups - 11
Inventories 1,266 1,152
Other current assets 105 107
------ ------
Total current assets 2,035 1,888
Long-term receivables and other investments 228 215
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$8,856 and $8,890 7,353 7,521
Prepaid pensions 278 274
Other noncurrent assets 197 211
------ ------
Total assets $10,091 $10,109
====== ======
LIABILITIES
Current liabilities:
Notes payable $114 $31
Accounts payable 1,166 1,210
Payable to other groups 51 35
Payroll and benefits payable 74 80
Accrued taxes 43 68
Deferred income taxes 177 154
Accrued interest 64 94
Long-term debt due within one year 308 353
------ ------
Total current liabilities 1,997 2,025
Long-term debt, less unamortized discount 3,167 3,367
Long-term deferred income taxes 1,111 1,072
Employee benefits 343 338
Deferred credits and other liabilities 251 253
Preferred stock of subsidiary 182 182
------ ------
Total liabilities 7,051 7,237
STOCKHOLDERS' EQUITY 3,040 2,872
------ ------
Total liabilities and stockholders' equity $10,091 $10,109
====== ======
<FN>
Selected notes to financial statements appear on pages 23-26.
</TABLE>
<PAGE> 22
<TABLE>
MARATHON GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
<CAPTION>
First Quarter Ended
March 31
(Dollars in millions) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $216 $77
Adjustments to reconcile to net cash provided from
operating activities:
Depreciation, depletion and amortization 182 207
Exploratory dry well costs 14 9
Inventory market valuation credits (155) (88)
Pensions (5) (7)
Postretirement benefits other than pensions 4 2
Deferred income taxes 57 16
Gain on disposal of assets (21) -
Changes in:
Current receivables - sold - (6)
- operating turnover (24) 33
Inventories 41 67
Current accounts payable and accrued expenses (57) (214)
All other items - net 10 25
------ ------
Net cash provided from operating activities 262 121
------ ------
INVESTING ACTIVITIES:
Capital expenditures (100) (97)
Disposal of assets 85 4
All other items - net 2 -
------ ------
Net cash used in investing activities (13) (93)
------ ------
FINANCING ACTIVITIES:
Change in Marathon Group's share of USX consolidated
debt (188) 77
Dividends paid (49) (51)
------ ------
Net cash provided from (used in) financing
activities (237) 26
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - 1
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 12 55
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 77 28
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $89 $83
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(133) $(108)
Income taxes paid, including settlements with other
groups (5) (46)
<FN>
Selected notes to financial statements appear on pages 23-26.
</TABLE>
<PAGE> 23
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited but,
in the opinion of management, reflects all adjustments necessary for a fair
presentation of the results for the periods covered. All such adjustments
are of a normal recurring nature unless disclosed otherwise. These
financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Additional information is contained in the USX Annual Report
on Form 10-K for the year ended December 31, 1995.
2. The financial statements of the Marathon Group include the financial
position, results of operations and cash flows for the businesses of
Marathon Oil Company and certain other subsidiaries of USX, and a portion
of the corporate assets and liabilities and related transactions which are
not separately identified with ongoing operating units of USX. These
financial statements are prepared using the amounts included in the USX
consolidated financial statements. Corporate amounts reflected in these
financial statements are determined based upon methods which management
believes to be reasonable. The accounting policies applicable to the
preparation of the financial statements of the Marathon Group may be
modified or rescinded in the sole discretion of the Board of Directors of
USX (Board), although the Board has no present intention to do so. The
Board may also adopt additional policies depending on the circumstances.
Although the financial statements of the Marathon Group, the U. S. Steel
Group and the Delhi Group separately report the assets, liabilities
(including contingent liabilities) and stockholders' equity of USX
attributed to each such group, such attribution of assets, liabilities
(including contingent liabilities) and stockholders' equity among the
Marathon Group, the U. S. Steel Group and the Delhi Group for the purpose
of preparing their respective financial statements does not affect legal
title to such assets and responsibility for such liabilities. Holders of
USX-Marathon Group Common Stock (Marathon Stock), USX-U. S. Steel Group
Common Stock (Steel Stock) and USX-Delhi Group Common Stock (Delhi Stock)
are holders of common stock of USX and continue to be subject to all the
risks associated with an investment in USX and all of its businesses and
liabilities. Financial impacts arising from one Group that affect the
overall cost of USX's capital could affect the results of operations and
financial condition of other groups. In addition, net losses of any Group,
as well as dividends or distributions on any class of USX Common Stock or
series of Preferred Stock and repurchases of any class of USX Common Stock
or series of Preferred Stock at prices in excess of par or stated value,
will reduce the funds of USX legally available for payment of dividends on
all classes of Common Stock. Accordingly, the USX consolidated financial
information should be read in connection with the Marathon Group financial
information.
<PAGE> 24
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
3. The method of calculating net income per share for the Marathon Stock,
Steel Stock and Delhi Stock reflects the Board's intent that the separately
reported earnings and surplus of the Marathon Group, the U. S. Steel Group
and the Delhi Group, as determined consistent with the USX Certificate of
Incorporation, are available for payment of dividends on the respective
classes of stock, although legally available funds and liquidation
preferences of these classes of stock do not necessarily correspond with
these amounts.
Primary net income per share is calculated by adjusting net income for
dividend requirements of preferred stock and is based on the weighted
average number of common shares outstanding plus common stock equivalents,
provided they are not antidilutive. Common stock equivalents result from
assumed exercise of stock options, where applicable.
Fully diluted net income per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of
stock options provided, in each case, the effect is not antidilutive.
4. The items below are included in both revenues and operating costs,
resulting in no effect on income.
<TABLE>
<CAPTION>
(In millions)
-------------------
First Quarter Ended
March 31
1996 1995
---- ----
<S> <C> <C>
Consumer excise taxes on petroleum products and
merchandise $633 $647
Matching crude oil and refined product buy/sell
transactions settled in cash 599 561
</TABLE>
5. Other income in the first quarter of 1996 included a gain of $20 million,
primarily related to the sale of an investment in an equity affiliate.
6. The financial statement provision for estimated income taxes and related
tax payments or refunds have been reflected in the Marathon Group, the U.
S. Steel Group and the Delhi Group financial statements in accordance with
USX's tax allocation policy for such groups. In general, such policy
provides that the consolidated tax provision and related tax payments or
refunds are allocated among the Marathon Group, the U. S. Steel Group and
the Delhi Group for group financial statement purposes, based principally
upon the financial income, taxable income, credits, preferences and other
amounts directly related to the respective groups.
The provision for estimated income taxes for the Marathon Group is based on
tax rates and amounts which recognize management's best estimate of current
and deferred tax assets and liabilities. Differences between the combined
interim tax provisions of the Marathon, U. S. Steel and Delhi Groups and
USX consolidated are allocated to each group based on the relationship of
the individual group provisions to the combined interim provisions.
<PAGE> 25
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. Inventories are carried at the lower of cost or market. Cost of
inventories of crude oil and refined products is determined under the last-
in, first-out (LIFO) method.
<TABLE>
<CAPTION>
(In millions)
----------------------
March 31 December 31
1996 1995
-------- -----------
<S> <C> <C>
Crude oil and natural gas liquids $488 $510
Refined products and merchandise 751 758
Supplies and sundry items 81 93
------ ------
Total (at cost) 1,320 1,361
Less inventory market valuation reserve 54 209
------ ------
Net inventory carrying value $1,266 $1,152
====== ======
</TABLE>
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.
8. 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 March 31, 1996, the amount sold under the program that had not
been collected was $340 million, which will be forwarded to the buyers at
the end of the agreement, or in the event of earlier contract termination.
If the Marathon Group does not have a sufficient quantity of eligible
accounts receivable to reinvest in for the buyers, the size of the program
will be reduced accordingly. The buyers have rights to a pool of
receivables that must be maintained at a level of 110% of the program size.
9. On June 15, 1995, USX eliminated the Marathon Group's Retained Interest in
the Delhi Group (equivalent to 4,564,814 shares of Delhi Stock). This was
accomplished through a reallocation of assets and a corresponding
adjustment to debt and equity attributed to the Marathon and Delhi Groups.
The transfer was made at a price of $12.75 per equivalent share of Delhi
Stock, or an aggregate of $58 million, resulting in a corresponding
reduction of the Marathon Group debt. The Retained Interest represented
the Marathon Group's interest in the earnings and equity of the Delhi
Group.
10. USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the Marathon Group
involving a variety of matters, including laws and regulations relating to
the environment. Certain of these matters are discussed below. The
ultimate resolution of these contingencies could, individually or in the
aggregate, be material to the Marathon Group financial statements.
However, management believes that USX will remain a viable and competitive
enterprise even though it is possible that these contingencies could be
resolved unfavorably to the Marathon Group. See discussion of Liquidity
and Capital Resources in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
<PAGE> 26
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
10. (Continued)
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 March 31, 1996, and
December 31, 1995, accrued liabilities for remediation totaled $38 million
and $37 million, respectively. It is not presently possible to estimate
the ultimate amount of all remediation costs that might be incurred or the
penalties that may be imposed. Receivables for recoverable costs from
certain states, under programs to assist companies in cleanup efforts
related to underground storage tanks at retail marketing outlets, were $23
million at March 31, 1996, and $22 million at December 31, 1995.
For a number of years, the Marathon Group has made substantial capital
expenditures to bring existing facilities into compliance with various laws
relating to the environment. In the first quarter of 1996 and for the
years 1995 and 1994, such capital expenditures totaled $10 million, $50
million and $70 million, respectively. The Marathon Group anticipates
making additional such expenditures in the future; however, the exact
amounts and timing of such expenditures are uncertain because of the
continuing evolution of specific regulatory requirements.
At March 31, 1996, and December 31, 1995, accrued liabilities for
platform abandonment and dismantlement totaled $130 million and $128
million, respectively.
Guarantees by USX of the liabilities of affiliated entities of the Marathon
Group totaled $8 million at March 31, 1996.
At March 31, 1996, the Marathon Group's pro rata share of obligations of
LOOP INC. and various pipeline affiliates secured by throughput and
deficiency agreements totaled $185 million. Under the agreements, the
Marathon Group is required to advance funds if the affiliates are unable to
service debt. Any such advances are prepayments of future transportation
charges.
At March 31, 1996, contract commitments for the Marathon Group's capital
expenditures for property, plant and equipment totaled $191 million
compared with $112 million at December 31, 1995.
<PAGE> 27
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The Marathon Group includes Marathon Oil Company ("Marathon") and certain
other subsidiaries of USX which are engaged in worldwide exploration,
production, transportation and marketing of crude oil and natural gas; and
domestic refining, marketing and transportation of petroleum products.
Management's Discussion and Analysis should be read in conjunction with the
first quarter 1996 USX consolidated financial information and the Marathon Group
financial statements and selected notes. The discussion of Results of
Operations should be read in conjunction with the Supplemental Statistics
provided on page 32.
Results of Operations
- ---------------------
Sales (excluding matching buy/sell transactions and excise taxes) increased
by $265 million, or 12%, in the first quarter of 1996 from the comparable prior-
year period. The increase primarily reflected higher average refined product
and worldwide liquid hydrocarbon prices and an increase in worldwide natural gas
volumes and domestic natural gas prices. Sales for the first quarter of 1996
and 1995 are summarized in the following table:
<TABLE>
<CAPTION>
First Quarter Ended
March 31
-------------------
(Dollars in millions) 1996 1995
----- -----
<S> <C> <C>
Refined Products and Merchandise $1,756 $1,596
Crude Oil and Natural Gas Liquids 270 228
Natural Gas 319 253
Transportation and Other 50 53
------ ------
Subtotal $2,395 $2,130
Matching Buy/Sell Transactions (a) 599 561
Excise Taxes (a) 633 647
------ ------
Total Sales $3,627 $3,338
====== ======
- --------
<FN>
(a) Included in both sales and operating costs, resulting in no effect on
income.
</TABLE>
Operating income totaled $377 million in the first quarter of 1996,
compared with $212 million in the first quarter of 1995. First quarter
operating income for 1996 and 1995 included favorable noncash effects of $155
million and $88 million, respectively, reflecting adjustments (decreases) to the
inventory market valuation reserve. This reserve reflects the extent to which
the recorded costs of crude oil and refined product inventories exceed net
realizable value. The amounts of increases or decreases in the reserve in
future periods are dependent on changes in future crude oil and refined product
price levels and inventory turnover.
Excluding the effects of adjustments to the inventory market valuation
reserve, operating income in the first quarter of 1996 increased by $98 million
from last year's first quarter, due primarily to higher average refined product
margins, increased worldwide liquid hydrocarbon prices and natural gas volumes
and higher domestic natural gas prices, partially offset by reduced
international liquid hydrocarbon volumes. In addition, first quarter 1996
results included $10 million of charges associated with the withdrawal from the
Marine Preservation Association ("MPA"), a non-profit oil spill response group.
Marathon withdrew from
<PAGE> 28
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
the MPA due to the existence of more economical and equally effective
alternatives for responding to possible oil spill situations.
Operating income from worldwide exploration and production ("upstream") was
$217 million in the first quarter of 1996, compared with $148 million in the
first quarter of 1995. Domestic exploration and production had operating income
of $120 million in the first quarter of 1996, compared with $86 million in the
comparable prior-year quarter. The improvement was primarily due to higher
average natural gas and liquid hydrocarbon prices, higher natural gas volumes
and reduced depreciation, depletion and amortization ("DD&A") expense resulting
from the fourth quarter 1995 adoption of Statement of Financial Accounting
Standards No. 121 - Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of ("SFAS No. 121"). These favorable changes
were partially offset by increased dry well expenses. The increased volumes of
natural gas were largely attributable to the Indian Basin Field in southeastern
New Mexico and the East Texas Cotton Valley Pinnacle Reef Trend.
Operating income from international exploration and production was $97
million in the first quarter of 1996, compared with $62 million in last year's
first quarter. Improved results were mainly due to increased natural gas
volumes, higher average liquid hydrocarbon prices, reduced DD&A expense
following the adoption of SFAS No. 121 and lower exploration expenses, partially
offset by a decrease in liquid hydrocarbon liftings. The increase in natural
gas volumes mainly reflected Brae area gas sales through the Scottish Area Gas
Evacuation ("SAGE") pipeline system. SAGE sales averaged 207 net million cubic
feet per day ("mmcfd") during the first quarter of 1996, compared with 129 net
mmcfd in last year's first quarter. The decrease in average liquid hydrocarbon
liftings was primarily attributable to the East Brae Field in the U.K. North Sea
and the sale of Marathon's interest in Indonesian properties. The decline in
East Brae liquid hydrocarbon liftings was mainly due to lower than anticipated
reservoir sweep efficiency associated with the gas injection program.
Operating income from refining, marketing and transportation ("downstream")
operations was $34 million in the first quarter of 1996, compared with an
operating loss of $5 million in the first quarter of 1995. Despite higher crude
oil acquisition costs, improved results were primarily due to higher wholesale
margins on refined products, which were depressed in the year-ago quarter from
the effects of a mild winter and volatility associated with reformulated
gasoline. The favorable effect of improved wholesale margins was partly offset
by a charge associated with the withdrawal from the MPA, as discussed above.
Administrative was $32 million in the first quarter of 1996, compared with
$19 million in the same period of 1995. Effective with the first quarter of
1996, Marathon changed its procedures for distributing the costs of certain
administrative services to its operating components in order to optimize the
utilization of these services. Under the new approach, upstream and downstream
operating components are billed for direct services; unbilled services are
included in "Administrative." As a result, first quarter 1996 administrative
results included an estimated $14 million of expenses that were allocated to
other operating components in 1995.
Other income of $25 million in the first quarter of 1996 increased by $21
million from the prior-year quarter, due mainly to a gain on the sale of an
interest in a domestic pipeline company.
<PAGE> 29
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Net interest and other financial costs in the first quarter of 1996
decreased by $6 million from the first quarter of 1995, primarily reflecting the
favorable effects of lower average debt levels.
Net income for the Marathon Group totaled $216 million, or $.75 per share,
in the first quarter of 1996, compared with $77 million, or $.26 per share, in
the first quarter of 1995. The increase in net income primarily reflects the
factors discussed above.
Outlook
- -------
In the first quarter of 1996, Marathon and its co-venturer successfully
completed a three-well appraisal program on the Viosca Knoll Block 786 discovery
in the deepwater Gulf of Mexico and confirmed a commercial hydrocarbon
accumulation estimated to be in the range of 80 to 100 million gross barrels of
oil equivalent. Marathon holds a 50-percent interest in Block 786. Development
planning is in progress with first production expected by late 1998 or early
1999.
The Marathon Group holds a 30% interest in Sakhalin Energy Investment
Company Ltd., an incorporated joint venture company responsible for the overall
management of the Sakhalin II Project. The Sakhalin II Production Sharing
Contract ("PSC") was signed in June 1994 for the development of the Piltun-
Astokhskoye ("PA") oil field and the Lunskoye gas field located offshore
Sakhalin Island in the Russian Far East Region. In December 1995, Russian
Parliament passed a Production Sharing Agreement Law ("PSAL") which was formally
signed by President Yeltsin and took effect on January 11, 1996. Although the
adoption of this law was a significant step toward stabilization of the PSC,
work is currently underway to bring other Russian laws and normative acts
(regulations) into compliance with the PSAL. Other current activities include
the obtaining of production licenses and the finalizing of a Plan of Development
for the phased development of the PA oil field. This will allow for the timely
progression of development and appraisal activities upon the declaration of
Commencement Date which is anticipated to occur in June 1996.
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 energy prices in the future.
Domestic retail gasoline prices have increased significantly during the
second quarter of 1996 to date; however, crude oil and other feedstock costs to
refineries have also increased. As a result, the impact on the Marathon Group's
second quarter 1996 downstream results cannot yet be determined.
Cash Flows
- ----------
Net cash provided from operating activities was $262 million in the first
quarter of 1996, compared with $121 million in the first quarter of 1995. The
improvement mainly reflected favorable working capital changes and increased
profitability, partially offset by $39 million of payments related to certain
state tax issues.
<PAGE> 30
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Cash from the disposal of assets was $85 million in the first quarter of
1996, compared with $4 million in the first quarter of 1995. Proceeds in 1996
primarily reflected the sales of interests in Indonesian production properties
and a domestic pipeline company.
Capital expenditures in the first quarter of 1996 totaled $100 million,
compared with $97 million in the first quarter of 1995. Expenditures in both
periods were primarily for upstream projects. Capital expenditures for the year
1996 are expected to be approximately $780 million. Contract commitments for
capital expenditures were $191 million at March 31, 1996, compared with $112
million at year-end 1995.
Financial obligations decreased by $188 million in the first quarter of
1996, mainly reflecting cash provided from operating activities and asset sales,
partly offset by cash used for capital expenditures and dividend payments.
Financial obligations consist of the Marathon Group's portion of USX debt and
preferred stock of a subsidiary attributed to all three groups, as well as debt
specifically attributed to the Marathon Group.
Liquidity
- ---------
For discussion of USX's liquidity and capital resources, see USX
Consolidated Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
The Marathon Group has incurred and will continue to incur substantial
capital, operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. To the extent these expenditures, as with
all costs, are not ultimately reflected in the prices of the Marathon Group's
products and services, operating results will be adversely affected. The
Marathon Group believes that substantially all of its competitors are subject to
similar environmental laws and regulations. However, the specific impact on
each competitor may vary depending on a number of factors, including the age and
location of its operating facilities, marketing areas, production processes and
whether or not it is engaged in the petrochemical business or the marine
transportation of crude oil and refined products.
USX has been notified that it is a potentially responsible party ("PRP") at
17 waste sites related to the Marathon Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of March
31, 1996. 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 67 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.
<PAGE> 31
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the Marathon Group
involving a variety of matters, including laws and regulations relating to the
environment (see Note 10 to the Marathon Group financial statements for a
discussion of certain of these matters). The ultimate resolution of these
contingencies could, individually or in the aggregate, be material to the
Marathon Group financial statements. However, management believes that USX will
remain a viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the Marathon Group. See
discussion of Liquidity and Capital Resources in USX Consolidated Management's
Discussion and Analysis of Financial Condition and Results of Operations.
<PAGE> 32
<TABLE>
MARATHON GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS
-----------------------
($ in Millions)
<CAPTION>
First Quarter
Ended March 31
--------------
1996 1995
---- ----
<S> <C> <C>
OPERATING INCOME (LOSS)
Exploration & Production
Domestic $120 $86
International 97 62
Refining, Marketing & Transportation 34 (5)
Gas Gathering & Processing 3 -
Administrative (a) (32) (19)
----- ------
$222 $124
Inventory Mkt. Val. Res. Adj. 155 88
----- ------
Total Marathon Group $377 $212
CAPITAL EXPENDITURES $100 $97
OPERATING STATISTICS
Net Liquids Production (b):
Domestic 125.9 129.2
International 65.3 75.7
------ ------
Worldwide 191.2 204.9
Net Natural Gas Production (c):
Domestic 689.8 653.1
International - Equity 596.7 487.6
International - Other (d) 35.2 53.9
------- -------
Worldwide 1,321.7 1,194.6
Average Equity Sales Prices:
Liquid Hydrocarbons (per Bbl)
Domestic $16.17 $14.51
International 18.57 16.78
Natural Gas (per Mcf)
Domestic $2.02 $1.69
International 1.87 1.84
Natural Gas Sales (c) (e):
Domestic 1,090.8 996.8
International 631.9 541.5
------- -------
Worldwide 1,722.7 1,538.3
Crude Oil Refined (b) 489.8 478.8
Refined Products Sold (b) 725.3 729.7
- ------------
<FN>
(a) First quarter 1996 includes an estimated $14 million in expenses which
were allocated to other operating components in 1995.
(b) Thousands of barrels per day
(c) Millions of cubic feet per day
(d) Represents gas acquired for injection and subsequent resale
(e) Represents equity, royalty and trading volumes
</TABLE>
<PAGE> 33
<TABLE>
Part I - Financial Information (Continued):
<CAPTION>
C. U. S. Steel Group
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
------------------------------------
First Quarter Ended
March 31
(Dollars in millions, except per share amounts) 1996 1995*
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUES $1,591 $1,580
OPERATING COSTS:
Cost of sales (excludes items shown below) 1,415 1,348
Selling, general and administrative expenses
(credits) (41) (37)
Depreciation, depletion and amortization 78 77
Taxes other than income taxes 58 55
------ ------
Total operating costs 1,510 1,443
------ ------
OPERATING INCOME 81 137
Other income 8 16
Interest and other financial income 1 2
Interest and other financial costs (29) (39)
------ ------
INCOME BEFORE INCOME TAXES 61 116
Less provision for estimated income taxes 15 42
------ ------
NET INCOME 46 74
Dividends on preferred stock (6) (6)
------ ------
NET INCOME APPLICABLE TO STEEL STOCK $40 $68
====== ======
STEEL STOCK DATA:
Net income per share - primary $.49 $.89
- fully diluted .48 .86
Dividends paid per share .25 .25
Weighted average shares, in thousands
- Primary 83,197 76,173
- Fully diluted 85,030 87,092
<FN>
*Certain amounts have been reclassified to conform to 1996 classifications.
Selected notes to financial statements appear on pages 36-40.
</TABLE>
<PAGE> 34
<TABLE>
<CAPTION>
U. S. STEEL GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
------------------------------------
March 31 December 31
(Dollars in millions) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $29 $52
Receivables, less allowance for doubtful
accounts of $19 and $18 559 579
Receivable from other groups 51 35
Inventories 625 601
Deferred income tax benefits 181 177
------ ------
Total current assets 1,445 1,444
Long-term receivables and other investments,
less reserves of $25 and $23 532 613
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$5,967 and $5,909 2,490 2,512
Long-term deferred income tax benefits 347 362
Prepaid pensions 1,592 1,546
Other noncurrent assets 41 44
------ ------
Total assets $6,447 $6,521
====== ======
LIABILITIES
Current liabilities:
Notes payable $30 $8
Accounts payable 726 815
Payable to other groups - 11
Payroll and benefits payable 408 389
Accrued taxes 196 180
Accrued interest 18 23
Long-term debt due within one year 84 93
------ ------
Total current liabilities 1,462 1,519
Long-term debt, less unamortized discount 896 923
Employee benefits 2,416 2,424
Deferred credits and other liabilities 237 247
Preferred stock of subsidiary 64 64
------ ------
Total liabilities 5,075 5,177
------ ------
STOCKHOLDERS' EQUITY
Preferred stock 7 7
Common stockholders' equity 1,365 1,337
------ ------
Total stockholders' equity 1,372 1,344
------ ------
Total liabilities and stockholders' equity $6,447 $6,521
====== ======
<FN>
Selected notes to financial statements appear on pages 36-40.
</TABLE>
<PAGE> 35
<TABLE>
<CAPTION>
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------
First Quarter Ended
March 31
(Dollars in millions) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $46 $74
Adjustments to reconcile to net cash provided
from (used in) operating activities:
Depreciation, depletion and amortization 78 77
Pensions (42) (34)
Postretirement benefits other than pensions 2 (22)
Deferred income taxes 16 20
Gain on disposal of assets (3) (3)
Changes in:
Current receivables (1) 80
Inventories (24) (11)
Current accounts payable and accrued expenses (66) 26
All other items - net (19) (33)
------ ------
Net cash provided from (used in) operating
activities (13) 174
------ ------
INVESTING ACTIVITIES:
Capital expenditures (56) (56)
Disposal of assets 89 28
All other items - net (3) 2
------ ------
Net cash provided from (used in) investing
activities 30 (26)
------ ------
FINANCING ACTIVITIES:
Change in U. S. Steel Group's share of USX
consolidated debt (20) (131)
Specifically attributed debt - repayments (1) (1)
Steel Stock issued 7 12
Dividends paid (26) (25)
------ ------
Net cash used in financing activities (40) (145)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (23) 3
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 52 20
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $29 $23
====== ======
Cash provided from (used in) operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(31) $(45)
Income taxes (paid) refunded, including settlements
with other groups (18) 38
<FN>
Selected notes to financial statements appear on pages 36-40.
</TABLE>
<PAGE> 36
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited but,
in the opinion of management, reflects all adjustments necessary for a fair
presentation of the results for the periods covered. All such adjustments
are of a normal recurring nature unless disclosed otherwise. These
financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Additional information is contained in the USX Annual Report
on Form 10-K for the year ended December 31, 1995.
2. The financial statements of the U. S. Steel Group include the financial
position, results of operations and cash flows for all businesses of USX
other than the businesses, assets and liabilities included in the Marathon
Group or the Delhi Group, and a portion of the corporate assets and
liabilities and related transactions which are not separately identified
with ongoing operating units of USX. These financial statements are
prepared using the amounts included in the USX consolidated financial
statements. Corporate amounts reflected in these financial statements are
determined based upon methods which management believes to be reasonable.
The accounting policies applicable to the preparation of the financial
statements of the U. S. Steel Group may be modified or rescinded in the
sole discretion of the Board of Directors of USX (Board), although the
Board has no present intention to do so. The Board may also adopt
additional policies depending on the circumstances.
Although the financial statements of the U. S. Steel Group, the Marathon
Group and the Delhi Group separately report the assets, liabilities
(including contingent liabilities) and stockholders' equity of USX
attributed to each such group, such attribution of assets, liabilities
(including contingent liabilities) and stockholders' equity among the U. S.
Steel Group, the Marathon Group and the Delhi Group for purposes of
preparing their respective financial statements does not affect legal title
to such assets and responsibility for such liabilities. Holders of USX-
U. S. Steel Group Common Stock (Steel Stock), USX-Marathon Group Common
Stock (Marathon Stock) and USX-Delhi Group Common Stock (Delhi Stock) are
holders of common stock of USX and continue to be subject to all the risks
associated with an investment in USX and all of its businesses and
liabilities. Financial impacts arising from one Group that affect the
overall cost of USX's capital could affect the results of operations and
financial condition of other groups. In addition, net losses of any Group,
as well as dividends or distributions on any class of USX Common Stock or
series of Preferred Stock and repurchases of any class of USX Common Stock
or series of Preferred Stock at prices in excess of par or stated value,
will reduce the funds of USX legally available for payment of dividends on
all classes of Common Stock. Accordingly, the USX consolidated financial
information should be read in connection with the U. S. Steel Group
financial information.
<PAGE> 37
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
3. The method of calculating net income per share for the Steel Stock,
Marathon Stock and Delhi Stock reflects the Board's intent that the
separately reported earnings and surplus of the U. S. Steel Group, the
Marathon Group and the Delhi Group, as determined consistent with the USX
Certificate of Incorporation, are available for payment of dividends on the
respective classes of stock, although legally available funds and
liquidation preferences of these classes of stock do not necessarily
correspond with these amounts.
Primary net income per share is calculated by adjusting net income for
dividend requirements of preferred stock and is based on the weighted
average number of common shares outstanding plus common stock equivalents,
provided they are not antidilutive. Common stock equivalents result from
assumed exercise of stock options, where applicable.
Fully diluted net income per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of
stock options, provided in each case, the effect is not antidilutive.
4. Operating income includes net periodic pension credits of $40 million and
$33 million in the first quarter of 1996 and 1995, respectively. These
pension credits are primarily noncash and for the most part are included in
selling, general and administrative expenses. The expected long-term rate
of return on plan assets, which is reflected in the calculation of net
periodic pension credits, is 10% for both 1996 and 1995.
5. The financial statement provision for estimated income taxes and related
tax payments or refunds have been reflected in the U. S. Steel Group, the
Marathon Group and the Delhi Group financial statements in accordance with
USX's tax allocation policy for such groups. In general, such policy
provides that the consolidated tax provision and related tax payments or
refunds are allocated among the U. S. Steel Group, the Marathon Group and
the Delhi Group for group financial statement purposes, based principally
upon the financial income, taxable income, credits, preferences and other
amounts directly related to the respective groups.
The provision for estimated income taxes for the U. S. Steel Group is based
on tax rates and amounts which recognize management's best estimate of
current and deferred tax assets and liabilities. Differences between the
combined interim tax provisions of the U. S. Steel, Marathon and Delhi
Groups and USX consolidated are allocated to each group based on the
relationship of the individual group provisions to the combined interim
provisions.
<PAGE> 38
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
6. Inventories are carried at the lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
<TABLE>
<CAPTION>
(In millions)
-----------------------
March 31 December 31
1996 1995
-------- -----------
<S> <C> <C>
Raw materials $72 $89
Semi-finished products 319 300
Finished products 163 143
Supplies and sundry items 71 69
---- ----
Total $625 $601
==== ====
</TABLE>
7. 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 March 31, 1996, the amount sold under the program that had not
been collected was $350 million, which will be forwarded to the buyers at
the end of the agreement, or in the event of earlier contract termination.
If the U. S. Steel Group does not have a sufficient quantity of eligible
accounts receivable to reinvest in for the buyers, the size of the program
will be reduced accordingly. The buyers have rights to a pool of
receivables that must be maintained at a level of 115% of the program size.
In the event of a change in control of USX, as defined in the agreement,
the U. S. Steel Group may be required to forward payments collected on sold
accounts receivable to the buyers.
Prior to 1993, USX Credit, a division of USX, sold certain of its loans
receivable subject to limited recourse. USX Credit continues to collect
payments from the loans and transfer to the buyers principal collected plus
yield based on defined short-term market rates. At March 31, 1996, the
balance of sold loans receivable subject to recourse was $62 million.
USX Credit is not actively seeking new loans at this time. In the event of
a change in control of USX, as defined in the agreement, the U. S. Steel
Group may be required to provide cash collateral in the amount of the
uncollected loans receivable to assure compliance with the limited recourse
provisions.
<PAGE> 39
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the U. S. Steel
Group involving a variety of matters including laws and regulations
relating to the environment. Certain of these matters are discussed below.
The ultimate resolution of these contingencies could, individually or in
the aggregate, be material to the U. S. Steel Group financial statements.
However, management believes that USX will remain a viable and competitive
enterprise even though it is possible that these contingencies could be
resolved unfavorably to the U. S. Steel Group. See discussion of Liquidity
and Capital Resources in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
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
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.
The U. S. Steel Group is subject to federal, state and local laws and
regulations relating to the environment. These laws generally provide for
control of pollutants released into the environment and require responsible
parties to undertake remediation of hazardous waste disposal sites.
Penalties may be imposed for noncompliance. At March 31, 1996, and
December 31, 1995, accrued liabilities for remediation totaled $112 million
and $116 million, respectively. It is not presently possible to estimate
the ultimate amount of all remediation costs that might be incurred or the
penalties that may be imposed.
<PAGE> 40
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. (Continued)
For a number of years, the U. S. Steel Group has made substantial capital
expenditures to bring existing facilities into compliance with various laws
relating to the environment. In the first quarter of 1996 and for the
years December 31, 1995 and 1994, such capital expenditures totaled $14
million, $55 million and $57 million, respectively. The U. S. Steel Group
anticipates making additional such expenditures in the future; however, the
exact amounts and timing of such expenditures are uncertain because of the
continuing evolution of specific regulatory requirements.
Guarantees by USX of the liabilities of affiliated entities of the U. S.
Steel Group totaled $42 million at March 31, 1996. In the event that any
defaults of guaranteed liabilities occur, USX has access to its interest in
the assets of the affiliates to reduce U. S. Steel Group losses resulting
from these guarantees. As of March 31, 1996, the largest guarantee for a
single affiliate was $23 million.
At March 31, 1996, contract commitments for the U. S. Steel Group's capital
expenditures for property, plant and equipment totaled $205 million
compared with $178 million at December 31, 1995.
<PAGE> 41
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The U. S. Steel Group includes U. S. Steel, which is primarily engaged in
the production and sale of steel mill products, coke and taconite pellets. The
U. S. Steel Group also includes the management of mineral resources, domestic
coal mining, engineering and consulting services and technology licensing
(together with U. S. Steel, the "Steel and Related Businesses"). Other
businesses that are part of the U. S. Steel Group include real estate
development and management, and leasing and financing activities. Management's
Discussion and Analysis should be read in conjunction with the first quarter
1996 USX consolidated financial information and the U. S. Steel Group financial
statements and selected notes. The discussion of Results of Operations should
be read in conjunction with the Supplemental Statistics provided on page 45.
Results of Operations
- ---------------------
Sales for the U. S. Steel Group increased $11 million in the first quarter
of 1996 compared with the first quarter of 1995. The increase primarily
reflected higher steel shipment volumes, generally offset by significantly lower
steel shipment prices.
Operating income for the U. S. Steel Group totaled $81 million in the first
quarter of 1996, compared with operating income of $137 million in the same
quarter of 1995. The $56 million decrease mainly reflected lower results from
Steel and Related Businesses.
Steel and Related Businesses reported operating income of $33 million in
1996, compared with operating income of $100 million in the same quarter of
1995. The $67 million decrease was mainly due to significantly lower steel
shipment prices and severe winter weather at virtually all U. S. Steel's
operating locations, partially offset by higher steel shipment volumes. In the
first quarter of 1995, operating results were negatively affected by the effects
of three planned blast furnace outages and higher accruals for profit sharing
plans.
Administrative and Other Businesses includes the portion of pension
credits, postretirement benefit costs and certain other expenses principally
attributable to the former businesses of the U. S. Steel Group as well as USX
corporate general and administrative costs allocated to the U. S. Steel Group.
Operating income for Administrative and Other Businesses in the first quarter of
1996 increased $11 million over the same quarter of 1995 primarily due to higher
pension credits.
Other income in the first quarter of 1996 decreased $8 million compared
with first quarter 1995 due to lower income from affiliates.
Net income for the U. S. Steel Group totaled $46 million, or $.49 per
share, in the first quarter of 1996, compared with net income of $74 million, or
$.89 per share, in the same quarter of 1995. The decline in net income
primarily reflects the factors discussed above.
First quarter 1996 steel shipments of 2.9 million tons increased more than
6% from the same quarter of 1995. Raw steel production in the first quarter of
1996
<PAGE> 42
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
totaled 3.2 million tons, an increase of 7% over first quarter 1995. Raw steel
production in the first quarter of 1996 averaged 99% versus 96% of capability in
the first quarter of 1995. As a result of improvements in operating
efficiencies, U. S. Steel has increased its stated annual raw steel production
capability by 0.3 million tons to 12.8 million tons for 1996.
Outlook
- -------
On April 2, 1996, a hearth break-out idled the Gary Works' No. 13 blast
furnace, U. S. Steel's largest furnace, which provides about 9,000 tons of
molten iron a day, almost half of Gary's total iron production and about one-
fourth of U. S. Steel's total iron output. Repairs are in progress and are
expected to take as much as five days more than the 50 to 55 days previously
reported. The furnace is expected to return to production in late May 1996.
Production is expected to increase throughout the month of June as the
furnace returns to normal operation. The U. S. Steel Group is
purchasing molten iron as well as steel slabs to offset some of the
production loss during the outage. The outage will have a significant
negative impact on the U. S. Steel Group's shipments, results of
operations and cash flows in 1996, primarily in the second quarter. USX
maintains physical damage and business interruption insurance coverage for
events of this nature, subject to a $50 million deductible for recoverable
items.
The U. S. Steel Group expects a continued strong order book for the second
quarter of 1996, although shipments will be lower than the first quarter because
of limited steel availability. Improvement is anticipated in transaction prices
for most products, and product mix should be more favorable than the first
quarter of 1996. The U. S. Steel Group recently announced further price
increases for sheet, plate and tubular products to take effect in June and July.
Steel imports to the United States accounted for an estimated 20% of the
domestic steel market in the first two months of 1996, and 21%, 25% and 19% for
the years 1995, 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.
During the third quarter of 1996, raw steel production will be reduced by a
planned blast furnace outage at Fairfield Works.
Cash Flows
- ----------
Net cash used in operating activities was $13 million in the first quarter
of 1996, compared with net cash provided from operating activities of $174
million in
the same period of 1995. The first quarter of 1996 included payments of $28
million related to the Pickering litigation and $10 million to the Voluntary
Employee Benefit Association ("VEBA") Trust. The first quarter of 1995
reflected payments of $35 million to the VEBA Trust. Excluding these items, net
cash from operating activities decreased by $184 million due to unfavorable
working capital changes and decreased profitability.
Cash from the disposal of assets increased $61 million in the first quarter
of 1996 compared with the same quarter of 1995. The 1996 proceeds mainly
reflected the sale of National-Oilwell. The 1995 proceeds mainly reflected
property sales.
<PAGE> 43
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Capital expenditures for property, plant and equipment in the first quarter
totaled $56 million for both 1996 and 1995. Capital expenditures for the year
1996 are expected to total approximately $320 million, compared with $324
million in 1995. Capital expenditures for 1996 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.
Contract commitments for capital expenditures at March 31, 1996 were $205
million, compared with $178 million at year-end 1995.
In the second quarter of 1996, a new vacuum degasser at the Mon Valley
Works is scheduled to become fully operational, enabling Mon Valley to convert
an additional 1.2 million tons annually of steel production to higher-quality
grades for quality critical applications such as automotive. Also, a new
granulated coal injection system at the Fairfield Works blast furnace is in the
final start-up phase and will increase efficiency and reduce costs of
ironmaking.
Financial obligations decreased $21 million in the first quarter of 1996
primarily reflecting the net effects of cash from operating and investing
activities. Financial obligations consist of the U. S. Steel Group's portion of
USX debt and preferred stock of a subsidiary attributed to all three groups, as
well as debt and financing agreements specifically attributed to the U. S. Steel
Group.
On May 2, 1996, an aggregate of 6.9 million shares of RMI Titanium Company
(RMI) Common Stock was sold in a public offering. Included in the offering were
2.3 million shares sold by USX for net proceeds of $40 million. Following this
transaction, USX owns approximately 27% of the outstanding common stock of RMI.
USX will recognize a pretax gain in the second quarter of 1996 of approximately
$50 million, a portion of which is attributable to a change in interest gain
resulting from the shares sold by RMI.
Liquidity
- ---------
For discussion of USX's liquidity and capital resources, see USX
Consolidated Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
The U. S. Steel Group has incurred and will continue to incur substantial
capital, operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. In recent years, these expenditures have
been mainly for process changes in order to meet Clean Air Act obligations,
although ongoing compliance costs have also been significant. To the extent
these expenditures, as with all costs, are not ultimately reflected in the
prices of the U. S. Steel Group's products and services, operating results will
be adversely affected. The U. S. Steel Group believes that all of its domestic
competitors are subject to similar environmental laws and regulations. However,
the specific impact on each competitor may vary depending on a number of
factors, including the age and location of its operating facilities and its
production methods.
<PAGE> 44
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
USX has been notified that it is a potentially responsible party ("PRP") at
28 waste sites related to the U. S. Steel Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of March
31, 1996. In addition, there are 23 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 39 additional sites related to the U. S. Steel Group
where remediation is being sought under other environmental statutes, both
federal and state, or where private parties are seeking remediation through
discussions or litigation. At many of these sites, USX is one of a number of
parties involved and the total cost of remediation, as well as USX's share
thereof, is frequently dependent upon the outcome of investigations and remedial
studies. The U. S. Steel Group accrues for environmental remediation activities
when the responsibility to remediate is probable and the amount of associated
costs is reasonably determinable. As environmental remediation matters proceed
toward ultimate resolution or as additional remediation obligations arise,
charges in excess of those previously accrued may be required.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the U. S. Steel Group
involving a variety of matters, including laws and regulations relating to the
environment, certain of which are discussed in Note 8 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 Northern District of Alabama. Plaintiffs' claims
seek damages in excess of $276 million, which may be subject to trebling.
The ultimate resolution of these contingencies could, individually or in
the aggregate, be material to the U. S. Steel Group financial statements.
However, management believes that USX will remain a viable and competitive
enterprise even though it is possible that these contingencies could be resolved
unfavorably to the U. S. Steel Group. See discussion of Liquidity and Capital
Resources in USX Consolidated Management's Discussion and Analysis of Financial
Condition and Results of Operations.
<PAGE> 45
<TABLE>
<CAPTION>
U. S. STEEL GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS
------------------------------------
($ in Millions)
First Quarter
Ended March 31
--------------
1996 1995
---- ----
REVENUES
<S> <C> <C>
Steel and Related Businesses (a) $1,584 $1,549
Other 7 31
------ ------
Total U. S. Steel Group $1,591 $1,580
OPERATING INCOME (LOSS)
Steel and Related Businesses (a) $33 $100
Administrative and Other Businesses (b) 48 37
---- -----
Total U. S. Steel Group $81 $137
CAPITAL EXPENDITURES $56 $56
OPERATING STATISTICS
Public & Affiliated Steel Shipments (c) 2,898 2,722
Raw Steel-Production (c) 3,154 2,945
Raw Steel-Capability Utilization (d) 99.1% 95.5%
- ------------
<FN>
(a) Includes the production and sale of steel products, coke and taconite
pellets; domestic coal mining; the management of mineral resources; and
engineering and consulting services and technology licensing.
(b) Includes pension credits, other postretirement benefit costs and certain
other expenses principally attributable to former business units of the
U. S. Steel Group. Also includes results of real estate development and
management, and leasing and financing activities.
(c) Thousands of net tons
(d) Based on annual raw steel production capability of 12.8 million tons for
1996 and 12.5 million tons for 1995.
</TABLE>
<PAGE> 46
Part I - Financial Information (Continued):
D. Delhi Group
<TABLE>
<CAPTION>
DELHI GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
First Quarter Ended
March 31
(Dollars in millions, except per share amounts) 1996 1995*
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUES $272.5 $137.4
OPERATING COSTS:
Cost of sales (excludes items shown below) 248.4 113.1
Selling, general and administrative expenses 6.7 6.4
Depreciation, depletion and amortization 6.9 6.3
Taxes other than income taxes 2.0 2.0
------ ------
Total operating costs 264.0 127.8
------ ------
OPERATING INCOME 8.5 9.6
Other income .2 .1
Interest and other financial costs (5.0) (3.3)
------ ------
INCOME BEFORE INCOME TAXES 3.7 6.4
Less provision for estimated income taxes 1.3 2.2
------ ------
NET INCOME 2.4 4.2
Net income applicable to Retained Interest - (1.4)
------ ------
NET INCOME APPLICABLE TO OUTSTANDING DELHI STOCK $2.4 $2.8
====== ======
DELHI STOCK DATA:
Net income per share - primary and fully diluted $.25 $.30
Dividends paid per share .05 .05
Weighted average shares, in thousands
- Primary and fully diluted 9,447 9,438
<FN>
*Certain amounts have been reclassified to conform to 1996 classifications.
Selected notes to financial statements appear on pages 49-52.
</TABLE>
<PAGE> 47
<TABLE>
<CAPTION>
DELHI GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
------------------------------
March 31 December 31
(Dollars in millions) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $2.3 $1.9
Receivables, less allowance for doubtful
accounts of $.8 and $.8 95.5 93.2
Receivable from other groups .7 .3
Inventories 6.3 10.7
Other current assets 3.3 3.2
------ ------
Total current assets 108.1 109.3
Long-term receivables and other investments 8.3 8.3
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$439.8 and $433.9 518.0 502.3
Other noncurrent assets 2.5 4.4
------ ------
Total assets $636.9 $624.3
====== ======
LIABILITIES
Current liabilities:
Notes payable $6.6 $1.6
Accounts payable 138.4 137.7
Payable to other groups - .1
Payroll and benefits payable 3.8 3.8
Accrued taxes 7.8 7.0
Accrued interest 3.5 4.9
Long-term debt due within one year 17.8 18.8
------ ------
Total current liabilities 177.9 173.9
Long-term debt, less unamortized discount 187.1 182.0
Long-term deferred income taxes 136.6 135.9
Deferred credits and other liabilities 17.4 16.5
Preferred stock of subsidiary 3.8 3.8
------ ------
Total liabilities 522.8 512.1
STOCKHOLDERS' EQUITY 114.1 112.2
------ ------
Total liabilities and stockholders' equity $636.9 $624.3
====== ======
<FN>
Selected notes to financial statements appear on pages 49-52.
</TABLE>
<PAGE> 48
<TABLE>
<CAPTION>
DELHI GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
First Quarter Ended
March 31
(Dollars in millions) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $2.4 $4.2
Adjustments to reconcile to net cash provided from
operating activities:
Depreciation, depletion and amortization 6.9 6.3
Pensions .7 .4
Deferred income taxes .5 1.1
Gain on disposal of assets (.4) (.4)
Changes in:
Current receivables - sold - 6.0
- operating turnover (2.7) (3.0)
Inventories 4.4 4.1
Current accounts payable and accrued expenses 1.6 5.1
All other items - net 2.1 .5
------ ------
Net cash provided from operating activities 15.5 24.3
------ ------
INVESTING ACTIVITIES:
Capital expenditures (22.6) (5.6)
Disposal of assets .6 4.4
------ ------
Net cash used in investing activities (22.0) (1.2)
------ ------
FINANCING ACTIVITIES:
Change in Delhi Group's share of USX consolidated debt 7.4 (22.0)
Dividends paid (.5) (.5)
Payment attributed to Retained Interest - (.2)
------ ------
Net cash provided from (used in) financing
activities 6.9 (22.7)
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS .4 .4
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1.9 .1
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $2.3 $.5
====== ======
Cash provided from (used in) operating activities included:
Interest and other financial costs paid $(6.3) $(4.0)
Income taxes (paid) refunded, including settlements
with other groups .2 (2.1)
<FN>
Selected notes to financial statements appear on pages 49-52.
</TABLE>
<PAGE> 49
DELHI GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited but,
in the opinion of management, reflects all adjustments necessary for a fair
presentation of the results for the periods covered. All such adjustments
are of a normal recurring nature unless disclosed otherwise. These
financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Additional information is contained in the USX Annual Report
on Form 10-K for the year ended December 31, 1995.
2. The financial statements of the Delhi Group include the financial position,
results of operations and cash flows for the businesses of Delhi Gas
Pipeline Corporation and certain other subsidiaries of USX, and a portion
of the corporate assets and liabilities and related transactions which are
not separately identified with ongoing operating units of USX. These
financial statements are prepared using amounts included in the USX
consolidated financial statements. Corporate amounts reflected in these
financial statements are determined based upon methods which management
believes to be reasonable. The accounting policies applicable to the
preparation of the financial statements of the Delhi Group may be modified
or rescinded in the sole discretion of the Board of Directors of USX
(Board), although the Board has no present intention to do so. The Board
may also adopt additional policies depending on the circumstances.
On June 15, 1995, USX eliminated the Marathon Group's Retained Interest in
the Delhi Group (equivalent to 4,564,814 shares of USX-Delhi Group Common
Stock (Delhi Stock)). This was accomplished through a reallocation of
assets and a corresponding adjustment to debt and equity attributed to the
Delhi and Marathon Groups. The transfer was made at a price of $12.75 per
equivalent share of Delhi Stock, or an aggregate of $58.2 million. The
Retained Interest represented the Marathon Group's interest in the earnings
and equity of the Delhi Group. Prior to the elimination, the Retained
Interest was approximately 33%, based on the 14,003,205 shares of Delhi
Stock designated by the Board to represent 100% of the common stockholders'
equity value of USX attributable to the Delhi Group.
Although the financial statements of the Delhi Group, the Marathon Group
and the U. S. Steel Group separately report the assets, liabilities
(including contingent liabilities) and stockholders' equity of USX
attributed to each such group, such attribution of assets, liabilities
(including contingent liabilities) and stockholders' equity among the Delhi
Group, the Marathon Group and the U. S. Steel Group for the purpose of
preparing their respective financial statements does not affect legal title
to such assets and responsibility for such liabilities. Holders of Delhi
Stock, USX-Marathon Group Common Stock (Marathon Stock) and USX-U. S. Steel
Group Common Stock (Steel Stock) are holders of common stock of USX, and
continue to be subject to all the risks associated with an investment in
USX and all of its
<PAGE> 50
DELHI GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
2. (Continued)
businesses and liabilities. Financial impacts arising from one Group that
affect the overall cost of USX's capital could affect the results of
operations and financial condition of other groups. In addition, net
losses of any Group, as well as dividends and distributions on any class of
USX Common Stock or series of Preferred Stock and repurchases of any class
of USX Common Stock or series of Preferred Stock at prices in excess of par
or stated value, will reduce the funds of USX legally available for payment
of dividends on all classes of Common Stock. Accordingly, the USX
consolidated financial information should be read in connection with the
Delhi Group financial information.
3. The method of calculating net income per share for the Delhi Stock,
Marathon Stock and Steel Stock reflects the Board's intent that the
separately reported earnings and surplus of the Delhi Group, the Marathon
Group and the U. S. Steel Group, as determined consistent with the USX
Certificate of Incorporation, are available for payment of dividends on the
respective classes of stock, although legally available funds and
liquidation preferences of these classes of stock do not necessarily
correspond with these amounts.
Primary net income per share is calculated by adjusting net income for
dividend requirements of preferred stock and income that was applicable to
the Retained Interest and is based on the weighted average number of common
shares outstanding plus common stock equivalents, provided they are not
antidilutive. Common stock equivalents result from assumed exercise of
stock options, where applicable.
Fully diluted net income per share assumes exercise of stock options,
provided the effect is not antidilutive.
4. The financial statement provision for estimated income taxes and related
tax payments or refunds have been reflected in the Delhi Group, the
Marathon Group and the U. S. Steel Group financial statements in accordance
with USX's tax allocation policy for such groups. In general, such policy
provides that the consolidated tax provision and related tax payments or
refunds are allocated among the Delhi Group, the Marathon Group and the U.
S. Steel Group for group financial statement purposes, based principally
upon the financial income, taxable income, credits, preferences and other
amounts directly related to the respective groups.
The provision for estimated U.S. income taxes for the Delhi Group is based
on tax rates and amounts which recognize management's best estimate of
current and deferred tax assets and liabilities. Differences between the
combined interim tax provisions of the Delhi, the Marathon and the U. S.
Steel Groups and USX consolidated are allocated to each group based on the
relationship of the individual group provisions to the combined interim
provisions.
<PAGE> 51
DELHI GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. Inventories are carried at lower of average cost or market.
<TABLE>
<CAPTION>
(In millions)
----------------------
March 31 December 31
1996 1995
-------- -----------
<S> <C> <C>
Natural gas in storage $5.0 $9.4
Natural gas liquids (NGLs) in storage .2 .2
Materials and supplies 1.1 1.1
---- ----
Total $6.3 $10.7
==== ====
</TABLE>
6. The Delhi Group participates in an agreement (the program) to sell an
undivided interest in certain accounts receivable subject to limited
recourse. Payments are collected from the sold accounts receivable; the
collections are reinvested in new accounts receivable for the buyers; and a
yield, based on defined short-term market rates, is transferred to the
buyers. At March 31, 1996, the amount sold under the program that had not
been collected was $50.0 million, which will be forwarded to the buyers at
the end of the agreement, or in the event of earlier contract termination.
If the Delhi Group does not have a sufficient quantity of eligible accounts
receivable to reinvest in for the buyers, the size of the program will be
reduced accordingly. The buyers have rights to a pool of receivables that
must be maintained at a level of 110% of the program size.
7. USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the Delhi Group
involving a variety of matters, including laws and regulations relating to
the environment. Certain of these matters are discussed below. The
ultimate resolution of these contingencies could, individually or in the
aggregate, be material to the Delhi Group financial statements. However,
management believes that USX will remain a viable and competitive
enterprise even though it is possible that these contingencies could be
resolved unfavorably to the Delhi Group. See discussion of Liquidity and
Capital Resources in USX Consolidated Management's Discussion and Analysis
of Financial Condition and Results of Operations.
The Delhi Group is subject to federal, state and local laws and regulations
relating to the environment. These laws generally provide for control of
pollutants released into the environment and require responsible parties to
undertake remediation of hazardous waste disposal sites. Penalties may be
imposed for noncompliance. Expenditures for remediation and penalties have
not been material.
<PAGE> 52
DELHI GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. (Continued)
For a number of years, the Delhi Group has made capital expenditures to
bring existing facilities into compliance with various laws relating to the
environment. In the first quarter of 1996 and for the years December 31,
1995 and 1994, such capital expenditures totaled $1.8 million, $5.5 million
and $4.6 million, respectively. The Delhi Group anticipates making
additional such expenditures in the future; however, the exact amounts and
timing of such expenditures are uncertain because of the continuing
evolution of specific regulatory requirements.
At March 31, 1996, contract commitments for the Delhi Group's capital
expenditures for property, plant and equipment totaled $21.0 million
compared with $9.3 million at December 31, 1995.
<PAGE> 53
DELHI GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The Delhi Group includes Delhi Gas Pipeline Corporation ("DGP") and certain
other subsidiaries of USX Corporation ("USX") which are engaged in the
purchasing, gathering, processing, transporting and marketing of natural gas.
The following discussion should be read in conjunction with the first quarter
1996 USX consolidated financial information and the Delhi Group financial
statements and selected notes. In addition, the discussion of Results of
Operations should be read in conjunction with the Supplemental Statistics
provided on page 57.
Results of Operations
- ---------------------
Sales totaled $272.5 million in the first quarter of 1996, compared with
$137.4 million in the first quarter of 1995, as summarized in the following
table:
<TABLE>
<CAPTION>
First Quarter Ended
March 31
-------------------
(Dollars in millions) 1996 1995
----- -----
<S> <C> <C>
Gas Sales and Trading $247.6 $117.3
Transportation 3.9 2.4
Gas Processing 19.1 17.2
Other 1.9 .5
------ ------
Total Sales $272.5 $137.4
====== ======
</TABLE>
The 98% increase from last year's first quarter was primarily due to higher
prices related to gas sales and trading and increased trading volumes.
Operating income of $8.5 million was recorded in the first quarter of 1996,
compared with $9.6 million in the first quarter of 1995. The $1.1 million
decrease reflected lower margins on gas sales and trading. These lower margins
reflect the negative impact, estimated at $2.9 million, of a previously
disclosed market anomaly caused by extreme winter weather in the eastern United
States and the inability to move Texas gas to that market due to transportation
constraints. Gas sales volumes remained relatively flat as some gas sales
volumes that were converted to transportation volumes were replaced by gas sales
from storage.
Natural gas volumes from trading sales totaled 624.6 million cubic feet per
day ("mmcfd") in the first quarter of 1996, compared with 207.6 mmcfd in the
first quarter of 1995. The trading business involves the purchase of natural
gas from sources other than wells directly connected to the Delhi Group's
systems and the subsequent sale of like volumes. Unit margins earned in the
trading business are usually significantly less than those earned on system
sales.
The transportation margin increased $1.5 million in the first quarter of
1996 compared with the first quarter of 1995 mainly due to an 83% increase in
transportation volumes, partially offset by lower transportation rates. The
increase in transportation volumes primarily reflected new transportation
agreements in addition to some conversion of gas sales volumes to transportation
volumes.
<PAGE> 54
DELHI GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The gas processing margin decreased $1.8 million in the first quarter of
1996 from 1995 mainly as a result of a 40% increase in feedstock costs and a 10%
decline in natural gas liquids ("NGLs") sales volumes.
Interest and other financial costs were $5.0 million in the first quarter
of 1996, compared with $3.3 million in the first quarter of 1995. The increase
was mainly due to increased debt levels that primarily resulted from the second
quarter 1995 elimination of the Marathon Group's Retained Interest.
Net income of $2.4 million, or $.25 per share, was recorded in the first
quarter of 1996, compared with $4.2 million, or $.30 per share, in the first
quarter of 1995. The decrease in net income primarily reflects the factors
discussed above.
Outlook
- -------
The Delhi Group's operating results from gas sales are affected by
fluctuations in natural gas prices and demand levels in the markets that it
serves. The levels of gas sales and trading margins for future periods are
difficult to project accurately because of fluctuations in customer demand for
premium services, competition in attracting new premium customers and the
volatility of natural gas prices. The Delhi Group attempts to sell all of the
natural gas available on its system each month. Natural gas volumes not sold to
its premium markets are typically sold in the short-term interruptible ("spot")
market, generally at lower average unit margins than those realized from premium
sales. Because the strongest demand for gas and the highest gas sales unit
margins generally occur during the winter heating season, the Delhi Group has
historically recognized the greatest portion of income from its gas sales
business during the first and fourth quarters of the year.
Since the adoption of Federal Energy Regulatory Commission ("FERC") Order
No. 636 in 1992, competition has increased significantly, and the domestic gas
industry 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 service will enable the Delhi Group to remain a
competitive entity in the markets that it serves.
The Delhi Group monitors the economics of removing NGLs from the gas stream
for processing on an ongoing basis to determine the appropriate level of each
gas plant's operation. The levels of gas processing margin for future periods
are 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.
<PAGE> 55
DELHI GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Cash Flows
- ----------
Net cash provided from operating activities was $15.5 million in the first
quarter of 1996, compared with $24.3 million in the first quarter of 1995. The
decrease is primarily due to unfavorable working capital changes.
Capital expenditures for the Delhi Group were $22.6 million in the first
quarter of 1996, compared with $5.6 million in the first quarter of 1995.
Capital expenditures for the year 1996 are expected to approximate $75 million,
exceeding the $50 million expended in 1995. Spending in 1996 will include a
major expansion of treating, gathering and transmission facilities in east Texas
to service the rapidly developing Pinnacle Reef gas play. 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. Contract commitments for capital expenditures were
$21.0 million at March 31, 1996, compared with $9.3 million at year-end 1995.
Cash from disposal of assets decreased $3.8 million in the first quarter of
1996 compared with the first quarter of 1995. The 1995 proceeds mainly
reflected the sale of non-strategic properties in Arkansas and Oklahoma.
Financial obligations increased by $7.4 million in the first quarter of
1996, mainly resulting from the Delhi Group's increased capital expenditures
partially offset by net cash provided from operating activities. Financial
obligations consist of the Delhi Group's portion of USX debt and preferred stock
of a subsidiary attributed to all three groups.
Liquidity
- ---------
For discussion of USX's liquidity and capital resources, see USX
Consolidated Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
The Delhi Group has incurred and will continue to incur capital and
operating and maintenance expenditures as a result of environmental laws and
regulations. To the extent these expenditures, as with all costs, are not
ultimately reflected in the prices of the Delhi Group's products and services,
operating results will be adversely affected. The Delhi Group believes that
substantially all of its
competitors are subject to similar environmental laws and regulations. However,
the specific impact on each competitor may vary depending on a number of
factors, including the age and location of its operating facilities and its
production processes.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the Delhi Group
involving a variety of matters, including laws and regulations relating to the
environment. The ultimate resolution of these contingencies could, individually
or in the aggregate,
<PAGE> 56
DELHI GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
be material to the Delhi Group financial statements. However, management
believes that USX will remain a viable and competitive enterprise even though it
is possible that these contingencies could be resolved unfavorably to the Delhi
Group. See discussion of Financial Condition in USX Consolidated Management's
Discussion and Analysis of Financial Condition and Results of Operations.
<PAGE> 57
<TABLE>
<CAPTION>
DELHI GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS
------------------------------
($ in Millions)
First Quarter
Ended March 31
--------------
1996 1995
---- ----
GROSS MARGIN
<S> <C> <C>
Gas Sales and Trading Margin $19.4 $20.6
Transportation Margin 3.9 2.4
------ ------
Systems and Trading Margin 23.3 23.0
Gas Processing Margin 4.9 6.7
------ ------
Total Gross Margin $28.2 $29.7
OPERATING INCOME $ 8.5 $9.6
CAPITAL EXPENDITURES $22.6 $5.6
OPERATING STATISTICS
Natural Gas Volumes (a)
Natural Gas Sales 624.8 631.1
Transportation 422.4 231.0
------- ------
Systems Throughput 1,047.2 862.1
Trading Sales 624.6 207.6
Partnership - equity share (b) - 14.0
------- ------
Total Sales Volumes 1,671.8 1,083.7
Natural Gas Liquids Sales (c) 727.8 810.6
- ------------
<FN>
(a) Millions of cubic feet per day
(b) Related to an investment which was sold in the second quarter of 1995
(c) Thousands of gallons per day
</TABLE>
<PAGE> 58
Part II - Other Information
- ----------------------------
Item 1.- LEGAL PROCEEDINGS
Marathon Group
(a) Environmental Proceedings
On March 29, 1996, the U.S. Department of Justice ("DOJ") filed a Complaint
in the U.S. District Court, Southern District, Illinois against
Marathon Oil Company for violation of the Clean Air Act ("CAA") and
the Resource Conservation and Recovery Act ("RCRA"). The CAA
violations, which pertain to a boiler at the Robinson, Illinois
refinery, arise from alleged past noncompliance with the State's
opacity, particulate and carbon monoxide air emission standards.
Marathon contends that it is currently in compliance with the air
emission standards. The RCRA violation, which pertains to a land
treatment unit at the Robinson refinery, arises from alleged past
noncompliance with the Land Disposal Restrictions that require the
pretreatment of hazardous wastes prior to land disposal. The DOJ
proposed a penalty settlement prior to the filing of the Complaint of
$975,000.
U. S. Steel Group
(a) B&LE Litigation
On May 1, 1996, settlement was reached with plaintiffs in the remaining
action in the Lower Lake Erie Iron Ore Antitrust Litigation (Toledo
World Terminal vs. B&LE), with payment to the plaintiffs of $6.9
million due on or before June 15, 1996.
(b) Environmental Proceedings - Gary Works
On April 3, 1996, USX announced a final agreement with the Indiana
Department of Environmental Management to settle air pollution
violations at the Gary Works by paying a $6 million fine and agreeing
to spend up to $100 million for pollution control equipment and
programs over the next two years.
<PAGE> 59
Part II - Other Information (continued)
- --------------------------------------
Item 5. OTHER INFORMATION
SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION OF MARATHON OIL COMPANY
Supplementary Data
---------------------------------------------------------------------
(Unaudited)
The following summarized consolidated financial information of Marathon Oil
Company, a wholly owned subsidiary of USX, is included in this Form 10-Q in
satisfaction of the reporting obligation of Marathon which has debt securities
registered under the Securities Exchange Act. All such securities are
guaranteed by USX.
<TABLE>
<CAPTION>
(In millions)
-------------------
First Quarter Ended
March 31
1996 1995
---- ----
INCOME DATA:
<S> <C> <C>
Revenues $3,612 $3,319*
Operating income 382 218*
Net income 208 59
<FN>
*Reclassified to conform to 1996 classifications.
(In millions)
----------------------
March 31 December 31
1996 1995
-------- -----------
BALANCE SHEET DATA:
Assets:
Current assets $2,704 $2,656
Noncurrent assets 7,925 8,088
------ ------
Total assets $10,629 $10,744
====== ======
Liabilities and Stockholder's Equity:
Current liabilities $1,650 $1,659
Noncurrent liabilities 7,528 7,842
Stockholder's equity 1,451 1,243
------ ------
Total liabilities and stockholder's equity $10,629 $10,744
====== ======
</TABLE>
<PAGE> 60
Part II - Other Information (Continued):
- ----------------------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
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)
12.1 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
12.2 Computation of Ratio of Earnings to Fixed Charges
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
Form 8-K dated January 26, 1996 reporting under Item 5, Other Events, the
preliminary unaudited results of operations for the year ended
December 31, 1995.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned chief accounting officer thereunto duly authorized.
USX CORPORATION
By /s/ Lewis B. Jones
Lewis B. Jones
Vice President &
Comptroller
May 14, 1996
<TABLE>
<CAPTION>
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)
Three Months
Ended Year Ended December 31
March 31 --------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Portion of rentals
representing interest $20 $20 $78 $85 $84 $87 $91
Capitalized interest 3 5 13 58 105 78 63
Other interest and fixed
charges 111 121 464 464 372 408 474
Pretax earnings which would
be required to cover
preferred stock dividend
requirements of parent 9 12 46 49 44 14 15
---- ---- ---- ---- ---- ---- ----
Combined fixed charges
and preferred stock
dividends (A) $143 $158 $601 $656 $605 $587 $643
==== ==== ==== ==== ==== ==== ====
Earnings-pretax income (loss)
with applicable
adjustments (B) $527 $404 $902 $1,263 $280 $376 $(53)
==== ==== ==== ==== ==== ==== ====
Ratio of (B) to (A) 3.68 2.56 1.50 1.92 (a) (a) (a)
==== ==== ==== ==== ==== ==== ====
<FN>
(a) Earnings did not cover combined fixed charges and preferred stock
dividends by $325 million for 1993, by $211 million for 1992 and by $696
million for 1991.
</TABLE>
<TABLE>
<CAPTION>
Exhibit 12.2
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS - (Unaudited)
-------------------------------------------------
(Dollars in Millions)
Three Months
Ended Year Ended December 31
March 31 --------------------------------
1996 1995 1995 1994 1993 1992 1991
--- ---- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Portion of rentals
representing interest $20 $20 $78 $85 $84 $87 $91
Capitalized interest 3 5 13 58 105 78 63
Other interest and fixed
charges 111 121 464 464 372 408 474
---- ---- ---- ----- ---- ---- ----
Total fixed charges (A) $134 $146 $555 $607 $561 $573 $628
==== ==== ==== ==== ==== ==== ====
Earnings-pretax income (loss)
with applicable
adjustments (B) $527 $404 $902 $1,263 $280 $376 $(53)
==== ==== ==== ==== ==== ==== ====
Ratio of (B) to (A) 3.93 2.78 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>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 120
<SECURITIES> 0
<RECEIVABLES> 1240
<ALLOWANCES> 22
<INVENTORY> 1897
<CURRENT-ASSETS> 3357
<PP&E> 25625
<DEPRECIATION> 15264
<TOTAL-ASSETS> 16646
<CURRENT-LIABILITIES> 3407
<BONDS> 4250
0
7
<COMMON> 380
<OTHER-SE> 4139
<TOTAL-LIABILITY-AND-EQUITY> 16646
<SALES> 5469
<TOTAL-REVENUES> 5469
<CGS> 5003
<TOTAL-COSTS> 5003
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 120
<INCOME-PRETAX> 385
<INCOME-TAX> 120
<INCOME-CONTINUING> 265
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 365
<EPS-PRIMARY> 0
<EPS-DILUTED> 0<F1><F2><F3>
<FN>
<F1>Consists of Marathon Stock issued, $288; Steel Stock issued, $83; Delhi
Stock issued, $9.
<F2>Primary earnings per share applicable to Marathon Stock, $0.75; Steel Stock,
$0.49; Delhi Stock, $0.25.
<F3>Fully diluted earnings per share applicable to Marathon Stock, $0.74; Steel
Stock, $0.48; Delhi Stock, $0.25.
</FN>
</TABLE>
