<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 September 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ------------ to ------------
USX CORPORATION
- --------------------------------------------------------------------------------
----
(Exact name of registrant as specified in its charter)
Delaware 1-5153 25-0996816
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(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 October 31, 1997 follows:
USX-Marathon Group - 288,415,232 shares
USX-U. S. Steel Group - 86,151,414 shares
USX-Delhi Group - 9,445,338 shares
<PAGE> 2
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED September 30, 1997
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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 16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 17
Financial Statistics 26
B. Marathon Group
Item 1. Financial Statements:
Marathon Group Statement of Operations 27
Marathon Group Balance Sheet 28
Marathon Group Statement of Cash Flows 29
Selected Notes to Financial Statements 30
Item 2. Marathon Group Management's Discussion and
Analysis of Financial Condition and
Results of Operations 34
Supplemental Statistics 42
<PAGE> 3
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED September 30, 1997
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INDEX Page
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PART I - FINANCIAL INFORMATION (Continued)
C. U. S. Steel Group
Item 1. Financial Statements:
U. S. Steel Group Statement of Operations 43
U. S. Steel Group Balance Sheet 44
U. S. Steel Group Statement of Cash Flows 45
Selected Notes to Financial Statements 46
Item 2. U. S. Steel Group Management's Discussion
and Analysis of Financial Condition
and Results of Operations 52
Supplemental Statistics 59
D. Delhi Group
Item 1. Financial Statements:
Delhi Group Statement of Operations 60
Delhi Group Balance Sheet 61
Delhi Group Statement of Cash Flows 62
Selected Notes to Financial Statements 63
Item 2. Delhi Group Management's Discussion and
Analysis of Financial Condition
and Results of Operations 67
Supplemental Statistics 73
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 74
Item 5. Other Information 75
Item 6. Exhibits and Reports on Form 8-K 76
<PAGE> 4
Part I - Financial Information
<TABLE>
A. Consolidated Corporation
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
------------------------------------------------
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1997 1996* 1997 1996*
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $5,629 $5,782 $16,766 $16,613
OPERATING COSTS:
Cost of sales (excludes items shown below) 3,934 4,296 11,952 12,329
Selling, general and administrative expenses 66 34 163 114
Depreciation, depletion and amortization 235 236 722 744
Taxes other than income taxes 851 861 2,392 2,405
Exploration expenses 55 30 129 86
Inventory market valuation charges (credits) (41) (96) 137 (179)
------ ------ ------ ------
Total operating costs 5,100 5,361 15,495 15,499
------ ------ ------ ------
OPERATING INCOME 529 421 1,271 1,114
Gain on affiliate stock offering - - - 53
Other income 23 21 74 70
Interest and other financial income 8 7 17 19
Interest and other financial costs (89) (105) (275) (326)
------ ------ ------ ------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 471 344 1,087 930
Less provision for estimated income taxes 163 110 369 278
------ ------ ------ ------
INCOME FROM CONTINUING OPERATIONS 308 234 718 652
DISCONTINUED OPERATIONS (net of income taxes)
Net loss attributable to the Delhi Group (1) (1) (1) -
------ ------ ------ ------
NET INCOME 307 233 717 652
Noncash credit from exchange of preferred stock - - 10 -
Dividends on preferred stock (2) (6) (10) (17)
------ ------ ------ ------
NET INCOME APPLICABLE TO COMMON STOCKS $305 $227 $717 $635
====== ====== ====== ======
<FN>
*Certain amounts have been reclassified to conform to 1997 classifications.
Selected notes to financial statements appear on pages 9-15.
</TABLE>
<PAGE> 5
<TABLE>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Continued) (Unaudited)
INCOME PER COMMON SHARE
------------------------------------------------------------
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions, except per share amounts) 1997 1996 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONTINUING OPERATIONS
APPLICABLE TO MARATHON STOCK:
Net income $192 $164 $418 $504
- Per share - primary .66 .57 1.45 1.75
- fully diluted .66 .57 1.45 1.74
Dividends paid per share .19 .17 .57 .51
Weighted average shares, in thousands
- Primary 288,703 287,608 288,337 287,557
- Fully diluted 291,890 296,640 291,508 296,590
APPLICABLE TO STEEL STOCK:
Net income $114 $64 $300 $131
- Per share - primary 1.32 .76 3.50 1.56
- fully diluted 1.25 .75 3.26 1.55
Dividends paid per share .25 .25 .75 .75
Weighted average shares, in thousands
- Primary 85,849 84,487 85,502 83,781
- Fully diluted 93,947 86,422 93,607 85,588
DISCONTINUED OPERATIONS
APPLICABLE TO DELHI STOCK:
Net income (loss) $(.6) $(1.2) $(.7) $-
- Per share - primary and fully diluted (.06) (.14) (.07) -
Dividends paid per share .05 .05 .15 .15
Weighted average shares, in thousands
- Primary and fully diluted 9,450 9,448 9,450 9,448
<FN>
Selected notes to financial statements appear on pages 9-15.
</TABLE>
<PAGE> 6
<TABLE>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Unaudited)
----------------------------------------
<CAPTION>
ASSETS
September 30 December 31
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $67 $55
Receivables, less allowance for doubtful
accounts of $7 and $26 976 1,270
Inventories 1,917 1,939
Deferred income tax benefits 57 57
Net assets of discontinued operations 431 -
Other current assets 98 81
------ ------
Total current assets 3,546 3,402
Investments and long-term receivables,
less reserves of $17 and $17 987 854
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$15,324 and $15,280 9,876 10,404
Prepaid pensions 2,210 2,014
Other noncurrent assets 318 306
------ ------
Total assets $16,937 $16,980
====== ======
<FN>
Selected notes to financial statements appear on pages 9-15.
</TABLE>
<PAGE> 7
<TABLE>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Continued) (Unaudited)
--------------------------------------------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30 December 31
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES
Current liabilities:
Notes payable $86 $81
Accounts payable 1,943 2,204
Payroll and benefits payable 543 475
Accrued taxes 220 304
Accrued interest 57 102
Long-term debt due within one year 500 353
------ ------
Total current liabilities 3,349 3,519
Long-term debt, less unamortized discount 3,096 3,859
Long-term deferred income taxes 1,157 1,097
Employee benefits 2,787 2,797
Deferred credits and other liabilities 742 436
Preferred stock of subsidiary 250 250
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust 182 -
STOCKHOLDERS' EQUITY
Preferred stock -
6.50% Cumulative Convertible issued - 2,962,037 shares and
6,900,000 shares ($148 and $345 liquidation
preference, respectively) 3 7
Common stocks:
Marathon Stock issued - 288,278,794 shares and
287,525,213 shares 288 288
Steel Stock issued - 85,974,302 shares and
84,885,473 shares 86 85
Delhi Stock issued - 9,451,588 shares and
9,448,269 shares 9 9
Additional paid-in capital 4,017 4,150
Delhi treasury common stock, at cost, 6,600 shares
and -0- shares - -
Retained earnings 1,004 517
Other equity adjustments (33) (34)
------ ------
Total stockholders' equity 5,374 5,022
------ ------
Total liabilities and stockholders' equity $16,937 $16,980
====== ======
<FN>
Selected notes to financial statements appear on pages 9-15.
</TABLE>
<PAGE> 8
<TABLE>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------------------
<CAPTION>
Nine Months Ended
September 30
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $717 $652
Adjustments to reconcile to net cash provided
from operating activities:
Depreciation, depletion and amortization 740 765
Exploratory dry well costs 57 38
Inventory market valuation charges (credits) 137 (179)
Pensions (196) (157)
Postretirement benefits other than pensions 11 25
Deferred income taxes 107 192
Gain on disposal of assets (58) (39)
Gain on affiliate stock offering - (53)
Payment of amortized discount on zero coupon debentures(17) -
Changes in:
Current receivables 116 (61)
Inventories (121) (112)
Current accounts payable and accrued expenses (50) (226)
All other - net (88) (2)
------ ------
Net cash provided from operating activities 1,355 843
------ ------
INVESTING ACTIVITIES:
Capital expenditures (887) (730)
Disposal of assets 430 271
Withdrawal from property exchange trusts - net 97 -
Investments in equity affiliates - net (217) (1)
All other - net 9 -
------ ------
Net cash used in investing activities (568) (460)
------ ------
FINANCING ACTIVITIES:
Commercial paper and revolving credit arrangements - net 6 331
Other debt repayments (588) (595)
Common stock issued 47 48
Dividends paid (238) (226)
------ ------
Net cash used in financing activities (773) (442)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2) -
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12 (59)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 55 131
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $67 $72
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(340) $(418)
Income taxes paid (275) (99)
NONCASH TRANSACTION - mandatorily redeemable securities
exchanged for preferred stock 182 -
<FN>
Selected notes to financial statements appear on pages 9-15.
</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, 1996.
Effective January 1, 1997, USX adopted American Institute of Certified
Public Accountants Statement of Position No. 96-1, "Environmental
Remediation Liabilities" (SOP 96-1), which provides additional
interpretation of existing accounting standards related to recognition,
measurement and disclosure of environmental remediation liabilities. As a
result of adopting SOP 96-1 in the first quarter, USX identified additional
environmental remediation liabilities of $46 million, of which $28 million
was discounted to a present value of $13 million and $18 million was not
discounted. Assumptions used in the calculation of the present value
amount included an inflation factor of 2% and an interest rate of 7% over a
range of 22 to 30 years. Estimated receivables for recoverable costs
related to adoption of SOP 96-1 were $4 million. The net unfavorable
effect on first quarter 1997 operating income was $27 million.
2. The method of calculating net income (loss) per share for the Marathon
Stock, Steel Stock and Delhi Stock reflects the USX Board of Directors'
intent that the separately reported earnings and surplus of the Marathon
Group, the U. S. Steel Group and the Delhi Group, as determined consistent
with the USX Certificate of Incorporation, are available for payment of
dividends on the respective classes of stock, although legally available
funds and liquidation preferences of these classes of stock do not
necessarily correspond with these amounts. The financial statements of the
Marathon Group, the U. S. Steel Group and the Delhi Group, taken together,
include all accounts which comprise the corresponding consolidated
financial statements of USX.
Primary net income (loss) per share is calculated by adjusting net
income for dividend requirements of preferred stock and the noncash credit
on exchange of preferred stock and is based on the weighted average number
of common shares outstanding plus common stock equivalents, provided they
are not antidilutive. Common stock equivalents result from assumed
exercise of stock options, where applicable.
Fully diluted net income (loss) per share assumes conversion of
convertible securities for the applicable periods outstanding and assumes
exercise of stock options, provided in each case, the effect is not
antidilutive.
<PAGE> 10
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
3. The items below are included in both revenues and operating costs,
resulting in no effect on income.
<TABLE>
<CAPTION>
(In millions)
-------------------------------
Third Qtr. Nine Months
Ended Ended
September 30 September 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Consumer excise taxes on petroleum
products and merchandise $738 $757 $2,057 $2,090
Matching crude oil and refined product
buy/sell transactions settled in cash 539 706 1,845 2,028
</TABLE>
4. Operating income includes net periodic pension credits of $117 million
and $121 million in the first nine months of 1997 and 1996, respectively,
($41 million and $42 million in the third quarter of 1997 and 1996,
respectively). These pension credits are primarily noncash and for the
most part are included in selling, general and administrative expenses.
5. On May 2, 1996, an aggregate of 6.9 million shares of RMI Titanium
Company (RMI) common stock was sold in a public offering at a price of
$18.50 per share and total net proceeds of $121 million. Included in the
offering were 2.3 million shares sold by USX for net proceeds of $40
million. USX recognized a total pretax gain in the second quarter of 1996
of $53 million, of which $34 million was attributable to the shares sold by
USX and $19 million was attributable to the increase in value of USX's
investment as a result of the shares sold by RMI. The income tax effect
related to the total gain was $19 million. As a result of this
transaction, USX's ownership in RMI decreased from approximately 50% to
27%. USX continues to account for its investment in RMI under the equity
method of accounting.
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)
----------------------
Sept. 30 December 31
1997 1996
-------- -----------
<S> <C> <C>
Raw materials $642 $594
Semi-finished products 312 309
Finished products 962 908
Supplies and sundry items 138 128
------ ------
Total (at cost) 2,054 1,939
Less inventory market valuation reserve 137 -
------ ------
Net inventory carrying value $1,917 $1,939
====== ======
</TABLE>
<PAGE> 11
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
7. (Continued)
The inventory market valuation reserve reflects the extent that the
recorded LIFO cost basis of crude oil and refined products inventories
exceeds net realizable value. The reserve is decreased to reflect
increases in market prices and inventory turnover and increased to reflect
decreases in market prices. Changes in the inventory market valuation
reserve result in noncash charges or credits to operating income. For
additional information, see Outlook in the Marathon Group's Management's
Discussion and Analysis of Financial Condition and Results of Operations.
8. At September 30, 1997, USX had no borrowings against its
$2,350 million long-term revolving credit agreement.
USX had no borrowings at September 30, 1997, against its short-term
lines of credit totaling $200 million, which require a 1/8% fee or
maintenance of compensating balances of 3%. USX had other outstanding
short-term borrowings of $86 million.
In the event of a change in control of USX, debt obligations totaling
$3,011 million at September 30, 1997, may be declared immediately due and
payable.
On November 10, 1997, USX announced that it will redeem all of its
outstanding 5 3/4% Convertible Subordinated Debentures Due 2001, on
December 12, 1997. At September 30, 1997, $176 million aggregate
principal amount of these debentures was outstanding.
9. During the first nine months of 1997, USX redeemed Zero Coupon
Convertible Senior Debentures Due 2005 with a carrying value of $41
million; the aggregate principal amount of $227 million 7% Convertible
Subordinated Debentures Due 2017; and $120 million aggregate principal
amount of 8.50% Sinking Fund Debentures Due 2006.
10. In December 1996, USX issued $117 million of debt (notes) indexed to
the price of RMI common stock. At maturity in February 2000, USX must
exchange these notes for shares of RMI common stock, or redeem the notes
for the equivalent amount of cash. Interest and other financial costs
included a favorable adjustment to the carrying value of the indexed debt
of $6 million for the first nine months of 1997. There was no adjustment
for the third quarter 1997.
11.In the second quarter of 1997, USX exchanged approximately 3.9 million
6.75% Convertible Quarterly Income Preferred Securities (Trust Preferred
Securities) of USX Capital Trust I, a Delaware statutory business trust
(Trust), for an equivalent number of shares of its 6.50% Cumulative
Convertible Preferred Stock (6.50% Preferred Stock) (Exchange). The
Exchange resulted in the recording of Trust Preferred Securities at a fair
value of $182 million and a noncash credit to Retained Earnings of $10
million.
<PAGE> 12
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
11. (Continued)
USX owns all of the common securities of the Trust, which was formed
for the purpose of the Exchange. (The Trust Common Securities and the
Trust Preferred Securities are together referred to as the Trust
Securities.) The Trust Securities represent undivided beneficial ownership
interests in the assets of the Trust, which consist solely of USX 6.75%
Convertible Junior Subordinated Debentures maturing March 31, 2037
(Debentures), having an aggregate principal amount equal to the aggregate
initial liquidation amount ($50.00 per security and $203 million in total)
of the Trust Securities issued by the Trust. Interest and principal
payments on the Debentures will be used to make quarterly distributions and
to pay redemption and liquidation amounts on the Trust Preferred
Securities. The quarterly distributions, which accumulate at the rate of
6.75% per annum on the Trust Preferred Securities and the accretion from
fair value to the initial liquidation amount, are charged to income and
included in interest and other financial costs.
Under the terms of the Debentures, USX has the right to defer payment
of interest for up to 20 consecutive quarters and, as a consequence,
monthly distributions on the Trust Preferred Securities will be deferred
during such period. If USX exercises this right, then, subject to limited
exceptions, it may not pay any dividend or make any distribution with
respect to any shares of its capital stock.
The Trust Preferred Securities are convertible at any time prior to
the close of business on March 31, 2037, (unless such right is terminated
earlier under certain circumstances) at the option of the holder, into
shares of USX-U. S. Steel Group Common Stock (Steel Stock) at a conversion
price of $46.25 per share of Steel Stock (equivalent to a conversion ratio
of 1.081 shares of Steel Stock for each Trust Preferred Security), subject
to adjustment in certain circumstances.
The Trust Preferred Securities may be redeemed at any time at the
option of USX, initially at a premium of 103.90% of the initial liquidation
amount through March 31, 1998, and thereafter, declining annually to the
initial liquidation amount on April 1, 2003 and thereafter. They are
mandatorily redeemable at March 31, 2037, or earlier under certain
circumstances.
Payments related to quarterly distributions and to the payment of
redemption and liquidation amounts on the Trust Preferred Securities by the
Trust are guaranteed by USX on a subordinated basis.
12. 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 September 30,
1997, the amount sold under the programs that had not been collected was
$740 million, which will be forwarded to the buyers at the end of the
agreements, or in the event of earlier contract termination. If USX does
not have a sufficient quantity of eligible accounts receivable to reinvest
in for the buyers, the size of the
<PAGE> 13
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
12. (Continued)
programs will be reduced accordingly. The buyers have rights to a
pool of receivables that must be maintained at a level of 110% to 115% of
the programs' size. In the event of a change in control of USX, as defined
in one of the agreements, USX may be required to forward to the buyers,
payments collected on sold accounts receivable of $350 million. Subsequent
to the balance sheet date, in anticipation of the sale of the subsidiaries
that comprise all of the Delhi Group (see Note 15), one of the programs was
amended to remove all Delhi Group receivables. Additionally, USX gave
notice to the buyers of the Marathon Group's accounts receivable program
that it intends to reduce the amount sold under its agreement ($340
million at September 30, 1997) to zero by December 31, 1997.
Prior to 1993, USX Credit, a division of USX, sold certain of its
loans receivable subject to limited recourse under an agreement that
expires in December 1997. USX Credit continues to collect payments from
the loans and transfer to the buyers principal collected plus yield based
on defined short-term market rates. At September 30, 1997, the balance of
sold loans receivable subject to recourse was $19 million. USX Credit is
not actively seeking new loans at this time. In the event of a change in
control of USX, as defined in the agreement, USX may be required to provide
cash collateral in the amount of the uncollected loans receivable to assure
compliance with the limited recourse provisions.
13. Effective June 1, 1997, USX entered into a strategic partnership with
two limited partners to acquire an interest in three coke batteries at its
U. S. Steel Group's Clairton (Pa.) Works and to operate and sell coke and
byproducts from those facilities. USX is the general partner and is
responsible for purchasing, operations and products marketing. Proceeds to
USX as a result of the transaction were $361 million, and deferred gains of
$262 million at June 30, 1997 (included in deferred credits and other
liabilities) will be recognized over the life of the partnership's assets.
USX's partnership interest will be accounted for under the equity method of
accounting.
14. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments involving a variety
of matters, including laws and regulations relating to the environment.
Certain of these matters are discussed below. The ultimate resolution of
these contingencies could, individually or in the aggregate, be material to
the consolidated financial statements. However, management believes that
USX will remain a viable and competitive enterprise even though it is
possible that these contingencies could be resolved unfavorably. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
USX is subject to federal, state, local and foreign laws and
regulations relating to the environment. These laws generally provide for
control of pollutants released into the environment and require responsible
parties to undertake remediation of hazardous waste disposal sites.
Penalties may be imposed for noncompliance. At September 30, 1997, and
December 31, 1996, accrued liabilities for remediation totaled $161 million
and $144 million, respectively. It is not presently possible to estimate
the ultimate amount of all remediation costs that might be incurred or the
penalties that may be imposed. Receivables for recoverable costs from
certain states, under programs to assist companies in cleanup efforts
related to underground storage tanks at retail marketing outlets, were $41
million at September 30, 1997, and $23 million at December 31, 1996.
<PAGE> 14
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
14. (Continued)
For a number of years, USX has made substantial capital expenditures
to bring existing facilities into compliance with various laws relating to
the environment. In the first nine months of 1997 and for the years 1996
and 1995, such capital expenditures totaled $92 million, $165 million and
$111 million, respectively. USX anticipates making additional such
expenditures in the future; however, the exact amounts and timing of such
expenditures are uncertain because of the continuing evolution of specific
regulatory requirements.
At September 30, 1997, and December 31, 1996, accrued liabilities for
platform abandonment and dismantlement totaled $126 million and $118
million, respectively.
Guarantees by USX of the liabilities of affiliated entities totaled
$85 million at September 30, 1997. In the event that any defaults of
guaranteed liabilities occur, USX has access to its interest in the assets
of most of the affiliates to reduce losses resulting from these guarantees.
As of September 30, 1997, the largest guarantee for a single affiliate was
$45 million.
At September 30, 1997, USX's pro rata share of obligations of LOOP LLC
and various pipeline affiliates secured by throughput and deficiency
agreements totaled $170 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 September 30, 1997, totaled $501 million compared with $526
million at December 31, 1996.
15. On October 22, 1997, USX announced that it had entered into a
definitive agreement to sell its stock in Delhi Gas Pipeline Corporation
and other subsidiaries of USX that comprise all of the Delhi Group (Delhi
Companies). The transaction involves a gross purchase price of $762
million. Under the USX Restated Certificate of Incorporation, USX is
required to elect one of three options to return the value of the net
proceeds received in the transaction to the holders of shares in USX-Delhi
Group Common Stock (Delhi shareholders). Of the three options, USX
currently anticipates that it will elect to use the net proceeds to redeem
all shares of Delhi Stock. The net proceeds are to be distributed to the
Delhi shareholders on or prior to the first business day following the 60th
day following the closing date of the transaction.
The financial results of the Delhi Group have been reclassified as
discontinued operations for all periods presented in the Consolidated
Statement of Operations. The net assets of the Delhi Companies have been
reclassified in the Consolidated Balance Sheet as of September 30, 1997, to
separately reflect them as net assets of discontinued operations.
<PAGE> 15
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
15. (Continued)
The summarized results of discontinued operations and the related per
share effect are as follows:
<TABLE>
<CAPTION>
(In millions, except per share amounts)
Nine Months Ended
September 30
1997 1996
---- ----
<S> <C> <C>
Revenues $1,031 $743
Operating costs 1,016 728
------ ------
Operating income 15 15
Interest and other financial costs (18) (15)
------ ------
Income (loss) before income taxes (3) -
Provision (credit) for estimated income taxes (2) -
------ ------
Income (loss) from discontinued operations $(1) $-
====== ======
Income (loss) from discontinued operations per share
of Delhi Stock $(.07) $-
====== ======
</TABLE>
The net assets of the Delhi Companies as included in the Consolidated
Balance Sheet and a reconciliation to the net assets of the Delhi Group are
as follows:
<TABLE>
<CAPTION>
(In millions)
September 30,
1997
------------
<S> <C>
Current assets $184
Property, plant and equipment 596
Investments and other noncurrent assets 13
Current liabilities (191)
Long-term debt (2)
Deferred income taxes (150)
Deferred credits and other liabilities (19)
------
Net assets of discontinued operations 431
Financial and other corporate activities attributed
to the Delhi Group (317)
------
Net assets of the Delhi Group $114
======
</TABLE>
<PAGE> 16
<TABLE>
<CAPTION>
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS - (Unaudited) (a)
----------------------------------------------------------
Nine Months Ended
September 30 Year Ended December 31
- -------------------- -------------------------------------------------------
1997 1996* 1996* 1995* 1994* 1993* 1992*
---- ---- ---- ---- ---- ---- ----
<C> <C> <C> <C> <C> <C> <C>
4.13 3.37 3.62 1.49 2.01 (b) (b)
==== ==== ==== ==== ==== ==== ====
<FN>
(a) Amounts represent combined fixed charges and earnings from
continuing operations.
(b) Earnings did not cover combined fixed charges and preferred stock
dividends by $356 million for 1993 and by $241 million for 1992.
* Amounts have been reclassified to conform to 1997 classifications.
</TABLE>
<TABLE>
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS - (Unaudited) (a)
-------------------------------------------------
<CAPTION>
Nine Months Ended
September 30 Year Ended December 31
- --------------------- -------------------------------------------------------
1997 1996* 1996* 1995* 1994* 1993* 1992*
---- ---- ---- ---- ---- ---- ----
<C> <C> <C> <C> <C> <C> <C>
4.34 3.63 3.90 1.62 2.18 (b) (b)
==== ==== ==== ==== ==== ==== ====
<FN>
(a) Amounts represent fixed charges and earnings from continuing
operations.
(b) Earnings did not cover fixed charges by $312 million for 1993 and by
$227 million for 1992.
* Amounts have been reclassified to conform to 1997 classifications.
</TABLE>
PAGE> 17
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
USX Corporation ("USX") is a diversified company engaged primarily in the
energy business through its Marathon Group, in the steel business through its
U. S. Steel Group and in the gas gathering and processing, natural gas liquids
trading and electric power marketing businesses through its Delhi Group.
On October 22, 1997, USX announced that it had entered into a definitive
agreement for USX to sell its stock in Delhi Gas Pipeline Corporation and other
subsidiaries of USX that comprise all of the Delhi Group (the "Delhi Companies")
to Koch Midstream Enterprises, Inc., an affiliate of Koch Industries, Inc.
Accordingly, Delhi Group financial results have been reclassified as
discontinued operations for all periods presented in the Consolidated Statement
of Operations. The assets and liabilities of the Delhi Companies have been
reclassified and presented in the Consolidated Balance Sheet as of September 30,
1997, as net assets of discontinued operations. For further discussion, see Note
15 to the Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations for the Delhi Group.
The following discussion should be read in conjunction with the third
quarter 1997 USX Consolidated Financial Statements and selected notes. For net
income (loss) per common share amounts applicable to each of USX's three classes
of common stock, USX-Marathon Group Common Stock ("Marathon Stock"), USX-U. S.
Steel Group Common Stock ("Steel Stock") and USX-Delhi Group Common Stock
("Delhi Stock"), see Consolidated Statement of Operations - Income per Common
Share. For Group results, see Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Marathon Group, the U. S. Steel
Group and the Delhi Group. For operating statistics, see Supplemental Statistics
following Management's Discussion and Analysis of Financial Condition and
Results of Operations for the respective Groups.
Certain sections of the discussion include forward-looking statements
concerning trends or events potentially affecting USX. These statements
typically contain words such as "anticipates", "believes", "estimates",
"expects" or similar words indicating that future outcomes are uncertain. In
accordance with "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995, these statements are accompanied by cautionary language
identifying important factors, though not necessarily all such factors, that
could cause future outcomes to differ materially from those set forth in
forward-looking statements. For additional cautionary language related to
USX and each of its Groups, see Item 5. in USX's Form 10-Q for the quarterly
period ended March 31, 1997.
<PAGE> 18
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
Revenues for the third quarter and first nine months of 1997 and 1996 are
set forth in the following table:
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues
Marathon Group $3,929 $4,195 $11,786 $11,893
U. S. Steel Group 1,722 1,611 5,063 4,782
Eliminations (22) (24) (83) (62)
------ ------ ------- -------
Total USX Corporation revenues (a) $5,629 $5,782 $16,766 $16,613
Less:
Matching crude oil and refined product buy/sell
transactions settled in cash (b) 539 706 1,845 2,028
Consumer excise taxes on petroleum products
and merchandise (b) 738 757 2,057 2,090
------ ------ ------ ------
Revenues adjusted to exclude above items $4,352 $4,319 $12,864 $12,495
====== ====== ====== ======
- ------
<FN>
(a) Excludes revenues of the Delhi Group, which have been reclassified as
discontinued operations.
(b) Included in both revenues and operating costs for the Marathon Group and
USX Consolidated, resulting in no effect on income.
</TABLE>
Adjusted revenues increased by $33 million in the third quarter of 1997 as
compared with the third quarter of 1996. The improvement reflected an increase
of $111 million for the U. S. Steel Group, partially offset by a decline of $80
million for the Marathon Group. The increase for the U. S. Steel Group was due
primarily to higher average realized steel prices and increased steel shipment
volumes. The decline for the Marathon Group was due primarily to decreased
volumes and lower average prices for worldwide liquid hydrocarbons, lower
average prices for refined products and decreased volumes for international
natural gas, partially offset by increased volumes of refined products.
Adjusted revenues increased by $369 million in the first nine months of
1997 as compared with the first nine months of 1996. The improvement reflected
increases of $281 million for the U. S. Steel Group and $109 million for the
Marathon Group. The increase for the U. S. Steel Group was due primarily to
higher average realized steel prices and increased steel shipment volumes. The
increase for the Marathon Group was due primarily to increased sales volumes of
refined products and domestic natural gas, and higher average prices for
worldwide natural gas and refined products, partially offset by reduced volumes
of worldwide liquid hydrocarbons and international natural gas.
<PAGE> 19
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Operating income and certain items included in operating income for the
third quarter and first nine months of 1997 and 1996 are set forth in the
following table:
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating income
Marathon Group $345 $318 $790 $929
U. S. Steel Group 184 103 481 185
----- ----- ----- -----
Total USX Corporation operating income (a) $529 $421 $1,271 $1,114
Less: certain favorable (unfavorable) items for
Marathon Group
IMV reserve adjustment (b) 41 96 (137) 179
Charges for withdrawal from MPA (c) - - - (10)
U. S. Steel Group
Effect of adoption of SOP 96-1 (d) - - (20) -
Certain other environmental accrual adj. - net - - 11 -
Gary Works No. 13 blast furnace repairs (e) - - - (39)
Certain legal accruals - - - (20)
----- ----- ----- -----
Subtotal 41 96 (146) 110
----- ----- ----- -----
Operating income adjusted to exclude above items $488 $325 $1,417 $1,004
===== ===== ===== =====
<FN>
- ------
(a) Excludes operating income of the Delhi Group, which has been reclassified
as discontinued operations.
(b) The inventory market valuation ("IMV") reserve reflects the extent to which
the recorded LIFO cost basis of crude oil and refined product inventories
exceeds net realizable value. For additional discussion of this noncash
adjustment, see Outlook in Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Marathon Group.
(c) Marine Preservation Association ("MPA") is a non-profit oil spill response
group.
(d) American Institute of Certified Public Accountants Statement of Position
No. 96-1, "Environmental Remediation Liabilities" ("SOP 96-1") provides
additional guidance on recognition, measurement and disclosure of remediation
liabilities.
(e) Reflects repair of damages incurred during a break-out on April 2, 1996;
excludes effects of business interruption.
</TABLE>
Adjusted operating income increased by $163 million in the third quarter of
1997 as compared with the third quarter of 1996, reflecting increases of $82
million for the Marathon Group and $81 million for the U. S. Steel Group. The
increase for the Marathon Group was due primarily to higher average margins on
refined products, partially offset by lower prices and decreased volumes of
worldwide liquid hydrocarbons, higher worldwide exploration expense and
increased administrative expenses. The increase for the U. S. Steel Group was
due primarily to recovery of insurance proceeds related to the 1996 breakout at
the Gary (Ind.) Works' No. 13 blast furnace, higher steel shipments, reduced
costs and higher average realized steel prices.
<PAGE> 20
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Adjusted operating income increased by $413 million in the first nine
months of 1997 as compared with the first nine months of 1996, reflecting
increases of $246 million for the U. S. Steel Group and $167 million for the
Marathon Group. The increase for the U. S. Steel Group was due primarily to
increased steel shipments, higher average realized steel prices, lower operating
costs, operating efficiencies and recovery of insurance proceeds related to the
1996 breakout at the Gary Works' No. 13 blast furnace. Operations in the third
quarter and first nine months of 1996 were negatively affected by cost
inefficiencies related to planned and unplanned outages at U. S. Steel's three
largest blast furnaces. The increase for the Marathon Group was due primarily to
higher average margins for refined products and higher prices for worldwide
natural gas, partially offset by reduced worldwide liquid hydrocarbon production
and prices, higher worldwide exploration expense and increased administrative
expenses.
Gain on affiliate stock offering was $53 million in the first nine months
of 1996. For details, see Note 5 to the Consolidated Financial Statements.
Net interest and other financial costs for the third quarter and first nine
months of 1997 and 1996 are set forth in the following table:
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest and other financial income $8 $7 $17 $19
Interest and other financial costs (89) (105) (275) (326)
----- ------ ------ ------
Net interest and other financial costs (81) (98) (258) (307)
Less:
Favorable adjustment to
carrying value of indexed debt(a) - - 6 -
----- ------ ------ ------
Net interest and other financial costs
adjusted to exclude above item $(81) $(98) $(264) $(307)
===== ====== ====== ======
- ------
<FN>
(a) In December 1996, USX issued $117 million of 6 3/4% Exchangeable Notes
Due February 1, 2000 ("indexed debt") indexed to the price of RMI Titanium
Company ("RMI") common stock. At maturity, USX must exchange these notes for
shares of RMI common stock, or redeem the notes for the equivalent amount of
cash. The carrying value of indexed debt is adjusted quarterly to settlement
value, based on changes in the value of RMI common stock. Any resulting
adjustment is charged or credited to income and included in interest and
other financial costs. USX's 27% interest in RMI continues to be accounted
for under the equity method.
</TABLE>
Excluding the adjustment to the carrying value of indexed debt, net
interest and other financial costs decreased by $43 million in the first nine
months of 1997 as compared with the first nine months of 1996, due primarily to
lower average debt levels.
<PAGE> 21
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Provision for estimated income taxes in the third quarter and first nine
months of 1997 included adjustments relating to the 1997 tax year reflecting a
reduction in estimated tax credits and an increase in estimated state income tax
expense. A significant portion of these adjustments resulted from USX's entry
into a strategic partnership with two limited partners to acquire an interest in
three coke batteries at its U. S. Steel Group's Clairton (Pa.) Works. See Note
13 to the Consolidated Financial Statements for additional discussion.
Income from continuing operations was $308 million in the third quarter of
1997, an increase of $74 million from the third quarter of 1996. Income from
continuing operations in the first nine months of 1997 was $718 million, an
increase of $66 million from the first nine months of 1996.
Net loss attributable to the Delhi Group reflects the operations of the
Delhi Group which is the subject of a formal plan of disposal announced on
October 22, 1997.
Net income was $307 million in the third quarter of 1997, an increase of
$74 million from the third quarter of 1996. Net income was $717 million in the
first nine months of 1997, an increase of $65 million from the first nine months
of 1996.
Noncash credit from exchange of preferred stock was $10 million, or 12
cents per share of Steel Stock, in the first nine months of 1997. In May 1997,
USX exchanged approximately 3.9 million 6.75% Convertible Quarterly Income
Preferred Securities ("Trust Preferred Securities") of USX Capital Trust I for
an equivalent number of shares of its outstanding 6.50% Cumulative Convertible
Preferred Stock. The $10 million noncash credit reflects the difference between
the carrying value of the preferred stock and the fair value of the Trust
Preferred Securities at the date of the exchange. See Note 11 to the
Consolidated Financial Statements for additional discussion.
Dividends to Stockholders
- -------------------------
On October 28, 1997, the USX Board of Directors (the "Board") declared
dividends of 19 cents per share on Marathon Stock and 25 cents per share on
Steel Stock, payable December 10, 1997, to stockholders of record at the close
of business on November 19, 1997. The Board also declared a dividend of $0.8125
per share on USX's 6.50% Cumulative Convertible Preferred Stock, payable
December 31, 1997, to stockholders of record at the close of business on
December 1, 1997.
In view of the pending agreement for USX to sell its stock in the
subsidiaries that comprise all of the Delhi Group, the Board did not declare a
dividend on Delhi Stock. The net proceeds available for distribution to Delhi
Group stockholders after disposition of the Delhi Group will effectively be
increased by the amount that would have been paid to the Delhi Group
stockholders had a dividend been declared.
Cash Flows
- ----------
Cash and cash equivalents totaled $67 million at September 30, 1997,
compared with $55 million at December 31, 1996.
<PAGE> 22
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Net cash provided from operating activities totaled $1,355 million in the
first nine months of 1997, compared with $843 million in the first nine months
of 1996. The 1997 period included payments of $49 million to fund the U. S.
Steel Group's principal pension plan for the 1996 plan year and receipt of
insurance recoveries of $40 million related to an April 1996 breakout at the
Gary Works No. 13 blast furnace. The 1996 period included payments of $59
million to the Internal Revenue Service for certain agreed and unagreed
adjustments relating to the 1990 tax year, $39 million related to certain state
tax issues and $28 million for final settlement of the Pickering v. USX
litigation. Excluding the effects of these items, net cash provided from
operating activities increased by $395 million in the first nine months of 1997,
due primarily to favorable working capital changes, higher average margins for
refined products, higher average realized steel prices and volumes and higher
average prices for worldwide natural gas, partially offset by increased income
tax payments, reduced worldwide liquid hydrocarbon production and prices, higher
worldwide exploration expense and increased administrative expenses. In
addition, net cash provided from operating activities in the first nine months
of 1996 was adversely affected by cost inefficiencies related to planned and
unplanned outages at U. S. Steel's three largest blast furnaces.
Cash from the disposal of assets was $430 million in the first nine months
of 1997, compared with $271 million in the first nine months of 1996. The 1997
proceeds included $361 million resulting from USX's entry into a strategic
partnership with two limited partners to acquire an interest in three coke
batteries at its U. S. Steel Group's Clairton Works. The 1996 proceeds primarily
reflected the sale of the U. S. Steel Group's investment in National-Oilwell (an
oil field service joint venture); sale of shares of RMI common stock; sales of
the Marathon Group's interests in oil and gas production properties in Indonesia
and Tunisia and the sale of the Marathon Group's interest in a domestic pipeline
company.
The net withdrawal from property exchange trusts of $97 million in the
first nine months of 1997 mainly represents cash withdrawn from an interest-
bearing escrow account that was established in the fourth quarter of 1996 in
connection with the disposal of Marathon Group oil production properties in
Alaska.
Capital expenditures for property, plant and equipment in the first nine
months of 1997 were $887 million, compared with $730 million in the first nine
months of 1996. For further details, see USX Corporation - Financial Statistics,
following Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Contract commitments for capital expenditures were $501 million at
September 30, 1997, compared with $526 million at December 31, 1996.
Net investments in equity affiliates of $217 million in the first nine
months of 1997 mainly reflected funding of Marathon Group equity affiliates'
capital projects (including the Sakhalin II project in Russia and the Nautilus
natural gas pipeline system in the Gulf of Mexico), and the Marathon Group's
acquisition of an additional 7.5% interest in Sakhalin Energy Investment Company
Ltd. ("Sakhalin Energy"), which brings the Marathon Group's interest to 37.5%.
Sakhalin Energy is the incorporated joint venture company responsible for the
Sakhalin II project.
<PAGE> 23
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
USX's total long-term debt, preferred stock of subsidiary, USX obligated
preferred securities of a subsidiary trust and notes payable was $4.1 billion at
September 30, 1997, down $429 million from December 31, 1996, mainly reflecting
cash provided from operating activities and asset sales during 1997, in excess
of cash used for capital expenditures, dividend payments and investments in
equity affiliates. Redemptions and maturities of long-term debt during the first
nine months of 1997 included $227 million of 7% Convertible Subordinated
Debentures Due 2017, $150 million of 8 7/8% Notes Due 1997, $120 million of
8.50% Sinking Fund Debentures Due 2006 and $41 million of Zero Coupon
Convertible Senior Debentures Due 2005.
In May 1997, USX exchanged approximately 3.9 million 6.75% Trust Preferred
Securities of USX Capital Trust I for an equivalent number of shares of its
outstanding 6.50% Cumulative Convertible Preferred Stock. The exchange resulted
in the recording of $182 million of Trust Preferred Securities and a $10 million
noncash credit to Retained Earnings. See Note 11 to the Consolidated Financial
Statements for additional discussion.
Liquidity
- ---------
At September 30, 1997, USX had available its long-term revolving credit
agreement of $2,350 million, short-term lines of credit of $200 million, and
short-term credit agreements of $125 million, against which it had no
outstanding borrowings. USX had outstanding short-term borrowings of $86 million
against uncommitted lines of credit. USX's short-term lines of credit require a
1/8% fee or maintenance of compensating balances of 3%.
USX management believes that its short-term and long-term liquidity is
adequate to satisfy its obligations as of September 30, 1997, and to complete
currently authorized capital spending programs. Future requirements for USX's
business needs, including the funding of capital expenditures, debt maturities
for the balance of 1997 and years 1998 and 1999, and any amounts that may
ultimately be paid in connection with contingencies (which are discussed in Note
14 to the Consolidated Financial Statements), are expected to be financed by a
combination of internally generated funds, proceeds from the sale of stock,
borrowings or other external financing sources.
USX management's opinion concerning liquidity and USX's ability to avail
itself in the future of the financing options mentioned in the above forward-
looking statements are affected by various factors including the performance of
each Group (as indicated by levels of cash provided from operating activities,
and other measures) the state of worldwide debt and equity markets, investor
perceptions and expectations of past and future performance and actions, the
overall U.S. financial climate, and, in particular, with respect to borrowings,
by levels of USX's outstanding debt and credit ratings by ratings agencies. To
the extent that management's assumptions concerning these factors prove to be
inaccurate, USX's liquidity position could be adversely affected.
<PAGE> 24
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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 September 30, 1997. In addition, there are 26
sites where USX has received information requests or other indications that USX
may be a PRP under CERCLA but where sufficient information is not presently
available to confirm the existence of liability. There are also 109 additional
sites, excluding retail marketing outlets, where remediation is being sought
under other environmental statutes, both federal and state, or where private
parties are seeking remediation through discussions or litigation. At many of
these sites, USX is one of a number of parties involved and the total cost of
remediation, as well as USX's share thereof, is frequently dependent upon the
outcome of investigations and remedial studies. USX accrues for environmental
remediation activities when the responsibility to remediate is probable and the
amount of associated costs is reasonably determinable. As environmental
remediation matters proceed toward ultimate resolution or as additional
remediation obligations arise, charges in excess of those previously accrued may
be required.
Effective January 1, 1997, USX adopted SOP 96-1. USX operating income in
the first nine months of 1997 included first quarter charges of $27 million (net
of expected recoveries) related to adoption, primarily accruals of post-closure
monitoring costs, study costs and administrative costs. See Note 1 to the
Consolidated Financial Statements for additional discussion.
Operating income in the first nine months of 1997 also included net
favorable effects of $16 million related to other environmental accrual
adjustments.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments involving a variety of matters,
including laws and regulations relating to the environment (see Note 14 to the
Consolidated Financial Statements for a discussion of certain of these matters).
The ultimate resolution of these contingencies could, individually or in the
aggregate, be material to the Consolidated Financial Statements. However,
management believes that USX will remain a viable and competitive enterprise
even though it is possible that these contingencies could be resolved
unfavorably. See discussion of Liquidity herein.
<PAGE> 25
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Outlook
- -------
USX management expects that the closing of the previously mentioned sale of
USX's stock in the Delhi Companies to Koch Midstream Enterprises, Inc., will
occur in November, 1997, with an effective date of October 31, 1997, subject to
receipt of regulatory approval and satisfaction of other customary conditions.
An estimated $84 million aftertax gain from the sale of the Delhi Companies will
be recorded in the fourth quarter of 1997, upon closing of the transaction. For
more information on this transaction see Outlook in Management's Discussion and
Analysis of Financial Condition and Results of Operations for the Delhi Group.
USX continues to evaluate the extent to which Year 2000 compliance could
affect its business operations, and is implementing modifications (including
replacement and revision of affected software), and contacting suppliers and
vendors, in order to avoid business interruption or creation of erroneous
results. Based on information available at this time, management believes that
incremental costs of compliance will not be material to the operating results of
USX. The discussion of USX's efforts and management's expectations relating to
the effect of Year 2000 compliance on operating results are forward-looking
statements. Actual results could be materially different because USX's ability
to achieve Year 2000 compliance and the level of incremental costs associated
therewith could be adversely affected by, among other things, the availability
and cost of programming and testing resources, vendors' ability to modify
proprietary software and unanticipated problems identified in the ongoing
compliance review. In addition, USX has limited or no control over comparable
corrective actions taken by entities with which it interacts. Therefore, Year
2000 compliance problems experienced by these entities could adversely affect
the operating results of USX.
In November, USX gave notice to the buyers of its Marathon Group and Delhi
Group accounts receivables program that it intends to reduce the amount sold
under the agreement to zero by December 31, 1997. The amount sold under
the program that had not been collected as of September 30, 1997, was $390
million. See Note 12 to the Consolidated Financial Statements for additional
discussion of this agreement.
On November 10, 1997, USX announced that it will redeem all of its
outstanding 5 3/4% Convertible Subordinated Debentures Due 2001, on December 12,
1997. At September 30, 1997, $176 million aggregate principal amount of these
debentures was outstanding. USX will redeem the debentures at a price of $1,000
per $1,000 principal amount plus accrued interest to the redemption date.
See Outlook in Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Marathon Group, the U. S. Steel Group and the
Delhi Group.
Accounting Standard
- -------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"), which changes the computation and presentation of net income per share.
USX will adopt SFAS No. 128 in the fourth quarter of 1997, as required. While
restatement for prior-periods is required by the standard, net income per share
presented for each class of USX Common Stock for the third quarter and first
nine months of 1997 and for the years 1996 and 1995 is not expected to change
materially.
<PAGE> 26
<TABLE>
USX CORPORATION
FINANCIAL STATISTICS (Unaudited)
--------------------------------
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
-------------- --------------
(Dollars in millions) 1997 1996 1997 1996
- ------------------------------------------------------------------------------
REVENUES
<C> <C> <C> <C> <C>
Marathon Group $3,929 $4,195 $11,786 $11,893
U. S. Steel Group 1,722 1,611 5,063 4,782
Eliminations (22) (24) (83) (62)
------- ------- ------- -------
Total (a) $5,629 $5,782 $16,766 $16,613
OPERATING INCOME
Marathon Group $345 $318 $790 $929
U. S. Steel Group 184 103 481 185
------ ------ ------ ------
Total (a) $529 $421 $1,271 $1,114
CAPITAL EXPENDITURES
Marathon Group $263 $176 $652 $426
U. S. Steel Group 59 91 176 249
Delhi Group 21 13 59 55
------ ------ ------ ------
Total $343 $280 $887 $730
INVESTMENTS IN (CASH FROM) EQUITY AFFILIATES - NET
Marathon Group $60 $9 $197 $11
U. S. Steel Group 5 (5) 20 (10)
------ ------ ------ ------
Total $65 $4 $217 $1
<FN>
(a)The financial results of the Delhi Group have been classified as discontinued
operations for all periods presented in the Consolidated Statement of
Operations.
</TABLE>
<PAGE> 27
Part I - Financial Information (Continued):
<TABLE>
B. Marathon Group
MARATHON GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions, except per share amounts) 1997 1996* 1997 1996*
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $3,929 $4,195 $11,786 $11,893
OPERATING COSTS:
Cost of sales (excludes items shown below) 2,523 2,897 7,760 8,069
Selling, general and administrative expenses 96 75 263 235
Depreciation, depletion and amortization 163 167 497 522
Taxes other than income taxes 788 804 2,210 2,231
Exploration expenses 55 30 129 86
Inventory market valuation charges (credits) (41) (96) 137 (179)
------ ------ ------ ------
Total operating costs 3,584 3,877 10,996 10,964
------ ------ ------ ------
OPERATING INCOME 345 318 790 929
Other income 10 1 33 29
Interest and other financial income 7 7 15 16
Interest and other financial costs (66) (75) (202) (238)
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 296 251 636 736
Less provision for estimated income taxes 104 87 218 232
------ ------ ------ ------
NET INCOME $192 $164 $418 $504
====== ====== ====== ======
MARATHON STOCK DATA:
Net income per share
- Primary $.66 $.57 $1.45 $1.75
- Fully diluted .66 .57 1.45 1.74
Dividends paid per share .19 .17 .57 .51
Weighted average shares, in thousands
- Primary 288,703 287,608 288,337 287,557
- Fully diluted 291,890 296,640 291,508 296,590
<FN>
*Certain amounts have been reclassified to conform to 1997 classifications.
Selected notes to financial statements appear on pages 30-33.
</TABLE>
<PAGE> 28
<TABLE>
MARATHON GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
---------------------------------
<CAPTION>
September 30 December 31
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $50 $32
Receivables, less allowance for doubtful
accounts of $2 and $2 513 613
Inventories 1,203 1,282
Other current assets 140 119
------ ------
Total current assets 1,906 2,046
Investments and long-term receivables 424 311
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$9,542 and $9,031 7,388 7,298
Prepaid pensions 296 280
Other noncurrent assets 234 216
------ ------
Total assets $10,248 $10,151
======= ======
LIABILITIES
Current liabilities:
Notes payable $70 $59
Accounts payable 1,247 1,385
Payroll and benefits payable 135 106
Accrued taxes 104 98
Deferred income taxes 108 155
Accrued interest 44 75
Long-term debt due within one year 401 264
------ ------
Total current liabilities 2,109 2,142
Long-term debt, less unamortized discount 2,365 2,642
Long-term deferred income taxes 1,291 1,178
Employee benefits 369 356
Deferred credits and other liabilities 315 311
Preferred stock of subsidiary 182 182
STOCKHOLDERS' EQUITY 3,617 3,340
------ ------
Total liabilities and stockholders' equity $10,248 $10,151
====== ======
<FN>
Selected notes to financial statements appear on pages 30-33.
</TABLE>
<PAGE> 29
<TABLE>
MARATHON GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
<CAPTION>
Nine Months Ended
September 30
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $418 $504
Adjustments to reconcile to net cash provided from
operating activities:
Depreciation, depletion and amortization 497 522
Exploratory dry well costs 57 38
Inventory market valuation charges (credits) 137 (179)
Pensions (14) (12)
Postretirement benefits other than pensions 8 11
Deferred income taxes 65 134
Gain on disposal of assets (29) (31)
Payment of amortized discount on zero coupon debentures(13) -
Changes in:
Current receivables 99 (112)
Inventories (58) 10
Current accounts payable and accrued expenses (136) 3
All other - net (40) 2
------ ------
Net cash provided from operating activities 991 890
------ ------
INVESTING ACTIVITIES:
Capital expenditures (652) (426)
Disposal of assets 39 126
Withdrawal from property exchange trusts - net 97 -
Investments in equity affiliates - net (197) (11)
------ ------
Net cash used in investing activities (713) (311)
------ ------
FINANCING ACTIVITIES:
Decrease in Marathon Group's share of
USX consolidated debt (72) (459)
Specifically attributed debt repayments (40) -
Marathon Stock issued 18 1
Dividends paid (164) (147)
------ ------
Net cash used in financing activities (258) (605)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2) -
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 18 (26)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 32 77
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $50 $51
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(238) $(295)
Income taxes paid, including settlements with other
groups (187) (44)
<FN>
Selected notes to financial statements appear on pages 30-33.
</TABLE>
<PAGE> 30
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited
but, in the opinion of management, reflects all adjustments necessary for a
fair presentation of the results for the periods covered. All such
adjustments are of a normal recurring nature unless disclosed otherwise.
These financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Additional information is contained in the USX Annual Report
on Form 10-K for the year ended December 31, 1996.
Effective January 1, 1997, USX adopted American Institute of Certified
Public Accountants Statement of Position No. 96-1, "Environmental
Remediation Liabilities" (SOP 96-1), which provides additional
interpretation of existing accounting standards related to recognition,
measurement and disclosure of environmental remediation liabilities. As a
result of adopting SOP 96-1 in the first quarter, the Marathon Group
recognized additional environmental remediation liabilities of $11 million.
Estimated receivables for recoverable costs related to adoption of SOP 96-1
were $4 million. The net unfavorable effect on Marathon Group first
quarter 1997 operating income was $7 million.
2. The financial statements of the Marathon Group include the financial
position, results of operations and cash flows for the businesses of
Marathon Oil Company and certain other subsidiaries of USX, and a portion
of the corporate assets and liabilities and related transactions which are
not separately identified with ongoing operating units of USX. These
financial statements are prepared using the amounts included in the USX
consolidated financial statements. Corporate amounts reflected in these
financial statements are determined based upon methods which management
believes to be reasonable. The accounting policies applicable to the
preparation of the financial statements of the Marathon Group may be
modified or rescinded in the sole discretion of the Board of Directors of
USX (Board), although the Board has no present intention to do so. The
Board may also adopt additional policies depending on the circumstances.
Although the financial statements of the Marathon Group, the U. S.
Steel Group and the Delhi Group separately report the assets, liabilities
(including contingent liabilities) and stockholders' equity of USX
attributed to each such group, such attribution of assets, liabilities
(including contingent liabilities) and stockholders' equity among the
Marathon Group, the U. S. Steel Group and the Delhi Group for the purpose
of preparing their respective financial statements does not affect legal
title to such assets and responsibility for such liabilities. Holders of
USX-Marathon Group Common Stock (Marathon Stock), USX-U. S. Steel Group
Common Stock (Steel Stock) and USX-Delhi Group Common Stock (Delhi Stock)
are holders of common stock of USX and continue to be subject to all the
risks associated with an investment in USX and all of its businesses and
liabilities. Financial impacts arising from one Group that affect the
overall cost of USX's capital could affect the results of operations and
financial condition of other groups. In addition, net losses of any Group,
as well as dividends or distributions on any class of USX Common Stock or
series of Preferred Stock and repurchases of any class of
<PAGE> 31
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
2. (Continued)
USX Common Stock or series of Preferred Stock at prices in excess of
par or stated value, will reduce the funds of USX legally available for
payment of dividends on all classes of Common Stock. Accordingly, the USX
consolidated financial information should be read in connection with the
Marathon Group financial information.
3. The method of calculating net income (loss) per share for the Marathon
Stock, Steel Stock and Delhi Stock reflects the Board's intent that the
separately reported earnings and surplus of the Marathon Group, the
U. S. Steel Group and the Delhi Group, as determined consistent with the
USX Certificate of Incorporation, are available for payment of dividends on
the respective classes of stock, although legally available funds and
liquidation preferences of these classes of stock do not necessarily
correspond with these amounts.
Primary net income per share is based on the weighted average number
of common shares outstanding plus common stock equivalents, provided they
are not antidilutive. Common stock equivalents result from assumed
exercise of stock options, where applicable.
Fully diluted net income per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of
stock options provided, in each case, the effect is not antidilutive.
4. The items below are included in both revenues and operating costs,
resulting in no effect on income.
<TABLE>
<CAPTION>
(In millions)
-------------------------------
Third Qtr. Nine Months
Ended Ended
September 30 September 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Consumer excise taxes on petroleum
products and merchandise $738 $757 $2,057 $2,090
Matching crude oil and refined product
buy/sell transactions settled in cash 539 706 1,845 2,028
</TABLE>
5. The financial statement provision for estimated income taxes and
related tax payments or refunds have been reflected in the Marathon Group,
the U. S. Steel Group and the Delhi Group financial statements in
accordance with USX's tax allocation policy for such groups. In general,
such policy provides that the consolidated tax provision and related tax
payments or refunds are allocated among the Marathon Group, the U. S. Steel
Group and the Delhi Group for group financial statement purposes, based
principally upon the financial income, taxable income, credits, preferences
and other amounts directly related to the respective groups.
<PAGE> 32
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (Continued)
The provision for estimated income taxes for the Marathon Group is
based on tax rates and amounts which recognize management's best estimate
of current and deferred tax assets and liabilities. Differences between
the combined interim tax provisions of the Marathon, U. S. Steel and Delhi
Groups and USX consolidated are allocated to each group based on the
relationship of the individual group provisions to the combined interim
provisions. The Marathon Group's third quarter 1997 provision for
estimated income taxes included a $9 million unfavorable effect (net of
federal income tax) to remeasure deferred state income tax liabilities due
to a change in tax law.
6. Inventories are carried at the lower of cost or market. Cost of
inventories of crude oil and refined products is determined under the last-
in, first-out (LIFO) method.
<TABLE>
<CAPTION>
(In millions)
----------------------
Sept. 30 December 31
1997 1996
-------- -----------
<S> <C> <C>
Crude oil and natural gas liquids $496 $463
Refined products and merchandise 767 746
Supplies and sundry items 77 73
------ ------
Total (at cost) 1,340 1,282
Less inventory market valuation reserve 137 -
------ ------
Net inventory carrying value $1,203 $1,282
====== ======
</TABLE>
The inventory market valuation reserve reflects the extent that the
recorded LIFO cost basis of crude oil and refined products inventories
exceeds net realizable value. The reserve is decreased to reflect
increases in market prices and inventory turnover and increased to reflect
decreases in market prices. Changes in the inventory market valuation
reserve result in noncash charges or credits to operating income. For
additional information, see Outlook in the Marathon Group's Management's
Discussion and Analysis of Financial Condition and Results of Operations.
7. The Marathon Group participates in an agreement (the program) to sell
an undivided interest in certain accounts receivable subject to limited
recourse. Payments are collected from the sold accounts receivable; the
collections are reinvested in new accounts receivable for the buyers; and a
yield, based on defined short-term market rates, is transferred to the
buyers. At September 30, 1997, the amount sold under the program that had
not been collected was $340 million, which will be forwarded to the buyers
at the end of the agreement, or in the event of earlier contract
termination. Subsequent to the balance sheet date, USX gave notice to the
buyers of the Marathon Group's accounts receivable program that it intends
to reduce the amount sold under the agreement to zero by December 31,
1997.
<PAGE> 33
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments relating to the
Marathon Group involving a variety of matters, including laws and
regulations relating to the environment. Certain of these matters are
discussed below. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the Marathon Group
financial statements. However, management believes that USX will remain a
viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the Marathon Group. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The Marathon Group is subject to federal, state, local and foreign
laws and regulations relating to the environment. These laws generally
provide for control of pollutants released into the environment and require
responsible parties to undertake remediation of hazardous waste disposal
sites. Penalties may be imposed for noncompliance. At September 30, 1997,
and December 31, 1996, accrued liabilities for remediation totaled $52
million and $37 million, respectively. It is not presently possible to
estimate the ultimate amount of all remediation costs that might be
incurred or the penalties that may be imposed. Receivables for recoverable
costs from certain states, under programs to assist companies in cleanup
efforts related to underground storage tanks at retail marketing outlets,
were $41 million at September 30, 1997, and $23 million at December 31,
1996.
For a number of years, the Marathon Group has made substantial capital
expenditures to bring existing facilities into compliance with various laws
relating to the environment. In the first nine months of 1997 and for the
years 1996 and 1995, such capital expenditures totaled $53 million,
$66 million and $50 million, respectively. The Marathon Group anticipates
making additional such expenditures in the future; however, the exact
amounts and timing of such expenditures are uncertain because of the
continuing evolution of specific regulatory requirements.
At September 30, 1997, and December 31, 1996, accrued liabilities for
platform abandonment and dismantlement totaled $126 million and $118
million, respectively.
Guarantees by USX of the liabilities of affiliated entities of the
Marathon Group totaled $51 million at September 30, 1997. As of September
30, 1997, the largest guarantee for a single affiliate was $45 million.
At September 30, 1997, the Marathon Group's pro rata share of
obligations of LOOP LLC and various pipeline affiliates secured by
throughput and deficiency agreements totaled $170 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 September 30, 1997, contract commitments for the Marathon Group's
capital expenditures for property, plant and equipment totaled $384 million
compared with $388 million at December 31, 1996.
<PAGE> 34
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The Marathon Group includes Marathon Oil Company ("Marathon") and certain
other subsidiaries of USX which are engaged in worldwide exploration,
production, transportation and marketing of crude oil and natural gas; domestic
refining, marketing and transportation of petroleum products; and power
generation. Management's Discussion and Analysis should be read in conjunction
with the third quarter 1997 USX consolidated financial information and the
Marathon Group Financial Statements and selected notes. The discussion of
Results of Operations should be read in conjunction with the Supplemental
Statistics provided on page 42.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting the
businesses of the Marathon Group. These statements typically contain words such
as "believes", "estimates", "expects" or similar words indicating that future
outcomes are uncertain. In accordance with "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, these statements are
accompanied by cautionary language identifying important factors, though not
necessarily all such factors, that could cause future outcomes to differ
materially from those set forth in forward-looking statements.
Results of Operations
- ---------------------
Revenues for the third quarter and first nine months of 1997 and 1996 are
summarized in the following table:
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Refined products $1,854 $1,793 $5,264 $5,111
Merchandise 276 270 780 755
Liquid hydrocarbons 205 346 713 894
Natural gas 270 275 990 867
Transportation and other 47 48 137 148
------ ------ ------ ------
Subtotal 2,652 2,732 7,884 7,775
Matching crude oil and refined product buy/sell
transactions settled in cash (a) 539 706 1,845 2,028
Consumer excise taxes on petroleum products and
merchandise (a) 738 757 2,057 2,090
------ ------ ------ ------
Total Revenues $3,929 $4,195 $11,786 $11,893
====== ====== ====== ======
<FN>
- --------
(a)Included in both revenues and operating costs, resulting in no effect on
income.
</TABLE>
Revenues (excluding matching buy/sell transactions and excise taxes)
decreased by $80 million in the third quarter of 1997 from the comparable prior-
year period, primarily reflecting lower worldwide liquid hydrocarbon volumes and
prices, reduced average refined product prices and lower international natural
gas volumes, partly offset by higher volumes of refined products. For the first
nine months of 1997,
<PAGE> 35
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
revenues increased by $109 million from the comparable prior-year period, as
increased sales volumes of refined products and domestic natural gas and
improved worldwide natural gas and refined product prices were partially offset
by reduced volumes of worldwide liquid hydrocarbons and international natural
gas.
Operating income and certain items included in operating income for the
third quarter and first nine months of 1997 and 1996 are set forth in the
following table:
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Operating income $345 $318 $790 $929
Less: Certain favorable (unfavorable) items
IMV reserve adjustment (a) 41 96 (137) 179
Charges for withdrawal from MPA (b) - - - (10)
------ ------ ------ ------
Subtotal 41 96 (137) 169
------ ------ ------ ------
Operating income adjusted to exclude above items $304 $222 $927 $760
====== ====== ====== ======
- --------
<FN>
(a)The inventory market valuation ("IMV") reserve reflects the extent to which
the recorded LIFO cost basis of crude oil and refined products inventories
exceeds net realizable value. For additional discussion of this noncash
adjustment, see Outlook herein.
(b)Marine Preservation Association ("MPA") is a non-profit oil spill response
group.
</TABLE>
Adjusted operating income in the third quarter of 1997 increased by $82
million from last year's third quarter, due primarily to higher average margins
on refined products, partially offset by lower prices and volumes of worldwide
liquid hydrocarbons, higher worldwide exploration expense and increased
administrative expenses. Adjusted operating income in the first nine months of
1997 increased by $167 million from the first nine months of 1996. This
improvement mainly resulted from higher average refined product margins and
higher worldwide natural gas prices, partially offset by reduced worldwide
liquid hydrocarbon production and prices, higher worldwide exploration expense
and increased administrative expenses.
Operating income for domestic exploration and production ("upstream")
decreased by $49 million in the third quarter and by $20 million in the first
nine months of 1997 from the comparable 1996 periods. The third quarter decline
primarily reflected lower liquid hydrocarbon and natural gas prices and
increased exploration expense. The unfavorable change in third quarter gas
prices was mainly due to an adjustment relating to a contract dispute on gas
delivered during the first six months of 1997. The decrease in operating
results for the first nine months was primarily due to lower liquid hydrocarbon
production and prices and higher exploration expense, partially offset by
increased natural gas production and prices. The lower liquid hydrocarbon
volumes were mostly due to the fourth quarter 1996 disposal of oil producing
properties in Alaska, while the increase in gas volumes was mainly attributable
to the Cotton Valley Pinnacle Reef play in east Texas.
<PAGE> 36
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
International upstream's 1997 operating income decreased by $47 million for
the third quarter and by $42 million for the first nine months as compared to
the similar periods in 1996. The third quarter decline primarily reflected
lower natural gas volumes, mainly in Norway and Ireland, lower liquid
hydrocarbon liftings in the United Kingdom, increased exploration expense and
lower liquid hydrocarbon prices. The decrease in the first nine months of 1997
was mainly due to lower liquid hydrocarbon liftings and natural gas volumes and
higher exploration expense, partially offset by lower pipeline and terminal
expenses and reduced depreciation, depletion and amortization expense, also due
largely to the lower volumes, and higher gas prices. Similar to the third
quarter, the decrease in liquid hydrocarbon volumes primarily reflected lower
liftings in the U.K. North Sea, while the lower natural gas volumes were mainly
attributable to offshore fields in Norway and Ireland.
Operating income for refining, marketing and transportation ("downstream")
operations increased by $193 million for the third quarter and by $280 million
for the first nine months of 1997 from the comparable 1996 periods, primarily
reflecting higher refined product margins. For the third quarter and first nine
months, the improvement in margins was mainly attributable to a decline in crude
oil and other feedstock acquisition costs, while the first nine months of 1997
also benefited from an increase in average refined product prices.
Administrative expenses increased by $16 million for the third quarter and
by $42 million for the first nine months of 1997 from the similar periods in
1996. The third quarter increase primarily reflected higher accruals for stock
appreciation rights ("SARs") due to an increase in the market price of USX-
Marathon Group Common Stock. In addition to higher SARs accruals, the first
nine months of 1997 also included increased accruals for other employee benefit
and compensation plans, including Marathon's performance-based variable pay
plan.
Other income in the first nine months of 1997 and 1996 included gains of
$15 million and $20 million, respectively, on the sales of interests in certain
domestic pipeline companies and other investments.
Net interest and other financial costs in the first nine months of 1997
decreased by $35 million from the comparable 1996 period, mainly due to lower
average debt levels.
Net income for the third quarter increased by $28 million in 1997 from 1996
and decreased by $86 million in the first nine months of 1997 as compared to the
similar 1996 period. Excluding the after-tax effects of the inventory market
valuation adjustment and other special items, financial results increased by $62
million for the third quarter and by $119 million for the first nine months in
1997 from 1996, primarily reflecting the factors discussed above.
Cash Flows
- ----------
Net cash provided from operating activities was $991 million in the first
nine months of 1997, compared with $890 million in the first nine months of
1996. Excluding first quarter 1996 payments of $39 million related to certain
state tax issues, net cash from operating activities increased by $62 million,
mainly reflecting improved net income (excluding the IMV reserve adjustment and
other noncash items), partially offset by unfavorable working capital changes,
including increased income tax payments.
<PAGE> 37
MARATHON 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 nine
months of 1997 totaled $652 million, compared with $426 million in the
comparable 1996 period. Expenditures in both periods, as well as the increase
from last year, were primarily attributable to domestic upstream projects,
including the following Gulf of Mexico developments - Viosca Knoll 786
("Petronius"), Green Canyon 244 ("Troika"), Ewing Bank 963 ("Arnold") and Ewing
Bank 917 ("Oyster"). Contract commitments for capital expenditures were $384
million at September 30, 1997, compared with $388 million at year-end 1996.
Cash from the disposal of assets was $39 million in the first nine months
of 1997, compared with $126 million in the first nine months of 1996. Proceeds
in 1997 were primarily from the sales of interests in various domestic upstream
properties, certain cost-basis investments and an interest in a domestic
pipeline company. Proceeds in 1996 were mainly from the sales of interests in
oil and gas production properties in Indonesia and Tunisia and an interest in a
domestic pipeline company.
The net withdrawal from property exchange trusts of $97 million in the
first nine months of 1997 mainly represents cash withdrawn from an interest-
bearing escrow account that was established in the fourth quarter of 1996 in
connection with the disposal of oil production properties in Alaska.
Investments in equity affiliates of $197 million in the first nine months
of 1997 mainly reflected funding of equity affiliates' capital projects,
primarily the Sakhalin II project in Russia and the Nautilus natural gas
pipeline system in the Gulf of Mexico. Also included were Marathon's
acquisition of an additional 7.5% interest in Sakhalin Energy Investment Company
Ltd. (which brings its total interest to 37.5%), investment in the Odyssey crude
oil pipeline system in the Gulf of Mexico (with a 29% interest) and acquisition
of a 50% ownership in a power generation company in Ecuador.
Financial obligations decreased by $112 million in the first nine months of
1997 as net cash provided from operating activities, trust withdrawals and asset
disposals exceeded cash used for capital expenditures, investments in equity
affiliates 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.
Dividends paid in the first nine months of 1997 increased by $17 million
from the first nine months of 1996 reflecting the two-cents-per-share increase
in the quarterly USX-Marathon Group Common Stock dividend rate, initially
declared in October 1996.
Liquidity
- ---------
For discussion of USX's liquidity and capital resources, see USX
Consolidated Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
The Marathon Group has incurred and will continue to incur substantial
capital, operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. To the extent these expenditures, as with
all costs, are not ultimately reflected in the prices of the Marathon Group's
products
<PAGE> 38
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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
20 waste sites related to the Marathon Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of
September 30, 1997. In addition, there are 9 sites related to the Marathon
Group where USX has received information requests or other indications that USX
may be a PRP under CERCLA but where sufficient information is not presently
available to confirm the existence of liability. There are also 68 additional
sites, excluding retail marketing outlets, related to the Marathon 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 Marathon
Group accrues for environmental remediation activities when the responsibility
to remediate is probable and the amount of associated costs is reasonably
determinable. As environmental remediation matters proceed toward ultimate
resolution or as additional remediation obligations arise, charges in excess of
those previously accrued may be required.
Effective January 1, 1997, USX adopted the American Institute of Certified
Public Accountants Statement of Position No. 96-1, "Environmental Remediation
Liabilities" ("SOP 96-1"). Operating income for the first nine months of 1997
included first quarter charges of $7 million (net of expected recoveries)
related to such adoption, primarily for accruals of post-closure monitoring
costs, study costs and administrative costs. See Note 1 to the Marathon Group
Financial Statements for additional discussion.
Accrued liabilities for remediation totaled $52 million at September 30,
1997, an increase of $15 million from December 31, 1996, due primarily to first
quarter accrual adjustments for adoption of SOP 96-1 and accruals related to
retail marketing outlets. Receivables for expected recoveries totaled $41
million at September 30, 1997, an increase of $18 million from December 31,
1996, due mainly to first quarter accrual adjustments reflecting an increase in
the estimated portion of costs that are ultimately recoverable, and accruals for
recoveries associated with adoption of SOP 96-1. See Note 8 to the Marathon
Group Financial Statements.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the Marathon Group
involving a variety of matters, including laws and regulations relating to the
environment (see Note 8 to the Marathon Group Financial Statements for a
discussion of certain of these matters). The ultimate resolution of these
contingencies could, individually or in the aggregate, be material to the
Marathon Group Financial Statements. However, management believes that USX will
remain a viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the Marathon Group. See
discussion of Liquidity in USX Consolidated Management's Discussion and Analysis
of Financial Condition and Results of Operations.
<PAGE> 39
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Outlook
- -------
The outlook regarding the Marathon Group's revenues, margins and income is
largely dependent upon future prices and volumes of crude oil, natural gas and
refined products. Prices have historically been volatile and have frequently
been driven by unpredictable changes in supply and demand resulting from
fluctuations in economic activity and political developments in the world's
major oil and gas producing areas, including OPEC member countries. Any
substantial decline in such prices could have a material adverse effect on the
Marathon Group's results of operations. A prolonged decline in such prices
could also adversely affect the quantity of crude oil and natural gas reserves
that can be economically produced and the amount of capital available for
exploration and development.
Relative to the changing levels of commodity prices, when U.S. Steel
Corporation acquired Marathon Oil Company in March 1982, crude oil and refined
product prices were at historically high levels. In applying the purchase
method of accounting, Marathon's crude oil and refined product inventories were
revalued by reference to current prices at the time of acquisition. This became
the new LIFO cost basis of the inventories, which has been maintained since the
1982 acquisition. Generally accepted accounting principles require that
inventories be valued at lower of cost or market. Accordingly, Marathon has
established an IMV reserve to reduce the LIFO cost basis of these inventories on
a quarterly basis, to the extent necessary, to current market value.
Adjustments to the IMV reserve result in noncash charges or credits to operating
income. These adjustments affect the comparability of financial results from
period to period as well as comparisons with other energy companies, which may
not have such adjustments. The IMV reserve adjustments have been separately
reported, on a consistent basis, as a component of operating results and
separately identified in management's discussion of operations.
Commodity prices have fluctuated widely and, since 1986, have generally
remained below prices that existed at the time of the 1982 acquisition,
resulting in periodic adjustments to the LIFO cost basis of the inventories. At
December 31, 1996, market prices exceeded LIFO cost, and no IMV reserve was
required. At
September 30, 1997, LIFO cost exceeded market prices by $137 million, resulting
in a corresponding charge to operating income in the first nine months of 1997
($41 million credit in the third quarter). During the first nine months of
1996, favorable market price movements resulted in a $179 million credit to
operating income ($96 million credit in the third quarter). This $316 million
variance in operating income between the two nine-month periods ($55 million
variance for the third quarter) affects the comparability of reported financial
results. In management's opinion, the Marathon Group's operating performance
should be evaluated exclusive of the IMV reserve adjustments, which management
believes provides a more indicative view of the profit and cash flow performance
of the Group.
As commodity prices continue to fluctuate, future quarterly IMV reserve
adjustments can be reasonably expected. In addition to reported financial
results, management believes that the Marathon Group's future operating
performance should be evaluated exclusive of the impact of these adjustments,
whether favorable or unfavorable.
<PAGE> 40
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In August 1997, Marathon announced that the Vermillion Creek Deep No. 1
exploratory well in Wyoming commenced gas sales at a rate in excess of 12
million cubic feet per day ("mmcfd") on July 29, 1997. Marathon has an 89%
working interest in this discovery well, subject to reversionary interests at
payout, which would reduce Marathon's interest to 54%. Pursuant to terms of an
exploration agreement, Marathon has an opportunity to earn up to a 50% working
interest in 74,000 acres in the Vermillion Basin of Wyoming and Colorado through
additional seismic acquisition and drilling.
In October, Marathon confirmed successful delineation of an earlier
discovery at Green Canyon Block 112 in the Gulf of Mexico with an appraisal well
on adjacent Green Canyon Block 113. The Green Canyon Block 113 No. 1 well,
which has been suspended, encountered 120 feet of net oil pay. The new field is
about nine miles away from a platform operated by Marathon's co-venturer.
Marathon has 65% and 20% interests in Green Canyon Blocks 112 and 113,
respectively.
Also in Gulf of Mexico operations, successful infill drilling during the
third quarter of 1997 has raised liquid hydrocarbon production at the Ewing Bank
873 field from 27,000 gross barrels per day ("bpd") to 46,000 gross bpd.
Marathon is the operator with a 66.7% interest. To handle the addition of two
subsea developments, Oyster and Arnold, that will be tied back to the Ewing Bank
873 platform, a project is currently underway to increase the platform's
processing capacity to 70,000 bpd of liquids and 50 mmcfd of gas. Marathon is
the operator of both subsea developments with a 66.7% interest in Ewing Bank
917, expected to come on stream in January 1998, and a 62.5% interest in Ewing
Bank 963, due to start up in April 1998.
On October 20, 1997, the first well of the West Brae/Sedgwick joint
development in the U.K. North Sea began producing at a rate of 9,500 gross bpd
of oil. This well is the first of four planned subsea wells to be tied back to
the Marathon-operated Brae A platform. Average production of 22,500 gross bpd
is expected for full year 1998 from this joint development of which Marathon is
the operator and has a 28.1% interest.
In October, Marathon announced an oil discovery in 150 feet of water,
offshore Gabon. The Tchatamba South No. 1 wildcat well flowed from two separate
intervals at a combined rate of 8,165 bpd. This discovery is located 10 miles
south of Marathon's Tchatamba Marine field, which is scheduled for first
production in January 1998. The well has been temporarily abandoned, and a
delineation well is currently underway. Marathon is the operator of this
concession with a 75% interest.
With respect to the Sakhalin II project in Russia, work is underway at a
South Korean shipyard to convert the Molikpaq drilling unit into a production
facility. In addition, a contract with a Russian shipyard for the fabrication
of a major structural support to be placed under the Molikpaq is on schedule and
in the final stages of completion. The Marathon Group holds a 37.5% interest in
Sakhalin Energy Investment Company Ltd. ("Sakhalin Energy"), an incorporated
joint venture company responsible for the overall management of the Sakhalin II
project. First oil production is planned for mid-1999.
In September, Marathon and a third party executed definitive agreements to
develop 800 million pounds per year of polymer grade propylene and polypropylene
facilities at Marathon's Garyville, Louisiana refinery. Marathon will build and
<PAGE> 41
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
operate facilities to produce polymer grade propylene from the current refinery
feedstock stream. The third party will construct the polypropylene facilities
and market its output. Both plants are expected to be operating by late third
quarter 1999.
Progress continues on the proposed joint venture, first announced in May
1997, that would combine the major elements of the Marathon Group's and Ashland
Inc.'s downstream operations. Due diligence work has been completed, and
definitive joint venture agreements are expected to be signed in December 1997.
Closing of the transaction is targeted for calendar year-end; however, various
permitting and regulatory matters may extend the actual closing into early 1998.
Marathon will have a 62% ownership interest and Ashland will have a 38% interest
in the new limited liability joint venture company, Marathon Ashland Petroleum
LLC.
In November, USX gave notice to the buyers of the Marathon Group's accounts
receivables program that it intends to reduce the amount sold under the
agreement to zero by December 31, 1997. This was done mainly in anticipation
of forming Marathon Ashland Petroleum LLC. The amount sold under the program
that had not been collected as of September 30, 1997 was $340 million. See
Note 7 to the Marathon Group Financial Statements for Additional discussion of
this agreement.
With respect to Year 2000 compliance, Marathon continues to identify,
analyze, modify and/or replace non-compliant systems, equipment and other
devices that utilize date/time-oriented software or computer chips. In
management's opinion, the incremental costs associated with this effort will not
be material to the operating results of the Marathon Group. The discussion of
Marathon's efforts and management's expectations relating to the effect of Year
2000 compliance on operating results are forward-looking statements. Actual
results could be materially different because Marathon's ability to achieve Year
2000 compliance and the level of incremental costs associated therewith could be
adversely affected by unanticipated problems identified in the ongoing
compliance review. In addition, Marathon has limited or no control over
comparable corrective actions by proprietary software vendors and other entities
with which it interacts; therefore, Year 2000 compliance problems experienced by
these entities could adversely affect the operating results of the Marathon
Group.
The above forward-looking statements regarding discoveries, projects and
dates of initial production are based on a number of assumptions, including
(among others) prices, supply and demand, regulatory constraints, reserve
estimates, drilling rig availability and geological and operating
considerations. In addition, development of new production properties in
countries outside the United States may require protracted negotiations with
host governments and is frequently subject to political considerations, such as
tax regulations, which could adversely affect the economics of projects. With
respect to the Sakhalin II project in Russia, Sakhalin Energy continues to seek
to have certain Russian laws and normative acts at the Russian Federation and
local levels brought into compliance with the existing Production Sharing
Agreement Law. To the extent these assumptions prove inaccurate and
negotiations, other considerations and legal developments are not satisfactorily
resolved, actual results could be materially different than present
expectations.
Accounting Standard
- -------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"), which changes the computation and presentation of net income per share.
USX will adopt SFAS No. 128 in the fourth quarter of 1997, as required. While
restatement for prior-periods is required by the standard, net income per share
presented for USX-Marathon Group Common Stock for the third quarter and first
nine months of 1997 and for the years 1996 and 1995 is not expected to change
materially.
<PAGE> 42
<TABLE>
MARATHON GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
-----------------------------------
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1997 1996* 1997 1996*
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING INCOME (LOSS)
Exploration & Production
Domestic $86 $135 $376 $396
International 39 86 212 254
Refining, Marketing & Transportation 227 34 474 194
Gas Gathering and Processing 1 - 6 5
Administrative (49) (33) (141) (99)
------ ------ ------ ------
$304 $222 $927 $750
Inventory Market Val. Res. Adjustment. 41 96 (137) 179
------ ------ ------ ------
Total Marathon Group $345 $318 $790 $929
CAPITAL EXPENDITURES $263 $176 $652 $426
INVESTMENTS IN EQUITY AFFILIATES-NET 60 9 197 11
OPERATING STATISTICS
Net Liquid Hydrocarbon Production (a):
Domestic 113.8 119.2 113.9 122.6
International 47.2 55.0 50.7 60.3
------ ------ ------ ------
Worldwide 161.0 174.2 164.6 182.9
Net Natural Gas Production (b):
Domestic 698.2 648.4 716.8 663.1
International - Equity 340.3 437.2 425.6 496.1
International - Other (c) 35.3 31.6 33.0 32.9
------- ------- ------- -------
Total Consolidated 1,073.8 1,117.2 1,175.4 1,192.1
Equity Affiliate 33.4 32.6 42.5 43.8
------- ------- ------- -------
Worldwide 1,107.2 1,149.8 1,217.9 1,235.9
Average Equity Sales Prices (d):
Liquid Hydrocarbons (per Bbl) Domestic $15.94 $18.90 $17.10 $17.71
International 18.12 20.37 18.89 19.36
Natural Gas (per Mcf)
Domestic $1.87(f)$2.05 $2.14 $2.03
International 1.87 1.93 2.01 1.90
Natural Gas Sales (b)(e):
Domestic 1,074.1 952.6 1,147.2 1,005.2
International 375.6 468.8 458.6 529.0
------- ------- ------- -------
Total Consolidated 1,449.7 1,421.4 1,605.8 1,534.2
Equity Affiliate 33.4 32.6 42.5 43.8
------- ------- ------- -------
Worldwide 1,483.1 1,454.0 1,648.3 1,578.0
Crude Oil Refined (a) 562.6 520.5 513.2 511.2
Refined Products Sold (a) 793.3 789.1 758.8 766.3
Matching buy/sell volumes included in above (a) 35.9 65.9 48.4 73.3
- ------------
<FN>
(a) Thousands of barrels per day
(b) Millions of cubic feet per day
(c) Represents gas acquired for injection and subsequent resale
(d) Prices exclude gains and losses from hedging activities
(e) Represents equity, royalty and resale volumes
(f) Includes a $(.13) adjustment relating to a contract dispute on gas
delivered during the first six months of 1997
* Certain amounts have been reclassified to conform to 1997
classifications
</TABLE>
<PAGE> 43
<TABLE>
Part I - Financial Information (Continued):
C. U. S. Steel Group
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
------------------------------------
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions, except per share amounts) 1997 1996 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $1,722 $1,611 $5,063 $4,782
OPERATING COSTS:
Cost of sales (excludes items shown below) 1,433 1,423 4,275 4,322
Selling, general and administrative
expenses (credits) (30) (41) (100) (121)
Depreciation, depletion and amortization 72 69 225 222
Taxes other than income taxes 63 57 182 174
------ ------ ------ ------
Total operating costs 1,538 1,508 4,582 4,597
------ ------ ------ ------
OPERATING INCOME 184 103 481 185
Gain on affiliate stock offering - - - 53
Other income 13 20 41 41
Interest and other financial income 1 - 2 3
Interest and other financial costs (23) (30) (73) (88)
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 175 93 451 194
Less provision for estimated income taxes 59 23 151 46
------ ------ ------ ------
NET INCOME 116 70 300 148
Noncash credit from exchange of preferred stock - - 10 -
Dividends on preferred stock (2) (6) (10) (17)
------ ------ ------ ------
NET INCOME APPLICABLE TO STEEL STOCK $114 $64 $300 $131
====== ====== ====== ======
STEEL STOCK DATA:
Net income per share
- Primary $1.32 $.76 $3.50 $1.56
- Fully diluted 1.25 .75 3.26 1.55
Dividends paid per share .25 .25 .75 .75
Weighted average shares, in thousands
- Primary 85,849 84,487 85,502 83,781
- Fully diluted 93,947 86,422 93,607 85,588
<FN>
Selected notes to financial statements appear on pages 46-51.
</TABLE>
<PAGE> 44
<TABLE>
U. S. STEEL GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
------------------------------------
<CAPTION>
September 30 December 31
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $17 $23
Receivables, less allowance for doubtful
accounts of $5 and $23 517 580
Inventories 714 648
Deferred income tax benefits 231 177
------ ------
Total current assets 1,479 1,428
Investments and long-term receivables,
less reserves of $17 and $17 647 621
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$5,780 and $5,796 2,488 2,551
Long-term deferred income tax benefits 144 217
Prepaid pensions 1,914 1,734
Other noncurrent assets 29 29
------ ------
Total assets $6,701 $6,580
====== ======
LIABILITIES
Current liabilities:
Notes payable $10 $18
Accounts payable 700 667
Payroll and benefits payable 407 365
Accrued taxes 167 154
Accrued interest 9 22
Long-term debt due within one year 62 73
------ ------
Total current liabilities 1,355 1,299
Long-term debt, less unamortized discount 505 1,014
Employee benefits 2,418 2,430
Deferred credits and other liabilities 534 207
Preferred stock of subsidiary 64 64
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust 182 -
STOCKHOLDERS' EQUITY
Preferred stock 3 7
Common stockholders' equity 1,640 1,559
------ ------
Total stockholders' equity 1,643 1,566
------ ------
Total liabilities and stockholders' equity $6,701 $6,580
====== ======
<FN>
Selected notes to financial statements appear on pages 46-51.
</TABLE>
<PAGE> 45
<TABLE>
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------
<CAPTION>
Nine Months Ended
September 30
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $300 $148
Adjustments to reconcile to net cash provided
from (used in) operating activities:
Depreciation, depletion and amortization 225 222
Pensions (184) (146)
Postretirement benefits other than pensions 3 14
Deferred income taxes 37 58
Gain on disposal of assets (28) (8)
Gain on affiliate stock offering - (53)
Payment of amortized discount on zero coupon debentures (3) -
Changes in:
Current receivables 47 30
Inventories (66) (123)
Current accounts payable and accrued expenses 70 (215)
All other - net (48) (5)
------ ------
Net cash provided from (used in)
operating activities 353 (78)
------ ------
INVESTING ACTIVITIES:
Capital expenditures (176) (249)
Disposal of assets 390 144
Investments in equity affiliates - net (20) 10
All other - net 9 -
------ ------
Net cash provided from (used in)
investing activities 203 (95)
------ ------
FINANCING ACTIVITIES:
Increase (decrease) in U. S. Steel Group's share of USX
consolidated debt (513) 175
Specifically attributed debt repayments (6) (4)
Steel Stock issued 29 47
Dividends paid (72) (77)
------ ------
Net cash provided from (used in)
financing activities (562) 141
------ ------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6) (32)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 23 52
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $17 $20
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(82) $(107)
Income taxes paid, including settlements with
other groups (88) (55)
NONCASH TRANSACTION - mandatorily redeemable securities
exchanged for preferred stock 182 -
<FN>
Selected notes to financial statements appear on pages 46-51.
</TABLE>
<PAGE> 46
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited
but, in the opinion of management, reflects all adjustments necessary for a
fair presentation of the results for the periods covered. All such
adjustments are of a normal recurring nature unless disclosed otherwise.
These financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Additional information is contained in the USX Annual Report
on Form 10-K for the year ended December 31, 1996.
Effective January 1, 1997, USX adopted American Institute of Certified
Public Accountants Statement of Position No. 96-1, "Environmental
Remediation Liabilities" (SOP 96-1), which provides additional
interpretation of existing accounting standards related to recognition,
measurement and disclosure of environmental remediation liabilities. As a
result of adopting SOP 96-1 in the first quarter, the U. S. Steel Group
identified additional environmental remediation liabilities of $35 million,
of which $28 million was discounted to a present value of $13 million and
$7 million was not discounted. Assumptions used in the calculation of the
present value amount included an inflation factor of 2% and an interest
rate of 7% over a range of 22 to 30 years. The unfavorable effect on first
quarter 1997 operating income was $20 million.
2. The financial statements of the U. S. Steel Group include the
financial position, results of operations and cash flows for all businesses
of USX other than the businesses, assets and liabilities included in the
Marathon Group or the Delhi Group, and a portion of the corporate assets
and liabilities and related transactions which are not separately
identified with ongoing operating units of USX. These financial statements
are prepared using the amounts included in the USX consolidated financial
statements. Corporate amounts reflected in these financial statements are
determined based upon methods which management believes to be reasonable.
The accounting policies applicable to the preparation of the financial
statements of the U. S. Steel Group may be modified or rescinded in the
sole discretion of the Board of Directors of USX (Board), although the
Board has no present intention to do so. The Board may also adopt
additional policies depending on the circumstances.
Although the financial statements of the U. S. Steel Group, the
Marathon Group and the Delhi Group separately report the assets,
liabilities (including contingent liabilities) and stockholders' equity of
USX attributed to each such group, such attribution of assets, liabilities
(including contingent liabilities) and stockholders' equity among the U. S.
Steel Group, the Marathon Group and the Delhi Group for purposes of
preparing their respective financial statements does not affect legal title
to such assets and responsibility for such liabilities. Holders of USX-
U. S. Steel Group Common Stock (Steel Stock), USX-Marathon Group Common
Stock (Marathon Stock) and USX-Delhi Group Common Stock (Delhi Stock) are
holders of common stock of USX and continue to be subject to all the risks
associated with an investment in USX and all of its businesses and
liabilities. Financial impacts arising from one Group that affect the
overall cost of USX's capital could affect the results of operations and
financial condition of other groups. In addition, net losses of any Group,
as well as dividends or distributions on any class of USX
<PAGE> 47
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
2. (Continued)
Common Stock or series of Preferred Stock and repurchases of any class
of USX Common Stock or series of Preferred Stock at prices in excess of par
or stated value, will reduce the funds of USX legally available for payment
of dividends on all classes of Common Stock. Accordingly, the USX
consolidated financial information should be read in connection with the U.
S. Steel Group financial information.
3. The method of calculating net income (loss) per share for the Steel
Stock, Marathon Stock and Delhi Stock reflects the Board's intent that the
separately reported earnings and surplus of the U. S. Steel Group, the
Marathon Group and the Delhi Group, as determined consistent with the USX
Certificate of Incorporation, are available for payment of dividends on the
respective classes of stock, although legally available funds and
liquidation preferences of these classes of stock do not necessarily
correspond with these amounts.
Primary net income per share is calculated by adjusting net income for
dividend requirements of preferred stock and the noncash credit on exchange
of preferred stock and is based on the weighted average number of common
shares outstanding plus common stock equivalents, provided they are not
antidilutive. Common stock equivalents result from assumed exercise of
stock options, where applicable.
Fully diluted net income per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of
stock options, provided in each case, the effect is not antidilutive.
4. Operating income includes net periodic pension credits of $114 million
and $123 million in the first nine months of 1997 and 1996, respectively,
($40 million and $42 million in the third quarter of 1997 and 1996,
respectively). These pension credits are primarily noncash and for the
most part are included in selling, general and administrative expenses.
5. On May 2, 1996, an aggregate of 6.9 million shares of RMI Titanium
Company (RMI) common stock was sold in a public offering at a price of
$18.50 per share and total net proceeds of $121 million. Included in the
offering were 2.3 million shares sold by USX for net proceeds of $40
million. The U. S. Steel Group recognized a total pretax gain in the
second quarter of 1996 of $53 million, of which $34 million was
attributable to the shares sold by USX and $19 million was attributable to
the increase in value of its investment as a result of the shares sold by
RMI. The income tax effect related to the total gain was $19 million. As
a result of this transaction, USX's ownership in RMI decreased from
approximately 50% to 27%. The U. S. Steel Group continues to account for
its investment in RMI under the equity method of accounting.
<PAGE> 48
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
6. In December 1996, USX issued $117 million of debt (notes) indexed to
the price of RMI common stock. At maturity in February 2000, USX must
exchange these notes for shares of RMI common stock, or redeem the notes
for the equivalent amount of cash. Interest and other financial costs
included a favorable adjustment to the carrying value of the indexed debt
of $6 million for the first nine months of 1997. There was no adjustment
for the third quarter 1997.
7. The financial statement provision for estimated income taxes and
related tax payments or refunds have been reflected in the U. S. Steel
Group, the Marathon Group and the Delhi Group financial statements in
accordance with USX's tax allocation policy for such groups. In general,
such policy provides that the consolidated tax provision and related tax
payments or refunds are allocated among the U. S. Steel Group, the Marathon
Group and the Delhi Group for group financial statement purposes, based
principally upon the financial income, taxable income, credits, preferences
and other amounts directly related to the respective groups.
The provision for estimated income taxes for the U. S. Steel Group is
based on tax rates and amounts which recognize management's best estimate
of current and deferred tax assets and liabilities. Differences between
the combined interim tax provisions of the U. S. Steel, Marathon and Delhi
Groups and USX consolidated are allocated to each group based on the
relationship of the individual group provisions to the combined interim
provisions.
8. Inventories are carried at the lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
<TABLE>
<CAPTION>
(In millions)
-----------------------
Sept. 30 December 31
1997 1996
-------- -----------
<S> <C> <C>
Raw materials $146 $124
Semi-finished products 312 309
Finished products 195 162
Supplies and sundry items 61 53
---- ----
Total $714 $648
==== ====
</TABLE>
9. The U. S. Steel Group participates in an agreement (the program) to
sell an undivided interest in certain accounts receivable subject to
limited recourse. Payments are collected from the sold accounts
receivable; the collections are
<PAGE> 49
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
9. (Continued)
reinvested in new accounts receivable for the buyers; and a yield,
based on defined short-term market rates, is transferred to the buyers. At
September 30, 1997, the amount sold under the program that had not been
collected was $350 million, which will be forwarded to the buyers at the
end of the agreement, or in the event of earlier contract termination. If
the U. S. Steel Group does not have a sufficient quantity of eligible
accounts receivable to reinvest in for the buyers, the size of the program
will be reduced accordingly. The buyers have rights to a pool of
receivables that must be maintained at a level of at least 115% of the
program size. In the event of a change in control of USX, as defined in
the agreement, the U. S. Steel Group may be required to forward payments
collected on sold accounts receivable to the buyers.
Prior to 1993, USX Credit, a division of USX, sold certain of its
loans receivable subject to limited recourse under an agreement that
expires in December 1997. USX Credit continues to collect payments from
the loans and transfer to the buyers principal collected plus yield based
on defined short-term market rates. At September 30, 1997, the balance of
sold loans receivable subject to recourse was $19 million. USX Credit is
not actively seeking new loans at this time. In the event of a change in
control of USX, as defined in the agreement, the U. S. Steel Group may be
required to provide cash collateral in the amount of the uncollected loans
receivable to assure compliance with the limited recourse provisions.
10.In the second quarter of 1997, USX exchanged approximately 3.9 million
6.75% Convertible Quarterly Income Preferred Securities (Trust Preferred
Securities) of USX Capital Trust I, a Delaware statutory business trust
(Trust), for an equivalent number of shares of its 6.50% Cumulative
Convertible Preferred Stock (6.50% Preferred Stock) (Exchange). The
Exchange resulted in the recording of Trust Preferred Securities at a fair
value of $182 million and a noncash credit to Retained Earnings of $10
million.
USX owns all of the common securities of the Trust, which was formed
for the purpose of the Exchange. (The Trust Common Securities and the
Trust Preferred Securities are together referred to as the Trust
Securities.) The Trust Securities represent undivided beneficial ownership
interests in the assets of the Trust, which consist solely of USX 6.75%
Convertible Junior Subordinated Debentures maturing March 31, 2037
(Debentures), having an aggregate principal amount equal to the aggregate
initial liquidation amount ($50.00 per security and $203 million in total)
of the Trust Securities issued by the Trust. Interest and principal
payments on the Debentures will be used to make quarterly distributions and
to pay redemption and liquidation amounts on the Trust Preferred
Securities. The quarterly distributions, which accumulate at the rate of
6.75% per annum on the Trust Preferred Securities and the accretion from
fair value to the initial liquidation amount, are charged to income and
included in interest and other financial costs.
<PAGE> 50
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
10. (Continued)
Under the terms of the Debentures, USX has the right to defer payment
of interest for up to 20 consecutive quarters and, as a consequence,
monthly distributions on the Trust Preferred Securities will be deferred
during such period. If USX exercises this right, then, subject to limited
exceptions, it may not pay any dividend or make any distribution with
respect to any shares of its capital stock.
The Trust Preferred Securities are convertible at any time prior to
the close of business on March 31, 2037, (unless such right is terminated
earlier under certain circumstances) at the option of the holder, into
shares of Steel Stock at a conversion price of $46.25 per share of Steel
Stock (equivalent to a conversion ratio of 1.081 shares of Steel Stock for
each Trust Preferred Security), subject to adjustment in certain
circumstances.
The Trust Preferred Securities may be redeemed at any time at the
option of USX, initially at a premium of 103.90% of the initial liquidation
amount through March 31, 1998, and thereafter, declining annually to the
initial liquidation amount on April 1, 2003 and thereafter. They are
mandatorily redeemable at March 31, 2037, or earlier under certain
circumstances.
Payments related to quarterly distributions and to the payment of
redemption and liquidation amounts on the Trust Preferred Securities by the
Trust are guaranteed by USX on a subordinated basis.
11. Effective June 1, 1997, the U. S. Steel Group entered into a strategic
partnership with two limited partners to acquire an interest in three coke
batteries at its Clairton (Pa.) Works and to operate and sell coke and
byproducts from those facilities. The U. S. Steel Group is the general
partner and is responsible for purchasing, operations and products
marketing. Proceeds as a result of the transaction were $361 million, and
deferred gains of $262 million at June 30, 1997 (included in deferred
credits and other liabilities) will be recognized over the life of the
partnership's assets. The U. S. Steel Group's partnership interest will be
accounted for under the equity method of accounting.
12. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments relating to the U.
S. Steel Group involving a variety of matters including laws and
regulations relating to the environment. Certain of these matters are
discussed below. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the U. S. Steel Group
financial statements. However, management believes that USX will remain a
viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the U. S. Steel Group. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
<PAGE> 51
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
12. (Continued)
The U. S. Steel Group is subject to federal, state and local laws and
regulations relating to the environment. These laws generally provide for
control of pollutants released into the environment and require responsible
parties to undertake remediation of hazardous waste disposal sites.
Penalties may be imposed for noncompliance. At September 30, 1997, and
December 31, 1996, accrued liabilities for remediation totaled $109 million
and $107 million, respectively. It is not presently possible to estimate
the ultimate amount of all remediation costs that might be incurred or the
penalties that may be imposed.
For a number of years, the U. S. Steel Group has made substantial
capital expenditures to bring existing facilities into compliance with
various laws relating to the environment. In the first nine months of 1997
and for the years 1996 and 1995, such capital expenditures totaled $31
million, $90 million and $55 million, respectively. The U. S. Steel Group
anticipates making additional such expenditures in the future; however, the
exact amounts and timing of such expenditures are uncertain because of the
continuing evolution of specific regulatory requirements.
Guarantees by USX of the liabilities of affiliated entities of the U.
S. Steel Group totaled $34 million at September 30, 1997. In the event
that any defaults of guaranteed liabilities occur, USX has access to its
interest in the assets of the affiliates to reduce U. S. Steel Group losses
resulting from these guarantees. As of September 30, 1997, the largest
guarantee for a single affiliate was $14 million.
At September 30, 1997, contract commitments for the U. S. Steel
Group's capital expenditures for property, plant and equipment totaled $109
million compared with $134 million at December 31, 1996.
<PAGE> 52
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 third quarter
1997 USX consolidated financial information and the U. S. Steel Group Financial
Statements and selected notes. The discussion of Results of Operations should
be read in conjunction with the Supplemental Statistics provided on page 61.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting the
businesses of the U. S. Steel Group. These statements typically contain words
such as "anticipates", "believes", "estimates", "expects" or similar words
indicating that future outcomes are not known with certainty and subject to risk
factors that could cause these outcomes to differ significantly from those
projected. In accordance with "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, these statements are accompanied by
cautionary language identifying important factors, though not necessarily all
such factors, that could cause future outcomes to differ materially from those
set forth in forward-looking statements.
Results of Operations
- ---------------------
Revenues for the U. S. Steel Group increased $111 million and $281 million
in the third quarter and first nine months of 1997, respectively, compared with
the same periods in 1996. These increases primarily reflected higher steel
shipment volumes and higher average realized steel prices.
<PAGE> 53
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Operating income and certain items included in operating income for the
third quarter and first nine months of 1997 and 1996 are set forth in the
following table:
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating income $184 $103 $481 $185
Less: certain favorable (unfavorable) items for
Effect of adoption of SOP 96-1 (a) - - (20) -
Certain other environmental accrual adj. - net - - 11 -
Gary Works No. 13 blast furnace repairs (b) - - - (39)
Certain legal accruals - - - (20)
----- ----- ----- -----
Subtotal - - (9) (59)
----- ----- ----- -----
Operating income adjusted to exclude above items $184 $103 $490 $244
===== ===== ===== =====
- ------
<FN>
(a) American Institute of Certified Public Accountants Statement of
Position No. 96-1, "Environmental Remediation Liabilities" ("SOP 96-1")
provides additional guidance on recognition, measurement and disclosure
of remediation liabilities. For further details, see Note 1 to the U. S.
Steel Group Financial Statements.
(b) Reflects repair of damages incurred during a break-out on April 2,
1996; excludes effects of business interruption.
</TABLE>
Adjusted operating income for the U. S. Steel Group increased $81 million
and $246 million in the third quarter and first nine months of 1997,
respectively, compared with the same periods in 1996. These increases were
primarily due to higher results from Steel and Related Businesses.
Operating income for Steel and Related Businesses increased $81 million and
$308 million in the third quarter and first nine months of 1997, respectively,
compared with the same periods in 1996. The increase in operating income in the
third quarter of 1997 resulted from the $25 million in final insurance
settlement payments related to the 1996 hearth breakout at the Gary (Ind.) Works
No. 13 blast furnace, higher steel shipment volumes, reduced costs and higher
average realized steel prices.
Results in the first nine months of 1996 included $39 million of charges
related to repair costs on the Gary (Ind.) Works No. 13 blast furnace which was
idled by a hearth breakout on April 2, 1996, and $16 million of charges for
unrelated accruals. Excluding these charges, first nine months of 1997
operating income increased $253 million from the same period in 1996. This
increase was primarily due to higher steel shipment volumes, higher average
realized steel prices, lower operating costs, operating efficiencies and a total
of $40 million in insurance settlement payments related to the 1996 hearth
breakout. In the third quarter and first nine months of 1996, operations were
negatively impacted by cost inefficiencies related to the planned and unplanned
outages at U. S. Steel's three largest blast furnaces. These outages resulted in
reduced shipments.
<PAGE 54>
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Operating income for Administrative and Other Businesses in the first nine
months of 1997 included charges of $9 million related to environmental accruals
and the adoption of SOP 96-1. Operating income for Administrative and Other
Businesses in the first nine months of 1996 included charges of $4 million
related to legal accruals. Excluding these charges, first nine months of 1997
operating income decreased $7 million from the same period of 1996 primarily due
to lower pension credits, partially offset by higher income from USX Credit and
real estate development and management. Administrative and Other Businesses
includes the portion of pension credits, postretirement benefit costs and
certain other expenses principally attributable to the former businesses of the
U. S. Steel Group as well as USX corporate general and administrative costs
allocated to the U. S. Steel Group.
The pension credits referred to in Administrative and Other Businesses,
combined with pension costs for ongoing operating units of the U. S. Steel
Group, resulted in net pension credits (which are primarily noncash) of $114
million and $123 million in the nine months of 1997 and 1996, respectively. The
amounts of these credits fluctuate over time primarily reflecting changes in the
expected long-term rate of return on plan assets and assumed discount rate on
the outstanding pension obligation. To the extent that these credits decline in
the future, operating income would be adversely affected.
Gain on affiliate stock offering totaled $53 million for the first nine
months of 1996. For further details, see Note 5 to the U. S. Steel Group
Financial Statements.
Other income in the third quarter of 1997 decreased $7 million compared
with the same period of 1996 due to lower income from affiliates.
Net interest and other financial costs for the third quarter and first nine
months of 1997 and 1996 are set forth in the following table:
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest and other financial income $1 $- $2 $3
Interest and other financial costs (23) (30) (73) (88)
------ ------ ------ ------
Net interest and other financial costs (22) (30) (71) (85)
Less:
Favorable (unfavorable) adjustment to
carrying value of indexed debt(a) - - 6 -
------ ------ ------ ------
Net interest and other financial costs
adjusted to exclude above item $(22) $(30) $(77) $(85)
====== ====== ====== ======
- ------
<FN>
(a) In December 1996, USX issued $117 million in aggregate principal
amount of 6.75% Notes Due February 1, 2000 ("indexed debt"),mandatorily
exchangeable at maturity for common stock of RMI Titanium Company ("RMI")
(or for the equivalent amount of cash, at USX's option). The carrying
value of indexed debt is adjusted quarterly to settlement value based on
changes in the value of RMI common stock. Any resulting adjustment is
charged or credited to income and included in interest and other
financial costs. USX's 27% interest in RMI continues to be accounted for
under the equity method.
</TABLE>
<PAGE> 55
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The decreases in adjusted net interest and other financial costs in
the third quarter and first nine months of 1997 resulted from a reduction
in debt.
Provisions for estimated income taxes in the third quarter and the
first nine months of 1997 increased over 1996 due to improved operations,
a reduction in estimated tax credits and an increase in estimated state
income tax expense. A significant portion of this increase resulted from
U. S. Steel Group's entry into a strategic partnership with two limited
partners to acquire an interest in three coke batteries at its Clairton
(Pa.) Works (for additional information, see Note 11 to the U. S. Steel
Group Financial Statements).
Net income increased $46 million and $152 million in the third quarter and
first nine months of 1997, respectively, as compared with the same periods in
1996. The increase mainly reflects the factors discussed above.
Noncash credit from exchange of preferred stock totaled $10 million in the
first nine months of 1997. On May 16, 1997, USX exchanged approximately 3.9
million 6.75% Convertible Quarterly Income Preferred Securities ("Trust
Preferred Securities") of USX Capital Trust I, for an equivalent number of
shares of its outstanding 6.50% Cumulative Convertible Preferred Stock ("6.50%
Preferred Stock"). The noncash credit from exchange of preferred stock
represents the difference between the carrying value of the 6.50% Preferred
Stock and the fair value of the Trust Preferred Securities of USX Capital Trust
I, at the date of the exchange. For additional discussion on the exchange, see
Note 10 to the U. S. Steel Group Financial Statements.
Operating Statistics
- --------------------
Third quarter 1997 steel shipments of 2.9 million tons and raw steel
production of 2.9 million tons increased 6% and 14%, respectively, from the same
quarter of 1996. First nine months of 1997 steel shipments of 8.7 million tons
and raw steel production of 9.2 million tons increased 5% and 11%, respectively,
from the first nine months of 1996. Raw steel capability utilization in the
third quarter and first nine months of 1997 averaged 90% and 96%, respectively,
versus 79% and 86% in the same periods of 1996.
Cash Flows
- ------------
Net cash provided from operating activities was $353 million in the first
nine months of 1997, compared with net cash used in operating activities of $78
million in the same period of 1996. The first nine months of 1997 included
payments of $49 million to fund the U. S. Steel Group's principal pension plan
for the 1996 plan year and receipts of $40 million in insurance recoveries
related to the 1996 hearth breakout. The first nine months of 1996 included a
payment of $59 million to the Internal Revenue Service for certain agreed and
unagreed adjustments relating to the 1990 tax year. In addition, net cash used
in operating activities included a payment of $28 million related to the
Pickering litigation. Excluding these items, net cash from operating activities
increased by $353 million due to favorable working capital changes and increased
profitability.
<PAGE> 56
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 nine
months of 1997 were $176 million, compared with $249 million in the same period
in 1996. Contract commitments for capital expenditures at September 30, 1997
were $109 million, compared with $134 million at year-end 1996.
Cash from the disposal of assets increased $246 million in the first nine
months of 1997, compared with the same period of 1996. The 1997 proceeds
included $361 million resulting from U. S. Steel's entry into a strategic
partnership with two limited partners to acquire an interest in three coke
batteries at its Clairton Works. The gain of $262 million from this transaction
will be recognized in income over the life of the partnership's assets. The net
effect of this transaction is not expected to have a material impact on full
year 1997 net income. For additional information, see Note 11 to the U. S.
Steel Group Financial Statements. The 1996 proceeds mainly reflected the sale
of U. S. Steel Group's investment in National-Oilwell.
Financial obligations decreased $519 million in the first nine months of
1997 primarily reflecting the net effects of cash from operating, investing and
other financing activities. Financial obligations consist of the U. S. Steel
Group's portion of USX debt and preferred stock of a subsidiary attributed to
all three groups, as well as debt and financing agreements specifically
attributed to the U. S. Steel Group.
Liquidity
- ---------
For discussion of USX's liquidity and capital resources, see USX
Consolidated Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
The U. S. Steel Group has incurred and will continue to incur substantial
capital, operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. In recent years, these expenditures have
been mainly for process changes in order to meet Clean Air Act obligations,
although ongoing compliance costs have also been significant. To the extent
these expenditures, as with all costs, are not ultimately reflected in the
prices of the U. S. Steel Group's products and services, operating results will
be adversely affected. The U. S. Steel Group believes that all of its domestic
competitors are subject to similar environmental laws and regulations. However,
the specific impact on each competitor may vary depending on a number of
factors, including the age and location of its operating facilities and its
production methods. To the extent that competitors are not required to
undertake equivalent costs in their operations, the competitive position of the
U. S. Steel Group could be adversely affected.
USX has been notified that it is a potentially responsible party ("PRP") at
25 waste sites related to the U. S. Steel Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of
September 30, 1997. In addition, there are 17 sites related to the U. S. Steel
Group where USX has received information requests or other indications that USX
may be a PRP under CERCLA but where sufficient information is not presently
available to confirm the existence of liability or make any judgment as to the
amount thereof. There are also 41 additional sites related to the U. S. Steel
Group where remediation is being sought under other environmental statutes, both
federal and state, or where private parties
<PAGE 57>
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
are seeking remediation through discussions or litigation. At many of these
sites, USX is one of a number of parties involved and the total cost of
remediation, as well as USX's share thereof, is frequently dependent upon the
outcome of investigations and remedial studies. The U. S. Steel Group
accrues for environmental remediation activities when the responsibility to
remediate is probable and the amount of associated costs is reasonably
determinable. As environmental remediation matters proceed toward ultimate
resolution or as additional remediation obligations arise, charges in excess
of those previously accrued may be required.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the U. S. Steel Group
involving a variety of matters, including laws and regulations relating to the
environment, certain of which are discussed in Note 12 to the U. S. Steel Group
Financial Statements. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the U. S. Steel Group Financial
Statements. However, management believes that USX will remain a viable and
competitive enterprise even though it is possible that these contingencies could
be resolved unfavorably to the U. S. Steel Group. See discussion of Cash Flows
and Liquidity in USX Consolidated Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Outlook
- -------
The U. S. Steel Group anticipates that steel demand will remain relatively
strong in the fourth quarter, and the outlook remains positive. The market
strength is dependent on continued strong demand for capital goods, oil and gas
tubular products and consumer durables in domestic and international economies.
However, growing domestic production and continuing high levels of imports are
creating some instances of oversupply in certain markets. This, along with a
competitor's recent announcements of lower prices on sheet products, could have
an adverse effect on U. S. Steel's product prices and shipment levels.
The world steel industry is characterized by excess production capacity
which has restricted price increases during periods of economic growth and led
to price decreases during economic contractions. Within the next year, the
anticipated increased availability of flat-rolled steel could have an adverse
effect on U. S. Steel's product prices and shipment levels as companies attempt
to gain or retain market share.
Steel imports to the United States accounted for an estimated 25% of the
domestic steel market in the first eight months of 1997, and 23%, 21% and 25%
for the years 1996, 1995 and 1994, respectively. The domestic steel industry
has, in the past, been adversely affected by unfairly traded imports, and higher
levels of imported steel may ultimately have an adverse effect on product prices
and shipment levels.
In October, 1997, U. S. Steel Group contributed $20 million to the
Voluntary Employee Benefit Trust (VEBA), bringing total contributions in 1997 to
$30 million.
<PAGE 58>
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
On November 4, 1997, USX sold the 160-inch plate mill and related
facilities at its former Texas Works to U. S. Denro Steels, Inc., doing business
as Jindal United Steel Corporation. The plate mill was idled in 1986. Under
the terms of the agreement, U. S. Steel Group will be a holder of preferred
stock and the exclusive North American marketing agent for the steel plate
products to be manufactured at the plate mill.
On November 5, 1997, U. S. Steel Group and VSZ a.s., announced plans for a
50-50 joint venture in Kosice, Slovakia, for the production and marketing of tin
mill products to serve an emerging Central European market. The proposed joint
venture would start with a production capacity of 140,000 metric tons at VSZ's
Ocel plant in Kosice and plans to add 200,000 metric tons of new tin mill
production capacity. The joint venture is projected to begin operations on
January 1, 1998, pending negotiation and approval of necessary final agreements.
With respect to Year 2000 compliance, the U. S. Steel Group continues to
identify, analyze and modify and/or replace non-compliant systems, equipment,
and other devices that utilize date/time-oriented software or computer chips.
In addition, the U. S. Steel Group is monitoring the compliance efforts of
entities with which it interacts. Based on information available at this time,
management believes that the incremental costs associated with achieving Year
2000 compliance will not be material to the operating results of the U. S. Steel
Group. The discussion of the U. S. Steel Group's efforts and management's
expectations relating to the effect of Year 2000 compliance on operating results
are forward-looking statements. Actual results could be materially different
because the U. S. Steel Group's ability to achieve Year 2000 compliance and the
level of incremental costs associated therewith could be adversely impacted by,
among other things, the availability and cost of programming and testing
resources, vendors' ability to modify proprietary software and unanticipated
problems identified in the ongoing compliance review. In addition, the U. S.
Steel Group has limited or no control over the actions of proprietary software
vendors and other entities with which it interacts. Therefore, Year 2000
compliance problems experienced by these entities could adversely affect the
operating results of the U. S. Steel Group.
The above forward-looking statements concerning anticipated steel demand
are based upon assumptions as to future product prices and mix, and levels of
steel production capability, production and shipments. In the event these
assumptions prove to be inaccurate, actual results may differ significantly from
those presently anticipated.
Accounting Standard
- -------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"), which changes the computation and presentation of net income per share.
USX will adopt SFAS No. 128 in the fourth quarter of 1997, as required. While
restatement for prior-periods is required by the standard, net income per share
presented for the USX-U. S. Steel Group Common Stock for the third quarter and
first nine months of 1997 and for the years 1996 and 1995 is not expected to
change materially.
<PAGE> 59
<TABLE>
U. S. STEEL GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS
-----------------------------------
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1997 1996 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Steel and Related Businesses (a) $1,701 $1,595 $5,008 $4,738
Other 21 16 55 44
------ ------ ------ ------
Total U. S. Steel Group $1,722 $1,611 $5,063 $4,782
OPERATING INCOME
Steel and Related Businesses (a) $139 $58 $353 $45
Administrative and Other (b) 45 45 128 140
------ ------ ------ ------
Total U. S. Steel Group $184 $103 $481 $185
CAPITAL EXPENDITURES $59 $91 $176 $249
OPERATING STATISTICS
Public & Affiliated Steel Shipments (c) 2,861 2,699 8,670 8,255
Raw Steel-Production (c) 2,915 2,550 9,157 8,245
Raw Steel-Capability Utilization (d) 90.4% 79.2% 95.6% 86.0%
- ------------
<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.
</TABLE>
<PAGE> 60
Part I - Financial Information (Continued):
D. Delhi Group
<TABLE>
DELHI GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions, except per share amounts) 1997 1996 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $424.5 $247.8$1,031.2 $742.8
OPERATING COSTS:
Cost of sales (excludes items shown below) 403.7 228.7 968.2 680.2
Selling, general and administrative expenses 9.4 7.0 24.0 20.9
Depreciation, depletion and amortization 6.0 7.0 18.1 20.7
Taxes other than income taxes 1.9 1.9 6.1 5.9
------ ------ ------ ------
Total operating costs 421.0 244.6 1,016.4 727.7
------ ------ ------ ------
OPERATING INCOME 3.5 3.2 14.8 15.1
Other income - - .1 .2
Interest and other financial costs (6.4) (5.1) (17.9) (15.3)
------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES (2.9) (1.9) (3.0) -
Less provision (credit) for estimated
income taxes (2.3) (.7) (2.3) -
------ ------ ------ ------
NET INCOME (LOSS) $(.6) $(1.2) $(.7) $-
====== ====== ====== ======
DELHI STOCK DATA:
Net income (loss) per share
- Primary and fully diluted $(.06) $(.14) $(.07) $-
Dividends paid per share .05 .05 .15 .15
Weighted average shares, in thousands
- Primary and fully diluted 9,450 9,448 9,450 9,448
<FN>
The Delhi Group is a discontinued operation of USX - see Note 2.
Selected notes to financial statements appear on pages 63-66.
</TABLE>
<PAGE> 61
<TABLE>
DELHI GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
------------------------------
<CAPTION>
September 30 December 31
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $.4 $.4
Receivables, less allowance for doubtful
accounts of $.8 and $.8 132.5 131.3
Inventories 5.5 8.6
Other current assets 5.1 5.4
------ ------
Total current assets 143.5 145.7
Investments and long-term receivables 4.7 5.8
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$457.2 and $452.6 596.0 555.3
Other noncurrent assets 11.1 7.8
------ ------
Total assets $755.3 $714.6
====== ======
LIABILITIES
Current liabilities:
Notes payable $6.4 $4.3
Accounts payable 186.9 196.3
Payroll and benefits payable 5.3 4.2
Accrued taxes 4.3 5.4
Accrued interest 3.7 5.3
Long-term debt due within one year 36.8 16.5
------ ------
Total current liabilities 243.4 232.0
Long-term debt, less unamortized discount 228.0 202.7
Long-term deferred income taxes 145.1 139.7
Deferred credits and other liabilities 20.8 20.2
Preferred stock of subsidiary 3.8 3.8
STOCKHOLDERS' EQUITY 114.2 116.2
------ ------
Total liabilities and stockholders' equity $755.3 $714.6
====== ======
<FN>
The Delhi Group is a discontinued operation of USX - see Note 2.
Selected notes to financial statements appear on pages 63-66.
</TABLE>
<PAGE> 62
<TABLE>
DELHI GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
<CAPTION>
Nine Months Ended
September 30
(Dollars in millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income (loss) $(.7) $-
Adjustments to reconcile to net cash provided from
operating activities:
Depreciation, depletion and amortization 18.1 20.7
Pensions 1.8 .7
Deferred income taxes 4.9 -
Gain on disposal of assets (.6) (.5)
Payment of amortized discount on zero
coupon debentures (1.0) -
Changes in:
Current receivables (1.3) 18.4
Inventories 3.1 .5
Current accounts payable and accrued expenses (11.0) (11.5)
All other - net (2.6) 2.2
------ ------
Net cash provided from operating activities 10.7 30.5
------ ------
INVESTING ACTIVITIES:
Capital expenditures (59.2) (55.4)
Disposal of assets 1.0 .6
------ ------
Net cash used in investing activities (58.2) (54.8)
------ ------
FINANCING ACTIVITIES:
Increase in Delhi Group's share of USX
consolidated debt 48.9 24.3
Dividends paid (1.4) (1.4)
------ ------
Net cash provided from financing activities 47.5 22.9
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS - (1.4)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .4 1.9
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $.4 $.5
====== ======
Cash used in operating activities included:
Interest and other financial costs paid $(20.4) $(16.6)
Income taxes paid, including settlements with
other groups (.5) (.2)
<FN>
The Delhi Group is a discontinued operation of USX - see Note 2.
Selected notes to financial statements appear on pages 63-66.
</TABLE>
<PAGE> 63
DELHI GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited
but, in the opinion of management, reflects all adjustments necessary for a
fair presentation of the results for the periods covered. All such
adjustments are of a normal recurring nature unless disclosed otherwise.
These financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Additional information is contained in the USX Annual Report
on Form 10-K for the year ended December 31, 1996.
Effective January 1, 1997, USX adopted American Institute of Certified
Public Accountants Statement of Position No. 96-1, "Environmental
Remediation Liabilities" (SOP 96-1), which provides additional
interpretation of existing accounting standards related to recognition,
measurement and disclosure of environmental remediation liabilities.
Adoption of SOP 96-1 had no effect on Delhi Group results of operations or
financial condition.
2. On October 22, 1997, USX announced that it had entered into a
definitive agreement to sell its stock in Delhi Gas Pipeline Corporation
and other subsidiaries of USX that comprise all of the Delhi Group (Delhi
Companies). The transaction involves a gross purchase price of $762
million. Under the USX Restated Certificate of Incorporation, USX is
required to elect one of three options to return the value of the net
proceeds received in the transaction to the holders of shares in USX-Delhi
Group Common Stock (Delhi shareholders). Of the three options, USX
currently anticipates that it will elect to use the net proceeds to redeem
all shares of Delhi Stock. The net proceeds are to be distributed to the
Delhi shareholders on or prior to the first business day following the 60th
day following the closing date of the transaction.
The financial results of the Delhi Group have been reclassified as
discontinued operations for all periods presented in the USX Consolidated
Statement of Operations. The net assets of the Delhi Companies have been
reclassified in the USX Consolidated Balance Sheet as of September 30,
1997, to separately reflect them as net assets of discontinued operations.
3. 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
<PAGE> 64
DELHI GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
3. (Continued)
statements are determined based upon methods which management believes
to be reasonable. The accounting policies applicable to the preparation of
the financial statements of the Delhi Group may be modified or rescinded in
the sole discretion of the Board of Directors of USX (Board), although the
Board has no present intention to do so. The Board may also adopt
additional policies depending on the circumstances.
Although the financial statements of the Delhi Group, the Marathon
Group and the U. S. Steel Group separately report the assets, liabilities
(including contingent liabilities) and stockholders' equity of USX
attributed to each such group, such attribution of assets, liabilities
(including contingent liabilities) and stockholders' equity among the Delhi
Group, the Marathon Group and the U. S. Steel Group for the purpose of
preparing their respective financial statements does not affect legal title
to such assets and responsibility for such liabilities. Holders of USX-
Delhi Group Common Stock (Delhi Stock), USX-Marathon Group Common Stock
(Marathon Stock) and USX-U. S. Steel Group Common Stock (Steel Stock) are
holders of common stock of USX, and continue to be subject to all the risks
associated with an investment in USX and all of its businesses and
liabilities. Financial impacts arising from one Group that affect the
overall cost of USX's capital could affect the results of operations and
financial condition of other groups. In addition, net 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.
4. The method of calculating net income (loss) per share for the Delhi
Stock, Marathon Stock and Steel Stock reflects the Board's intent that the
separately reported earnings and surplus of the Delhi Group, the Marathon
Group and the U. S. Steel Group, as determined consistent with the USX
Certificate of Incorporation, are available for payment of dividends on the
respective classes of stock, although legally available funds and
liquidation preferences of these classes of stock do not necessarily
correspond with these amounts.
Primary net income (loss) per share is calculated based on the
weighted average number of common shares outstanding plus common stock
equivalents, provided they are not antidilutive. Common stock equivalents
result from assumed exercise of stock options, where applicable.
Fully diluted net income (loss) per share assumes exercise of stock
options, provided the effect is not antidilutive.
5. 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
<PAGE> 65
DELHI GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (Continued)
among the Delhi Group, the Marathon Group and the U. S. Steel Group
for group financial statement purposes, based principally upon the
financial income, taxable income, credits, preferences and other amounts
directly related to the respective groups.
The provision (credit) for estimated income taxes for the Delhi Group
is based on tax rates and amounts which recognize management's best
estimate of current and deferred tax assets and liabilities. Differences
between the combined interim tax provisions of the Delhi, Marathon and U.
S. Steel Groups and USX consolidated are allocated to each group based on
the relationship of the individual group provisions to the combined interim
provisions. The Delhi Group's third quarter 1997 credit for estimated
income taxes included a $1.0 million favorable deferred state income tax
adjustment, net of federal income tax.
6. In the second quarter of 1997, the Delhi Group revised the estimated
economic lives of its depreciable assets. Depreciation expense for 1997
has been revised based on this increase in the estimated economic lives.
The favorable effect on net income in the second quarter and first nine
months of 1997 was $2.1 million, or $.22 per share.
7. Inventories are carried at lower of average cost or market.
<TABLE>
<CAPTION>
(In millions)
----------------------
Sept. 30 December 31
1997 1996
-------- -----------
<S> <C> <C>
Natural gas in storage $3.4 $6.4
Natural gas liquids in storage .3 .1
Materials and supplies 1.8 2.1
---- ----
Total $5.5 $8.6
==== ====
</TABLE>
8. 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 September 30, 1997, the amount sold under the program that had
not been collected was $50.0 million. Subsequent to the balance sheet
date, in anticipation of the sale of the subsidiaries comprising all of the
Delhi Group, the program was amended to remove all Delhi Group receivables.
<PAGE> 66
DELHI GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
9. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments relating to the
Delhi Group involving a variety of matters, including laws and regulations
relating to the environment. Certain of these matters are discussed below.
The ultimate resolution of these contingencies could, individually or in
the aggregate, be material to the Delhi Group financial statements.
However, management believes that USX will remain a viable and competitive
enterprise even though it is possible that these contingencies could be
resolved unfavorably to the Delhi Group. See discussion of Liquidity in
USX Consolidated Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The Delhi Group is subject to federal, state and local laws and
regulations relating to the environment. These laws generally provide for
control of pollutants released into the environment and require responsible
parties to undertake remediation of hazardous waste disposal sites.
Penalties may be imposed for noncompliance. Expenditures for remediation
and penalties have not been material.
For a number of years, the Delhi Group has made capital expenditures to
bring existing facilities into compliance with various laws relating to
the environment. In the first nine months of 1997 and for the years
1996 and 1995, such capital expenditures totaled $7.9 million, $9.0
million and $5.5 million, respectively. The Delhi Group anticipates
making additional such expenditures in the future; however, the exact
amounts and timing of such expenditures are uncertain because of
the continuing evolution of specific regulatory requirements.
At September 30, 1997, contract commitments for the Delhi Group's capital
expenditures for property, plant and equipment totaled $8.0 million
compared with $4.4 million at December 31, 1996.
<PAGE> 67
DELHI GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The Delhi Group ("Delhi") includes Delhi Gas Pipeline Corporation and
certain other subsidiaries of USX which are engaged in the purchasing,
gathering, processing, treating, transporting and marketing of natural gas,
natural gas liquids ("NGLs") and electric power. The following discussion
should be read in conjunction with the third quarter 1997 USX consolidated
financial information and the Delhi Group Financial Statements and selected
notes. In addition, the discussion of Results of Operations should be read in
conjunction with the Supplemental Statistics provided on page 73.
Certain sections of the discussion include forward-looking statements
concerning trends or events potentially affecting the Delhi Group. These
statements typically contain words such as "anticipates", "believes",
"estimates", or "expects", or similar words indicating that future outcomes are
uncertain. In accordance with "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, these statements are accompanied by
cautionary language identifying important factors, though not necessarily all
such factors, that could cause future outcomes to differ materially from those
set forth in forward-looking statements.
Outlook
- -------
On October 22, 1997, USX Corporation announced that it had entered into a
definitive agreement for USX to sell its stock in Delhi Gas Pipeline Corporation
and the other subsidiaries of USX that comprise all of the Delhi Group (the
"Delhi Companies") to Koch Midstream Enterprises, Inc., an affiliate of Koch
Industries, Inc. The transaction involves a gross purchase price of $762
million, which, based upon September 30, 1997, financial information, USX
estimates will result in net proceeds available for distribution to the holders
of USX-Delhi Common Stock ("Delhi Stock") of between $19 and $21 cash per share
of Delhi Stock.
The net proceeds are calculated in accordance with USX's Restated
Certificate of Incorporation (the "USX Certificate") which (in relevant part)
defines net proceeds as an amount equal to the gross proceeds of a disposition
after any payment of, or reasonable provision for , (i) any taxes payable by USX
in respect of such disposition, (ii) any taxes payable by USX in respect of any
dividend or redemption, (iii) any transaction costs, including, without
limitation, any legal, investment banking and accounting fees and expenses, and
(iv) any liabilities (contingent or otherwise) of, or allocated to, the Delhi
Group, including, without limitation, any indemnity obligations incurred in
connection with the disposition.
The following is a sample calculation of the midpoint of the $19 to $21 per
share estimated range of net proceeds which is based on Delhi Group data as of
September 30, 1997. The estimate of net proceeds included herein is a forward-
looking statement. A number of factors used in the calculation may change
between September 30 and the effective date including, among other things, the
amount of debt attributed to the Delhi Group, which is impacted by the Delhi
Group's cash flow through the effective date, and the taxes to be incurred,
which are impacted by changes in the tax basis of the Delhi Group's assets after
September 30. Actual net proceeds will be based on data as of the effective
date, currently expected to be October 31, 1997. Accordingly, the actual net
proceeds may vary from the estimated range set forth above.
<PAGE> 68
<TABLE>
<CAPTION>
DELHI GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
$ Millions
<S> <C>
Gross Purchase Price $762
Less: Estimated adjustments to purchase price for
liabilities retained by the Delhi Companies 27
-----
Estimated Adjusted Purchase Price $735
Less: Estimated attributed debt, preferred stock,
transaction costs and other liabilities of the
Delhi Group 317
Less: Estimated taxes payable (1) 220
-----
Estimated net proceeds $198
=====
Estimated net proceeds per share available for distribution (2) $20
=====
</TABLE>
An estimated financial gain of $84 million aftertax, which is based on the
preceding sample calculation of the midpoint of the estimated range of net
proceeds available for distribution to Delhi shareholders, will be recorded by
the Delhi Group when the transaction is closed. This gain, which may vary from
the estimate set forth herein, will accrue to the benefit of Delhi shareholders
and is already reflected in the estimated range of net proceeds indicated above.
Under the USX Certificate, USX is required to elect one of three options to
return the value of the net proceeds received in the transaction to the Delhi
shareholders. The net proceeds are to be distributed to the shareholders on or
prior to the first business day following the 60th day following the closing
date of the transaction ("Redemption Date").
Following is an excerpted summary of the three options:
USX is required to
(A) declare and pay a dividend to the holders of Delhi Stock in an
amount equal to the net proceeds of such disposition; or
(B) redeem the outstanding shares of Delhi Stock with such net
proceeds; or
(C) exchange each outstanding share of Delhi Stock for a number of
fully paid and nonassessable shares of Marathon Stock equal
to 110% of the average daily ratio of the market value of one
share of Delhi Stock to the market value of one share of
Marathon Stock during a specified ten-business day period.
Of the three options, USX currently anticipates that it will elect to use
the net proceeds to redeem all shares of Delhi Stock. USX is required to give
public notice of which option it has elected not less than 30 days nor more than
60 days prior to the Redemption Date. Due to the time required to finalize the
calculation of the net proceeds, USX anticipates that it will give the required
notice approximately 30 days after the closing date of the transaction.
The transaction is subject to the receipt of Hart-Scott-Rodino approval and
other customary conditions. The parties expect the closing to occur in
November.
- ---------------------
[FN]
(1) Based on estimated tax basis of $165 million at September 30, 1997, and
assuming a tax rate of 38.5%.
(2) Based on 9.45 million shares outstanding at September 30, 1997, and
assuming the settlement of outstanding employee stock options to purchase
approximately 409,000 shares of Delhi Stock.
<PAGE> 69
DELHI GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
Revenues for the third quarter and first nine months of 1997 and 1996 are
summarized in the following table:
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1997 1996 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gas sales and trading $267.6 $212.9 $774.3 $645.3
Transportation 5.0 4.0 14.6 12.5
Gas processing and NGLs trading 37.8 23.9 97.8 63.7
Gathering service fees 6.7 5.8 21.7 16.3
Electric power marketing 107.4 1.2 122.2 4.5
Other - - .6 .5
------ ------ ------- ------
Total revenues $424.5 $247.8 $1,031.2 $742.8
====== ====== ======= ======
</TABLE>
Revenues for the third quarter and first nine months of 1997, increased
$176.7 million and $288.4 million, respectively, from the comparable prior-year
periods, primarily due to increased volumes for natural gas and NGLs trading and
electric power marketing, and increased natural gas sales prices. Revenues from
trading activities typically have a lower impact on gross margins than revenues
from sales activities.
Operating income in the third quarter of 1997 increased by $0.3 million as
compared with the third quarter of 1996. Operating income in the third quarter
of 1997 included the unfavorable effect of employee severance accruals.
Excluding these accruals, operating income increased $1.8 million as compared
with the third quarter of 1996. This was primarily the result of increased
gross margins and decreased depreciation, depletion and amortization ("DD&A"),
partially offset by increased selling, general and administrative expenses
("SG&A"), exclusive of the employee severance accruals, and increased operating
expenses. Operating income in the first nine months of 1997 decreased by $0.3
million as compared with the first nine months of 1996. Excluding the
unfavorable effect of employee severance accruals, operating income increased
$1.2 million as compared with the first nine months of 1996. This was primarily
the result of increased gross margins and decreased DD&A, partially offset by
increased operating expenses and increased SG&A.
Gas sales and trading gross margin in the third quarter of 1997 increased
by $1.6 million as compared with the third quarter of 1996. This was primarily
the result of a 19% increase in unit margins, which was partially offset by a 4%
decrease in gas sales volumes. Gas sales and trading gross margin in the first
nine months of 1997 decreased by $6.0 million as compared with the first nine
months of 1996. This was primarily the result of a 10% decrease in unit margins
and a 4% decrease in gas sales volumes.
Transportation gross margin for the third quarter and first nine months of
1997, increased $1.0 million and $2.1 million, respectively, from the comparable
prior-year periods, primarily due to volume increases of 36% and 27%,
respectively, which were partially offset by decreased average transportation
rates.
<PAGE> 70
DELHI GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Natural gas processing and NGLs trading gross margin in the third quarter
of 1997 decreased by $3.7 million, as compared with the third quarter of 1996.
The decrease was primarily the result of lower NGLs sales prices and higher
feedstock costs, resulting in a 40% decrease in unit margins, and a 12% decrease
in NGLs sales volumes. Gas processing and NGLs trading gross margin in the
first nine months of 1997 decreased by $0.6 million, from the comparable 1996
period, mainly due to slightly lower unit margins and trading losses.
Gathering service fees from treating, dehydration, compression and other
services, for the third quarter and first nine months of 1997, increased $0.9
million and $5.4 million, respectively, from the comparable prior-year periods.
These increases were due to higher systems volumes and higher natural gas sales
prices.
Electric power marketing gross margin for the third quarter and first nine
months of 1997, increased $2.2 million and $2.3 million, respectively, from the
comparable prior-year periods, primarily due to large volume increases, which
were partially offset by decreased unit margins.
Operating costs, excluding gas and electricity purchase costs, increased
$1.7 million in the third quarter of 1997 as compared with the third quarter of
1996. Excluding the unfavorable effect of employee severance accruals
previously mentioned, operating costs, excluding gas and electricity purchase
costs, increased $0.2 million as compared with the third quarter of 1996. The
primary reason for the increase was higher SG&A, exclusive of the employee
severance accruals, substantially offset by decreased DD&A. Operating costs,
excluding gas and electricity purchase costs, for the first nine months of 1997
increased by $3.5 million as compared with the first nine months of 1996.
Excluding the employee severance accruals, operating costs, excluding gas and
electricity purchase costs, increased $2.0 million as compared to the first nine
months of 1996. Operating expenses (cost of sales excluding gas and electricity
purchase costs), increased $2.8 million primarily due to higher field operating
expenses. SG&A, exclusive of employee severance accruals increased $1.6
million, primarily due to increased corporate administrative costs and
compensation charges. The increases in operating expenses and SG&A were
partially offset by a $2.6 million decrease in DD&A.
Credit for estimated income taxes, for the third quarter and first nine
months of 1997, included a $1.0 million favorable deferred state income tax
adjustment, net of federal income tax effects.
Interest and other financial costs, for the third quarter and first nine
months of 1997, increased $1.3 million and $2.6 million, respectively, from the
comparable prior-year periods, primarily due to increased debt levels caused by
capital spending in excess of cash provided from operating activities.
A net loss of $0.6 million was recorded in the third quarter of 1997,
compared with a net loss of $1.2 million in the third quarter of 1996. Delhi
reported a net loss of $0.7 million for the first nine months of 1997. Net
income was at break-even for the first nine months of 1996. The changes in net
income primarily reflect the factors discussed above.
<PAGE> 71
DELHI GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Dividends to Shareholders
- -------------------------
In view of the pending agreement for USX to sell its stock in the Delhi
Companies, the USX Board of Directors did not declare a third quarter dividend
on Delhi Stock. The net proceeds available for distribution to Delhi Group
stockholders after disposition of the Delhi Group will effectively be increased
by the amount that would have been paid to the Delhi Group stockholders had a
third quarter dividend been declared.
Cash Flows
- ----------
Net cash provided from operating activities of $10.7 million decreased
$19.8 million in the first nine months of 1997, compared with the first nine
months of 1996. The decrease primarily reflected unfavorable changes in working
capital.
Capital expenditures for property, plant and equipment in the first nine
months of 1997 were $59.2 million, compared with $55.4 million in the first nine
months of 1996. Expenditures in the first nine months of 1997 were primarily
for completion of the second phase of the Cotton Valley Pinnacle Reef expansion
project in east Texas, expansion of pipeline and processing assets in west
Texas, and acquisitions and expansions related to Delhi's south Texas systems.
Contract commitments for capital expenditures were $8.0 million at September 30,
1997, compared with $4.4 million at year-end 1996.
Financial obligations increased by $48.9 million in the first nine months
of 1997 as capital expenditures exceeded net cash provided from operating
activities. Financial obligations consist of the Delhi Group's portion of USX
debt and preferred stock of a subsidiary attributed to all three groups.
Liquidity
- ---------
For discussion of USX's liquidity and capital resources, see USX
Consolidated Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
The Delhi Group has incurred and will continue to incur capital and
operating and maintenance expenditures as a result of environmental laws and
regulations. To the extent these expenditures, as with all costs, are not
ultimately reflected in the prices of the Delhi Group's products and services,
operating results will be adversely affected. The Delhi Group believes that
substantially all of its competitors are subject to similar environmental laws
and regulations. However, the specific impact on each competitor may vary
depending on a number of factors, including the age and location of its
operating facilities and its production processes.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the Delhi Group
involving a variety of matters, including laws and regulations relating to the
environment. The ultimate resolution of these contingencies could, individually
or in the aggregate, be material to the Delhi Group financial statements.
However, management believes that USX will remain a viable and competitive
enterprise even though it is possible that these contingencies could be resolved
unfavorably to the Delhi Group. See discussion of Cash Flows and Liquidity in
USX Consolidated Management's Discussion and Analysis of Financial Condition and
Results of Operations.
<PAGE> 72
DELHI GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Accounting Standard
- -------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"), which changes the computation and presentation of net income per share.
USX will adopt SFAS No. 128 in the fourth quarter of 1997, as required. While
restatement for prior-periods is required by the standard, net income per share
presented for USX-Delhi Group Common Stock for the third quarter and first nine
months of 1997 and for the years 1996 and 1995 is not expected to change
materially.
<PAGE> 73
<TABLE>
DELHI GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
-----------------------------------
<CAPTION>
Third Quarter Nine Months
Ended Ended
Sept 30 Sept 30
(Dollars in millions) 1997 1996* 1997 1996*
- --------------------------------------------------------------------------------
<S> <C> <C>
GROSS MARGIN
Gas Sales and Trading $13.0 $11.4 $38.1 $44.1
Transportation 5.0 4.0 14.6 12.5
------ ------ ------ ------
Systems and Trading 18.0 15.4 52.7 56.6
Gas Processing and NGLs Trading 4.1 7.8 18.0 18.6
Gathering Service Fees 6.7 5.8 21.7 16.3
Electric Power Marketing 2.3 .1 2.5 .2
------ ------ ------ ------
Total Gross Margin $31.1 $29.1 $94.9 $91.7
OPERATING INCOME $3.5 $3.2 $14.8 $15.1
CAPITAL EXPENDITURES $21.6 $13.5 $59.2 $55.4
OPERATING STATISTICS
Natural Gas Volumes (a)
Natural Gas Sales 496.7 516.4 515.1 532.9
Transportation 630.7 464.3 583.0 456.5
------ ------ ------ ------
Systems Throughput 1,127.4 980.7 1,098.1 989.4
Trading Sales 791.0 589.7 695.7 562.7
------- ------- ------- -------
Total Sales Volumes 1,918.4 1,570.4 1,793.8 1,552.1
Processed NGLs Sold (b) 704.4 801.3 772.0 764.0
Electric Power Marketing (c) 3,836.0 45.9 4,504.0 202.6
- ---------------
<FN>
(a) Millions of cubic feet per day
(b) Thousands of gallons per day
(c) Gigawatthours
*Certain amounts have been reclassified to conform to 1997
classifications
The Delhi Group is a discontinued operation of USX - see Note 2.
</TABLE>
<PAGE> 74
Part II - Other Information
- ----------------------------
Item 1. LEGAL PROCEEDINGS
Marathon Group
On January 23, 1997, a Notice of Violation was served by the
Illinois Environmental Protection Agency ("IEPA") on the Marathon
Group, including Marathon Oil Company (Robinson Refinery and Brand
Marketing), Marathon Pipe Line Company and Emro Marketing Company,
consolidating various alleged violations of federal and state
environmental laws and regulations relating to air, water and soil
contamination. Based on the ongoing negotiations with IEPA, a penalty
in excess of $100,000 may be assessed against each of these companies.
U. S. Steel Group
On September 17, 1997, USX received a draft consent decree
addressing issues raised in a Notice of Violation (NOV) issued by the
United States Environmental Protection Agency (U.S.EPA) in January
1997. The NOV alleged air quality violations at U. S. Steel's Edgar
Thomson Plant. The draft consent decree addressed these issues,
including various operational requirements, which U.S.EPA believes are
necessary to bring the plant into compliance, and proposed a civil
penalty of $2 million. USX had begun implementing some of the
compliance requirements identified by U.S.EPA. USX is arranging a
meeting with U.S.EPA and other involved agencies to begin negotiations
on the consent decree and an appropriate penalty.
<PAGE> 75
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)
-------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
1997 1996 1997 1996
---- ---- ---- ----
INCOME DATA:
<S> <C> <C> <C> <C>
Revenues $3,920 $4,186 $11,755 $11,859
Operating income 356 323 814 945
Net income 219 156 423 471
</TABLE>
<TABLE>
<CAPTION>
(In millions)
-----------------------
Sept. 30 December 31
1997 1996
-------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Assets:
Current assets $3,301 $3,271
Noncurrent assets 8,217 7,977
------ ------
Total assets $11,518 $11,248
====== ======
Liabilities and Stockholder's Equity:
Current liabilities $1,996 $2,197
Noncurrent liabilities 7,245 7,199
Stockholder's equity 2,277 1,852
------- -------
Total liabilities and stockholder's equity $11,518 $11,248
</TABLE>
======= =======
<PAGE> 76
Part II - Other Information (Continued):
- ----------------------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
2.1 Stock Purchase and Sale Agreement
relating to disposition of Delhi
Group Companies................... Incorporated by reference
to exhibit 2 of Form
8-K dated October 22,
1997.
3.1 USX Restated Certificate of
Incorporation dated
September 1, 1996................. Incorporated by reference
to Exhibit 3.1 to the
USX Report on Form
10-Q for the quarter
ended March 31, 1997.
3.2 USX By-Laws, effective as of
July 30, 1996..................... Incorporated by reference
to Exhibit 3(a) to the
USX Report on Form
10-Q for the quarter
ended June 30, 1996.
4.1 Amended and Restated Rights
Agreement......................... Incorporated by reference
to USX's Form 8
Amendment to Form 8-A
filed on October 9,
1992 (File No. 1-5153).
12.1 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
12.2 Computation of Ratio of Earnings to Fixed Charges
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
Form 8-K dated October 22, 1997, reporting under Item 2. Acquisition
or Disposition of Assets, that USX Corporation announced that it had
entered into a definitive agreement for USX to sell its stock in Delhi
Gas Pipeline Corporation and the other subsidiaries of USX that
comprise all of the Delhi Group to Koch Midstream Enterprises, Inc.,
an affiliate of Koch Industries, Inc.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned chief accounting officer thereunto duly authorized.
USX CORPORATION
By /s/ Kenneth L. Matheny
Kenneth L. Matheny
Vice President &
Comptroller
November 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 67
<SECURITIES> 0
<RECEIVABLES> 983
<ALLOWANCES> 7
<INVENTORY> 1917
<CURRENT-ASSETS> 3546
<PP&E> 25200
<DEPRECIATION> 15324
<TOTAL-ASSETS> 16937
<CURRENT-LIABILITIES> 3349
<BONDS> 3096
182
3
<COMMON> 383<F1>
<OTHER-SE> 4988
<TOTAL-LIABILITY-AND-EQUITY> 16937
<SALES> 16766
<TOTAL-REVENUES> 16766
<CGS> 15495
<TOTAL-COSTS> 15495
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 275
<INCOME-PRETAX> 1087
<INCOME-TAX> 369
<INCOME-CONTINUING> 718
<DISCONTINUED> 1
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 717
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F3>
<FN>
<F1>CONSISTS OF MARATHON STOCK ISSUED, $288; STEEL STOCK ISSUED, $86; DELHI
STOCK ISSUED, $9.
<F2>PRIMARY EARNINGS (LOSS) PER SHARE APPLICABLE TO MARATHON STOCK, $1.45; STEEL
STOCK, $3.50; DELHI STOCK $(.07).
<F3>FULLY DILUTED EARNINGS (LOSS) PER SHARE APPLICABLE TO MARATHON STOCK, $1.45;
STEEL STOCK, $3.26; DELHI STOCK, $(.07).
</FN>
</TABLE>
Exhibit 12.1
<TABLE>
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS - (Unaudited) (a)
----------------------------------------------------------
(Dollars in Millions)
<CAPTION>
Nine Months
Ended Year Ended December 31
September 30 --------------------------------
1997 1996* 1996* 1995* 1994* 1993* 1992*
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Portion of rentals
representing interest $60 $59 $78 $76 $83 $81 $83
Capitalized interest 17 9 11 13 58 105 78
Other interest and fixed
charges 242 289 382 452 456 365 404
Pretax earnings which would
be required to cover
preferred stock dividend
requirements of parent 17 27 36 46 49 44 14
---- ---- ---- ---- ---- ---- ----
Combined fixed charges
and preferred stock
dividends (A) $336 $384 $507 $587 $646 $595 $579
==== ==== ==== ==== ==== ==== ====
Earnings-pretax income
with applicable
adjustments (B) $1386 $1295 $1837 $877 $1300 $239 $338
==== ==== ==== ==== ==== ==== ====
Ratio of (B) to (A) 4.13 3.37 3.62 1.49 2.01 (b) (b)
==== ==== ==== ==== ==== ==== ====
<FN>
(a) Amounts represent combined fixed charges and earnings from
continuing operations.
(b) Earnings did not cover combined fixed charges and preferred stock
dividends by $356 million for 1993 and by $241 million for 1992.
* Amounts have been reclassified to conform to 1997 classifications.
</TABLE>
<TABLE>
Exhibit 12.2
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS - (Unaudited) (a)
-------------------------------------------------
(Dollars in Millions)
<CAPTION>
Nine Months
Ended Year Ended December 31
September 30 --------------------------------
1997 1996* 1996* 1995* 1994* 1993* 1992*
---- ---- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Portion of rentals
representing interest $60 $59 $78 $76 $83 $81 $83
Capitalized interest 17 9 11 13 58 105 78
Other interest and fixed
charges 242 289 382 452 456 365 404
---- ---- ---- ---- ----- ---- ----
Total fixed charges (A) $319 $357 $471 $541 $597 $551 $565
==== ==== ==== ==== ==== ==== ====
Earnings-pretax income
with applicable
adjustments (B) $1386 $1295 $1837 $877 $1300 $239 $338
==== ==== ==== ==== ==== ==== ====
Ratio of (B) to (A) 4.34 3.63 3.90 1.62 2.18 (b) (b)
==== ==== ==== ==== ==== ==== ====
<FN>
(a) Amounts represent fixed charges and earnings from continuing
operations.
(b) Earnings did not cover fixed charges by $312 million for 1993 and by
$227 million for 1992.
* Amounts have been reclassified to conform to 1997 classifications.
</TABLE>
