<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
-----------------------
Date of Report (Date of earliest event reported):
February 27, 1998
USX Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-5153 25-0996816
--------------- ------------ -------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
600 Grant Street, Pittsburgh, PA 15219-4776
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(412) 433-1121
-------------------------------
(Registrant's telephone number,
including area code)
<PAGE>
Item 5. Other Events.
------------
The audited Financial Statements and Supplementary Data for USX
Corporation for the fiscal year ended December 31, 1997, together with the
related Management's Discussion and Analysis of Financial Condition and Results
of Operations, Quantitative and Qualitative Disclosures about Market Risk,
reports of the independent accountants and Financial Data Schedule are filed
herewith to be available prior to filing of USX Corporation's 1997 Form 10-K.
Item 7. Financial Statements and Exhibits.
----------------------------------
(c) Exhibits.
---------
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
23. Consent of Price Waterhouse LLP
27. Financial Data Schedule
99.1 USX Consolidated
99.2 Marathon Group
99.3 U. S. Steel Group
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
USX CORPORATION
By /s/ Kenneth L. Matheny
-----------------------
Kenneth L. Matheny
Vice President & Comptroller
Dated: February 27, 1998
<PAGE>
Exhibit 12.1
USX Corporation
Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
TOTAL ENTERPRISE BASIS--Unaudited(a)
Continuing Operations
(Dollars in Millions)
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------
1997 1996 1995 1994 1993
------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C>
Portion of rentals representing interest...... $ 82 $ 78 $ 76 $ 83 $ 81
Capitalized interest.......................... 31 11 13 58 105
Other interest and fixed charges.............. 312 382 452 456 365
Pretax earnings which would be required to
cover preferred stock dividend requirements
of parent.................................... 20 36 46 49 44
------ ------ ----- ------ -----
Combined fixed charges and preferred stock
dividends (A)................................ $ 445 $ 507 $ 587 $ 646 $ 595
====== ====== ===== ====== =====
Earnings--pretax income (loss) with
applicable adjustments (B)................... $1,745 $1,837 $ 877 $1,300 $ 239
====== ====== ===== ====== =====
Ratio of (B) to (A)........................... 3.92 3.62 1.49 2.01 (b)
====== ====== ===== ====== =====
</TABLE>
- ---------
(a) Amounts in prior years have been reclassified to conform to 1997
classifications.
(b) Earnings did not cover fixed charges and preferred stock dividends by $356
million for 1993.
<PAGE>
Exhibit 12.2
Computation of Ratio of Earnings to Fixed Charges
TOTAL ENTERPRISE BASIS--Unaudited(a)
Continuing Operations
(Dollars in Millions)
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------
1997 1996 1995 1994 1993
------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C>
Portion of rentals representing interest.. $ 82 $ 78 $ 76 $ 83 $ 81
Capitalized interest...................... 31 11 13 58 105
Other interest and fixed charges.......... 312 382 452 456 365
------ ------ ----- ------ -----
Total fixed charges (A)................... $ 425 $ 471 $ 541 $ 597 $ 551
====== ====== ===== ====== =====
Earnings--pretax income (loss) with
applicable adjustments (B)............... $1,745 $1,837 $ 877 $1,300 $ 239
====== ====== ===== ====== =====
Ratio of (B) to (A)....................... 4.11 3.90 1.62 2.18 (b)
====== ====== ===== ====== =====
</TABLE>
- --------
(a) Amounts in prior years have been reclassified to conform to 1997
classifications.
(b) Earnings did not cover fixed charges by $312 million for 1993.
<PAGE>
Exhibit 23.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the prospectuses
constituting part of the Registration Statements listed below of our reports
dated February 10, 1998 relating to the Consolidated Financial Statements
of USX Corporation, the Financial Statements of the Marathon Group and the
Financial Statements of the U. S. Steel Group, appearing on pages U-1, M-1
and S-1, respectively, of this Form 8-K:
On Form S-3: Relating to:
File No. 33-34703 Marathon Group Dividend Reinvestment Plan
33-43719 U. S. Steel Group Dividend Reinvestment Plan
33-50191 USX Corporation Debt Securities, Preferred
Stock and Common Stock
33-51621 USX Corporation Debt Securities, Preferred
Stock and Common Stock
33-52937 USX Debt Securities
33-56659 Marathon Group Common Stock
33-57997 Marathon Group Dividend Reinvestment Plan
33-60142 USX Corporation Debt Securities
33-60172 U. S. Steel Group Dividend Reinvestment Plan
On Form S-8: Relating to:
File No. 33-6248 1986 Stock Option Plan
33-8669 Marathon Oil Company Thrift Plan
33-38025 1990 Stock Plan
33-41864 1990 Stock Plan
33-48116 Parity Investment Bonus
33-54333 Parity Investment Bonus
33-60667 Parity Investment Bonus
33-56828 Marathon Oil Company Thrift Plan
33-52917 Savings Fund Plan
333-00429 Savings Fund Plan
333-29699 1990 Stock Plan
333-29709 Marathon Oil Company Thrift Plan
PRICE WATERHOUSE LLP
600 Grant Street
Pittsburgh, PA 15219-2794
February 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 54
<SECURITIES> 0
<RECEIVABLES> 1,432
<ALLOWANCES> 15
<INVENTORY> 1,685
<CURRENT-ASSETS> 3,472
<PP&E> 25,528
<DEPRECIATION> 15,466
<TOTAL-ASSETS> 17,284
<CURRENT-LIABILITIES> 3,523
<BONDS> 2,932
432
3
<COMMON> 375<F1>
<OTHER-SE> 5,022
<TOTAL-LIABILITY-AND-EQUITY> 17,284
<SALES> 22,375
<TOTAL-REVENUES> 22,588
<CGS> 20,883
<TOTAL-COSTS> 20,883
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 352
<INCOME-PRETAX> 1,358
<INCOME-TAX> 450
<INCOME-CONTINUING> 908
<DISCONTINUED> 80
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 988
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F3>
<FN>
<F1>Consists of Marathon Stock issued, $289; Steel Stock issued, $86.
<F2>Basic earnings (loss) per share applicable to Marathon Stock, $1.59; Steel
Stock, $5.24; Delhi Stock $8.43.
<F3>Diluted earnings (loss) per share applicable to Marathon Stock, $1.58; Steel
Stock, $4.88; discontinued operations - Delhi Stock, $8.41.
</FN>
</TABLE>
<PAGE>
EXHIBIT 99.1
- --------------------------------
USX
- --------------------------------
Index to Consolidated Financial Statements, Supplementary
Data, Management's Discussion and Analysis and Quantitative and
Qualitative Disclosures About Market Risk
Page
----
Management's Report.......................................... U-1
Audited Consolidated Financial Statements:
Report of Independent Accountants.......................... U-1
Consolidated Statement of Operations....................... U-2
Consolidated Balance Sheet................................. U-4
Consolidated Statement of Cash Flows....................... U-5
Consolidated Statement of Stockholders' Equity............. U-6
Notes to Consolidated Financial Statements................. U-8
Selected Quarterly Financial Data............................ U-29
Principal Unconsolidated Affiliates.......................... U-30
Supplementary Information.................................... U-30
Five-Year Operating Summary -- Marathon Group................ U-35
Five-Year Operating Summary -- U. S. Steel Group............. U-37
Five-Year Financial Summary.................................. U-38
Management's Discussion and Analysis......................... U-39
Quantitative and Qualitative Disclosures About Market Risk... U-55
<PAGE>
Management's Report
The accompanying consolidated financial statements of USX
Corporation and Subsidiary Companies (USX) are the responsibility
of and have been prepared by USX in conformity with generally
accepted accounting principles. They necessarily include some
amounts that are based on best judgments and estimates. The
consolidated financial information displayed in other sections of
this report is consistent with these consolidated financial
statements.
USX seeks to assure the objectivity and integrity of its
financial records by careful selection of its managers, by
organizational arrangements that provide an appropriate division of
responsibility and by communications programs aimed at assuring
that its policies and methods are understood throughout the
organization.
USX has a comprehensive formalized system of internal accounting
controls designed to provide reasonable assurance that assets are
safeguarded and that financial records are reliable. Appropriate
management monitors the system for compliance, and the internal
auditors independently measure its effectiveness and recommend
possible improvements thereto. In addition, as part of their audit
of the consolidated financial statements, USX's independent
accountants, who are elected by the stockholders, review and test
the internal accounting controls selectively to establish a basis
of reliance thereon in determining the nature, extent and timing of
audit tests to be applied.
The Board of Directors pursues its oversight role in the
area of financial reporting and internal accounting control through
its Audit Committee. This Committee, composed solely of
nonmanagement directors, regularly meets (jointly and separately)
with the independent accountants, management and internal auditors
to monitor the proper discharge by each of its responsibilities
relative to internal accounting controls and the consolidated
financial statements.
<TABLE>
<CAPTION>
<S> <C> <C>
Thomas J. Usher Robert M. Hernandez Kenneth L. Matheny
Chairman, Board of Directors Vice Chairman Vice President
& Chief Executive Officer & Chief Financial Officer & Comptroller
</TABLE>
Report of Independent Accountants
To the Stockholders of USX Corporation:
In our opinion, the accompanying consolidated financial statements
appearing on pages U-2 through U-28 present fairly, in all material
respects, the financial position of USX Corporation and its
subsidiaries at December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years
in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of USX's management; our responsibility is to
express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 5, page U-11, in 1995 USX adopted a new
accounting standard for the impairment of long-lived assets.
Price Waterhouse LLP
600 Grant Street, Pittsburgh, Pennsylvania 15219-2794
February 10, 1998
U-1
<PAGE>
Consolidated Statement of Operations
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Sales (Note 4) $22,375 $22,743 $20,273
Dividend and affiliate income 105 99 100
Gain on disposal of assets 94 71 29
Gain on affiliate stock offering (Note 8) - 53 -
Other income 14 11 11
------- ------- -------
Total revenues 22,588 22,977 20,413
------- ------- -------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 16,047 16,930 14,522
Selling, general and administrative expenses 218 144 163
Depreciation, depletion and amortization 967 985 1,135
Taxes other than income taxes 3,178 3,202 3,113
Exploration expenses 189 146 149
Inventory market valuation charges (credits) (Note 19) 284 (209) (70)
Impairment of long-lived assets (Note 5) - - 675
------ ------- -------
Total costs and expenses 20,883 21,198 19,687
------ ------- -------
INCOME FROM OPERATIONS 1,705 1,779 726
Net interest and other financial costs (Note 6) 347 421 466
------ ------- -------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 1,358 1,358 260
Provision for estimated income taxes (Note 12) 450 412 43
------ ------- -------
INCOME FROM CONTINUING OPERATIONS 908 946 217
------ ------- -------
DISCONTINUED OPERATIONS (Note 3):
Income (loss) from operations (net of income tax) (1) 6 4
Gain on disposal (net of income tax) 81 - -
------ ------- -------
INCOME FROM DISCONTINUED OPERATIONS 80 6 4
------ ------- -------
Extraordinary loss (Note 7) - 9 7
------ ------- -------
NET INCOME 988 943 214
Noncash credit from exchange of preferred stock (Note 26) 10 - -
Dividends on preferred stock (13) (22) (28)
------- ------- -------
NET INCOME APPLICABLE TO COMMON STOCKS $ 985 $ 921 $ 186
-----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
U-2
<PAGE>
Income Per Common Share
<TABLE>
<CAPTION>
(Dollars in millions, except per share data) 1997 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C>
CONTINUING OPERATIONS
APPLICABLE TO MARATHON STOCK:
Income (loss) before extraordinary loss $ 456 $ 671 $ (87)
Extraordinary loss - (7) (5)
----- ----- ------
Net income (loss) $ 456 $ 664 $ (92)
PER SHARE DATA
BASIC:
Income (loss) before extraordinary loss $1.59 $2.33 $(.31)
Extraordinary loss - (.02) (.02)
----- ----- ------
Net income (loss) $1.59 $2.31 $(.33)
DILUTED:
Income (loss) before extraordinary loss $1.58 $2.31 $(.31)
Extraordinary loss - (.02) (.02)
----- ----- ------
Net income (loss) $1.58 $2.29 $(.33)
----------------------------------------------------------------------
APPLICABLE TO STEEL STOCK:
Income before extraordinary loss $ 449 $ 253 $ 279
Extraordinary loss - (2) (2)
----- ----- ------
Net income $ 449 $ 251 $ 277
PER SHARE DATA
BASIC:
Income before extraordinary loss $5.24 $3.00 $3.53
Extraordinary loss - (.02) (.02)
----- ----- ------
Net income $5.24 $2.98 $3.51
DILUTED:
Income before extraordinary loss $4.88 $2.97 $3.43
Extraordinary loss - (.02) (.02)
----- ----- ------
Net income $4.88 $2.95 $3.41
----------------------------------------------------------------------
DISCONTINUED OPERATIONS
APPLICABLE TO OUTSTANDING DELHI STOCK:
Income before extraordinary loss $79.7 $ 6.4 $ 1.4
Extraordinary loss - (.5) (.3)
----- ----- ------
Net income $79.7 $ 5.9 $ 1.1
PER SHARE DATA
BASIC:
Income before extraordinary loss $8.43 $ .67 $ .15
Extraordinary loss - (.06) (.03)
----- ----- ------
Net income $8.43 $ .61 $ .12
DILUTED:
Income before extraordinary loss $8.41 $ .67 $ .15
Extraordinary loss - (.06) (.03)
----- ----- ------
Net income $8.41 $ .61 $ .12
----------------------------------------------------------------------
</TABLE>
See Note 24, for a description and computation of income per
common share.
The accompanying notes are an integral part of these
consolidated financial statements.
U-3
<PAGE>
Consolidated Balance Sheet
<TABLE>
<CAPTION>
(Dollars in millions) December 31 1997 1996
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 54 $ 55
Receivables, less allowance for doubtful accounts of
$15 and $26 (Note 13) 1,417 1,270
Inventories (Note 19) 1,685 1,939
Deferred income tax benefits (Note 12) 229 57
Other current assets 87 81
------- -------
Total current assets 3,472 3,402
Investments and long-term receivables, less reserves
of $15 and $17 (Note 14) 1,028 854
Property, plant and equipment - net (Note 17) 10,062 10,404
Prepaid pensions (Note 10) 2,247 2,014
Other noncurrent assets 280 306
Cash restricted for redemption of Delhi Stock (Note 3) 195 -
------- -------
Total assets $17,284 $16,980
--------------------------------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Notes payable $ 121 $ 81
Accounts payable 2,011 2,204
Payroll and benefits payable 521 475
Accrued taxes 304 304
Accrued interest 95 102
Long-term debt due within one year (Note 16) 471 353
------- -------
Total current liabilities 3,523 3,519
Long-term debt (Note 16) 2,932 3,859
Long-term deferred income taxes (Note 12) 1,353 1,097
Employee benefits (Note 11) 2,713 2,797
Deferred credits and other liabilities 736 436
Preferred stock of subsidiary (Note 25) 250 250
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely junior subordinated
convertible debentures of USX (Note 26) 182 -
Redeemable Delhi Stock (Note 3) 195 -
STOCKHOLDERS' EQUITY (Details on pages U-6 and U-7)
Preferred stock (Note 27)-
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 - 288,786,343 shares and 287,525,213 shares
(par value $1 per share, authorized 550,000,000 shares) 289 288
Steel Stock issued - 86,577,799 shares and 84,885,473 shares
(par value $1 per share, authorized 200,000,000 shares) 86 85
Delhi Stock issued - 9,448,269 shares
(par value $1 per share, authorized 50,000,000 shares) (Note 3) - 9
Additional paid-in capital 3,924 4,150
Retained earnings 1,138 517
Other equity adjustments (40) (34)
------- -------
Total stockholders' equity 5,400 5,022
------- -------
Total liabilities and stockholders' equity $17,284 $16,980
--------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
U-4
<PAGE>
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $ 988 $ 943 $ 214
Adjustments to reconcile to net cash provided
from operating activities:
Extraordinary loss - 9 7
Depreciation, depletion and amortization 987 1,012 1,160
Exploratory dry well costs 78 54 64
Inventory market valuation charges (credits) 284 (209) (70)
Pensions (225) (187) (338)
Postretirement benefits other than pensions (117) 36 12
Deferred income taxes 228 257 (68)
Gain on disposal of the Delhi Companies (287) - -
Gain on disposal of assets (94) (71) (30)
Gain on affiliate stock offering - (53) -
Payment of amortized discount on zero coupon debentures (17) - (129)
Impairment of long-lived assets - - 675
Changes in: Current receivables - sold (390) - (10)
- operating turnover 16 (170) (74)
Inventories (39) 27 40
Current accounts payable and accrued expenses 91 83 195
All other - net (45) (82) (16)
------- ------- -------
Net cash provided from operating activities 1,458 1,649 1,632
------- ------- -------
INVESTING ACTIVITIES:
Capital expenditures (1,373) (1,168) (1,016)
Proceeds from sale of the Delhi Companies 752 - -
Disposal of assets 481 443 157
Withdrawal (deposit) - property exchange trusts 98 (98) -
Investments in equity affiliates - net (249) (2) 3
Cash restricted for redemption of Delhi Stock (195) - -
All other - net (3) 26 1
------- ------- -------
Net cash used in investing activities (489) (799) (855)
------- ------- -------
FINANCING ACTIVITIES:
Commercial paper and revolving credit arrangements net 41 (153) (117)
Other debt - borrowings 11 191 52
- repayments (786) (711) (446)
Preferred stock redeemed - - (105)
Common stock - issued 82 53 218
- repurchased - - (1)
Dividends paid (316) (307) (295)
------- ------- -------
Net cash used in financing activities (968) (927) (694)
------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2) 1 -
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1) (76) 83
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 55 131 48
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 54 $ 55 $ 131
- -------------------------------------------------------------------------------------------------
</TABLE>
See Note 20, for supplemental cash flow information.
The accompanying notes are an integral part of these consolidated financial
statements.
U-5
<PAGE>
Consolidated Statement of Stockholders' Equity
After the redemption of the USX Delhi Common Stock (Delhi Stock) on
January 26, 1998 (Note 3), USX has two classes of common stock: USX
Marathon Group Common Stock (Marathon Stock) and USX U. S. Steel
Group Common Stock (Steel Stock), which are intended to reflect the
performance of the Marathon Group and the U. S. Steel Group,
respectively. (See Note 9, for a description of the two Groups.)
On all matters where the holders of Marathon Stock and
Steel Stock vote together as a single class, Marathon Stock has one
vote per share and Steel Stock has a fluctuating vote per share
based on the relative market value of a share of Steel Stock to the
market value of a share of Marathon Stock. In the event of a
disposition of all or substantially all the properties and assets
of the U. S. Steel Group, USX must either distribute the net
proceeds to the holders of the Steel Stock as a special dividend or
in redemption of the stock, or exchange the Steel Stock for the
Marathon Stock. In the event of liquidation of USX, the holders of
the Marathon Stock and Steel Stock will share in the funds
remaining for common stockholders based on the relative market
capitalization of the respective Marathon Stock and Steel Stock to
the aggregate market capitalization of both classes of common
stock.
<TABLE>
<CAPTION>
Shares in thousands Dollars in millions
----------------------------------- --------------------------------
1997 1996 1995 1997 1996 1995
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PREFERRED STOCKS (Note 27):
Adjustable Rate Cumulative:
Outstanding at beginning of year - - 2,100 $ - $ - $ 105
Redeemed - - (2,100) - - (105)
---------- ---------- ---------- --------- ---------- ---------
Outstanding at end of year - - - $ - $ - $ -
---------------------------------------------------------------------------------------------------------------------
6.50% Cumulative Convertible:
Outstanding at beginning of year 6,900 6,900 6,900 $ 7 $ 7 $ 7
Shares exchanged for trust
preferred securities (3,938) - - (4) - -
---------- ---------- ---------- --------- ---------- ---------
Outstanding at end of year 2,962 6,900 6,900 $ 3 $ 7 $ 7
---------------------------------------------------------------------------------------------------------------------
COMMON STOCKS:
Marathon Stock:
Outstanding at beginning of year 287,525 287,398 287,186 $ 288 $ 287 $ 287
Issued for employee stock plans 1,261 127 212 1 1 -
---------- ---------- ---------- --------- --------- ---------
Outstanding at end of year 288,786 287,525 287,398 $ 289 $ 288 $ 287
---------------------------------------------------------------------------------------------------------------------
Steel Stock:
Outstanding at beginning of year 84,885 83,042 75,970 $ 85 $ 83 $ 76
Issued in public offering - - 5,000 - - 5
Issued for:
Employee stock plans 1,416 1,649 1,681 1 2 2
Dividend Reinvestment Plan 277 194 391 - - -
---------- ---------- ---------- --------- --------- ---------
Outstanding at end of year 86,578 84,885 83,042 $ 86 $ 85 $ 83
---------------------------------------------------------------------------------------------------------------------
Delhi Stock:
Outstanding at beginning of year 9,448 9,447 9,438 $ 9 $ 9 $ 9
Issued (canceled) for employee stock plans (3) 1 9 - - -
Reclassified to redeemable Delhi Stock (9,445) - - (9) - -
---------- ---------- ---------- --------- --------- ---------
Outstanding at end of year - 9,448 9,447 $ - $ 9 $ 9
---------------------------------------------------------------------------------------------------------------------
</TABLE>
(Table continued on next page)
U-6
<PAGE>
<TABLE>
<CAPTION>
Shares in thousands Dollars in millions
--------------------------------- ----------------------------------
1997 1996 1995 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TREASURY COMMON STOCKS, AT COST:
Marathon Stock:
Balance at beginning of year - - - $ - $ - $ -
Repurchased (14) (7) (40) - - (1)
Reissued for employee stock plans 14 7 40 - - 1
--------- --------- --------- --------- --------- ---------
Balance at end of year - - - $ - $ - $ -
- --------------------------------------------------------------------------------------------------------------------
Steel Stock:
Balance at beginning of year - - - $ - $ - $ -
Repurchased (11) (7) (15) - - -
Reissued for employee stock plans 11 7 15 - - -
--------- --------- --------- --------- --------- ---------
Balance at end of year - - - $ - $ - $ -
- --------------------------------------------------------------------------------------------------------------------
Delhi Stock:
Balance at beginning of year - - - $ - $ - $ -
Repurchased (1) (1) (2) - - -
Reissued for employee stock plans 1 1 2 - - -
--------- --------- --------- --------- --------- ---------
Balance at end of year - - - $ - $ - $ -
- --------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year $ 4,150 $ 4,094 $ 4,168
Marathon Stock issued 38 3 4
Steel Stock issued 52 53 227
6.50% preferred stock exchanged for
trust preferred securities (188) - -
Reclassified to redeemable Delhi Stock (128) - -
Dividends on preferred stock - - (28)
Dividends on Marathon Stock (per share $.68) - - (195)
Dividends on Steel Stock (per share $1.00) - - (80)
Dividends on Delhi Stock (per share $.20) - - (2)
--------- --------- ---------
Balance at end of year $ 3,924 $ 4,150 $ 4,094
- --------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT):
Balance at beginning of year $ 517 $ (116) $ (330)
Net income 988 943 214
Dividends on preferred stock (13) (22) -
Dividends on Marathon Stock (per share: $.76 in 1997
and $.70 in 1996) (219) (201) -
Dividends on Steel Stock (per share $1.00) (86) (85) -
Dividends on Delhi Stock (per share: $.15 in 1997 and
$.20 in 1996) (1) (2) -
Reclassified to redeemable Delhi Stock (58) - -
Noncash credit from exchange of preferred stock 10 - -
--------- --------- ---------
Balance at end of year $ 1,138 $ 517 $ (116)
- ---------------------------------------------------------------------------------------------------------------------
OTHER EQUITY ADJUSTMENTS:
Foreign currency translation $ (8) $ (8) $ (8)
Deferred compensation (Note 21) (3) (4) (5)
Minimum pension liability (Note 10) (32) (22) (23)
Unrealized holding gains on investments 3 - -
--------- --------- ---------
Total other equity adjustments $ (40) $ (34) $ (36)
- --------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 5,400 $ 5,022 $ 4,328
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
U-7
<PAGE>
Notes to Consolidated Financial Statements
1. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
PRINCIPLES APPLIED IN CONSOLIDATION - The consolidated financial
statements include the accounts of USX Corporation and its
majority-owned subsidiaries (USX).
Investments in unincorporated oil and gas joint ventures,
undivided interest pipelines and jointly-owned gas processing
plants are consolidated on a pro rata basis.
Investments in other entities over which USX has significant
influence are accounted for using the equity method of accounting
and are carried at USX's share of net assets plus advances. The
proportionate share of income from these equity method investments
is included in revenues.
Investments in other companies whose stock is publicly traded
are carried at market value. The difference between the cost of
these investments and market value is recorded as a direct
adjustment to stockholders' equity (net of tax). Investments in
companies whose stock has no readily determinable fair value are
carried at cost. Dividends from these investments are recognized in
revenues.
Gains or losses from a change in ownership interest of a
consolidated subsidiary or an unconsolidated affiliate are
recognized in revenues in the period of change.
USE OF ESTIMATES - Generally accepted accounting principles require
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at year-end and the reported
amounts of revenues and expenses during the year.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash
on hand and on deposit and highly liquid debt instruments with
maturities generally of three months or less.
INVENTORIES - Inventories are carried at lower of cost or market.
Cost of inventories is determined primarily under the last-in,
first-out (LIFO) method.
DERIVATIVE INSTRUMENTS - USX engages in commodity and currency risk
management activities within the normal course of its businesses as
an end-user of derivative instruments (Note 28). Management is
authorized to manage exposure to price fluctuations related to the
purchase, production or sale of crude oil, natural gas, refined
products, nonferrous metals and electricity through the use of a
variety of derivative financial and nonfinancial instruments.
Derivative financial instruments require settlement in cash and
include such instruments as over-the-counter (OTC) commodity swap
agreements and OTC commodity options. Derivative nonfinancial
instruments require or permit settlement by delivery of commodities
and include exchange-traded commodity futures contracts and
options. At times, derivative positions are closed, prior to
maturity, simultaneous with the underlying physical transaction and
the effects are recognized in income accordingly. USX's practice
does not permit derivative positions to remain open if the
underlying physical market risk has been removed. Derivative
instruments relating to fixed price sales of equity production are
marked-to-market in the current period and the related income
effects are included within income from operations. All other
changes in the market value of derivative instruments are deferred,
including both closed and open positions, and are subsequently
recognized in income, as sales or cost of sales, in the same period
as the underlying transaction. Premiums on all commodity-based
option contracts are initially recorded based on the amount paid or
received; the options' market value is subsequently recorded as a
receivable or payable, as appropriate. The margin receivable
accounts required for open commodity contracts reflect changes in
the market prices of the underlying commodity and are settled on a
daily basis.
Forward currency contracts are used to manage currency risks
related to anticipated revenues and operating costs, firm
commitments for capital expenditures and existing assets or
liabilities denominated in a foreign currency. Gains or losses
related to firm commitments are deferred and included with the
underlying transaction; all other gains or losses are recognized in
income in the current period as sales, cost of sales, interest
income or expense, or other income, as appropriate. Net contract
values are included in receivables or payables, as appropriate.
Recorded deferred gains or losses are reflected within other
noncurrent assets or deferred credits and other liabilities. Cash
flows from the use of derivative instruments are reported in the
same category as the hedged item in the statement of cash flows.
EXPLORATION AND DEVELOPMENT - USX follows the successful efforts
method of accounting for oil and gas exploration and development.
U-8
<PAGE>
GAS BALANCING - USX follows the sales method of accounting for gas
production imbalances.
LONG-LIVED ASSETS - Except for oil and gas producing properties,
depreciation is generally computed on the straight-line method
based upon estimated lives of assets. USX's method of computing
depreciation for steel producing assets modifies straight-line
depreciation based on the level of production. The modification
factors range from a minimum of 85% at a production level below 81%
of capability, to a maximum of 105% for a 100% production level. No
modification is made at the 95% production level, considered the
normal long-range level.
Depreciation and depletion of oil and gas producing properties
are computed using predetermined rates based upon estimated proved
oil and gas reserves applied on a units-of-production method.
Depletion of mineral properties, other than oil and gas, is
based on rates which are expected to amortize cost over the
estimated tonnage of minerals to be removed.
When an entire property, plant, major facility or facilities
depreciated on an individual basis are sold or otherwise disposed
of, any gain or loss is reflected in income. Proceeds from disposal
of other facilities depreciated on a group basis are credited to
the depreciation reserve with no immediate effect on income.
USX evaluates impairment of its oil and gas assets primarily on
a field-by-field basis. Other assets are evaluated on an individual
asset basis or by logical groupings of assets. Assets deemed to be
impaired are written down to their fair value, including any
related goodwill, using discounted future cash flows and, if
available, comparable market values.
ENVIRONMENTAL LIABILITIES - USX provides for remediation costs and
penalties when the responsibility to remediate is probable and the
amount of associated costs is reasonably determinable. Generally,
the timing of remediation accruals coincides with completion of a
feasibility study or the commitment to a formal plan of action.
Remediation liabilities are accrued based on estimates of known
environmental exposure and could be discounted in certain
instances. If recoveries of remediation costs from third parties
are probable, a receivable is recorded. Estimated abandonment and
dismantlement costs of offshore production platforms are accrued
based on production of estimated proved oil and gas reserves.
POSTEMPLOYMENT BENEFITS - USX recognizes an obligation to provide
postemployment benefits, primarily for disability-related claims
covering indemnity and medical payments. The obligation for these
claims and the related periodic costs are measured using actuarial
techniques and assumptions, including an appropriate discount rate,
analogous to the required methodology for measuring pension and
other postretirement benefit obligations. Actuarial gains and
losses are deferred and amortized over future periods.
INSURANCE - USX is insured for catastrophic casualty and certain
property and business interruption exposures, as well as those
risks required to be insured by law or contract. Costs resulting
from noninsured losses are charged against income upon occurrence.
RECLASSIFICATIONS - Certain reclassifications of prior years' data
have been made to conform to 1997 classifications and to reflect
the discontinued operations presentation from the 1997 sale of the
Delhi Companies. See Note 3.
________________________________________________________________________________
2. NEW ACCOUNTING STANDARDS
The following accounting standards were adopted by USX:
Environmental remediation liabilities - 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, 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 of adoption on income from
operations at January 1, 1997, was $27 million.
Earnings per share - In 1997, USX adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS No. 128). This Statement establishes standards for
computing and presenting earnings per share (EPS). SFAS No. 128
requires dual presentation of basic and diluted EPS. Basic EPS
excludes dilution and is computed by dividing net income
available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if stock
options or convertible securities were exercised or converted
into common stock. The Company's adoption of SFAS No. 128 did
not materially change current and prior years' EPS.
U-9
<PAGE>
Stock-based compensation - Effective January 1, 1996, USX
adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123), which
establishes a fair value based method of accounting for employee
stock-based compensation plans. The Standard permits companies
to continue to apply the accounting provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25), provided certain disclosures are made.
USX has complied with SFAS No. 123 by following the accounting
provisions of APB No. 25 and including the required disclosures
at Note 21.
________________________________________________________________________________
3. DISCONTINUED OPERATIONS
Effective October 31, 1997, USX sold its stock in Delhi Gas
Pipeline Corporation and other subsidiaries of USX that comprise
all of the Delhi Group (Delhi Companies). The transaction
involved a gross purchase price of $762 million. Under the USX
Restated Certificate of Incorporation (USX Certificate), USX was
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 elected to use the net proceeds of $195
million, or $20.60 per share, to redeem all shares of Delhi
Stock. The net proceeds were distributed to the Delhi
shareholders on January 26, 1998.
The net proceeds were calculated in accordance with the
USX Certificate by deducting from the gross purchase price,
amounts of certain liabilities retained by the Delhi Companies
as well as amounts necessary to provide for taxes incurred by
USX in connection with the transaction, transaction fees and
expenses, contingent liabilities of the Delhi Group and certain
other liabilities and obligations not being assumed by the buyer
(including the portion of USX's debt and preferred stock
attributed to the Delhi Group). To the extent that the actual
future cash outflows for the liabilities retained from the Delhi
Companies vary from the amounts withheld from the proceeds, the
difference will be attributed to the Marathon and U. S. Steel
Groups.
The following is a calculation of the net proceeds
available for distribution and redemption price:
<TABLE>
<CAPTION>
(In millions, except per share amount)
---------------------------------------------------------------------------------------------
<S> <C> <C>
Gross purchase price $ 762
Less adjustments per stock purchase and sale agreement/(a)/ 10
------
Adjusted purchase price 752
Less deductions for:
Income taxes payable by USX with respect to the transaction $ 208
Liabilities (contingent and otherwise) of or attributed to the
Delhi Group/(b)/ 346
Transaction costs, net of income taxes 4 558
----- ------
Plus interest earned on funds held for redemption from closing
date until redemption date, net of income taxes 1
------
Net proceeds available for distribution $ 195
======
Net proceeds per share/(c)/ $20.60
-------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Reflects liabilities retained by the Delhi Companies for
which adjustments were required under the stock purchase
and sale agreement.
/(b)/ Includes debt and preferred stock attributed to the Delhi
Group at October 31, 1997.
/(c)/ 9,445,338 shares were reclassified to redeemable Delhi
Stock as of December 31, 1997.
The sale of the Delhi Companies resulted in a gain on
disposal of $81 million, net of $206 million income taxes.
As of December 31, 1997, the balance sheet of the Delhi
Group consisted of cash restricted for the redemption of Delhi
Stock of $195 million and redeemable Delhi Stock in an equal and
offsetting amount.
The financial results of the Delhi Group have been
reclassified as discontinued operations for all periods
presented in the Consolidated Statement of Operations and are
summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
--------------
(In millions) 1997/(a)/ 1996 1995
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $1,205 $1,062 $ 671
Costs and expenses 1,190 1,031 647
------ ------ -----
Income from operations 15 31 24
Net interest and other financial costs 23 21 16
------ ------ -----
Income (loss) before income taxes (8) 10 8
Provision (credit) for estimated income taxes (7) 4 4
------ ------ -----
Net income (loss) $ (1) $ 6 $ 4
---------------------------------------------------------------------------------------
</TABLE>
/(a)/ Represents ten months of operations.
U-10
<PAGE>
________________________________________________________________________________
4. REVENUES
The items below are included in revenues and costs and expenses,
with no effect on income.
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consumer excise taxes on petroleum products
and merchandise $2,736 $2,768 $2,708
Matching crude oil and refined product
buy/sell transactions settled in cash 2,436 2,912 2,067
----------------------------------------------------------------------------------------------
</TABLE>
________________________________________________________________________________
5. IMPAIRMENT OF LONG-LIVED ASSETS
In 1995, USX adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" (SFAS No. 121). SFAS
No. 121 requires that long-lived assets, including related
goodwill, be reviewed for impairment and written down to fair
value whenever events or changes in circumstances indicate that
the carrying value may not be recoverable.
Adoption of SFAS No. 121 resulted in an impairment charge
included in 1995 costs and expenses of $675 million. The
impaired assets primarily included certain domestic and
international oil and gas properties, an idled refinery, surplus
real estate and related goodwill.
USX assessed impairment of its oil and gas properties
based primarily on a field-by-field approach. The predominant
method used to determine fair value was a discounted cash flow
approach and where available, comparable market values were
used. The impairment provision reduced capitalized costs of oil
and gas properties by $533 million.
In addition, the Indianapolis, Indiana refinery, which was
temporarily idled in October 1993, was impaired by $126 million,
including related goodwill. The impairment was based on a
discounted cash flow approach and comparable market values.
Other long-lived assets written down included certain iron
ore mineral rights and surplus real estate holdings. The
impairment charge recognized for these assets was $16 million.
________________________________________________________________________________
6. OTHER ITEMS
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INTEREST AND OTHER FINANCIAL COSTS
FROM CONTINUING OPERATIONS
INTEREST AND OTHER FINANCIAL INCOME:
Interest income $ 11 $ 8 $ 17
Other (6) (1) 3
----- ----- -----
Total 5 7 20
----- ----- -----
INTEREST AND OTHER FINANCIAL COSTS:
Interest incurred 289 345 395
Less interest capitalized 31 11 13
----- ----- -----
Net interest 258 334 382
Interest on tax issues 20 14 6 /(a)/
Financial costs on trust preferred securities 10 - -
Financial costs on preferred stock of subsidiary 21 21 21
Amortization of discounts 6 9 27
Expenses on sales of accounts receivable 40 40 46
Adjustment to settlement value of indexed debt (10) 6 -
Other 7 4 4
----- ----- -----
Total 352 428 486
----- ----- -----
NET INTEREST AND OTHER FINANCIAL COSTS $ 347 $ 421 $ 466
----------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Includes a $20 million benefit related to refundable
federal income taxes paid in prior years.
________________________________________________________________
FOREIGN CURRENCY TRANSACTIONS
For 1997, 1996 and 1995, the aggregate foreign currency
transaction gains (losses) included in determining income
from continuing operations were $4 million, $(24) million and
$3 million, respectively.
U-11
<PAGE>
________________________________________________________________________________
7. EXTRAORDINARY LOSS
On December 30, 1996, USX irrevocably called for redemption on
January 30, 1997, $120 million of 8-1/2% Sinking Fund
Debentures, resulting in a 1996 extraordinary loss of $9
million, net of a $5 million income tax benefit. In 1995, USX
extinguished $553 million of debt prior to maturity, primarily
consisting of Zero Coupon Convertible Senior Debentures, with a
carrying value of $393 million, and $83 million of 8-1/2%
Sinking Fund Debentures, which resulted in an extraordinary loss
of $7 million, net of a $4 million income tax benefit.
________________________________________________________________________________
8. GAIN ON AFFILIATE STOCK OFFERING
In 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 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.
________________________________________________________________________________
9. OPERATIONS AND SEGMENT INFORMATION CONTINUING OPERATIONS
After the redemption of the Delhi Stock on January 26, 1998, USX
has two classes of common stock: Marathon Stock and Steel Stock,
which are intended to reflect the performance of the Marathon
Group and the U. S. Steel Group, respectively. The operations
and segments of USX conform to USX's group structure. A
description of each group and its products and services is as
follows:
MARATHON GROUP - The Marathon Group is involved in
worldwide exploration, production, transportation and
marketing of crude oil and natural gas; domestic refining,
marketing and transportation of petroleum products; and
power generation. Marathon Group revenues as a percentage
of total consolidated USX revenues were 69% in 1997, 71%
in 1996 and 68% in 1995. See five-year operating data on
page U-35.
U. S. STEEL GROUP - The U. S. Steel Group, which consists
primarily of steel operations, includes the largest
domestic integrated steel producer and is primarily
engaged in the production and sale of steel mill products,
coke and taconite pellets. The U. S. Steel Group also
includes the management of mineral resources, domestic
coal mining, and engineering and consulting services.
Other businesses that are part of the U. S. Steel Group
include real estate development and management and leasing
and financing activities. U. S. Steel Group revenues as a
percentage of total consolidated USX revenues were 31% in
1997, 29% in 1996 and 32% in 1995. See five-year operating
data on page U-37.
INDUSTRY SEGMENT:
<TABLE>
<CAPTION>
Depreciation,
Revenues Depletion
Between Total Operating and Capital
(In millions) Year Revenues Groups/(a)/ Revenues Income/(b)/ Assets Amortization Expenditures
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Marathon Group: 1997 $15,649 $ 105 $15,754 $ 866 $10,565 $ 664 $1,038
1996 16,307 87 16,394 1,234 10,151 693 751
1995 13,856 57 13,913 113 10,109 817 642
- ------------------------------------------------------------------------------------------------------------------------------------
U. S. Steel Group: 1997 6,939 2 6,941 704 6,694 303 261
1996 6,670 - 6,670 360 6,580 292 337
1995 6,557 - 6,557 500 6,521 318 324
- ------------------------------------------------------------------------------------------------------------------------------------
Adjustments for 1997 - (107) (107) - 25 - 74
Discontinued 1996 - (87) (87) - 249 - 80
Operations and 1995 - (57) (57) - 113 - 50
Eliminations
- ------------------------------------------------------------------------------------------------------------------------------------
Total USX Corporation: 1997 $22,588 $ - $22,588 $ 1,570 $17,284 $ 967 $1,373
1996 22,977 - 22,977 1,594 16,980 985 1,168
1995 20,413 - 20,413 613 16,743 1,135 1,016
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Intergroup sales and transfers were conducted on an arm's-length basis.
/(b)/ Operating income includes inventory market valuation charges (credits) for
the Marathon Group of $284 million, $(209) million and $(70) million in
1997, 1996 and 1995, respectively (Note 19); and in 1995, impairment of
long-lived asset charges of $659 million for the Marathon Group and $16
million for the U. S. Steel Group (Note 5). Operating income does not
include dividend and affiliate income, gains from changes in ownership,
gains and losses on disposal of investments and other income, which are
included in income from operations in the Consolidated Statement of
Operations.
U-12
<PAGE>
EXPORT SALES:
The information below summarizes export sales by geographic area for the
U.S. Steel Group. Export sales from domestic operations for the Marathon Group
were not material.
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Far East $ 14 $ 58 $ 338
Europe 122 103 142
Other 302 232 224
----- ----- -----
Total export sales $ 438 $ 393 $ 704
- -------------------------------------------------------------------------------------------
</TABLE>
GEOGRAPHIC AREA:
The information below summarizes the operations in different geographic areas.
Transfers between geographic areas are at prices which approximate market.
<TABLE>
<CAPTION>
Revenues
-------------------------------
Within Between Operating
Geographic Geographic Income
(In millions) Year Areas Areas Total (Loss) Assets
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Marathon Group:
United States 1997 $ 15,034 $ - $ 15,034 $ 607 $ 6,683
1996 15,509 - 15,509 866 6,604
1995 13,162 - 13,162 129 6,791
Europe 1997 698 - 698 268 2,144
1996 859 - 859 368 2,230
1995 726 - 726 109 2,372
Other International 1997 22 39 61 (9) 1,738
1996 26 43 69 - 1,317
1995 25 85 110 (125) 946
Eliminations 1997 - (39) (39) - -
1996 - (43) (43) - -
1995 - (85) (85) - -
Total Marathon Group 1997 $ 15,754 $ - $ 15,754 $ 866 $10,565
1996 16,394 - 16,394 1,234 10,151
1995 13,913 - 13,913 113 10,109
- ------------------------------------------------------------------------------------------------------------------------------------
U. S. Steel Group:
United States 1997 $ 6,926 $ - $ 6,926 $ 705 $ 6,667
1996 6,642 - 6,642 363 6,552
1995 6,538 4 6,542 501 6,492
International 1997 15 - 15 (1) 27
1996 28 - 28 (3) 28
1995 19 - 19 (1) 29
Eliminations 1997 - - - - -
1996 - - - - -
1995 - (4) (4) - -
Total U. S. Steel Group 1997 $ 6,941 $ - $ 6,941 $ 704 $ 6,694
1996 6,670 - 6,670 360 6,580
1995 6,557 - 6,557 500 6,521
- ------------------------------------------------------------------------------------------------------------------------------------
Adjustments for 1997 $ (107) $ - $ (107) $ - $ 25
Discontinued Operations 1996 (87) - (87) - 249
and Eliminations 1995 (57) - (57) - 113
- ------------------------------------------------------------------------------------------------------------------------------------
Total USX Corporation 1997 $ 22,588 $ - $22,588 $1,570 $ 17,284
1996 22,977 - 22,977 1,594 16,980
1995 20,413 - 20,413 613 16,743
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
U-13
<PAGE>
________________________________________________________________________________
10. PENSIONS
USX has noncontributory defined benefit plans covering
substantially all employees. Benefits under these plans are
based upon years of service and final average pensionable
earnings, or a minimum benefit based upon years of service,
whichever is greater. In addition, pension benefits under the
contributory benefit provisions cover certain participating
salaried employees and are based upon a percent of total career
pensionable earnings. The funding policy for defined benefit
plans provides that payments to the pension trusts shall be
equal to the minimum funding requirements of ERISA plus such
additional amounts as may be approved.
USX also participates in multiemployer plans, most of which
are defined benefit plans associated with coal operations.
PENSION COST (CREDIT) - The defined benefit cost from continuing
operations for major plans for 1997, 1996 and 1995 was
determined assuming an expected long-term rate of return on plan
assets of 9.5%, 10% and 10%, respectively, and was as follows:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
USX major plans:
Cost of benefits earned during the period $ 96 $ 104 $ 83
Interest cost on projected benefit obligation
(7.5% for 1997; 7% for 1996; and 8% for 1995) 562 568 604
Return on assets - actual return (1,972) (1,275) (2,039)
- deferred gain 1,144 422 1,200
Net amortization of unrecognized losses 3 7 -
------ ------- -------
Total major plans (167) (174) (152)
Multiemployer and other USX plans 6 6 6
------ ------- -------
Total periodic pension credit (161) (168) (146)
Curtailment, settlement and termination costs 4 6 2
------ ------- -------
Total pension credit $ (157) $ (162) $ (144)
----------------------------------------------------------------------------------------------------
</TABLE>
FUNDS' STATUS - The assumed discount rate used to measure the
benefit obligations of major plans was 7% at December 31, 1997,
and 7.5% at December 31, 1996. The assumed rate of future
increases in compensation levels was 4% at both year-ends. The
following table sets forth the plans' funded status and the
amounts reported in USX's consolidated balance sheet:
<TABLE>
<CAPTION>
(In millions) December 31 1997 1996
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of funds' status to reported amounts:
Projected benefit obligation (PBO)/(a)/ $(8,085) $(7,924)
Plan assets at fair market value/(b)/ 10,925 9,883
------- -------
Assets in excess of PBO/(c)/ 2,840 1,959
Unrecognized net gain from transition (249) (300)
Unrecognized prior service cost 628 640
Unrecognized net gain (993) (311)
Additional minimum liability/(d)/ (79) (77)
------- -------
Net pension asset included in balance sheet $ 2,147 $ 1,911
-------------------------------------------------------------------------------------------------------------------
/(a)/ PBO includes:
Accumulated benefit obligation (ABO) $(7,490) $(7,394)
Vested benefit obligation (7,031) (6,931)
/(b)/ Types of assets held:
Stocks of other corporations 56% 56%
U.S. Government securities 17% 18%
Corporate debt instruments and other 27% 26%
/(c)/ Includes several small plans that have ABOs in excess of plan assets:
PBO $ (151) $ (135)
Plan assets 24 18
------- -------
PBO in excess of plan assets $ (127) $ (117)
/(d)/ Additional minimum liability recorded was offset by the following:
Intangible asset $ 30 $ 42
Stockholders' equity adjustment net of deferred income tax 32 22
------------------------------------------------------------------------------------------------------------------
</TABLE>
U-14
<PAGE>
________________________________________________________________________________
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
USX has defined benefit retiree health and life insurance plans
covering most employees upon their retirement. Health benefits
are provided, for the most part, through comprehensive hospital,
surgical and major medical benefit provisions subject to various
cost sharing features. Life insurance benefits are provided to
nonunion and certain union represented retiree beneficiaries
primarily based on employees' annual base salary at retirement.
For other union retirees, benefits are provided for the most
part based on fixed amounts negotiated in labor contracts with
the appropriate unions. Except for certain life insurance
benefits paid from reserves held by insurance carriers, most
benefits have not been prefunded.
POSTRETIREMENT BENEFIT COST - Postretirement benefit cost for
defined benefit plans for 1997, 1996 and 1995 was determined
assuming discount rates of 7.5%, 7% and 8%, respectively, and an
expected return on plan assets of 9.5% in 1997 and 10% for 1996
and 1995:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost of benefits earned during the period $ 21 $ 26 $ 26
Interest on accumulated postretirement benefit obligation (APBO) 175 183 198
Return on assets - actual return (19) (12) (11)
- deferred gain (loss) 8 1 (1)
Amortization of unrecognized (gains) losses (12) 2 (1)
----- ----- -----
Total defined benefit plans 173 200 211
Multiemployer plans/(a)/ 15 15 15
----- ----- -----
Total postretirement benefit cost $ 188 $ 215 $ 226
------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Payments are made to a multiemployer benefit plan created
by the Coal Industry Retiree Health Benefit Act of 1992
based on assigned beneficiaries receiving benefits. The
present value of this unrecognized obligation is broadly
estimated to be $108 million, including the effects of
future medical inflation, and this amount could increase
if additional beneficiaries are assigned.
FUNDS' STATUS - The following table sets forth the plans' funded
status and the amounts reported in USX's consolidated balance
sheet:
<TABLE>
<CAPTION>
(In millions) December 31 1997 1996
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reconciliation of funds' status to reported amounts:
Fair value of plan assets $ 258 $ 111
------ ------
APBO attributable to:
Retirees 1,772 1,784
Fully eligible plan participants 271 233
Other active plan participants 408 393
------ ------
Total APBO 2,451 2,410
------ ------
APBO in excess of plan assets 2,193 2,299
Unrecognized net gain 254 260
Unrecognized prior service cost 7 6
------ ------
Accrued liability included in balance sheet $2,454 $2,565
------------------------------------------------------------------------------------------------------------
</TABLE>
The assumed discount rate used to measure the APBO was 7%
and 7.5% at December 31, 1997, and December 31, 1996,
respectively. The assumed rate of future increases in
compensation levels was 4% at both year-ends. The weighted
average health care cost trend rate in 1998 is approximately 8%,
declining to an ultimate rate in 2004 of approximately 5%. A one
percentage point increase in the assumed health care cost trend
rates for each future year would have increased the aggregate of
the service and interest cost components of the 1997 net
periodic postretirement benefit cost by $22 million and would
have increased the APBO as of December 31, 1997, by $242
million.
U-15
<PAGE>
- --------------------------------------------------------------------------------
12. INCOME TAXES
Provisions (credits) for estimated income taxes on income from continuing
operations were:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------- ------------------------------ ---------------------------------
(In millions) Current Deferred Total Current Deferred Total Current Deferred Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal $208 $ 163 $371 $142 $ 151 $ 293 $ 80 $ (71) $ 9
State and local 7 32 39 12 21 33 19 (31) (12)
Foreign 12 28 40 4 82 86 15 31 46
---- ----- ---- ---------- -------- -------- -------- ---------- ----------
Total $227 $ 223 $450 $158 $ 254 $ 412 $ 114 $ (71) $ 43
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of federal statutory tax rate (35%) to total provisions
from continuing operations follows:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate applied to income from continuing operations
before income taxes $ 475 $ 476 $ 92
Credits other than foreign tax credits (24) (48) (1)
State and local income taxes after federal income tax effects 25 22 (8)
Effects of foreign operations, including foreign tax credits (11) (16) (35) /(a)/
Effects of partially-owned companies (9) (16) (15)
Dispositions of subsidiary investments - (8) (6)
Excess percentage depletion (10) (7) (8)
Nondeductible business and amortization expenses 5 5 17
Adjustment of prior years' income taxes 2 3 2
Adjustment of valuation allowances (5) - 6
Other 2 1 (1)
-------- -------- ----------
Total provisions on income from continuing operations $ 450 $ 412 $ 43
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Includes incremental tax benefits of $39 million resulting from
USX's election to credit, rather than deduct, certain foreign
income taxes for federal income tax purposes.
Deferred tax assets and liabilities resulted from the
following:
<TABLE>
<CAPTION>
(In millions) December 31 1997 1996
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Minimum tax credit carryforwards $ 222 $ 436
General business credit carryforwards - 24
State tax loss carryforwards (expiring in 1998 through 2012) 127 141
Foreign tax loss carryforwards (portion of which expire in 1998 through 2012) 483 519
Employee benefits 1,004 1,025
Receivables, payables and debt 63 79
Expected federal benefit for:
Crediting certain foreign deferred income taxes 249 216
Deducting state and other foreign deferred income taxes 47 41
Contingency and other accruals 198 167
Other 59 155
Valuation allowances (363) (396)
------ ---------
Total deferred tax assets/(a)/ 2,089 2,407
------ ---------
Deferred tax liabilities:
Property, plant and equipment 2,041 2,180
Prepaid pensions 786 721
Inventory 212 319
Other 167 228
------ ---------
Total deferred tax liabilities 3,206 3,448
------ ---------
Net deferred tax liabilities $1,117 $1,041
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ USX expects to generate sufficient future taxable income to
realize the benefit of its deferred tax assets. In addition,
the ability to realize the benefit of foreign tax credits is
based upon certain assumptions concerning future operating
conditions (particularly as related to prevailing oil prices),
income generated from foreign sources and USX's tax profile in
the years that such credits may be claimed.
The consolidated tax returns of USX for the years 1990 through
1994 are under various stages of audit and administrative
review by the IRS. USX believes it has made adequate provision
for income taxes and interest which may become payable for
years not yet settled.
Pretax income from continuing operations included $250 million,
$339 million and $(50) million attributable to foreign sources
in 1997, 1996 and 1995, respectively.
Undistributed earnings of consolidated foreign subsidiaries at
December 31, 1997, amounted to $108 million. No provision for
deferred U.S. income taxes has been made because USX intends to
permanently reinvest such earnings in its foreign operations.
If such earnings were not permanently reinvested, a deferred
tax liability of $38 million would have been required.
U-16
<PAGE>
- --------------------------------------------------------------------------------
13. SALES OF RECEIVABLES
USX has an agreement (the program) at December 31, 1997, to sell
an undivided interest in certain accounts receivable. Payments are
collected from the sold accounts receivable; the collections are
reinvested in new accounts receivable for the buyers; and a yield,
based on defined short-term market rates, is transferred to the
buyers. At December 31, 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 in 1998, 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 program will be reduced
accordingly. The amounts sold under the current and previous
programs averaged $705 million, $740 million and $744 million for
years 1997, 1996 and 1995, respectively. (For most of 1997 and for
the years 1996 and 1995, the Marathon and Delhi Groups had a
separate accounts receivable program that was terminated in late
1997.) The buyers have rights to a pool of receivables that must be
maintained at a level of at least 115% of the program's size. USX
does not generally require collateral for accounts receivable, but
significantly reduces credit risk through credit extension and
collection policies, which include analyzing the financial
condition of potential customers, establishing credit limits,
monitoring payments and aggressively pursuing delinquent accounts.
In the event of a change in control of USX, USX may be required to
forward to the buyers, payments collected on the sold accounts
receivable.
- --------------------------------------------------------------------------------
14. INVESTMENTS AND LONG-TERM RECEIVABLES
<TABLE>
<CAPTION>
(In millions) December 31 1997 1996
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity method investments $ 838 $ 549
Other investments 88 94
Deposit in property exchange trusts - 98
Receivables due after one year 71 67
Forward currency contracts - 16
Other 31 30
------ ------
Total $1,028 $ 854
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
Summarized financial information of affiliates accounted for by
the equity method of accounting follows:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income data--year:
Revenues $3,705 $3,274 $3,531
Operating income 342 318 339
Net income 191 193 187
-----------------------------------------------------------------------------------------------------------------------
Balance sheet data December 31:
Current assets $1,094 $ 925
Noncurrent assets 3,476 2,728
Current liabilities 863 781
Noncurrent liabilities 1,521 1,582
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
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. The related unamortized deferred
gains of $244 million at December 31, 1997 (included in deferred
credits and other liabilities) are being recognized over the life
of the partnership's assets. USX's partnership interest is
accounted for under the equity method of accounting. The fair value
attributed to USX for its general partnership interest exceeds the
historical basis of contributed net assets by $38 million and is
being amortized on a straight-line basis over the life of the
partnership.
Dividends and partnership distributions received from equity
affiliates were $34 million in 1997, $49 million in 1996 and $85
million in 1995.
USX purchases from equity affiliates totaled $461 million, $509
million and $458 million in 1997, 1996 and 1995, respectively. USX
sales to equity affiliates totaled $812 million, $830 million and
$769 million in 1997, 1996 and 1995, respectively.
- --------------------------------------------------------------------------------
15. SHORT-TERM CREDIT AGREEMENT
USX has a short-term credit agreement totaling $125 million at
December 31, 1997. Interest is based on the bank's prime rate or
London Interbank Offered Rate (LIBOR), and carries a facility fee
of .15%. Certain other banks provide short-term lines of credit
totaling $200 million which require a .125% fee or maintenance of
compensating balances of 3%. At December 31, 1997, there were no
borrowings against these facilities. USX had other outstanding
short-term borrowings of $121 million.
U-17
<PAGE>
- --------------------------------------------------------------------------------
16. LONG-TERM DEBT
<TABLE>
<CAPTION>
Interest December 31
(In millions) Rates-% Maturity 1997 1996
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
USX Corporation:
Revolving credit/(a)/ 2001 $ - $ -
Notes payable 6/3//8-9/4//5 1998-2023 2,239 2,398
Foreign currency obligations/(b)/ 5/3//4 1998 68 75
Zero Coupon Convertible Senior Debentures/(c)/ 7/7//8 - 41
Convertible Subordinated Debentures/(c)/ 5/3//4 - 180
Convertible Subordinated Debentures/(c)/ 7 - 227
Obligations relating to Industrial Development and
Environmental Improvement Bonds and Notes/(d)/ 3/9//20-6/7//8 1998-2030 470 473
Indexed debt/(e)/ 6/3//4 2000 113 123
All other obligations, including sale-leaseback
financing and capital leases 1998-2012 98 104
Consolidated subsidiaries:
Guaranteed Notes 7 2002 135 135
Guaranteed Loan/(f)/ 9/1//20 1998-2006 265 283
Notes payable 8/1//2 1998-2001 3 9
Sinking Fund Debentures/(c)/ 8/1//2 - 120
All other obligations, including capital leases 1998-2009 38 73
------ ------
Total/(g)(h)/ 3,429 4,241
Less unamortized discount 26 29
Less amount due within one year 471 353
------ ------
Long-term debt due after one year $2,932 $3,859
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ An amended agreement which terminates in August 2001,
provides for borrowing under a $2,350 million revolving
credit facility. Interest is based on defined short-term
market rates. During the term of this agreement, USX is
obligated to pay a variable facility fee on total
commitments, which was .15 % at December 31, 1997.
/(b)/ Foreign currency exchange agreements were executed in
connection with the Swiss franc obligations, which
effectively fixed the principal repayment at $59 million at
December 31, 1997, and interest in U.S. dollars, thereby
eliminating currency exchange risks (Note 28).
/(c)/ These debentures were redeemed during 1997.
/(d)/ At December 31, 1997, USX had outstanding obligations
relating to Environmental Improvement Bonds in the amount of
$256 million, which were supported by letter of credit
arrangements that could become short-term obligations under
certain circumstances.
/(e)/ The indexed debt represents 6 3/4% exchangeable notes due
February 1, 2000, in the principal amount of $117 million or
$21.375 per note, which was the market price per share of RMI
common stock on November 26, 1996. At maturity, the principal
amount of each note will be mandatorily exchanged by USX into
shares of RMI common stock (or, at USX's option, the cash
equivalent and/or such other consideration as permitted or
required by the terms of the notes) at a defined exchange
rate, which is based on the average market price of RMI
common stock valued in January 2000. The carrying value of
the notes is adjusted quarterly to settlement value and any
resulting adjustment is charged or credited to income and
included in net interest and other financial costs.
/(f)/ The guaranteed loan was used to fund a portion of the costs
in connection with the development of the East Brae Field and
the SAGE pipeline in the North Sea. A portion of proceeds
from a long-term gas sales contract is dedicated to loan
service under certain circumstances. Prepayment of the loan
may be required under certain situations, including events
impairing the security interest.
/(g)/ Required payments of long-term debt for the years 1999-2002
are $70 million, $173 million, $289 million and $293 million,
respectively.
/(h)/ In the event of a change in control of USX, as defined in the
related agreements, debt obligations totaling $3,001 million
may be declared immediately due and payable. The principal
obligations subject to such a provision are Notes payable-
$2,239 million; and Guaranteed Loan $265 million. In such
event, USX may also be required to either repurchase the
leased Fairfield slab caster for $110 million or provide a
letter of credit to secure the remaining obligation.
U-18
<PAGE>
- --------------------------------------------------------------------------------
17. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
(In millions) December 31 1997 1996
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Marathon Group $17,233 $16,329
U. S. Steel Group 8,295 8,347
Delhi Group - 1,008
------- ---------
Total 25,528 25,684
Less accumulated depreciation, depletion and amortization 15,466 15,280
------- ---------
Net $10,062 $10,404
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
Property, plant and equipment includes gross assets acquired
under capital leases (including sale-leasebacks accounted for as
financings) of $134 million at December 31, 1997, and $141 million
at December 31, 1996; related amounts in accumulated depreciation,
depletion and amortization were $94 million and $91 million,
respectively.
- --------------------------------------------------------------------------------
18. LEASES
Future minimum commitments for capital leases (including sale-
leasebacks accounted for as financings) and for operating leases
having remaining noncancelable lease terms in excess of one year
are as follows:
<TABLE>
<CAPTION>
Capital Operating
(In millions) Leases Leases
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 13 $ 226
1999 13 190
2000 13 252
2001 13 170
2002 13 101
Later years 142 239
Sublease rentals - (30)
----- -----
Total minimum lease payments 207 $1,148
=====
Less imputed interest costs 85
-----
Present value of net minimum lease payments
included in long-term debt $ 122
-----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Operating lease rental expense from continuing operations:
(In millions) 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rental $ 237 $ 227 $ 218
Contingent rental 16 15 19
Sublease rentals (8) (8) (8)
----- ----- ---------
Net rental expense $ 245 $ 234 $ 229
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
USX leases a wide variety of facilities and equipment under
operating leases, including land and building space, office
equipment, production facilities and transportation equipment. Most
long-term leases include renewal options and, in certain leases,
purchase options. In the event of a change in control of USX, as
defined in the agreements, or certain other circumstances,
operating lease obligations totaling $129 million may be declared
immediately due and payable.
U-19
<PAGE>
- --------------------------------------------------------------------------------
19. INVENTORIES
<TABLE>
<CAPTION>
(In millions) December 31 1997 1996
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Raw materials $ 582 $ 594
Semi-finished products 331 309
Finished products 922 908
Supplies and sundry items 134 128
------ ------
Total (at cost) 1,969 1,939
Less inventory market valuation reserve 284 -
------ ------
Net inventory carrying value $1,685 $1,939
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, and December 31, 1996, the LIFO method
accounted for 92% and 93%, respectively, of total inventory value.
Current acquisition costs were estimated to exceed the above
inventory values at December 31 by approximately $300 million and
$340 million in 1997 and 1996, respectively.
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 costs and expenses.
- --------------------------------------------------------------------------------
20. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH USED IN OPERATING ACTIVITIES INCLUDED:
Interest and other financial costs paid
(net of amount capitalized) $ (382) $ (488) $ (605)
Income taxes paid (400) (127) (170)
_______________________________________________________________________________________________________________________
COMMERCIAL PAPER AND REVOLVING CREDIT ARRANGEMENTS NET:
Commercial paper - issued $ - $ 1,422 $ 2,434
- repayments - (1,555) (2,651)
Credit agreements - borrowings 10,454 10,356 4,719
- repayments (10,449) (10,340) (4,659)
Other credit arrangements - net 36 (36) 40
-------- -------- --------
Total $ 41 $ (153) $ (117)
-----------------------------------------------------------------------------------------------------------------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for dividend reinvestment
and employee stock plans $ 10 $ 6 $ 21
Acquisition of assets - debt issued - 2 -
Disposal of assets - notes and common stock received - 12 9
- liabilities assumed by buyers 240 25 -
Trust preferred securities exchanged for preferred stock 182 - -
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
21. STOCK-BASED COMPENSATION PLANS
The 1990 Stock Plan, as amended, authorizes the Compensation
Committee of the Board of Directors to grant restricted stock and
stock options to key management employees. Such employees are
generally granted awards of the class of common stock intended to
reflect the performance of the group(s) to which their work
relates. Up to .5 percent of the outstanding Marathon Stock and .8
percent of the outstanding Steel Stock, as determined on December
31 of the preceding year, are available for grants during each
calendar year the 1990 Plan is in effect. In addition, awarded
shares that do not result in shares being issued are available for
subsequent grant in the same year, and any ungranted shares from
prior years' annual allocations are available for subsequent grant
during the years the 1990 Plan is in effect. As of December 31,
1997, 7,452,556 Marathon Stock shares and 2,272,170 Steel Stock
shares were available for grants in 1998. The Stock-Based
Compensation Plans' activity below includes the Delhi Stock prior
to its January 1998 redemption (Note 3).
Restricted stock represents stock granted for such
consideration, if any, as determined by the Compensation Committee,
subject to provisions for forfeiture and restricting transfer.
Those restrictions may be removed as conditions such as
performance, continuous service and other criteria are met.
Restricted stock is issued at the market price per share at the
date of grant and vests over service periods that range from one to
five years.
U-20
<PAGE>
Deferred compensation is charged to stockholders' equity when
the restricted stock is granted and subsequently adjusted for
changes in the market value of the underlying stock. The deferred
compensation is expensed over the balance of the vesting period and
adjusted if conditions of the restricted stock grant are not met.
The following table presents information on restricted stock
grants:
<TABLE>
<CAPTION>
Marathon Stock Steel Stock Delhi Stock
----------------------------- -------------------------- -------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Number of shares
granted 20,430 11,495 232,828 11,942 5,605 146,054 - - 10,000
Weighted-average
grant-date fair
value per share $ 29.38 $ 22.38 $ 19.50 $ 32.00 $31.94 $ 33.81 $ - $ - $ 10.25
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
Stock options represent the right to purchase shares of
Marathon Stock, Steel Stock or Delhi Stock at the market value of
the stock at date of grant. Certain options contain the right to
receive cash and/or common stock equal to the excess of the fair
market value of shares of common stock, as determined in accordance
with the plan, over the option price of shares. Stock options
expire 10 years from the date they are granted and vest over a one-
year service period.
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
Marathon Stock Steel Stock Delhi Stock
------------------------ ------------------------ -----------------------
Shares Price/(a)/ Shares Price/(a)/ Shares Price/(a)/
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 5,178,350 $24.44 720,300 $ 37.27 192,800 $17.50
Granted 577,950 19.45 361,750 31.97 67,100 12.63
Exercised (22,700) 17.66 (8,680) 21.87 - -
Canceled (677,050) 26.44 (16,720) 31.03 - -
---------- --------- -------
Balance December 31, 1995 5,056,550 23.63 1,056,650 35.68 259,900 16.24
Granted 633,825 22.38 411,705 31.94 77,550 13.63
Exercised (321,985) 17.50 (100,260) 31.98 (1,500) 12.69
Canceled (137,820) 26.82 (22,500) 33.43 (9,000) 17.49
---------- --------- -------
Balance December 31, 1996 5,230,570 23.78 1,345,595 34.85 326,950 15.60
Granted 756,260 29.38 457,590 32.00 94,250 13.31
Exercised (2,215,665) 23.86 (158,265) 31.85 (6,300) 12.21
Canceled (76,300) 26.91 (11,820) 34.36 (6,650) 15.73
---------- --------- -------
Balance December 31, 1997 3,694,865 24.81 1,633,100 34.35 408,250 /(b)/ 15.13
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Weighted-average exercise price.
/(b)/ Redeemed on January 26, 1998.
The following table represents stock options at December
31, 1997, excluding the Delhi Stock, which was redeemed on January
26, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------------- -----------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of of Shares Remaining Average of Shares Average
Exercise Under Contractual Exercise Under Exercise
Prices Option Life Price Option Price
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Marathon Stock $17.00-23.44 1,806,455 6.7 years $20.66 1,806,455 $20.66
25.38-26.88 344,250 2.4 25.81 344,250 25.81
29.08-29.88 1,544,160 5.6 29.43 789,200 29.49
--------- ---------
Total 3,694,865 2,939,905
--------- ---------
Steel Stock $22.24-25.44 40,615 3.4 years $24.70 40,615 $24.70
31.69-34.44 1,309,310 8.2 32.52 855,220 32.79
44.19 283,175 5.4 44.19 283,175 44.19
--------- ---------
Total 1,633,100 1,179,010
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
During 1996, USX adopted SFAS No. 123, Accounting for
Stock-Based Compensation, as discussed in Note 2, and elected to
continue to follow the accounting provisions of APB No. 25. Actual
stock-based compensation expense was $30 million in 1997, $8
million in 1996 and $3 million in 1995. Incremental compensation
expense, as determined under SFAS No. 123, was not material ($.02
or less per share for all years presented). Therefore, pro forma
net income and earnings per share data have been omitted.
Effective January 1, 1997, USX created a deferred compensation
plan for non-employee directors of its Board of Directors. The plan
permits participants to defer some or all of their annual retainers
in the form of common stock units or cash. Common stock units are
book entry units equal in value to a share of Marathon Stock or
Steel Stock. Deferred stock benefits are distributed in shares of
common stock within five business days after a participant leaves
the Board of Directors. During 1997, no shares of common stock were
distributed.
U-21
<PAGE>
________________________________________________________________________________
22. DIVIDENDS
In accordance with the USX Certificate of Incorporation,
dividends on the Marathon Stock and Steel Stock are limited to the
legally available funds of USX. Net losses of any Group, as well as
dividends and distributions on any class of USX Common Stock or
series of preferred stock and repurchases of any class of USX
Common Stock or series of preferred stock at prices in excess of
par or stated value, will reduce the funds of USX legally available
for payment of dividends on all classes of Common Stock. Subject to
this limitation, the Board of Directors intends to declare and pay
dividends on the Marathon Stock and Steel Stock based on the
financial condition and results of operations of the related group,
although it has no obligation under Delaware law to do so. In
making its dividend decisions with respect to each of the Marathon
Stock and Steel Stock, the Board of Directors considers, among
other things, the long-term earnings and cash flow capabilities of
the related group as well as the dividend policies of similar
publicly traded companies.
Dividends on the Steel Stock are further limited to the
Available Steel Dividend Amount. At December 31, 1997, the
Available Steel Dividend Amount was at least $3,028 million. The
Available Steel Dividend Amount will be increased or decreased, as
appropriate, to reflect U. S. Steel Group net income, dividends,
repurchases or issuances with respect to the Steel Stock and
preferred stock attributed to the U. S. Steel Group and certain
other items.
________________________________________________________________________________
23. STOCKHOLDER RIGHTS PLAN
USX's Board of Directors has adopted a Stockholder Rights Plan
and declared a dividend distribution of one right for each
outstanding share of Marathon Stock and Steel Stock referred to
together as "Voting Stock." Each right becomes exercisable, at a
price of $120, when any person or group has acquired, obtained the
right to acquire or made a tender or exchange offer for 15% or more
of the total voting power of the Voting Stock, except pursuant to a
qualifying all-cash tender offer for all outstanding shares of
Voting Stock, which is accepted with respect to shares of Voting
Stock representing a majority of the voting power other than Voting
Stock beneficially owned by the offeror. Each right entitles the
holder, other than the acquiring person or group, to purchase one
one-hundredth of a share of Series A Junior Preferred Stock or,
upon the acquisition by any person of 15% or more of the total
voting power of the Voting Stock, Marathon Stock or Steel Stock (as
the case may be) or other property having a market value of twice
the exercise price. After the rights become exercisable, if USX is
acquired in a merger or other business combination where it is not
the survivor, or if 50% or more of USX's assets, earnings power or
cash flow are sold or transferred, each right entitles the holder
to purchase common stock of the acquiring entity having a market
value of twice the exercise price. The rights and exercise price
are subject to adjustment, and the rights expire on October 9,
1999, or may be redeemed by USX for one cent per right at any time
prior to the point they become exercisable. Under certain
circumstances, the Board of Directors has the option to exchange
one share of the respective class of Voting Stock for each
exercisable right.
________________________________________________________________________________
24. INCOME PER COMMON SHARE
The method of calculating net income (loss) per share for the
Marathon Stock, the Steel Stock and, prior to November 1, 1997, the
Delhi Stock reflects the USX Board of Directors' intent that the
separately reported earnings and surplus of the Marathon Group, the
U. S. Steel Group and the Delhi Group, as determined consistent
with the USX Certificate of Incorporation, are available for
payment of dividends on the respective classes of stock, although
legally available funds and liquidation preferences of these
classes of stock do not necessarily correspond with these amounts.
The financial statements of the Marathon Group, the U. S. Steel
Group and the Delhi Group, taken together, include all accounts
which comprise the corresponding consolidated financial statements
of USX.
The USX Board of Directors, prior to June 15, 1995, had
designated 14,003,205 shares of Delhi Stock to represent 100% of
the common stockholders' equity value of USX attributable to the
Delhi Group. The Delhi Fraction was the percentage interest in the
Delhi Group represented by the shares of Delhi Stock that were
outstanding at any particular time and, based on 9,438,391
outstanding shares at June 14, 1995, was approximately 67%. The
Marathon Group financial statements reflected a percentage interest
in the Delhi Group of approximately 33% (Retained Interest) through
June 14, 1995. On June 15, 1995, USX eliminated the Marathon
Group's Retained Interest in the Delhi Group (equivalent to
4,564,814 shares of Delhi Stock). This was accomplished through a
reallocation of assets and a corresponding adjustment to debt and
equity attributed to the Marathon and Delhi Groups. The
reallocation was made at a price of $12.75 per equivalent share of
Delhi Stock, or an aggregate of $58 million, resulting in a
corresponding reduction of the Marathon Group debt.
Basic net income (loss) per share is calculated by adjusting net
income (loss) for dividend requirements of preferred stock and the
noncash credit on exchange of preferred stock and, in the case of
Delhi Stock, for the income applicable to the Retained Interest
prior to June 15, 1995; and is based on the weighted average number
of common shares outstanding.
Diluted net income (loss) per share assumes conversion of
convertible securities for the applicable periods outstanding and
assumes exercise of stock options, provided in each case, the
effect is not antidilutive.
U-22
<PAGE>
<TABLE>
<CAPTION>
COMPUTATION OF INCOME PER SHARE
1997 1996 1995
------------------- ------------------ ------------------
Basic Diluted Basic Diluted Basic Diluted
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONTINUING OPERATIONS
MARATHON GROUP
--------------
Net income (loss) (millions):
Income (loss) before extraordinary loss $ 456 $ 456 $ 671 $ 671 $ (83) $ (83)
Dividends on preferred stock - - - - (4) (4)
Extraordinary loss - - (7) (7) (5) (5)
-------- -------- -------- -------- -------- --------
Net income (loss) applicable to Marathon Stock 456 456 664 664 (92) (92)
Effect of dilutive securities
Convertible debentures - 3 - 14 - -
-------- -------- -------- -------- -------- --------
Net income (loss) assuming conversions $ 456 $ 459 $ 664 $ 678 $ (92) $ (92)
======== ======== ======== ======== ======== ========
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 288,038 288,038 287,460 287,460 287,271 287,271
Effect of dilutive securities:
Convertible debentures - 1,936 - 8,975 - -
Stock options - 546 - 133 - -
-------- -------- -------- -------- -------- --------
Average common shares and dilutive effect 288,038 290,520 287,460 296,568 287,271 287,271
======== ======== ======== ======== ======== ========
Per share:
Income (loss) before extraordinary loss $ 1.59 $ 1.58 $ 2.33 $ 2.31 $ (.31) $ (.31)
Extraordinary loss - - (.02) (.02) (.02) (.02)
-------- -------- -------- -------- -------- --------
Net income (loss) $ 1.59 $ 1.58 $ 2.31 $ 2.29 $ (.33) $ (.33)
-------------------------------------------------------------------------------------------------------------------------
U. S. STEEL GROUP
-----------------
Net income (millions):
Income before extraordinary loss $ 452 $ 452 $ 275 $ 275 $ 303 $ 303
Dividends on preferred stock (13) - (22) (22) (24) (24)
Noncash credit from exchange of preferred stock 10 - - - - -
Extraordinary loss - - (2) (2) (2) (2)
-------- -------- -------- -------- -------- --------
Net income applicable to Steel Stock 449 452 251 251 277 277
Effect of dilutive securities:
Trust preferred securities - 6 - - - -
Preferred stock - - - - - 22
Convertible debentures - 2 - 3 - 6
-------- -------- -------- -------- -------- --------
Net income assuming conversions $ 449 $ 460 $ 251 $ 254 $ 277 $ 305
======== ======== ======== ======== ======== ========
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 85,672 85,672 84,025 84,025 79,064 79,064
Effect of dilutive securities:
Trust preferred securities - 2,660 - - - -
Preferred stock - 4,811 - - - 7,480
Convertible debentures - 1,025 - 1,925 - 2,814
Stock options - 35 - 12 - 21
-------- -------- -------- -------- -------- --------
Average common shares and dilutive effect 85,672 94,203 84,025 85,962 79,064 89,379
======== ======== ======== ======== ======== ========
Per Share:
Income before extraordinary loss $ 5.24 $ 4.88 $ 3.00 $ 2.97 $ 3.53 $ 3.43
Extraordinary loss - - (.02) (.02) (.02) (.02)
-------- -------- -------- -------- -------- --------
Net income $ 5.24 $ 4.88 $ 2.98 $ 2.95 $ 3.51 $ 3.41
-------------------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS
DELHI GROUP
-----------
Net income (millions):
Income before extraordinary loss $ 79.7 $ 79.7 $ 6.4 $ 6.4 $ 4.0 $ 4.0
Dividends on preferred stock - - - - (.2) (.2)
Net income applicable to Retained Interest - - - - (2.4) (2.4)
Extraordinary loss - - (.5) (.5) (.3) (.3)
-------- -------- -------- -------- -------- --------
Net income applicable to outstanding
Delhi Stock $ 79.7 $ 79.7 $ 5.9 $ 5.9 $ 1.1 $ 1.1
======== ======== ======== ======== ======== ========
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 9,449 9,449 9,448 9,448 9,442 9,442
Stock options - 21 - 3 - -
-------- -------- -------- -------- -------- --------
Average common shares and dilutive effect 9,449 9,470 9,448 9,451 9,442 9,442
======== ======== ======== ======== ======== ========
Per share applicable to outstanding Delhi Stock:
Income before extraordinary loss $ 8.43 $ 8.41 $ .67 $ .67 $ .15 $ .15
Extraordinary loss - - (.06) (.06) (.03) (.03)
-------- -------- -------- -------- -------- --------
Net income $ 8.43 $ 8.41 $ .61 $ .61 $ .12 $ .12
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
U-23
<PAGE>
________________________________________________________________________________
25. PREFERRED STOCK OF SUBSIDIARY
USX Capital LLC, a wholly owned subsidiary of USX, sold
10,000,000 shares (carrying value of $250 million) of 8 3/4%
Cumulative Monthly Income Preferred Shares (MIPS) (liquidation
preference of $25 per share) in 1994. Proceeds of the issue were
loaned to USX. USX has the right under the loan agreement to extend
interest payment periods for up to 18 months, and as a consequence,
monthly dividend payments on the MIPS can be deferred by USX
Capital LLC during any such interest payment period. In the event
that USX exercises this right, USX may not declare dividends on any
share of its preferred or common stocks. The MIPS are redeemable at
the option of USX Capital LLC and subject to the prior consent of
USX, in whole or in part from time to time, for $25 per share on or
after March 31, 1999, and will be redeemed from the proceeds of any
repayment of the loan by USX. In addition, upon final maturity of
the loan, USX Capital LLC is required to redeem the MIPS. The
financial costs are included in net interest and other financial
costs.
________________________________________________________________________________
26. USX OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF A
SUBSIDIARY TRUST
In 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 net
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 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. In addition, USX unconditionally guarantees the Trust's
Debentures. The obligations of USX under the Debentures, and the
related indenture, trust agreement and guarantee constitute a full
and unconditional guarantee by USX of the Trust's obligations under
the Trust Preferred Securities.
________________________________________________________________________________
27. PREFERRED STOCK
USX is authorized to issue 40,000,000 shares of preferred stock,
without par value-
6.50% CUMULATIVE CONVERTIBLE PREFERRED STOCK (6.50% PREFERRED
STOCK)-As of December 31, 1997, 2,962,037 shares (stated value of
$1.00 per share; liquidation preference of $50.00 per share) were
outstanding. The 6.50% Preferred Stock is convertible at any time,
at the option of the holder, into shares of Steel Stock at a
conversion price of $46.125 per share of Steel Stock, subject to
adjustment in certain circumstances. This stock is redeemable at
USX's sole option, at a price of $51.95 per share beginning April
1, 1997, and thereafter at prices declining annually on each April
1 to an amount equal to $50.00 per share on and after April 1,
2003. In 1997, USX exchanged approximately 3.9 million shares of
its 6.50% Preferred Stock for an equivalent number of shares of its
Trust Preferred Securities.
U-24
<PAGE>
________________________________________________________________________________
28. DERIVATIVE INSTRUMENTS
USX uses commodity-based derivative instruments to manage exposure
to price fluctuations related to the anticipated purchase or
production and sale of crude oil, natural gas, refined products,
nonferrous metals and electricity. The derivative instruments used,
as a part of an overall risk management program, include exchange-
traded futures contracts and options, and instruments which require
settlement in cash such as OTC commodity swaps and OTC options.
While risk management activities generally reduce market risk
exposure due to unfavorable commodity price changes for raw
material purchases and products sold, such activities can also
encompass strategies which assume certain price risk in isolated
transactions.
USX uses forward currency contracts to eliminate the exposure to
currency price fluctuations relating to Swiss franc debt
obligations. The forward currency contracts effectively fix the
principal and interest payments in U.S. dollars at the time of
maturity.
USX remains at risk for possible changes in the market value of
the derivative instrument; however, such risk should be mitigated
by price changes in the underlying hedged item. USX is also exposed
to credit risk in the event of nonperformance by counterparties.
The credit worthiness of counterparties is subject to continuing
review, including the use of master netting agreements to the
extent practical, and full performance is anticipated.
The following table sets forth quantitative information by class
of derivative instrument:
<TABLE>
<CAPTION>
FAIR CARRYING RECORDED
VALUE AMOUNT DEFERRED AGGREGATE
ASSETS ASSETS GAIN OR CONTRACT
(In millions) (LIABILITIES)/(A)/ (LIABILITIES) (LOSS) VALUES/(B)/
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997:
Exchange-traded commodity futures $ - $ - $ - $ 30
Exchange-traded commodity options 1 /(c)/ 1 2 129
OTC commodity swaps/(d)/ (3) /(e)/ (3) (4) 50
OTC commodity options - - - 6
--------- --------- --------- ---------
Total commodities $ (2) $ (2) $ (2) $ 215
--------- --------- --------- ---------
Forward currency contract/(g)/:
receivable $ 11 $ 10 $ - 59
payable (1) (1) (1) 5
--------- --------- --------- ---------
Total currencies $ 10 $ 9 $ (1) $ 64
-----------------------------------------------------------------------------------------------------------
December 31, 1996:
Exchange-traded commodity futures $ - $ - $ (2) $ 49
Exchange-traded commodity options (1) /(c)/ (1) (2) 254
OTC commodity swaps (1) /(e)/ (2) - 88
OTC commodity options (6) /(f)/ (6) - 84
--------- --------- --------- ---------
Total commodities $ (8) $ (9) $ (4) $ 475
--------- --------- --------- ---------
Forward currency contract:
- receivable $ 19 $ 16 $ - $ 59
- payable (1) (1) (1) 10
--------- --------- --------- ---------
Total currencies $ 18 $ 15 $ (1) $ 69
-----------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/The fair value amounts for OTC positions are based on various
indices or dealer quotes. The fair value amounts for currency
contracts are based on dealer quotes of forward prices
covering the remaining duration of the foreign exchange
contract. The exchange-traded futures contracts and certain
option contracts do not have a corresponding fair value since
changes in the market prices are settled on a daily basis.
/(b)/Contract or notional amounts do not quantify risk exposure,
but are used in the calculation of cash settlements under the
contracts. The contract or notional amounts do not reflect the
extent to which positions may offset one another.
/(c)/Includes fair values as of December 31, 1997 and 1996, for
assets of $3 million and $1 million and for liabilities of
$(2) million and $(2) million, respectively.
/(d)/The OTC swap arrangements vary in duration with certain
contracts extending into mid 2000.
/(e)/Includes fair values as of December 31, 1997 and 1996, for
assets of $1 million and $3 million and for liabilities of
$(4) million and $(4) million, respectively.
/(f)/Includes fair values as of December 31, 1996, for assets of $1
million and for liabilities of $(7) million.
/(g)/The forward currency contract matures in 1998.
U-25
<PAGE>
________________________________________________________________________________
29. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value of the financial instruments disclosed herein is not
necessarily representative of the amount that could be realized or
settled, nor does the fair value amount consider the tax
consequences of realization or settlement. The following table
summarizes financial instruments, excluding derivative financial
instruments disclosed in Note 28, by individual balance sheet
account:
<TABLE>
<CAPTION>
1997 1996
-------------------- -------------------
FAIR CARRYING Fair Carrying
(In millions) December 31 VALUE AMOUNT Value Amount
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 54 $ 54 $ 55 $ 55
Receivables 1,417 1,417 1,270 1,270
Investments and long-term receivables 177 120 252 211
------ ------ ------ --------
Total financial assets $1,648 $1,591 $1,577 $1,536
---------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Notes payable $ 121 $ 121 $ 81 $ 81
Accounts payable 2,011 2,011 2,204 2,204
Accrued interest 95 95 102 102
Long-term debt (including amounts due within one year) 3,646 3,281 4,332 4,083
Trust preferred securities and preferred
stock of subsidiary 435 432 254 250
------ ------ ------ --------
Total financial liabilities $6,308 $5,940 $6,973 $6,720
---------------------------------------------------------------------------------------------------
</TABLE>
Fair value of financial instruments classified as current assets
or liabilities approximates carrying value due to the short-term
maturity of the instruments. Fair value of investments and long-
term receivables was based on discounted cash flows or other
specific instrument analysis. Fair value of trust preferred
securities and preferred stock of subsidiary was based on market
prices. Fair value of long-term debt instruments was based on
market prices where available or current borrowing rates available
for financings with similar terms and maturities.
USX's unrecognized financial instruments consist of receivables
sold and financial guarantees. It is not practicable to estimate
the fair value of these forms of financial instrument obligations
because there are no quoted market prices for transactions which
are similar in nature. For details relating to sales of receivables
see Note 13, and for details relating to financial guarantees see
Note 30.
________________________________________________________________________________
30. CONTINGENCIES AND COMMITMENTS
USX is the subject of, or party to, a number of pending or
threatened legal actions, contingencies and commitments involving a
variety of matters, including laws and regulations relating to the
environment. Certain of these matters are discussed below. The
ultimate resolution of these contingencies could, individually or
in the aggregate, be material to the consolidated financial
statements. However, management believes that USX will remain a
viable and competitive enterprise even though it is possible that
these contingencies could be resolved unfavorably.
ENVIRONMENTAL MATTERS
USX is subject to federal, state, local and foreign laws and
regulations relating to the environment. These laws generally
provide for control of pollutants released into the environment and
require responsible parties to undertake remediation of hazardous
waste disposal sites. Penalties may be imposed for noncompliance.
At December 31, 1997, and December 31, 1996, accrued liabilities
for remediation totaled $158 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 $42 million at December 31, 1997, and $23 million at
December 31, 1996.
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 1997 and 1996, such
capital expenditures totaled $134 million and $165 million,
respectively. USX anticipates making additional such expenditures
in the future; however, the exact amounts and timing of such
expenditures are uncertain because of the continuing evolution of
specific regulatory requirements.
At December 31, 1997, and December 31, 1996, accrued liabilities
for platform abandonment and dismantlement totaled $128 million and
$118 million, respectively.
U-26
<PAGE>
GUARANTEES -
Guarantees of the liabilities of affiliated entities by USX and
its consolidated subsidiaries totaled $73 million at December 31,
1997, and $80 million at December 31, 1996. In the event that any
defaults of guaranteed liabilities occur, USX has access to its
interest in the assets of most of the affiliates to reduce
potential losses resulting from these guarantees. As of December
31, 1997, the largest guarantee for a single affiliate was $23
million.
At December 31, 1997, and December 31, 1996, USX's pro rata
share of obligations of LOOP LLC and various pipeline affiliates
secured by throughput and deficiency agreements totaled $165
million and $176 million, respectively. Under the agreements, USX
is required to advance funds if the affiliates are unable to
service debt. Any such advances are prepayments of future
transportation charges.
COMMITMENTS -
At December 31, 1997, and December 31, 1996, contract
commitments for capital expenditures for property, plant and
equipment totaled $424 million and $526 million, respectively.
USX entered into a 15-year take-or-pay arrangement in 1993,
which requires USX to accept pulverized coal each month or pay a
minimum monthly charge of approximately $1.3 million. Charges for
deliveries of pulverized coal totaled $24 million in 1997 and $23
million in 1996. If USX elects to terminate the contract early, a
maximum termination payment of $114 million, which declines over
the duration of the agreement, may be required.
USX is a party to a transportation agreement with a subsidiary
of Transtar, Inc. (Transtar), for Great Lakes shipments of raw
materials required by steel operations. The agreement is in effect
until March 15, 2000, and requires USX to pay, at a minimum,
Transtar's annual fixed costs related to the agreement, including
lease/charter costs, depreciation of owned vessels, dry dock fees
and other administrative costs. Total transportation costs under
the agreement were $77 million in 1997 and $72 million in 1996,
including fixed costs of $20 million in both years. The fixed costs
are expected to continue at approximately the same level over the
duration of the agreement.
________________________________________________________________________________
31. SUBSEQUENT EVENT - BUSINESS COMBINATIONS
On December 12, 1997, USX and Ashland Inc. (Ashland) signed
definitive agreements to combine the major elements of their
refining, marketing and transportation (RM&T) operations. Pursuant
to those agreements, on January 1, 1998, USX transferred certain
RM&T net assets to a new consolidated subsidiary, which was named
Marathon Ashland Petroleum LLC (MAP). Also on January 1, 1998, USX
acquired certain RM&T net assets from Ashland in exchange for a 38%
interest in MAP. The acquisition will be accounted for under the
purchase method of accounting. The purchase price was determined to
be $1.9 billion, based upon an external valuation of the fair
value. The change in USX's ownership interest in MAP resulted in a
change in interest gain which will be recognized in the first
quarter 1998.
In connection with the formation of MAP, USX and Ashland entered
into a Limited Liability Company Agreement dated January 1, 1998
(the LLC Agreement). The LLC Agreement provides for an initial term
of MAP expiring on December 31, 2022 (25 years from its formation).
The term will automatically be extended for ten-year periods,
unless a termination notice is given by either party.
Also in connection with the formation of MAP, the parties
entered into a Put/Call, Registration Rights and Standstill
Agreement (the Put/Call Agreement). The Put/Call Agreement provides
that at any time after December 31, 2004, Ashland will have the
right to sell to USX all of Ashland's ownership interest in MAP,
for an amount in cash and/or the Marathon Oil Company or USX debt
or equity securities equal to the product of 85% (90% if equity
securities are used) of the fair market value of MAP at that time,
multiplied by Ashland's percentage interest in MAP. Payment could
be made at closing, or at USX's option, in three equal annual
installments, the first of which would be payable at closing. At
any time after December 31, 2004, USX will have the right to
purchase all of Ashland's ownership interests in MAP, for an amount
in cash equal to the product of 115% of the fair market value of
MAP at that time, multiplied by Ashland's percentage interest in
MAP.
U-27
<PAGE>
The following unaudited pro forma data for USX includes the
results of operations for the Ashland RM&T net assets, giving
effect to the acquisition as if it had been consummated at the
beginning of the year presented. The pro forma data is based on
historical information and does not necessarily reflect the actual
results that would have occurred nor is it necessarily indicative
of future results of operations.
<TABLE>
<CAPTION>
(In millions, except per share amounts) 1997/(a)/
-------------------------------------------------------------------
<S> <C>
Consolidated:
Revenues $29,288
Net income 987
Net income per common share of Marathon Stock:
Basic 1.58
Diluted 1.57
-------------------------------------------------------------------
</TABLE>
/(a)/ The USX data is based on a calendar year. Ashland data is
based on a twelve-month period ended September 30, 1997.
/(b)/ Excluding the pro forma inventory market valuation
adjustment, pro forma net income would have been $1,150
million. Reported net income, excluding the reported
inventory market valuation adjustment, would have been
$1,167 million.
U-28
<PAGE>
Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1997
-------------------------------------------------------
(In millions, except per share data) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR.
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONTINUING OPERATIONS
Revenues $5,734 $ 5,657 (a) $5,502 (a) $5,695 (a)
Income from operations 346 557 (a) 436 (a) 366 (a)
Costs and expenses include:
Inventory market valuation
charges (credits) 147 (41) 64 114
Income before
extraordinary loss 190 308 (a) 215 (a) 195 (a)
Net income:
Income from
continuing operations $ 190 $ 308 $ 215 $ 195
Income (loss) from
discontinued operations 81 (1) (1) 1
------ ------ ----- ----------
NET INCOME $ 271 $ 307 $ 214 $ 196
- ---------------------------------------------------------------------------------------------------------
MARATHON STOCK DATA:
- --------------------
Income before
extraordinary loss
applicable to
Marathon Stock $ 38 $ 192 $ 118 $ 108
Per share: basic .14 .66 .41 .37
diluted .13 .66 .41 .37
Dividends paid per share .19 .19 .19 .19
Price range of Marathon
Stock(b):
Low 29 28-15/16 25-5/8 23-3/4
High 38-7/8 38-3/16 31-1/8 28-1/2
- ---------------------------------------------------------------------------------------------------------
STEEL STOCK DATA:
- ---------------------------
Income before
extraordinary loss
applicable to Steel Stock $ 149 $ 114 $ 105 $ 81
Per share: basic 1.74 1.32 1.23 .96
diluted 1.64 1.25 1.06 .93
Dividends paid per share .25 .25 .25 .25
Price range of Steel
Stock(b):
Low 26-7/8 34-3/16 25-3/8 26-3/8
High 36-15/16 40-3/4 35-5/8 33-3/8
- ---------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS
DELHI STOCK DATA:
- ---------------------------
Income (loss) before
extraordinary loss
applicable to Delhi Stock $ 81 (c) $ (1) $ (1) $ 1
Per share: basic 8.51 (c) (.06) (.16) .15
diluted 8.46 (c) (.06) (.16) .15
Dividends paid per share - .05 .05 .05
Price range of Delhi
Stock(b):
Low 14-7/8 12-1/8 12-1/4 13
High 20-5/8 15-1/2 14-3/8 17
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
1996
--------------------------------------------------------
(In millions, except per share data) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR.
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONTINUING OPERATIONS
Revenues $6,226 (a) $5,809 (a) $5,706 (a) $5,236 (a)
Income from operations 527 (a) 448 (a) 308 (a) 496 (a)
Costs and expenses include:
Inventory market valuation
charges (credits) (30) (96) 72 (155)
Income before
extraordinary loss 294 (a) 234 (a) 156 (a) 262 (a)
Net income:
Income from
continuing operations $ 285 $ 234 $ 156 $ 262
Income (loss) from
discontinued operations 6 (1) (2) 3
------ ------- ------ -----
NET INCOME $ 291 $ 233 $ 154 $ 265
- ---------------------------------------------------------------------------------------------------------
MARATHON STOCK DATA:
- --------------------
Income before
extraordinary loss
applicable to
Marathon Stock $ 167 $ 164 $ 124 $ 216
Per share: basic .58 .57 .43 .75
diluted .57 .57 .43 .74
Dividends paid per share .19 .17 .17 .17
Price range of Marathon
Stock(b):
Low 21-1/8 20 19-1/8 17-1/4
High 25-1/2 22-1/8 22-7/8 20-1/2
- ---------------------------------------------------------------------------------------------------------
STEEL STOCK DATA:
- ---------------------------
Income before
extraordinary loss
applicable to Steel Stock $ 122 $ 64 $ 27 $ 40
Per share: basic 1.43 .76 .32 .49
diluted 1.36 .75 .32 .48
Dividends paid per share .25 .25 .25 .25
Price range of Steel
Stock(b):
Low 26-1/2 24-1/8 27-3/4 30
High 32 29-5/8 35-7/8 37-7/8
- ---------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS
DELHI STOCK DATA:
- ---------------------------
Income (loss) before
extraordinary loss
applicable to Delhi Stock $ 6 $ (1) $ (1) $ 2
Per share: basic .68 (.14) (.12) .25
diluted .68 (.14) (.12) .25
Dividends paid per share .05 .05 .05 .05
Price range of Delhi
Stock(b):
Low 12-1/8 11-1/2 11-3/8 10
High 16-5/8 14-3/4 14-5/8 12-3/8
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) Reclassified to conform to current classifications and exclude discontinued
operations see Note 3, to the USX consolidated financial statements.
(b) Composite tape.
(c) Represents one month of operations and gain on disposal of the Delhi
Companies.
U-29
<PAGE>
Principal Unconsolidated Affiliates (Unaudited)
<TABLE>
<CAPTION>
December 31, 1997
Company Country Ownership Activity
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLAM Petroleum B.V. Netherlands 50% Oil & Gas Production
Double Eagle Steel Coating Company United States 50% Steel Processing
Kenai LNG Corporation United States 30% Natural Gas Liquification
LOCAP, Inc. United States 37% Pipeline & Storage Facilities
LOOP LLC United States 32% Offshore Oil Port
Nautilus Pipeline Company, LLC United States 24% Natural Gas Transmission
PRO-TEC Coating Company United States 50% Steel Processing
RMI Titanium Company United States 27% Titanium Metal Products
Sakhalin Energy Investment Company Ltd. Russia 38% Oil & Gas Development
Transtar, Inc. United States 46% Transportation
USS/Kobe Steel Company United States 50% Steel Products
USS-POSCO Industries United States 50% Steel Processing
Worthington Specialty Processing United States 50% Steel Processing
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Supplementary Information on Mineral Reserves (Unaudited)
MINERAL RESERVES (OTHER THAN OIL AND GAS)
<TABLE>
<CAPTION>
Reserves at December 31(a) Production
---------------------------- ---------------------------
(Million tons) 1997 1996 1995 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Iron(b) 754.8 716.3 730.9 16.8 15.1 15.5
Coal(c) 798.8 859.5 862.8 7.5 7.1 7.5
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) Commercially recoverable reserves include demonstrated (measured and
indicated) quantities which are expressed in recoverable net product tons.
(b) In 1997, iron ore reserves increased 55.3 million tons due to lease
exchanges. In 1996, iron ore reserves increased .5 million tons due to
changes in estimates of recoverable amounts.
(c) In 1997, coal reserves decreased 53.2 million tons due to a lease
termination. In 1996, coal reserves increased 3.8 million tons after
exploration and lease activity.
<TABLE>
<CAPTION>
Supplementary Information on Oil and Gas Producing Activities (Unaudited)
CAPITALIZED COSTS AND ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
United Other Equity
(In millions) December 31 States Europe International Consolidated Affiliates Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997
Capitalized costs:
Proved properties $8,117 $4,384 $163 $12,664 $405 $13,069
Unproved properties 335 68 75 478 4 482
------ ------- ---- ------ ------- -------
Total 8,452 4,452 238 13,142 409 13,551
------ ------- ---- ------ ------- -------
Accumulated depreciation,
depletion and amortization:
Proved properties 4,915 2,517 76 7,508 127 7,635
Unproved properties 86 - 4 90 - 90
------ ------ ------ ------- ------- -------
Total 5,001 2,517 80 7,598 127 7,725
------ ------ ------ ------- ------- -------
Net capitalized costs $3,451 $1,935 $158 $ 5,544 $282 $ 5,826
- -------------------------------------------------------------------------------------------------------------------------
1996
Capitalized costs:
Proved properties $7,667 $4,304 $126 $12,097 $183 $12,280
Unproved properties 292 63 68 423 57 480
------ ------ ------ ------- ------ -------
Total 7,959 4,367 194 12,520 240 12,760
------ ------ ------ ------- ------ -------
Accumulated depreciation,
depletion and amortization:
Proved properties 4,715 2,363 60 7,138 120 7,258
Unproved properties 81 2 5 88 - 88
------ ------ ------ ------- ------ -------
Total 4,796 2,365 65 7,226 120 7,346
------ ------ ------ ------- ------ -------
Net capitalized costs $3,163 $2,002 $129 $ 5,294 $120 $ 5,414
------------------------------------------------------------------------------------------------------------------------
</TABLE>
U-30
<PAGE>
Supplementary Information on Oil and Gas Producing Activities
(Unaudited) CONTINUED
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES, EXCLUDING CORPORATE
OVERHEAD AND INTEREST COSTS(a)
<TABLE>
<CAPTION>
United Other Equity
(In millions) States Europe International Consolidated Affiliates Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997: Revenues:
Sales(b) $ 581 $ 572 $ 21 $ 1,174 $ 42 $ 1,216
Transfers 724 - 38 762 - 762
------ ----- ----- ------- ---- -------
Total revenues 1,305 572 59 1,936 42 1,978
Expenses:
Production costs (337) (162) (12) (511) (15) (526)
Exploration expenses (127) (34) (25) (186) (1) (187)
Depreciation, depletion
and amortization (300) (130) (16) (446) (8) (454)
Other expenses (32) (3) (13) (48) - (48)
------ ----- ----- ------- ---- -------
Total expenses (796) (329) (66) (1,191) (24) (1,215)
Other production-related
earnings(c) - 28 1 29 1 30
------ ----- ----- ------- ---- -------
Results before income taxes 509 271 (6) 774 19 793
Income taxes (credits) 170 79 4 253 4 257
------ ----- ----- ------- ---- -------
Results of operations $ 339 $ 192 $ (10) $ 521 $ 15 $ 536
- -----------------------------------------------------------------------------------------------------------------------
1996: Revenues:
Sales(b) $ 451 $ 736 $ 24 $ 1,211 $ 45 $ 1,256
Transfers 858 - 43 901 - 901
------ ----- ----- ------- ---- -------
Total revenues 1,309 736 67 2,112 45 2,157
Expenses:
Production costs(d) (340) (202) (12) (554) (14) (568)
Exploration expenses (97) (24) (24) (145) (3) (148)
Depreciation, depletion
and amortization (302) (160) (14) (476) (12) (488)
Other expenses (31) (5) (15) (51) - (51)
------ ----- ----- ------- ---- -------
Total expenses (770) (391) (65) (1,226) (29) (1,255)
Other production-related
earnings(c) 1 28 - 29 1 30
------ ----- ----- ------- ---- -------
Results before income taxes 540 373 2 915 17 932
Income taxes (credits) 192 115 (1) 306 7 313
------ ----- ----- ------- ---- -------
Results of operations $ 348 $ 258 $ 3 $ 609 $ 10 $ 619
- -----------------------------------------------------------------------------------------------------------------------
1995: Revenues:
Sales(b) $ 395 $ 622 $ 24 $ 1,041 $ 41 $ 1,082
Transfers 706 - 84 790 - 790
------ ----- ----- ------- ---- -------
Total revenues 1,101 622 108 1,831 41 1,872
Expenses:
Production costs (305) (219) (23) (547) (15) (562)
Exploration expenses (68) (37) (39) (144) (2) (146)
Depreciation, depletion
and amortization(e) (361) (184) (54) (599) (11) (610)
Other expenses (29) (5) (4) (38) - (38)
------ ----- ----- ------- ---- -------
Total expenses (763) (445) (120) (1,328) (28) (1,356)
Other production-related
earnings(c) - 31 - 31 1 32
------ ----- ----- ------- ---- -------
Results before income taxes 338 208 (12) 534 14 548
Income taxes (credits) 124 83 (5) 202 5 207
------ ----- ----- ------- ---- -------
Results of operations $ 214 $ 125 $ (7) $ 332 $ 9 $ 341
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes the results of hedging gains and losses.
(b) Includes net gains and (losses) on asset dispositions, as of December 31,
1997, 1996 and 1995, of $7 million, $25 million and $(2) million,
respectively.
(c) Includes revenues, net of associated costs, from third-party activities
that are an integral part of USX's production operations. Third-party
activities may include the processing and/or transportation of third-party
production, and the purchase and subsequent resale of gas utilized in
reservoir management.
(d) Includes domestic production tax charges of $11 million relating to prior
periods.
(e) Excludes charges of $465 million related to impairment of long-lived
assets.
U-31
<PAGE>
Supplementary Information on Oil and Gas Producing Activities
(Unaudited) CONTINUED
COSTS INCURRED FOR PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT INCLUDING
CAPITAL EXPENDITURES
<TABLE>
<CAPTION>
United Other Equity
(In millions) States Europe International Consolidated Affiliates Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997: Property acquisition:
Proved $ 16 $ - $ - $ 16 $ - $ 16
Unproved 50 - - 50 - 50
Exploration 170 53 43 266 3 269
Development 477 67 27 571 152 723
- --------------------------------------------------------------------------------------------------------------------------
1996: Property acquisition:
Proved $ 36 $ - $ - $ 36 $ - $ 36
Unproved 44 - 2 46 19 65
Exploration 134 26 34 194 1 195
Development 268 31 15 314 3 317
- --------------------------------------------------------------------------------------------------------------------------
1995: Property acquisition:
Proved $ 13 $ - $ 1 $ 14 $ - $ 14
Unproved 24 - - 24 5 29
Exploration 100 42 52 194 1 195
Development 223 44 37 304 8 312
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
The following estimates of net reserves have been determined by deducting
royalties of various kinds from USX's gross reserves. The reserve estimates are
believed to be reasonable and consistent with presently known physical data
concerning size and character of the reservoirs and are subject to change as
additional knowledge concerning the reservoirs becomes available. The estimates
include only such reserves as can reasonably be classified as proved; they do
not include reserves which may be found by extension of proved areas or reserves
recoverable by secondary or tertiary recovery methods unless these methods are
in operation and are showing successful results. Undeveloped reserves consist of
reserves to be recovered from future wells on undrilled acreage or from existing
wells where relatively major expenditures will be required to realize
production. Liquid hydrocarbon production amounts for international operations
principally reflect tanker liftings of equity production. USX did not have any
quantities of oil and gas reserves subject to long-term supply agreements with
foreign governments or authorities in which USX acts as producer.
<TABLE>
<CAPTION>
United Other Equity
(Millions of barrels) States Europe International Consolidated Affiliates Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Liquid Hydrocarbons
Proved developed and undeveloped reserves:
Beginning of year 1995 553 211 31 795 - 795
Purchase of reserves in place 2 - - 2 - 2
Revisions of previous estimates (5) (8) (5) (18) - (18)
Improved recovery 4 - - 4 - 4
Extensions, discoveries and
other additions 67 - 3 70 - 70
Production (48) (20) (6) (74) - (74)
Sales of reserves in place (15) - - (15) - (15)
----- ---- --- ---- ----- -----
End of year 1995 558 183 23 764 - 764
Purchase of reserves in place 26 - - 26 - 26
Revisions of previous estimates 3 (1) 3 5 - 5
Improved recovery 19 - - 19 - 19
Extensions, discoveries and
other additions 54 13 15 82 - 82
Production (45) (18) (3) (66) - (66)
Sales of reserves in place (26) - (12) (38) - (38)
----- ---- --- ---- ----- -----
End of year 1996 589 177 26 792 - 792
Purchase of reserves in place 2 - - 2 - 2
Revisions of previous estimates 9 (1) 3 11 - 11
Improved recovery 22 - - 22 - 22
Extensions, discoveries and
other additions 31 - - 31 82 113
Production (42) (15) (3) (60) - (60)
Sales of reserves in place (2) - - (2) - (2)
----- ----- --- ---- ------ -----
End of year 1997 609 161 26 796 82 878
- --------------------------------------------------------------------------------------------------------------------------
Proved developed reserves:
Beginning of year 1995 493 202 22 717 - 717
End of year 1995 470 182 21 673 - 673
End of year 1996 443 163 11 617 - 617
End of year 1997 486 161 12 659 - 659
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
U-32
<PAGE>
Supplementary Information on Oil and Gas Producing Activities
(Unaudited) CONTINUED
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES (CONTINUED)
<TABLE>
<CAPTION>
United Other Equity
(Billions of cubic feet) States Europe International Consolidated Affiliates Total
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Natural Gas
Proved developed and undeveloped reserves:
Beginning of year - 1995 2,127 1,484 43 3,654 153 3,807
Purchase of reserves in place 24 - - 24 - 24
Revisions of previous estimates (17) (12) (3) (32) (7) (39)
Improved recovery 1 - - 1 - 1
Extensions, discoveries and
other additions 313 26 - 339 - 339
Production (231) (154) (5) (390) (15) (405)
Sales of reserves in place (7) - - (7) - (7)
----- ----- ---- ----- ---- -----
End of year - 1995 2,210 1,344 35 3,589 131 3,720
Purchase of reserves in place 10 - - 10 - 10
Revisions of previous estimates (27) 26 (14) (15) 9 (6)
Improved recovery 10 - - 10 - 10
Extensions, discoveries and
other additions 308 2 5 315 8 323
Production (247) (166) (5) (418) (16) (434)
Sales of reserves in place (25) (28) - (53) - (53)
----- ----- ---- ----- ---- -----
End of year - 1996 2,239 1,178 21 3,438 132 3,570
Purchase of reserves in place 31 - - 31 - 31
Revisions of previous estimates (39) 9 6 (24) (6) (30)
Improved recovery
Extensions, discoveries and
other additions 262 - - 262 - 262
Production (264) (139) (4) (407) (15) (422)
Sales of reserves in place (9) - - (9) - (9)
----- ----- ---- ----- ---- -----
End of year - 1997 2,220 1,048 23 3,291 111 3,402
--------------------------------------------------------------------------------------------------------------------
Proved developed reserves:
Beginning of year - 1995 1,442 1,436 41 2,919 104 3,023
End of year - 1995 1,517 1,300 35 2,852 105 2,957
End of year - 1996 1,720 1,133 16 2,869 100 2,969
End of year - 1997 1,702 1,024 19 2,745 78 2,823
--------------------------------------------------------------------------------------------------------------------
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND
CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES
Estimated discounted future net cash flows and changes
therein were determined in accordance with Statement of
Financial Accounting Standards No. 69. Certain information
concerning the assumptions used in computing the valuation of
proved reserves and their inherent limitations are discussed
below. USX believes such information is essential for a proper
understanding and assessment of the data presented.
Future cash inflows are computed by applying year-end prices
of oil and gas relating to USX's proved reserves to the year-end
quantities of those reserves. Future price changes are
considered only to the extent provided by contractual
arrangements in existence at year-end.
The assumptions used to compute the proved reserve valuation
do not necessarily reflect USX's expectations of actual revenues
to be derived from those reserves nor their present worth.
Assigning monetary values to the estimated quantities of
reserves, described on the preceding page, does not reduce the
subjective and ever-changing nature of such reserve estimates.
Additional subjectivity occurs when determining present
values because the rate of producing the reserves must be
estimated. In addition to uncertainties inherent in predicting
the future, variations from the expected production rate also
could result directly or indirectly from factors outside of
USX's control, such as unintentional delays in development,
environmental concerns, changes in prices or regulatory
controls.
The reserve valuation assumes that all reserves will be
disposed of by production. However, if reserves are sold in
place or subjected to participation by foreign governments,
additional economic considerations also could affect the amount
of cash eventually realized.
Future development and production costs, including
abandonment and dismantlement costs, are computed by estimating
the expenditures to be incurred in developing and producing the
proved oil and gas reserves at the end of the year, based on
year-end costs and assuming continuation of existing economic
conditions.
Future income tax expenses are computed by applying the
appropriate year-end statutory tax rates, with consideration of
future tax rates already legislated, to the future pretax net
cash flows relating to USX's proved oil and gas reserves.
Permanent differences in oil and gas related tax credits and
allowances are recognized.
Discount was derived by using a discount rate of 10 percent a
year to reflect the timing of the future net cash flows relating
to proved oil and gas reserves.
U-33
<PAGE>
Supplementary Information on Oil and Gas Producing Activities
(Unaudited) CONTINUED
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED OIL AND GAS RESERVES (CONTINUED)
<TABLE>
<CAPTION>
United Other Equity
(In millions) States Europe International Consolidated Affiliates Total
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997:
Future cash inflows $13,902 $ 6,189 $ 484 $20,575 $ 1,714 $22,289
Future production costs (4,739) (2,310) (172) (7,221) (643) (7,864)
Future development costs (702) (162) (18) (882) (200) (1,082)
Future income tax expenses (2,413) (1,371) (62) (3,846) (232) (4,078)
------- ------- ----- ------- -------- -------
Future net cash flows 6,048 2,346 232 8,626 639 9,265
10% annual discount for
estimated timing of cash flows (2,696) (1,011) (52) (3,759) (367) (4,126)
------- ------- ----- ------- -------- -------
Standardized measure of
discounted future net cash
flows relating to proved oil
and gas reserves $ 3,352 $ 1,335 $ 180 $ 4,867 $ 272 $ 5,139
--------------------------------------------------------------------------------------------------------------------
December 31, 1996:
Future cash inflows $19,640 $ 8,177 $ 631 $ 28,448 $ 390 $28,838
Future production costs (5,442) (2,454) (177) (8,073) (153) (8,226)
Future development costs (762) (179) (45) (986) (35) (1,021)
Future income tax expenses (4,151) (2,256) (115) (6,522) (78) (6,600)
------- ------- ----- -------- -------- -------
Future net cash flows 9,285 3,288 294 12,867 124 12,991
10% annual discount for
estimated timing of cash flows (4,232) (1,033) (69) (5,334) (40) (5,374)
------- ------- ----- ------- -------- -------
Standardized measure of
discounted future net cash
flows relating to proved oil
and gas reserves $ 5,053 $ 2,255 225 $ 7,533 $ 84 $ 7,617
--------------------------------------------------------------------------------------------------------------------
December 31, 1995:
Future cash inflows $12,944 $ 6,204 $ 460 $ 19,608 $ 337 $19,945
Future production costs (4,397) (2,537) (148) (7,082) (152) (7,234)
Future development costs (535) (74) (22) (631) (24) (655)
Future income tax expenses (2,253) (901) (86) (3,240) (57) (3,297)
------- ------- ----- ------- -------- -------
Future net cash flows 5,759 2,692 204 8,655 104 8,759
10% annual discount for
estimated timing of cash flows (2,608) (1,039) (46) (3,693) (29) (3,722)
------- ------- ----- ------- -------- -------
Standardized measure of
discounted future net cash
flows relating to proved oil
and gas reserves $ 3,151 $ 1,653 $ 158 $ 4,962 $ 75 $ 5,037
--------------------------------------------------------------------------------------------------------------------
</TABLE>
SUMMARY OF CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES
<TABLE>
<CAPTION>
Consolidated Equity Affiliates Total
----------------------------- --------------------------- ----------------------------
(In millions) 1997 1996 1995 1997 1996 1995 1997 1996 1995
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales and transfers of
oil and gas produced,
net of production costs $(1,424) $(1,558) $(1,285) $ (28) $(31) $(26) $(1,452) $(1,589) $(1,311)
Net changes in prices and
production costs related
to future production (3,677) 3,651 97 (36) 37 5 (3,713) 3,688 102
Extensions, discoveries and
improved recovery, less
related costs 458 1,572 852 263 9 - 721 1,581 852
Development costs incurred
during the period 571 314 304 152 3 8 723 317 312
Changes in estimated future
development costs (302) (316) (56) (138) (10) (8) (440) (326) (64)
Revisions of previous
quantity estimates 43 15 (117) (5) 9 (5) 38 24 (122)
Net changes in purchases
and sales of minerals
in place 14 (58) (39) - - - 14 (58) (39)
Accretion of discount 1,065 658 624 13 11 19 1,078 669 643
Net change in income taxes 1,350 (1,342) 186 (29) (11) (2) 1,321 (1,353) 184
Other (764) (365) (180) (4) (8) (2) (768) (373) (182)
--------------------------------------------------------------------------------------------------------------------------
Net change for the year (2,666) 2,571 386 188 9 (11) (2,478) 2,580 375
Beginning of year 7,533 4,962 4,576 84 75 86 7,617 5,037 4,662
--------------------------------------------------------------------------------------------------------------------------
End of year $4,867 $7,533 $4,962 $272 $ 84 $ 75 $ 5,139 $7,617 $5,037
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
U-34
<PAGE>
Five-Year Operating Summary - Marathon Group
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET LIQUID HYDROCARBON PRODUCTION (thousands of barrels
per day)
United States (by region)
Alaska - 8 9 9 9
Gulf Coast 29 30 33 12 10
Southern 8 9 11 12 12
Central 5 4 8 9 9
Mid-Continent - Yates 25 25 24 23 22
Mid-Continent - Other 21 20 19 18 18
Rocky Mountain 27 26 28 27 31
------------------------------------------------
Total United States 115 122 132 110 111
------------------------------------------------
International
Abu Dhabi - - - 1 2
Egypt 8 8 5 7 6
Indonesia - - 10 3 3
Norway 2 3 2 2 2
Tunisia - - 2 3 8
United Kingdom 39 48 54 46 24
------------------------------------------------
Total International 49 59 73 62 45
------------------------------------------------
Total 164 181 205 172 156
Natural gas liquids included in above 17 17 17 15 14
--------------------------------------------------------------------------------------------------------------------
NET NATURAL GAS PRODUCTION (millions of cubic feet per day)
United States (by region)
Alaska 151 145 133 123 116
Gulf Coast 78 88 94 79 98
Southern 189 161 142 134 94
Central 119 109 105 110 107
Mid-Continent 125 122 112 89 78
Rocky Mountain 60 51 48 39 36
------------------------------------------------
Total United States 722 676 634 574 529
------------------------------------------------
International
Egypt 11 13 15 17 17
Ireland 228 259 269 263 258
Norway 54 87 81 81 75
United Kingdom - equity 130 140 98 39 23
- other/(a)/ 32 32 35 - -
------------------------------------------------
Total International 455 531 498 400 373
------------------------------------------------
Consolidated 1,177 1,207 1,132 974 902
Equity affiliate/(b)/ 42 45 44 40 35
------------------------------------------------
Total 1,219 1,252 1,176 1,014 937
------------------------------------------------------------------------------------------------------------------
AVERAGE SALES PRICES
Liquid Hydrocarbons (dollars per barrel)/(c)/
United States $16.88 $18.58 $14.59 $13.53 $14.54
International 18.77 20.34 16.66 15.61 16.22
Natural Gas (dollars per thousand cubic feet)/(c)/
United States $2.20 $2.09 $1.63 $1.94 $1.94
International 2.00 1.97 1.80 1.58 1.52
------------------------------------------------------------------------------------------------------------------
NET PROVED RESERVES AT YEAR-END (developed and
undeveloped)
Liquid Hydrocarbons (millions of barrels)
United States 609 589 558 553 573
International 187 203 206 242 269
------------------------------------------------
Consolidated 796 792 764 795 842
Equity affiliate/(d)/ 82 - - - -
------------------------------------------------
Total 878 792 764 795 842
Developed reserves as % of total net reserves 75% 78% 88% 90% 88%
------------------------------------------------------------------------------------------------------------------
Natural Gas (billions of cubic feet)
United States 2,220 2,239 2,210 2,127 2,045
International 1,071 1,199 1,379 1,527 1,703
------------------------------------------------
Consolidated 3,291 3,438 3,589 3,654 3,748
Equity affiliate/(b)/ 111 132 131 153 153
------------------------------------------------
Total 3,402 3,570 3,720 3,807 3,901
Developed reserves as % of total net reserves 83% 83% 80% 79% 80%
------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Represents gas acquired for injection and subsequent
resale.
/(b)/ Represents Marathon's equity interest in CLAM Petroleum
B.V.
/(c)/ Prices exclude gains/losses from hedging activities.
/(d)/ Represents Marathon's equity interest in Sakhalin Energy
Investment Company Ltd.
U-35
<PAGE>
Five-Year Operating Summary Marathon Group CONTINUED
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. REFINERY OPERATIONS (thousands of
barrels per day)
In-use crude oil capacity at year-end 575 570 570 570 570
Refinery runs - crude oil refined 525 511 503 491 549
- other charge and blend stocks 99 96 94 107 102
In-use crude oil capacity utilization rate 92% 90% 88% 86% 90%
---------------------------------------------------------------------------------------------------------
SOURCE OF CRUDE PROCESSED (thousands of
barrels per day)
United States 202 229 254 218 299
Europe 10 12 6 31 3
Middle East and Africa 241 193 183 171 173
Other International 72 79 58 70 75
-------------------------------------------------
Total 525 513 501 490 550
---------------------------------------------------------------------------------------------------------
REFINED PRODUCT YIELDS (thousands of
barrels per day)
Gasoline 353 345 339 340 369
Distillates 154 155 146 146 157
Propane 13 13 12 13 15
Feedstocks and special products 36 35 38 33 33
Heavy fuel oil 35 30 31 38 39
Asphalt 39 36 36 30 38
-------------------------------------------------
Total 630 614 602 600 651
---------------------------------------------------------------------------------------------------------
REFINED PRODUCTS YIELDS (% breakdown)
Gasoline 56% 56% 57% 57% 57%
Distillates 24 25 24 24 24
Other products 20 19 19 19 19
-------------------------------------------------
Total 100% 100% 100% 100% 100%
---------------------------------------------------------------------------------------------------------
U.S. REFINED PRODUCT SALES (thousands of
barrels per day)
Gasoline 452 468 445 443 420
Distillates 198 192 180 183 179
Propane 12 12 12 16 18
Feedstocks and special products 40 37 44 32 32
Heavy fuel oil 34 31 31 38 39
Asphalt 39 35 35 31 38
-------------------------------------------------
Total 775 775 747 743 726
Matching buy/sell volumes included in above 51 71 47 73 47
---------------------------------------------------------------------------------------------------------
REFINED PRODUCTS SALES BY CLASS OF TRADE
(as a % of total sales)
Wholesale - independent private-brand
marketers and consumers 61% 62% 61% 62% 63%
Retail - Marathon brand outlets 13 13 13 13 13
- Emro Marketing Company outlets 26 25 26 25 24
-------------------------------------------------
Total 100% 100% 100% 100% 100%
---------------------------------------------------------------------------------------------------------
REFINED PRODUCTS (dollars per barrel)
Average sales price $ 26.38 $ 27.43 $ 23.80 $ 22.75 $ 23.42
Average cost of crude oil throughput 19.00 21.94 18.09 16.59 17.05
---------------------------------------------------------------------------------------------------------
PETROLEUM INVENTORIES AT YEAR-END
(thousands of barrels)
Crude oil and natural gas liquids 18,660 19,325 21,598 21,892 21,689
Refined products 20,598 21,283 22,102 23,657 23,136
---------------------------------------------------------------------------------------------------------
U.S. Refined Product Marketing Outlets at year-end
Marathon operated terminals 51 51 51 51 51
Retail - Marathon brand 2,465 2,392 2,380 2,356 2,331
- Emro Marketing Company 1,544 1,592 1,627 1,659 1,571
---------------------------------------------------------------------------------------------------------
PIPELINES (miles of common carrier
pipelines, including affiliates)
Crude Oil - gathering lines 1,003 1,052 1,115 1,115 1,130
- trunklines 2,552 2,552 2,553 2,559 2,581
Products - trunklines 1,493 1,493 1,494 1,494 1,495
-------------------------------------------------
Total 5,048 5,097 5,162 5,168 5,206
---------------------------------------------------------------------------------------------------------
PIPELINE BARRELS HANDLED (millions)
Crude Oil - gathering lines 43.9 43.2 43.8 43.4 43.8
- trunklines 369.6 378.7 371.3 353.0 382.4
Products - trunklines 262.4 274.8 252.3 282.2 295.6
-------------------------------------------------
Total 675.9 696.7 667.4 678.6 721.8
---------------------------------------------------------------------------------------------------------
CARNEGIE NATURAL GAS COMPANY STATISTICS
Miles of pipeline 1,794 1,787 1,800 1,799 1,810
Reserves dedicated to gathering
operations - owned
(proved developed - billions of cubic feet) 39.8 42.8 44.3 43.8 46.7
Natural gas throughput (billions of cubic feet) 31.8 34.1 34.1 27.9 37.2
---------------------------------------------------------------------------------------------------------
</TABLE>
U-36
<PAGE>
Five-Year Operating Summary - U. S. Steel Group
<TABLE>
<CAPTION>
(Thousands of net tons, unless otherwise noted) 1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RAW STEEL PRODUCTION
Gary, IN 7,428 6,840 7,163 6,768 6,624
Mon Valley, PA 2,561 2,746 2,740 2,669 2,507
Fairfield, AL 2,361 1,862 2,260 2,240 2,203
----------------------------------------------------
Total 12,350 11,448 12,163 11,677 11,334
-----------------------------------------------------------------------------------------------------
RAW STEEL CAPABILITY
Continuous cast 12,800 12,800 12,500 11,990 11,850
Total production as % of
total capability 96.5 89.4 97.3 97.4 95.6
-----------------------------------------------------------------------------------------------------
HOT METAL PRODUCTION 10,591 9,716 10,521 10,328 9,972
-----------------------------------------------------------------------------------------------------
COKE PRODUCTION 5,757/(a)/ 6,777 6,770 6,777 6,425
-----------------------------------------------------------------------------------------------------
IRON ORE PELLETS MINNTAC, MN
Shipments 16,319 14,962 15,218 16,174 15,911
-----------------------------------------------------------------------------------------------------
COAL PRODUCTION
Metallurgical coal/(b)/ 7,528 7,283 7,509 7,424 8,142
Steam coal/(b)(c)/ - - - - 2,444
-------------------------------------------------------
Total 7,528 7,283 7,509 7,424 10,586
-----------------------------------------------------------------------------------------------------
COAL SHIPMENTS/(b)(c)/ 7,811 7,117 7,502 7,698 10,980
-----------------------------------------------------------------------------------------------------
STEEL SHIPMENTS BY PRODUCT
Sheet and semi-finished steel
products 8,170 8,677 8,721 7,988 7,613
Tubular, plate and tin mill
products 3,473 2,695 2,657 2,580 2,356
-------------------------------------------------------
Total 11,643 11,372 11,378 10,568 9,969
Total as % of domestic steel
industry 10.9 11.3 11.7 11.1 11.3
------------------------------------------------------------------------------------------------------
STEEL SHIPMENTS BY MARKET
Steel service centers 2,746 2,831 2,564 2,780 2,831
Transportation 1,758 1,721 1,636 1,952 1,771
Further conversion:
Joint ventures 1,568 1,542 1,332 1,308 1,074
Trade customers 1,378 1,227 1,084 1,058 1,150
Containers 856 874 857 962 835
Construction 994 865 671 722 667
Oil, gas and petrochemicals 810 746 748 367 342
Export 453 493 1,515 355 327
All other 1,080 1,073 971 1,064 972
-------------------------------------------------------
Total 11,643 11,372 11,378 10,568 9,969
----------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ The reduction in coke production in 1997 reflected U. S.
Steel's entry into a strategic partnership with two limited
partners to acquire an interest in three coke batteries at
its Clairton (Pa.) Works.
/(b)/ The Maple Creek Coal Mine, which was idled in January 1994
and sold in June 1995, produced 1.0 million net tons of
metallurgical coal and 0.7 million net tons of steam coal in
1993.
/(c)/ The Cumberland Coal Mine, which was sold in June 1993,
produced 1.6 million net tons in 1993 prior to the sale.
U-37
<PAGE>
Five-Year Financial Summary
<TABLE>
<CAPTION>
(Dollars in millions, except as noted) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Revenues $22,588 $22,977/(a)/ $20,413/(a)/ $ 19,055/(a)/ $ 17,798/(a)/
Income from operations 1,705 1,779/(a)/ 726/(a)/ 1,174/(a)/ 285/(a)/
Costs and expenses include:
Inventory market valuation charges (credits) 284 (209) (70) (160) 241
Restructuring charges - - - - 42
Impairment of long-lived assets - - 675 - -
Income (loss) from continuing operations $ 908 $ 946/(a)/ $ 217/(a)/ $ 532/(a)/ $ (179)/(a)/
Income (loss) from discontinued operations 80 6 4 (31) 12
Extraordinary loss and cumulative effect of
changes in accounting principles - (9) (7) - (92)
-----------------------------------------------------------------
NET INCOME (LOSS) $ 988 $ 943 $ 214 $ 501 $ (259)
- ----------------------------------------------------------------------------------------------------------------------------
APPLICABLE TO MARATHON STOCK
Income (loss) before extraordinary loss
and cumulative effect of changes in
accounting principles $ 456 $ 671 $ (87) $ 315 $ (12)
Income (loss) before extraordinary loss and
cumulative effect of changes in accounting
principles per share - basic (in dollars) 1.59 2.33 (.31) 1.10 (.04)
- diluted (in dollars) 1.58 2.31 (.31) 1.10 (.04)
Net income (loss) 456 664 (92) 315 (35)
Net income (loss) per share - basic (in dollars) 1.59 2.31 (.33) 1.10 (.12)
- diluted (in dollars) 1.58 2.29 (.33) 1.10 (.12)
Dividends paid per share (in dollars) .76 .70 .68 .68 .68
- ----------------------------------------------------------------------------------------------------------------------------
APPLICABLE TO STEEL STOCK
Income (loss) before extraordinary loss and
cumulative effect of change in accounting principle $ 449 $ 253 $ 279 $ 176 $ (190)
Income (loss) before extraordinary loss and
cumulative effect of change in accounting
principle per share - basic (in dollars) 5.24 3.00 3.53 2.35 (2.96)
- diluted (in dollars) 4.88 2.97 3.43 2.33 (2.96)
Net income (loss) 449 251 277 176 (259)
Net income (loss) per share - basic (in dollars) 5.24 2.98 3.51 2.35 (4.04)
- diluted (in dollars) 4.88 2.95 3.41 2.33 (4.04)
Dividends paid per share (in dollars) 1.00 1.00 1.00 1.00 1.00
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET POSITION AT YEAR-END
Cash and cash equivalents $ 54 $ 55 $ 131 $ 48 $ 268
Total assets 17,284 16,980 16,743 17,517 17,414
Capitalization:
Notes payable $ 121 $ 81 $ 40 $ 1 $ 1
Total long-term debt 3,403 4,212 4,937 5,599 5,970
Minority interests/(b)/ 432 250 250 250 5
Redeemable Delhi Stock 195 - - - -
Preferred stock 3 7 7 112 112
Common stockholders' equity 5,397 5,015 4,321 4,190 3,752
-----------------------------------------------------------------
Total capitalization $ 9,551 $ 9,565 $ 9,555 $ 10,152 $ 9,840
- ----------------------------------------------------------------------------------------------------------------------------
% of total debt to capitalization/(c)/ 41.4 47.5 54.7 57.6 60.7
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOW DATA
Net cash from operating activities $ 1,458 $ 1,649 $ 1,632 $ 817 $ 952
Capital expenditures 1,373 1,168 1,016 1,033 1,151
Disposal of assets 481 443 157 293 469
Dividends paid 316 307 295 301 288
- ----------------------------------------------------------------------------------------------------------------------------
EMPLOYEE DATA
Total employment costs/(d)(e)/ $ 2,289 $ 2,179 $ 2,186 $ 2,281 $ 2,128
Average number of employees/(d)/ 41,620 41,553 42,133 42,596 43,789
Number of pensioners at year-end 97,051 99,713 102,449 105,227 108,079
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Reclassified to conform to 1997 classifications and exclude discontinued
operations see Note 3, to the USX consolidated financial statements.
/(b)/ Includes preferred stock of subsidiary, minority interests in common
stock of subsidiaries and trust preferred securities.
/(c)/ Total debt represents the sum of notes payable, total long-term debt and
minority interests.
/(d)/ Excludes the Delhi Companies sold in 1997.
/(e)/ Excludes employee related costs attributable to restructuring charges or
credits.
U-38
<PAGE>
Management's Discussion and Analysis
USX Corporation ("USX") is a diversified company engaged
primarily in the energy business through its Marathon Group, and in
the steel business through its U. S. Steel Group.
Effective October 31, 1997, USX sold Delhi Gas Pipeline
Corporation and other subsidiaries of USX that comprised all of the
USX - Delhi Group ("Delhi Companies"). On January 26, 1998, USX
used the $195 million net proceeds from the sale to redeem all of
the 9.45 million outstanding shares of USX - Delhi Group Common
Stock. Accordingly, Management's Discussion and Analysis of the
Delhi Group is not provided. However, the following discussion
includes information about the Delhi Companies where appropriate.
For additional discussion about the Delhi Companies, see Note 3 to
the Consolidated Financial Statements.
Effective January 1, 1998, the USX - Marathon Group and Ashland
Inc. formed a new refining, marketing and transportation company,
Marathon Ashland Petroleum LLC ("MAP"). For further discussion, see
Note 31 to the Consolidated Financial Statements. The following
discussion excludes MAP, except where otherwise noted.
Management's Discussion and Analysis of USX Consolidated
Financial Statements provides certain information about the
Marathon and U. S. Steel Groups, particularly in Management's
Discussion and Analysis of Operations by Industry Segment. More
expansive Group information is provided in Management's Discussion
and Analysis of the Marathon Group and U. S. Steel Group, which are
included in the USX 1997 Form 10-K. Management's Discussion and
Analysis should be read in conjunction with the USX Consolidated
Financial Statements and Notes to Consolidated Financial
Statements.
Certain sections of Management's Discussion and Analysis 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
risk factors affecting the businesses of USX, see Supplementary
Data Disclosures About Forward-Looking Statements in the USX 1997
Form 10-K.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INCOME
REVENUES for each of the last three years are summarized in the
following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues/(a)(b)/
Marathon Group $15,754 $16,394 $13,913
U. S. Steel Group 6,941 6,670 6,557
Eliminations (107) (87) (57)
------- ------- -------
Total USX Corporation revenues 22,588 22,977 20,413
Less:
Matching crude oil and refined product buy/sell transactions/(c)/ 2,436 2,912 2,067
Consumer excise taxes on petroleum products and merchandise/(c)/ 2,736 2,768 2,708
------- ------- -------
Revenues adjusted to exclude above items $17,416 $17,297 $15,638
-------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Consists of sales, dividend and affiliate income, net gains
on disposal of assets, gain on affiliate stock offering and
other income. Amounts for 1996 and 1995 were reclassified in
1997 to include dividend and affiliate income, gain on
affiliate stock offering and other income, and to conform to
other 1997 classifications.
/(b)/ Effective October 31, 1997, USX sold the Delhi Companies.
Excludes revenues of the Delhi Companies, which have been
reclassified as discontinued operations for all periods
presented.
/(c)/ Included in both revenues and operating costs for the
Marathon Group and USX Consolidated, resulting in no effect
on income.
Adjusted revenues increased by $119 million, or 1%, in 1997
as compared with 1996, reflecting a 4% increase for the U. S. Steel
Group, partially offset by a 1% decrease for the Marathon Group.
Adjusted revenues increased by $1,659 million, or 11%, in 1996 as
compared with 1995, reflecting increases of 17% for the Marathon
Group, and 2% for the U. S. Steel Group.
U-39
<PAGE>
Management's Discussion and Analysis CONTINUED
INCOME FROM OPERATIONS and certain items included in income from
operations for each of the last three years are summarized in the
following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from operations/(a)/
Marathon Group $ 932 $1,296 $ 147
U. S. Steel Group 773 483 582
Adjustments for discontinued operations - - (3)
------ ------ ------
Total USX Corporation income from operations 1,705 1,779 726
Less: Certain favorable (unfavorable) items for
Marathon Group
IMV reserve adjustment/(b)/ (284) 209 70
Net gains on certain asset sales/(c)/ - 35 -
Charges for withdrawal from MPA/(d)/ - (10) -
Certain state tax adjustments/(e)/ - (11) -
Impairment of long-lived assets/(f)/ - - (659)
Expected environmental remediation recoveries/(g)/ - - 15
U. S. Steel Group
Effect of adoption of SOP 96-1/(h)/ (20) - -
Net gains on certain asset sales/(i)/ 15 - -
Certain other environmental accrual adjustments - net 11 - -
Gain on affiliate stock offering/(j)/ - 53 -
Certain Gary Works blast furnace repairs/(k)/ - (39) (34)
Employee reorganization charges/(l)/ - (13) -
Impairment of long-lived assets/(f)/ - - (16)
Adjustments for certain employee-related costs - - 18
Certain legal accruals - - (44)
------ ------ ------
Subtotal (278) 224 (650)
------ ------ ------
Income from operations adjusted to exclude above items $1,983 $1,555 $1,376
----------------------------------------------------------------------------------------
</TABLE>
/(a)/ Consists of operating income, dividend and affiliate income,
net gains on disposal of investments, gain on affiliate stock
offering and other income. Excludes income from operations
from the Delhi Group, which has been reclassified as
discontinued operations for all periods presented. Amounts
for 1996 and 1995 were reclassified in 1997 to include
dividend and affiliate income, gain on affiliate stock
offering and other income, and to conform to other 1997
classifications. See Note 9 to the Consolidated Financial
Statements for a discussion of operating income.
/(b)/ 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
Management's Discussion and Analysis of Operations by
Industry Segment for the Marathon Group, herein.
/(c)/ Net gain on sales of the Marathon Group's interests in a
domestic pipeline company and certain production properties.
/(d)/ Marine Preservation Association ("MPA") is a non-profit oil
spill response group.
/(e)/ Accrual of domestic production taxes for prior years.
/(f)/ Related to adoption of Statement of Financial Accounting
Standards No. 121 - "Accounting For the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of "
("SFAS No. 121").
/(g)/ Expected recoveries from state governments of expenditures
related to underground storage tanks at retail marketing
outlets.
/(h)/ Effective January 1, 1997, USX adopted American Institute of
Certified Public Accountants Statement of Position No. 96-1 -
"Environmental Remediation Liabilities", which provides
additional guidance on recognition, measurement and
disclosure of remediation liabilities.
/(i)/ Net gain on the sale of the plate mill at the U. S. Steel
Group's former Texas Works.
/(j)/ See Note 8 to the Consolidated Financial Statements.
/(k)/ Amounts in 1996 and 1995 reflect repair of damages incurred
at Gary Works during a hearth break-out at the No. 13 blast
furnace on April 2, 1996, and in an explosion at the No. 8
blast furnace on April 5, 1995, respectively.
/(l)/ Primarily related to employee costs associated with work
force reduction programs.
U-40
<PAGE>
Management's discussion and Analysis CONTINUED
Adjusted income from operations increased by $428 million in
1997 as compared with 1996, reflecting increases of $285 million
for the U. S. Steel group and $143 million for the Marathon Group.
Adjusted income from operations increased by $179 million in 1996
as compared with 1995, primarily reflecting an increase of $352
million for the Marathon Group, partially offset by a decline of
$176 million for the U. S. Steel Group. For further discussion, see
Management's Discussion and Analysis of Operations by Industry
Segment, herein.
Net pension credits included in income from operations totaled
$157 million in 1997, compared with $162 million in 1996, and $144
million in 1995. The decrease in 1997 from 1996 primarily reflected
a reduction in the expected long-term rate of return on plan
assets, partially offset by an increase in market-related value of
plan assets and an increase in the assumed discount rate. The
increase in 1996 from 1995 primarily reflected a decrease in the
assumed discount rate and an increase in the market-related value
of plan assets. For further discussion, see Note 10 to the
Consolidated Financial Statements.
NET INTEREST AND OTHER FINANCIAL COSTS for each of the last
three years are summarized in the following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
----------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and other financial income/(a)/ $ 5 $ 7 $ 20
Interest and other financial costs 352 428 486
----- ----- -----
Net interest and other financial costs/(a)/ 347 421 466
Less:
Favorable (unfavorable) adjustments to
carrying value of Indexed Debt/(b)/ 10 (6) -
Favorable effect of interest on refundable federal
income taxes paid in prior years - - 20
----- ----- -----
Net interest and other financial costs
adjusted to exclude above items $ 357 $ 415 $ 486
----------------------------------------------------------------------------
</TABLE>
/(a)/ Amounts in 1996 and 1995 have been restated to conform to
1997 classifications.
/(b)/ 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.
Excluding effects of the items detailed in the above table,
interest and other financial costs decreased by $58 million in 1997
as compared with 1996, and by $71 million in 1996 as compared with
1995, due primarily to lower average debt levels. The decrease in
1997 also reflected increased capitalized interest on Marathon
Group worldwide exploration and production projects. For additional
information, see Note 6 to the Consolidated Financial Statements.
The PROVISION FOR ESTIMATED INCOME TAXES was $450 million in
1997, compared with $412 million in 1996 and $43 million in 1995.
Provisions included credits other than foreign tax credits of $24
million and $48 million in 1997 and 1996, respectively (primarily
nonconventional fuel source credits). A significant portion of the
reduction in these credits in 1997 as compared with 1996 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 14 to the
Consolidated Financial Statements for additional discussion. The
provision in 1995 included a $39 million incremental U.S. income
tax benefit resulting from USX's election to credit, rather than
deduct, foreign income taxes for U.S. federal income tax purposes.
For reconciliation of the federal statutory rate to total
provisions on income from continuing operations, see Note 12 to the
Consolidated Financial Statements.
U-41
<PAGE>
Management's Discussion and Analysis CONTINUED
EXTRAORDINARY LOSS in 1996 and 1995 reflected unfavorable
aftertax effects of early extinguishment of debt. In December 1996,
USX irrevocably called for redemption on January 30, 1997, 8-1/2%
Sinking Fund Debentures Due 2006, with a carrying value of $120
million, resulting in an extraordinary loss of $9 million, net of
an income tax benefit of $5 million. In 1995, USX extinguished $553
million of debt prior to maturity, primarily consisting of Zero
Coupon Convertible Senior Debentures Due 2005, with a carrying
value of $393 million ($264 million in original proceeds and $129
million of amortized discount) and $83 million of 8-1/2% Sinking
Fund Debentures, which resulted in an extraordinary loss of $7
million, net of an income tax effect of $4 million.
INCOME FROM DISCONTINUED OPERATIONS reflects aftertax income of
the Delhi Companies sold during 1997. Income in 1997 included an
$81 million gain on disposal of the Delhi Companies (net of income
taxes). For additional discussion, see Note 3 to the Consolidated
Financial Statements.
NET INCOME was $988 million in 1997, $943 million in 1996 and
$214 million in 1995. Excluding the effects of the $81 million gain
on disposal related to discontinued operations in 1997, the $430
million unfavorable effect of adoption of SFAS No. 121 in 1995, and
adjustments to the inventory market valuation reserve in each of
1997, 1996 and 1995, net income increased by $275 million in 1997
as compared with 1996 and by $211 million in 1996 as compared with
1995.
NONCASH CREDIT FROM EXCHANGE OF PREFERRED STOCK was $10 million,
or 12 cents per share of Steel Stock, in 1997. In May 1997, USX
exchanged 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 $10 million noncash credit reflects the difference between the
carrying value of the 6.50% Preferred Stock and the fair value of
the Trust Preferred Securities at the date of the exchange. See
Note 26 to the Consolidated Financial Statements for additional
discussion.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, CASH FLOWS AND
LIQUIDITY
CURRENT ASSETS increased by $70 million from year-end 1996,
primarily reflecting increased deferred income tax benefits and
receivable balances, partially offset by a decline in inventory
balances. The increase in deferred income tax benefits was
primarily due to expectations of the increased utilization of
federal tax credit carryforwards within the next year. The increase
in receivables primarily reflected a net increase in trade
receivables following USX's termination of the Marathon Group
receivable sales program and sale of the Delhi Companies in late
1997. The decrease in inventories primarily reflected lower year-
end refined product prices resulting in a $284 million increase to
the inventory market valuation reserve.
NET PROPERTY, PLANT AND EQUIPMENT decreased by $342 million from
year-end 1996, primarily reflecting depreciation, depletion and
amortization ("DD&A") expense of $967 million and the sale in 1997
of the Delhi Companies with net property plant and equipment of
$608 million at the time of the sale, partially offset by property
additions. For discussion of property additions, see Capital
Expenditures, herein.
DEFERRED CREDITS AND OTHER LIABILITIES increased by $300 million
from year-end 1996 due primarily to unamortized deferred gains of
$244 million related to USX's entry in 1997 into a strategic
partnership with two limited partners to acquire an interest in
three coke batteries at the U. S. Steel Group's Clairton (Pa.)
Works.
TOTAL LONG-TERM DEBT AND NOTES PAYABLE decreased by $769 million
from year-end 1996, mainly reflecting cash flows provided from
operating activities and asset sales during 1997, in excess of cash
used for capital expenditures, dividend payments and investments in
equity affiliates. At December 31, 1997, USX had available its
long-term revolving credit agreement of $2,350 million, short-term
lines of credit of $200 million and a short-term credit agreement
of $125 million, against which it had no outstanding borrowings.
USX had outstanding borrowings of $121 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%.
U-42
<PAGE>
Management's Discussion and Analysis CONTINUED
STOCKHOLDERS' EQUITY increased by $378 million from year-end
1996 mainly reflecting 1997 net income, partially offset by
dividends paid and a decrease in additional paid-in capital. The
decrease in additional paid-in capital resulted primarily from the
exchange of 6.50% Preferred Stock for Trust Preferred Securities,
and reclassification of equity in the Delhi Group to redeemable
Delhi Stock, following the sale of the Delhi Companies in late
1997. For further discussion of Trust Preferred Securities, see
Financial Obligations, herein, the Consolidated Statement of
Stockholders' Equity and Note 26 to the Consolidated Financial
Statements.
NET CASH FROM OPERATING ACTIVITIES was $1,458 million in 1997,
$1,649 million in 1996 and $1,632 million in 1995. Cash provided
from operating activities in 1997 included a payment of $390
million resulting from termination of a Marathon Group and Delhi
Group accounts receivable sales program, payments of $199 million
to fund employee benefit plans related to the U. S. Steel Group,
and insurance recoveries of $40 million related to a 1996 hearth
breakout at the Gary Works No. 13 blast furnace. Cash provided from
operating activities in 1996 included a payment of $59 million to
the Internal Revenue Service for certain agreed and unagreed
adjustments relating to the tax year 1990, payments of $39 million
related to certain state tax issues, and a payment of $28 million
related to settlement of the Pickering litigation. Excluding the
effects of these adjustments, cash provided from operating
activities increased by $232 million in 1997 as compared with 1996,
due primarily to favorable working capital changes, improved
profitability and reduced interest payments, partially offset by
increased income taxes paid.
Net cash provided from operating activities in 1995 included
payments of $204 million to fund employee benefit plans related to
the U. S. Steel Group, $129 million for amortized discount on USX's
zero coupon debentures and $20 million as partial settlement in the
Pickering litigation. Excluding the effects of these adjustments,
cash provided from operating activities decreased by $210 million
in 1996 as compared with 1995, due primarily to unfavorable working
capital changes.
For additional discussion of 1997 funding of U. S. Steel benefit
plans, see Benefit Plan Activity, herein.
CAPITAL EXPENDITURES for each of the last three years are
summarized in the following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Marathon Group
Exploration and production ("Upstream")
United States $ 647 $ 424 $ 322
International 163 80 141
Refining, marketing and transportation ("Downstream") 216 222 169
Other 12 25 10
------ ------ ------
Subtotal Marathon Group 1,038 751 642
U. S. Steel Group 261 337 324
Discontinued operations (Delhi Group)/(a)/ 74 80 50
------ ------ ------
Total USX Corporation capital expenditures $1,373 $1,168 $1,016
---------------------------------------------------------------------------------
</TABLE>
/(a)/ Effective October 31, 1997, USX sold Delhi Gas Pipeline
Corporation and other subsidiaries of USX that comprised all
of the Delhi Group.
Marathon Group's domestic upstream capital expenditures in
1997 mainly included development of Gulf of Mexico properties,
including Viosca Knoll 786 (Petronius), Green Canyon 244 (Troika),
Ewing Bank 963 (Arnold) and Ewing Bank 917 (Oyster). International
upstream capital expenditures included development of the West Brae
field in the U.K. North Sea and projects in Egypt and offshore
Gabon. Downstream capital expenditures in 1997 were primarily for
upgrading and expanding Emro Marketing Company's network of retail
outlets, and refinery modification projects.
U. S. Steel Group capital expenditures in 1997 included a
blast furnace reline at Mon Valley Works, a new heat-treat line for
plate products at Gary Works and environmental expenditures,
primarily at Gary Works.
U-43
<PAGE>
Management's Discussion and Analysis CONTINUED
CAPITAL EXPENDITURES IN 1998 are expected to be $1.6 billion.
Expenditures for the Marathon Group are expected to be
approximately $1.3 billion. The increase from 1997 levels primarily
reflects inclusion of 100% of the capital requirements for MAP.
Domestic upstream projects planned for 1998 include continuing
development of projects in the Gulf of Mexico. International
upstream projects include development of properties offshore Gabon.
Downstream spending is expected to be primarily for retail
marketing upgrading and expansion projects and refinery
modifications.
Capital expenditures for the U. S. Steel Group in 1998 are
expected to be approximately $340 million. Planned projects include
a reline of the No. 6 blast furnace and other projects at Gary
Works, and environmental expenditures.
INVESTMENTS IN EQUITY AFFILIATES of $249 million in 1997, mainly
reflected funding of Marathon Group 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 the Marathon Group's acquisition of an additional
7.5% interest in Sakhalin Energy Investment Company Ltd. ("Sakhalin
Energy"), 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. Sakhalin Energy
is the incorporated joint venture company responsible for the
Sakhalin II project. Following the acquisition of the additional
interest, the Marathon Group holds a 37.5% interest in Sakhalin
Energy. Investments in U. S. Steel Group equity affiliate capital
projects included the addition of a second galvanizing line at the
PRO-TEC Coating Company joint venture in northwest Ohio.
INVESTMENTS IN EQUITY AFFILIATES IN 1998 are expected to be
approximately $210 million. Projected investments include
additional funding of Sakhalin Energy's spending on the Sakhalin II
project, a U. S. Steel Group 50%-owned joint venture in the Slovak
Republic, and Marathon Group power generation projects. Although
project expenditures for the Sakhalin II project remain high,
third-party financing arranged by Sakhalin Energy is expected to
reduce the need for direct investment by the Marathon Group in
1998.
Contract commitments for capital expenditures were $424 million
at year-end 1997, compared with $526 million at year-end 1996.
The above statements with respect to 1998 capital expenditures
and investments are forward-looking statements reflecting
management's best estimates based on information currently
available. To the extent this information proves to be inaccurate,
the timing and levels of future expenditures and investments could
differ materially from those included in the forward-looking
statements. Factors that could cause future capital expenditures
and investments to differ materially include changes in industry
supply and demand, general economic conditions, the availability of
business opportunities and levels of cash flow from operations for
each of the Groups. The timing of completion or cost of particular
capital projects could be affected by unforeseen hazards such as
weather conditions, explosions or fires, or by delays in obtaining
government or partner approval. In addition, levels of investments
may be affected by the ability of equity affiliates to obtain
third-party financing.
PROCEEDS FROM SALE OF THE DELHI COMPANIES totaled $752 million.
In January 1998, USX used the net proceeds of $195 million to
redeem all of the 9.45 million outstanding shares of USX - Delhi
Group Common Stock. For additional discussion, including a
reconcilement of proceeds from the sale to net proceeds, see Note 3
to the Consolidated Financial Statements.
PROCEEDS FROM DISPOSAL OF ASSETS were $481 million in 1997,
compared with $443 million in 1996 and $157 million in 1995.
Proceeds in 1997 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 and $15 million from the sale of the plate mill at
the U. S. Steel Group's former Texas Works. Proceeds in 1996
primarily reflected the sale of the U. S. Steel Group's investment
in National-Oilwell (an oil field service joint venture); the sale
of a portion of its investment in RMI common stock; disposal of the
Marathon Group's interests in Alaskan oil properties and certain
domestic and international oil and gas production properties; and
the sale of the Marathon Group's equity interest in a domestic
pipeline company. Proceeds in 1995 primarily reflected sales of
certain domestic oil and gas production properties, mainly in the
Illinois Basin, and other properties.
WITHDRAWAL FROM PROPERTY EXCHANGE TRUSTS of $98 million in 1997
mainly represents cash withdrawn from an interest-bearing escrow
account that was established in 1996 in connection with the
disposal of oil production properties in Alaska.
U-44
<PAGE>
Management's Discussion and Analysis CONTINUED
FINANCIAL OBLIGATIONS (the net of debt repayments, borrowings,
commercial paper and revolving credit arrangements on the
Consolidated Statement of Cash Flows) decreased by $734 million in
1997, compared with decreases of $673 million in 1996 and $511
million in 1995. These amounts represent financial activities
involving commercial paper, revolving credit agreements, lines of
credit, other debt and preferred stock of a subsidiary. The
decrease in financial obligations in each of the three years
primarily reflected cash flows provided from operating activities
and asset sales in excess of cash used for capital expenditures and
dividend payments (and with respect to 1997, in excess of $249
million of cash used for investments in equity affiliates).
Financial obligations for USX obligated mandatorily redeemable
convertible preferred securities of a subsidiary trust resulted
from a noncash exchange in 1997.
In 1997, USX redeemed, prior to maturity, $180 million of 5-3/4%
Convertible Subordinated Debentures Due 2001, $227 million of 7%
Convertible Subordinated Debentures Due 2017, $120 million of 8.50%
Sinking Fund Debentures Due 2006 and $41 million of Zero Coupon
Convertible Senior Debentures Due 2005. Maturities of long-term
debt during 1997 consisted of $150 million of 8-7/8% Notes Due
1997. In 1996, USX redeemed, prior to maturity, $161 million of
Marathon Oil Company 9-3/4% Guaranteed Notes Due 1999. In 1995, USX
extinguished, prior to maturity, $553 million of debt, primarily
consisting of Zero Coupon Convertible Senior Debentures Due 2005,
with a carrying value of $393 million ($264 million in original
proceeds and $129 million of amortized discount) and $83 million of
8-1/2% Sinking Fund Debentures. Also in 1995, USX redeemed all of
the outstanding shares of its Adjustable Rate Cumulative Preferred
Stock at a cost of $105 million.
Issuance of long-term debt and Trust Preferred Securities for
each of the last three years is summarized in the following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggregate principal amounts of:
Trust Preferred Securities/(a)/ $ 182 $ - $ -
Indexed Debt/(b)/ - 117 -
Environmental Improvement Revenue Refunding Bonds/(c)/ - 78 53
------- ------- -------
Total $ 182 $ 195 $ 53
---------------------------------------------------------------------------------------
</TABLE>
/(a)/ In 1997, USX exchanged 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 USX's 6.50% Cumulative Convertible Preferred
Stock. This was a noncash transaction. For additional
discussion, see Note 26 to the Consolidated Financial
Statements.
/(b)/ See description below.
/(c)/ Issued to refinance certain environmental improvement bonds.
USX currently has three effective shelf registration
statements with the Securities and Exchange Commission aggregating
$943 million, of which $633 million is dedicated to offer and issue
debt securities ("Debt Shelf"). The balance allows USX to offer and
issue debt and/or equity securities. In December 1996, USX issued,
under its Debt Shelf, $117 million in aggregate principal amount of
Indexed Debt, mandatorily exchangeable at maturity for common stock
of RMI (or for the equivalent amount of cash, at USX's option) at a
defined exchange rate based upon the average market price of RMI
common stock valued in January 2000. The carrying value of the
notes is adjusted quarterly to settlement value and any resulting
adjustment is charged or credited to income and included in
interest and other financial costs. At December 31, 1997, the
adjusted carrying value of Indexed Debt was $113 million. At
December 31, 1997, USX owned 5,483,600 shares of RMI common stock,
constituting approximately 27% of the outstanding shares.
In the event of a change in control of USX, debt and
guaranteed obligations totaling $3.5 billion at year-end 1997 may
be declared immediately due and payable or required to be
collateralized. See Notes 13, 16 and 18 to the Consolidated
Financial Statements.
DIVIDENDS PAID increased by $9 million in 1997 as compared
with 1996, due primarily to the full-year effect of a two-cents-
per-share increase in the quarterly USX - Marathon Group Common
Stock dividend rate declared October 29, 1996. The increase was
partially offset by decreased dividends on preferred stock,
reflecting 6.50% Preferred Stock exchanged for Trust Preferred
Securities during 1997. Dividends paid increased by $12 million in
1996 as compared with 1995, due primarily to the sale of 5,000,000
shares of USX -U.S. Steel Group Common Stock ("Steel Stock") to the
public in 1995 and the previously mentioned increase in the
quarterly USX - Marathon Group Common Stock dividend rate.
U-45
<PAGE>
Management's Discussion and Analysis CONTINUED
In January 1998, the USX Board of Directors declared a fourth
quarter dividend on the USX - Marathon Group Common Stock of 21
cents per share, an increase of two cents per share over the
previous quarterly dividend. Total dividends paid on the USX -
Marathon Group Common Stock in the first quarter of 1998 will
increase by approximately $6 million as a result of this dividend
increase.
BENEFIT PLAN ACTIVITY
In accordance with USX's long-term funding practice, which is
designed to maintain an appropriate funded status, USX contributed
$49 million in 1997 to fund the U. S. Steel Group's principal
pension plan for the 1996 plan year. In 1995, net proceeds of $169
million from the public offering of 5,000,000 shares of Steel Stock
were used to fund the U. S. Steel Group's principal pension plan
for the 1994 and the 1995 plan years.
Also in 1997, USX contributed $80 million for elective funding
of retiree life insurance of union and nonunion participants, and
$70 million to the United Steelworkers of America ("USWA")
Voluntary Employee Benefit Association Trust ("VEBA"). A total of
$40 million of the $70 million VEBA contribution represented
prefunding for the years 1998 and 1999.
DEBT AND PREFERRED STOCK RATINGS
Standard & Poor's Corp. currently rates USX and Marathon Oil
Company ("Marathon") senior debt as investment grade, following an
upgrade in November 1996 to BBB- from BB+. USX's subordinated debt
and preferred stock were also upgraded to BB+ from BB-. Moody's
Investors Services, Inc. currently rates USX's and Marathon's
senior debt as investment grade at Baa3 and USX's subordinated debt
and preferred stock as Ba2. Duff & Phelps Credit Rating Co.
currently rates USX's senior notes as investment grade at BBB and
USX's subordinated debt as BBB-.
DERIVATIVE INSTRUMENTS
See Quantitative and Qualitative Disclosures About Market Risk
for discussion of derivative instruments and associated market
risk.
LIQUIDITY
USX management believes that its short-term and long-term
liquidity is adequate to satisfy its obligations as of December 31,
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 years
1998, 1999 and 2000, and any amounts that may ultimately be paid in
connection with contingencies (which are discussed in Note 30 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 based on currently
available information. To the extent that this information proves
to be inaccurate, future availability of financing may be adversely
affected. Factors that affect the availability of financing include
the performance of each Group (as indicated by levels of cash
provided from operating activities, and other measures), the state
of the debt and equity markets, investor perceptions and
expectations of past and future performance, the overall U.S.
financial climate, and, in particular, with respect to borrowings,
levels of USX's outstanding debt and credit ratings by rating
agencies. For a summary of long-term debt, see Note 16 to the
Consolidated Financial Statements.
U-46
<PAGE>
Management's Discussion and Analysis C O N T I N U E D
MANAGEMENT'S DISCUSSION AND ANALYSIS OF ENVIRONMENTAL MATTERS, LITIGATION AND
CONTINGENCIES
USX has incurred and will continue to incur substantial capital,
operating and maintenance, and remediation expenditures as a result
of environmental laws and regulations. To the extent these
expenditures, as with all costs, are not ultimately reflected in
the prices of USX's products and services, operating results will
be adversely affected. USX believes that domestic competitors of
the U. S. Steel Group and substantially all the competitors of the
Marathon 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.
The following table summarizes USX's environmental expenditures
for each of the last three years/(a)/:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C>
Capital
Marathon Group $ 81 $ 66 $ 50
U. S. Steel Group 43 90 55
Discontinued operations/(b)/ 10 9 6
----- ----- -----
Total capital $ 134 $ 165 $ 111
--------------------------------------------------------
Compliance
Operating & maintenance
Marathon Group $ 84 $ 75 $ 102
U. S. Steel Group 196 199 195
Discontinued operations/(b)/ 4 4 4
----- ----- -----
Total operating & maintenance 284 278 301
Remediation/(c)/
Marathon Group 19 26 37
U. S. Steel Group 29 33 35
----- ----- -----
Total remediation 48 59 72
Total compliance $ 332 $ 337 $ 373
--------------------------------------------------------
</TABLE>
/(a)/Amounts for the Marathon Group are based on American
Petroleum Institute survey guidelines. Amounts for the U. S.
Steel Group are based on previously established U.S.
Department of Commerce survey guidelines.
/(b)/Effective October 31, 1997, USX sold Delhi Gas Pipeline
Corporation and other subsidiaries of USX that comprised all
of the Delhi Group.
/(c)/Amounts do not include noncash provisions recorded for
environmental remediation, but include spending charged
against such reserves, net of recoveries where permissible.
USX's environmental capital expenditures accounted for 10%,
14% and 11% of total consolidated capital expenditures in 1997,
1996 and 1995, respectively.
USX's environmental compliance expenditures averaged 2% of
total consolidated operating costs in each of 1997, 1996 and 1995.
Remediation spending primarily reflected ongoing clean-up costs for
soil and groundwater contamination associated with underground
storage tanks and piping at retail gasoline stations, and
remediation activities at former and present operating locations.
The Resource Conservation and Recovery Act ("RCRA")
establishes standards for the management of solid and hazardous
wastes. Besides affecting current waste disposal practices, RCRA
also addresses the environmental effects of certain past waste
disposal operations, the recycling of wastes and the regulation of
storage tanks.
A significant portion of USX's currently identified
environmental remediation projects relate to the remediation of
former and present operating locations. These projects include
continuing remediation at an in situ uranium mining operation, the
remediation of former coke-making facilities, a closed and
dismantled refinery site and the closure of permitted hazardous and
non-hazardous waste landfills.
USX has been notified that it is a potentially responsible
party ("PRP") at 45 waste sites under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA")
as of December 31, 1997. In addition, there are 27 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 110 additional sites, excluding
U-47
<PAGE>
Management's Discussion and Analysis C O N T I N U E D
retail gasoline stations, 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. See
Note 30 to the Consolidated Financial Statements.
New or expanded environmental requirements, which could increase
USX's environmental costs, may arise in the future. USX intends to
comply with all legal requirements regarding the environment, but
since many of them are not fixed or presently determinable (even
under existing legislation) and may be affected by future
legislation, it is not possible to predict accurately the ultimate
cost of compliance, including remediation costs which may be
incurred and penalties which may be imposed. However, based on
presently available information, and existing laws and regulations
as currently implemented, USX does not anticipate that
environmental compliance expenditures (including operating and
maintenance and remediation) will materially increase in 1998. USX
expects environmental capital expenditures in 1998 to be
approximately $165 million, or approximately 10% of total estimated
consolidated capital expenditures. Predictions beyond 1998 can only
be broad-based estimates which have varied, and will continue to
vary, due to the ongoing evolution of specific regulatory
requirements, the possible imposition of more stringent
requirements and the availability of new technologies, among other
matters. Based upon currently identified projects, USX anticipates
that environmental capital expenditures in 1999 will total
approximately $110 million; however, actual expenditures may vary
as the number and scope of environmental projects are revised as a
result of improved technology or changes in regulatory requirements
and could increase if additional projects are identified or
additional requirements are imposed.
Effective January 1, 1997, USX adopted American Institute of
Certified Public Accountants Statement of Position No. 96-1 -
"Environmental Remediation Liabilities", which requires that
companies include certain direct costs and post-closure monitoring
costs in accruals for remediation liabilities. USX income from
operations included first quarter charges of $27 million (net of
expected recoveries) related to adoption, primarily for accruals of
post-closure monitoring costs, study costs and administrative
costs. See Note 2 to the Consolidated Financial Statements for
additional discussion.
Income from operations in 1997 also included net favorable
effects of $13 million related to other environmental accrual
adjustments.
USX is the subject of, or party to, a number of pending or
threatened legal actions, contingencies and commitments involving a
variety of 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.
OUTLOOK AND YEAR 2000
For Outlook with respect to the Marathon Group and U. S. Steel
Group, see Management's Discussion and Analysis of Operations by
Industry Segment, herein.
For discussion of the Year 2000 issue as it affects the Marathon
Group and the U. S. Steel Group, see Management's Discussion and
Analysis of Operations by Industry Segment, herein.
ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued
two new accounting standards:
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" requires that companies report all recognized
changes in assets and liabilities that are not the result of
transactions with owners, including those that are not reported in
net income. USX plans to adopt the standard, effective with its
1998 financial statements, as required.
Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" introduces a "management approach" for identifying
reportable industry segments of an enterprise. USX plans to adopt
the standard, effective with its 1998 financial statements, as
required.
U-48
<PAGE>
Management's Discussion and Analysis C O N T I N U E D
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS BY INDUSTRY SEGMENT
THE MARATHON GROUP
The Marathon Group consists of Marathon Oil Company and certain
other subsidiaries of USX, which are engaged in worldwide
exploration, production, transportation and marketing of crude oil
and natural gas; domestic refining, marketing and transportation of
petroleum products; and power generation. Effective January 1,
1998, the USX Marathon Group and Ashland Inc. formed a new
refining, marketing and transportation company, Marathon Ashland
Petroleum LLC.
Marathon Group REVENUES (excluding matching buy/sell
transactions and excise taxes) decreased by $132 million in 1997
from 1996, and increased by $1,576 million in 1996 from 1995. The
decrease in 1997 was due primarily to lower average refined product
prices and worldwide liquid hydrocarbon prices and volumes,
partially offset by increased volumes of refined products and
increased volumes and higher prices for domestic natural gas. The
increase in 1996 from 1995 was due primarily to higher average
prices for refined products, worldwide liquid hydrocarbons and
natural gas, partially offset by decreased volumes for worldwide
liquid hydrocarbons.
Marathon Group INCOME FROM OPERATIONS and certain items included
in income from operations for each of the last three years are
summarized in the following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from operations/(a)/ $ 932 $1,296 $ 147
Less: Certain favorable (unfavorable) items
IMV reserve adjustment/(b)/ (284) 209 70
Net gains on certain asset sales/(c)/ - 35 -
Charges for withdrawal from MPA/(d)/ - (10) -
Certain state tax adjustments/(e)/ - (11) -
Impairment of long-lived assets/(f)/ - - (659)
Expected environmental remediation recoveries/(g)/ - - 15
------- ------- ------
Subtotal (284) 223 (574)
------- ------- ------
Income from operations adjusted to exclude above items $1,216 $1,073 $ 721
--------------------------------------------------------------------------------------
</TABLE>
/(a)/Consists of operating income, dividend and affiliate income,
net gains on disposal of investments and other income. Amounts
for 1996 and 1995 were reclassified in 1997 to include
dividend and affiliate income and other income, and to conform
to other 1997 classifications. See Note 9 to the Consolidated
Financial Statements for a discussion of operating income.
/(b)/The inventory market valuation reserve ("IMV") reflects the
extent to which the recorded LIFO cost basis of crude oil and
refined products inventories exceeds net realizable value. For
additional details of this noncash adjustment, see discussion
below.
/(c)/Includes net gains on sales of interests in a domestic
pipeline company and certain production properties.
/(d)/Marine Preservation Association ("MPA") is a non-profit oil
spill response group.
/(e)/Reflected domestic production tax accruals for prior years.
/(f)/Related to adoption of SFAS No. 121.
/(g)/Expected recoveries from state governments of expenditures
related to underground storage tanks at retail marketing
outlets.
Adjusted income from operations for the Marathon Group increased
by $143 million in 1997 from 1996, and by $352 million in 1996 from
1995. The increase in 1997 was due primarily to higher average
refined product margins and higher worldwide natural gas prices,
partially offset by reduced worldwide liquid hydrocarbon production
and prices, increased worldwide exploration expense and increased
administrative expenses. The increase in 1996 from 1995 was due
primarily to higher average prices for worldwide liquid
hydrocarbons and natural gas, reduced DD&A expense and increased
worldwide volumes of natural gas. These favorable effects were
partially offset by decreased worldwide liquid hydrocarbon volumes,
net losses on production hedging activities (primarily occurring in
the fourth quarter of 1996) and lower refined product margins.
Reduced DD&A expense resulted mainly from the fourth quarter 1995
adoption of SFAS No. 121, and property sales.
U-49
<PAGE>
Management's Discussion and Analysis C O N T I N U E D
With respect to the IMV reserve adjustment, 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 income from operations.
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, 1997, LIFO cost
exceeded market prices by $284 million, resulting in a
corresponding charge to income from operations for total year 1997.
During 1996 and 1995, favorable market price movements resulted in
credits to income from operations of $209 million and $70 million,
respectively. The $493 million variance in income from operations
between 1997 and 1996 for the IMV reserve adjustments (and $139
million variance between 1996 and 1995) 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.
OUTLOOK-MARATHON GROUP
The outlook regarding the Marathon Group's sales levels, 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.
With respect to Marathon's upstream operations, worldwide liquid
hydrocarbon volumes are expected to increase by twenty-five percent
in 1998, with most of the increase anticipated in the second half
of the year. This primarily reflects projected new production from
fields in the Gulf of Mexico (such as Green Canyon 244 and Ewing
Bank Blocks 963 and 917), the Tchatamba Marine field in Gabon and
the West Brae field in the U.K. North Sea, partially offset by
natural production declines of mature fields. Marathon's worldwide
natural gas volumes in 1998 are expected to remain consistent with
1997 volumes at around 1.2 billion cubic feet per day, as natural
declines in mature international fields, primarily in Ireland and
Norway, are anticipated to be offset by anticipated increases in
domestic production (mainly in the Austin Chalk area in Texas,
Green Canyon 244 and the Vermillion Basin in Wyoming). These
projections are based on known discoveries and do not include any
additions from acquisitions or future exploratory drilling.
Other major upstream projects which are currently underway or
under evaluation and are expected to improve future income streams,
include Viosca Knoll Block 786 and Green Canyon Blocks 112 and 113
in the Gulf of Mexico, the Tchatamba South field, located offshore
Gabon, and the Sakhalin II project in the Russian Far East Region
(discussed below).
U-50
<PAGE>
Management's Discussion and Analysis C O N T I N U E D
The Marathon Group holds a 37.5% interest in Sakhalin Energy, an
incorporated joint venture company responsible for the overall
management of the Sakhalin II project. This project includes
development of the Piltun-Astokhskoye ("P-A") oil field and the
Lunskoye gas field located offshore Sakhalin Island in the Russian
Far East Region. During 1997, authorized representatives of the
Russian Government approved the Development Plan for the P-A
License Area, Phase 1: Astokh Feature. Appraisal work for the
remainder of the P-A field was also authorized. The P-A full field
development plan is scheduled to be completed and submitted to the
Russian Government by June 1999. First production of oil from the
Astokh Feature, which will be developed using an arctic-class
drilling vessel called the Molikpaq, remains on target for the
summer of 1999. Late in 1997, the Sakhalin Energy consortium
arranged for a limited recourse project financing facility of $348
million with a group of international financial institutions.
Subject to various conditions, initial borrowings by Sakhalin
Energy under this facility are anticipated in 1998 to partially
fund Phase 1 expenditure requirements.
Looking at downstream operations, Marathon and Ashland Inc.
officially formed MAP, which commenced operations on January 1,
1998. Major elements of both firms' refining, marketing and
transportation operations were combined, with Marathon having a 62%
ownership interest in MAP and Ashland holding a 38% interest. MAP
has seven refineries with a combined capacity of 935,000 barrels
per day ("bpd"), 84 light products and asphalt terminals in the
Midwest and Southeast United States, about 5,400 retail marketing
outlets in 20 states and significant pipeline holdings. Potential
efficiencies derived by MAP have been broadly estimated to be in
excess of $200 million annually on a pretax basis. While a modest
part of these efficiencies will be achieved in mid- to late 1998,
full realization of efficiencies should occur over the next few
years as MAP's integration plans are implemented. In conjunction
with the formation of MAP, the Marathon Group is expected to
recognize an estimated $250 million one-time, pretax change-in-
interest gain in the first quarter of 1998. For additional details
of the agreements and the one-time financial gain, see Note 31 to
the USX Consolidated Financial Statements.
MAP's refined product sales volumes for 1998 are expected to
increase slightly from 1997 levels of Marathon's and Ashland's
separate downstream operations, which were a combined volume of
approximately 1.2 million bpd. A major maintenance shutdown
("turnaround") was completed at the Garyville (La.) refinery in
early 1998, and major turnarounds are planned for the Canton (Ohio)
refinery in the fourth quarter of 1998, the Catlettsburg (Ky.)
refinery in the first quarter of 1999 and the Detroit (Mich.)
refinery in the fourth quarter of 1999. Each turnaround is expected
to last about one month.
The above forward-looking statements of projects, expected
production and sales levels, and dates of initial production are
based on a number of assumptions, including (among others) prices,
supply and demand, regulatory constraints, reserve estimates,
production decline rates for mature fields, reserve replacement
rates, 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/or
negotiations, legal developments and other considerations are not
satisfactorily resolved, actual results could be materially
different than present expectations.
The above discussion also contains forward-looking statements
with respect to the amount and timing of efficiencies to be
realized by MAP. Some factors that could potentially cause actual
results to differ materially from present expectations include
unanticipated costs to implement shared technology, difficulties in
integrating corporate structures, delays in leveraging volume
procurement advantages or delays in personnel rationalization.
YEAR 2000
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. Marathon has
contacted all of its vendors from which systems have been purchased
and has requested that appropriate corrections be provided by mid-
1998. Modifications to internally developed systems are being
handled in-house. In addition, during 1997, Marathon began
including Year 2000 provisions in a variety of its contracts. In
management's opinion, the incremental costs associated with these
efforts will not be material to the operating results of the
Marathon Group.
U-51
<PAGE>
Management's Discussion and Analysis C O N T I N U E D
This 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 U. S. STEEL GROUP
The U. S. Steel Group includes U. S. Steel, which is primarily
engaged in the production and sale of steel mill products, coke and
taconite pellets. The U. S. Steel Group also includes the
management of mineral resources, domestic coal mining and
engineering and consulting services. Other businesses that are part
of the U. S. Steel Group include real estate development and
management, and leasing and financing activities.
U. S. Steel Group REVENUES were $6.9 billion in 1997, as
compared with $6.7 billion in 1996 and $6.6 billion in 1995. The
increase in 1997 from 1996 primarily reflected higher average
realized steel prices and increased shipment volumes. The increase
in 1996 from 1995 resulted primarily from improved product mix,
partially offset by lower average steel product prices. Steel
shipment volumes in 1996 remained at 1995 levels.
U. S. Steel Group INCOME FROM OPERATIONS and certain items
included in income from operations for each of the last three years
are summarized in the following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from operations/(a)/ $ 773 $ 483 $ 582
Less: Certain favorable (unfavorable) items
Effect of adoption of SOP 96-1/(b)/ (20) - -
Certain other environmental accrual adjustments net 11 - -
Net gains on certain asset sales/(c)/ 15 - -
Gain on affiliate stock offering/(d)/ - 53 -
Certain Gary Works blast furnace repairs/(e)/ - (39) (34)
Employee reorganization charges/(f)/ - (13) -
Impairment of long-lived assets/(g)/ - - (16)
Adjustments for certain employee-related costs - - 18
Certain legal accruals - - (44)
----- ----- -----
Subtotal 6 1 (76)
----- ----- -----
Income from operations adjusted to exclude above items $ 767 $ 482 $ 658
------------------------------------------------------------------------------------
</TABLE>
/(a)/ Consists of operating income, affiliate income, net gains on
disposal of investments, gain on affiliate stock offering and
other income. Amounts for 1996 and 1995 were reclassified in
1997 to include affiliate income, gain on affiliate stock
offering and other income. See Note 9 to the Consolidated
Financial Statements for a discussion of operating income.
/(b)/ American Institute of Certified Public Accountants Statement
of Position No. 96-1 "Environmental Remediation Liabilities"
provides additional guidance on recognition, measurement and
disclosure of remediation liabilities.
/(c)/ Reflects the sale of the plate mill at the U. S. Steel
Group's former Texas Works.
/(d)/ See Note 8 to the Consolidated Financial Statements.
/(e)/ Amounts in 1996 and 1995 reflect repair of damages incurred
at Gary Works during a hearth break-out at the No. 13 blast
furnace on April 2, 1996, and in an explosion at the No. 8
blast furnace on April 5, 1995, respectively.
/(f)/ Related to employee costs associated with work force
reduction programs.
/(g)/ Related to adoption of SFAS No. 121.
U-52
<PAGE>
Management's Discussion and Analysis C O N T I N U E D
Adjusted income from operations increased by $285 million in
1997 as compared with 1996, due primarily to increased shipment
volumes, higher average realized steel prices, improved operating
efficiencies, and receipt of $40 million in insurance settlements
related to the 1996 hearth break-out at the Gary Works No. 13 blast
furnace. These improvements were partially offset by higher 1997
accruals for profit sharing. Adjusted income from operations
decreased by $176 million in 1996 from 1995, due primarily to lower
average prices for steel products, cost inefficiencies and reduced
shipments related to outages at U. S. Steel's three largest blast
furnaces including lost sales from the unplanned outage of the No.
13 blast furnace at Gary Works. These factors were partially offset
by improved product mix and decreased accruals for profit sharing
plans.
OUTLOOK - U. S. STEEL GROUP
The U. S. Steel Group presently anticipates that steel demand
will remain relatively strong in 1998, and the outlook remains
positive for the markets it serves. This market strength is
dependent on continued strong demand for capital goods, oil and gas
tubular products and consumer durables in domestic and
international economies. Based on the continuing strong demand for
its products, U. S. Steel Group announced in December 1997, price
increases for plate and tubular products for spot market shipments
scheduled for delivery after March 28, 1998, for plate and March
31, 1998, for tubular. In January 1998, price increases were also
announced for sheet products affecting orders scheduled for
shipment after April 1, 1998. These increases will not apply to
shipments under long term contracts where prices were previously
negotiated. However, growing domestic production for flat-rolled
products (an estimated 4.6 million tons of additional production
capability from new and existing sources is expected in 1998),
continuing high levels of imports and a return to the market of a
competitor following a lengthy strike, could have an adverse effect
on U. S. Steel's product prices and shipment levels. In addition,
uncertainties related to the Asian economies could potentially
impact the domestic markets, if Asian countries increase their
level of steel exports to the United States.
Steel imports to the United States accounted for an estimated
24%, 23% and 21% of the domestic steel market in the first eleven
months of 1997, and for the years 1996 and 1995, respectively.
Steel imports of hot rolled, cold rolled and galvanized sheets as a
percentage of total finished imports, increased 4% in the first
eleven months of 1997, compared to the same period in 1996. The
domestic steel industry has, in the past, been adversely affected
by unfairly traded imports, and higher levels of imported steel may
have an adverse effect on product prices, shipment levels and
results of operations.
U. S. Steel Group shipments in the first quarter of 1998 are
expected to be lower than in the fourth quarter of 1997 due to a
seasonal industry decline in first quarter shipments. During the
second and third quarters of 1998, raw steel production is expected
to be reduced by a 100-day planned blast furnace reline at Gary
Works. U. S. Steel expects to supplement raw steel production with
the purchase of slabs from outside sources, which should allow it
to maintain shipment levels during this planned outage.
On February 5, 1998, U. S. Steel Group and VSZ a.s., Kosice,
entered into a 50-50 joint venture in Kosice, Slovakia, for the
production and marketing of tin mill products to serve an emerging
Central European market. In February 1998, the joint venture, doing
business as VSZ U. S. Steel, s. r.o., took ownership and commenced
operations of an existing tin mill facility (VSZ's Ocel plant in
Kosice) with an annual production capacity of 140,000 metric tons.
The joint venture plans to add 200,000 annual metric tons of new
tin mill production capacity in the next two years.
In 1997, U. S. Steel Group, through a subsidiary, United States
Steel Export Company de Mexico, along with Feralloy Mexico, S.R.L.
de C.V., and Intacero de Mexico, S.A. de C.V., formed a joint
venture for a slitting and warehouse facility in San Luis Potosi,
Mexico. The joint venture will conduct business as Acero Prime and
will service primarily the appliance industry. Construction will
begin in 1998 with operations commencing in early 1999.
The preceding statements concerning anticipated steel demand,
steel pricing, purchasing slabs to supplement raw steel production
and shipment levels are forward-looking and are based upon
assumptions as to future product prices and mix, and levels of
steel production capability, production and shipments. These
forward-looking statements can be affected by imports, domestic and
international economies, domestic production capacity, availability
of slabs, and customer demand. In the event these assumptions prove
to be inaccurate, actual results may differ significantly from
those presently anticipated.
U-53
<PAGE>
Management's Discussion and Analysis C O N T I N U E D
YEAR 2000
A task force has been established to identify all potential
areas of risk and to make any required modifications as they relate
to business computer systems, technical infrastructure, end-user
computing, business partners, manufacturing, environmental
operations, systems products produced and sold, and dedicated R&D
test facilities. A Year 2000 impact assessment for all of the
aforementioned areas is expected to be completed by the end of
first quarter 1998. The U. S. Steel Group technical software
infrastructure for mainframe computers is essentially Year 2000
compliant; however, vendor software and other computing platforms
are still in the process of being analyzed for compliance. The U.
S. Steel Group is monitoring the compliance efforts of the entities
with which it does business, and is participating with steel
industry and other trade associations to collectively address Year
2000 issues involving such entities. The U. S. Steel Group's
objective is to achieve compliance by the end of 1998, and to use
the year 1999 to validate and confirm Year 2000 compliance,
including continued monitoring of progress by the U. S. Steel
Group's business partners. 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 Year 2000 compliance are
forward-looking statements. 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.
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 DELHI GROUP
Effective October 31, 1997, USX sold Delhi Gas Pipeline
Corporation and other subsidiaries of USX that comprise all of the
Delhi Group.
U-54
<PAGE>
Quantitative and Qualitative Disclosures About Market Risk
MANAGEMENT OPINION CONCERNING DERIVATIVE INSTRUMENTS
USX employs a strategic approach of limiting its use of
derivative instruments principally to hedging activities, whereby
gains and losses are generally offset by price changes in the
underlying commodity. Based on this approach, combined with risk
assessment procedures and internal controls, management believes
that its use of derivative instruments does not expose USX to
material risk. USX's use of derivative instruments for hedging
activities could materially affect USX's results of operations in
particular quarterly or annual periods. This is primarily because
use of such instruments may limit the company's ability to benefit
from favorable price movements. However, management believes that
use of these instruments will not have a material adverse effect on
financial position or liquidity. For a summary of accounting
policies related to derivative instruments, see Note 1 to the
Consolidated Financial Statements.
COMMODITY PRICE RISK AND RELATED RISKS
In the normal course of its business, USX is exposed to market
risk, or price fluctuations related to the purchase, production or
sale of crude oil, natural gas, refined products and steel
products. To a lesser extent, USX is exposed to the risk of price
fluctuations on coal, coke, natural gas liquids, electricity,
petroleum feedstocks and certain nonferrous metals used as raw
materials. USX is also exposed to effects of price fluctuations on
the value of its commodity inventories.
USX's market risk strategy has generally been to obtain
competitive prices for its products and services and allow
operating results to reflect market price movements dictated by
supply and demand. However, USX uses fixed-price contracts and
derivative commodity instruments to manage a relatively small
portion of its commodity price risk. USX uses fixed-price contracts
for portions of its natural gas production to manage exposure to
fluctuations in natural gas prices. In addition, USX uses
derivative commodity instruments such as exchange-traded futures
contracts and options, and over-the-counter ("OTC") commodity swaps
and options to manage exposure to market risk related to the
purchase, production or sale of crude oil, natural gas, refined
products, certain nonferrous metals and electricity. USX's
strategic approach is to limit the use of these instruments
principally to hedging activities. Accordingly, gains and losses on
derivative commodity instruments are generally offset by the
effects of price changes in the underlying commodity. However,
certain derivative commodity instruments have the effect of
restoring the equity portion of fixed-price sales of natural gas to
variable market-based pricing. These instruments are used as part
of USX's overall risk management programs.
U-55
<PAGE>
Quantitative Qualitative Disclosures
About Market Risk CONTINUED
Sensitivity analyses of the incremental effects on pretax income
of hypothetical 10% and 25% changes in commodity prices for open
derivative commodity instruments as of December 31, 1997, are
provided in the following table:/(a)/
<TABLE>
<CAPTION>
(Dollars in millions)
--------------------------------------------------------------------------------------------
INCREMENTAL DECREASE IN
PRETAX INCOME ASSUMING A
HYPOTHETICAL PRICE CHANGE OF/(a)/
DERIVATIVE COMMODITY INSTRUMENTS 10% 25%
---------------------------------------------------------------------------------------------
<S> <C> <C>
Marathon Group/(b)(c)/:
Crude oil (price increase)/(d)/ $2.7 $ 8.6
Natural gas (price decrease)/(d)/ 2.9 7.1
Refined products (price decrease)/(d)/ .4 1.1
---- -----
Total $6.0 $16.8
U. S. Steel Group:
Natural gas (price decrease)/(d)/ $1.1 $ 2.8
--------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Gains and losses on derivative commodity instruments are
generally offset by price changes in the underlying
commodity. Effects of these offsets are not reflected in the
sensitivity analyses. Amounts reflect the estimated
incremental effect on pretax income of hypothetical 10% and
25% changes in closing commodity prices for each open
contract position at December 31, 1997. Marathon Group and U.
S. Steel Group management evaluate their portfolios of
derivative commodity instruments on an ongoing basis and add
or revise strategies to reflect anticipated market conditions
and changes in risk profiles. Changes to the portfolios
subsequent to December 31, 1997, would cause future pretax
income effects to differ from those presented in the table.
/(b)/ The number of net open contracts varied throughout 1997, from
a low of 637 contracts at December 31, to a high of 9,307
contracts at June 11, and averaged 5,400 for the year. The
derivative commodity instruments used and hedging positions
taken also varied throughout 1997, and will continue to vary
in the future. Because of these variations in the composition
of the portfolio over time, the number of open contracts, by
itself, cannot be used to predict future income effects.
During 1998, the size of the portfolio is expected to
increase above average 1997 levels as a result of increased
volumes for Marathon Ashland Petroleum LLC, on a basis
consistent with guidelines established in previously existing
downstream hedging programs.
/(c)/ The calculation of sensitivity amounts for basis swaps
assumes that the physical and paper indices are perfectly
correlated. Gains and losses on options are based on the
difference between the strike price and the underlying
commodity price.
/(d)/ The direction of the price change used in calculating the
sensitivity amount for each commodity reflects that which
would result in the largest incremental decrease in pretax
income when applied to the derivative commodity instruments
used to hedge that commodity.
While derivative commodity instruments are generally used to
reduce risks from unfavorable commodity price movements, they also
may limit the opportunity to benefit from favorable movements.
During the fourth quarter of 1996, certain hedging strategies
matured which limited the Marathon Group's ability to benefit from
favorable market price increases on the sales of equity crude oil
and natural gas production, resulting in pretax hedging losses of
$33 million. In total, Marathon's upstream operations recorded net
pretax hedging losses of $3 million in 1997, compared with net
losses of $38 million in 1996, and net gains of $10 million in
1995.
Marathon's downstream operations generally use derivative
commodity instruments to lock-in costs of certain raw material
purchases, to protect carrying values of inventories and to protect
margins on fixed-price sales of refined products. In total,
Marathon's downstream operations recorded net pretax hedging gains
of $29 million in 1997, compared with net losses of $22 million in
1996 and $4 million in 1995. Essentially, all of these upstream and
downstream gains and losses were offset by changes in the prices of
the underlying hedged commodities, with the net effect
approximating the targeted results of the hedging strategies.
The U. S. Steel Group uses OTC commodity swaps to manage
exposure to market risk related to the purchase of natural gas used
as a raw material. The U. S. Steel Group recorded net pretax
hedging gains of $5 million in 1997, compared with pretax gains of
$21 million in 1996 and pretax losses of $15 million in 1995. These
gains and losses were offset by changes in the realized prices of
the underlying hedged natural gas.
For additional quantitative information relating to derivative
commodity instruments, including aggregate contract values and fair
values, where appropriate, see Note 28 to the Consolidated
Financial Statements.
U-56
<PAGE>
Quantitative Qualitative Disclosures
About Market Risk CONTINUED
USX is subject to basis risk, caused by factors that affect the
relationship between commodity futures prices reflected in
derivative commodity instruments and the cash market price of the
underlying commodity. Natural gas transaction prices are frequently
based on industry reference prices that may vary from prices
experienced in local markets. For example, New York Mercantile
Exchange ("NYMEX") contracts for natural gas are priced at
Louisiana's Henry Hub, while the underlying quantities of natural
gas may be produced and sold in the Western United States at prices
that do not move in strict correlation with NYMEX prices. To the
extent that commodity price changes in one region are not reflected
in other regions, derivative commodity instruments may no longer
provide the expected hedge, resulting in increased exposure to
basis risk. These regional price differences could yield favorable
or unfavorable results. OTC transactions are being used to manage
exposure to a portion of basis risk.
USX is subject to liquidity risk, caused by timing delays in
liquidating contract positions due to a potential inability to
identify a counterparty willing to accept an offsetting position.
Due to the large number of active participants, liquidity risk
exposure is relatively low for exchange-traded transactions.
INTEREST RATE RISK
USX is subject to the effects of interest rate fluctuations on
certain of its non-derivative financial instruments. A sensitivity
analysis of the projected incremental effect of a hypothetical 10%
decrease in year-end 1997 interest rates on the fair value of USX's
non-derivative financial instruments, is provided in the following
table:
<TABLE>
<CAPTION>
(Dollars in millions)
-------------------------------------------------------------------------------------------------------
Incremental
Increase in
Carrying Fair Fair
Non-Derivative Financial Instruments/(a)/ Value (b) Value /(b)/ Value /(c)/
<S> <C> <C> <C>
Financial assets:
Investments and long-term receivables/(d)/ $120 $ 177 $ -
Financial liabilities:
Long-term debt (including amounts due within one year)/(e)/ $3,281 $ 3,646 $ 117
Preferred stock of subsidiary/(f)/ 250 254 24
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust/(g)/ 182 181 17
------ ------- -------
Total $3,713 $ 4,081 $ 158
-------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Fair values of cash and cash equivalents, cash restricted for
redemption of Delhi Stock, receivables, notes payable,
accounts payable and accrued interest, approximate carrying
value and are relatively insensitive to changes in interest
rates due to the short-term maturity of the instruments.
Accordingly, these instruments are excluded from the table.
/(b)/ At December 31, 1997. For additional discussion, see Note
29 to the Consolidated Financial Statements.
/(c)/ Reflects, by class of financial instrument, the estimated
incremental effect of a hypothetical 10% decrease in interest
rates at December 31, 1997, on the fair value of USX's non-
derivative financial instruments. For financial liabilities,
this assumes a 10% decrease in the weighted average yield to
maturity of USX's long-term debt at December 31, 1997.
/(d)/ For additional information, see Note 14 to the Consolidated
Financial Statements.
/(e)/ Fair value was based on market prices where available, or
current borrowing rates for financings with similar terms and
maturities. For additional information, see Note 16 to the
Consolidated Financial Statements.
/(f)/ In 1994, USX Capital LLC, a wholly owned subsidiary of USX,
sold 10,000,000 shares of 8-3/4% Cumulative Monthly Income
Preferred Shares. For further discussion, see Note 25 to the
Consolidated Financial Statements.
/(g)/ In 1997, USX exchanged 3.9 million 6.75% Convertible
Quarterly Income Preferred Securities of USX Capital Trust I,
a Delaware statutory business trust, for an equivalent number
of shares of its 6.50% Cumulative Convertible Preferred
Stock. For further discussion, see Note 26 to the
Consolidated Financial Statements.
At December 31, 1997, USX's portfolio of long-term debt was
comprised primarily of fixed-rate instruments. Therefore, the fair
value of the portfolio is relatively sensitive to effects of
interest rate fluctuations. This sensitivity is illustrated by the
$117 million increase in the fair value of long-term debt assuming
a hypothetical 10% decrease in interest rates. However, USX's
sensitivity to interest rate declines and corresponding increases
in the fair value of its debt portfolio would unfavorably affect
USX's results and cash flows only to the extent that USX elected to
repurchase or otherwise retire all or a portion of its fixed-rate
debt portfolio at prices above carrying value.
U-57
<PAGE>
Quantitative Qualitative Disclosures
About Market Risk CONTINUED
FOREIGN CURRENCY EXCHANGE RATE RISK
USX is subject to the risk of price fluctuations related to
anticipated revenues and operating costs, firm commitments for
capital expenditures and existing assets or liabilities denominated
in currencies other than U.S. dollars. USX has not generally used
derivative instruments to manage this risk. However, USX has made
limited use of forward currency contracts to manage exposure to
certain currency price fluctuations.
At December 31, 1997, a forward currency contract with a fair
value of $10 million was outstanding. This contract hedges exposure
to currency price fluctuations relating to a Swiss franc debt
obligation with a fair value of $69 million at December 31, 1997.
The debt obligation and forward contract mature in 1998.
EQUITY PRICE RISK
USX is subject to equity price risk resulting from its issuance
in December 1996 of $117 million of 6 3/4% Exchangeable Notes Due
February 1, 2000 ("Indexed Debt"). At maturity, USX must exchange
the notes for shares of RMI Titanium Company ("RMI") common stock,
or redeem the notes for the equivalent amount of cash. Each
quarter, USX adjusts the carrying value of Indexed Debt 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. During 1997,
USX recorded adjustments of $16 million favorable in the first
quarter, $10 million unfavorable in the second quarter and $4
million favorable in the fourth quarter. At year-end 1997, a
hypothetical 10% increase in the value of RMI common stock would
have resulted in a $4 million unfavorable effect on pretax income.
USX holds a 27% interest in RMI which is accounted for under the
equity method. At December 31, 1997, this investment in RMI common
stock had a fair market value of $110 million and a carrying value
of $56 million. The unfavorable effects on income described above
would generally be offset by changes in the market value of USX's
investment in RMI. However, under the equity method of accounting,
USX cannot recognize in income these changes in the market value
until the investment is liquidated.
The Marathon Group holds investments in common stock and
warrants of certain third parties. The fair value of these
investments has not been material.
SAFE HARBOR
USX's quantitative and qualitative disclosures about market risk
include forward-looking statements as defined in the Private
Securities Litigation Reform Act of 1995. These statements are
accompanied by cautionary language identifying important factors
(particularly the underlying assumptions and limitations disclosed
in footnotes to the tables), though not necessarily all such
factors, that could cause future outcomes to differ materially from
those projected.
Forward-looking statements with respect to management's opinion
about risks associated with USX's use of derivative instruments,
and projected increases in the size of the Marathon Group's hedge
portfolio are based on certain assumptions with respect to market
prices and industry supply of and demand for crude oil, refined
products, steel products and certain raw materials. To the extent
that these assumptions prove to be inaccurate, future outcomes with
respect to USX's hedging programs may differ materially from those
discussed in the forward-looking statements.
U-58
<PAGE>
EXHIBIT 99.2
- --------------------------
Marathon Group
- --------------------------
Index to Financial Statements, Supplementary Data,
Management's Discussion and Analysis and Quantitative and
Qualitative Disclosures About Market Risk
Page
----
Management's Report........................................... M-1
Audited Financial Statements:
Report of Independent Accountants........................... M-1
Statement of Operations..................................... M-2
Balance Sheet............................................... M-3
Statement of Cash Flows..................................... M-4
Notes to Financial Statements............................... M-5
Selected Quarterly Financial Data............................ M-21
Principal Unconsolidated Affiliates.......................... M-21
Supplementary Information.................................... M-21
Five-Year Operating Summary.................................. M-22
Five-Year Financial Summary.................................. M-24
Management's Discussion and Analysis......................... M-25
Quantitative and Qualitative Disclosures About Market Risks.. M-35
<PAGE>
Management's Report
The accompanying financial statements of the Marathon Group are
the responsibility of and have been prepared by USX Corporation
(USX) in conformity with generally accepted accounting principles.
They necessarily include some amounts that are based on best
judgments and estimates. The Marathon Group financial information
displayed in other sections of this report is consistent with these
financial statements.
USX seeks to assure the objectivity and integrity of its
financial records by careful selection of its managers, by
organizational arrangements that provide an appropriate division of
responsibility and by communications programs aimed at assuring
that its policies and methods are understood throughout the
organization.
USX has a comprehensive formalized system of internal
accounting controls designed to provide reasonable assurance that
assets are safeguarded and that financial records are reliable.
Appropriate management monitors the system for compliance, and the
internal auditors independently measure its effectiveness and
recommend possible improvements thereto. In addition, as part of
their audit of the financial statements, USX's independent
accountants, who are elected by the stockholders, review and test
the internal accounting controls selectively to establish a basis
of reliance thereon in determining the nature, extent and timing of
audit tests to be applied.
The Board of Directors pursues its oversight role in the
area of financial reporting and internal accounting control through
its Audit Committee. This Committee, composed solely of
nonmanagement directors, regularly meets (jointly and separately)
with the independent accountants, management and internal auditors
to monitor the proper discharge by each of its responsibilities
relative to internal accounting controls and the consolidated and
group financial statements.
<TABLE>
<S> <C> <C>
Thomas J. Usher Robert M. Hernandez Kenneth L. Matheny
Chairman, Board of Directors Vice Chairman Vice President
& Chief Executive Officer & Chief Financial Officer & Comptroller
</TABLE>
Report of Independent Accountants
To the Stockholders of USX Corporation:
In our opinion, the accompanying financial statements appearing
on pages M-2 through M-20 present fairly, in all material respects,
the financial position of the Marathon Group at December 31, 1997
and 1996, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These
financial statements are the responsibility of USX's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 7, page M-9, in 1995 USX adopted a new
accounting standard for the impairment of long-lived assets.
The Marathon Group is a business unit of USX Corporation (as
described in Note 1, page M-5); accordingly, the financial
statements of the Marathon Group should be read in connection with
the consolidated financial statements of USX Corporation.
Price Waterhouse LLP
600 Grant Street, Pittsburgh, Pennsylvania 15219-2794
February 10, 1998
M-1
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Sales (Note 5) $15,668 $16,297 $13,871
Dividend and affiliate income 36 33 23
Gain on disposal of assets 37 55 8
Other income 13 9 11
-------- -------- --------
Total revenues 15,754 16,394 13,913
-------- -------- --------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 10,392 11,188 9,011
Selling, general and administrative expenses 355 309 297
Depreciation, depletion and amortization 664 693 817
Taxes other than income taxes 2,938 2,971 2,903
Exploration expenses 189 146 149
Inventory market valuation charges (credits) (Note 20) 284 (209) (70)
Impairment of long-lived assets (Note 7) -- -- 659
-------- -------- --------
Total costs and expenses 14,822 15,098 13,766
-------- -------- --------
INCOME FROM OPERATIONS 932 1,296 147
Net interest and other financial costs (Note 6) 260 305 337
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 672 991 (190)
Provision (credit) for estimated income taxes (Note 18) 216 320 (107)
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 456 671 (83)
Extraordinary loss (Note 8) -- 7 5
-------- -------- --------
NET INCOME (LOSS) 456 664 (88)
Dividends on preferred stock -- -- 4
-------- -------- --------
NET INCOME (LOSS) APPLICABLE TO MARATHON STOCK $ 456 $ 664 $ (92)
-------------------------------------------------------------------------------------------
</TABLE>
Income Per Common Share Applicable to Marathon Stock
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC:
Income (loss) before extraordinary loss $ 1.59 $ 2.33 $ (.31)
Extraordinary loss - (.02) (.02)
------- -------- --------
Net income (loss) $ 1.59 $ 2.31 $ (.33)
DILUTED:
Income (loss) before extraordinary loss $ 1.58 $ 2.31 $ (.31)
Extraordinary loss - (.02) (.02)
------- -------- --------
Net income (loss) $ 1.58 $ 2.29 $ (.33)
------------------------------------------------------------------------------------------
</TABLE>
See Note 24, for a description and computation of income per common
share.
The accompanying notes are an integral part of these financial
statements.
M-2
<PAGE>
Balance Sheet
<TABLE>
<CAPTION>
(Dollars in millions) December 31 1997 1996
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 36 $ 32
Receivables, less allowance for doubtful accounts
of $2 and $2 (Note 23) 856 613
Inventories (Note 20) 980 1,282
Other current assets 146 119
------- -------
Total current assets 2,018 2,046
Investments and long-term receivables (Note 19) 455 311
Property, plant and equipment - net (Note 17) 7,566 7,298
Prepaid pensions (Note 15) 290 280
Other noncurrent assets 236 216
------- -------
Total assets $10,565 $10,151
--------------------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Notes payable $ 108 $ 59
Accounts payable 1,348 1,385
Payroll and benefits payable 142 106
Accrued taxes 102 98
Deferred income taxes (Note 18) 61 155
Accrued interest 84 75
Long-term debt due within one year (Note 11) 417 264
------- -------
Total current liabilities 2,262 2,142
Long-term debt (Note 11) 2,476 2,642
Long-term deferred income taxes (Note 18) 1,318 1,178
Employee benefits (Note 16) 375 356
Deferred credits and other liabilities 332 311
Preferred stock of subsidiary (Note 9) 184 182
STOCKHOLDERS' EQUITY (Note 22) 3,618 3,340
------- -------
Total liabilities and stockholders' equity $10,565 $10,151
--------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
M-3
<PAGE>
Statement of Cash Flows
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income (loss) $ 456 $ 664 $ (88)
Adjustments to reconcile to net cash provided
from operating activities:
Extraordinary loss - 7 5
Depreciation, depletion and amortization 664 693 817
Exploratory dry well costs 78 54 64
Inventory market valuation charges (credits) 284 (209) (70)
Pensions (4) (3) (16)
Postretirement benefits other than pensions 10 15 12
Deferred income taxes 30 104 (204)
Gain on disposal of assets (37) (55) (8)
Payment of amortized discount on zero coupon debentures (13) - (96)
Impairment of long-lived assets - - 659
Changes in: Current receivables - sold (340) - 8
- operating turnover 97 (119) (120)
Inventories 18 72 55
Current accounts payable and accrued expenses 11 211 (27)
All other - net (8) 69 53
------- ------ ------
Net cash provided from operating activities 1,246 1,503 1,044
------- ------ ------
INVESTING ACTIVITIES:
Capital expenditures (1,038) (751) (642)
Disposal of assets 60 282 77
Elimination of Retained Interest in Delhi Group - - 58
Withdrawal (deposit) - property exchange trusts 98 (98) -
Investments in equity affiliates (233) (13) (4)
------- ------ ------
Net cash used in investing activities (1,113) (580) (511)
------- ------ ------
FINANCING ACTIVITIES (Note 4):
Increase (decrease) in Marathon Group's portion of
USX consolidated debt 97 (769) (204)
Specifically attributed debt - repayments (39) (1) (2)
Preferred stock redeemed - - (78)
Marathon Stock repurchased - - (1)
Marathon Stock issued 34 2 -
Dividends paid (219) (201) (199)
------- ------ ------
Net cash used in financing activities (127) (969) (484)
------- ------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2) 1 -
------- ------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4 (45) 49
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 32 77 28
------- ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 36 $ 32 $ 77
- --------------------------------------------------------------------------------------------------
</TABLE>
See Note 12, for supplemental cash flow information.
The accompanying notes are an integral part of these financial statements.
M-4
<PAGE>
Notes to Financial Statements
1. BASIS OF PRESENTATION
After the redemption of the USX - Delhi Group stock on January
26, 1998, USX Corporation (USX) has two classes of common stock:
USX - Marathon Group Common Stock (Marathon Stock) and USX - U. S.
Steel Group Common Stock (Steel Stock), which are intended to
reflect the performance of the Marathon Group and the U. S. Steel
Group, respectively.
The financial statements of the Marathon Group include the
financial position, results of operations and cash flows for the
businesses of Marathon Oil Company and certain other subsidiaries
of USX, and a portion of the corporate assets and liabilities and
related transactions which are not separately identified with
ongoing operating units of USX. The Marathon Group is involved in
worldwide exploration, production, transportation and marketing of
crude oil and natural gas; domestic refining, marketing and
transportation of petroleum products; and power generation. The
Marathon Group financial statements are prepared using the amounts
included in the USX consolidated financial statements.
Although the financial statements of the Marathon Group 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 Marathon Group and the U. S. Steel Group for the
purpose of preparing their respective financial statements does not
affect legal title to such assets or responsibility for such
liabilities. Holders of Marathon Stock and Steel Stock are holders
of common stock of USX and continue to be subject to all the risks
associated with an investment in USX and all of its businesses and
liabilities. Financial impacts arising from one Group that affect
the overall cost of USX's capital could affect the results of
operations and financial condition of the other Group. In addition,
net losses of either 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 both
classes of Common Stock. Accordingly, the USX consolidated
financial information should be read in connection with the
Marathon Group financial information.
- --------------------------------------------------------------------------------
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
PRINCIPLES APPLIED IN CONSOLIDATION - These financial statements
include the accounts of the businesses comprising the Marathon
Group. The Marathon Group and the U. S. Steel Group financial
statements, taken together, comprise all of the accounts included
in the USX consolidated financial statements.
Investments in unincorporated oil and gas joint ventures,
undivided interest pipelines and jointly-owned gas processing
plants are consolidated on a pro rata basis.
Investments in other entities over which the Marathon Group has
significant influence are accounted for using the equity method of
accounting and are carried at the Marathon Group's share of net
assets plus advances. The proportionate share of income from these
equity method investments is included in revenues.
Investments in other companies whose stock is publicly traded
are carried at market value. The difference between the cost of
these investments and market value is recorded as a direct
adjustment to stockholders' equity (net of tax). Investments in
companies whose stock has no readily determinable fair value are
carried at cost. Dividends from these investments are recognized in
revenues.
Gains or losses from a change in ownership interest of a
consolidated subsidiary or an unconsolidated affiliate are
recognized in revenues in the period of change.
The proportionate share of income represented by the Retained
Interest (Note 4) in the Delhi Group prior to June 15, 1995, is
included in revenues. In November 1997, USX sold its stock in Delhi
Gas Pipeline Corporation and other subsidiaries of USX that
comprise all of the Delhi Group (Delhi Companies).
USE OF ESTIMATES - Generally accepted accounting principles
require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at year-end and the reported
amounts of revenues and expenses during the year.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include
cash on hand and on deposit and highly liquid debt instruments with
maturities generally of three months or less.
INVENTORIES - Inventories are carried at lower of cost or market.
Cost of inventories is determined primarily under the last-in,
first-out (LIFO) method.
M-5
<PAGE>
DERIVATIVE INSTRUMENTS - The Marathon Group engages in commodity
and currency risk management activities within the normal course of
its business as an end-user of derivative instruments (Note 25).
Management is authorized to manage exposure to price fluctuations
related to the purchase, production or sale of crude oil, natural
gas, refined products and electricity through the use of a variety
of derivative financial and nonfinancial instruments. Derivative
financial instruments require settlement in cash and include such
instruments as over-the-counter (OTC) commodity swap agreements and
OTC commodity options. Derivative nonfinancial instruments require
or permit settlement by delivery of commodities and include
exchange-traded commodity futures contracts and options. At times,
derivative positions are closed, prior to maturity, simultaneous
with the underlying physical transaction and the effects are
recognized in income accordingly. The Marathon Group's practice
does not permit derivative positions to remain open if the
underlying physical market risk has been removed. Derivative
instruments relating to fixed price sales of equity production are
marked-to-market in the current period and the related income
effects are included within income from operations. All other
changes in the market value of derivative instruments are deferred,
including both closed and open positions, and are subsequently
recognized in income, as sales or cost of sales, in the same period
as the underlying transaction. Premiums on all commodity-based
option contracts are initially recorded based on the amount paid or
received; the options' market value is subsequently recorded as a
receivable or payable, as appropriate. The margin receivable
accounts required for open commodity contracts reflect changes in
the market prices of the underlying commodity and are settled on a
daily basis.
Forward currency contracts are used to manage currency risks
related to anticipated revenues and operating costs, firm
commitments for capital expenditures and existing assets or
liabilities denominated in a foreign currency. Gains or losses
related to firm commitments are deferred and included with the
underlying transaction; all other gains or losses are recognized in
income in the current period as sales, cost of sales, interest
income or expense, or other income, as appropriate. Net contract
values are included in receivables or payables, as appropriate.
Recorded deferred gains or losses are reflected within other
noncurrent assets or deferred credits and other liabilities. Cash
flows from the use of derivative instruments are reported in the
same category as the hedged item in the statement of cash flows.
EXPLORATION AND DEVELOPMENT - The Marathon Group follows the
successful efforts method of accounting for oil and gas exploration
and development.
GAS BALANCING - The Marathon Group follows the sales method of
accounting for gas production imbalances.
LONG-LIVED ASSETS - Depreciation and depletion of oil and gas
producing properties are computed using predetermined rates based
upon estimated proved oil and gas reserves applied on a units-of-
production method. Other items of property, plant and equipment are
depreciated principally by the straight-line method.
When an entire property, major facility or facilities
depreciated on an individual basis are sold or otherwise disposed
of, any gain or loss is reflected in income. Proceeds from disposal
of other facilities depreciated on a group basis are credited to
the depreciation reserve with no immediate effect on income.
The Marathon Group evaluates impairment of its oil and gas
assets primarily on a field-by-field basis. Other assets are
evaluated on an individual asset basis or by logical groupings of
assets. Assets deemed to be impaired are written down to their fair
value, including any related goodwill, using discounted future cash
flows and, if available, comparable market values.
ENVIRONMENTAL LIABILITIES - The Marathon Group provides for
remediation costs and penalties when the responsibility to
remediate is probable and the amount of associated costs is
reasonably determinable. Generally, the timing of remediation
accruals coincides with completion of a feasibility study or the
commitment to a formal plan of action. Remediation liabilities are
accrued based on estimates of known environmental exposure and
could be discounted in certain instances. If recoveries of
remediation costs from third parties are probable, a receivable is
recorded. Estimated abandonment and dismantlement costs of offshore
production platforms are accrued based upon estimated proved oil
and gas reserves on a units-of-production method.
INSURANCE - The Marathon Group is insured for catastrophic casualty
and certain property and business interruption exposures, as well
as those risks required to be insured by law or contract. Costs
resulting from noninsured losses are charged against income upon
occurrence.
RECLASSIFICATIONS - Certain reclassifications of prior years'
data have been made to conform to 1997 classifications.
M-6
<PAGE>
- --------------------------------------------------------------------------------
3. NEW ACCOUNTING STANDARDS
The following accounting standards were adopted by USX during
1997:
Environmental remediation liabilities - 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, the
Marathon Group identified 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 of adoption on the Marathon
Group's income from operations at January 1, 1997, was $7
million.
Earnings per share USX adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No.
128). This Statement establishes standards for computing and
presenting earnings per share (EPS). SFAS No. 128 requires dual
presentation of basic and diluted EPS. Basic EPS excludes
dilution and is computed by dividing net income available to
common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if stock options or
convertible securities were exercised or converted into common
stock. The adoption of SFAS No. 128 did not materially change
current and prior years' EPS of the Marathon Group.
- --------------------------------------------------------------------------------
4. CORPORATE ACTIVITIES
FINANCIAL ACTIVITIES - As a matter of policy, USX manages most
financial activities on a centralized, consolidated basis. Such
financial activities include the investment of surplus cash; the
issuance, repayment and repurchase of short-term and long-term
debt; the issuance, repurchase and redemption of preferred stock;
and the issuance and repurchase of common stock. Transactions
related primarily to invested cash, short-term and long-term debt
(including convertible debt), related net interest and other
financial costs, and preferred stock and related dividends are
attributed to the Marathon Group, the U. S. Steel Group and, prior
to November 1, 1997, the Delhi Group based upon the cash flows of
each group for the periods presented and the initial capital
structure of each group. Most financing transactions are attributed
to and reflected in the financial statements of all groups. See
Note 9, for the Marathon Group's portion of USX's financial
activities attributed to all groups. However, transactions such as
leases, certain collaterized financings, certain indexed debt
instruments, financial activities of consolidated entities which
are less than wholly owned by USX and transactions related to
securities convertible solely into any one class of common stock
are or will be specifically attributed to and reflected in their
entirety in the financial statements of the group to which they
relate.
CORPORATE GENERAL AND ADMINISTRATIVE COSTS - Corporate general and
administrative costs are allocated to the Marathon Group, the U. S.
Steel Group and, prior to November 1, 1997, the Delhi Group based
upon utilization or other methods management believes to be
reasonable and which consider certain measures of business
activities, such as employment, investments and sales. The costs
allocated to the Marathon Group were $37 million in 1997 and $30
million in 1996 and 1995, and primarily consist of employment costs
including pension effects, professional services, facilities and
other related costs associated with corporate activities.
COMMON STOCK TRANSACTIONS - The USX Board of Directors, prior to
June 15, 1995, had designated 14,003,205 shares of USX - Delhi
Group Common Stock (Delhi Stock) to represent 100% of the common
stockholders' equity value of USX attributable to the Delhi Group.
The Delhi Fraction was the percentage interest in the Delhi Group
represented by the shares of Delhi Stock that were outstanding at
any particular time and, based on 9,438,391 outstanding shares at
June 14, 1995, was approximately 67%. The Marathon Group financial
statements reflected a percentage interest in the Delhi Group of
approximately 33% (Retained Interest) through June 14, 1995. The
financial position, results of operations and cash flows of the
Delhi Group were reflected in the financial statements of the
Marathon Group only to the extent of the Retained Interest. The
shares deemed to represent the Retained Interest were not
outstanding shares of Delhi Stock and could not be voted by the
Marathon Group. As additional shares of Delhi Stock deemed to
represent the Retained Interest were sold, the Retained Interest
decreased. When a dividend was paid in respect to the outstanding
Delhi Stock, the Marathon Group financial statements were credited,
and the Delhi Group financial statements were charged, with the
aggregate transaction amount times the quotient of the Retained
Interest divided by the Delhi Fraction.
On June 15, 1995, USX eliminated the Marathon Group's Retained
Interest in the Delhi Group (equivalent to 4,564,814 shares of
Delhi Stock). This was accomplished through a reallocation of
assets and a corresponding adjustment to debt and equity attributed
to the Marathon and Delhi Groups. The reallocation was made at a
price of $12.75 per equivalent share of Delhi Stock, or an
aggregate of $58 million, resulting in a corresponding reduction of
the Marathon Group debt.
M-7
<PAGE>
INCOME TAXES - All members of the USX affiliated group are
included in the consolidated United States federal income tax
return filed by USX. Accordingly, the provision for federal income
taxes and the related payments or refunds of tax are determined on
a consolidated basis. The consolidated provision and the related
tax payments or refunds have been reflected in the Marathon Group,
the U. S. Steel Group and, prior to November 1, 1997, the Delhi
Group financial statements in accordance with USX's tax allocation
policy. In general, such policy provides that the consolidated tax
provision and related tax payments or refunds are allocated among
the Marathon Group, the U. S. Steel Group and, prior to November 1,
1997, the Delhi Group, for group financial statement purposes,
based principally upon the financial income, taxable income,
credits, preferences and other amounts directly related to the
respective groups.
For tax provision and settlement purposes, tax benefits
resulting from attributes (principally net operating losses and
various tax credits), which cannot be utilized by one of the groups
on a separate return basis but which can be utilized on a
consolidated basis in that year or in a carryback year, are
allocated to the group that generated the attributes. To the extent
that one of the groups is allocated a consolidated tax attribute
which, as a result of expiration or otherwise, is not ultimately
utilized on the consolidated tax return, the prior years'
allocation of such attribute is adjusted such that the effect of
the expiration is borne by the group that generated the attribute.
Also, if a tax attribute cannot be utilized on a consolidated basis
in the year generated or in a carryback year, the prior years'
allocation of such consolidated tax effects is adjusted in a
subsequent year to the extent necessary to allocate the tax
benefits to the group that would have realized the tax benefits on
a separate return basis. As a result, the allocated group amounts
of taxes payable or refundable are not necessarily comparable to
those that would have resulted if the groups had filed separate tax
returns.
- --------------------------------------------------------------------------------
5. REVENUES
The items below are included in revenues and costs and expenses,
with no effect on income.
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consumer excise taxes on petroleum products and merchandise $2,736 $2,768 $2,708
Matching crude oil and refined product
buy/sell transactions settled in cash 2,436 2,912 2,067
-----------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
6. OTHER ITEMS
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INTEREST AND OTHER FINANCIAL COSTS
INTEREST AND OTHER FINANCIAL INCOME/(a)/:
Interest income $ 7 $ 4 $ 9
Other (6) (1) 3
------ ------ ------
Total 1 3 12
------ ------ ------
INTEREST AND OTHER FINANCIAL COSTS/(a)/:
Interest incurred 232 260 297
Less interest capitalized 24 3 8
------ ------ ------
Net interest 208 257 289
Interest on tax issues 7 4 (5) /(b)/
Financial costs on preferred stock of subsidiary 16 16 16
Amortization of discounts 4 7 21
Expenses on sales of accounts receivable (Note 23) 19 20 24
Other 7 4 4
------ ------ ------
Total 261 308 349
------ ------ ------
NET INTEREST AND OTHER FINANCIAL COSTS/(a)/ $ 260 $ 305 $ 337
-----------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ See Note 4, for discussion of USX net interest and other
financial costs attributable to the Marathon Group.
/(b)/ Includes a $17 million benefit related to refundable
federal income taxes paid in prior years.
----------------------------------------------------------------
FOREIGN CURRENCY TRANSACTIONS
For 1997, 1996 and 1995, the aggregate foreign currency
transaction gains (losses) included in determining net income
were $4 million, $(24) million and $3 million, respectively.
M-8
<PAGE>
- -------------------------------------------------------------------------------
7. IMPAIRMENT OF LONG-LIVED ASSETS
In 1995, USX adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" (SFAS No. 121). SFAS No.
121 requires that long-lived assets, including related goodwill, be
reviewed for impairment and written down to fair value whenever
events or changes in circumstances indicate that the carrying value
may not be recoverable.
Adoption of SFAS No. 121 resulted in an impairment charge
included in 1995 costs and expenses of $659 million. The impaired
assets primarily included certain domestic and international oil
and gas properties, an idled refinery and related goodwill.
The Marathon Group assessed impairment of its oil and gas
properties based primarily on a field-by-field approach. The
predominant method used to determine fair value was a discounted
cash flow approach and where available, comparable market values
were used. The impairment provision reduced capitalized costs of
oil and gas properties by $533 million.
In addition, the Indianapolis, Indiana refinery, which
was temporarily idled in October 1993, was impaired by $126
million, including related goodwill. The impairment was based on a
discounted cash flow approach and comparable market values.
- -------------------------------------------------------------------------------
8. EXTRAORDINARY LOSS
On December 30, 1996, USX irrevocably called for redemption on
January 30, 1997, $120 million of debt, resulting in a 1996
extraordinary loss to the Marathon Group of $7 million, net of a $4
million income tax benefit. In 1995, USX extinguished $553 million
of debt prior to maturity, which resulted in an extraordinary loss
to the Marathon Group of $5 million, net of a $3 million income tax
benefit.
- -------------------------------------------------------------------------------
9. FINANCIAL ACTIVITIES ATTRIBUTED TO GROUPS
The following is the portion of USX financial activities attributed
to the Marathon Group. These amounts exclude debt amounts
specifically attributed to the Marathon Group.
<TABLE>
<CAPTION>
Marathon Group Consolidated USX/(a)/
----------------------- -----------------------
(In millions) December 31 1997 1996 1997 1996
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 5 $ 6 $ 6 $ 8
Receivables/(b)/ 9 - 10 -
Long-term receivables/(b)/ - 12 - 16
Other noncurrent assets/(b)/ 7 5 8 8
------ ------ ------ ----------
Total assets $ 21 $ 23 $ 24 $ 32
-----------------------------------------------------------------------------------------------------------------
Notes payable $ 108 $ 58 $ 121 $ 80
Accounts payable 1 2 1 2
Accrued interest 79 71 89 98
Long-term debt due within one year (Note 11) 416 224 466 309
Long-term debt (Note 11) 2,452 2,618 2,704 3,615
Preferred stock of subsidiary 184 182 250 250
------ ------ ------ ----------
Total liabilities $3,240 $3,155 $ 3,631 $4,354
-----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Marathon Group/(c)/ Consolidated USX
----------------------- ----------------------
(In millions) 1997 1996 1995 1997 1996 1995
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest and other financial
costs (Note 6) $ 246 $ 277 $ 329 $ 309 $ 376 $ 439
----------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ For details of USX long-term debt and preferred stock of
subsidiary, see Notes 16 and 25, respectively, to the USX
consolidated financial statements.
/(b)/ Primarily reflects forward currency contracts used to manage
currency risks related to USX debt and interest denominated
in a foreign currency.
/(c)/ The Marathon Group's net interest and other financial costs
reflect weighted average effects of all financial activities
attributed to all groups.
M-9
<PAGE>
- -------------------------------------------------------------------------------
10. LEASES
Future minimum commitments for capital leases and for operating
leases having remaining noncancelable lease terms in excess of one
year are as follows:
<TABLE>
<CAPTION>
Capital Operating
(In millions) Leases Leases
-----------------------------------------------------------------------
<S> <C> <C>
1998 $ 2 $ 106
1999 2 80
2000 2 157
2001 2 57
2002 2 55
Later years 27 140
Sublease rentals - (29)
----- ---------
Total minimum lease payments 37 $ 566
=========
Less imputed interest costs 13
-----
Present value of net minimum lease payments
included in long-term debt $ 24
---------------------------------------------------------------------------------------
</TABLE>
Operating lease rental expense:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rental $ 102 $ 96 $ 97
Contingent rental 10 10 10
Sublease rentals (7) (6) (5)
----- ----- ---------
Net rental expense $ 105 $ 100 $ 102
---------------------------------------------------------------------------------------
</TABLE>
The Marathon Group leases a wide variety of facilities and
equipment under operating leases, including land and building
space, office equipment, production facilities and transportation
equipment. Most long-term leases include renewal options and, in
certain leases, purchase options. In the event of a change in
control of USX, as defined in the agreements, or certain other
circumstances, operating lease obligations totaling $109 million
may be declared immediately due and payable.
- --------------------------------------------------------------------------------
11. LONG-TERM DEBT
The Marathon Group's portion of USX's consolidated long-term
debt is as follows:
<TABLE>
<CAPTION>
Marathon Group Consolidated USX/(a)/
---------------------- ----------------------
(In millions) December 31 1997 1996 1997 1996
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Specifically attributed debt/(b)/:
Sale-leaseback financing and capital leases $ 24 $ 24 $ 123 $ 129
Indexed debt less unamortized discount - - 110 119
Seller-provided financing - 40 - 40
------ ------ ------ ----------
Total 24 64 233 288
Less amount due within one year - 40 5 44
------ ------ ------ ----------
Total specifically attributed long-term debt $ 24 $ 24 $ 228 $ 244
--------------------------------------------------------------------------------------------------
Debt attributed to groups/(c)/ $2,889 $2,860 $3,194 $3,949
Less unamortized discount 21 18 24 25
Less amount due within one year 416 224 466 309
------ ------ ------ ----------
Total long-term debt attributed to groups $2,452 $2,618 $2,704 $3,615
--------------------------------------------------------------------------------------------------
Total long-term debt due within one year $ 416 $ 264 $ 471 $ 353
Total long-term debt due after one year 2,476 2,642 2,932 3,859
--------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ See Note 16, to the USX consolidated financial statements
for details of interest rates, maturities and other terms of
long-term debt.
/(b)/ As described in Note 4, certain financial activities are
specifically attributed only to the Marathon Group and the U.
S. Steel Group.
/(c)/ Most long-term debt activities of USX Corporation and its
wholly owned subsidiaries are attributed to all groups (in
total, but not with respect to specific debt issues) based on
their respective cash flows (Notes 4, 9 and 12).
M-10
<PAGE>
- -------------------------------------------------------------------------------
12. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH USED IN OPERATING ACTIVITIES INCLUDED:
Interest and other financial costs paid (net of amount capitalized) $ (257) $ (339) $ (431)
Income taxes paid, including settlements with other groups (178) (74) (163)
----------------------------------------------------------------------------------------------------------
USX DEBT ATTRIBUTED TO ALL GROUPS - NET:
Commercial paper:
Issued $ - $ 1,422 $ 2,434
Repayments - (1,555) (2,651)
Credit agreements:
Borrowings 10,454 10,356 4,719
Repayments (10,449) (10,340) (4,659)
Other credit arrangements - net 36 (36) 40
Other debt:
Borrowings 10 78 52
Repayments (741) (705) (440)
-------- -------- -------
Total $ (690) $ (780) $ (505)
--------------------------------------------------------------------------------------------------------
Marathon Group activity $ 97 $ (769) $ (204)
U. S. Steel Group activity (561) (31) (399)
Delhi Group activity (226) 20 98
-------- -------- -------
Total $ (690) $ (780) $ (505)
--------------------------------------------------------------------------------------------------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Marathon Stock issued for employee stock plans $ 5 $ 2 $ 5
Disposal of assets - common stock received - - 5
- liabilities assumed by buyers 5 25 -
----------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
13. DIVIDENDS
In accordance with the USX Certificate of Incorporation,
dividends on the Marathon Stock and Steel Stock are limited to the
legally available funds of USX. Net losses of either 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 both classes of Common Stock. Subject
to this limitation, the Board of Directors intends to declare and
pay dividends on the Marathon Stock based on the financial
condition and results of operation of the Marathon Group, although
it has no obligation under Delaware law to do so. In making its
dividend decisions with respect to Marathon Stock, the Board of
Directors considers among other things, the long-term earnings and
cash flow capabilities of the Marathon Group as well as the
dividend policies of similar publicly traded energy companies.
- --------------------------------------------------------------------------------
14. STOCK-BASED COMPENSATION PLANS AND STOCKHOLDER RIGHTS PLAN
USX Stock-Based Compensation Plans and Stockholder Rights Plan
are discussed in Note 21, and Note 23, respectively, to the USX
consolidated financial statements.
In 1996, USX adopted SFAS No. 123, Accounting for Stock-
Based Compensation and elected to continue to follow the accounting
provisions of APB No. 25, as discussed in Note 2, to the USX
consolidated financial statements. The Marathon Group's actual
stock-based compensation expense was $20 million in 1997, $6
million in 1996 and $2 million in 1995. Incremental compensation
expense, as determined under SFAS No. 123, was not material ($.02
or less per share for all years presented). Therefore, pro forma
net income and earnings per share data have been omitted.
M-11
<PAGE>
- --------------------------------------------------------------------------------
15. PENSIONS
The Marathon Group has noncontributory defined benefit plans
covering substantially all employees. Benefits under these plans
are based primarily upon years of service and the highest three
years earnings during the last ten years before retirement. Certain
subsidiaries provide benefits for employees covered by other plans
based primarily upon employees' service and career earnings. The
funding policy for all plans provides that payments to the pension
trusts shall be equal to the minimum funding requirements of ERISA
plus such additional amounts as may be approved.
PENSION COST (CREDIT) - The defined benefit cost for major plans
for 1997, 1996 and 1995 was determined assuming an expected long-
term rate of return on plan assets of 9.5%, 10% and 10%,
respectively, and was as follows:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Major plans:
Cost of benefits earned during the period $ 31 $ 35 $ 26
Interest cost on projected benefit obligation
(7.5% for 1997; 7% for 1996; and 8% for 1995) 45 45 41
Return on assets - actual return (217) (139) (197)
- deferred gain 132 55 116
Net amortization of unrecognized gains (3) (3) (4)
------- ------- -------
Total major plans (12) (7) (18)
Other plans 4 4 4
------- ------- -------
Total periodic pension credit (8) (3) (14)
Curtailment losses - - 2
------- ------- -------
Total pension credit $ (8) $ (3) $ (12)
--------------------------------------------------------------------------------------
</TABLE>
FUNDS' STATUS - The assumed discount rate used to measure the
benefit obligations of major plans was 7% at December 31, 1997, and
7.5% at December 31, 1996. The assumed rate of future increases in
compensation levels was 5% at both year-ends. The following table
sets forth the plans' funded status and the amounts reported in the
Marathon Group's balance sheet:
<TABLE>
<CAPTION>
(In millions) December 31 1997 1996
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reconciliation of funds' status to reported amounts:
Projected benefit obligation (PBO)/(a)/ $ (771) $ (627)
Plan assets at fair market value/(b)/ 1,150 989
-------- --------
Assets in excess of PBO/(c)/ 379 362
Unrecognized net gain from transition (40) (45)
Unrecognized prior service cost 45 8
Unrecognized net gain (115) (65)
Additional minimum liability/(d)/ (14) (11)
-------- --------
Net pension asset included in balance sheet $ 255 $ 249
--------------------------------------------------------------------------------------------
/(a)/ PBO includes:
Accumulated benefit obligation (ABO) $ (562) $ (479)
Vested benefit obligation (496) (424)
/(b)/ Types of assets held:
Stocks of other corporations 70% 70%
U.S. Government securities 9% 10%
Corporate debt instruments and other 21% 20%
/(c)/ Includes several small plans that have ABOs in excess of
plan assets:
PBO $ (82) $ (68)
Plan assets 24 18
-------- --------
PBO in excess of plan assets $ (58) $ (50)
/(d)/ Additional minimum liability recorded was offset by the
following:
Intangible asset $ 3 $ 3
Stockholders' equity adjustment - net of deferred income tax 7 5
--------------------------------------------------------------------------------------------
</TABLE>
M-12
<PAGE>
- --------------------------------------------------------------------------------
16. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Marathon Group has defined benefit retiree health and life
insurance plans covering most employees upon their retirement.
Health benefits are provided, for the most part, through
comprehensive hospital, surgical and major medical benefit
provisions subject to various cost sharing features. Life insurance
benefits are provided to nonunion and most union represented
retiree beneficiaries primarily based on employees' annual base
salary at retirement. Benefits have not been prefunded.
POSTRETIREMENT BENEFIT COST - Postretirement benefit cost for
defined benefit plans for 1997, 1996 and 1995 was determined
assuming discount rates of 7.5%, 7% and 8%, respectively, and was
as follows:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost of benefits earned during the period $ 6 $ 8 $ 7
Interest on accumulated postretirement benefit obligation (APBO) 22 23 22
Amortization of unrecognized gains (3) (3) (3)
----- ----- -----
Total postretirement benefit cost $ 25 $ 28 $ 26
-----------------------------------------------------------------------------------------
</TABLE>
OBLIGATIONS - The following table sets forth the plans' obligations
and the amounts reported in the Marathon Group's balance sheet:
<TABLE>
<CAPTION>
(In millions) December 31 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reconciliation of APBO to reported amounts:
APBO attributable to:
Retirees $ 196 $ 162
Fully eligible plan participants 72 53
Other active plan participants 113 84
----- -----
Total APBO 381 299
Unrecognized net loss (73) (4)
Unrecognized prior service cost 18 21
----- -----
Accrued liability included in balance sheet $ 326 $ 316
-------------------------------------------------------------------------------------
</TABLE>
The assumed discount rate used to measure the APBO was 7% and
7.5% at December 31, 1997, and December 31, 1996, respectively. The
assumed rate of future increases in compensation levels was 5% at
both year-ends. The weighted average health care cost trend rate in
1998 is approximately 8%, gradually declining to an ultimate rate
in 2004 of approximately 5%. A one percentage point increase in the
assumed health care cost trend rates for each future year would
have increased the aggregate of the service and interest cost
components of the 1997 net periodic postretirement benefit cost by
$5 million and would have increased the APBO as of December 31,
1997, by $56 million.
- --------------------------------------------------------------------------------
17. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
(In millions) December 31 1997 1996
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Production $13,219 $12,605
Refining 1,703 1,633
Marketing 1,442 1,350
Transportation 626 515
Other 243 226
------- -------
Total 17,233 16,329
Less accumulated depreciation, depletion and amortization 9,667 9,031
------- -------
Net $ 7,566 $ 7,298
--------------------------------------------------------------------------------------------------
</TABLE>
Property, plant and equipment includes gross assets acquired
under capital leases of $24 million at December 31, 1997 and 1996;
the related amounts for the years 1997 and 1996 in accumulated
depreciation, depletion and amortization were $24 million.
M-13
<PAGE>
- --------------------------------------------------------------------------------
18. INCOME TAXES
Income tax provisions and related assets and liabilities attributed
to the Marathon Group are determined in accordance with the USX
group tax allocation policy (Note 4).
Provisions (credits) for estimated income taxes were:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------ --------------------------- ---------------------------
(In millions) Current Deferred Total Current Deferred Total Current Deferred Total
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal $171 $ (5) $166 $193 $ 13 $ 206 $ 72 $(221) $(149)
State and local 3 7 10 12 9 21 10 (14) (4)
Foreign 12 28 40 11 82 93 15 31 46
---- ----- ---- ---- ----- ----- ----- ----- -----
Total $186 $ 30 $216 $216 $ 104 $ 320 $ 97 $(204) $(107)
---------------------------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of federal statutory tax rate (35%) to total
provisions (credits) follows:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate applied to income (loss) before income taxes $ 235 $ 347 $ (67)
State and local income taxes after federal income tax effects 6 14 (3)
Effects of foreign operations, including foreign tax credits (8) (14) (36)/(a)/
Effects of partially-owned companies (6) (10) (7)
Dispositions of subsidiary investments - (8) (6)
Credits other than foreign tax credits (9) (8) (1)
Nondeductible business and amortization expenses 3 3 10
Adjustment of prior years' income taxes (4) (6) (1)
Adjustment of valuation allowances (4) - 4
Other 3 2 -
----- ----- -----
Total provisions (credits) $ 216 $ 320 $(107)
--------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Includes incremental tax benefits of $44 million resulting
from USX's election to credit, rather than deduct, certain
foreign income taxes for federal income tax purposes.
Deferred tax assets and liabilities resulted from the
following:
<TABLE>
<CAPTION>
(In millions) December 31 1997 1996
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Minimum tax credit carryforwards $ 42 $ 110
State tax loss carryforwards (expiring in 1998 through 2012) 52 40
Foreign tax loss carryforwards (portion of which expire in 1998 through 2012) 483 519
Employee benefits 172 158
Expected federal benefit for:
Crediting certain foreign deferred income taxes 249 216
Deducting state and other foreign deferred
income taxes 53 51
Contingency and other accruals 148 116
Other 54 56
Valuation allowances (311) (325)
------ ------
Total deferred tax assets/(a)/ 942 941
------ ------
Deferred tax liabilities:
Property, plant and equipment 1,820 1,685
Inventory 199 306
Prepaid pensions 129 121
Other 114 118
------ -----
Total deferred tax liabilities 2,262 2,230
------ -----
Net deferred tax liabilities $1,320 $1,289
----------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ USX expects to generate sufficient future taxable income to
realize the benefit of the Marathon Group's deferred tax
assets. In addition, the ability to realize the benefit of
foreign tax credits is based upon certain assumptions
concerning future operating conditions (particularly as
related to prevailing oil prices), income generated from
foreign sources and USX's tax profile in the years that such
credits may be claimed.
The consolidated tax returns of USX for the years 1990
through 1994 are under various stages of audit and administrative
review by the IRS. USX believes it has made adequate provision for
income taxes and interest which may become payable for years not
yet settled.
Pretax income (loss) included $250 million, $341 million
and $(50) million attributable to foreign sources in 1997, 1996 and
1995, respectively.
Undistributed earnings of consolidated foreign
subsidiaries at December 31, 1997, amounted to $108 million. No
provision for deferred U.S. income taxes has been made because the
Marathon Group intends to permanently reinvest such earnings in its
foreign operations. If such earnings were not permanently
reinvested, a deferred tax liability of $38 million would have been
required.
M-14
<PAGE>
- --------------------------------------------------------------------------------
19. INVESTMENTS AND LONG-TERM RECEIVABLES
<TABLE>
<CAPTION>
(In millions) December 31 1997 1996
----------------------------------------------------------------------------
<S> <C> <C> <C>
Equity method investments $ 366 $ 135
Other investments 32 31
Deposit in property exchange trusts - 98
Receivables due after one year 49 34
Forward currency contracts - 12
Other 8 1
----- -----
Total $ 455 $ 311
----------------------------------------------------------------------------
</TABLE>
The following represents summarized financial information of
affiliates accounted for by the equity method of accounting, except
for the Retained Interest in the Delhi Group:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C>
Income data - year:
Revenues $ 562 $ 405 $ 255
Operating income 114 95 77
Net income 52 53 24
---------------------------------------------------------------
Balance sheet data - December 31:
Current assets $ 170 $ 146
Noncurrent assets 1,470 1,150
Current liabilities 236 198
Noncurrent liabilities 721 737
---------------------------------------------------------------
</TABLE>
Dividends and partnership distributions received from equity
affiliates were $21 million in 1997, $24 million in 1996 and $14
million in 1995.
Marathon Group purchases from equity affiliates totaled
$37 million, $49 million and $52 million in 1997, 1996 and 1995,
respectively. Marathon Group sales to equity affiliates were $10
million in 1997, $6 million in 1996 and immaterial in 1995.
Summarized financial information of the Delhi Group, which
was accounted for by the equity method of accounting follows:
<TABLE>
<CAPTION>
(In millions) 1995/(a)/
------------------------------------------------------
<S> <C>
Income data for the period:
Revenues $ 276
Operating income 14
Net income 7
-----------------------------------------------------
</TABLE>
/(a)/ Retained Interest in the Delhi Group was eliminated on June
15, 1995.
20. INVENTORIES
<TABLE>
<CAPTION>
(In millions) December 31 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Crude oil and natural gas liquids $ 452 $ 463
Refined products and merchandise 735 746
Supplies and sundry items 77 73
------ ------
Total (at cost) 1,264 1,282
Less inventory market valuation reserve 284 -
------ ------
Net inventory carrying value $ 980 $1,282
--------------------------------------------------------------------------------
</TABLE>
Inventories of crude oil and refined products are valued by
the LIFO method. The LIFO method accounted for 91% and 94% of total
inventory value at December 31, 1997, and December 31, 1996,
respectively.
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 costs and expenses.
M-15
<PAGE>
- --------------------------------------------------------------------------------
21. INTERGROUP TRANSACTIONS
SALES AND PURCHASES - Marathon Group sales to other groups totaled
$105 million, $87 million and $54 million in 1997, 1996 and 1995,
respectively. Marathon Group purchases from the Delhi Group totaled
$18 million in 1997, $9 million in 1996 and $6 million in 1995. At
December 31, 1997 and 1996, Marathon Group receivables included $3
million and $19 million, respectively, related to transactions with
other groups. Marathon Group accounts payable included none at
December 31, 1997, and $2 million at December 31, 1996, related to
transactions with the Delhi Group. These transactions were conducted
on an arm's-length basis. After October 31, 1997, transactions with
the Delhi Companies were treated as third-party transactions.
INCOME TAXES RECEIVABLE FROM/PAYABLE TO OTHER GROUPS - At December 31,
1997 and 1996, amounts receivable from/payable to other groups for
income taxes were included in the balance sheet as follows:
<TABLE>
<CAPTION>
(In millions) December 31 1997 1996
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Receivables $ 2 $ 1
Accounts payable 22 30
Noncurrent:
Deferred credits and other liabilities 97 83
------------------------------------------------------------------------------------------
</TABLE>
These amounts have been determined in accordance with the tax
allocation policy described in Note 4. Amounts classified as current
are settled in cash in the year succeeding that in which such amounts
are accrued. Noncurrent amounts represent estimates of intergroup tax
effects of certain issues for years that are still under various
stages of audit and administrative review. Such tax effects are not
settled among the groups until the audit of those respective tax years
is closed. The amounts ultimately settled for open tax years will be
different than recorded noncurrent amounts based on the final
resolution of all of the audit issues for those years.
- --------------------------------------------------------------------------------
22. STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In millions, except per share data) 1997 1996 1995
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK:
Balance at beginning of year $ - $ - $ 78
Redeemed - - (78)
------ ------ ------
Balance at end of year $ - $ - $ -
------------------------------------------------------------------------------------------
COMMON STOCKHOLDERS' EQUITY (Note 4):
Balance at beginning of year $3,340 $2,872 $3,163
Net income (loss) 456 664 (88)
Marathon Stock issued 39 4 5
Marathon Stock repurchased - - (1)
Dividends on preferred stock - - (4)
Dividends on Marathon Stock
(per share: $.76 in 1997, $.70 in 1996 and $.68 in 1995) (219) (201) (195)
Foreign currency translation adjustments - - 1
Deferred compensation adjustments 1 - (3)
Minimum pension liability adjustments (Note 15) (2) 1 (6)
Unrealized holding gains on investments 3 - -
------- ------- -------
Balance at end of year $3,618 $3,340 $2,872
------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $3,618 $3,340 $2,872
------------------------------------------------------------------------------------------
</TABLE>
M-16
<PAGE>
- --------------------------------------------------------------------------------
23. SALES OF RECEIVABLES
The Marathon Group, prior to December 1997, participated in an
agreement (the program) to sell an undivided interest in certain
accounts receivable. At December 31, 1997, the amount sold under the
program that had not been collected was zero, since the program was
terminated in December 1997. The amount sold under the program
averaged $314 million in 1997, $340 million in 1996 and $361 million
in 1995.
- --------------------------------------------------------------------------------
24. INCOME PER COMMON SHARE
The method of calculating net income per share for the Marathon Stock,
the Steel Stock and, prior to November 1, 1997, the Delhi Stock
reflects the USX Board of Directors' intent that the separately
reported earnings and surplus of the Marathon Group, the U. S. Steel
Group and the Delhi Group, as determined consistent with the USX
Certificate of Incorporation, are available for payment of dividends
to the respective classes of stock, although legally available funds
and liquidation preferences of these classes of stock do not
necessarily correspond with these amounts.
Basic net income (loss) per share is calculated by adjusting net
income (loss) for dividend requirements of preferred stock and is
based on the weighted average number of common shares outstanding.
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.
<TABLE>
<CAPTION>
1997 1996 1995
------------------ -------------------- --------------------
COMPUTATION OF INCOME PER SHARE BASIC DILUTED Basic Diluted Basic Diluted
------------------------------- -------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) (millions):
Income (loss) before extraordinary loss $ 456 $ 456 $ 671 $ 671 $ (83) $ (83)
Dividends on preferred stock - - - - (4) (4)
Extraordinary loss - - (7) (7) (5) (5)
-------- -------- -------- -------- -------- --------
Net income (loss) applicable to Marathon Stock 456 456 664 664 (92) (92)
Effect of dilutive securities -
Convertible debentures - 3 - 14 - -
-------- -------- -------- -------- -------- --------
Net income (loss) assuming conversions $ 456 $ 459 $ 664 $ 678 $ (92) $ (92)
======== ======== ======== ======== ======== ========
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 288,038 288,038 287,460 287,460 287,271 287,271
Effect of dilutive securities:
Convertible debentures - 1,936 - 8,975 - -
Stock options - 546 - 133 - -
-------- -------- -------- -------- -------- --------
Average common shares and dilutive effect 288,038 290,520 287,460 296,568 287,271 287,271
-------- -------- -------- -------- -------- --------
Per share:
Income (loss) before extraordinary loss $ 1.59 $ 1.58 $ 2.33 $ 2.31 $ (.31) $ (.31)
Extraordinary loss - - (.02) (.02) (.02) (.02)
-------- -------- -------- -------- -------- --------
Net income (loss) $ 1.59 $ 1.58 $ 2.31 $ 2.29 $ (.33) $ (.33)
======== ======== ======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
25. DERIVATIVE INSTRUMENTS
The Marathon Group uses commodity-based derivative instruments to
manage exposure to price fluctuations related to the anticipated
purchase or production and sale of crude oil, natural gas, refined
products and electricity. The derivative instruments used, as a part
of an overall risk management program, include exchange-traded futures
contracts and options, and instruments which require settlement in
cash such as OTC commodity swaps and OTC options. While risk
management activities generally reduce market risk exposure due to
unfavorable commodity price changes for raw material purchases and
products sold, such activities can also encompass strategies which
assume certain price risk in isolated transactions.
USX has used forward currency contracts to hedge foreign
denominated debt, a portion of which has been attributed to the
Marathon Group.
The Marathon Group remains at risk for possible changes in the
market value of the derivative instrument; however, such risk should
be mitigated by price changes in the underlying hedged item. The
Marathon Group is also exposed to credit risk in the event of
nonperformance by counterparties. The credit worthiness of
counterparties is subject to continuing review, including the use of
master netting agreements to the extent practical, and full
performance is anticipated.
M-17
<PAGE>
The following table sets forth quantitative information by class
of derivative instrument:
<TABLE>
<CAPTION>
FAIR CARRYING RECORDED
VALUE AMOUNT DEFERRED AGGREGATE
ASSETS ASSETS GAIN OR CONTRACT
(In millions) (LIABILITIES) /(A)/ (LIABILITIES) (LOSS) VALUES /(B)/
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997:
Exchange-traded commodity futures $ - $ - $ - $ 30
Exchange-traded commodity options 1 /(c)/ 1 2 129
OTC commodity swaps /(d)/ (2) /(e)/ (2) (3) 30
OTC commodity options - - - 6
------ ------- ------ --------
Total commodities $ (1) $ (1) $ (1) $ 195
------ ------- ------ --------
Forward currency contract /(f)/:
- receivable $ 10 $ 9 $ - $ 52
- payable (1) (1) (1) 5
------ ------- ------ --------
Total currencies $ 9 $ 8 $ (1) $ 57
-----------------------------------------------------------------------------------------------------
December 31, 1996:
Exchange-traded commodity futures $ - $ - $ (2) $ 38
Exchange-traded commodity options (1) /(c)/ (1) (2) 251
OTC commodity swaps (3) /(e)/ (2) - 32
OTC commodity options (7) (7) (1) 80
------ ------- ------ --------
Total commodities $ (11) $ (10) $ (5) $ 401
------ ------- ------ --------
Forward currency contract:
- receivable $ 14 $ 12 $ - $ 43
- payable (1) (1) (1) 7
------ ------- ------ --------
Total currencies $ 13 $ 11 $ (1) $ 50
-----------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ The fair value amounts for OTC positions are based on various
indices or dealer quotes. The fair value amounts for currency
contracts are based on dealer quotes of forward prices covering
the remaining duration of the foreign exchange contract. The
exchange-traded futures contracts and certain option contracts
do not have a corresponding fair value since changes in the
market prices are settled on a daily basis.
/(b)/ Contract or notional amounts do not quantify risk exposure, but
are used in the calculation of cash settlements under the
contracts. The contract or notional amounts do not reflect the
extent to which positions may offset one another.
/(c)/ Includes fair values as of December 31, 1997 and 1996, for
assets of $3 million and $1 million and liabilities of $(2)
million and $(2) million, respectively.
/(d)/ The OTC swap arrangements vary in duration with certain
contracts extending into mid 2000.
/(e)/ Includes fair values as of December 31, 1997 and 1996, for
assets of $1 million and $1 million and liabilities of $(3)
million and $(4) million, respectively.
/(f)/ The forward currency contract matures in 1998.
- --------------------------------------------------------------------------------
26. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value of the financial instruments disclosed herein is not
necessarily representative of the amount that could be realized or
settled, nor does the fair value amount consider the tax consequences
of realization or settlement. The following table summarizes financial
instruments, excluding derivative financial instruments disclosed in
Note 25, by individual balance sheet account. As described in Note 4,
the Marathon Group's specifically attributed financial instruments and
the Marathon Group's portion of USX's financial instruments attributed
to all groups are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ ----------------------
FAIR CARRYING Fair Carrying
(In millions) December 31 VALUE AMOUNT Value Amount
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 36 $ 36 $ 32 $ 32
Receivables 856 856 613 613
Investments and long-term receivables 143 86 204 163
------ ------ ------ ------
Total financial assets $1,035 $ 978 $ 849 $ 808
----------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Notes payable $ 108 $ 108 $ 59 $ 59
Accounts payable 1,348 1,348 1,385 1,385
Accrued interest 84 84 75 75
Long-term debt (including amounts due within one year) 3,198 2,869 3,062 2,882
Preferred stock of subsidiary 187 184 185 182
------ ------ ------ ------
Total financial liabilities $4,925 $4,593 $4,766 $4,583
----------------------------------------------------------------------------------------------------------
</TABLE>
M-18
<PAGE>
Fair value of financial instruments classified as current assets
or liabilities approximates carrying value due to the short-term
maturity of the instruments. Fair value of investments and long-term
receivables was based on discounted cash flows or other specific
instrument analysis. Fair value of preferred stock of subsidiary was
based on market prices. Fair value of long-term debt instruments was
based on market prices where available or current borrowing rates
available for financings with similar terms and maturities.
The Marathon Group's unrecognized financial instruments consist
of accounts receivables sold and financial guarantees. It is not
practicable to estimate the fair value of these forms of financial
instrument obligations because there are no quoted market prices for
transactions which are similar in nature. For details relating to
sales of receivables see Note 23, and for details relating to
financial guarantees see Note 27.
- --------------------------------------------------------------------------------
27. CONTINGENCIES AND COMMITMENTS
USX is the subject of, or party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the Marathon
Group involving a variety of matters, including laws and regulations
relating to the environment. Certain of these matters are discussed
below. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the Marathon Group
financial statements. However, management believes that USX will
remain a viable and competitive enterprise even though it is possible
that these contingencies could be resolved unfavorably to the Marathon
Group.
ENVIRONMENTAL MATTERS -
The Marathon Group is subject to federal, state, local and
foreign laws and regulations relating to the environment. These laws
generally provide for control of pollutants released into the
environment and require responsible parties to undertake remediation
of hazardous waste disposal sites. Penalties may be imposed for
noncompliance. At December 31, 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
$42 million at December 31, 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 1997 and 1996, such
capital expenditures totaled $81 million and $66 million,
respectively. The Marathon Group anticipates making additional such
expenditures in the future; however, the exact amounts and timing of
such expenditures are uncertain because of the continuing evolution of
specific regulatory requirements.
At December 31, 1997, and December 31, 1996, accrued liabilities
for platform abandonment and dismantlement totaled $128 million and
$118 million, respectively.
GUARANTEES -
Guarantees by USX and its consolidated subsidiaries of the
liabilities of affiliated entities of the Marathon Group totaled $23
million and $46 million at December 31, 1997, and December 31, 1996,
respectively. As of December 31, 1997, the largest guarantee for a
single affiliate was $23 million.
At December 31, 1997, and December 31, 1996, the Marathon Group's
pro rata share of obligations of LOOP LLC and various pipeline
affiliates secured by throughput and deficiency agreements totaled
$165 million and $176 million, respectively. Under the agreements, the
Marathon Group is required to advance funds if the affiliates are
unable to service debt. Any such advances are prepayments of future
transportation charges.
COMMITMENTS -
At December 31, 1997, and December 31, 1996, contract commitments
for the Marathon Group's capital expenditures for property, plant and
equipment totaled $268 million and $388 million, respectively.
M-19
<PAGE>
- --------------------------------------------------------------------------------
28. SUBSEQUENT EVENT - BUSINESS COMBINATIONS
On December 12, 1997, the Marathon Group and Ashland Inc.
(Ashland) signed definitive agreements to combine the major elements
of their refining, marketing and transportation (RM&T) operations.
Pursuant to those agreements, on January 1, 1998, the Marathon Group
transferred certain RM&T net assets to a new consolidated subsidiary,
which was named Marathon Ashland Petroleum LLC (MAP). Also on January
1, 1998, the Marathon Group acquired certain RM&T net assets from
Ashland in exchange for a 38% interest in MAP. The acquisition will be
accounted for under the purchase method of accounting. The purchase
price was determined to be $1.9 billion, based upon an external
valuation. The change in the Marathon Group's ownership interest in
MAP resulted in a change in interest gain which will be recognized in
the first quarter 1998.
In connection with the formation of MAP, the Marathon Group and
Ashland entered into a Limited Liability Company Agreement dated
January 1, 1998 (the LLC Agreement). The LLC Agreement provides for an
initial term of MAP expiring on December 31, 2022 (25 years from its
formation). The term will automatically be extended for ten-year
periods, unless a termination notice is given by either party.
Also in connection with the formation of MAP, the parties entered
into a Put/Call, Registration Rights and Standstill Agreement (the
Put/Call Agreement). The Put/Call Agreement provides that at any time
after December 31, 2004, Ashland will have the right to sell to the
Marathon Group all of Ashland's ownership interest in MAP, for an
amount in cash and/or the Marathon Oil Company or USX debt or equity
securities equal to the product of 85% (90% if equity securities are
used) of the fair market value of MAP at that time, multiplied by
Ashland's percentage interest in MAP. Payment could be made at
closing, or at the Marathon Group's option, in three equal annual
installments, the first of which would be payable at closing. At any
time after December 31, 2004, the Marathon Group will have the right
to purchase all of Ashland's ownership interests in MAP, for an amount
in cash equal to the product of 115% of the fair market value of MAP
at that time, multiplied by Ashland's percentage interest in MAP.
The following unaudited pro forma data for the Marathon Group
includes the results of operations for the Ashland RM&T net assets,
giving effect to the acquisition as if it had been consummated at the
beginning of the year presented. The pro forma data is based on
historical information and does not necessarily reflect the actual
results that would have occurred nor is it necessarily indicative of
future results of operations.
<TABLE>
<CAPTION>
(In millions, except per share amounts) 1997 /(a)/
----------------------------------------------------------------------
<S> <C>
Revenues $22,454
Net income 455
Net income per common share:
Basic 1.58
Diluted 1.57
----------------------------------------------------------------------
</TABLE>
/(a)/ The Marathon Group data is based on a calendar year. Ashland data
is based on a twelve-month period ended September 30, 1997.
/(b)/ Excluding the pro forma inventory market valuation adjustment,
pro forma net income would have been $618 million. Reported net
income, excluding the reported inventory market valuation
adjustment, would have been $635 million.
M-20
<PAGE>
Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------
(In millions, except per share data) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR.
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 3,920 $ 3,944/(a)/ $ 3,787/(a)/ $ 4,103/(a)/
Income from operations 94 360/(a)/ 243/(a)/ 235/(a)/
Costs and expenses include:
Inventory market valuation
charges (credits) 147 (41) 64 114
Income before
extraordinary loss 38 192 118 108
Net income 38 192 118 108
- ------------------------------------------------------------------------------------------------------
MARATHON STOCK DATA:
- -------------------
Income before extraordinary
loss applicable to
Marathon Stock $ 38 $ 192 $ 118 $ 108
-Per share: basic .14 .66 .41 .37
diluted .13 .66 .41 .37
Dividends paid per share .19 .19 .19 .19
Price range of Marathon Stock (b):
-Low 29 28-5/16 25-5/8 23-3/4
-High 38-7/8 38-3/16 31-1/8 28-1/2
- ------------------------------------------------------------------------------------------------------
<CAPTION>
1996
--------------------------------------------------------------
(In millions, except per share data) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR.
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 4,457/(a)/ $ 4,202/(a)/ $ 4,078/(a)/ $ 3,657/(a)
Income from operations 323/(a)/ 325/(a)/ 241/(a)/ 407/(a)
Costs and expenses include:
Inventory market valuation
charges (credits) (30) (96) 72 (155)
Income before
extraordinary loss 167 164 124 216
Net income 160 164 124 216
- ------------------------------------------------------------------------------------------------------
MARATHON STOCK DATA:
- -------------------
Income before extraordinary
loss applicable to
Marathon Stock $ 167 $ 164 $ 124 $ 216
-Per share: basic .58 .57 .43 .75
diluted .57 .57 .43 .74
Dividends paid per share .19 .17 .17 .17
Price range of Marathon Stock /(b)/:
-Low 21-1/8 20 19-1/8 17-1/4
-High 25-1/2 22-1/8 22-7/8 20-1/2
- ------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Reclassified to conform to current classifications.
/(b)/ Composite tape.
Principal Unconsolidated Affiliates (Unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
COMPANY COUNTRY OWNERSHIP ACTIVITY
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CLAM Petroleum BV Netherlands 50% Oil & Gas Production
Kenai LNG Corporation United States 30% Natural Gas Liquification
LOCAP, Inc. United States 37% Pipeline & Storage Facilities
LOOP LLC United States 32% Offshore Oil Port
Nautilus Pipeline Company, LLC United States 24% Natural Gas Transmission
Sakhalin Energy Investment Company Ltd. Russia 38% Oil & Gas Development
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Supplementary Information on Oil and Gas Producing Activities (Unaudited)
See the USX consolidated financial statements for Supplementary Information on
Oil and Gas Producing Activities relating to the Marathon Group, pages U-30
through U-34.
M-21
<PAGE>
Five-Year Operating Summary
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET LIQUID HYDROCARBON PRODUCTION (thousands of barrels per day)
United States (by region)
Alaska - 8 9 9 9
Gulf Coast 29 30 33 12 10
Southern 8 9 11 12 12
Central 5 4 8 9 9
Mid-Continent - Yates 25 25 24 23 22
Mid-Continent - Other 21 20 19 18 18
Rocky Mountain 27 26 28 27 31
------------------------------------------------
Total United States 115 122 132 110 111
------------------------------------------------
International
Abu Dhabi - - - 1 2
Egypt 8 8 5 7 6
Indonesia - - 10 3 3
Norway 2 3 2 2 2
Tunisia - - 2 3 8
United Kingdom 39 48 54 46 24
------------------------------------------------
Total International 49 59 73 62 45
------------------------------------------------
Total 164 181 205 172 156
Natural gas liquids included in above 17 17 17 15 14
-----------------------------------------------------------------------------------------------------------------------
NET NATURAL GAS PRODUCTION (millions of cubic feet per day)
United States (by region)
Alaska 151 145 133 123 116
Gulf Coast 78 88 94 79 98
Southern 189 161 142 134 94
Central 119 109 105 110 107
Mid-Continent 125 122 112 89 78
Rocky Mountain 60 51 48 39 36
------------------------------------------------
Total United States 722 676 634 574 529
International ------------------------------------------------
Egypt 11 13 15 17 17
Ireland 228 259 269 263 258
Norway 54 87 81 81 75
United Kingdom - equity 130 140 98 39 23
- other/(a)/ 32 32 35 - -
------------------------------------------------
Total International 455 531 498 400 373
------------------------------------------------
Consolidated 1,177 1,207 1,132 974 902
Equity affiliate/(b)/ 42 45 44 40 35
------------------------------------------------
Total 1,219 1,252 1,176 1,014 937
-----------------------------------------------------------------------------------------------------------------------
AVERAGE SALES PRICES
Liquid Hydrocarbons (dollars per barrel)/(c)/
United States $16.88 $18.58 $14.59 $13.53 $14.54
International 18.77 20.34 16.66 15.61 16.22
Natural Gas (dollars per thousand cubic feet)/(c)/
United States $ 2.20 $ 2.09 $ 1.63 $ 1.94 $ 1.94
International 2.00 1.97 1.80 1.58 1.52
-----------------------------------------------------------------------------------------------------------------------
NET PROVED RESERVES AT YEAR-END (developed and undeveloped)
Liquid Hydrocarbons (millions of barrels)
United States 609 589 558 553 573
International 187 203 206 242 269
------------------------------------------------
Consolidated 796 792 764 795 842
Equity affiliate/(d)/ 82 - - - -
------------------------------------------------
Total 878 792 764 795 842
Developed reserves as % of total net reserves 75% 78% 88% 90% 88%
-----------------------------------------------------------------------------------------------------------------------
Natural Gas (billions of cubic feet)
United States 2,220 2,239 2,210 2,127 2,045
International 1,071 1,199 1,379 1,527 1,703
------------------------------------------------
Consolidated 3,291 3,438 3,589 3,654 3,748
Equity affiliate/(b)/ 111 132 131 153 153
------------------------------------------------
Total 3,402 3,570 3,720 3,807 3,901
Developed reserves as % of total net reserves 83% 83% 80% 79% 80%
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Represents gas acquired for injection and subsequent
resale.
/(b)/ Represents Marathon's equity interest in CLAM Petroleum
B.V.
/(c)/ Prices exclude gains/losses from hedging activities.
/(d)/ Represents Marathon's equity interest in Sakhalin Energy
Investment Company Ltd.
M-22
<PAGE>
Five-Year Operating Summary CONTINUED
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. REFINERY OPERATIONS (thousands of barrels per day)
In-use crude oil capacity at year-end 575 570 570 570 570
Refinery runs - crude oil refined 525 511 503 491 549
- other charge and blend stocks 99 96 94 107 102
In-use crude oil capacity utilization rate 92% 90% 88% 86% 90%
- --------------------------------------------------------------------------------------------------------------------------
SOURCE OF CRUDE PROCESSED (thousands of barrels per day)
United States 202 229 254 218 299
Europe 10 12 6 31 3
Middle East and Africa 241 193 183 171 173
Other International 72 79 58 70 75
----------------------------------------------------
Total 525 513 501 490 550
- --------------------------------------------------------------------------------------------------------------------------
REFINED PRODUCT YIELDS (thousands of barrels per day)
Gasoline 353 345 339 340 369
Distillates 154 155 146 146 157
Propane 13 13 12 13 15
Feedstocks and special products 36 35 38 33 33
Heavy fuel oil 35 30 31 38 39
Asphalt 39 36 36 30 38
----------------------------------------------------
Total 630 614 602 600 651
- --------------------------------------------------------------------------------------------------------------------------
REFINED PRODUCTS YIELDS (% breakdown)
Gasoline 56% 56% 57% 57% 57%
Distillates 24 25 24 24 24
Other products 20 19 19 19 19
----------------------------------------------------
Total 100% 100% 100% 100% 100%
- --------------------------------------------------------------------------------------------------------------------------
U.S. REFINED PRODUCT SALES (thousands of barrels per day)
Gasoline 452 468 445 443 420
Distillates 198 192 180 183 179
Propane 12 12 12 16 18
Feedstocks and special products 40 37 44 32 32
Heavy fuel oil 34 31 31 38 39
Asphalt 39 35 35 31 38
----------------------------------------------------
Total 775 775 747 743 726
Matching buy/sell volumes included in above 51 71 47 73 47
- --------------------------------------------------------------------------------------------------------------------------
REFINED PRODUCTS SALES BY CLASS OF TRADE (as a % of total sales)
Wholesale - independent private-brand
marketers and consumers 61% 62% 61% 62% 63%
Retail - Marathon brand outlets 13 13 13 13 13
- Emro Marketing Company outlets 26 25 26 25 24
----------------------------------------------------
Total 100% 100% 100% 100% 100%
- --------------------------------------------------------------------------------------------------------------------------
REFINED PRODUCTS (dollars per barrel)
Average sales price $ 26.38 $ 27.43 $ 23.80 $ 22.75 $ 23.42
Average cost of crude oil throughput 19.00 21.94 18.09 16.59 17.05
- --------------------------------------------------------------------------------------------------------------------------
PETROLEUM INVENTORIES AT YEAR-END (thousands of barrels)
Crude oil and natural gas liquids 18,660 19,325 21,598 21,892 21,689
Refined products 20,598 21,283 22,102 23,657 23,136
- --------------------------------------------------------------------------------------------------------------------------
U.S. REFINED PRODUCT MARKETING OUTLETS AT YEAR-END
Marathon operated terminals 51 51 51 51 51
Retail - Marathon brand 2,465 2,392 2,380 2,356 2,331
- Emro Marketing Company 1,544 1,592 1,627 1,659 1,571
- --------------------------------------------------------------------------------------------------------------------------
PIPELINES (miles of common carrier pipelines, including affiliates)
Crude Oil - gathering lines 1,003 1,052 1,115 1,115 1,130
- trunklines 2,552 2,552 2,553 2,559 2,581
Products - trunklines 1,493 1,493 1,494 1,494 1,495
----------------------------------------------------
Total 5,048 5,097 5,162 5,168 5,206
- --------------------------------------------------------------------------------------------------------------------------
PIPELINE BARRELS HANDLED (millions)
Crude Oil - gathering lines 43.9 43.2 43.8 43.4 43.8
- trunklines 369.6 378.7 371.3 353.0 382.4
Products - trunklines 262.4 274.8 252.3 282.2 295.6
----------------------------------------------------
Total 675.9 696.7 667.4 678.6 721.8
- --------------------------------------------------------------------------------------------------------------------------
CARNEGIE NATURAL GAS COMPANY STATISTICS
Miles of pipeline 1,794 1,787 1,800 1,799 1,810
Reserves dedicated to gathering operations -- owned
(proved developed -- billions of cubic feet) 39.8 42.8 44.3 43.8 46.7
Natural gas throughput (billions of cubic feet) 31.8 34.1 34.1 27.9 37.2
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
M-23
<PAGE>
Five-Year Financial Summary
<TABLE>
<CAPTION>
(Dollars in millions, except as noted) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES
Refined products $ 7,012 $ 7,132 $ 6,127 $ 5,622 $ 5,769
Merchandise 1,045 1,000 941 869 792
Liquid hydrocarbons 941 1,111 881 800 627
Natural gas 1,331 1,194 950 670 607
Crude oil and refined products
matching buy/sell transactions/(a)/ 2,436 2,912 2,067 2,071 2,018
Excise taxes/(a)/ 2,736 2,768 2,708 2,542 1,927
Gain on sale of assets 37 55 8 172 33
All other 216 222 231 203 248
-----------------------------------------------------------------------------
Total revenues $15,754 $16,394/(b)/ $13,913/(b)/ $12,949/(b)/ $12,021/(b)/
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS
U.S. production $ 626 $ 627 $ 376 $ 258 $ 179
U.S. exploration expense (126) (97) (70) (84) (60)
International production 336 423 257 138 55
International exploration expense (63) (49) (79) (73) (85)
Refining, marketing and transportation 563 239 274 423 413
Other energy related businesses 48 77 60 34 37
Administrative (168) (133) (82) (80) (70)
Inventory market valuation
(charges) credits (284) 209 70 160 (241)
Impairment of long-lived assets - - (659) - -
-----------------------------------------------------------------------------
Total income from operations 932 1,296/(b)/ 147/(b)/ 776/(b)/ 228/(b)/
Net interest and other financial costs 260 305 337 300 283
Provision (credit) for income taxes 216 320 (107) 155 (49)
-----------------------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS
AND CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES $ 456 $ 671 $ (83) $ 321 $ (6)
Per common share - basic (in dollars) 1.59 2.33 (.31) 1.10 (.04)
- diluted (in dollars) 1.58 2.31 (.31) 1.10 (.04)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 456 $ 664 $ (88) $ 321 $ (29)
Per common share - basic (in dollars) 1.59 2.31 (.33) 1.10 (.12)
- diluted (in dollars) 1.58 2.29 (.33) 1.10 (.12)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET POSITION AT YEAR-END
Current assets $ 2,018 $ 2,046 $ 1,888 $ 1,737 $ 1,572
Net property, plant and equipment 7,566 7,298 7,521 8,471 8,536
Total assets 10,565 10,151 10,109 10,951 10,822
Short-term debt 525 323 384 56 24
Other current liabilities 1,737 1,819 1,641 1,656 1,619
Long-term debt 2,476 2,642 3,367 3,983 4,274
Common stockholders' equity 3,618 3,340 2,872 3,163 3,032
Per share (in dollars) 12.53 11.62 9.99 11.01 10.58
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOW DATA
Net cash from operating activities $ 1,246 $ 1,503 $ 1,044 $ 720 $ 830
Net cash from operating activities
before working capital changes 1,460 1,339 1,128 944 910
Capital expenditures 1,038 751 642 753 910
Disposal of assets 60 282 77 263 174
Dividends paid 219 201 199 201 201
- -----------------------------------------------------------------------------------------------------------------------------------
EMPLOYEE DATA
Marathon Group:
Total employment costs $ 854 $ 790 $ 781 $ 856 $ 845
Average number of employees 20,695 20,461 21,015 21,005 21,963
Number of pensioners at year-end 3,099 3,203 3,378 3,495 3,572
Emro Marketing Company:
(Included in Marathon Group totals)
Total employment costs $ 263 $ 241 $ 229 $ 221 $ 211
Average number of employees 12,816 12,474 12,087 11,669 11,550
Number of pensioners at year-end 215 207 206 199 187
- -----------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDER DATA AT YEAR-END
Number of common shares
outstanding (in millions) 288.8 287.5 287.4 287.2 286.6
Registered shareholders (in thousands) 84.0 92.1 101.2 110.4 118.5
Market price of common stock $33.750 $23.875 $19.500 $16.375 $16.500
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ These items are included in both revenues and costs and expenses,
resulting in no effect on income.
/(b)/ Reclassified to conform to 1997 classifications.
M-24
<PAGE>
Management's Discussion and Analysis
The Marathon Group includes Marathon Oil Company ("Marathon")
and certain other subsidiaries of USX Corporation ("USX"), which
are engaged in worldwide exploration, production, transportation
and marketing of crude oil and natural gas; domestic refining,
marketing and transportation of petroleum products; and power
generation. Effective January 1, 1998, the USX - Marathon Group
and Ashland Inc. formed a new refining, marketing and
transportation company, Marathon Ashland Petroleum LLC ("MAP").
For further discussion of MAP, see Note 28 to the Marathon Group
Financial Statements and Management's Discussion and Analysis of
Operations - Outlook herein. Management's Discussion and Analysis
should be read in conjunction with the Marathon Group's Financial
Statements and Notes to Financial Statements.
During 1997, the Marathon Group's financial performance was
primarily led by strong refined product margins, which
significantly offset the unfavorable effects of lower worldwide
liquid hydrocarbon prices and volumes. In addition, Marathon
increased its 1997 capital and investment expenditures by $507
million, or 66%, from 1996 levels, substantially funding its
spending with cash provided by operating activities.
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 "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 risk factors affecting the businesses of the
Marathon Group, see Supplementary Data - Disclosures About
Forward-Looking Statements in USX's 1997 Form 10-K.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INCOME
REVENUES for each of the last three years are summarized in
the following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Refined products $ 7,012 $ 7,132 $ 6,127
Merchandise 1,045 1,000 941
Liquid hydrocarbons 941 1,111 881
Natural gas 1,331 1,194 950
Transportation and other/(a)/(c)/ 253 277 239
-------- -------- --------
Subtotal 10,582 10,714 9,138
-------- -------- --------
Matching buy/sell transactions/(b)/ 2,436 2,912 2,067
Excise taxes/(b)/ 2,736 2,768 2,708
-------- -------- --------
Total revenues/(c)/ $ 15,754 $ 16,394 $ 13,913
-----------------------------------------------------------------------------------
</TABLE>
/(a)/ Includes dividend and affiliate income, net gains on
disposal of assets and other income.
/(b)/ Included in both revenues and operating costs, resulting in
no effect on income.
/(c)/ Amounts in 1996 and 1995 were reclassified in 1997 to
include dividend and affiliate income and other income, and
to conform to other 1997 classifications.
Revenues (excluding matching buy/sell transactions and excise
taxes) decreased by $132 million in 1997 from 1996 and increased
by $1,576 million in 1996 from 1995. The decrease in 1997 mainly
reflected lower average refined product prices and lower
worldwide liquid hydrocarbon prices and volumes, partly offset by
increased volumes of refined products and higher domestic natural
gas volumes and prices. The increase in 1996 primarily resulted
from higher average refined product, worldwide liquid hydrocarbon
and natural gas prices, partially offset by lower worldwide
liquid hydrocarbon volumes.
M-25
<PAGE>
Management's Discussion and Analysis CONTINUED
INCOME FROM OPERATIONS and certain items included in income
from operations for each of the last three years are summarized
in the following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from operations/(a)/ $ 932 $ 1,296 $ 147
Less: Certain favorable (unfavorable) items
IMV reserve adjustment/(b)/ (284) 209 70
Net gains on certain asset sales/(c)/ - 35 -
Charges for withdrawal from MPA/(d)/ - (10) -
Certain state tax adjustments/(e)/ - (11) -
Impairment of long-lived assets/(f)/ - - (659)
Expected environmental remediation recoveries/(g)/ - - 15
------- ------- -------
Subtotal (284) 223 (574)
------- ------- -------
Income from operations excluding above items $ 1,216 $ 1,073 $ 721
--------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Consists of operating income, dividend and affiliate
income, net gains on disposal of investments and other
income. Amounts for 1996 and 1995 were reclassified in 1997
to include dividend and affiliate income and other income,
and to conform to other 1997 classifications. See Note 9 to
the Consolidated Financial Statements for a discussion of
operating income.
/(b)/ 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 details of this noncash adjustment,
see discussion below.
/(c)/ Includes net gains on sales of interests in a domestic
pipeline company and certain production properties.
/(d)/ Marine Preservation Association ("MPA") is a non-profit oil
spill response group.
/(e)/ Accrual of domestic production taxes for prior years.
/(f)/ Related to adoption of Statement of Financial Accounting
Standards No. 121 - "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of "
("SFAS No. 121").
/(g)/ Expected recoveries from state governments of expenditures
related to underground storage tanks at retail marketing
outlets.
Adjusted income from operations increased by $143 million in
1997 from 1996 and by $352 million in 1996 from 1995. The
improvement in 1997 was primarily due to 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. The improvement in 1996 from
1995 was primarily due to higher worldwide liquid hydrocarbon and
natural gas prices, reduced depreciation, depletion and
amortization ("DD&A") expense, resulting mainly from the fourth
quarter 1995 adoption of SFAS No. 121 and property sales, and
increased worldwide volumes of natural gas. These favorable
effects were partially offset by lower worldwide liquid
hydrocarbon volumes, net losses on production hedging activities
(primarily occurring in the fourth quarter of 1996) and lower
refined product margins. For additional details, see Management's
Discussion and Analysis of Operations.
With respect to the IMV reserve adjustment, 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 income from operations. 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, 1997, LIFO
cost exceeded market prices by $284 million, resulting in a
corresponding charge to income from operations for total year
1997. During 1996 and 1995, favorable market price movements
resulted in credits to income from operations of $209 million
M-26
<PAGE>
Management's Discussion and Analysis CONTINUED
and $70 million, respectively. The $493 million variance in
income from operations between 1997 and 1996 for the IMV reserve
adjustments (and $139 million variance between 1996 and 1995)
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.
NET INTEREST AND OTHER FINANCIAL COSTS decreased by $45
million in 1997 from 1996, following a decrease of $32 million in
1996 from 1995. The decrease in both periods was mainly due to
lower average debt levels, while 1997 also reflected an increase
in capitalized interest on worldwide exploration and production
projects. For additional details, see Note 6 to the Marathon
Group Financial Statements.
The CREDIT FOR ESTIMATED INCOME TAXES in 1995 included
incremental tax benefits of $44 million resulting from USX's
election to credit, rather than deduct, foreign income taxes for
U.S. federal income tax purposes. For reconciliation of the
federal statutory tax rate to total provisions (credits), see
Note 18 to the Marathon Group Financial Statements.
An EXTRAORDINARY LOSS on extinguishment of debt of $7
million in 1996 and $5 million in 1995 represents the portion of
the loss on early extinguishment of USX debt attributed to the
Marathon Group. For additional information, see Note 8 to the
Marathon Group Financial Statements.
NET INCOME decreased by $208 million in 1997 from 1996,
following an increase of $752 million in 1996 from 1995.
Excluding the aftertax effects of the IMV reserve adjustment and
other special items, financial results increased by $106 million
in 1997 from 1996 and by $300 million in 1996 from 1995,
primarily reflecting the factors discussed above.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, CASH FLOWS AND
LIQUIDITY
CURRENT ASSETS declined $28 million from year-end 1996,
primarily due to a decrease in inventories, offset by an increase
in receivables. The reduced inventory values were due mainly to
lower year-end refined product prices, which resulted in an IMV
reserve of $284 million. The increase in receivables was
primarily due to the termination of the accounts receivable sales
program (see Note 23 to the Marathon Group Financial Statements),
partly offset by a reduction in trade receivables from lower
year-end commodity prices.
CURRENT LIABILITIES increased $120 million from year-end
1996, primarily due to an increase in long-term debt due within
one year.
NET PROPERTY, PLANT AND EQUIPMENT increased by $268 million
from year-end 1996, primarily reflecting property additions in
excess of DD&A and dry well write-offs. Net property, plant and
equipment for each of the last three years is summarized in the
following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
---------------------------------------------------------------------------
<S> <C> <C> <C>
Exploration and production
United States $ 3,452 $ 3,172 $ 3,220
International 2,165 2,197 2,419
Refining 751 758 766
Marketing 834 802 753
Transportation 271 285 276
Other 93 84 87
------- ------- -------
Total $ 7,566 $ 7,298 $ 7,521
---------------------------------------------------------------------------
</TABLE>
TOTAL LONG-TERM DEBT AND NOTES PAYABLE at December 31, 1997
was $3.0 billion, essentially unchanged from year-end 1996,
mainly reflecting that cash required for Marathon's expanded
capital and investment expenditure program and for dividend
payments was substantially provided by cash from operating
activities, trust withdrawals and asset disposals. Virtually all
of the debt is a direct obligation of, or is guaranteed by, USX.
Net cash provided from operating activities totaled $1,246
million in 1997, compared with $1,503 million in 1996 and $1,044
million in 1995. Cash provided from operating activities in 1997
included the impact of terminating Marathon's participation in an
accounts receivable sales program, resulting in a cash outflow of
$340 million. Operating cash flow in 1996 included payments of
$39 million related to certain state tax issues, while 1995
included payments of $96 million
M-27
<PAGE>
Management's Discussion and Analysis CONTINUED
representing the Marathon Group's share of the amortized discount
on USX's zero coupon debentures. Excluding the effects of these
items, net cash from operating activities increased by $44
million in 1997 from 1996 and by $402 million in 1996 from 1995.
The increase in 1997 mainly reflected improved net income
(excluding the IMV reserve adjustment and other noncash items),
partially offset by increased income tax payments. The increase
in 1996 was primarily due to favorable working capital changes
and improved net income (excluding the IMV reserve adjustment and
other noncash items).
CAPITAL EXPENDITURES for each of the last three years are
summarized in the following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Exploration and production ("Upstream")
United States $ 647 $ 424 $ 322
International 163 80 141
------- ------- -------
Total exploration and production 810 504 463
Refining, marketing and transportation ("Downstream") 216 222 169
Other 12 25 10
------- ------- -------
Total $ 1,038 $ 751 $ 642
------------------------------------------------------------------------------------------------
</TABLE>
During 1997, domestic upstream capital spending mainly
included development of Gulf of Mexico properties, including
Viosca Knoll 786 (Petronius), Green Canyon 244 (Troika), Ewing
Bank 963 (Arnold) and Ewing Bank 917 (Oyster). International
upstream spending included development of the West Brae field in
the U.K. North Sea and projects in Egypt and offshore Gabon.
Downstream spending in 1997 mainly consisted of upgrading and
expanding Emro Marketing Company's network of retail outlets, and
refinery modification projects. Contract commitments for capital
expenditures at year-end 1997 were $268 million, compared with
$388 million at year-end 1996.
Capital expenditures in 1998 are expected to increase to
approximately $1.3 billion, with the increase from 1997 levels
mainly due to the inclusion of 100% of the capital requirements
for MAP, which commenced operations on January 1, 1998. Domestic
upstream projects planned for 1998 include continuing development
of Petronius and Green Canyon 112/113 (Stellaria) in the Gulf of
Mexico, while international upstream projects include development
of the Tchatamba South field, offshore Gabon. Downstream spending
by MAP will primarily consist of upgrades and expansions of
retail marketing outlets and refinery modifications.
INVESTMENTS IN EQUITY AFFILIATES of $233 million in 1997
mainly reflected funding of equity affiliates' capital projects,
primarily the Sakhalin II project in the Russian Far East Region
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. ("Sakhalin Energy"), bringing 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.
In 1998, investments in equity affiliates are expected to be
approximately $150 million, primarily reflecting additional
funding of Sakhalin Energy's spending on the Sakhalin II project
and funding of power generation projects. Although project
expenditures for the Sakhalin II project remain high, third-party
financing arranged by Sakhalin Energy is expected to reduce the
need for direct investment by Marathon in 1998.
The above statements with respect to future capital
expenditures and investments are forward-looking statements,
reflecting management's best estimates, based on information
currently available. To the extent this information proves to be
inaccurate, the timing and levels of future spending could differ
materially from those included in the forward-looking statements.
Factors that could cause future capital expenditures and
investments to differ materially from present expectations
include industry supply and demand factors, general economic
conditions, levels of cash flow from operations, available
business opportunities, unforeseen hazards such as weather
conditions, and/or by delays in obtaining government or partner
approval. In addition, levels of investments may be affected by
the ability of equity affiliates to obtain third-party financing.
Cash from disposal of assets was $60 million in 1997,
compared with $282 million in 1996 and $77 million in 1995.
Proceeds in 1997 were mainly 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 primarily reflected the sales of interests in
certain domestic and international oil
M-28
<PAGE>
Management's Discussion and Analysis CONTINUED
and gas production properties and the sale of an equity interest
in a domestic pipeline company. Proceeds in 1995 were mainly from
the sales of certain domestic oil and gas production properties.
WITHDRAWAL FROM PROPERTY EXCHANGE TRUSTS of $98 million in
1997 mainly represented cash withdrawn from an interest-bearing
escrow account that was established in 1996 in connection with
the disposal of oil production properties in Alaska.
FINANCIAL OBLIGATIONS increased $58 million in 1997 as net
cash provided from operating activities, trust withdrawals and
asset sales was slightly exceeded by 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 both groups, as well as debt specifically
attributed to the Marathon Group. For discussion of USX financing
activities attributed to both groups, see Management's Discussion
and Analysis of USX Consolidated Financial Condition, Cash Flows
and Liquidity.
DIVIDENDS PAID in 1997 increased by $18 million from 1996,
mainly due to a two-cents-per-share increase in the quarterly
USX - Marathon Group Common Stock dividend rate, initially
declared in October 1996.
In January 1998, the USX Board of Directors declared a
fourth quarter dividend on the USX - Marathon Group Common Stock
of 21 cents per share, an increase of two cents per share over
the previous quarterly dividend. Total dividends paid on the USX
Marathon Group Common Stock in the first quarter of 1998 will
increase by approximately $6 million as a result of this
increase.
DERIVATIVE INSTRUMENTS
See Quantitative and Qualitative Disclosures About Market
Risk for a discussion of derivative instruments and associated
market risk.
LIQUIDITY
For discussion of USX's liquidity and capital resources, see
Management's Discussion and Analysis of USX Consolidated
Financial Condition, Cash Flows and Liquidity.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF ENVIRONMENTAL MATTERS, LITIGATION AND
CONTINGENCIES
The Marathon Group has incurred and will continue to incur
substantial capital, operating and maintenance, and remediation
expenditures as a result of environmental laws and regulations.
To the extent these expenditures, as with all costs, are not
ultimately reflected in the prices of the Marathon Group's
products and services, operating results will be adversely
affected. The Marathon Group believes that substantially all of
its competitors are subject to similar environmental laws and
regulations. However, the specific impact on each competitor may
vary depending on a number of factors, including the age and
location of its operating facilities, marketing areas, production
processes and whether or not it is engaged in the petrochemical
or power business or the marine transportation of crude oil and
refined products.
Marathon Group environmental expenditures for each of the
last three years were/(a)/:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C>
Capital $ 81 $ 66 $ 50
Compliance
Operating & maintenance 84 75 102
Remediation/(b)/ 19 26 37
------ ------ ------
Total $ 184 $ 167 $ 189
----------------------------------------------------------------------
</TABLE>
/(a)/ Amounts are based on American Petroleum Institute survey
guidelines.
/(b)/ These amounts do not include noncash provisions recorded
for environmental remediation, but include spending charged
against such reserves, net of recoveries, where
permissible.
The Marathon Group's environmental capital expenditures
accounted for 8% of total capital expenditures in 1997 and 1995
and 9% in 1996.
During 1995 through 1997, compliance expenditures
represented 1% of the Marathon Group's total operating costs.
Remediation spending during this period was primarily related to
retail
M-29
<PAGE>
Management's Discussion and Analysis CONTINUED
marketing outlets which incur ongoing clean-up costs for soil and
groundwater contamination associated with underground storage
tanks and piping.
USX has been notified that it is a potentially responsible
party ("PRP") at 20 waste sites related to the Marathon Group
under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") as of December 31, 1997. In addition,
there are 11 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 71 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. See Note 27 to the Marathon Group Financial
Statements.
Effective January 1, 1997, USX adopted the American
Institute of Certified Public Accountants Statement of Position
No. 96-1 - "Environmental Remediation Liabilities" - which
requires that companies include direct costs in accruals for
remediation liabilities. Income from operations in 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
3 to the Marathon Group Financial Statements for additional
discussion.
New or expanded environmental requirements, which could
increase the Marathon Group's environmental costs, may arise in
the future. USX intends to comply with all legal requirements
regarding the environment, but since many of them are not fixed
or presently determinable (even under existing legislation) and
may be affected by future legislation, it is not possible to
predict accurately the ultimate cost of compliance, including
remediation costs which may be incurred and penalties which may
be imposed. However, based on presently available information,
and existing laws and regulations as currently implemented, the
Marathon Group does not anticipate that environmental compliance
expenditures (including operating and maintenance and
remediation) will materially increase in 1998. The Marathon
Group's capital expenditures for environmental controls are
expected to be approximately $100 million in 1998. Predictions
beyond 1998 can only be broad-based estimates which have varied,
and will continue to vary, due to the ongoing evolution of
specific regulatory requirements, the possible imposition of more
stringent requirements and the availability of new technologies,
among other matters. Based upon currently identified projects,
the Marathon Group anticipates that environmental capital
expenditures will be approximately $70 million in 1999; however,
actual expenditures may vary as the number and scope of
environmental projects are revised as a result of improved
technology or changes in regulatory requirements and could
increase if additional projects are identified or additional
requirements are imposed.
USX is the subject of, or party to, a number of pending or
threatened legal actions, contingencies and commitments relating
to the Marathon Group involving a variety of matters, including
laws and regulations relating to the environment, certain of
which are discussed in Note 27 to the Marathon Group Financial
Statements. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the Marathon
Group financial statements. However, management believes that USX
will remain a viable and competitive enterprise even though it is
possible that these contingencies could be resolved unfavorably
to the Marathon Group. See Management's Discussion and Analysis
of USX Consolidated Financial Condition, Cash Flows and
Liquidity.
M-30
<PAGE>
Management's Discussion and Analysis CONTINUED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
The Marathon Group's income from operations and average
volumes and selling prices for each of the last three years were
as follows:
INCOME FROM OPERATIONS/(a)/
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Exploration and production (Upstream)
Domestic $ 500 $ 530 $ 306
International 273 374 178
------- ------- ------
Total exploration and production 773 904 484
Refining, marketing and transportation (Downstream) 563 239 274
Other energy related businesses/(b)/ 48 77 60
Administrative/(c)/ (168) (133) (82)
------- ------- ------
1,216 1,087 736
Impairment of long-lived assets/(d)/ - - (659)
IMV reserve adjustment (284) 209 70
------- ------- ------
Total $ 932 $ 1,296 $ 147
-------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Consists of operating income, dividend and affiliate
income, net gains on disposal of investments and other
income. Amounts for 1996 and 1995 were reclassified in 1997
to include dividend and affiliate income and other income,
and to conform to other 1997 classifications. See Note 9 to
the Consolidated Financial Statements for a discussion of
operating income.
/(b)/ Includes marketing and transportation of domestic natural
gas and crude oil, and power generation.
/(c)/ Includes the portion of the Marathon Group's administrative
costs not allocated to the operating components and the
portion of USX corporate general and administrative costs
allocated to the Marathon Group.
/(d)/ Reflects adoption of SFAS No. 121, effective October 1,
1995. Consists of $(343) million related to Domestic
upstream, $(190) million related to International upstream,
and $(126) million related to Downstream.
AVERAGE VOLUMES AND SELLING PRICES
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(thousands of barrels per day)
Net liquids production/(a)/ - U.S. 115 122 132
- International/(b)/ 49 59 73
------- ------- -------
- Worldwide 164 181 205
(millions of cubic feet per day)
Net natural gas production - U.S. 722 676 634
- International - equity 423 499 463
- International - other/(c)/ 32 32 35
------- ------- -------
- Total Consolidated 1,177 1,207 1,132
- Equity affiliate 42 45 44
------- ------- -------
- Worldwide 1,219 1,252 1,176
------------------------------------------------------------------------------------------------------
(dollars per barrel)
Liquid hydrocarbons/(a)(d)/ - U.S. $ 16.88 $ 18.58 $ 14.59
- International 18.77 20.34 16.66
(dollars per mcf)
Natural gas/(d)/ - U.S. $ 2.20 $ 2.09 $ 1.63
- International - equity 2.00 1.97 1.80
------------------------------------------------------------------------------------------------------
(thousands of barrels per day)
Refined products sold 775 775 747
Matching buy/sell volumes included in above 51 71 47
------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Includes crude oil, condensate and natural gas liquids.
/(b)/ Represents equity tanker liftings, truck deliveries and
direct deliveries.
/(c)/ Represents gas acquired for injection and subsequent
resale.
/(d)/ Prices exclude gains/losses from hedging activities.
M-31
<PAGE>
Management's Discussion and Analysis CONTINUED
DOMESTIC UPSTREAM income from operations decreased by $30
million in 1997 from 1996 following an increase of $224 million
in 1996 from 1995. The decrease in 1997 was primarily due to
lower liquid hydrocarbon prices and production and higher
exploration expense, partially offset by increased natural gas
production and prices. In addition, results in 1996 included net
losses of $38 million on production hedging activities (see
Quantitative and Qualitative Disclosures About Market Risk for
the Marathon Group for additional details). The lower liquid
hydrocarbon volumes were mostly due to the fourth quarter 1996
disposal of oil producing properties in Alaska, while the
increase in natural gas volumes was mainly attributable to
properties in east Texas, Oklahoma and Wyoming.
The increase in 1996 from 1995 was primarily due to higher
average liquid hydrocarbon and natural gas prices, reduced DD&A
expense resulting, in part, from the fourth quarter 1995 adoption
of SFAS No. 121, and increased natural gas volumes, partially
offset by lower liquid hydrocarbon volumes, net losses on hedging
activities, higher exploration expense and an unfavorable
production tax adjustment for prior years.
INTERNATIONAL UPSTREAM income from operations decreased by
$101 million in 1997 following an increase of $196 million in
1996. The decrease in 1997 was mainly due to lower liquid
hydrocarbon liftings, lower natural gas volumes and lower liquid
hydrocarbon prices. These items were partially offset by reduced
pipeline and terminal expenses and reduced DD&A expenses, due
largely to the lower volumes. The lower liquid hydrocarbon
liftings primarily reflected lower production in the U.K. North
Sea, while the lower natural gas volumes were mainly due to
natural field declines in Ireland and Norway.
The increase in 1996 from 1995 primarily reflected higher
average liquid hydrocarbon and natural gas prices, reduced DD&A
expense resulting, mainly, from property sales and the adoption
of SFAS No. 121, lower exploration expense and increased natural
gas volumes, partially offset by lower liquid hydrocarbon
liftings. Income from operations in 1996 also included a gain on
the sale of certain production properties in the U.K. North Sea.
DOWNSTREAM income from operations increased by $324 million
in 1997 following a decrease of $35 million in 1996. The increase
in 1997 was predominantly due to an improvement in refined
product margins as favorable effects of reduced crude oil and
other feedstock costs more than offset a decrease in refined
product sales prices.
The decrease in 1996 from 1995 was mainly due to lower
refined product margins as increases in wholesale and retail
prices were unable to keep up with the increased costs of
acquiring crude oil and other feedstocks. In addition, 1996
results included a $10 million charge for the withdrawal from the
MPA, a non-profit oil response group, while 1995 results included
a $15 million favorable noncash adjustment for expected
environmental remediation recoveries.
OTHER ENERGY RELATED BUSINESSES income from operations
decreased by $29 million in 1997 following an increase of $17
million in 1996. The decrease in 1997 and the increase in 1996
were mainly due to a 1996 gain on the sale of an equity interest
in a domestic pipeline company.
In the fourth quarter of 1997, the Marathon Group began
reporting "Other energy related businesses" as an operating
category. This category includes income from operations of
Carnegie Natural Gas Company (formerly reported as "Gas Gathering
and Processing"), Marathon Power Company, Ltd. and certain
activities that were excluded from MAP (such as Marathon's
natural gas and crude oil marketing operations and interests in
various pipeline companies).
ADMINISTRATIVE expenses increased by $35 million in 1997
following an increase of $51 million in 1996 from 1995. The
increase in 1997 mainly reflected higher accruals for stock
appreciation rights and increased accruals for other employee
benefit and compensation plans, including Marathon's performance-
based variable pay plan. The increase in 1996 from 1995 primarily
resulted from a change in the methodology for distributing costs
of certain administrative services to other operating components.
M-32
<PAGE>
Management's Discussion and Analysis CONTINUED
OUTLOOK
The outlook regarding the Marathon Group's sales levels,
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.
With respect to Marathon's upstream operations, worldwide
liquid hydrocarbon volumes are expected to increase by twenty-
five percent in 1998, with most of the increase anticipated in
the second half of the year. This primarily reflects projected
new production from fields in the Gulf of Mexico (such as Green
Canyon 244 and Ewing Bank Blocks 963 and 917), the Tchatamba
Marine field in Gabon and the West Brae field in the U.K. North
Sea, partially offset by natural production declines of mature
fields. Marathon's worldwide natural gas volumes in 1998 are
expected to remain consistent with 1997 volumes at around 1.2
billion cubic feet per day, as natural declines in mature
international fields, primarily in Ireland and Norway, are
anticipated to be offset by increases in domestic production
(mainly in the Austin Chalk area in Texas, Green Canyon 244 and
the Vermillion Basin in Wyoming). These projections are based on
known discoveries and do not include any additions from
acquisitions or future exploratory drilling.
Other major upstream projects, which are currently underway
or under evaluation and are expected to improve future income
streams, include Viosca Knoll Block 786 and Green Canyon Blocks
112 and 113 in the Gulf of Mexico, the Tchatamba South field,
located offshore Gabon, and the Sakhalin II project in Russia
(discussed below).
The Marathon Group holds a 37.5% interest in Sakhalin
Energy, an incorporated joint venture company responsible for the
overall management of the Sakhalin II project. This project
includes development of the Piltun-Astokhskoye ("P-A") oil field
and the Lunskoye gas field located offshore Sakhalin Island in
the Russian Far East Region. During 1997, authorized
representatives of the Russian Government approved the
Development Plan for the P-A License Area, Phase 1: Astokh
Feature. Appraisal work for the remainder of the P-A field was
also authorized. The P-A full field development plan is scheduled
to be completed and submitted to the Russian Government by June
1999. First production of oil from the Astokh Feature, which will
be developed using an arctic-class drilling vessel called the
Molikpaq, remains on target for the summer of 1999. Late in 1997,
the Sakhalin Energy consortium arranged for a limited recourse
project financing facility of $348 million with a group of
international financial institutions. Subject to various
conditions, initial borrowings by Sakhalin Energy under this
facility are anticipated in 1998 to partially fund Phase 1
expenditure requirements.
Looking at downstream operations, Marathon and Ashland Inc.
officially formed MAP, which commenced operations on January 1,
1998. Major elements of both firms' refining, marketing and
transportation operations were combined, with Marathon having a
62% ownership interest in MAP and Ashland holding a 38% interest.
MAP has seven refineries with a combined capacity of 935,000
barrels per day ("bpd"), 84 light products and asphalt terminals
in the Midwest and Southeast United States, about 5,400 retail
marketing outlets in 20 states and significant pipeline holdings.
Potential efficiencies derived by MAP have been broadly estimated
to be in excess of $200 million annually on a pretax basis. While
a modest part of these efficiencies will be achieved in mid- to
late 1998, full realization of efficiencies should occur over the
next few years as MAP's integration plans are implemented. In
conjunction with the formation of MAP, the Marathon Group is
expected to recognize an estimated $250 million one-time, pretax
change in interest gain in the first quarter of 1998. For
additional details of the agreements and the one-time financial
gain, see Note 28 to the Marathon Group Financial Statements.
MAP's refined product sales volumes for 1998 are expected to
increase slightly from 1997 levels of Marathon's and Ashland's
separate downstream operations, which were a combined volume of
approximately 1.2 million bpd. A major maintenance shutdown
("turnaround") was completed at the Garyville (La.) refinery in
early 1998, and major turnarounds are planned for the Canton
(Ohio) refinery in the fourth quarter of 1998, the Catlettsburg
(Ky.) refinery in the first quarter of 1999 and the Detroit
(Mich.) refinery in the fourth quarter of 1999. Each turnaround
is expected to last about one month.
M-33
<PAGE>
Management's Discussion and Analysis CONTINUED
The above forward-looking statements of projects, expected
production and sales levels, and dates of initial production are
based on a number of assumptions, including (among others)
prices, supply and demand, regulatory constraints, reserve
estimates, production decline rates for mature fields, reserve
replacement rates, 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/or negotiations, legal
developments and other considerations are not satisfactorily
resolved, actual results could be materially different than
present expectations.
The above discussion also contains forward-looking
statements with respect to the amount and timing of efficiencies
to be realized by MAP. Some factors that could potentially cause
actual results to differ materially from present expectations
include unanticipated costs to implement shared technology,
difficulties in integrating corporate structures, delays in
leveraging volume procurement advantages or delays in personnel
rationalization.
YEAR 2000
The Marathon Group continues to identify, analyze, modify
and/or replace non-compliant systems, equipment and other devices
that utilize date/time-oriented software or computer chips.
Marathon has contacted all of its vendors from which systems have
been purchased and has requested that appropriate corrections be
provided by mid-1998. Modifications to internally developed
systems are being handled in-house. In addition, during 1997,
Marathon began including Year 2000 provisions in a variety of its
contracts. In management's opinion, the incremental costs
associated with these efforts will not be material to the
operating results of the Marathon Group.
This 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.
ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board
issued two new accounting standards: Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
requires that companies report all recognized changes in assets
and liabilities that are not the result of transactions with
owners, including those that are not reported in net income. USX
plans to adopt the standard, effective with its 1998 financial
statements, as required.
Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" introduces a "management approach" for identifying
reportable industry segments of an enterprise. USX plans to adopt
the standard, effective with its 1998 financial statements, as
required.
M-34
<PAGE>
The Marathon Group
Quantitative and Qualitative Disclosures About Market Risk
MANAGEMENT OPINION CONCERNING DERIVATIVE INSTRUMENTS
USX employs a strategic approach of limiting its use of
derivative instruments principally to hedging activities, whereby
gains and losses are generally offset by price changes in the
underlying commodity. Based on this approach, combined with risk
assessment procedures and internal controls, management believes
that its use of derivative instruments does not expose the Marathon
Group to material risk. The Marathon Group's use of derivative
instruments for hedging activities could materially affect the
Marathon Group's results of operations in particular quarterly or
annual periods. This is primarily because use of such instruments
may limit the company's ability to benefit from favorable price
movements. However, management believes that use of these
instruments will not have a material adverse effect on financial
position or liquidity. For a summary of accounting policies related
to derivative instruments, see Note 2 to the Marathon Group
Financial Statements.
COMMODITY PRICE RISK AND RELATED RISKS
In the normal course of its business, the Marathon Group is
exposed to market risk, or price fluctuations related to the
purchase, production or sale of crude oil, natural gas and refined
products. To a lesser extent, the Marathon Group is exposed to the
risk of price fluctuations on natural gas liquids, electricity, and
petroleum feedstocks used as raw materials. The Marathon Group is
also exposed to effects of price fluctuations on the value of its
commodity inventories.
The Marathon Group's market risk strategy has generally been to
obtain competitive prices for its products and services and allow
operating results to reflect market price movements dictated by
supply and demand. However, the Marathon Group uses fixed-price
contracts and derivative commodity instruments to manage a
relatively small portion of its commodity price risk. The Marathon
Group uses fixed-price contracts to manage market risk exposure
related to the sale of portions of its natural gas production. In
addition, the Marathon Group uses derivative commodity instruments
such as exchange-traded futures contracts and options, and over-
the-counter ("OTC") commodity swaps and options to manage exposure
related to the purchase, production or sale of crude oil, natural
gas, refined products and electricity. The Marathon Group's
strategic approach is to limit the use of these instruments
principally to hedging activities. Accordingly, gains and losses on
derivative commodity instruments are generally offset by the
effects of price changes in the underlying commodity. However,
certain derivative commodity instruments have the effect of
restoring the equity portion of fixed-price sales of natural gas to
variable market-based prices. These instruments are used as part of
Marathon's overall risk management programs.
M-35
<PAGE>
Quantitative and Qualitative Disclosures
About Market Risk CONTINUED
Sensitivity analyses of the incremental effects on pretax income
of hypothetical 10% and 25% changes in commodity prices for open
derivative commodity instruments for the Marathon Group as of
December 31, 1997, are provided in the following table:/(a)/
<TABLE>
<CAPTION>
(Dollars in millions)
--------------------------------------------------------------------------------
INCREMENTAL DECREASE IN
PRETAX INCOME ASSUMING A
HYPOTHETICAL PRICE CHANGE OF/(a)/
Derivative Commodity Instruments 10% 25%
--------------------------------------------------------------------------------
<S> <C> <C>
Crude oil (price increase)/(b)/ $2.7 $ 8.6
Natural gas (price decrease)/(b)/ 2.9 7.1
Refined products (price decrease)/(b)/ .4 1.1
---- -----
Total $6.0 $16.8
--------------------------------------------------------------------------------
</TABLE>
/(a)/ Gains and losses on derivative commodity instruments are
generally offset by price changes in the underlying
commodity. Effects of these offsets are not reflected in the
sensitivity analyses. Amounts reflect the estimated
incremental effect on pretax income of hypothetical 10% and
25% changes in closing commodity prices for each open
contract position at December 31, 1997. The Marathon Group
evaluates its portfolio of derivative commodity instruments
on an ongoing basis and adds or revises strategies to reflect
anticipated market conditions and changes in risk profiles.
Changes to the size or composition of the portfolio
subsequent to December 31, 1997, would cause future pretax
income effects to differ from those presented in the table.
The number of net open contracts varied throughout 1997, from
a low of 637 contracts at December 31, to a high of 9,307
contracts at June 11, and averaged 5,400 for the year. The
derivative commodity instruments used and hedging positions
taken also varied throughout 1997, and will continue to vary
in the future. Because of these variations in the composition
of the portfolio over time, the number of open contracts, by
itself, cannot be used to predict future income effects.
During 1998, the size of the portfolio is expected to
increase above average 1997 levels as a result of increased
volumes for Marathon Ashland Petroleum LLC, on a basis
consistent with guidelines established in previously existing
downstream hedging programs.
The calculation of sensitivity amounts for basis swaps
assumes that the physical and paper indices are perfectly
correlated. Gains and losses on options are based on the
difference between the strike price and the underlying
commodity price.
/(b)/ The direction of the price change used in calculating the
sensitivity amount for each commodity reflects that which
would result in the largest incremental decrease in pretax
income when applied to the derivative commodity instruments
used to hedge that commodity.
While derivative commodity instruments are generally used to
reduce risks from unfavorable commodity price movements, they also
may limit the opportunity to benefit from favorable movements.
During the fourth quarter of 1996, certain hedging strategies
matured which limited the Marathon Group's ability to benefit from
favorable market price increases on the sales of equity crude oil
and natural gas production, resulting in pretax hedging losses of
$33 million. In total, Marathon's upstream operations recorded
pretax hedging losses of $3 million in 1997, compared with net
losses of $38 million in 1996, and net gains of $10 million in
1995.
Marathon's downstream operations generally use derivative
commodity instruments to lock-in costs of certain raw material
purchases, to protect carrying values of inventories and to protect
margins on fixed-price sales of refined products. In total,
downstream operations recorded net pretax hedging gains of $29
million in 1997, compared with net losses of $22 million in 1996
and $4 million in 1995. Essentially, all of these upstream and
downstream gains and losses were offset by changes in the prices of
the underlying hedged commodities, with the net effect
approximating the targeted results of the hedging strategies. For
additional information relating to derivative commodity
instruments, including aggregate contract values, and fair values,
where appropriate, see Note 25 to the Marathon Group Financial
Statements.
The Marathon Group is subject to basis risk, caused by
factors that affect the relationship between commodity futures
prices reflected in derivative commodity instruments and the cash
market price of the underlying commodity. Natural gas transaction
prices are frequently based on industry reference prices that may
vary from prices experienced in local markets. For example, New
York Mercantile Exchange ("NYMEX") contracts for natural gas are
priced at Louisiana's Henry Hub, while the underlying quantities of
natural gas may be produced and sold in the Western United States
at prices that do not move in strict correlation with NYMEX prices.
To the extent that commodity price changes
M-36
<PAGE>
Quantitative and Qualitative Disclosures
About Market Risk CONTINUED
in one region are not reflected in other regions, derivative
commodity instruments may no longer provide the expected hedge,
resulting in increased exposure to basis risk. These regional price
differences could yield favorable or unfavorable results. OTC
transactions are being used to manage exposure to most of the basis
risk.
The Marathon Group is subject to liquidity risk, caused by
timing delays in liquidating contract positions due to a potential
inability to identify a counterparty willing to accept an
offsetting position. Due to the large number of active
participants, exposure to liquidity risk is relatively low for
exchange-traded transactions.
INTEREST RATE RISK
USX is subject to the effects of interest rate fluctuations on
certain of its non-derivative financial instruments. A sensitivity
analysis of the projected incremental effect of a hypothetical 10%
decrease in year-end 1997 interest rates on the fair value of the
Marathon Group's specifically attributed non-derivative financial
instruments and the Marathon Group's portion of USX's non-
derivative financial instruments attributed to all groups, is
provided in the following table:
<TABLE>
<CAPTION>
(Dollars in millions)
---------------------------------------------------------------------------------------------------------
Incremental
Increase in
Carrying Fair Fair
Non-Derivative Financial Instruments/(a)/ Value /(b)/ Value /(b)/ Value /(c)/
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial assets:
Investments and long-term receivables/(d)/ $ 86 $ 143 $ --
---------------------------------------------------------------------------------------------------------
Financial liabilities:
Long-term debt (including amounts due within one year)/(e)/ $2,869 $3,198 $ 106
Preferred stock of subsidiary/(f)/ 184 187 18
----- ----- -------
Total $3,053 $3,385 $ 124
---------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Fair values of cash and cash equivalents, receivables, notes
payable, accounts payable and accrued interest, approximate
carrying value and are relatively insensitive to changes in
interest rates due to the short-term maturity of the
instruments. Accordingly, these instruments are excluded from
the table.
/(b)/ At December 31, 1997. For further discussion, see Note 26 to
the Marathon Group Financial Statements.
/(c)/ Reflects, by class of financial instrument, the estimated
incremental effect of a hypothetical 10% decrease in interest
rates at December 31, 1997, on the fair value of non-
derivative financial instruments. For financial liabilities
this assumes a 10% decrease in the weighted average yield to
maturity of USX's long-term debt at December 31, 1997.
/(d)/ For additional information, see Note 19 to the Marathon
Group Financial Statements.
/(e)/ Fair value was based on market prices where available, or
current borrowing rates for financings with similar terms
and maturities. For additional information, see Note 11 to
the Marathon Group Financial Statements.
/(f)/ In 1994, USX Capital LLC, a wholly owned subsidiary of USX,
sold 10,000,000 shares of 8-3/4% Cumulative Monthly Income
Preferred Shares. For further discussion, see Note 25 to
the Consolidated Financial Statements.
At December 31, 1997, USX's portfolio of long-term debt was
comprised primarily of fixed-rate instruments. Therefore, the fair
value of the portfolio is relatively sensitive to effects of
interest rate fluctuations. This sensitivity is illustrated by the
$106 million increase in the fair value of long-term debt assuming a
hypothetical 10% decrease in interest rates. However, USX's
sensitivity to interest rate declines and corresponding increases in
the fair value of its debt portfolio would unfavorably affect USX's
results and cash flows only to the extent that USX elected to
repurchase or otherwise retire all or a portion of its fixed-rate
debt portfolio at prices above carrying value.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Marathon Group is subject to the risk of price
fluctuations related to anticipated revenues and operating costs,
firm commitments for capital expenditures and existing assets or
liabilities denominated in currencies other than U.S. dollars. USX
has not generally used derivative instruments to manage this risk.
However, USX has made limited use of forward currency contracts to
manage exposure to certain currency price fluctuations. At December
31, 1997, a forward currency contract with a fair value of $10
million was outstanding. The Marathon Group's attributed portion of
the contract was $9 million. This contract hedges exposure to
currency price fluctuations relating to a Swiss franc debt
obligation with a fair value of $69 million at December 31, 1997.
The debt obligation and forward contract mature in 1998.
M-37
<PAGE>
Quantitative and Qualitative Disclosures
About Market Risk CONTINUED
EQUITY PRICE RISK
The Marathon Group holds investments in common stock and
warrants of certain third parties. The fair value of these
investments ($17 million at December 31, 1997) has not been
material.
SAFE HARBOR
The Marathon Group's quantitative and qualitative disclosures
about market risk include forward-looking statements as defined in
the Private Securities Litigation Reform Act of 1995. These
statements are accompanied by cautionary language identifying
important factors (particularly the underlying assumptions and
limitations disclosed in footnotes to the tables), though not
necessarily all such factors, that could cause future outcomes to
differ materially from those projected.
Forward-looking statements with respect to management's opinion
about risks associated with USX's use of derivative instruments,
and projected increases in the size of the Marathon Group's hedge
portfolio are based on certain assumptions with respect to market
prices and industry supply of and demand for crude oil, refined
products and certain raw materials. To the extent that these
assumptions prove to be inaccurate, future outcomes with respect to
the Marathon Group's hedging programs may differ materially from
those discussed in the forward-looking statements.
M-38
<PAGE>
EXHIBIT 99.3
- --------------------------
U. S. Steel Group
- --------------------------
Index to Financial Statements, Supplementary Data,
Management's Discussion and Analysis and Quantitative and
Qualitative Disclosures About Market Risk
Page
----
Management's Report........................................... S-1
Audited Financial Statements:
Report of Independent Accountants........................... S-1
Statement of Operations..................................... S-2
Balance Sheet............................................... S-3
Statement of Cash Flows..................................... S-4
Notes to Financial Statements............................... S-5
Selected Quarterly Financial Data............................. S-21
Principal Unconsolidated Affiliates........................... S-22
Supplementary Information..................................... S-22
Five-Year Operating Summary................................... S-23
Five-Year Financial Summary................................... S-24
Management's Discussion and Analysis.......................... S-25
Quantitative and Qualitative Disclosures About Market Risk.... S-36
<PAGE>
MANAGEMENT'S REPORT
The accompanying financial statements of the U. S. Steel Group
are the responsibility of and have been prepared by USX Corporation
(USX) in conformity with generally accepted accounting principles.
They necessarily include some amounts that are based on best
judgments and estimates. The U. S. Steel Group financial
information displayed in other sections of this report is
consistent with these financial statements.
USX seeks to assure the objectivity and integrity of its
financial records by careful selection of its managers, by
organizational arrangements that provide an appropriate division of
responsibility and by communications programs aimed at assuring
that its policies and methods are understood throughout the
organization.
USX has a comprehensive formalized system of internal accounting
controls designed to provide reasonable assurance that assets are
safeguarded and that financial records are reliable. Appropriate
management monitors the system for compliance, and the internal
auditors independently measure its effectiveness and recommend
possible improvements thereto. In addition, as part of their audit
of the financial statements, USX's independent accountants, who are
elected by the stockholders, review and test the internal
accounting controls selectively to establish a basis of reliance
thereon in determining the nature, extent and timing of audit tests
to be applied.
The Board of Directors pursues its oversight role in the area of
financial reporting and internal accounting control through its
Audit Committee. This Committee, composed solely of nonmanagement
directors, regularly meets (jointly and separately) with the
independent accountants, management and internal auditors to
monitor the proper discharge by each of its responsibilities
relative to internal accounting controls and the consolidated and
group financial statements.
<TABLE>
<S> <C> <C>
Thomas J. Usher Robert M. Hernandez Kenneth L. Matheny
Chairman, Board of Directors Vice Chairman Vice President
& Chief Executive Officer & Chief Financial Officer & Comptroller
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of USX Corporation:
In our opinion, the accompanying financial statements appearing
on pages S-2 through S-20 present fairly, in all material respects,
the financial position of the U. S. Steel Group at December 31,
1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles. These
financial statements are the responsibility of USX's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 5, page S-8, in 1995 USX adopted a new
accounting standard for the impairment of long-lived assets.
The U. S. Steel Group is a business unit of USX Corporation (as
described in Note 1, page S-5); accordingly, the financial
statements of the U. S. Steel Group should be read in connection
with the consolidated financial statements of USX Corporation.
Price Waterhouse LLP
600 Grant Street, Pittsburgh, Pennsylvania 15219-2794
February 10, 1998
S-1
<PAGE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Sales $6,814 $6,533 $6,456
Income from affiliates 69 66 80
Gain on disposal of assets 57 16 21
Gain on affiliate stock offering (Note 6) -- 53 --
Other income 1 2 --
------ ------ ------
Total revenues 6,941 6,670 6,557
------ ------ ------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 5,762 5,829 5,565
Selling, general and administrative expenses (credits) (Note 13) (137) (165) (134)
Depreciation, depletion and amortization 303 292 318
Taxes other than income taxes 240 231 210
Impairment of long-lived assets (Note 5) -- -- 16
------ ------ ------
Total costs and expenses 6,168 6,187 5,975
------ ------ ------
INCOME FROM OPERATIONS 773 483 582
Net interest and other financial costs (Note 8) 87 116 129
------ ------ ------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 686 367 453
Provision for estimated income taxes (Note 15) 234 92 150
------ ------ ------
INCOME BEFORE EXTRAORDINARY LOSS 452 275 303
Extraordinary loss (Note 7) -- 2 2
------ ------ ------
NET INCOME 452 273 301
Noncash credit from exchange of preferred stock (Note 21) 10 -- --
Dividends on preferred stock (13) (22) (24)
------ ------ ------
NET INCOME APPLICABLE TO STEEL STOCK $ 449 $ 251 $ 277
------------------------------------------------------------------------------------------------------------
</TABLE>
INCOME PER COMMON SHARE APPLICABLE TO STEEL STOCK
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC:
Income before extraordinary loss $ 5.24 $ 3.00 $ 3.53
Extraordinary loss -- (.02) (.02)
------ ------ ------
Net income $ 5.24 $ 2.98 $ 3.51
DILUTED:
Income before extraordinary loss $ 4.88 $ 2.97 $ 3.43
Extraordinary loss -- (.02) (.02)
------ ------ ------
Net income $ 4.88 $ 2.95 $ 3.41
------------------------------------------------------------------------------------------------------------
</TABLE>
See Note 24, for a description and computation of income per common
share.
The accompanying notes are an integral part of these financial
statements.
S-2
<PAGE>
BALANCE SHEET
<TABLE>
<CAPTION>
(Dollars in millions) December 31 1997 1996
----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18 $ 23
Receivables, less allowance for doubtful accounts
of $13 and $23 (Note 19) 588 580
Inventories (Note 17) 705 648
Deferred income tax benefits (Note 15) 220 177
------ ------
Total current assets 1,531 1,428
Investments and long-term receivables,
less reserves of $15 and $17 (Note 16) 670 621
Property, plant and equipment - net (Note 20) 2,496 2,551
Long-term deferred income tax benefits (Note 15) 19 217
Prepaid pensions (Note 13) 1,957 1,734
Other noncurrent assets 21 29
------ ------
Total assets $6,694 $6,580
----------------------------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Notes payable $ 13 $ 18
Accounts payable 687 667
Payroll and benefits payable 379 365
Accrued taxes 190 154
Accrued interest 11 22
Long-term debt due within one year (Note 10) 54 73
------ ------
Total current liabilities 1,334 1,299
Long-term debt (Note 10) 456 1,014
Employee benefits (Note 14) 2,338 2,430
Deferred credits and other liabilities 536 207
Preferred stock of subsidiary (Note 9) 66 64
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely junior subordinated
convertible debentures of USX (Note 21) 182 --
STOCKHOLDERS' EQUITY (Note 22)
Preferred stock 3 7
Common stockholders' equity 1,779 1,559
------ ------
Total stockholders' equity 1,782 1,566
------ ------
Total liabilities and stockholders' equity $6,694 $6,580
----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
S-3
<PAGE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $ 452 $ 273 $ 301
Adjustments to reconcile to net cash provided from operating activities:
Extraordinary loss -- 2 2
Depreciation, depletion and amortization 303 292 318
Pensions (222) (185) (323)
Postretirement benefits other than pensions (127) 21 --
Deferred income taxes 193 150 133
Gain on disposal of assets (57) (16) (21)
Gain on affiliate stock offering -- (53) --
Payment of amortized discount on zero coupon debentures (3) -- (28)
Impairment of long-lived assets -- -- 16
Changes in: Current receivables (24) (10) 107
Inventories (57) (47) (14)
Current accounts payable and accrued expenses 61 (193) 160
All other - net (49) (148) (64)
----- ----- -----
Net cash provided from operating activities 470 86 587
----- ----- -----
INVESTING ACTIVITIES:
Capital expenditures (261) (337) (324)
Disposal of assets 420 161 67
Investments in equity affiliates - net (16) 11 4
All other - net (3) 26 1
----- ----- -----
Net cash provided from (used in) investing activities 140 (139) (252)
----- ----- -----
FINANCING ACTIVITIES (Note 4):
Decrease in U. S. Steel Group's portion of USX consolidated debt (561) (31) (399)
Specifically attributed debt:
Borrowings -- 113 --
Repayments (6) (5) (4)
Preferred stock redeemed -- -- (25)
Steel Stock issued 48 51 218
Dividends paid (96) (104) (93)
----- ----- -----
Net cash provided from (used in) financing activities (615) 24 (303)
----- ----- -----
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5) (29) 32
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 23 52 20
----- ----- -----
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 18 $ 23 $ 52
---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Note 11, for supplemental cash flow information.
The accompanying notes are an integral part of these financial
statements.
S-4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
After the redemption of the USX - Delhi Group stock on January 26,
1998, USX Corporation (USX) has two classes of common stock: USX -
U.S. Steel Group Common Stock (Steel Stock) and USX - Marathon
Group Common Stock (Marathon Stock), which are intended to reflect
the performance of the U. S. Steel Group and the Marathon Group,
respectively.
The financial statements of the U. S. Steel Group include the
financial position, results of operations and cash flows for all
businesses of USX other than the businesses, assets and liabilities
included in the Marathon Group, and a portion of the corporate
assets and liabilities and related transactions which are not
separately identified with ongoing operating units of USX. The U.
S. Steel Group, which consists primarily of steel operations,
includes the largest domestic integrated steel producer and is
primarily engaged in the production and sale of steel mill
products, coke and taconite pellets. The U. S. Steel Group also
includes the management of mineral resources, domestic coal mining,
and engineering and consulting services. Other businesses that are
part of the U. S. Steel Group include real estate development and
management and leasing and financing activities. The U. S. Steel
Group financial statements are prepared using the amounts included
in the USX consolidated financial statements.
Although the financial statements of the U. S. Steel Group and
the Marathon 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 and the Marathon Group for the
purpose of preparing their respective financial statements does not
affect legal title to such assets or responsibility for such
liabilities. Holders of Steel Stock and Marathon 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 the other Group. In addition,
net losses of either 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 both
classes of Common Stock. Accordingly, the USX consolidated
financial information should be read in connection with the U. S.
Steel Group financial information.
________________________________________________________________________________
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
PRINCIPLES APPLIED IN CONSOLIDATION - These financial statements
include the accounts of the U. S. Steel Group. The U. S. Steel
Group and the Marathon Group financial statements, taken together,
comprise all of the accounts included in the USX consolidated
financial statements.
Investments in entities over which the U. S. Steel Group has
significant influence are accounted for using the equity method of
accounting and are carried at the U. S. Steel Group's share of net
assets plus advances. The proportionate share of income from these
equity method investments is included in revenues.
Investments in companies whose stock has no readily determinable
fair value are carried at cost. Dividends from these investments
are recognized in revenues.
Gains or losses from a change in ownership interest of an
unconsolidated affiliate are recognized in revenues in the period
of change.
USE OF ESTIMATES - Generally accepted accounting principles require
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at year-end and the reported
amounts of revenues and expenses during the year.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash
on hand and on deposit and highly liquid debt instruments with
maturities generally of three months or less.
INVENTORIES - Inventories are carried at lower of cost or market.
Cost of inventories is determined primarily under the last-in,
first-out (LIFO) method.
DERIVATIVE INSTRUMENTS - The U. S. Steel Group engages in commodity
risk management activities within the normal course of its business
as an end-user of derivative instruments (Note 26). Management is
authorized to manage exposure to price fluctuations related to the
purchase of natural gas and nonferrous metals through the use of a
variety of derivative financial and nonfinancial
S-5
<PAGE>
instruments. Derivative financial instruments require settlement in
cash and include such instruments as over-the-counter (OTC)
commodity swap agreements and OTC commodity options. Derivative
nonfinancial instruments require or permit settlement by delivery
of commodities and include exchange-traded commodity futures
contracts and options. At times, derivative positions are closed,
prior to maturity, simultaneous with the underlying physical
transaction and the effects are recognized in income accordingly.
The U. S. Steel Group's practice does not permit derivative
positions to remain open if the underlying physical market risk has
been removed. Changes in the market value of derivative instruments
are deferred, including both closed and open positions, and are
subsequently recognized in income as cost of sales in the same
period as the underlying transaction. Premiums on all commodity-
based option contracts are initially recorded based on the amount
paid or received; the options' market value is subsequently
recorded as a receivable or payable, as appropriate. The margin
receivable accounts required for open commodity contracts reflect
changes in the market prices of the underlying commodity and are
settled on a daily basis.
Forward currency contracts are used to manage currency risks
related to USX attributed debt denominated in a foreign currency.
Gains or losses related to firm commitments are deferred and
included with the underlying transaction; all other gains or losses
are recognized in income in the current period as interest income
or expense, as appropriate. Net contract values are included in
receivables or payables, as appropriate.
Recorded deferred gains or losses are reflected within other
noncurrent assets or deferred credits and other liabilities. Cash
flows from the use of derivative instruments are reported in the
same category as the hedged item in the statement of cash flows.
LONG-LIVED ASSETS - Depreciation is generally computed using a
modified straight-line method based upon estimated lives of assets
and production levels. The modification factors range from a
minimum of 85% at a production level below 81% of capability, to a
maximum of 105% for a 100% production level. No modification is
made at the 95% production level, considered the normal long-range
level.
Depletion of mineral properties is based on rates which are
expected to amortize cost over the estimated tonnage of minerals to
be removed.
When an entire plant, major facility or facilities depreciated
on an individual basis are sold or otherwise disposed of, any gain
or loss is reflected in income. Proceeds from disposal of other
facilities depreciated on a group basis are credited to the
depreciation reserve with no immediate effect on income.
The U. S. Steel Group evaluates impairment of its long-lived
assets on an individual asset basis or by logical groupings of
assets. Assets deemed to be impaired are written down to their fair
value, including any related goodwill, using discounted future cash
flows and, if available, comparable market values.
ENVIRONMENTAL REMEDIATION - The U. S. Steel Group provides for
remediation costs and penalties when the responsibility to
remediate is probable and the amount of associated costs is
reasonably determinable. Generally, the timing of remediation
accruals coincides with completion of a feasibility study or the
commitment to a formal plan of action. Remediation liabilities are
accrued based on estimates of known environmental exposure and
could be discounted in certain instances.
POSTEMPLOYMENT BENEFITS - The U. S. Steel Group recognizes an
obligation to provide postemployment benefits, primarily for
disability-related claims covering indemnity and medical payments.
The obligation for these claims and the related periodic costs are
measured using actuarial techniques and assumptions, including an
appropriate discount rate, analogous to the required methodology
for measuring pension and other postretirement benefit obligations.
Actuarial gains and losses are deferred and amortized over future
periods.
INSURANCE - The U. S. Steel Group is insured for catastrophic
casualty and certain property and business interruption exposures,
as well as those risks required to be insured by law or contract.
Costs resulting from noninsured losses are charged against income
upon occurrence.
RECLASSIFICATIONS - Certain reclassifications of prior years'
data have been made to conform to 1997 classifications.
________________________________________________________________________________
3. NEW ACCOUNTING STANDARDS
The following accounting standards were adopted by USX during
1997:
Environmental remediation liabilities 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, 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
S-6
<PAGE>
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 net unfavorable effect of adoption on the
U. S. Steel Group's income from operations at January 1, 1997,
was $20 million.
Earnings per share - USX adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No.
128). This Statement establishes standards for computing and
presenting earnings per share (EPS). SFAS No. 128 requires dual
presentation of basic and diluted EPS. Basic EPS excludes
dilution and is computed by dividing net income available to
common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if stock options or
convertible securities were exercised or converted into common
stock. The adoption of SFAS No. 128 did not materially change
current and prior years' EPS of the U. S. Steel Group.
________________________________________________________________________________
4. CORPORATE ACTIVITIES
FINANCIAL ACTIVITIES - As a matter of policy, USX manages most
financial activities on a centralized, consolidated basis. Such
financial activities include the investment of surplus cash; the
issuance, repayment and repurchase of short-term and long-term
debt; the issuance, repurchase and redemption of preferred stock;
and the issuance and repurchase of common stock. Transactions
related primarily to invested cash, short-term and long-term debt
(including convertible debt), related net interest and other
financial costs, and preferred stock and related dividends are
attributed to the U. S. Steel Group, the Marathon Group and, prior
to November 1, 1997, the Delhi Group based upon the cash flows of
each group for the periods presented and the initial capital
structure of each group. Most financing transactions are attributed
to and reflected in the financial statements of the groups. See
Note 9, for the U. S. Steel Group's portion of USX's financial
activities attributed to the groups. However, transactions such as
leases, certain collateralized financings, certain indexed debt
instruments, financial activities of consolidated entities which
are less than wholly owned by USX and transactions related to
securities convertible solely into any one class of common stock
are or will be specifically attributed to and reflected in their
entirety in the financial statements of the group to which they
relate.
CORPORATE GENERAL AND ADMINISTRATIVE COSTS - Corporate general and
administrative costs are allocated to the U. S. Steel Group, the
Marathon Group and, prior to November 1, 1997, the Delhi Group
based upon utilization or other methods management believes to be
reasonable and which consider certain measures of business
activities, such as employment, investments and sales. The costs
allocated to the U. S. Steel Group were $31 million in 1997, $29
million in 1996 and $30 million in 1995, and primarily consist of
employment costs including pension effects, professional services,
facilities and other related costs associated with corporate
activities.
INCOME TAXES - All members of the USX affiliated group are included
in the consolidated United States federal income tax return filed
by USX. Accordingly, the provision for federal income taxes and the
related payments or refunds of tax are determined on a consolidated
basis. The consolidated provision and the related tax payments or
refunds have been reflected in the U. S. Steel Group, the Marathon
Group and, prior to November 1, 1997, the Delhi Group financial
statements in accordance with USX's tax allocation policy. In
general, such policy provides that the consolidated tax provision
and related tax payments or refunds are allocated among the U. S.
Steel Group, Marathon Group and, prior to November 1, 1997, the
Delhi Group, for group financial statement purposes, based
principally upon the financial income, taxable income, credits,
preferences and other amounts directly related to the respective
groups.
For tax provision and settlement purposes, tax benefits
resulting from attributes (principally net operating losses and
various tax credits), which cannot be utilized by one of the groups
on a separate return basis but which can be utilized on a
consolidated basis in that year or in a carryback year, are
allocated to the group that generated the attributes. To the extent
that one of the groups is allocated a consolidated tax attribute
which, as a result of expiration or otherwise, is not ultimately
utilized on the consolidated tax return, the prior years'
allocation of such attribute is adjusted such that the effect of
the expiration is borne by the group that generated the attribute.
Also, if a tax attribute cannot be utilized on a consolidated basis
in the year generated or in a carryback year, the prior years'
allocation of such consolidated tax effects is adjusted in a
subsequent year to the extent necessary to allocate the tax
benefits to the group that would have realized the tax benefits on
a separate return basis. As a result, the allocated group amounts
of taxes payable or refundable are not necessarily comparable to
those that would have resulted if the groups had filed separate tax
returns.
S-7
<PAGE>
________________________________________________________________________________
5. IMPAIRMENT OF LONG-LIVED ASSETS
In 1995, USX adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of " (SFAS No. 121). SFAS No.
121 requires that long-lived assets, including related goodwill, be
reviewed for impairment and written down to fair value whenever
events or changes in circumstances indicate that the carrying value
may not be recoverable. The impaired assets included certain iron
ore mineral rights and surplus real estate holdings. The
predominant method used to determine fair value was comparable
market value analysis. The impairment charge recognized in 1995
costs and expenses for these assets was $16 million.
________________________________________________________________________________
6. GAIN ON AFFILIATE STOCK OFFERING
In 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 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.
________________________________________________________________________________
7. EXTRAORDINARY LOSS
On December 30, 1996, USX irrevocably called for redemption on
January 30, 1997, $120 million of debt, resulting in a 1996
extraordinary loss to the U. S. Steel Group of $2 million, net of a
$1 million income tax benefit. In 1995, USX extinguished $553
million of debt prior to maturity, which resulted in an
extraordinary loss to the U. S. Steel Group of $2 million, net of a
$1 million income tax benefit.
________________________________________________________________________________
8. NET INTEREST AND OTHER FINANCIAL COSTS
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
---------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST AND OTHER FINANCIAL INCOME/(a)/ -
Interest income $ 4 $ 4 $ 8
----- ----- -----
INTEREST AND OTHER FINANCIAL COSTS/(a)/:
Interest incurred 57 85 98
Less interest capitalized 7 8 5
----- ----- -----
Net interest 50 77 93
Interest on tax issues 13 10 11
Financial costs on trust preferred securities 10 -- --
Financial costs on preferred stock of subsidiary 5 5 5
Amortization of discounts 2 2 6
Expenses on sales of accounts receivable (Note 19) 21 20 22
Adjustment to settlement value of indexed debt (10) 6 --
----- ----- -----
Total 91 120 137
----- ----- -----
NET INTEREST AND OTHER FINANCIAL COSTS/(a)/ $ 87 $ 116 $ 129
---------------------------------------------------------------------------
</TABLE>
/(a)/See Note 4, for discussion of USX net interest and other
financial costs attributable to the U. S. Steel Group.
S-8
<PAGE>
- --------------------------------------------------------------------------------
9. FINANCIAL ACTIVITIES ATTRIBUTED TO GROUPS
The following is the portion of USX financial activities attributed
to the U. S. Steel Group. These amounts exclude debt amounts
specifically attributed to the U. S. Steel Group.
<TABLE>
<CAPTION>
U. S. Steel Group Consolidated USX/(a)/
--------------------------------- ------------------------
(In millions) December 31 1997 1996 1997 1996
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1 $ 2 $ 6 $ 8
Receivables/(b)/ 1 - 10 -
Long-term receivables/(b)/ - 3 - 16
Other noncurrent assets/(b)/ 1 2 8 8
----- ----- ------ -------
Total assets $ 3 $ 7 $ 24 $ 32
--------------------------------------------------------------------------------------------------------------
Notes payable $ 13 $ 18 $ 121 $ 80
Accounts payable - - 1 2
Accrued interest 10 22 89 98
Long-term debt due within one year (Note 10) 50 69 466 309
Long-term debt (Note 10) 252 794 2,704 3,615
Preferred stock of subsidiary 66 64 250 250
----- ----- ------ -------
Total liabilities $ 391 $ 967 $3,631 $4,354
--------------------------------------------------------------------------------------------------------------
<CAPTION>
U. S. Steel Group/(c)/ Consolidated USX/(a)/
--------------------------------- ------------------------
(In millions) 1997 1996 1995 1997 1996 1995
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest and other financial costs (Note 8) $ 46 $ 81 $ 98 $ 309 $ 376 $ 439
--------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ For details of USX long-term debt and preferred stock of
subsidiary, see Notes 16 and 25, respectively, to the USX
consolidated financial statements.
/(b)/ Primarily reflects forward currency contracts used to
manage currency risks related to USX debt and interest
denominated in a foreign currency.
/(c)/ The U. S. Steel Group's net interest and other financial
costs reflect weighted average effects of all financial
activities attributed to all groups.
- --------------------------------------------------------------------------------
10. LONG-TERM DEBT
The U. S. Steel Group's portion of USX's consolidated long-term
debt is as follows:
<TABLE>
<CAPTION>
U. S. Steel Group Consolidated USX/(a)/
--------------------------------- ----------------------
(In millions) December 31 1997 1996 1997 1996
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Specifically attributed debt/(b)/:
Sale-leaseback financing and capital leases $ 99 $ 105 $ 123 $ 129
Indexed debt less unamortized discount 110 119 110 119
Seller-provided financing - - - 40
----- ------- ------- --------
Total 209 224 233 288
Less amount due within one year 5 4 5 44
----- ------- ------- --------
Total specifically attributed long-term debt $ 204 $ 220 $ 228 $ 244
------------------------------------------------------------------------------------------------------------
Debt attributed to groups/(c)/ $ 305 $ 869 $3,194 $3,949
Less unamortized discount 3 6 24 25
Less amount due within one year 50 69 466 309
----- ------- ------- --------
Total long-term debt attributed to groups $ 252 $ 794 $2,704 $3,615
------------------------------------------------------------------------------------------------------------
Total long-term debt due within one year $ 55 $ 73 $ 471 $ 353
Total long-term debt due after one year 456 1,014 2,932 3,859
------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ See Note 16, to the USX consolidated financial statements
for details of interest rates, maturities and other terms of
long-term debt.
/(b)/ As described in Note 4, certain financial activities are
specifically attributed only to the U. S. Steel Group and the
Marathon Group.
/(c)/ Most long-term debt activities of USX Corporation and its
wholly owned subsidiaries are attributed to all groups (in
total, but not with respect to specific debt issues) based on
their respective cash flows (Notes 4, 9 and 11).
S-9
<PAGE>
- --------------------------------------------------------------------------------
11. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH USED IN OPERATING ACTIVITIES INCLUDED:
Interest and other financial costs paid (net of amount capitalized) $ (99) $ (129) $ (159)
Income taxes paid, including settlements
with other groups (48) (53) (4)
-------------------------------------------------------------------------------------------------------------------
USX DEBT ATTRIBUTED TO ALL GROUPS - NET:
Commercial paper:
Issued $ - $ 1,422 $ 2,434
Repayments - (1,555) (2,651)
Credit agreements:
Borrowings 10,454 10,356 4,719
Repayments (10,449) (10,340) (4,659)
Other credit arrangements - net 36 (36) 40
Other debt:
Borrowings 10 78 52
Repayments (741) (705) (440)
-------- -------- -------
Total $ (690) $ (780) $ (505)
-------------------------------------------------------------------------------------------------------------------
U. S. Steel Group activity $ (561) $ (31) $ (399)
Marathon Group activity 97 (769) (204)
Delhi Group activity (226) 20 98
-------- -------- -------
Total $ (690) $ (780) $ (505)
-------------------------------------------------------------------------------------------------------------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Steel Stock issued for Dividend Reinvestment Plan and
employee stock plans $ 5 $ 4 $ 16
Disposal of assets-notes received - 12 4
Trust preferred securities exchanged for preferred stock 182 - -
-------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
12. INTERGROUP TRANSACTIONS
SALES AND PURCHASES - U. S. Steel Group sales to the Marathon
Group in 1997 totaled $2 million. U. S. Steel Group purchases from
the Marathon Group totaled $29 million, $21 million and $17 million
in 1997, 1996 and 1995, respectively. At December 31, 1997 and
1996, U. S. Steel Group accounts payable included $3 million
related to transactions with the Marathon Group. These transactions
were conducted on an arm's-length basis.
INCOME TAXES RECEIVABLE FROM/PAYABLE TO OTHER GROUPS - At
December 31, 1997 and 1996, amounts receivable from/payable to
other groups for income taxes were included in the balance sheet as
follows:
<TABLE>
<CAPTION>
(In millions) December 31 1997 1996
--------------------------------------------------------------------------------
<S> <C> <C>
Current:
Receivables $ 22 $ 30
Accounts payable 2 1
Noncurrent:
Investments and long-term receivables 97 84
--------------------------------------------------------------------------------
</TABLE>
These amounts have been determined in accordance with the tax
allocation policy described in Note 4. Amounts classified as
current are settled in cash in the year succeeding that in which
such amounts are accrued. Noncurrent amounts represent estimates of
intergroup tax effects of certain issues for years that are still
under various stages of audit and administrative review. Such tax
effects are not settled among the groups until the audit of those
respective tax years is closed. The amounts ultimately settled for
open tax years will be different than recorded noncurrent amounts
based on the final resolution of all of the audit issues for those
years.
S-10
<PAGE>
- --------------------------------------------------------------------------------
13. PENSIONS
The U. S. Steel Group has noncontributory defined benefit plans
covering substantially all employees. Benefits under these plans
are based upon years of service and final average pensionable
earnings, or a minimum benefit based upon years of service,
whichever is greater. In addition, pension benefits under the
contributory benefit provisions cover certain participating
salaried employees and are based upon a percent of total career
pensionable earnings. The funding policy for defined benefit plans
provides that payments to the pension trusts shall be equal to the
minimum funding requirements of ERISA plus such additional amounts
as may be approved. Certain of these plans provide benefits to USX
corporate employees, and the related costs or credits for such
employees are allocated to all groups (Note 4).
The U. S. Steel Group also participates in multiemployer plans,
most of which are defined benefit plans associated with coal
operations.
PENSION COST (CREDIT) The defined benefit cost for major plans for
1997, 1996 and 1995 was determined assuming an expected long-term
rate of return on plan assets of 9.5%, 10% and 10%, respectively.
The total pension credit is primarily included in selling, general
and administrative expenses.
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Major plans:
Cost of benefits earned during the period $ 65 $ 69 $ 57
Interest cost on projected benefit obligation
(7.5% for 1997; 7% for 1996; and 8% for 1995) 517 523 563
Return on assets - actual return (1,755) (1,136) (1,842)
- deferred gain 1,012 367 1,084
Net amortization of unrecognized losses 6 10 4
------- ------- ------------
Total major plans (155) (167) (134)
Multiemployer and other plans 2 2 2
------- ------- ------------
Total periodic pension credit (153) (165) (132)
Settlement and termination costs 4 6 -
------- ------- ------------
Total pension credit $ (149) $ (159) $ (132)
----------------------------------------------------------------------------------------------------------
</TABLE>
FUNDS' STATUS - The assumed discount rate used to measure the
benefit obligations of major plans was 7% at December 31, 1997, and
7.5% at December 31, 1996. The assumed rate of future increases in
compensation levels was 4% at both year-ends. The following table
sets forth the plans' funded status and the amounts reported in the
U. S. Steel Group's balance sheet:
<TABLE>
<CAPTION>
(In millions) December 31 1997 1996
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of funds' status to reported amounts:
Projected benefit obligation (PBO)/(a)/ $(7,314) $(7,258)
Plan assets at fair market value/(b)/ 9,775 8,860
------- ------------
Assets in excess of PBO/(c)/ 2,461 1,602
Unrecognized net gain from transition (209) (253)
Unrecognized prior service cost 583 631
Unrecognized net gain (878) (244)
Additional minimum liability/(d)/ (65) (65)
------- ------------
Net pension asset included in balance sheet $ 1,892 $ 1,671
------------------------------------------------------------------------------------------------------------
/(a)/ PBO includes:
Accumulated benefit obligation (ABO) $(6,928) $(6,884)
Vested benefit obligation (6,535) (6,477)
/(b)/ Types of assets held:
USX stocks - 1%
Stocks of other corporations 55% 54%
U.S. Government securities 17% 19%
Corporate debt instruments and other 28% 26%
/(c)/ Includes several small plans that have ABOs in excess of
plan assets:
PBO $ (69) $ (67)
Plan assets - -
------- ------------
PBO in excess of plan assets $ (69) $ (67)
/(d)/ Additional minimum liability recorded was offset by the following:
Intangible asset $ 27 $ 39
Stockholders' equity adjustment - net of deferred income tax 25 17
------------------------------------------------------------------------------------------------------------
</TABLE>
S-11
<PAGE>
- --------------------------------------------------------------------------------
14. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The U. S. Steel Group has defined benefit retiree health and life
insurance plans covering most employees upon their retirement.
Health benefits are provided, for the most part, through
comprehensive hospital, surgical and major medical benefit
provisions subject to various cost sharing features. Life insurance
benefits are provided to nonunion retiree beneficiaries primarily
based on employees' annual base salary at retirement. These plans
provide benefits to USX corporate employees, and the related costs
for such employees are allocated to all groups (Note 4). For union
retirees, benefits are provided for the most part based on fixed
amounts negotiated in labor contracts with the appropriate unions.
Except for certain life insurance benefits paid from reserves held
by insurance carriers, most benefits have not been prefunded.
POSTRETIREMENT BENEFIT COST - Postretirement benefit cost for
defined benefit plans for 1997, 1996 and 1995 was determined
assuming discount rates of 7.5%, 7% and 8%, respectively, and an
expected return on plan assets of 9.5% for 1997 and 10% for 1996
and 1995:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost of benefits earned during the period $ 15 $ 18 $ 19
Interest on accumulated postretirement benefit obligation (APBO) 153 160 176
Return on assets - actual return (19) (12) (11)
- deferred gain (loss) 8 1 (1)
Amortization of unrecognized (gains) losses (9) 5 2
----- ----- -----------
Total defined benefit plans 148 172 185
Multiemployer plans/(a)/ 15 15 15
----- ----- -----------
Total postretirement benefit cost $ 163 $ 187 $ 200
----------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Payments are made to a multiemployer benefit plan created by
the Coal Industry Retiree Health Benefit Act of 1992 based on
assigned beneficiaries receiving benefits. The present value
of this unrecognized obligation is broadly estimated to be
$108 million, including the effects of future medical
inflation, and this amount could increase if additional
beneficiaries are assigned.
FUNDS' STATUS - The following table sets forth the plans' funded
status and the amounts reported in the U. S. Steel Group's balance
sheet:
<TABLE>
<CAPTION>
(In millions) December 31 1997 1996
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of funds' status to reported amounts:
Fair value of plan assets $ 258 $ 111
------ ------------
Less APBO attributable to:
Retirees 1,576 1,622
Fully eligible plan participants 199 180
Other active plan participants 295 309
------ ------------
Total APBO 2,070 2,111
------ ------------
APBO in excess of plan assets 1,812 2,000
Unrecognized net gain 327 264
Unrecognized prior service cost (11) (15)
------ ------------
Accrued liability included in balance sheet $2,128 $2,249
------------------------------------------------------------------------------------------------------------
</TABLE>
The assumed discount rate used to measure the APBO was 7% and
7.5% at December 31, 1997, and December 31, 1996, respectively. The
assumed rate of future increases in compensation levels was 4% at
both year-ends. The weighted average health care cost trend rate in
1998 is approximately 8%, declining to an ultimate rate in 2004 of
approximately 5%. A one percentage point increase in the assumed
health care cost trend rates for each future year would have
increased the aggregate of the service and interest cost components
of the 1997 net periodic postretirement benefit cost by $17 million
and would have increased the APBO as of December 31, 1997, by $186
million.
S-12
<PAGE>
15. INCOME TAXES
Income tax provisions and related assets and liabilities
attributed to the U. S. Steel Group are determined in accordance
with the USX group tax allocation policy (Note 4).
Provisions (credits) for estimated income taxes were:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- ---------------------------- -----------------------------
(In millions) Current Deferred Total Current Deferred Total Current Deferred Total
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal $ 37 $ 168 $ 205 $ (51) $ 138 $ 87 $ 8 $ 150 $ 158
State and local 4 25 29 - 12 12 9 (17) (8)
Foreign - - - (7) - (7) - - -
------ ------ ------ ------ ------ ------ ------ ----- ------
Total $ 41 $ 193 $ 234 $ (58) $ 150 $ 92 $ 17 $ 133 $ 150
--------------------------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of federal statutory tax rate (35%) to total provisions
follows:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate applied to income before income taxes $ 240 $ 129 $ 159
Credits other than foreign tax credits (15) (40) -
State and local income taxes after federal income tax effects 19 8 (5)
Excess percentage depletion (10) (7) (8)
Effects of partially-owned companies (3) (6) (8)
Effects of foreign operations, including foreign tax
credits (3) (2) 1
Nondeductible business expenses 2 2 7
Adjustment of prior years' income taxes 6 9 3
Adjustment of valuation allowances (1) - 2
Other (1) (1) (1)
------ ------ -------
Total provisions $ 234 $ 92 $ 150
------------------------------------------------------------------------------------------------------------
</TABLE>
Deferred tax assets and liabilities resulted from the following:
<TABLE>
<CAPTION>
(In millions) December 31 1997 1996
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Minimum tax credit carryforwards $ 180 $ 320
General business credit carryforwards - 24
State tax loss carryforwards (expiring in 1998 through 2012) 75 101
Employee benefits 832 865
Receivables, payables and debt 59 77
Contingency and other accruals 50 50
Other 62 97
Valuation allowances (52) (71)
-------- --------
Total deferred tax assets/(a)/ 1,206 1,463
-------- --------
Deferred tax liabilities:
Property, plant and equipment 221 342
Prepaid pensions 657 600
Inventory 13 13
Federal effect of state deferred tax assets 6 15
Other 106 106
-------- --------
Total deferred tax liabilities 1,003 1,076
-------- --------
Net deferred tax assets $ 203 $ 387
-------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ USX expects to generate sufficient future taxable income to
realize the benefit of the U. S. Steel Group's deferred tax
assets.
The consolidated tax returns of USX for the years 1990
through 1994 are under various stages of audit and administrative
review by the IRS. USX believes it has made adequate provision for
income taxes and interest which may become payable for years not
yet settled.
S-13
<PAGE>
- --------------------------------------------------------------------------------
16. INVESTMENTS AND LONG-TERM RECEIVABLES
<TABLE>
<CAPTION>
(In millions) December 31 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C>
Equity method investments $ 472 $ 412
Other investments 56 63
Receivables due after one year 22 30
Income tax receivable from other groups (Note 12) 97 84
Forward currency contracts - 3
Other 23 29
------ ------
Total $ 670 $ 621
-----------------------------------------------------------------------------------------------
</TABLE>
Summarized financial information of affiliates accounted for by
the equity method of accounting follows:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income data - year:
Revenues $ 3,143 $ 2,868 $ 3,268
Operating income 228 223 259
Net income 139 140 161
-----------------------------------------------------------------------------------------------
Balance sheet data - December 31:
Current assets $ 924 $ 779
Noncurrent assets 2,006 1,574
Current liabilities 627 583
Noncurrent liabilities 800 845
-----------------------------------------------------------------------------------------------
</TABLE>
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. The related unamortized
deferred gains of $244 million at December 31, 1997 (included in
deferred credits and other liabilities) are being recognized over
the life of the partnership's assets. The U. S. Steel Group's
partnership interest is accounted for under the equity method of
accounting. The fair value attributed to the U. S. Steel Group for
its general partnership interest exceeds the historical basis of
contributed net assets by $38 million and is being amortized on a
straight-line basis over the life of the partnership.
Dividends and partnership distributions received from
equity affiliates were $13 million in 1997, $25 million in 1996 and
$67 million in 1995.
U. S. Steel Group purchases of transportation services
and semi-finished steel from equity affiliates totaled $424
million, $460 million and $406 million in 1997, 1996 and 1995,
respectively. At December 31, 1997 and 1996, U. S. Steel Group
payables to these affiliates totaled $21 million and $23 million,
respectively. U. S. Steel Group sales of steel and raw materials to
equity affiliates totaled $802 million, $824 million and $768
million in 1997, 1996 and 1995, respectively. At December 31, 1997
and 1996, U. S. Steel Group receivables from these affiliates were
$149 million. Generally, these transactions were conducted under
long-term, market-based contractual arrangements.
- --------------------------------------------------------------------------------
17. INVENTORIES
<TABLE>
<CAPTION>
(In millions) December 31 1997 1996
------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 130 $ 124
Semi-finished products 331 309
Finished products 187 162
Supplies and sundry items 57 53
------- -------
Total $ 705 $ 648
------------------------------------------------------------------------
</TABLE>
At December 31, 1997, and December 31, 1996,
respectively, the LIFO method accounted for 93% and 92% of total
inventory value. Current acquisition costs were estimated to exceed
the above inventory values at December 31 by approximately $300
million and $340 million in 1997 and 1996, respectively.
S-14
<PAGE>
- --------------------------------------------------------------------------------
18. LEASES
Future minimum commitments for capital leases (including sale-
leasebacks accounted for as financings) and for operating leases
having remaining noncancelable lease terms in excess of one year
are as follows:
<TABLE>
<CAPTION>
Capital Operating
(In millions) Leases Leases
----------------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 11 $ 120
1999 11 110
2000 11 95
2001 11 113
2002 11 46
Later years 115 99
Sublease rentals - (1)
--------- ---------
Total minimum lease payments 170 $ 582
=========
Less imputed interest costs 72
---------
Present value of net minimum lease payments
included in long-term debt $ 98
----------------------------------------------------------------------------------------
</TABLE>
Operating lease rental expense:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rental $ 135 $ 131 $ 121
Contingent rental 6 5 9
Sublease rentals (1) (2) (3)
------- ------- -------
Net rental expense $ 140 $ 134 $ 127
--------------------------------------------------------------------------------------
</TABLE>
The U. S. Steel Group leases a wide variety of facilities
and equipment under operating leases, including land and building
space, office equipment, production facilities and transportation
equipment. Most long-term leases include renewal options and, in
certain leases, purchase options. In the event of a change in
control of USX, as defined in the agreements, or certain other
circumstances, lease obligations totaling $20 million may be
declared immediately due and payable.
- --------------------------------------------------------------------------------
19. SALES OF RECEIVABLES
The U. S. Steel Group participates in an agreement (the program)
to sell an undivided interest in certain accounts receivable.
Payments are collected from the sold accounts receivable; the
collections are reinvested in new accounts receivable for the
buyers; and a yield, based on defined short-term market rates, is
transferred to the buyers. At December 31, 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
in 1998, or in the event of earlier contract termination. If the U.
S. Steel Group does not have a sufficient quantity of eligible
accounts receivable to reinvest in for the buyers, the size of the
program will be reduced accordingly. The amount sold under the
program averaged $350 million in 1997, 1996 and 1995. The buyers
have rights to a pool of receivables that must be maintained at a
level of at least 115% of the program size. The U. S. Steel Group
does not generally require collateral for accounts receivable, but
significantly reduces credit risk through credit extension and
collection policies, which include analyzing the financial
condition of potential customers, establishing credit limits,
monitoring payments and aggressively pursuing delinquent accounts.
In the event of a change in control of USX, as defined in the
agreement, the U. S. Steel Group may be required to forward
payments collected on sold accounts receivable to the buyers.
S-15
<PAGE>
- --------------------------------------------------------------------------------
20. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
(In millions) December 31 1997 1996
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Land and depletable property $ 161 $ 155
Buildings 477 471
Machinery and equipment 7,548 7,605
Leased assets 109 116
-------- --------
Total 8,295 8,347
Less accumulated depreciation, depletion and amortization 5,799 5,796
-------- --------
Net $ 2,496 $ 2,551
--------------------------------------------------------------------------------------------------
</TABLE>
Amounts in accumulated depreciation, depletion and
amortization for assets acquired under capital leases (including
sale-leasebacks accounted for as financings) were $70 million and
$67 million at December 31, 1997, and December 31, 1996,
respectively.
- --------------------------------------------------------------------------------
21. USX OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF A
SUBSIDIARY TRUST
In 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 net
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 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. In addition, USX unconditionally guarantees the
Trust's Debentures. The obligations of USX under the Debentures,
and the related indenture, trust agreement and guarantee constitute
a full and unconditional guarantee by USX of the Trust's
obligations under the Trust Preferred Securities.
S-16
<PAGE>
- --------------------------------------------------------------------------------
22. STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In millions, except per share data) 1997 1996 1995
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK:
Balance at beginning of year $ 7 $ 7 $ 32
Exchanged for trust preferred securities (4) - -
Redeemed - - (25)
------- ------- -------
Balance at end of year $ 3 $ 7 $ 7
------------------------------------------------------------------------------------------------------
COMMON STOCKHOLDERS' EQUITY (Note 4):
Balance at beginning of year $ 1,559 $ 1,337 $ 913
Net income 452 273 301
6.50% preferred stock exchanged for
trust preferred securities (Note 21) (188) - -
Steel Stock issued 53 55 234
Dividends on preferred stock (13) (22) (24)
Dividends on Steel Stock (per share $1.00) (86) (85) (80)
Deferred compensation adjustments - 1 (2)
Minimum pension liability adjustments (Note 13) (8) - (6)
Other 10 - 1
------- ------- -------
Balance at end of year $ 1,779 $ 1,559 $ 1,337
------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 1,782 $ 1,566 $ 1,344
------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
23. DIVIDENDS
In accordance with the USX Certificate of Incorporation,
dividends on the Steel Stock and Marathon Stock are limited to
the legally available funds of USX. Net losses of either 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 both classes of
Common Stock. Subject to this limitation, the Board of Directors
intends to declare and pay dividends on the Steel Stock based on
the financial condition and results of operations of the U. S.
Steel Group, although it has no obligation under Delaware law to
do so. In making its dividend decisions with respect to Steel
Stock, the Board of Directors considers, among other things, the
long-term earnings and cash flow capabilities of the U. S. Steel
Group as well as the dividend policies of similar publicly traded
steel companies.
Dividends on the Steel Stock are further limited to the
Available Steel Dividend Amount. At December 31, 1997, the
Available Steel Dividend Amount was at least $3,028 million. The
Available Steel Dividend Amount will be increased or decreased,
as appropriate, to reflect U. S. Steel Group net income,
dividends, repurchases or issuances with respect to the Steel
Stock and preferred stock attributed to the U. S. Steel Group and
certain other items.
S-17
<PAGE>
- --------------------------------------------------------------------------------
24. INCOME PER COMMON SHARE
The method of calculating net income per share for the Steel
Stock, the Marathon Stock and, prior to November 1, 1997, the
Delhi Stock reflects the USX Board of Directors' intent that the
separately reported earnings and surplus of the U. S. Steel
Group, the Marathon Group and the Delhi Group, as determined
consistent with the USX Certificate of Incorporation, are
available for payment of dividends to the respective classes of
stock, although legally available funds and liquidation
preferences of these classes of stock do not necessarily
correspond with these amounts.
Basic 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.
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.
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED
----- -------- ----- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
COMPUTATION OF INCOME PER SHARE
-------------------------------
Net income (millions):
Income before extraordinary loss $ 452 $ 452 $ 275 $ 275 $ 303 $ 303
Dividends on preferred stock (13) - (22) (22) (24) (24)
Noncash credit from exchange of preferred stock 10 - - - - -
Extraordinary loss - - (2) (2) (2) (2)
-------- -------- -------- -------- -------- --------
Net income applicable to Steel Stock 449 452 251 251 277 277
Effect of dilutive securities:
Trust preferred securities - 6 - - - -
Preferred stock - - - - - 22
Convertible debentures - 2 - 3 - 6
-------- -------- -------- -------- -------- --------
Net income assuming conversions $ 449 $ 460 $ 251 $ 254 $ 277 $ 305
======== ======== ======== ======== ======== ========
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 85,672 85,672 84,025 84,025 79,064 79,064
Effect of dilutive securities:
Trust preferred securities - 2,660 - - - -
Preferred stock - 4,811 - - - 7,480
Convertible debentures - 1,025 - 1,925 - 2,814
Stock options - 35 - 12 - 21
-------- -------- -------- -------- -------- --------
Average common shares and dilutive effect 85,672 94,203 84,025 85,962 79,064 89,379
======== ======== ======== ======== ======== ========
Per share:
Income before extraordinary loss $ 5.24 $ 4.88 $ 3.00 $ 2.97 $ 3.53 $ 3.43
Extraordinary loss - - (.02) (.02) (.02) (.02)
-------- -------- -------- -------- -------- --------
Net income $ 5.24 $ 4.88 $ 2.98 $ 2.95 $ 3.51 $ 3.41
======== ======== ======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
25. STOCK-BASED COMPENSATION PLANS AND STOCKHOLDER RIGHTS PLAN
USX Stock-Based Compensation Plans and Stockholder Rights Plan
are discussed in Note 21, and Note 23, respectively, to the USX
consolidated financial statements.
In 1996, USX adopted SFAS No. 123, Accounting for Stock-
Based Compensation and elected to continue to follow the
accounting provisions of APB No. 25, as discussed in Note 2, to
the USX consolidated financial statements. The U. S. Steel
Group's actual stock-based compensation expense was $8 million in
1997, $2 million in 1996 and $1 million in 1995. Incremental
compensation expense, as determined under SFAS No. 123, was not
material ($.02 or less per share for all years presented).
Therefore, pro forma net income and earnings per share data have
been omitted.
S-18
<PAGE>
- --------------------------------------------------------------------------------
26. DERIVATIVE INSTRUMENTS
The U. S. Steel Group uses derivative instruments, such
as commodity swaps, to manage exposure to price fluctuations
relevant to the cost of natural gas and nonferrous metals used in
steel operations.
USX has used forward currency contracts to hedge foreign
denominated debt, a portion of which has been attributed to the U.
S. Steel Group.
The U. S. Steel Group remains at risk for possible
changes in the market value of the derivative instrument; however,
such risk should be mitigated by price changes in the underlying
hedged item. The U. S. Steel Group is also exposed to credit risk
in the event of nonperformance by counterparties. The credit
worthiness of counterparties is subject to continuing review,
including the use of master netting agreements to the extent
practical, and full performance is anticipated.
The following table sets forth quantitative information
by class of derivative instrument:
<TABLE>
<CAPTION>
FAIR CARRYING RECORDED
VALUE AMOUNT DEFERRED AGGREGATE
ASSETS ASSETS GAIN OR CONTRACT
(In millions) (LIABILITIES)/(A)/ (LIABILITIES) (LOSS) VALUES/(B)/
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997:
OTC commodity swaps/(c)/ $ (1) $ (1) $ (1) $ 20
-------- -------- -------- --------
Forward currency contract/(d)/:
- receivable $ 1 $ 1 $ - $ 7
---------------------------------------------------------------------------------------------------------
December 31, 1996:
OTC commodity swaps $ 2 $ - $ - $ 17
-------- -------- -------- --------
Forward currency contract:
- receivable $ 4 $ 3 $ - $ 13
- payable - - - 2
-------- -------- -------- --------
Total currencies $ 4 $ 3 $ - $ 15
---------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ The fair value amounts are based on exchange-traded index
prices and dealer quotes.
/(b)/ Contract or notional amounts do not quantify risk exposure,
but are used in the calculation of cash settlements under
the contracts.
/(c)/ The OTC swap arrangements vary in duration with certain
contracts extending into 1999.
/(d)/ The forward currency contract matures in 1998.
- --------------------------------------------------------------------------------
27. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value of the financial instruments disclosed herein is not
necessarily representative of the amount that could be realized or
settled, nor does the fair value amount consider the tax
consequences of realization or settlement. The following table
summarizes financial instruments, excluding derivative financial
instruments disclosed in Note 26, by individual balance sheet
account. As described in Note 4, the U. S. Steel Group's
specifically attributed financial instruments and the U. S. Steel
Group's portion of USX's financial instruments attributed to all
groups are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- ----------------
FAIR CARRYING FAIR CARRYING
(In millions) December 31 VALUE AMOUNT VALUE AMOUNT
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 18 $ 18 $ 23 $ 23
Receivables 588 588 580 580
Investments and long-term receivables 131 131 132 132
------ ------ ------ --------
Total financial assets $ 737 $ 737 $ 735 $ 735
----------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Notes payable $ 13 $ 13 $ 18 $ 18
Accounts payable 687 687 667 667
Accrued interest 11 11 22 22
Long-term debt (including amounts due within one year) 448 412 1,037 982
Trust preferred securities and preferred
stock of subsidiary 248 248 65 64
------ ------ ------ --------
Total financial liabilities $1,407 $1,371 $1,809 $1,753
----------------------------------------------------------------------------------------------
</TABLE>
Fair value of financial instruments classified as current assets or
liabilities approximates carrying value due to the short-term
maturity of the instruments. Fair value of investments and long-
term receivables was based on discounted cash flows or other
specific instrument analysis. Fair value of trust preferred
securities and preferred stock of subsidiary was based on market
prices. Fair value of long-term debt instruments was based on
market prices where available or current borrowing rates available
for financings with similar terms and maturities.
S-19
<PAGE>
The U. S. Steel Group's unrecognized financial
instruments consist of receivables sold and financial guarantees.
It is not practicable to estimate the fair value of these forms of
financial instrument obligations because there are no quoted market
prices for transactions which are similar in nature. For details
relating to sales of receivables see Note 19, and for details
relating to financial guarantees see Note 28.
- --------------------------------------------------------------------------------
28. CONTINGENCIES AND COMMITMENTS
USX is the subject of, or party to, a number of pending or
threatened legal actions, contingencies and commitments relating to
the U. S. Steel Group involving a variety of matters, including
laws and regulations relating to the environment. Certain of these
matters are discussed below. The ultimate resolution of these
contingencies could, individually or in the aggregate, be material
to the U. S. Steel Group financial statements. However, management
believes that USX will remain a viable and competitive enterprise
even though it is possible that these contingencies could be
resolved unfavorably to the U. S. Steel Group.
ENVIRONMENTAL MATTERS -
The U. S. Steel Group is subject to federal, state, and
local laws and regulations relating to the environment. These laws
generally provide for control of pollutants released into the
environment and require responsible parties to undertake
remediation of hazardous waste disposal sites. Penalties may be
imposed for noncompliance. Accrued liabilities for remediation
totaled $106 million and $107 million at December 31, 1997, and
December 31, 1996, 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 1997
and 1996, such capital expenditures totaled $43 million and $90
million, respectively. The U. S. Steel Group anticipates making
additional such expenditures in the future; however, the exact
amounts and timing of such expenditures are uncertain because of
the continuing evolution of specific regulatory requirements.
GUARANTEES -
Guarantees by USX of the liabilities of affiliated
entities of the U. S. Steel Group totaled $50 million at December
31, 1997, and $34 million at December 31, 1996. In the event that
any defaults of guaranteed liabilities occur, USX has access to its
interest in the assets of the affiliates to reduce potential U. S.
Steel Group losses resulting from these guarantees. As of December
31, 1997, the largest guarantee for a single affiliate was $17
million.
COMMITMENTS -
At December 31, 1997, and December 31, 1996, contract
commitments for the U. S. Steel Group's capital expenditures for
property, plant and equipment totaled $156 million and $134
million, respectively.
USX entered into a 15-year take-or-pay arrangement in
1993, which requires the U. S. Steel Group to accept pulverized
coal each month or pay a minimum monthly charge of approximately
$1.3 million. Charges for deliveries of pulverized coal totaled $24
million in 1997 and $23 million in 1996. If USX elects to terminate
the contract early, a maximum termination payment of $114 million,
which declines over the duration of the agreement, may be required.
The U. S. Steel Group is a party to a transportation
agreement with a subsidiary of Transtar, Inc. (Transtar), for Great
Lakes shipments of raw materials required by the U. S. Steel Group.
The agreement is in effect until March 15, 2000, and requires the
U. S. Steel Group to pay, at a minimum, Transtar's annual fixed
costs related to the agreement, including lease/charter costs,
depreciation of owned vessels, dry dock fees and other
administrative costs. Total transportation costs under the
agreement were $77 million in 1997 and $72 million in 1996,
including fixed costs of $20 million in both years. The fixed costs
are expected to continue at approximately the same level over the
duration of the agreement.
S-20
<PAGE>
Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------------------
(In millions, except per share data) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR.
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 1,838 $ 1,735 /(a)/ $ 1,737 /(a)/ $ 1,631 /(a)/
Income from operations 252 197 /(a)/ 193 /(a)/ 131 /(a)/
Income before
extraordinary loss 152 116 97 87
Net income 152 116 97 87
- ----------------------------------------------------------------------------------------------------------------------
STEEL STOCK DATA:
- -----------------
Income before
extraordinary loss
applicable to Steel Stock $ 149 $ 114 $ 105 $ 81
- Per share: basic 1.74 1.32 1.23 .96
diluted 1.64 1.25 1.06 .93
Dividends paid per share .25 .25 .25 .25
Price range of Steel
Stock/(b)/:
- Low 26-7/8 34-3/16 25-3/8 26-3/8
- High 36-15/16 40-3/4 35-5/8 33-3/8
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
1996
--------------------------------------------------------------------------
(In millions, except per share data) 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR.
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 1,794 /(a)/ $ 1,631 /(a)/ $ 1,646 /(a)/ $ 1,599 /(a)/
Income from operations 204 /(a)/ 123 /(a)/ 67 /(a)/ 89 /(a)/
Income before
extraordinary loss 127 70 32 46
Net income 125 70 32 46
- ----------------------------------------------------------------------------------------------------------------------
STEEL STOCK DATA:
- -----------------
Income before
extraordinary loss
applicable to Steel Stock $ 122 $ 64 $ 27 $ 40
- Per share: basic 1.43 .76 .32 .49
diluted 1.36 .75 .32 .48
Dividends paid per share .25 .25 .25 .25
Price range of Steel
Stock/(b)/:
- Low 26-1/2 24-1/8 27-3/4 30
- High 32 29-5/8 35-7/8 37-7/8
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Reclassified to conform to current classifications.
/(b)/ Composite tape.
S-21
<PAGE>
Principal Unconsolidated Affiliates (Unaudited)
<TABLE>
<CAPTION>
December 31, 1997
Company Country Ownership Activity
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Double Eagle Steel Coating Company United States 50% Steel Processing
PRO-TEC Coating Company United States 50% Steel Processing
RMI Titanium Company United States 27% Titanium metal products
Transtar, Inc. United States 46% Transportation
USS/Kobe Steel Company United States 50% Steel Products
USS-POSCO Industries United States 50% Steel Processing
Worthington Specialty Processing United States 50% Steel Processing
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Supplementary Information on Mineral Reserves (Unaudited)
See the USX consolidated financial statements for Supplementary Information on
Mineral Reserves relating to the U. S. Steel Group, page U-30.
S-22
<PAGE>
Five-Year Operating Summary
<TABLE>
<CAPTION>
(Thousands of net tons, unless otherwise noted) 1997 1996 1995 1994 1993
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RAW STEEL PRODUCTION
Gary, IN 7,428 6,840 7,163 6,768 6,624
Mon Valley, PA 2,561 2,746 2,740 2,669 2,507
Fairfield, AL 2,361 1,862 2,260 2,240 2,203
------------------------------------------
Total 12,350 11,448 12,163 11,677 11,334
---------------------------------------------------------------------------------------------------
RAW STEEL CAPABILITY
Continuous cast 12,800 12,800 12,500 11,990 11,850
Total production as % of total capability 96.5 89.4 97.3 97.4 95.6
---------------------------------------------------------------------------------------------------
HOT METAL PRODUCTION 10,591 9,716 10,521 10,328 9,972
---------------------------------------------------------------------------------------------------
COKE PRODUCTION 5,757/(a)/ 6,777 6,770 6,777 6,425
---------------------------------------------------------------------------------------------------
IRON ORE PELLETS MINNTAC, MN
Shipments - 16,319 14,962 15,218 16,174 15,911
---------------------------------------------------------------------------------------------------
COAL PRODUCTION
Metallurgical coal/(b)/ 7,528 7,283 7,509 7,424 8,142
Steam coal/(b)(c)/ - - - - 2,444
------------------------------------------
Total 7,528 7,283 7,509 7,424 10,586
---------------------------------------------------------------------------------------------------
COAL SHIPMENTS/(b)(c)/ 7,811 7,117 7,502 7,698 10,980
---------------------------------------------------------------------------------------------------
STEEL SHIPMENTS BY PRODUCT
Sheet and semi-finished steel products 8,170 8,677 8,721 7,988 7,613
Tubular, plate and tin mill products 3,473 2,695 2,657 2,580 2,356
------------------------------------------
Total 11,643 11,372 11,378 10,568 9,969
Total as % of domestic steel industry 10.9 11.3 11.7 11.1 11.3
---------------------------------------------------------------------------------------------------
STEEL SHIPMENTS BY MARKET
Steel service centers 2,746 2,831 2,564 2,780 2,831
Transportation 1,758 1,721 1,636 1,952 1,771
Further conversion:
Joint ventures 1,568 1,542 1,332 1,308 1,074
Trade customers 1,378 1,227 1,084 1,058 1,150
Containers 856 874 857 962 835
Construction 994 865 671 722 667
Oil, gas and petrochemicals 810 746 748 367 342
Export 453 493 1,515 355 327
All other 1,080 1,073 971 1,064 972
------------------------------------------
Total 11,643 11,372 11,378 10,568 9,969
---------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ The reduction in coke production in 1997 reflected U. S.
Steel's entry into a strategic partnership with two limited
partners to acquire an interest in three coke batteries at
its Clairton (Pa.) Works.
/(b)/ The Maple Creek Coal Mine, which was idled in January 1994
and sold in June 1995, produced 1.0 million net tons of
metallurgical coal and 0.7 million net tons of steam coal in
1993.
/(c)/ The Cumberland Coal Mine, which was sold in June 1993,
produced 1.6 million net tons in 1993 prior to the sale.
S-23
<PAGE>
Five-Year Financial Summary
<TABLE>
<CAPTION>
(Dollars in millions, except as noted) 1997 1996 1995 1994 1993
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES
Steel and related businesses
Sheet and semi-finished
steel products $ 3,820 $ 3,677 $ 3,623 $ 3,335 $ 3,082
Tubular, plate and tin mill products 1,754 1,635 1,677 1,518 1,302
Raw materials (coal, coke and iron ore) 671 757 731 754 740
All other 548 411 369 313 403
----------------------------------------------------------
Subtotal steel and related businesses 6,793 6,480 6,400 5,920 5,527
Steel and related equity affiliates 53 55 80 50 (2)
----------------------------------------------------------
Total steel and related 6,846 6,535 6,480 5,970 5,525
Administrative and other businesses 95 82 77 171 297
Gain on affiliate stock offering - 53 - - -
----------------------------------------------------------
Total revenues $ 6,941 $ 6,670/(a)/ $ 6,557/(a)/ $ 6,141/(a)/ $ 5,822/(a)/
------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS
Steel and related businesses $ 522 $ 167 $ 412 $ 228 $ 186
Steel and related equity affiliates 53 55 80 50 (2)
----------------------------------------------------------
Total steel and related 575 222 492 278 184
Administrative and other businesses 198 208 106 110 (81)
Gain on affiliate stock offering - 53 - - -
Restructuring charges - - - - (42)
Impairment of long-lived assets - - (16) - -
----------------------------------------------------------
Total income from operations 773 483/(a)/ 582/(a)/ 388/(a)/ 61/(a)/
Net interest and other financial costs 87 116 129 140 271
Provision (credit) for income taxes 234 92 150 47 (41)
------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS
and Cumulative Effect of Change in
Accounting Principle $ 452 $ 275 $ 303 $ 201 $ (169)
Per common share - basic (in dollars) 5.24 3.00 3.53 2.35 (2.96)
- diluted (in dollars) 4.88 2.97 3.43 2.33 (2.96)
NET INCOME (LOSS) $ 452 $ 273 $ 301 $ 201 $ (238)
Per common share - basic (in dollars) 5.24 2.98 3.51 2.35 (4.04)
- diluted (in dollars) 4.88 2.95 3.41 2.33 (4.04)
------------------------------------------------------------------------------------------------------------------
BALANCE SHEET POSITION AT YEAR-END
Current assets $ 1,531 $ 1,428 $ 1,444 $ 1,780 $ 1,562
Net property, plant and equipment 2,496 2,551 2,512 2,536 2,653
Total assets 6,694 6,580 6,521 6,480 6,629
Short-term debt 67 91 101 21 11
Other current liabilities 1,267 1,208 1,418 1,246 1,612
Long-term debt 456 1,014 923 1,432 1,551
Employee benefits 2,338 2,430 2,424 2,496 2,491
Trust preferred securities and
preferred stock of subsidiary 248 64 64 64 -
Common stockholders' equity 1,779 1,559 1,337 913 585
Per share (in dollars) 20.56 18.37 16.10 12.01 8.32
------------------------------------------------------------------------------------------------------------------
CASH FLOW DATA
Net cash from operating activities $ 470 $ 86 $ 587 $ 78 $ 90
Capital expenditures 261 337 324 248 198
Disposal of assets 420 161 67 19 291
Dividends paid 96 104 93 98 85
------------------------------------------------------------------------------------------------------------------
EMPLOYEE DATA/(b)/
Total employment costs $ 1,417 $ 1,372 $ 1,381 $ 1,402 $ 1,267
Average employment cost
(dollars per hour) 31.63 30.35 31.24 31.15 28.09
Average number of employees 20,683 20,831 20,845 21,310 21,527
Number of pensioners at year-end 93,952 96,510 99,062 101,732 104,607
------------------------------------------------------------------------------------------------------------------
STOCKHOLDER DATA AT YEAR-END
Number of common shares
outstanding (in millions) 86.6 84.9 83.0 76.0 70.3
Registered shareholders (in thousands) 65.1 71.0 76.7 81.2 84.3
Market price of common stock $31.250 $31.375 $30.750 $ 35.500 $ 43.250
------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Reclassified to conform to 1997 classifications.
/(b)/ Excludes employee related costs attributed to restructuring
charges.
S-24
<PAGE>
Management's Discussion and Analysis
The U. S. Steel Group includes U. S. Steel, which is primarily
engaged in the production and sale of steel mill products, coke and
taconite pellets. The U. S. Steel Group also includes the
management of mineral resources, domestic coal mining and
engineering and consulting services (together with U. S. Steel, the
"Steel & Related Businesses"). Steel & Related Equity Affiliates
includes joint ventures such as USS/Kobe Steel Ltd. ("USS/Kobe"),
USS-POSCO Industries ("USS-POSCO"), PRO-TEC Coating Company ("PRO-
TEC"), and Transtar Inc. Other businesses that are part of the U.
S. Steel Group include real estate development and management, and
leasing and financing activities. Management's Discussion and
Analysis should be read in conjunction with the U. S. Steel Group's
Financial Statements and Notes to Financial Statements.
In 1997, U. S. Steel Group's income from operations increased
primarily due to higher average steel product prices, higher
shipments and a benefit of $40 million from insurance settlement
payments related to a 1996 blast furnace hearth breakout.
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. For additional risk factors affecting
the businesses of the U. S. Steel Group, see Supplementary Data
Disclosures About Forward-Looking Statements USX Form 10-K.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INCOME
REVENUES for each of the last three years are summarized in the
following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
---------------------------------------------------------------------------
<S> <C> <C> <C>
Steel & Related Businesses $6,793 $6,480 $6,400
Steel & Related-Equity Affiliates 53 55 80
------ ------ ------
Subtotal-Steel & Related 6,846 6,535 6,480
Administrative & Other Businesses 95 82 77
Gain on Affiliate Stock Offering/(a)/ - 53 -
------ ------ ------
Total revenues/(b)/ $6,941 $6,670 $6,557
---------------------------------------------------------------------------
</TABLE>
/(a)/ For further details, see Note 6 to the U. S. Steel Group
Financial Statements.
/(b)/ Consists of sales, affiliate income, net gains on disposal
of assets, gain on affiliate stock offering and other
income. Amounts for 1996 and 1995 were reclassified in 1997
to include affiliate income, gain on affiliate stock
offering and other income.
Total revenues increased by $271 million in 1997 from 1996. The
increase primarily reflects higher average realized prices and
higher steel shipment volumes. Total revenues increased by $113
million in 1996 from 1995. The increase in 1996 resulted primarily
from an improved steel product mix and higher raw material selling
prices, partially offset by lower steel product prices. Steel
shipments in 1996 were essentially unchanged compared with 1995.
S-25
<PAGE>
Management's Discussion and Analysis CONTINUED
INCOME FROM OPERATIONS and certain items included in income from
operations for the last three years are set forth in the following
table:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total income from operations/(a)/ $ 773 $ 483 $ 582
Less: Certain favorable (unfavorable) items: - -
Effect of adoption of SOP 96-1/(b)/ (20) - -
Gain on asset sale/(c)/ 15 - -
Certain other environmental accrual adjustments net 11 - -
Gain on affiliate stock offering/(d)/ - 53 -
Certain Gary Works blast furnace repairs/(e)/ - (39) (34)
Employee reorganization charges/(f)/ - (13) -
Certain legal accruals - - (44)
Adjustments for certain employee-related costs - - 18
Impairment of long-lived assets/(g)/ - - (16)
----- ----- -----
Income from operations adjusted to exclude above items $ 767 $ 482 $ 658
--------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Consists of operating income, affiliate income, net gains on
disposal of investments, gain on affiliate stock offering
and other income. Amounts for 1996 and 1995 were
reclassified in 1997 to include affiliate income, gain on
affiliate stock offering and other income. See Note 9 to the
Consolidated Financial Statements for a discussion of
operating income.
/(b)/ Effective January 1, 1997, USX adopted American Institute
of Certified Public Accountants Statement of Position No.
96-1-"Environmental Remediation Liabilities", which provides
additional guidance on recognition, measurement and
disclosure of remediation liabilities. For further details,
see Note 3 to the U. S. Steel Group Financial Statements.
/(c)/ Reflects the sale of the plate mill at the U. S. Steel
Group's former Texas Works.
/(d)/ See Note 6 to the U. S. Steel Group Financial Statements.
/(e)/ Amounts in 1996 and 1995 reflect repair of damages at Gary
Works incurred during a hearth breakout at the No. 13 blast
furnace on April 2, 1996, and in an explosion at the No. 8
blast furnace on April 5, 1995, respectively.
/(f)/ Primarily related to employee costs associated with
workforce reduction programs.
/(g)/ Related to adoption of Statement of Financial Accounting
Standards No. 121-"Accounting For the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS No. 121").
Adjusted income from operations for the U. S. Steel Group
increased $285 million in 1997 from 1996, primarily due to higher
results from Steel and Related Businesses. Adjusted income from
operations decreased $176 million in 1996 from 1995, primarily due
to lower results from Steel and Related Businesses.
The U. S. Steel Group's income from operations for the last
three years was:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
------------------------------------------------------------------------
<S> <C> <C> <C>
Steel & Related Businesses $ 522 $ 167 $ 412
Steel & Related-Equity Affiliates 53 55 80
----- ----- -----
Subtotal-Steel & Related 575 222 492
Administrative & Other Businesses 198 208 106
Gain on Affiliate Stock Offering/(a)/ - 53 -
Impairment of long-lived assets - - (16)
----- ----- -----
Total income from operations/(b)/ $ 773 $ 483 $ 582
------------------------------------------------------------------------
</TABLE>
/(a)/ For further details, see Note 6 to the U. S. Steel Group
Financial Statements.
/(b)/ Amounts in 1996 and 1995 were reclassified in 1997 to
include other income.
Income from operations for Steel & Related Businesses increased
$355 million in 1997 from 1996. Results in 1997 included $15
million on the sale of the plate mill at U. S. Steel's former Texas
Works. Results in 1996 included $39 million of charges related to
repair of the Gary (Ind.) Works No. 13 blast furnace and $13
million of charges related to a voluntary workforce reduction at
the Fairless (Pa.) Works. Excluding these items, Steel & Related
Businesses income from operations increased $288 million in 1997
compared to 1996. The increase was primarily due to higher steel
shipments, higher average realized steel prices, improved operating
efficiencies, including the full year availability of the
S-26
<PAGE>
Management's Discussion and Analysis CONTINUED
No. 13 blast furnace, and a benefit of $40 million in insurance
settlement payments related to the 1996 hearth breakout. These
improvements were partially offset by higher 1997 accruals for
profit sharing.
Income from operations for Steel & Related Businesses decreased
$245 million in 1996 from 1995. Results in 1995 included $34
million of charges related to repairs of the Gary Works No. 8 blast
furnace which was damaged by an explosion, $37 million of charges
related to the settlement of the Pickering litigation and other
litigation accrual adjustments, and an $18 million favorable
accrual adjustment for certain employee-related costs. Excluding
these items, income from operations decreased $246 million in 1996
compared to 1995. The decrease was mainly due to lower average
steel product prices, cost inefficiencies and reduced shipments
related to outages at U. S. Steel's three largest blast furnaces
including lost sales from the unplanned blast furnace outage,
partially offset by improved product mix and decreased profit
sharing accruals.
The Gary Works No. 13 blast furnace, which represents about half
of Gary Works iron producing capacity and roughly one-fourth of U.
S. Steel's iron capacity, was idled on April 2, 1996 due to a
hearth breakout. In addition to direct repair costs, operating
results were adversely affected by production inefficiencies at
Gary, as well as at other U. S. Steel plants, reduced shipments and
higher costs for purchased iron and semifinished steel. The total
effect of this unplanned outage on 1996 income from operations is
estimated to have been more than $100 million. USX maintained
property damage and business interruption insurance coverages for
the No. 13 blast furnace hearth breakout and the 1995 Gary Works
No. 8 blast furnace explosion, subject to a $50 million deductible
per occurrence for recoverable items. In 1997, the insurance
companies and USX settled the Gary Works No. 13 blast furnace loss
for $40 million in excess of the deductible. On October 4, 1996,
USX filed litigation in Lake County, Indiana, Superior Court
against its insurers related to the No. 8 blast furnace explosion.
The timing of the resolution of this litigation and the outcome
cannot be predicted at this time.
Income from operations for Steel and Related-Equity Affiliates
decreased $2 million in 1997 from 1996. The decrease was mainly due
to significant losses incurred by USS/Kobe, partially offset by
higher income generated from USS-POSCO. Income from operations for
Steel and Related-Equity Affiliates decreased $25 million in 1996
from 1995. The decrease was mainly due to lower income from
USS/Kobe and PRO-TEC.
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. Income
from operations for Administrative and Other Businesses decreased
$10 million in 1997 from 1996. Income from operations for
Administrative and Other Businesses included charges of $9 million
related to environmental accruals and the adoption of SOP 96-1.
Excluding these charges, income from operations was virtually
unchanged in 1997 from 1996. Income from operations for
Administrative and Other Businesses increased $102 million in 1996
from 1995. Income from operations in 1995 included a $16 million
noncash charge related to the adoption of Statement of Financial
Accounting Standards No. 121-"Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of "
(See Note 5 to the U. S. Steel Group Financial Statements for
further details) and $7 million in other litigation accrual
adjustments. Excluding these charges, income from operations
increased $79 million in 1996 from 1995, primarily due to higher
pension credits of approximately $35 million referred to below and
higher income from USX Credit. USX Credit recognized income from
operations of $14 million and $7 million in 1997 and 1996,
respectively, compared to an operating loss of $14 million in 1995.
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 $149 million, $159 million and $132
million in 1997, 1996 and 1995, respectively. The decrease in 1997
primarily reflected a reduction in the expected long-term rate of
S-27
<PAGE>
Management's Discussion and Analysis CONTINUED
return on plan assets from 10 percent to 9.5 percent, partially
offset by an increase in the market related value of plan assets
and an increase in the assumed discount rate from 7.0 percent to
7.5 percent. The increase in 1996 from 1995 primarily reflected a
decrease in the assumed discount rate and an increase in the
market-related value of plan assets. In 1998, net pension credits
are expected to be approximately $200 million. See Note 13 to the
U. S. Steel Group Financial Statements. To the extent that these
credits decline in the future, income from operations would be
adversely affected.
NET INTEREST AND OTHER FINANCIAL COSTS for each of the last
three years are summarized in the following table:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
-------------------------------------------------------------------
<S> <C> <C> <C>
Net interest and other financial costs $ 87 $ 116 $ 129
Less:
Favorable (unfavorable) adjustments to
carrying value of Indexed Debt/(a)/ 10 (6) -
----- ----- -----
Net interest and other financial costs
adjusted to exclude above item $ 97 $ 110 $ 129
-------------------------------------------------------------------
</TABLE>
/(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.
Adjusted net interest and other financial costs decreased by $13
million in 1997 as compared with 1996, and by $19 million in 1996
as compared with 1995, due primarily to lower average debt levels.
The PROVISION FOR ESTIMATED INCOME TAXES in 1997 increased
compared to 1996 due to improved operations, a reduction in
estimated tax credits other than foreign tax credits (primarily
nonconventional fuel source credits) and an increase in estimated
state income tax expense. A significant portion of the reduction in
the nonconventional fuel source credits 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 (See Note 16 to the U. S. Steel Group
Financial Statements for additional discussion). For further
discussion on income taxes, see Note 15 to the U. S. Steel Group
Financial Statements.
The EXTRAORDINARY LOSSES on extinguishment of debt of $2 million
in both 1996 and 1995 represent the portion of the losses on early
extinguishment of USX debt attributed to the U. S. Steel Group. For
additional information, see Note 7 to the U. S. Steel Group
Financial Statements.
NET INCOME in 1997 was $452 million, compared with net income of
$273 million in 1996 and net income of $301 million in 1995. Net
income increased $179 million in 1997 from 1996, compared with a
decrease of $28 million in 1996 from 1995. The changes in net
income primarily reflect the factors discussed above.
NONCASH CREDIT FROM EXCHANGE OF PREFERRED STOCK totaled $10
million in 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 ($192
million) and the fair value of the Trust Preferred Securities of
USX Capital Trust I ($182 million), at the date of the exchange.
For additional discussion on the exchange, see Note 21 to the U. S.
Steel Group Financial Statements.
S-28
<PAGE>
Management's Discussion and Analysis CONTINUED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, CASH FLOWS AND
LIQUIDITY
CURRENT ASSETS at year-end 1997 increased $103 million from
year-end 1996 primarily due to higher inventories and deferred
income tax benefits.
CURRENT LIABILITIES in 1997 increased $35 million from 1996
primarily due to increased accrued taxes.
DEFERRED CREDITS AND OTHER LIABILITIES increased by $329 million
from year-end 1996 due primarily to unamortized deferred gains of
$244 million related to USX's entry in 1997 into a strategic
partnership with two limited partners to acquire an interest in
three coke batteries at the U. S. Steel Group's Clairton (Pa.)
Works.
TOTAL LONG-TERM DEBT AND NOTES PAYABLE at December 31, 1997 of
$523 million was $582 million lower than year-end 1996. U. S. Steel
Group used excess cash generated from operating activities and
assets sales, less capital expenditures, to reduce debt. Virtually
all of the debt is a direct obligation of, or is guaranteed by,
USX.
NET CASH PROVIDED FROM OPERATING ACTIVITIES in 1997 was $470
million compared with $86 million in 1996. The 1997 period included
payments of $80 million in elective funding of retiree life
insurance of union and nonunion participants, $70 million to the
United Steelworkers of America ("USWA") Voluntary Employee Benefit
Association Trust (VEBA) ($40 million represented prefunding for
years 1998 and 1999), $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 1996 period included a payment of $59 million to the
Internal Revenue Service for certain agreed and unagreed
adjustments relating to the tax year 1990, and a payment of $28
million related to settlement of the Pickering litigation.
Excluding these items, net cash provided from operating activities
increased $456 million in 1997 due mainly to increased
profitability and favorable working capital changes.
The U.S. Steel Group's net cash provided from operating
activities in 1995 reflects payments of $169 million to fund the
U.S. Steel Group's principal pension plan, $35 million to the
USWA's VEBA, $28 million representing U.S. Steel's share of the
amortized discount on USX's zero coupon debentures (see USX
Consolidated Management's Discussion and Analysis of Cash Flows for
further details) and $20 million as partial settlement in the
Pickering litigation. Excluding these items, net cash provided from
operating activities declined by $666 million in 1996 due mainly to
unfavorable working capital changes, decreased profitability and
lower distributions from equity affiliates.
CAPITAL EXPENDITURES in 1997 included a blast furnace reline at
Mon Valley Works, a new heat treat line for plates at Gary Works
and additional environmental expenditures primarily at Gary Works.
Capital expenditures in 1996 included a blast furnace reline and
new galvanizing line at Fairfield Works, environmental expenditures
primarily at Gary Works, and certain spending related to the Gary
No. 13 blast furnace hearth breakout. Contract commitments for
capital expenditures at year-end 1997 were $156 million, compared
with $134 million at year-end 1996.
Capital expenditures for 1998 are expected to be approximately
$340 million including a reline of the Gary Works No. 6 blast
furnace, an upgrade to the galvanizing line at Fairless Works,
replacement of coke battery thruwalls at Gary Works, conversion of
the Fairfield pipemill from blooms to rounds and additional
environmental expenditures primarily at Fairfield Works and Gary
Works.
Net cash used in INVESTMENTS IN EQUITY AFFILIATES of $16 million
reflected funding of equity affiliate capital projects (mainly the
construction of a second galvanizing line at the PRO-TEC Coating
Company joint venture), partially offset by dividends from equity
affiliates. Investments in equity affiliates in 1996 and 1995
provided net cash of $11 million and $4 million, respectively.
S-29
<PAGE>
Management's Discussion and Analysis CONTINUED
In 1998, net investments in equity affiliates are expected to be
approximately $60 million, which mainly reflects funding for entry
into a Slovakian joint venture with VSZ a.s. In February, 1998, the
joint venture, doing business as VSZ U.S. Steel, s.r.o., took over
ownership and commenced operation of an existing tin mill facility
(VSZ's Ocel plant in Kosice) with an annual production capacity of
140,000 metric tons. The joint venture plans to add 200,000 annual
metric tons of new tin mill production capacity in the next two
years. See discussion of "Outlook" below for further details.
The preceding statements concerning expected 1998 capital
expenditures and investments in equity affiliates are forward-
looking statements. These forward-looking statements are based on
assumptions, which can be affected by (among other things) levels
of cash flow from operations, unforeseen hazards such as weather
conditions, explosions or fires, and delays in obtaining government
or partner approval, which could delay the timing of completion of
particular capital projects. In addition, levels of investments may
be affected by the ability of equity affiliates to obtain external
financing. Accordingly, actual results may differ materially from
current expectations in the forward-looking statements.
CASH FROM DISPOSAL OF ASSETS totaled $420 million in 1997,
compared with $161 million in 1996 and $67 million in 1995. 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
(for additional information, see Note 16 to the U. S. Steel Group
Financial Statements). The net effect of this transaction did not
have a material impact on 1997 net income. The 1996 proceeds
reflected the sale of U. S. Steel Group's investment in National-
Oilwell and a portion of its investment in RMI common stock. The
1995 proceeds mainly reflected property sales.
In 1996, an aggregate of 6.9 million shares of RMI common stock
was sold in a public offering. Included in the offering were 2.3
million shares sold by USX for net proceeds of $40 million.
Following this transaction, USX owns approximately 27% of the
outstanding common stock of RMI. For additional information, see
Note 6 to the U. S. Steel Group Financial Statements.
FINANCIAL OBLIGATIONS decreased by $567 million in 1997 compared
with an increase of $77 million in 1996, and a decrease of $403
million in 1995. Financial obligations consist of the U.S. Steel
Group's portion of USX debt and preferred stock of a subsidiary
attributed to both groups as well as debt and financing agreements
specifically attributed to the U.S. Steel Group. The decrease in
1997 primarily reflected the net effects of cash from operating
activities, asset sales and capital expenditures. For a discussion
of USX financing activities attributed to both groups, see
Management's Discussion and Analysis of USX Consolidated Financial
Condition, Cash Flows and Liquidity.
In December 1996, USX issued Indexed Debt in the principal
amount of $117 million or $21.375 per note, which was the market
price per share of RMI common stock on November 26, 1996. At
maturity, the Indexed Debt will be mandatorily exchangeable by USX
into shares of RMI common stock (or for the equivalent amount of
cash, at USX's option) at a defined exchange rate, which is based
on the average market price of RMI common stock valued in January
2000. The carrying value of the notes is adjusted quarterly to
settlement value, and any resulting adjustment is charged or
credited to income and included in interest and other financial
costs. The carrying value was adjusted to $113 million at December
31, 1997. Net proceeds from the issuance of the notes totaled
approximately $113 million. This amount was reflected in its
entirety in the U.S. Steel Group financial statements. For
additional information, see Note 16 to the USX Consolidated
Financial Statements.
STEEL STOCK ISSUED totaled $48 million in 1997, $51 million in
1996 and $218 million in 1995. This included a public offering of
5,000,000 shares in 1995 for net proceeds of $169 million, which
was reflected in its entirety in the U. S. Steel Group Financial
Statements.
S-30
<PAGE>
Management's Discussion and Analysis CONTINUED
PENSION ACTIVITY
In accordance with USX's long-term funding practice, which is
designed to maintain an appropriate funded status, USX contributed
$49 million in 1997 to fund the U.S. Steel Group's principal
pension plan for the 1996 plan year. In 1995, net proceeds of $169
million from the public offering of 5,000,000 shares of Steel Stock
were used to fund the U.S. Steel Group's principal pension plan
for the 1994 and the 1995 plan years.
DERIVATIVE INSTRUMENTS
See Quantitative and Qualitative Disclosures About Market Risk
for discussion of derivative instruments and associated market risk
for U.S. Steel Group.
LIQUIDITY
For discussion of USX's liquidity and capital resources, see
Management's Discussion and Analysis of USX Consolidated Financial
Condition, Cash Flows and Liquidity.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF ENVIRONMENTAL MATTERS, LITIGATION AND
CONTINGENCIES
The U.S. Steel Group has incurred and will continue to incur
substantial capital, operating and maintenance, and remediation
expenditures as a result of environmental laws and regulations. In
recent years, these expenditures have been mainly for process
changes in order to meet Clean Air Act obligations, although
ongoing compliance costs have also been significant. To the extent
these expenditures, as with all costs, are not ultimately reflected
in the prices of the U.S. Steel Group's products and services,
operating results will be adversely affected. The U.S. Steel Group
believes that all of its domestic competitors are subject to
similar environmental laws and regulations. However, the specific
impact on each competitor may vary depending on a number of
factors, including the age and location of its operating
facilities, marketing areas, production processes and the specific
products and services it provides. 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.
The U.S. Steel Group's environmental expenditures for the last
three years were/(a)/:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
-------------------------------------------------------------------
<S> <C> <C> <C>
Capital $ 43 $ 90 $ 55
Compliance
Operating & Maintenance 196 199 195
Remediation/(b)/ 29 33 35
----- ----- -----
Total U.S. Steel Group $ 268 $ 322 $ 285
-------------------------------------------------------------------
</TABLE>
/(a)/ Based on previously established U.S. Department of Commerce
survey guidelines.
/(b)/ These amounts do not include noncash provisions recorded for
environmental remediation, but include spending charged
against such reserves, net of recoveries where permissible.
The U.S. Steel Group's environmental capital expenditures
accounted for 16%, 27% and 17% of total capital expenditures in
1997, 1996 and 1995, respectively.
Compliance expenditures represented 4% of the U.S. Steel
Group's total operating costs in 1997, 1996 and 1995. Remediation
spending during 1995 to 1997 was mainly related to remediation
activities at former and present operating locations. These
projects include the remediation of the Grand Calumet River, and
the closure and remediation of permitted hazardous and non-
hazardous waste landfills.
The Resource Conservation and Recovery Act ("RCRA") establishes
standards for the management of solid and hazardous wastes. Besides
affecting current waste disposal practices, RCRA also addresses the
environmental effects of certain past waste disposal operations,
the recycling of wastes and the regulation of storage tanks.
S-31
<PAGE>
Management's Discussion and Analysis CONTINUED
The U. S. Steel Group is in the study phase of RCRA corrective
action programs at its Fairless Works and its former Geneva Works.
A RCRA corrective action program has been initiated at its Gary
Works and its Fairfield Works. Until the studies are completed at
these facilities, USX is unable to estimate the cost of remediation
activities, if any, that will be required.
USX has been notified that it is a potential 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 December 31, 1997. In addition,
there are 16 sites related to the U. S. Steel Group where USX has
received information requests or other indications that USX may be
a PRP under CERCLA but where sufficient information is not
presently available to confirm the existence of liability or make
any judgment as to the amount thereof. There are also 39 additional
sites related to the U. S. Steel Group where remediation is being
sought under other environmental statutes, both federal and state,
or where private parties are seeking remediation through
discussions or litigation. At many of these sites, USX is one of a
number of parties involved and the total cost of remediation, as
well as USX's share thereof, is frequently dependent upon the
outcome of investigations and remedial studies. The U. S. Steel
Group accrues for environmental remediation activities when the
responsibility to remediate is probable and the amount of
associated costs is reasonably determinable. As environmental
remediation matters proceed toward ultimate resolution or as
additional remediation obligations arise, charges in excess of
those previously accrued may be required. See Note 28 to the U. S.
Steel Group Financial Statements.
In 1997, USX adopted American Institute of Certified Public
Accountants Statement of Position No. 96-1- "Environmental
Remediation Liabilities", which resulted in a $20 million charge.
For additional information, see Note 3 to the U. S. Steel Group
Financial Statements.
New or expanded environmental requirements, which could increase
the U. S. Steel Group's environmental costs, may arise in the
future. USX intends to comply with all legal requirements regarding
the environment, but since many of them are not fixed or presently
determinable (even under existing legislation) and may be affected
by future legislation, it is not possible to predict accurately the
ultimate cost of compliance, including remediation costs which may
be incurred and penalties which may be imposed. However, based on
presently available information, and existing laws and regulations
as currently implemented, the U. S. Steel Group does not anticipate
that environmental compliance expenditures (including operating and
maintenance and remediation) will materially increase in 1998. The
U. S. Steel Group's capital expenditures for environmental controls
are expected to be approximately $65 million in 1998 and are
expected to be spent on projects primarily at Gary Works and
Fairfield Works. Predictions beyond 1998 can only be broad-based
estimates which have varied, and will continue to vary, due to the
ongoing evolution of specific regulatory requirements, the possible
imposition of more stringent requirements and the availability of
new technologies to remediate sites, among other matters. Based
upon currently identified projects, the U. S. Steel Group
anticipates that environmental capital expenditures will be
approximately $40 million in 1999; however, actual expenditures may
vary as the number and scope of environmental projects are revised
as a result of improved technology or changes in regulatory
requirements and could increase if additional projects are
identified or additional requirements are imposed.
USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments relating to
the U. S. Steel Group involving a variety of matters, including
laws and regulations relating to the environment, certain of which
are discussed in Note 28 to the U. S. Steel Group Financial
Statements. 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.
S-32
<PAGE>
Management's Discussion and Analysis CONTINUED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
Average realized steel prices were 2.6% higher in 1997 versus
1996 due primarily to U. S. Steel realizing higher prices for
tubular and sheet products. In 1996, average realized steel prices
were essentially unchanged versus 1995 as the impact of lower
product prices was offset by improved product mix.
Steel shipments were 11.6 million tons in 1997, and 11.4 million
tons in 1996 and 1995. U. S. Steel Group shipments comprised
approximately 11% of the domestic steel market through November
1997. Exports accounted for approximately 4% of U. S. Steel Group
shipments in 1997, compared with 4% in 1996 and 13% in 1995.
Raw steel production was 12.3 million tons in 1997, compared
with 11.4 million tons in 1996 and 12.2 million tons in 1995. Raw
steel production averaged 97% of capability in 1997, compared with
89% of capability in 1996 and 97% of capability in 1995. In 1996,
raw steel production was negatively affected by an unplanned blast
furnace outage at the Gary Works No. 13 blast furnace. U. S. Steel
stated annual raw steel production capability was 12.8 millions
tons in 1997 and 1996, and 12.5 million tons in 1995.
Plate products accounted for 8% and 9% of U. S. Steel Group
shipments in 1997 and 1996, respectively. On November 5, 1996, two
other domestic steel plate producers filed antidumping cases with
the U. S. Department of Commerce ("Commerce") and the International
Trade Commission ("ITC") asserting that People's Republic of China,
the Russian Federation, Ukraine, and South Africa have engaged in
unfair trade practices with respect to the export of carbon cut-to-
length plate to the United States. U. S. Steel Group has supported
these cases. The Commerce issued final affirmative determination of
dumping for each country in October 1997, finding substantial
dumping margins on cut-to-length steel plate imports from these
countries. In December 1997, the ITC voted unanimously that the
United States industry producing cut-to-length carbon steel plate
was injured due to imports of dumped cut-to-length plate from the
four countries. The United States has negotiated suspension
agreements that limit imports of cut-to-length carbon steel plate
from the four countries to a total of approximately 440,000 tons
per year for the next five years, a reduction of about two-thirds
from 1996 import levels, and provide for an average 10-15% increase
in import prices to remove the injurious impact of the imports. Any
violation or abrogation of the suspension agreements will result in
imposition of the dumping duties found by the Commerce.
USX intends to file additional antidumping and countervailing
duty petitions if unfairly traded imports adversely impact, or
threaten to adversely impact, the results of the U. S. Steel Group.
For additional information regarding levels of imported steel, see
discussion of "Outlook" below.
U. S. Steel entered into a five and one-half year contract with
the United Steelworkers of America ("USWA"), effective February 1,
1994, covering approximately 15,000 employees. The contract
provided for reopener negotiations of specific payroll items. These
negotiations were resolved by following the settlements reached by
other major integrated producers (including the timing of a lump
sum bonus payment in July 1999), with revised contract terms
becoming effective as of February 1, 1997. This agreement expires
on August 1, 1999.
U. S. Steel Mining Company, LLC ("U. S. Steel Mining") entered
into a five year contract with the United Mine Workers of America
("UMWA"), effective January 1, 1998, covering approximately 1,000
employees. The agreement reached followed that of other major
mining companies.
The U. S. Steel Group depreciates steel assets by modifying
straight-line depreciation based on the level of production.
Depreciation charges for 1997, 1996, and 1995 were 102%, 94%, and
102%, respectively, of straight-line depreciation based on
production levels for each of the years. See Note 2 to the U. S.
Steel Group Financial Statements.
S-33
<PAGE>
Management's Discussion and Analysis CONTINUED
OUTLOOK
The U. S. Steel Group presently anticipates that steel demand
will remain relatively strong in 1998, and the outlook remains
positive for the markets it serves. This market strength is
dependent on continued strong demand for capital goods, oil and gas
tubular products and consumer durables in domestic and
international economies. Based on the continuing strong demand for
its products, U. S. Steel Group announced in December 1997, price
increases for plate and tubular products for spot market shipments
scheduled for delivery after March 28, 1998, for plate and March
31, 1998, for tubular. In January 1998, price increases were also
announced for sheet products affecting orders scheduled for
shipment after April 1, 1998. These increases will not apply to
shipments under long term contracts where prices were previously
negotiated. However, growing domestic production for flat-rolled
products (an estimated 4.6 million tons of additional production
capability from new and existing sources is expected in 1998),
continuing high levels of imports and a return to the market of a
competitor following a lengthy strike, could have an adverse effect
on U. S. Steel's product prices and shipment levels. In addition,
uncertainties of the Asian economies could potentially impact the
domestic markets, if Asian countries increase their level of steel
exports to the United States.
Steel imports to the United States accounted for an estimated
24%, 23% and 21% of the domestic steel market in the first eleven
months of 1997, and for the years 1996 and 1995, respectively.
Steel imports of hot rolled, cold rolled and galvanized sheets as a
percentage of total finished imports, increased 4% in the first
eleven months of 1997, compared to the same period in 1996. The
domestic steel industry has, in the past, been adversely affected
by unfairly traded imports, and higher levels of imported steel may
have an adverse effect on product prices, shipment levels and
results of operations.
U. S. Steel Group shipments in the first quarter of 1998 are
expected to be lower than in the fourth quarter of 1997 due to a
seasonal industry decline in first quarter shipments. During the
second and third quarters of 1998, raw steel production is expected
to be reduced by a 100 day planned blast furnace reline at Gary
Works. U. S. Steel expects to supplement raw steel production with
the purchase of slabs from outside sources, which should allow it
to maintain shipment levels during this planned outage.
On February 5, 1998, U. S. Steel Group and VSZ a.s., Kosice,
entered into a 50-50 joint venture in Kosice, Slovakia, for the
production and marketing of tin mill products to serve an emerging
Central European market. In February 1998, the joint venture, doing
business as VSZ U. S. Steel, s. r.o., took over ownership and
commenced operation of an existing tin mill facility (VSZ's Ocel
plant in Kosice) with an annual production capacity of 140,000
metric tons. The joint venture plans to add 200,000 annual metric
tons of new tin mill production capacity in the next two years.
In 1997, U. S. Steel Group, through a subsidiary, United States
Steel Export Company de Mexico, along with Feralloy Mexico, S.R.L.
de C.V., and Intacero de Mexico, S.A. de C.V., formed a joint
venture for a slitting and warehouse facility in San Luis Potosi,
Mexico. The joint venture will conduct business as Acero Prime and
will service primarily the appliance industry. Construction will
begin in 1998 with operations commencing in early 1999.
The preceding statements concerning anticipated steel demand,
steel pricing, purchasing slabs to supplement raw steel production
and shipment levels are forward-looking and are based upon
assumptions as to future product prices and mix, and levels of
steel production capability, production and shipments. These
forward-looking statements can be affected by imports, domestic and
international economies, domestic production capacity, availability
of slabs, and customer demand. In the event these assumptions prove
to be inaccurate, actual results may differ significantly from
those presently anticipated.
S-34
<PAGE>
Management's Discussion and Analysis CONTINUED
YEAR 2000
A task force has been established to identify all potential
areas of risk and to make any required modifications as they relate
to business computer systems, technical infrastructure, end-user
computing, business partners, manufacturing, environmental
operations, systems products produced and sold, and dedicated R&D
test facilities. A Year 2000 impact assessment for all of the
aforementioned areas is expected to be completed by the end of the
first quarter 1998. The U. S. Steel Group technical software
infrastructure for mainframe computers is essentially Year 2000
compliant; however, vendor software and other computing platforms
are still in the process of being analyzed for compliance. The U.
S. Steel Group is monitoring the compliance efforts of the entities
with which it does business and is participating with steel
industry and other trade associations to collectively address Year
2000 issues involving such entities. The U. S. Steel Group's
objective is to achieve compliance by the end of 1998, and to use
the year 1999 to validate and confirm Year 2000 compliance,
including continued monitoring of progress by the U. S. Steel
Group's business partners. 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 Year 2000 compliance are
forward-looking statements. 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.
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.
ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued
two new accounting standards:
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" requires that companies report all recognized
changes in assets and liabilities that are not the result of
transactions with owners, including those that are not reported in
net income. USX plans to adopt the standard, effective with its
1998 financial statements, as required.
Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" introduces a "management approach" for identifying
reportable industry segments of an enterprise. USX plans to adopt
the standard, effective with its 1998 financial statements, as
required.
S-35
<PAGE>
The Steel Group
Quantitative and Qualitative Disclosures About Market Risk
MANAGEMENT OPINION CONCERNING DERIVATIVE INSTRUMENTS
USX employs a strategic approach of limiting its use of
derivative instruments to hedging activities, whereby gains and
losses are generally offset by price changes in the underlying
commodity. Based on this approach, combined with risk assessment
procedures and internal controls, management believes that its use
of derivative instruments does not expose the U. S. Steel Group to
material risk. The U. S. Steel Group's use of derivative
instruments for hedging activities could materially affect the U.
S. Steel Group's results of operations in particular quarterly or
annual periods. This is primarily because use of such instruments
may limit the company's ability to benefit from favorable price
movements. However, management believes that use of these
instruments will not have a material adverse effect on financial
position or liquidity. For a summary of accounting policies related
to derivative instruments, see Note 2 to the U. S. Steel Group
Financial Statements.
COMMODITY PRICE RISK
In the normal course of its business, the U. S. Steel Group is
exposed to market risk, or price fluctuations related to the
production and sale of steel products. To a lesser extent, the U.
S. Steel Group is exposed to price risk related to the purchase,
production or sale of coal and coke and the purchase of natural
gas, steel scrap and certain metals used as raw materials. The U.
S. Steel Group is also exposed to effects of price fluctuations on
the value of its raw material and steel product inventories.
The U. S. Steel Group's market risk strategy has generally been
to obtain competitive prices for its products and services and
allow operating results to reflect market price movements dictated
by supply and demand. However, the U. S. Steel Group uses
derivative commodity instruments (primarily over-the-counter
commodity swaps) to manage exposure to market risk related to the
purchase of natural gas. The use of these instruments has not been
significant in relation to the U. S. Steel Group's overall business
activity.
Sensitivity analyses of the incremental effect on pretax income
of hypothetical 10% and 25% decreases in commodity prices for open
derivative commodity instruments as of December 31, 1997, are
provided in the following table:/(a)/
<TABLE>
<CAPTION>
(Dollars in millions)
----------------------------------------------------------------------------------
INCREMENTAL DECREASE
IN PRETAX INCOME ASSUMING A
HYPOTHETICAL PRICE DECREASE OF/(a)/
Derivative Commodity Instruments/(b)/ 10% 25%
----------------------------------------------------------------------------------
<S> <C> <C>
Natural gas $1.1 $2.8
----------------------------------------------------------------------------------
</TABLE>
/(a)/ Gains and losses on derivative commodity instruments are
generally offset by price changes in the underlying commodity.
Effects of these offsets are not reflected in the sensitivity
analyses. Amounts reflect the estimated incremental effect on
pretax income of hypothetical decreases in closing commodity
prices for each open contract position at December 31, 1997. The
U. S. Steel Group evaluates its portfolio of derivative commodity
instruments on an ongoing basis and adds or revises strategies to
reflect anticipated market conditions and changes in risk
profiles. Changes to the portfolio subsequent to December 31,
1997, would cause future pretax income effects to differ from
those presented in the table.
/(b)/ During 1997, the U. S. Steel Group made limited use of
derivative commodity swaps to hedge against price changes for
zinc used as a raw material. There were no open commodity swaps
on zinc or other nonferrous metals at December 31, 1997.
While these derivative commodity instruments are generally used
to reduce risks from unfavorable commodity price movements, they
also may limit the opportunity to benefit from favorable movements.
The U. S. Steel Group recorded net pretax hedging gains of $5
million in 1997, compared with pretax gains of $21 million in 1996
and pretax losses of $15 million in 1995. These gains and losses
were offset by changes in the realized prices of the underlying
hedged natural gas. For additional quantitative information
relating to derivative commodity instruments, including aggregate
contract values and fair values, where appropriate, see Note 26 to
the U. S. Steel Group Financial Statements.
S-36
<PAGE>
Quantitative and Qualitative Disclosures
About Market Risk CONTINUED
INTEREST RATE RISK
USX is subject to the effects of interest rate fluctuations on
certain of its non-derivative financial instruments. A sensitivity
analysis of the projected incremental effect of a hypothetical 10%
decrease in year-end 1997 interest rates on the fair value of the
U. S. Steel Group's specifically attributed non-derivative
financial instruments and the U. S. Steel Group's portion of USX's
non-derivative financial instruments attributed to all groups, is
provided in the following table:
<TABLE>
<CAPTION>
(Dollars in millions)
--------------------------------------------------------------------------------------------------------------------
Incremental
Increase in
Carrying Fair Fair
Non-Derivative Financial Instruments/(a)/ Value /(b)/ Value /(b)/ Value /(c)/
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial assets:
Investments and long-term receivables/(d)/ $ 34 $ 34 $ --
------------------------------------------------------------------------------------------------------------------
Financial liabilities:
Long-term debt (including amounts due within one year)/(e)/ $ 412 $ 448 $ 11
Preferred stock of subsidiary/(f)/ 66 67 6
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust/(g)/ 182 181 17
------- ------- -------
Total $ 660 $ 696 $ 34
------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Fair values of receivables, notes payable, accounts payable
and accrued interest, approximate carrying value and are
relatively insensitive to changes in interest rates due to the
short-term maturity of the instruments. Accordingly, these
instruments are excluded from the table.
/(b)/ At December 31, 1997. For additional discussion, see Note
27 to the U. S. Steel Group Financial Statements.
/(c)/ Reflects, by class of financial instrument, the estimated
incremental effect of a hypothetical 10% decrease in interest
rates at December 31, 1997, on the fair value of non-derivative
financial instruments. For financial liabilities this assumes a
10% decrease in the weighted average yield to maturity of USX's
long-term debt at December 31, 1997.
/(d)/ For additional information, see Note 16 to the U. S. Steel
Group Financial Statements.
/(e)/ Fair value was based on market prices where available, or
current borrowing rates for financings with similar terms and
maturities. For additional information, see Note 10 to the U. S.
Steel Group Financial Statements.
/(f)/ In 1994, USX Capital LLC, a wholly owned subsidiary of USX,
sold 10,000,000 shares of 8-3/4% Cumulative Monthly Income
Preferred Shares. For further discussion, see Note 25 to the
Consolidated Financial Statements.
/(g)/ In 1997, USX exchanged 3.9 million 6.75% Convertible
Quarterly Income Preferred Securities of USX Capital Trust I, a
Delaware statutory business trust, for an equivalent number of
shares of its 6.50% Cumulative Convertible Preferred Stock. For
further discussion, see Note 21 to the U. S. Steel Group
Financial Statements.
At December 31, 1997, USX's portfolio of long-term debt was
comprised primarily of fixed-rate instruments. Therefore, the fair
value of the portfolio is relatively sensitive to effects of
interest rate fluctuations. This sensitivity is illustrated by the
$11 million increase in the fair value of long-term debt assuming a
hypothetical 10% decrease in interest rates. However, USX's
sensitivity to interest rate declines and corresponding increases
in the fair value of its debt portfolio would unfavorably affect
USX's results and cash flows only to the extent that USX elected to
repurchase or otherwise retire all or a portion of its fixed-rate
debt portfolio at prices above carrying value.
S-37
<PAGE>
Quantitative and Qualitative Disclosures About Market Risk
CONTINUED
EQUITY PRICE RISK
The U. S. Steel Group is subject to equity price risk resulting
from USX's issuance in December 1996 of $117 million of 6-3/4%
Exchangeable Notes Due February 1, 2000 ("Indexed Debt"). At
maturity, USX must exchange the notes for shares of RMI Titanium
Company ("RMI") common stock, or redeem the notes for the
equivalent amount of cash. Each quarter, USX adjusts the carrying
value of Indexed Debt 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. During 1997, the U. S. Steel Group recorded adjustments of
$16 million favorable in the first quarter, $10 million unfavorable
in the second quarter and $4 million favorable in the fourth
quarter. At year-end 1997, a hypothetical 10% increase in the value
of RMI common stock would have resulted in a $4 million unfavorable
effect on pretax income. USX holds a 27% interest in RMI which is
accounted for under the equity method. At December 31, 1997, this
investment in RMI common stock had a fair market value of $110
million and a carrying value of $56 million. The unfavorable
effects on income described above would generally be offset by
changes in the market value of USX's investment in RMI. However,
under the equity method of accounting, USX cannot recognize in
income these changes in the market value until the investment is
liquidated.
SAFE HARBOR
The U. S. Steel Group's quantitative and qualitative
disclosures about market risk include forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995.
These statements are accompanied by cautionary language identifying
important factors (particularly the underlying assumptions and
limitations disclosed in footnotes to the tables), though not
necessarily all such factors, that could cause future outcomes to
differ materially from those projected.
Forward-looking statements with respect to management's opinion
about risks associated with USX's use of derivative instruments are
based on certain assumptions with respect to market prices and
industry supply of and demand for steel products and certain raw
materials. To the extent that these assumptions prove to be
inaccurate, future outcomes with respect to the U. S. Steel Group's
hedging programs may differ materially from those discussed in the
forward-looking statements.
S-38
