notes to consolidated financial statements accounting policies basis of consolidation — the consolidated financial statements include the accounts of utah international inc all subsidiary companies and a subsidiary's undivided interests in mining joint ventures utah after elimination of significant intercompany items and transactions in addition the statements include utah's equity in the earnings of affiliated companies in which utah does not have a majority interest the basis of recording the equity in these earnings is the affiliates most recent audited financial statements and their subsequent unaudited interim reports mining exploration and development costs — mining explora tion costs are expensed until it is determined that the development of a mineral deposit is likely to be economically feasible after this determination is made all costs related to further develop ment including financing costs of identifiable new borrowings associated with the development of new mining projects are capitalized and amortized over the lesser of ten years or the productive life of the property income taxes deferred income taxes are provided for timing differences in the reporting of certain income and expense items for financial statement and tax purposes no provision is made for permanent differences between financial statement and taxable income attributable to the excess of statutory depletion over book depletion arising from mining and oil and gas activities utah defers the investment credit and amortizes it over the average lives of the related assets mining properties — mining properties are carried at cost and include expenditures which substantially increase the useful lives of existing assets the cost of mining properties is depreciated depleted or amortized over the useful lives of the related assets by use of the unit-of-production straight-line or declining-balance methods on disposition of an asset its cost and related deprecia tion depletion or amortization are removed from the accounts and any gain or loss is recorded in income maintenance and repairs on major equipment and facilities are provided for principally over the useful lives of the assets minor maintenance and repairs and minor replacements are charged to operating costs and expenses as incurred maintenance and re pairs associated with the development of new mining projects are capitalized oil and gas properties — oil and gas properties are accounted for by use of the full cost method under this method all costs associated with the acquisition exploration and development of oil and gas properties both developed and undeveloped are capitalized not to exceed the fair value of the oil and gas reserves such capitalized costs all of which enter into the full cost pool as incurred are depleted by use of the unit-of-production method by applying the ratio of gross revenues from oil and gas properties in each period to estimated future gross revenues from proven reserves of all oil and gas properties estimated future gross revenues are adjusted periodically whenever significant changes occur in oil and gas prices or in proven reserves such revised future gross revenues are then used to calculate depletion for the current quarter and for future periods inventories — inventories which include principally mined ore and coal metal concentrates and mining supplies are stated at ihe lower of average cost or market the cost of production inven tories includes both direct and indirect costs consisting of labor purchased supplies and services and depreciation depletion and amortization of property plant and equipment 1 proposed merger with general electric company on december 15 1975 utah announced that the boards of directors of general electric company and utah had authorized the negotiation of a definitive merger agreement since then the merger has been approved by the boards of directors a definitive agreement to merge the companies has been executed and all necessary governmental approvals have been obtained the pro posed merger is to be accomplished through a tax-free exchange of 1.3 shares of general electric common stock for each share of utah common stock outstanding consummation of the merger is subject to the approval by the stockholders of both companies on december 15 1976 in connection with the proposed merger the companies requested a letter from the department of justice under its busi ness advisory clearance procedure in its letter dated october 1 1976 the department of justice stated that it has no present intention to take legal action to prevent or otherwise challenge the proposed merger in this connection utah has agreed to divest itself of management control of its entire uranium assets until the year 2000 while retaining the beneficial ownership thereof and the right to receive mandatory cumulative quarterly dividends amount ing to 85 of ihe uranium earnings without taking account of any deduction for exploration expenses as defined during the intervening period this is to be accomplished by depositing in a delaware voting trust upon consummation of the merger ail of the outstanding shares of common stock of a wholly owned sub sidiary to which utah's uranium assets net assets approximated 90 million at october 31 1976 and business have been con veyed thereafter utah will no longer consolidate the accounts of this subsidiary for financial reporting purposes dividends from the subsidiary will be recorded as income by utah 2 foreign operations and mineral sales backlog a substantial portion of utah's business is represented by opera tions located outside of the united states as summarized below at october 31 , 1976 and for the year then ended australia united states canada . . . 944,255 1 26 611 3 78 to japanese customers and 21 to european customers under long-term sales agreements b 94 to japanese customers under long-term sales agreements c includes utah's ocean cargo vessels not permanently situated in any one country and utah's investment in certain affiliates — a combined total of 95 million a substantial portion of such affi liates assets either are located within the united states or are ocean cargo vessels ¦ d principally represents investment in iron ore project under de velopment in which utah owns a 49 interest shipments are expected to commence during july 1977 at october 31 1976 approximately 96 of utah's mineral sales backlog totaling 6.1 biliion was under long-term sales agree ments which contain escalation clauses affording substantial pro tection against future cost increases in august 1 976 the commonwealth government of australia re duced the export duty on exports of high quality coking coal from sa6.00 per metric ton to a4.50 per metric ton in addition the government announced its intention to phase out entirely this duty within three years the complete elimination of the export duty would have a favorable material effect on utah's results of opera tions on october 31 , 1976 the australian dollar was equivalent to approximately us1 23 see note 12 for australian dollar devalu tion in november 1976 3 affiliated companies the composition of utah's investment in affiliated companies at october 31 1976 was as follows in thousands equity in undistributed earnings of affili included in retained earnings included in deferred income taxes $ 62,958 3,536 $ 66,494 75,172 141,666 below is a summary of the unaudited financial statements of mar cona corporation marcona samarco mineracao s.a samarco and cyprus pima mining company cyprus pima utah's most significant affiliates and of all affiliates combined as of october 31,1976 cyprus marcona samarco pima 46 49 25 total in thousands owned owned owned affiliates current assets . other assets . $ 39,056 $ 5,054 $ 43,742 104.765 396,736 93,283 401 790 137,025 808,563 115,049 693,514 current liabilities $ 33,300 long-term liabilities . 8,461 stockholders equity 1 02,060 $ 22.224 $ 20,872 $ 98,828 257,558 26,221 378,331 1 22.008 89,932 331 404 revenue net income loss . . utah's recorded share of stockholders equily net income loss . . 143,821 401 790 137,025 808,563 164,660 10,790 $ 95,414 343,842 2,860 7,346 $ 46,948 5,033 $ 22,474 705 141,666 2,672 on july 25 1975 the peruvian government expropriated the iron ore mining properties and facilities of marcona mining company in peru marcona mining company is a wholly owned subsidiary of marcona utah's underlying share of the book value of mar cona's investment in the peruvian properties was approximately 1 9.1 million which was net of approximately 5 million of income taxes previously provided by utah on the undistributed earnings of marcona subsequent to the expropriation marcona sustained additional losses which were deemed to be directly associated with the takeover by the peruvian government these losses related to marcona-owned and chartered vessels which were in volved in transporting ore from the peruvian mine such losses totaling approximately 4.7 million utah's share were combined with utah's share of the book value of marcona's investment in the peruvian properties as losses resulting from the expropriation accordingly utah wrote off such losses totaling 23.8 million as an extraordinary item during 1975 on september 23 1976 an intergovernmental agreement was reached between united states and peruvian government repre sentatives in settlement for the expropriated assets the agree ment provides lor a 37 million payment to marcona in the form of an interest-bearing promissory note to be paid from the proceeds of international financing being negotiated by the peruvian gov ernment in addition the agreement provides for a quantity of iron ore pellets to be purchased by marcona under a separate agree ment for resale in the united states over a four-year period and a contract of affreightment covering the transportation of peruvian ore marcona has confirmed its acceptance of this agreement when carried out as full settlement of its claims against peru arising out of the expropriation the agreement also relieves mar cona of any liabilities for the payment of taxes or other obligations to the peruvian government marcona plans to record the 37 mil lion when collected expected before december 31 1976 as an extraordinary gain net of the appropriate tax effect utah's share of such gain net of tax effects will similarly be recorded by utah marcona intends to record income or losses resulting from the pellet purchase contract and the contract of affreightment as income from continuing operations when realized in september 1976 utah acquired marcona's 49 interest in samarco at marcona's cost samarco is developing an iron ore project in brazil shipments are expected to begin in july 1977 see note 9 for a description of utah's additional investment re quirements and contingent liabilities related to samarco 4 joint ventures and partnerships below is a summary of the unaudited balance sheets of harbor bay isle associates a partnership formed to develop a residential community in the san francisco area and of all joint ventures other than mining joint ventures and partnerships combined as of october 31 1976 harbor bay isle total joint associates ventures and in thousands 50 owned)*1 partnerships current assets other assets principally land current liabilities long-term liabilities net worth $ 1,186 26,543 4,230 $ 3,829 33,344 6,461 a partnership agreement modifications made in 1975 provide that losses will be allocated in proportion to the partners capital ac counts profits if any will be shared equally after partners prior losses have been recovered in effect utah since april 1974 has recorded 100 of the partnership losses long-term liabilities consist of assessment liens payable to a reclamation district which issued bonds to raise funds for de veloping the project utah acquired substantially all of these bonds and they are included in long-term receivables and other in the accompanying consolidated balance sheet be cause of the difficulties experienced in developing this project utah has provided a significant reserve on its investment in the bonds 5 profit sharing and pension plans utah's retirement program for salaried employees consists of the profit sharing plan the stock investmenl plan and the retirement plan the retirement plan is a pension program in which utah is required to contribute sufficient funds each year to fully fund the liabilities of the plan an.nual contributions to the profit sharing plan and the stock investment plan are based upon a profit sharing formula there are no unamortized past service costs with respect to the retirement plan certain domestic operations provide pension plans resulting from collective bargaining agreements and two subsidiaries oper ating in foreign countries have established separate retirement plans fund assets of these plans at october 31 1976 approxi mated vested benefits at that date the employee retirement income security act of 1974 has not had a significant effect on utah's retirement programs 6 income taxes the provision for income taxes consisted of in thousands 1976 1975 federal and stale current deferred foreign — current deferred