-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lq9L/mUWBLWxTsOQcD3jWo8rTwgsW79DA2VwOHmxT+YCWU65DcAKKRnmibWpBIZO Ujz8ecaflkb6HPuF96L/Qw== 0000101778-01-500065.txt : 20010807 0000101778-01-500065.hdr.sgml : 20010807 ACCESSION NUMBER: 0000101778-01-500065 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: USX CORP CENTRAL INDEX KEY: 0000101778 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 250996816 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05153 FILM NUMBER: 1698867 BUSINESS ADDRESS: STREET 1: 600 GRANT ST STREET 2: ROOM 1312 CITY: PITTSBURGH STATE: PA ZIP: 15219-4776 BUSINESS PHONE: 4124331121 MAIL ADDRESS: STREET 1: 600 GRANT STREET STREET 2: ROOM 1312 CITY: PITTSBURGH STATE: PA ZIP: 15219-4776 FORMER COMPANY: FORMER CONFORMED NAME: UNITED STATES STEEL CORP/DE DATE OF NAME CHANGE: 19860714 10-Q 1 fm10q201.txt 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ------------ to ------------ USX CORPORATION ----------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 1-5153 25-0996816 --------------- ------------ ------------------- (State or other (Commission (IRS Employer jurisdiction of File Number) Identification No.) incorporation) 600 Grant Street, Pittsburgh, PA 15219-4776 - --------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (412) 433-1121 ------------------------------ (Registrant's telephone number, including area code) - ---------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes..X..No..... Common stock outstanding at July 31, 2001 follows: USX-Marathon Group - 308,913,392 shares USX-U. S. Steel Group - 89,141,345 shares 2 USX CORPORATION SEC FORM 10-Q QUARTER ENDED June 30, 2001 --------------------------- INDEX Page ----- ---- PART I - FINANCIAL INFORMATION A. Consolidated Corporation Item 1. Financial Statements: Consolidated Statement of Operations 4 Consolidated Balance Sheet 6 Consolidated Statement of Cash Flows 8 Selected Notes to Consolidated Financial Statements 9 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends and Ratio of Earnings to Fixed Charges 28 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 29 Item 3. Quantitative and Qualitative Disclosures about Market Risk 39 Financial Statistics 42 B. Marathon Group Item 1. Financial Statements: Marathon Group Statement of Operations 43 Marathon Group Balance Sheet 44 Marathon Group Statement of Cash Flows 45 Selected Notes to Financial Statements 46 Item 2. Marathon Group Management's Discussion and Analysis of Financial Condition and Results of Operations 59 Item 3. Quantitative and Qualitative Disclosures about Market Risk 70 Supplemental Statistics 73 3 USX CORPORATION SEC FORM 10-Q QUARTER ENDED June 30, 2001 --------------------------- INDEX Page ----- ---- PART I - FINANCIAL INFORMATION (Continued) C. U. S. Steel Group Item 1. Financial Statements: U. S. Steel Group Statement of Operations 75 U. S. Steel Group Balance Sheet 76 U. S. Steel Group Statement of Cash Flows 77 Selected Notes to Financial Statements 78 Item 2. U. S. Steel Group Management's Discussion and Analysis of Financial Condition and Results of Operations 89 Item 3. Quantitative and Qualitative Disclosures about Market Risk 99 Supplemental Statistics 102 PART II - OTHER INFORMATION Item 1. Legal Proceedings 103 Item 4. Submission of Matters to a Vote of Security Holders 105 Item 5. Other Information 106 Item 6. Exhibits and Reports on Form 8-K 107 4 Part I - Financial Information A. Consolidated Corporation USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) ------------------------------------------------
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 2001 2000 2001 2000 - ---------------------------------------------------------------------- REVENUES AND OTHER INCOME: Revenues $10,844 $10,293 $20,960 $19,600 Dividend and investee income 32 31 112 35 Net gains on disposal of assets 24 15 44 122 Gain (loss) on ownership change in Marathon Ashland Petroleum LLC (7) 4 (6) 8 Other income 10 7 78 14 ------ ------ ------ ------ Total revenues and other income 10,903 10,350 21,188 19,779 ------ ------ ------ ------ COSTS AND EXPENSES: Cost of revenues (excludes items shown below) 7,791 7,710 15,560 14,923 Selling, general and administrative expenses 204 67 329 138 Depreciation, depletion and amortization 385 318 761 639 Taxes other than income taxes 1,269 1,237 2,450 2,400 Exploration expenses 26 46 49 91 ------ ------ ------ ------ Total costs and expenses 9,675 9,378 19,149 18,191 ------ ------ ------ ------ INCOME FROM OPERATIONS 1,228 972 2,039 1,588 Net interest and other financial costs 86 92 109 187 Minority interest in income of Marathon Ashland Petroleum LLC 320 203 427 258 ------ ------ ------ ------ INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 822 677 1,503 1,143 Provision for income taxes 270 254 434 423 ------ ------ ------ ------ INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 552 423 1,069 720 Cumulative effect of change in accounting principle - - (8) - ------ ------ ------ ------ NET INCOME 552 423 1,061 720 Dividends on preferred stock 2 2 4 4 ------ ------ ------ ------ NET INCOME APPLICABLE TO COMMON STOCKS $550 $421 $1,057 $716 ====== ====== ====== ====== Selected notes to financial statements appear on pages 9-27.
5 USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF OPERATIONS (Continued) (Unaudited) INCOME PER COMMON SHARE ------------------------------------------------------------
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions, except per share amounts) 2001 2000 2001 2000 - --------------------------------------------------------------------- APPLICABLE TO MARATHON STOCK: Income before cumulative effect of change in accounting principle $582 $367 $1,090 $621 - Per share - basic 1.88 1.18 3.53 1.99 - diluted 1.88 1.18 3.52 1.99 Cumulative effect of change in accounting principle - - (8) - - Per share - basic - - (.03) - - diluted - - (.02) - Net income $582 $367 $1,082 $621 - Per share - basic and diluted 1.88 1.18 3.50 1.99 Dividends paid per share .23 .21 .46 .42 Weighted average shares, in thousands - Basic 309,101 312,233 308,928 312,180 - Diluted 309,627 312,431 309,338 312,359 APPLICABLE TO STEEL STOCK: Net income (loss) $(32) $4 $(25) $95 - Per share - basic (.36) .62 (.28) 1.08 - diluted (.36) .62 (.28) 1.07 Dividends paid per share .10 .25 .35 .50 Weighted average shares, in thousands - Basic 89,005 88,499 88,906 88,461 - Diluted 89,005 92,755 88,906 92,721 Selected notes to financial statements appear on pages 9-27.
6 USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET (Unaudited) ----------------------------------------
ASSETS June 30 December 31 (Dollars in millions) 2001 2000 - ----------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $723 $559 Receivables, less allowance for doubtful accounts of $131 and $60 2,836 2,888 Receivables subject to a security interest 350 350 Inventories 2,926 2,813 Deferred income tax benefits 234 261 Assets held for sale - 330 Other current assets 119 131 ------ ------ Total current assets 7,188 7,332 Investments and long-term receivables, less reserves of $39 and $38 1,041 801 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $16,810 and $16,222 12,977 12,114 Prepaid pensions 2,928 2,879 Other noncurrent assets 380 275 ------ ------ Total assets $24,514 $23,401 ====== ====== Selected notes to financial statements appear on pages 9-27.
7 USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET (Continued) (Unaudited) --------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY June 30 December 31 (Dollars in millions) 2001 2000 - ----------------------------------------------------------------------- LIABILITIES Current liabilities: Notes payable $250 $150 Accounts payable 3,547 3,774 Payroll and benefits payable 418 432 Accrued taxes 576 281 Accrued interest 114 108 Long-term debt due within one year 436 287 ------ ------ Total current liabilities 5,341 5,032 Long-term debt, less unamortized discount 3,673 4,173 Deferred income taxes 2,070 2,020 Employee benefits 2,578 2,415 Deferred credits and other liabilities 715 724 Preferred stock of subsidiary 250 250 USX obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely junior subordinated convertible debentures of USX 183 183 Minority interest in Marathon Ashland Petroleum LLC 2,010 1,840 STOCKHOLDERS' EQUITY Preferred stock - 6.50% Cumulative Convertible issued - 2,404,487 shares and 2,413,487 shares ($120 and $121 liquidation preference, respectively) 2 2 Common stocks: Marathon Stock issued - 312,165,978 shares and 312,165,978 shares 312 312 Steel Stock issued - 89,156,721 shares and 88,767,395 shares 89 89 Securities exchangeable solely into Marathon Stock issued - 264,441 shares and 281,148 shares - - Treasury common stock, at cost - Marathon Stock - 3,256,789 shares and 3,899,714 shares (87) (104) Additional paid-in capital 4,686 4,676 Deferred compensation (30) (8) Retained earnings 2,731 1,847 Accumulated other comprehensive loss (9) (50) ------ ------ Total stockholders' equity 7,694 6,764 ------ ------ Total liabilities and stockholders' equity $24,514 $23,401 ====== ====== Selected notes to financial statements appear on pages 9-27.
8
USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) ------------------------------------------------ Six Months Ended June 30 (Dollars in millions) 2001 2000 - ---------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income $1,061 $720 Adjustments to reconcile to net cash provided from operating activities: Cumulative effect of change in accounting principle 8 - Minority interest in income of Marathon Ashland Petroleum LLC 427 258 Depreciation, depletion and amortization 761 639 Exploratory dry well costs 6 32 Pensions and other postretirement benefits (42) (157) Deferred income taxes (179) 162 (Gain) loss on ownership change in Marathon Ashland Petroleum LLC 6 (8) Net gains on disposal of assets (44) (122) Changes in: Current receivables 150 (320) Inventories (83) (265) Current accounts payable and accrued expenses (99) 213 All other - net 51 (44) ------ ------ Net cash provided from operating activities 2,023 1,108 ------ ------ INVESTING ACTIVITIES: Capital expenditures (769) (673) Acquisition of Pennaco Energy, Inc. (506) - Disposal of assets 115 230 Restricted cash - withdrawals 26 161 - deposits (15) (194) Investees - investments (2) (67) - loans and advances (5) - - returns and repayments 10 2 All other - net (19) 23 ------ ------ Net cash used in investing activities (1,165) (518) ------ ------ FINANCING ACTIVITIES: Commercial paper and revolving credit arrangements - net (277) (253) Other debt - borrowings 139 273 - repayments (132) (309) Common stock repurchased (1) - Treasury stock reissued 3 - Preferred stock repurchased - (12) Dividends paid (177) (179) Distributions to minority shareholder of Marathon Ashland Petroleum LLC (244) (73) ------ ------ Net cash used in financing activities (689) (553) ------ ------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (5) (3) ------ ------ NET INCREASE IN CASH AND CASH EQUIVALENTS 164 34 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 559 133 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $723 $167 ====== ====== Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $(178) $(179) Income taxes paid (218) (141) Selected notes to financial statements appear on pages 9-27.
9 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (Unaudited) 1. The information furnished in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. Certain reclassifications of prior year data have been made to conform to 2001 classifications. Additional information is contained in the USX Annual Report on Form 10-K for the year ended December 31, 2000. 2. Effective January 1, 2001, USX adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended by SFAS Nos. 137 and 138. This Standard, as amended, requires recognition of all derivatives at fair value as either assets or liabilities. Changes in the fair value of all derivatives are recognized immediately in earnings, unless the derivative qualifies as a hedge of future cash flows or certain foreign currency exposures. For derivatives qualifying as hedges of future cash flows or certain foreign currency exposures, the effective portion of any changes in fair value is recognized in a component of stockholders' equity called other comprehensive income ("OCI") and then reclassified to earnings when the underlying anticipated transaction is consummated. Any ineffective portion of such hedges is recognized in earnings as it occurs. For derivatives designated as hedges of the fair value of recognized assets, liabilities or firm commitments, changes in the fair value of the hedged item are recognized immediately in earnings. Since changes in fair value of the related derivative are also recognized immediately in earnings, the net effect of that accounting is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value. USX uses commodity-based and foreign currency derivative instruments to manage its exposure to price risk. Management has authorized the use of futures, forwards, swaps and options to reduce the effects of fluctuations related to the purchase, production or sale of crude oil, natural gas, refined products, and nonferrous metals and also certain business transactions denominated in foreign currencies. In order to apply hedge accounting under SFAS No. 133, USX is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective portion of the hedge. Generally, USX has not elected to designate derivative instruments as qualifying for hedge accounting treatment. As a result, the changes in fair value of most derivatives are recognized immediately in earnings, while the changes in the fair value of the underlying items generally are not recognized until the transaction is consummated. At the date of adoption, USX had one strategy that qualified as a hedge of the fair value of a firm commitment. This strategy continues to qualify for hedge accounting treatment. Additional strategies, which are hedges of future cash flows, qualified as hedges on June 1, 2001. 10 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 2. (Continued) A portion of the cumulative effect adjustment relating to the adoption of SFAS No. 133 was recognized in OCI. The cumulative effect adjustment relates only to deferred gains or losses existing as of the close of business on December 31, 2000, for hedge transactions under prior accounting rules. A reconciliation of the changes in OCI relating to derivative instruments is as follows (amounts in millions):
Second Six Quarter Months Ended Ended June 30 June 30 Deferred gain (loss), net of tax 2001 2001 ------------------------------------------------------------------ Beginning balance $34 $- Cumulative effect adjustment - (8) Reclassification of the cumulative effect adjustment into earnings (7) 35 Changes in fair value 15 15 Reclassification to earnings - - ---- ---- Balance at June 30, 2001 $42 $42 ==== ====
Of the $42 million recorded in OCI as of June 30, 2001, $18 million, net of income taxes, is expected to be reclassified to earnings over the 12-month period ending June 30, 2002. The actual amounts that will be reclassified to earnings over the next twelve months will vary as a result of continual changes in fair value. The ineffective portion of changes in the fair value of hedges of future cash flows recognized during the second quarter and six months of 2001 was a favorable $4 million before income taxes. This amount was included in revenues. The futures contracts used in cash flow hedge strategies vary in duration with certain contracts extending into 2002. USX employs one strategy qualifying as a hedge of the fair value of a firm commitment. There is no ineffectiveness associated with this hedge. The hedging instrument and the existing firm commitment contract are priced on the same underlying index. The over-the-counter swap agreement extends into 2008. USX did not have any foreign currency contracts that qualified for hedge accounting. The changes in fair value of the forward currency contracts are recognized immediately in earnings. These forward currency contracts have various maturities extending into 2001. 11 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 2. (Continued) In June 2001, the Financial Accounting Standards Board approved Statements of Financial Accounting Standards No. 141 "Business Combinations" (SFAS 141), No. 142 "Goodwill and Other Intangible Assets" (SFAS 142) and No. 143 "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 141 requires all business combinations completed after June 30, 2001, be accounted for under the purchase method. This standard also establishes for all business combinations made after June 30, 2001, specific criteria for the recognition of intangible assets separately from goodwill. SFAS 141 also requires that the excess of fair value of acquired assets over cost (negative goodwill) be recognized immediately as an extraordinary gain, rather than deferred and amortized. USX will account for all future business combinations under SFAS 141. SFAS 142 addresses the accounting for goodwill and other intangible assets after an acquisition. The most significant changes made by SFAS 142 are: 1) goodwill and intangible assets with indefinite lives will no longer be amortized; 2) goodwill and intangible assets with indefinite lives must be tested for impairment at least annually; and 3) the amortization period for the intangible assets with finite lives will no longer be limited to forty years. USX will adopt SFAS 142 effective January 1, 2002, as required. At that time, amortization of existing goodwill will cease on the unamortized portion associated with previous acquisitions and certain investments accounted for under the equity method. This will have a favorable impact on the results of operations of approximately $5 million, net of tax, annually beginning in 2002. Additionally, SFAS 142 requires that unamortized negative goodwill associated with investments accounted for under the equity method and acquired before July 1, 2001, be recognized in income as a cumulative effect of change in accounting principle. USX expects to recognize a favorable cumulative effect of a change in accounting principle of approximately $35 million, net of tax, upon adoption. USX continues to evaluate the financial effects of the provisions of SFAS No. 142 pertaining to intangible assets other than goodwill. SFAS 143 provides accounting requirements for retirement obligations associated with tangible long-lived assets, including: 1) the timing of liability recognition; 2) initial measurement of the liability; 3) allocation of asset retirement cost to expense; 4) subsequent measurement of the liability; and 5) financial statement disclosures. SFAS 143 requires that an asset retirement cost should be capitalized as part of the cost of the related long- lived asset and subsequently allocated to expense using a systematic and rational method. USX will adopt the Statement effective January 1, 2003. The transition adjustment resulting from the adoption of SFAS 143 will be reported as a cumulative effect of a change in accounting principle. At this time, USX cannot reasonably estimate the effect of the adoption of this Statement on either its financial position or results of operations. 12 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 3. The Marathon Group's operations consist of three reportable operating segments: 1) Exploration and Production (E&P) - explores for and produces crude oil and natural gas on a worldwide basis; 2) Refining, Marketing and Transportation (RM&T) - refines, markets and transports crude oil and petroleum products, primarily in the Midwest and southeastern United States through Marathon Ashland Petroleum LLC (MAP); and 3) Other Energy Related Businesses (OERB). OERB is an aggregation of two segments which fall below the quantitative reporting thresholds: 1) Natural Gas and Crude Oil Marketing and Transportation - markets and transports its own and third-party natural gas and crude oil in the United States; and 2) Power Generation - develops, constructs and operates independent electric power projects worldwide. The U. S. Steel Group consists of two reportable operating segments: 1) Domestic Steel and 2) U. S. Steel Kosice (USSK). Domestic Steel includes the United States operations of U. S. Steel while USSK includes the U. S. Steel Kosice operations primarily located in the Slovak Republic. Domestic Steel is engaged in the domestic production, sale and transportation of steel mill products, coke, taconite pellets and coal; the management of mineral resources; real estate development; and engineering and consulting services. USSK is engaged in the production and sale of steel mill products and coke and primarily serves central European markets. 13 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 3. (Continued) The results of segment operations for USX are as follows:
Total Marathon (In millions) E&P RM&T OERB Segments - ----------------------------------------------------------------------- SECOND QUARTER 2001 - ------------------- Revenues and other income: Customer $1,140 $7,536 $437 $9,113 Intersegment (a) 136 7 19 162 Intergroup (a) 5 - 3 8 Equity in earnings of unconsolidated investees 16 8 7 31 Other 9 17 5 31 ------ ------ ------ ------ Total revenues and other income $1,306 $7,568 $471 $9,345 ====== ====== ====== ====== Segment income $459 $842 $10 $1,311 ====== ====== ====== ====== SECOND QUARTER 2000 - ------------------- Revenues and other income: Customer $957 $7,406 $305 $8,668 Intersegment (a) 119 35 13 167 Intergroup (a) 6 - 6 12 Equity in earnings (losses) of unconsolidated investees (3) 6 4 7 Other 7 10 2 19 ------ ------ ------ ------ Total revenues and other income $1,086 $7,457 $330 $8,873 ====== ====== ====== ====== Segment income $356 $529 $- $885 ====== ====== ====== ====== (a)Intersegment and intergroup sales and transfers were conducted under terms comparable to those with unrelated parties.
14 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 3. (Continued)
Total Total Domestic U.S.Steel Marathon (In millions) Steel USSK Segments Segments Total - ----------------------------------------------------------------------- SECOND QUARTER 2001 - ------------------- Revenues and other income: Customer $1,447 $284 $1,731 $9,113 $10,844 Intersegment (a) 2 - 2 162 164 Intergroup (a) 2 - 2 8 10 Equity in earnings (losses) of unconsolidated investees (8) 1 (7) 31 24 Other 11 - 11 31 42 ------ ------ ------ ------ ------ Total revenues and other income $1,454 $285 $1,739 $9,345 $11,084 ====== ====== ====== ====== ====== Segment income (loss) $(69) $41 $(28) $1,311 $1,283 ====== ====== ====== ====== ====== SECOND QUARTER 2000 - ------------------- Revenues and other income: Customer $1,625 $- $1,625 $8,668 $10,293 Intersegment (a) - - - 167 167 Intergroup (a) 4 - 4 12 16 Equity in earnings of unconsolidated investees 14 - 14 7 21 Other 13 - 13 19 32 ------ ------ ------ ------ ------ Total revenues and other income $1,656 $- $1,656 $8,873 $10,529 ====== ====== ====== ====== ====== Segment income $68 $- $68 $885 $953 ====== ====== ====== ====== ====== (a)Intersegment and intergroup sales and transfers were conducted under terms comparable to those with unrelated parties.
15 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 3. (Continued)
Total Marathon (In millions) E&P RM&T OERB Segments - ---------------------------------------------------------------------- SIX MONTHS 2001 - --------------- Revenues and other income: Customer $2,378 $14,278 $1,065 $17,721 Intersegment (a) 270 13 44 327 Intergroup (a) 15 - 5 20 Equity in earnings of unconsolidated investees 36 14 11 61 Other 17 32 7 56 ------ ------ ------ ------ Total revenues and other income $2,716 $14,337 $1,132 $18,185 ====== ====== ====== ====== Segment income $1,059 $1,118 $18 $2,195 ====== ====== ====== ====== SIX MONTHS 2000 - --------------- Revenues and other income: Customer $1,909 $13,833 $655 $16,397 Intersegment (a) 188 55 32 275 Intergroup (a) 11 - 11 22 Equity in earnings (losses) of unconsolidated investees (4) 10 8 14 Other 10 21 6 37 ------ ------ ------ ------ Total revenues and other income $2,114 $13,919 $712 $16,745 ====== ====== ====== ====== Segment income $665 $669 $13 $1,347 ====== ====== ====== ====== (a)Intersegment and intergroup sales and transfers were conducted under terms comparable to those with unrelated parties.
16 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 3. (Continued)
Total Total Domestic U.S.Steel Marathon (In millions) Steel USSK Segments Segments Total - ------------------------------------------------------------------------ SIX MONTHS 2001 - ---------------- Revenues and other income: Customer $2,709 $530 $3,239 $17,721 $20,960 Intersegment (a) 3 - 3 327 330 Intergroup (a) 4 - 4 20 24 Equity in earnings of unconsolidated investees 39 1 40 61 101 Other 17 1 18 56 74 ------ ------ ------ ------ ------ Total revenues and other income $2,772 $532 $3,304 $18,185 $21,489 ====== ====== ====== ====== ====== Segment income (loss) $(220) $82 $(138) $2,195 $2,057 ====== ====== ====== ====== ====== SIX MONTHS 2000 - --------------- Revenues and other income: Customer $3,203 $- $3,203 $16,397 $19,600 Intersegment (a) - - - 275 275 Intergroup (a) 8 - 8 22 30 Equity in earnings of unconsolidated investees 7 - 7 14 21 Other 26 - 26 37 63 ------ ------ ------ ------ ------ Total revenues and other income $3,244 $- $3,244 $16,745 $19,989 ====== ====== ====== ====== ====== Segment income $122 $- $122 $1,347 $1,469 ====== ====== ====== ====== ====== (a)Intersegment and intergroup sales and transfers were conducted under terms comparable to those with unrelated parties.
17 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 3. (Continued) The following schedules reconcile segment amounts to amounts reported in the Marathon and U. S. Steel Groups' financial statements:
Marathon Group U. S. Steel Group Second Quarter Second Quarter Ended Ended June 30 June 30 (In millions) 2001 2000 2001 2000 - ----------------------------------------------------------------------- Revenues and other income: Revenues and other income of reportable segments $9,345 $8,873 $1,739 $1,656 Items not allocated to segments - Gain (loss) on ownership change in MAP (7) 4 - - Elimination of intersegment revenues (162) (167) (2) - ------ ------ ----- ----- Total Group revenues and other income $9,176 $8,710 $1,737 $1,656 ====== ====== ====== ====== Income: Income (loss) for reportable segments $1,311 $885 $(28) $68 Items not allocated to segments: Gain (loss) on ownership change in MAP (7) 4 - - Administrative expenses (34) (29) (8) (5) Net pension credits - - 31 67 Costs related to former business activities - - (14) (18) Costs related to Proposed Separation (15) - (8) - ------ ------ ------ ------ Total Group income (loss) from operations $1,255 $860 $(27) $112 ====== ====== ====== ======
18 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 3. (Continued)
Marathon Group U. S. Steel Group Six Months Six Months Ended Ended June 30 June 30 (In millions) 2001 2000 2001 2000 - ----------------------------------------------------------------------- Revenues and other income: Revenues and other income of reportable segments $18,185 $16,745 $3,304 $3,244 Items not allocated to segments: Gain (loss) on ownership change in MAP (6) 8 - - Other (a) 59 87 - - Elimination of intersegment revenues (327) (275) (3) - ------ ------ ----- ----- Total Group revenues and other income $17,911 $16,565 $3,301 $3,244 ====== ====== ====== ====== Income: Income (loss) for reportable segments $2,195 $1,347 $(138) $122 Items not allocated to segments: Gain (loss) on ownership change in MAP (6) 8 - - Administrative expenses (65) (57) (15) (11) Net pension credits - - 72 132 Costs related to former business activities - - (38) (40) Costs related to Proposed Separation (16) - (9) - Other (a) 59 87 - - ------ ------ ------ ------ Total Group income (loss) from operations $2,167 $1,385 $(128) $203 ====== ====== ====== ====== (a) Represents in 2001 for the Marathon Group, gain on offshore lease resolution with the U.S. Government and in 2000, gain on disposition of Angus/Stellaria.
4. On November 24, 2000, USX acquired U. S. Steel Kosice, s.r.o. (USSK), which is primarily located in the Slovak Republic. USSK was formed in June 2000 to hold the steel operations and related assets of VSZ a.s. (VSZ), a diversified Slovak corporation. The acquisition was accounted for under the purchase method of accounting. In the first quarter 2001, Marathon Oil Company (Marathon) acquired Pennaco Energy, Inc. (Pennaco), a natural gas producer. Marathon acquired 87% of the outstanding stock of Pennaco through a tender offer completed on February 7, 2001 at $19 a share. On March 26, 2001, Pennaco was merged with a wholly owned subsidiary of Marathon. Under the terms of the merger, each share not held by Marathon was converted into the right to receive $19 in cash. The total cash purchase price of Pennaco was $506 million. The acquisition was accounted for under the purchase method of accounting. The excess of the purchase price over the preliminary fair value of net assets acquired (goodwill) was $64 million and was originally to be amortized over 17 years. 19 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 4. (Continued) However, with the adoption of SFAS No. 142, effective January 1, 2002, USX will cease the amortization of goodwill and will test the unamortized balance for impairment on an annual basis. Results of operations for the six months of 2001 include the results of Pennaco from February 7, 2001. On March 1, 2001, USX completed the purchase of the tin mill products business of LTV Corporation (LTV), which is now operated as East Chicago Tin. In this noncash transaction, USX assumed approximately $66 million of certain employee related obligations from LTV. The acquisition was accounted for using the purchase method of accounting. Results of operations for the six months of 2001 include the operations of East Chicago Tin from the date of acquisition. On March 23, 2001, Transtar, Inc. (Transtar) completed its previously announced reorganization with its two voting shareholders, USX and Transtar Holdings, L.P. (Holdings), an affiliate of Blackstone Capital Partners L.P. As a result of this transaction, USX became sole owner of Transtar and certain of its subsidiaries. Holdings became owner of the other subsidiaries of Transtar. USX accounted for the change in its ownership interest in Transtar using the purchase method of accounting. USX recognized in the six months of 2001 a pretax gain of $68 million (included in dividend and investee income) and a favorable deferred tax adjustment of $33 million related to this transaction. USX previously accounted for its investment in Transtar under the equity method of accounting. The following unaudited pro forma data for USX includes the results of operations of the above acquisitions giving effect to them as if they had been consummated at the beginning of the periods presented. The six months 2001 pro forma results exclude the $68 million gain and $33 million tax benefit recorded as a result of the Transtar transaction. In addition, VSZ did not historically provide carve-out financial information for its steel activities prepared in accordance with generally accepted accounting principles in the United States. Therefore, USX made certain estimates and assumptions regarding revenues and costs in the preparation of the unaudited pro forma data relating to USSK for the six months of 2000. The following 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. 20 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 4. (Continued)
Six Months Ended June 30 (In millions, except per share amounts) 2001 2000 - ---------------------------------------------------------------------- Revenues and other income $21,174 $20,402 Income before cumulative effect of change in accounting principle 964 740 Net income 956 740 Applicable to Marathon Stock: Income before cumulative effect of change in accounting principle 1,087 603 - Per share - basic and diluted 3.52 1.93 Net income 1,079 603 - Per share - basic and diluted 3.49 1.93 Applicable to Steel Stock: Net income (loss)(a) (127) 133 - Per share - basic (1.43) 1.51 - diluted (1.43) 1.48 (a) Amounts are net of dividends on preferred stock of $4 million.
5. In December 2000, Marathon and Kinder Morgan Energy Partners, L.P. signed a definitive agreement to form a joint venture combining certain of their oil and gas producing activities in the U.S. Permian Basin, including Marathon's interest in the Yates Field. This transaction has allowed Marathon to expand its interests in the Permian Basin and improve access to materials for use in enhanced recovery techniques in the Yates Field. The joint venture, named MKM Partners L.P., commenced operations in January 2001 and is accounted for under the equity method of accounting. 21 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 6. Inventories are carried at lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method.
(In millions) ---------------------- June 30 December 31 2001 2000 ------------------- Raw materials $933 $915 Semi-finished products 378 429 Finished products 1,411 1,279 Supplies and sundry items 204 190 ------ ------ Total $2,926 $2,813 ====== ======
7. Total comprehensive income was $562 million for the second quarter of 2001, $420 million for the second quarter of 2000, $1,103 million for the six months of 2001 and $716 million for the six months of 2000. 8. The method of calculating net income (loss) per share for the Marathon Stock and Steel Stock reflects the USX Board of Directors' intent that the separately reported earnings and surplus of the Marathon Group and the U. S. Steel Group, as determined consistent with the USX Restated 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 and the U. S. Steel Group, taken together, include all accounts which comprise the corresponding consolidated financial statements of USX. 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. 22 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 8. (Continued) COMPUTATION OF INCOME PER SHARE
Second Quarter Ended June 30 2001 2000 Basic Diluted Basic Diluted - ----------------------------------------------------------------------- Marathon Group - -------------- Net income (millions) $582 $582 $367 $367 ====== ====== ====== ====== Shares of common stock outstanding (thousands): Average number of common shares outstanding 309,101 309,101 312,233 312,233 Effect of dilutive securities - stock options - 526 - 198 ------ ------ ------ ------ Average common shares and dilutive effect 309,101 309,627 312,233 312,431 ====== ====== ====== ====== Net income per share $1.88 $1.88 $1.18 $1.18 ====== ====== ====== ====== U. S. Steel Group - ----------------- Net income (loss) (millions): Net income (loss) $(30) $(30) $56 $56 Dividends on preferred stock 2 2 2 2 ------ ------ ------ ------ Net income (loss) applicable to Steel Stock (32) (32) 54 54 Effect of dilutive convertible securities - - - 2 ------ ------ ------ ------ Net income (loss) assuming conversions $(32) $(32) $54 $56 ====== ====== ====== ====== Shares of common stock outstanding (thousands): Average number of common shares outstanding 89,005 89,005 88,499 88,499 Effect of dilutive securities - trust preferred securities - - - 4,256 ------ ------ ------ ------ Average common shares and dilutive effect 89,005 89,005 88,499 92,755 ====== ====== ====== ====== Net income (loss) per share $(.36) $(.36) $.62 $.62 ====== ====== ====== ======
23 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 8. (Continued)
COMPUTATION OF INCOME PER SHARE Six Months Ended June 30 2001 2000 Basic Diluted Basic Diluted - ----------------------------------------------------------------------- Marathon Group - -------------- Net income (millions): Income before cumulative effect of change in accounting principle $1,090 $1,090 $621 $621 Cumulative effect of change in accounting principle (8) (8) - - ------ ------ ------ ------ Net income $1,082 $1,082 $621 $621 ====== ====== ====== ====== Shares of common stock outstanding (thousands): Average number of common shares outstanding 308,928 308,928 312,180 312,180 Effect of dilutive securities - stock options - 410 - 179 ------ ------ ------ ------ Average common shares and dilutive effect 308,928 309,338 312,180 312,359 ====== ====== ====== ====== Per share: Income before cumulative effect of change in accounting principle $3.53 $3.52 $1.99 $1.99 Cumulative effect of change in accounting principle (.03) (.02) - - ------ ------ ------ ------ Net income $3.50 $3.50 $1.99 $1.99 ====== ====== ====== ====== U. S. Steel Group - ----------------- Net income (loss) (millions): Net income (loss) $(21) $(21) $99 $99 Dividends on preferred stock 4 4 4 4 ------ ------ ------ ------ Net income (loss) applicable to Steel Stock (25) (25) 95 95 Effect of dilutive convertible securities - - - 4 ------ ------ ------ ------ Net income (loss) assuming conversions $(25) $(25) $95 $99 ====== ====== ====== ====== Shares of common stock outstanding (thousands): Average number of common shares outstanding 88,906 88,906 88,461 88,461 Effect of dilutive securities: Trust preferred securities - - - 4,256 Stock options - - - 4 ------ ------ ------ ------ Average common shares and dilutive effect 88,906 88,906 88,461 92,721 ====== ====== ====== ====== Net income (loss) per share $(.28) $(.28) $1.08 $1.07 ====== ====== ====== ======
24 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 9. Included in revenues and costs and expenses for the second quarter of 2001 and 2000 were $1,132 million and $1,108 million, respectively, representing excise taxes on petroleum products and merchandise. Similar amounts for the six months of 2001 and 2000 were $2,170 million and $2,147 million, respectively. 10. The provision for income taxes for the periods reported is based on tax rates and amounts which recognize management's best estimate of current and deferred tax assets and liabilities. Interest and other financial costs in the six months of 2001 included a favorable adjustment of $76 million and provision for income taxes included an unfavorable adjustment of $20 million, both of which are related to certain prior years' taxes. In the second quarter of 2001, the income tax provision included a foreign deferred tax benefit of $9 million related to a reduction in the statutory rate enacted in the Canadian province of Alberta. 11. At June 30, 2001, USX had no borrowings against its $1,354 million long-term revolving credit facility and no borrowings against its $451 million short-term revolving credit facility. Certain banks provide USX with short-term lines of credit totaling $115 million which require a .125% fee or maintenance of compensating balances of 3%. At June 30, 2001, there were no borrowings against these facilities. At June 30, 2001, MAP had no borrowings against its $500 million revolving credit agreements with banks and had no amounts outstanding against its $190 million revolving credit agreement with Ashland, which was amended and extended for one year to March 15, 2002. At June 30, 2001, USSK had no borrowings against its $50 million short-term credit facility. At June 30, 2001, in the event of a change in control of USX, debt obligations totaling $3,330 million and operating lease obligations of $101 million may be declared immediately due and payable. In such event, USX may also be required to either repurchase the leased Fairfield slab caster for $100 million or provide a letter of credit to secure the remaining obligation. 12. On February 16, 2001, USX borrowed $250 million under a six- month term loan facility agreement. The loan is unsecured and any borrowings bear interest at defined short-term market rates. At June 30, 2001, $250 million remained outstanding on this facility. On March 30, 2001, USX borrowed $30 million under a five-year promissory note agreement. The amount borrowed is unsecured and requires quarterly principal payments and interest at a rate of 6.57%. At June 30, 2001, $29 million was outstanding under the agreement. 25 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 13. USX has a 16% investment in Republic Technologies International LLC (Republic) which was accounted for under the equity method of accounting. During the first quarter of 2001, USX discontinued applying the equity method since investments in and advances to Republic had been reduced to zero. Also, USX has recognized certain debt obligations of $14 million previously assumed by Republic. On April 2, 2001, Republic filed a voluntary petition with the U.S. Bankruptcy Court to reorganize its operations under Chapter 11 of the U.S. Bankruptcy Code. In the first quarter of 2001, as a result of Republic's action, USX recorded a pretax charge of $74 million for potentially uncollectible receivables from Republic. 14. In 1998, USX redeemed all shares of USX-Delhi Group Common Stock. After the redemption, 50,000,000 shares of this stock remain authorized but unissued. 15. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the consolidated financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. USX is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At June 30, 2001, and December 31, 2000, accrued liabilities for remediation totaled $216 million and $212 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 $60 million at June 30, 2001, and $57 million at December 31, 2000. For a number of years, USX has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the six months of 2001 and for the years 2000 and 1999, such capital expenditures totaled $23 million, $91 million and $78 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. On May 11, 2001, MAP entered into a consent decree with the U.S. Environmental Protection Agency which commits it to complete certain agreed upon environmental capital projects over the next eight years primarily aimed at reducing air emissions at its seven refineries. The current estimated cost to 26 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 15. (Continued) complete these projects is approximately $270 million. In addition, MAP is required to complete certain agreed upon supplemental environmental projects as part of an enforcement action for alleged Clean Air Act violations, at a current estimated cost of $8 million. The consent decree is currently awaiting court approval. At June 30, 2001, and December 31, 2000, accrued liabilities for platform abandonment and dismantlement totaled $178 million and $162 million, respectively. Guarantees by USX of the liabilities of affiliated entities totaled $80 million at June 30, 2001. In the event that any defaults of guaranteed liabilities occur, USX has access to its interest in the assets of most of the affiliates to reduce losses resulting from these guarantees. As of June 30, 2001, the largest guarantee for a single affiliate was $48 million. At June 30, 2001, USX's pro rata share of obligations of LOOP LLC and various pipeline affiliates secured by throughput and deficiency agreements totaled $119 million. Under the agreements, USX is required to advance funds if the affiliates are unable to service debt. Any such advances are prepayments of future transportation charges. Contract commitments to acquire property, plant and equipment and long-term investments at June 30, 2001, totaled $568 million compared with $663 million at December 31, 2000. 16. On July 31, 2001, USX announced that its board of directors approved the definitive plan of reorganization to separate the energy and steel businesses of USX (Proposed Separation). The Proposed Separation envisions a tax-free spin-off of the steel business of USX into a freestanding, publicly traded company to be known as United States Steel Corporation. Holders of current USX- U. S. Steel Group Common Stock will become holders of United States Steel Corporation Common Stock. Holders of current USX- Marathon Group Common Stock will become holders of Marathon Oil Corporation Common Stock. The Proposed Separation does not contemplate a cash distribution to stockholders. Each new company will carry approximately the same assets and liabilities now associated with its existing business, except for a value transfer of approximately $900 million from Marathon Oil Corporation to United States Steel Corporation, intended to maintain United States Steel Corporation as a strong, independent company. The form of the value transfer will be a reattribution of USX corporate debt between the USX-Marathon Group and the USX-U. S. Steel Group. The Proposed Separation is subject to the approval of the holders of a majority of the outstanding shares of each class of current USX common stock, receipt of a favorable private letter ruling from the Internal Revenue Service ("IRS") on the tax- free nature of the transaction, completion of necessary financing arrangements and receipt of necessary regulatory and third party consents. The transaction is expected to occur on or about December 31, 2001, subject to the absence of any materially adverse change in business conditions for the energy and/or steel business, delay in obtaining the IRS ruling or other unfavorable circumstances. Costs related to the Proposed Separation include professional fees and certain other 27 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 16. (Continued) expenses and are included in selling, general and administrative expenses. These costs in the second quarter and six months of 2001 were $23 million and $25 million, respectively. 17. On July 2, 2001, a corporate reorganization was implemented to create a new holding company structure. USX became a holding company that owns all of the outstanding equity of Marathon Oil Company, an Ohio Corporation which, directly and indirectly, owns and operates the businesses of the USX-Marathon Group, and United States Steel LLC, a Delaware limited liability company which owns and operates the businesses of the USX-U. S. Steel Group. The reorganization will not have any impact on the results of operations or financial position of USX Corporation, the Marathon Group or the U. S. Steel Group. This reorganization in corporate form is independent of the Proposed Separation of the energy and steel businesses of USX Corporation. 18. On July 27, 2001, United States Steel LLC and United States Steel LLC's wholly owned subsidiary, United States Steel Financing Corp., issued $385 million of Senior Notes due August 1, 2008 (Notes), at an interest rate of 10.75 percent. The Notes were issued to meet, in part, the conditions of the Proposed Separation related to the completion of necessary financing arrangements. These notes are guaranteed by USX Corporation until completion of the Proposed Separation, at which time they will be solely the obligation of United States Steel Corporation. The notes allow their redemption if the Proposed Separation does not occur. The Notes contain certain restrictive covenants that became effective on the date of issue. These convenants impose restrictions on certain activities of United States Steel Corporation after the Proposed Separation. Most of these covenants apply only when the Notes are not rated investment grade. 28 USX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS TOTAL ENTERPRISE BASIS - (Unaudited) CONTINUING OPERATIONS ----------------------------------------------------------
Six Months Ended June 30 Year Ended December 31 - ------------------------------------------------------------------ 2001 2000 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- ---- ---- 11.18 6.58 3.79 4.20 3.45 3.63 3.41 ==== ==== ==== ==== ==== ==== ====
USX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES TOTAL ENTERPRISE BASIS - (Unaudited) CONTINUING OPERATIONS -------------------------------------------------
Six Months Ended June 30 Year Ended December 31 - --------------------------------------------------------------------- 2001 2000 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- ---- ---- 11.56 6.74 3.89 4.32 3.56 3.79 3.65 ==== ==== ==== ==== ==== ==== ====
29 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- USX Corporation ("USX") is a diversified company that is principally engaged in the energy business through its Marathon Group and in the steel business through its U. S. Steel Group. The following discussion should be read in conjunction with the second quarter 2001 USX Consolidated Financial Statements and Selected Notes to Financial Statements. For income per common share amounts applicable to USX's two classes of common stock, USX-Marathon Group Common Stock ("Marathon Stock") and USX-U. S. Steel Group Common Stock ("Steel Stock"), see Consolidated Statement of Operations - Income per Common Share. For individual Group results, see Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group and the U. S. Steel Group. For operating statistics, see Supplemental Statistics following Management's Discussion and Analysis of Financial Condition and Results of Operations for each of the respective Groups. On July 31, 2001, USX announced that its board of directors approved the definitive plan of reorganization to separate the energy and steel businesses of USX ("Proposed Separation"). The Proposed Separation envisions a tax-free spin-off of the steel business of USX into a freestanding, publicly traded company to be known as United States Steel Corporation. Holders of current Steel Stock would become holders of United States Steel Corporation Common Stock. Holders of current Marathon Stock would become holders of Marathon Oil Corporation Common Stock. The Proposed Separation does not contemplate a cash distribution to stockholders. Each new company will carry approximately the same assets and liabilities now associated with its existing business, except for a value transfer of approximately $900 million from Marathon Oil Corporation to United States Steel Corporation, intended to maintain United States Steel Corporation as a strong, independent company. The form of the value transfer will be a reattribution of USX corporate debt between the USX-Marathon Group and the USX-U. S. Steel Group. The Proposed Separation is subject to the approval of the holders of a majority of the outstanding shares of each class of current USX common stock, receipt of a favorable private letter ruling from the Internal Revenue Service ("IRS") on the tax-free nature of the transaction, completion of necessary financing arrangements, and receipt of necessary regulatory and third party consents. The transaction is expected to occur on or about December 31, 2001, subject to the absence of any materially adverse change in business conditions for the energy and/or steel business, delay in obtaining the IRS ruling or other unfavorable circumstances. On July 2, 2001, a corporate reorganization was implemented to create a new holding company structure. USX became a holding company that owns all of the outstanding equity of Marathon Oil Company, a Ohio Corporation which, directly and indirectly, owns and operates the businesses of the USX-Marathon Group, and United States Steel LLC, a Delaware limited liability company which owns and operates the businesses of the USX-U. S. Steel Group. The reorganization will not have any impact on the results of operations or financial position of USX Corporation, the Marathon Group or the U. S. Steel Group. This reorganization in corporate form is independent of the Proposed Separation of the energy and steel businesses of USX Corporation. 30 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- 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, which could cause future outcomes to differ materially from those set forth in the forward-looking statements. For additional risk factors affecting the businesses of USX, see Supplementary Data - Disclosures About Forward-Looking Statements in the USX Annual Report on Form 10-K for the year ended December 31, 2000 and subsequent filings. Results of Operations - --------------------- Revenues and other income for the second quarter and the first six months of 2001 and 2000 are set forth in the following table:
Second Quarter Six Months Ended June 30 Ended June 30 (Dollars in millions) 2001 2000 2001 2000 - ----------------------------------------------------------------------- Revenues and other income Marathon Group $9,176 $8,710 $17,911 $16,565 U. S. Steel Group 1,737 1,656 3,301 3,244 Eliminations (10) (16) (24) (30) ------ ------ ------ ------ Total revenues and other income $10,903 $10,350 $21,188 $19,779 Less: Excise taxes(a) 1,132 1,108 2,170 2,147 Matching buy/sell transactions(a) 1,031 1,322 2,130 2,295 ------ ------ ------ ------ Revenues and other income excluding above items $8,740 $7,920 $16,888 $15,337 ====== ====== ====== ====== - ------ (a) Consumer excise taxes on petroleum products and merchandise and matching crude oil and refined products buy/sell transactions settled in cash are included in both revenues and costs and expenses for the Marathon Group and USX consolidated.
Revenues and other income (excluding excise taxes and matching buy/sell transactions) increased by $820 million in the second quarter of 2001 as compared with the second quarter of 2000, reflecting increases of $733 million for the Marathon Group and $81 million for the U. S. Steel Group. For the first six months of 2001, revenues increased $1,551 million as compared with the same period of 2000, reflecting increases of $1,488 million for the Marathon Group and $57 million for the U. S. Steel Group. For discussion of revenues and other income by Group, see Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group and the U. S. Steel Group. 31 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Income from operations for the second quarter and the first six months of 2001 and 2000 are set forth in the following table:
Second Quarter Six Months Ended June 30 Ended June 30 (Dollars in millions) 2001 2000 2001 2000 - ----------------------------------------------------------------------- Reportable segments Marathon Group Exploration & production $459 $356 $1,059 $665 Refining, marketing & transportation 842 529 1,118 669 Other energy related businesses 10 - 18 13 ------ ------ ------ ------ Income for reportable segments - Marathon Group $1,311 $885 $2,195 $1,347 U. S. Steel Group Domestic Steel $(69) $68 $(220) $122 U. S. Steel Kosice 41 - 82 - ----- ----- ----- ----- Income (loss) for reportable segments - U. S. Steel Group $(28) $68 $(138) $122 Income for reportable segments - USX Corporation 1,283 953 2,057 1,469 Items not allocated to segments: Marathon Group (56) (25) (28) 38 U. S. Steel Group 1 44 10 81 ----- ----- ----- ----- Total income from operations - USX Corporation $1,228 $972 $2,039 $1,588
Income for reportable segments increased by $330 million in the second quarter of 2001 as compared with the second quarter of 2000, reflecting an increase of $426 million for the Marathon Group reportable segments and a decrease of $96 million for U. S. Steel Group reportable segments. Income for reportable segments in the first six months of 2001 increased by $588 million compared with the first six months of 2000, reflecting an increase of $848 million for the Marathon Group reportable segments and a decrease of $260 million for the U. S. Steel Group reportable segments. For discussion of income from operations by segment, see Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group and the U. S. Steel Group. 32 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Net interest and other financial costs for the second quarter of 2001 decreased $6 million compared to the second quarter of 2000. The first six months of 2001 included a favorable adjustment of $76 million related to prior years' taxes. Excluding this adjustment, net interest and other financial costs for the first six months of 2001 decreased $2 million compared to the same period in 2000. The minority interest in income of MAP, which represents Ashland's 38 percent ownership interest, increased $117 million and $169 million in the second quarter and first six months of 2001, respectively, due to higher MAP income. For further discussion, see Management Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group. Provisions for income taxes of $270 million and $434 million for the second quarter and the first six months of 2001 were based on tax rates and amounts that recognize management's best estimate of current and deferred tax assets and liabilities. In the first six months of 2001, the provision included a $33 million tax benefit associated with the Transtar reorganization, a foreign deferred tax benefit of $9 million related to a reduction in the statutory rate enacted in the Canadian province of Alberta and an unfavorable adjustment of $20 million primarily related to the settlement of prior years' taxes. Cumulative effect of change in accounting principle of $8 million, net of a tax benefit of $5 million, in the first six months of 2001 was an unfavorable transition adjustment related to adopting SFAS No. 133. For further discussion, see Note 2 to the USX Consolidated Financial Statements. Net income was $552 million for the second quarter of 2001, an increase of $129 million compared to the second quarter of 2000 reflecting an increase of $215 million for the Marathon Group and a decrease of $86 million for the U. S. Steel Group. Net income was $1,061 million for the first six months of 2001, an increase of $341 million compared with the first six months of 2000, reflecting an increase of $461 million for the Marathon Group and a $120 million decrease for the U. S. Steel Group. Dividends to Stockholders - ------------------------- On July 31, 2001, the USX Board of Directors (the "Board") declared dividends of 23 cents per share on Marathon Stock and 10 cents per share on Steel Stock, payable September 10, 2001, to stockholders of record at the close of business on August 16, 2001. The Board also declared a dividend of $0.8125 per share on USX's 6.50% Cumulative Convertible Preferred Stock, payable September 28, 2001, to stockholders of record at the close of business on August 31, 2001. On August 13, 2001, Marathon Oil Canada Limited, an indirect subsidiary of Marathon Oil Company, will redeem its non-voting Exchangeable Shares through an exchange for shares of Marathon Stock on a one-for-one basis. 33 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Balance Sheet - ------------- Current assets at June 30, 2001 decreased $144 million from year- end 2000 primarily due to decreases in assets held for sale, accounts receivable and deferred income tax benefits, partially offset by increases in cash and cash equivalents and inventories. The decrease in assets held for sale resulted from the reclassification of the Yates field assets to investments and long-term receivables. Investments and long-term receivables increased $240 million from year-end 2000, primarily due to the reclassification of the Yates field assets from assets held for sale to an investment in MKM Partners L.P. Net property, plant and equipment at June 30, 2001 increased $863 million from year-end 2000 primarily due to the acquisitions of Pennaco Energy, Inc. ("Pennaco") and East Chicago Tin and the consolidation of Transtar. Current liabilities at June 30, 2001 increased $309 million compared to year-end 2000 primarily due to an increase in accrued taxes, debt due within one year and notes payable, partially offset by a decrease in accounts payable. The increase in accrued taxes was primarily related to the settlement of prior years' taxes. Total long-term debt and notes payable was $4,359 million at June 30, 2001, $251 million lower than year-end 2000. Debt decreased due to increased cash available for debt reduction. As a result, revolving credit agreements and outstanding commercial paper were reduced, partially offset by increased borrowings from a six-month term loan facility agreement and a new five-year promissory note agreement. Most of the debt is a direct obligation of, or is guaranteed by, USX. Employee benefits at June 30, 2001 increased $163 million compared to year-end 2000 primarily due to the addition of employees with the Transtar consolidation and the acquisition of the tin mill products business of LTV Corporation. Minority interest in Marathon Ashland Petroleum LLC increased by $170 million from year-end 2000 due to Ashland's share of recorded MAP income exceeding cash distributions to Ashland. Total stockholders' equity increased $930 million from year-end 2000 primarily due to increased net income, partially offset by dividends paid. Cash Flows - ---------- Net cash provided from operating activities totaled $2,023 million in the first six months of 2001, a $915 million increase from the first six months of 2000, reflecting increases of $789 million for the Marathon Group and $126 million for the U. S. Steel Group. The increases primarily reflect higher net income and lower use of working capital. For details, see Management's Discussion and Analysis of Financial Condition and Results of Operation for each Group. 34 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Capital expenditures for property, plant and equipment in the first six months of 2001 were $769 million compared with $673 million for the first six months of 2000. For further details, see Management's Discussion and Analysis of Financial Condition and Results of Operations for each of the respective Groups. Contract commitments to acquire property, plant and equipment and long-term investments at June 30, 2001, totaled $568 million compared with $663 million at December 31, 2000. In addition, MAP has a commitment to spend approximately $270 million over the next eight years for future environmental projects. The acquisition of Pennaco Energy, Inc. included cash payments of $506 million. For further discussion of Pennaco, see Note 4 to the USX Consolidated Financial Statements. Cash from disposal of assets was $115 million in the first six months of 2001, compared with $230 million in the first six months of 2000. Proceeds in 2001 were for the disposition of various Canadian oil fields, SSA stores, and various domestic production properties. Proceeds in 2000 were mainly from the disposition of Marathon's 33.34 percent interest in the Angus/Stellaria development in the Gulf of Mexico. The net change in restricted cash was a net withdrawal of $11 million in the first six months of 2001, compared with a net deposit of $33 million in the first six months of 2000. Restricted cash in both periods primarily reflected the net effects of cash deposited and withdrawn from domestic production property dispositions and acquisitions. Financial obligations (the net of commercial paper and revolving credit agreements and other debt borrowings and repayments on the Consolidated Statement of Cash Flows) decreased $270 million in the first six months of 2001 compared with a decrease of $289 million in the first six months of 2000. The decrease in 2001 reflects net cash provided from operating activities and asset sales in excess of cash used for capital expenditures, acquisitions, dividend payments and minority interest distributions. Distributions to minority shareholder of MAP were $244 million in the first six months of 2001, compared with $73 million in the first six months of 2000. For further details, see Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group. Debt and Preferred Stock Ratings - -------------------------------- Standard & Poor's Corp. rates USX's and Marathon's senior debt BBB, USX's subordinated debt BBB- and preferred stock BB+. Moody's Investor Services, Inc. rates USX's and Marathon's senior debt Baa1, USX's subordinated debt Baa2 and preferred stock Baa3. Fitch IBCA Duff & Phelps rates USX's senior notes BBB and USX's subordinated debt as BBB-. All senior debt of USX holds an investment grade rating. In connection with the Proposed Separation, Standard & Poor's reported that they had assigned a corporate credit rating of BBB+ for Marathon Oil Corporation with a stable outlook and a corporate credit rating of BB to United States Steel Corporation with a negative outlook, assuming the Proposed Separation is completed. Moody's has assigned a Ba1 senior implied rating to United States Steel Corporation with a stable outlook. Additionally, Standard & Poor's and Moody's have assigned BB and Ba2 ratings, respectively, to United States Steel LLC's $385 million senior unsecured note offering. 35 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Liquidity - --------- At June 30, 2001, USX had no borrowings against its $1,354 million long-term revolving credit agreement, no borrowings against its $451 million 364-day facility and no commercial paper borrowings. There were no borrowings against USX's short-term lines of credit totaling $115 million at June 30, 2001. At June 30, 2001, there were no borrowings against the USSK short-term credit facility. At June 30, 2001, MAP had no borrowings against its revolving credit agreements with banks and no amounts outstanding against its revolving credit agreement with Ashland, which was amended and extended for one year to March 15, 2002. At June 30, 2001, USX had $250 million outstanding under a six- month term loan facility expiring August 16, 2001 and $29 million outstanding under a five-year promissory note agreement expiring in 2006. On July 27, 2001, United States Steel LLC and United States Steel LLC's wholly owned subsidiary, United States Steel Financing Corp., issued $385 million of Senior Notes due August 1, 2008 ("Notes"), at an interest rate of 10.75 percent. The Notes were issued to meet, in part, the conditions of the Proposed Separation related to the completion of necessary financing arrangements. These Notes are guaranteed by USX Corporation until completion of the Proposed Separation, at which time they will be solely the obligation of United States Steel Corporation. The Notes allow their redemption if the Proposed Separation does not occur. In accordance with USX's policy of managing most financial activity on a centralized, consolidated basis, the proceeds from the issuance of these Notes will be attributed to and reflected in the financial statements of both groups. The Notes contain covenants that impose significant restrictions on certain activities of United States Steel Corporation. For a description of these covenants see Management's Discussion and Analysis of Financial Condition and Results of Operation for the U. S. Steel Group, "Liquidity", on page 93. Capital expenditures in the first six months of 2001 were $769 million and are expected to be approximately $2.1 billion for the full year, including expenditures by recently acquired businesses. Contract commitments for capital expenditures at June 30, 2001 totaled $568 million. USX management believes that its short-term and long-term liquidity is adequate to satisfy its obligations as of June 30, 2001, to complete currently authorized capital spending programs and to complete the Proposed Separation. Future requirements for USX's business needs, including the funding of capital expenditures, debt maturities for the balance of 2001 and years 2002 and 2003, and any amounts that may ultimately be paid in connection with contingencies (which are discussed in Note 15 to the USX Consolidated Financial Statements), are expected to be financed by a combination of internally generated funds, proceeds from the sale of stock, borrowings and other external financing sources. Until the Proposed Separation is implemented or abandoned, USX management believes that it will be more difficult to access traditional debt and equity markets. 36 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- 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 could affect the availability of financing include the performance of each Group (as measured by various factors including cash provided from operating activities), the state of worldwide 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, by levels of USX's outstanding debt and credit ratings by rating agencies. Environmental Matters, Contingencies and Commitments - ---------------------------------------------------- USX has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of USX's products and services, operating results will be adversely affected. USX believes that domestic competitors of the U. S. Steel Group and substantially all the competitors of the Marathon Group are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and the specific products and services it provides. USX has been notified that it is a potentially responsible party ("PRP") at 33 waste sites under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of June 30, 2001. In addition, there are 20 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 145 additional sites, excluding 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. Of these sites, 14 were associated with properties conveyed to MAP by Ashland for which Ashland has retained liability for substantially all costs associated with remediation. 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. New Tier II gasoline rules, which were finalized by the U.S. Environmental Protection Agency ("EPA") in February 2000, and the diesel fuel rules, which were finalized in January 2001, require substantially reduced sulfur levels. The combined capital cost to achieve compliance with the gasoline and diesel regulations could amount to approximately $700 million between 2003 and 2005. This is a forward-looking statement and can only be a broad-based estimate due to the ongoing evolution of regulatory requirements. Some factors (among others) that could potentially affect gasoline and diesel fuel compliance costs include obtaining the necessary construction and environmental permits, operating and logistical considerations, and unforeseen hazards such as weather conditions. 37 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- In October 1996, EPA Region V issued a Finding of Violation against the Robinson refinery alleging that it does not qualify for an exemption under the National Emission Standards for Benzene Waste Operations pursuant to the CAA, because the refinery's Total Annual Benzene releases exceed the limitation of 10 megagrams per year, and as a result, the refinery is in violation of the emission control, record keeping, and reports requirements. The Marathon Group contends that it does qualify for the exemption. However, in February 1999, the U.S. Department of Justice ("DOJ") in Chicago, Illinois, filed a civil complaint in the U.S. District Court for the Southern District of Illinois alleging six counts of violations of the CAA with respect to the benzene releases. The case has been settled in concept with Marathon and MAP agreeing to pay a combined $1.6 million civil penalty and the performance of $125,000 in supplemental environmental projects as part of an enforcement action for alleged Clean Air Act violations. A negotiated consent decree was filed with the Court May 11, 2001 and approval by the Court is anticipated in the third quarter 2001. In 1998, the EPA conducted multi-media inspections of MAP's Detroit and Robinson refineries covering compliance with the Clean Air Act, the Clean Water Act, reporting obligations under the Emergency Planning and Community Right to Know Act, and CERCLA and the handling of process waste. The EPA served a total of six Notices of Violation ("NOV") and Findings of Violation as a result of these inspections. On May 11, 2001, a consent decree was lodged with a federal court in Detroit, Michigan, where MAP settled with the EPA certain New Source Review ("NSR") and other air compliance issues as well as issues related to the EPA's 1998 multi-media inspections of the Detroit and Robinson refineries. MAP's settlement with the EPA includes all of MAP's refineries and commits MAP to specific control technologies and implementation schedules for approximately $270 million in environmental capital expenditures and improvements to MAP's refineries over approximately an eight year period that are consistent with MAP's current capital spending plans. It also commits MAP to payment of an aggregate civil penalty in the amount of $3.8 million and the performance of about $8 million in supplemental environmental projects as part of an enforcement action for alleged Clean Air Act violations. MAP believes that the settlement will provide MAP with increased permitting and operating flexibility while achieving significant emission reductions. Approval of the consent decree by the court is expected in the third quarter of 2001. In 2000, the Kentucky Natural Resources and Environmental Cabinet sent Marathon Ashland Pipe Line LLC a NOV seeking a civil penalty associated with a pipeline spill earlier that year in Winchester, Kentucky. MAP has settled this NOV in concept for a $170,000 penalty and reimbursement of response costs up to $131,000. A final consent decree is expected in the third quarter 2001. In October 1996, USX was notified by the Indiana Department of Environmental Management ("IDEM") acting as lead trustee, that IDEM and the U.S. Department of the Interior had concluded a preliminary investigation of potential injuries to natural resources related to the releases of hazardous substances from various municipal and industrial sources along the east branch of the Grand Calumet River and Indiana Harbor Canal. The public trustees completed a pre-assessment screen pursuant to federal regulations and have determined to perform a Natural Resource Damages Assessment. USX was identified as a PRP along with 15 other companies owning property along the river and harbor canal. USX and eight other PRPs have formed a joint defense group. In 2000, the trustees concluded their assessment of sediment injuries, which includes a technical review of environmental conditions. The PRP joint defense group has proposed terms for the settlement of this claim which have been endorsed by representatives of the trustees and the EPA to be included in a consent decree that USX expects will resolve this claim. A reserve has been established for the USX share of this anticipated settlement. 38 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The Berks Associates/Douglassville Site ("Berks Site") is situated on a 50-acre parcel located on the Schuylkill River in Berks County, Pa. Used oil and solvent reprocessing operations were conducted on the Berks Site between 1941 and 1986. In September 1997, USX signed a consent decree to conduct a feasibility study at the site relating to the alternative remedy. In 1999, a new Record of Decision was approved by the EPA and the U.S. Department of Justice. On January 19, 2001, USX signed a consent decree with the EPA to remediate this site. On April 6, 2001, USX paid $.4 million for costs associated with this site. The only remaining outstanding claim is the natural resource damages claim filed by the Commonwealth of Pennsylvania. In 1987, the California Department of Health Services ("DHS") issued a remedial action order for the GBF/Pittsburg landfill near Pittsburg, California. DHS alleged that from 1972 through 1974, Pittsburg Works arranged for the disposal of approximately 2.6 million gallons of waste oil, sludge, caustic mud and acid, which were eventually taken to this landfill for disposal. In 2000, the parties reached a buyout arrangement with a third party remediation firm, whereby the firm agreed to take title to and remediate the site and also indemnify the PRPs. This commitment was backed by pollution insurance. USX's share to participate in the buyout was approximately $1.1 million. Payment of the USX buyout amount was made December 2000. Title to the site was transferred to the remediation firm on January 31, 2001. In November 2000, a NOV was issued by the Jefferson County Health Department ("JCHD") alleging violation of the Halogenated Solvent National Emission Standards for Hazardous Air Pollutants and the JCHD Volatile Organic Compound ("VOC") regulations at the sheet mill stretch leveler at Fairfield Works. U. S. Steel Group proposed a civil penalty of $100,000 and a VOC emission limit, which have been agreed to by JCHD. A consent order was executed and approved by the court in May 2001. The penalty was paid by U. S. Steel Group in June 2001. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment (see Note 15 to the USX Consolidated Financial Statements for a discussion of certain of these matters). The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the USX Consolidated Financial Statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably. See discussion of Liquidity herein. Outlook - ------- See Outlook in Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group and the U. S. Steel Group. 39 USX CORPORATION AND SUBSIDIARY COMPANIES QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------- Commodity Price Risk and Related Risks - -------------------------------------- Sensitivity analysis of the incremental effects on pretax income of hypothetical 10% and 25% changes in commodity prices for commodity- based derivative instruments are provided in the following table(a):
Incremental Decrease in Income Before Income Taxes Assuming a Hypothetical Price Change of: (Dollars in millions) 10% 25% - -------------------------------------------------------------------- Commodity-Based Derivative Instruments Marathon Group(b)(c) Crude oil(f)(g) $8.0 $22.6 (d) Natural gas(f)(g) 10.4 25.3 (d) Refined products(f)(g) 0.3 1.8 (d) U. S. Steel Group Natural Gas 0.9 2.2 (e) Zinc 1.8 4.6 (e) Tin 0.1 0.3 (e) (a) With the adoption of SFAS No. 133, the definition of a derivative instrument has been expanded to include certain fixed price physical commodity contracts. Such instruments are included in the above table. Amounts reflect the estimated incremental effects on pretax income of hypothetical 10% and 25% changes in closing commodity prices at June 30, 2001. Management evaluates the portfolios of commodity-based derivative instruments on an ongoing basis and adjusts strategies to reflect anticipated market conditions, changes in risk profiles and overall business objectives. Changes to the portfolios subsequent to June 30, 2001, may cause future pretax income effects to differ from those presented in the table. (b) The number of net open contracts varied throughout second quarter 2001, from a low of 19,657 contracts at June 30, to a high of 30,633 contracts at May 30, and averaged 24,710 for the quarter. The type of derivative instruments and number of positions entered into will vary which changes the composition of the portfolio. Because of these variations, the number of open contracts, by itself, cannot be used to predict future income effects. (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 changes in intrinsic value only. (d) Price increase. (e) Price decrease. (f) 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. (g) Adjusted to reflect Marathon's 62 percent ownership of MAP.
40 USX CORPORATION AND SUBSIDIARY COMPANIES QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------- 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 June 30, 2001 interest rates on the fair value of USX's non- derivative financial instrument is provided in the following table:
(Dollars in millions) - ----------------------------------------------------------------------- As of June 30, 2001 Incremental Increase in Non-Derivative Fair Fair Financial Instruments(a) Value Value(b) - ----------------------------------------------------------------------- Financial assets: Investments and long-term receivables $272 $ - - ----------------------------------------------------------------------- Financial liabilities: Long-term debt(c)(d) $4,396 $146 Preferred stock of subsidiary 250 19 USX obligated mandatorily redeemable convertible preferred securities of a subsidiary trust 182 13 ------ ------ Total liabilities $4,828 $178 - ---------------------------------------------------------------------- (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) Reflects, by class of financial instrument, the estimated incremental effect of a hypothetical 10% decrease in interest rates at June 30, 2001 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 June 30, 2001. (c) Includes amounts due within one year. (d) Fair value was based on market prices where available, or current borrowing rates for financings with similar terms and maturities.
41 USX CORPORATION AND SUBSIDIARY COMPANIES QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------- 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 June 30, 2001, USX had open Euro forward sale contracts for Slovak Koruna with a total carrying value of approximately $20 million. A 10% increase in the June 30, 2001 Euro forward rates would result in a $2 million charge to income. The entire amount of these contracts is attributed to the U. S. Steel Group. At June 30, 2001, USX had open Canadian dollar forward purchase contracts with a total carrying value of approximately $9 million. A 10% increase in the Canadian dollar to U.S. dollar forward rate would result in a charge to income of approximately $1 million. The entire amount of these contracts is attributed to the Marathon Group. Equity Price Risk - ----------------- As of June 30, 2001, USX was subject to equity price risk and liquidity risk related to its investment in VSZ a.s., the former parent of U. S. Steel Kosice, s.r.o., which is attributed to the U. S. Steel Group. These risks are not readily quantifiable. Safe Harbor - ----------- USX's quantitative and qualitative disclosures about market risk include forward-looking statements with respect to management's opinion about risks associated with USX's use of derivative instruments. These statements are based on certain assumptions with respect to market prices and industry supply and demand for crude oil, natural gas, 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. 42 USX CORPORATION FINANCIAL STATISTICS (Unaudited) --------------------------------
Second Quarter Six Months Ended June 30 Ended June 30 (Dollars in millions) 2001 2000 2001 2000 - ----------------------------------------------------------------------- REVENUES AND OTHER INCOME Marathon Group $9,176 $8,710 $17,911 $16,565 U. S. Steel Group 1,737 1,656 3,301 3,244 Eliminations (10) (16) (24) (30) ------- ------- ------- ------- Total $10,903 $10,350 $21,188 $19,779 INCOME (LOSS) FROM OPERATIONS Marathon Group $1,255 $860 $2,167 $1,385 U. S. Steel Group (27) 112 (128) 203 ------ ------ ------ ------ Total $1,228 $972 $2,039 $1,588 CASH FLOW DATA - -------------- CAPITAL EXPENDITURES Marathon Group $352 $239 $628 $576 U. S. Steel Group 104 52 141 97 ------ ------ ------ ------ Total $456 $291 $769 $673
43 Part I - Financial Information (Continued): B. Marathon Group MARATHON GROUP OF USX CORPORATION STATEMENT OF OPERATIONS (Unaudited) -----------------------------------
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions, except per share amounts) 2001 2000 2001 2000 - ----------------------------------------------------------------------- REVENUES AND OTHER INCOME: Revenues $9,121 $8,680 $17,741 $16,419 Dividend and investee income 39 17 72 28 Net gains on disposal of assets 14 2 28 94 Gain (loss) on ownership change in Marathon Ashland Petroleum LLC (7) 4 (6) 8 Other income 9 7 76 16 ------ ------ ------ ------ Total revenues and other income 9,176 8,710 17,911 16,565 ------ ------ ------ ------ COSTS AND EXPENSES: Cost of revenues (excludes items shown below) 6,202 6,264 12,436 12,063 Selling, general and administrative expenses 185 124 326 258 Depreciation, depletion and amortization 306 240 609 486 Taxes other than income taxes 1,202 1,176 2,324 2,282 Exploration expenses 26 46 49 91 ------ ------ ------ ------ Total costs and expenses 7,921 7,850 15,744 15,180 ------ ------ ------ ------ INCOME FROM OPERATIONS 1,255 860 2,167 1,385 Net interest and other financial costs 38 68 73 139 Minority interest in income of Marathon Ashland Petroleum LLC 320 203 427 258 ------ ------ ------ ------ INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 897 589 1,667 988 Provision for income taxes 315 222 577 367 ------ ------ ------ ------ INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 582 367 1,090 621 Cumulative effect of change in accounting principle - - (8) - ------ ------ ------ ------ NET INCOME $582 $367 $1,082 $621 ====== ====== ====== ====== MARATHON STOCK DATA: Income before cumulative effect of change in accounting principle $582 $367 $1,090 $621 - Per share - basic 1.88 1.18 3.53 1.99 - diluted 1.88 1.18 3.52 1.99 Cumulative effect of change in accounting principle - - (8) - - Per share - basic - - (.03) - - diluted - - (.02) - Net income $582 $367 $1,082 $621 - Per share - basic and diluted 1.88 1.18 3.50 1.99 Dividends paid per share .23 .21 .46 .42 Weighted average shares, in thousands - Basic 309,101 312,233 308,928 312,180 - Diluted 309,627 312,431 309,338 312,359 Selected notes to financial statements appear on pages 46-58.
44 MARATHON GROUP OF USX CORPORATION BALANCE SHEET (Unaudited) ---------------------------------
June 30 December 31 (Dollars in millions) 2001 2000 - ----------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $469 $340 Receivables, less allowance for doubtful accounts of $3 and $3 2,187 2,267 Inventories 2,010 1,867 Deferred income tax benefits 63 60 Assets held for sale - 330 Other current assets 106 121 ------ ------ Total current assets 4,835 4,985 Investments and long-term receivables 709 362 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $10,102 and $9,691 9,879 9,375 Prepaid pensions 217 207 Other noncurrent assets 364 303 ------ ------ Total assets $16,004 $15,232 ====== ====== LIABILITIES Current liabilities: Notes payable $127 $80 Accounts payable 2,774 3,021 Income taxes payable 320 364 Payroll and benefits payable 175 230 Accrued taxes 334 108 Accrued interest 63 61 Long-term debt due within one year 212 148 ------ ------ Total current liabilities 4,005 4,012 Long-term debt, less unamortized discount 1,588 1,937 Deferred income taxes 1,361 1,354 Employee benefits 662 648 Deferred credits and other liabilities 360 412 Preferred stock of subsidiary 184 184 Minority interest in Marathon Ashland Petroleum LLC 2,010 1,840 COMMON STOCKHOLDERS' EQUITY 5,834 4,845 ------ ------ Total liabilities and common stockholders' equity $16,004 $15,232 ====== ====== Selected notes to financial statements appear on pages 46-58.
45 MARATHON GROUP OF USX CORPORATION STATEMENT OF CASH FLOWS (Unaudited) -----------------------------------
Six Months Ended June 30 (Dollars in millions) 2001 2000 - ----------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income $1,082 $621 Adjustments to reconcile to net cash provided from operating activities: Cumulative effect of change in accounting principle 8 - Minority interest in income of Marathon Ashland Petroleum LLC 427 258 Depreciation, depletion and amortization 609 486 Exploratory dry well costs 6 32 Pensions and other postretirement benefits 9 6 Deferred income taxes (235) 16 (Gain) loss on ownership change in Marathon Ashland Petroleum LLC 6 (8) Net gains on disposal of assets (28) (94) Changes in: Current receivables 132 (311) Inventories (140) (236) Current accounts payable and accrued expenses (206) 281 All other - net 128 (42) ------ ------ Net cash provided from operating activities 1,798 1,009 ------ ------ INVESTING ACTIVITIES: Capital expenditures (628) (576) Acquisition of Pennaco Energy, Inc. (506) - Disposal of assets 106 214 Restricted cash - withdrawals 23 158 - deposits (13) (193) Investees - investments (1) (56) - loans and advances (5) - - returns and repayments 10 2 All other - net (29) 20 ------ ------ Net cash used in investing activities (1,043) (431) ------ ------ FINANCING ACTIVITIES: Decrease in Marathon Group's portion of USX consolidated debt (238) (322) Specifically attributed debt - borrowings 112 273 - repayments (112) (271) Common stock repurchased (1) - Treasury stock reissued 3 - Dividends paid (142) (131) Distributions to minority shareholder of Marathon Ashland Petroleum LLC (244) (73) ------ ------ Net cash used in financing activities (622) (524) ------ ------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (4) (3) ------ ------ NET INCREASE IN CASH AND CASH EQUIVALENTS 129 51 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 340 111 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $469 $162 ====== ====== Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $(85) $(138) Income taxes paid, including settlements with the U. S. Steel Group (605) (226) Selected notes to financial statements appear on pages 46-58.
46 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS -------------------------------------- (Unaudited) 1. The information furnished in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. Certain reclassifications of prior year data have been made to conform to 2001 classifications. Additional information is contained in the USX Annual Report on Form 10-K for the year ended December 31, 2000. 2. The financial statements of the Marathon Group include the financial position, results of operations and cash flows for the businesses of Marathon Oil Company (Marathon) and certain other subsidiaries of USX, and a portion of the corporate assets and liabilities and related transactions which are not separately identified with ongoing operating units of USX. These financial statements are prepared using the amounts included in the USX consolidated financial statements. Corporate amounts reflected in these financial statements are determined based upon methods which management believes to be reasonable. The accounting policies applicable to the preparation of the financial statements of the Marathon Group may be modified or rescinded in the sole discretion of the Board of Directors of USX (Board), although the Board has no present intention to do so. The Board may also adopt additional policies depending on the circumstances. Although the financial statements of the Marathon Group 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 between the Marathon Group and the U. S. Steel Group for the purpose of preparing their respective financial statements does not affect legal title to such assets and responsibility for such liabilities. Holders of USX-Marathon Group Common Stock (Marathon Stock) and USX-U. S. Steel Group Common Stock (Steel Stock) are holders of common stock of USX and continue to be subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts arising from one Group that affect the overall cost of USX's capital could affect the results of operations and financial condition of the other Group. In addition, net losses of either Group, as well as dividends or distributions on any class of USX Common Stock or series of Preferred Stock and repurchases of any class of USX Common Stock or series of Preferred Stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on both classes of Common Stock. Accordingly, the USX consolidated financial information should be read in connection with the Marathon Group financial information. 47 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 2. (Continued) The financial statement provision for income taxes and related tax payments or refunds have been reflected in the Marathon Group and the U. S. Steel Group financial statements in accordance with USX's tax allocation policy for such groups. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated between the Marathon Group and the U. S. Steel Group for group financial statement purposes, based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to the respective groups. The provision for income taxes for the Marathon Group is based on tax rates and amounts which recognize management's best estimate of current and deferred tax assets and liabilities. Differences between the combined interim tax provisions of the Marathon and U. S. Steel Groups and USX consolidated are allocated to each group based on the relationship of the individual group provisions to the combined interim provisions. 3. Effective January 1, 2001, USX adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended by SFAS Nos. 137 and 138. This Standard, as amended, requires recognition of all derivatives at fair value as either assets or liabilities. Changes in the fair value of all derivatives are recognized immediately in earnings, unless the derivative qualifies as a hedge of future cash flows or certain foreign currency exposures. For derivatives qualifying as hedges of future cash flows or certain foreign currency exposures, the effective portion of any changes in fair value is recognized in a component of stockholders' equity called other comprehensive income ("OCI") and then reclassified to earnings when the underlying anticipated transaction is consummated. Any ineffective portion of such hedges is recognized in earnings as it occurs. For derivatives designated as hedges of the fair value of recognized assets, liabilities or firm commitments, changes in the fair value of the hedged item are recognized immediately in earnings. Since changes in fair value of the related derivative are also recognized immediately in earnings, the net effect of that accounting is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value. The Marathon Group uses commodity-based and foreign currency derivative instruments to manage its exposure to price risk. Management has authorized the use of futures, forwards, swaps and options to reduce the effects of fluctuations related to the purchase, production or sale of crude oil, natural gas and refined products. 48 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 3. (Continued) In order to apply hedge accounting under SFAS No. 133, the Marathon Group is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective portion of the hedge. Generally, the Marathon Group has not elected to designate derivative instruments as qualifying for hedge accounting treatment. As a result, the changes in fair value of most derivatives are recognized immediately in earnings, while the changes in the fair value of the underlying items generally are not recognized until the transaction is consummated. At the date of adoption, the Marathon Group had one strategy that qualified as a hedge of the fair value of a firm commitment. This strategy continues to qualify for hedge accounting treatment. Additional strategies, which are hedges of future cash flows, qualified as hedges on June 1, 2001. A portion of the cumulative effect adjustment relating to the adoption of SFAS No. 133 was recognized in OCI. The cumulative effect adjustment relates only to deferred gains or losses existing as of the close of business on December 31, 2000, for hedge transactions under prior accounting rules. A reconciliation of the changes in OCI relating to derivative instruments is as follows (amounts in millions):
Second Six Quarter Months Ended Ended June 30 June 30 Deferred gain (loss), net of tax 2001 2001 - ---------------------------------------------------------------------- Beginning balance $34 $- Cumulative effect adjustment - (8) Reclassification of the cumulative effect adjustment into earnings (7) 35 Changes in fair value 15 15 Reclassification to earnings - - ---- ---- Balance at June 30, 2001 $42 $42 ==== ====
Of the $42 million recorded in OCI as of June 30, 2001, $18 million, net of income taxes, is expected to be reclassified to earnings over the 12-month period ending June 30, 2002. The actual amounts that will be reclassified to earnings over the next twelve months will vary as a result of continual changes in fair value. The ineffective portion of changes in the fair value of hedges of future cash flows recognized during the second quarter and six months of 2001 was a favorable $4 million before income taxes. This amount was included in revenues. The futures contracts used in cash flow hedge strategies vary in duration with certain contracts extending into 2002. 49 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 3. (Continued) The Marathon Group employs one strategy qualifying as a hedge of the fair value of a firm commitment. There is no ineffectiveness associated with this hedge. The hedging instrument and the existing firm commitment contract are priced on the same underlying index. The over-the-counter swap agreement extends into 2008. The Marathon Group did not have any foreign currency contracts that qualified for hedge accounting. The changes in fair value of the forward currency contracts are recognized immediately in earnings. These forward currency contracts have various maturities extending into 2001. In June 2001, the Financial Accounting Standards Board approved Statements of Financial Accounting Standards No. 141 "Business Combinations" (SFAS 141), No. 142 "Goodwill and Other Intangible Assets" (SFAS 142) and No. 143 "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 141 requires all business combinations completed after June 30, 2001, be accounted for under the purchase method. This standard also establishes for all business combinations made after June 30, 2001, specific criteria for the recognition of intangible assets separately from goodwill. SFAS 141 also requires that the excess of fair value of acquired assets over cost (negative goodwill) be recognized immediately as an extraordinary gain, rather than deferred and amortized. The Marathon Group will account for all future business combinations under SFAS 141. SFAS 142 addresses the accounting for goodwill and other intangible assets after an acquisition. The most significant changes made by SFAS 142 are: 1) goodwill and intangible assets with indefinite lives will no longer be amortized; 2) goodwill and intangible assets with indefinite lives must be tested for impairment at least annually; and 3) the amortization period for the intangible assets with finite lives will no longer be limited to forty years. USX will adopt SFAS 142 effective January 1, 2002, as required. At that time, amortization of existing goodwill will cease on the unamortized portion associated with previous acquisitions and certain investments accounted for under the equity method. This will have a favorable impact on the results of operations of the Marathon Group of approximately $5 million, net of tax, annually beginning in 2002. Additionally, SFAS 142 requires that unamortized negative goodwill associated with investments accounted for under the equity method and acquired before July 1, 2001, be recognized in income as a cumulative effect of change in accounting principle. The Marathon Group expects to recognize a favorable cumulative effect of a change in accounting principle of approximately $15 million, net of tax, upon adoption. USX continues to evaluate the financial effects of the provisions of SFAS No. 142 pertaining to intangible assets other than goodwill. 50 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 3. (Continued) SFAS 143 provides accounting requirements for retirement obligations associated with tangible long-lived assets, including: 1) the timing of liability recognition; 2) initial measurement of the liability; 3) allocation of asset retirement cost to expense; 4) subsequent measurement of the liability; and 5) financial statement disclosures. SFAS 143 requires that an asset retirement cost should be capitalized as part of the cost of the related long- lived asset and subsequently allocated to expense using a systematic and rational method. USX will adopt the Statement effective January 1, 2003. The transition adjustment resulting from the adoption of SFAS 143 will be reported as a cumulative effect of a change in accounting principle. At this time, the Marathon Group cannot reasonably estimate the effect of the adoption of this Statement on either its financial position or results of operations. 4. Included in revenues and costs and expenses for the second quarter of 2001 and 2000 were $1,132 million and $1,108 million, respectively, representing excise taxes on petroleum products and merchandise. Similar amounts for the six months of 2001 and 2000 were $2,170 million and $2,147 million, respectively. 5. The Marathon Group's total comprehensive income was $593 million for the second quarter of 2001, $366 million for the second quarter of 2000, $1,127 million for the six months of 2001 and $618 million for the six months of 2000. 6. In the first quarter 2001, Marathon acquired Pennaco Energy, Inc. (Pennaco), a natural gas producer. Marathon acquired 87% of the outstanding stock of Pennaco through a tender offer completed on February 7, 2001 at $19 a share. On March 26, 2001, Pennaco was merged with a wholly owned subsidiary of Marathon. Under the terms of the merger, each share not held by Marathon was converted into the right to receive $19 in cash. The total cash purchase price of Pennaco was $506 million. The acquisition was accounted for under the purchase method of accounting. The excess of the purchase price over the preliminary fair value of net assets acquired (goodwill) was $64 million and was originally to be amortized over 17 years. However, as a result of USX's adoption of SFAS No. 142, effective January 1, 2002, the Marathon Group will cease the amortization of goodwill and will test the unamortized balance for impairment on an annual basis. Results of operations for the six months of 2001 include the results of Pennaco from February 7, 2001. 51 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 6. (Continued) The following unaudited pro forma data for the Marathon Group includes the results of operations of Pennaco giving effect to the acquisition as if it had been consummated at the beginning of the years 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.
Six Months Ended June 30 (In millions, except per share amounts) 2001 2000 ------------------------------------------------------------------ Revenues and other income $17,919 $16,582 Income before cumulative effect of change in accounting principle 1,087 603 - Per common share - basic and diluted 3.52 1.93 Net income 1,079 603 - Per common share - basic and diluted 3.49 1.93
7. In December 2000, Marathon and Kinder Morgan Energy Partners, L.P. signed a definitive agreement to form a joint venture combining certain of their oil and gas producing activities in the U.S. Permian Basin, including Marathon's interest in the Yates Field. This transaction has allowed Marathon to expand its interests in the Permian Basin and improve access to materials for use in enhanced recovery techniques in the Yates Field. The joint venture, named MKM Partners L.P., commenced operations in January 2001 and is accounted for under the equity method of accounting. 8. The Marathon Group's operations consist of three reportable operating segments: 1) Exploration and Production (E&P) - explores for and produces crude oil and natural gas on a worldwide basis; 2) Refining, Marketing and Transportation (RM&T) - refines, markets and transports crude oil and petroleum products, primarily in the Midwest and southeastern United States through Marathon Ashland Petroleum LLC (MAP); and 3) Other Energy Related Businesses (OERB). OERB is an aggregation of two segments which fall below the quantitative reporting thresholds: 1) Natural Gas and Crude Oil Marketing and Transportation - markets and transports its own and third-party natural gas and crude oil in the United States; and 2) Power Generation - develops, constructs and operates independent electric power projects worldwide. The results of segment operations are as follows: 52 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 8. (Continued)
Total (In millions) E&P RM&T OERB Segments - ----------------------------------------------------------------------- SECOND QUARTER 2001 - ------------------- Revenues and other income: Customer $1,140 $7,536 $437 $9,113 Intersegment (a) 136 7 19 162 Intergroup (a) 5 - 3 8 Equity in earnings of unconsolidated investees 16 8 7 31 Other 9 17 5 31 ------ ------ ------ ------ Total revenues and other income $1,306 $7,568 $471 $9,345 ====== ====== ====== ====== Segment income $459 $842 $10 $1,311 ====== ====== ====== ====== SECOND QUARTER 2000 - ------------------- Revenues and other income: Customer $957 $7,406 $305 $8,668 Intersegment (a) 119 35 13 167 Intergroup (a) 6 - 6 12 Equity in earnings (losses) of unconsolidated investees (3) 6 4 7 Other 7 10 2 19 ------ ------ ------ ------ Total revenues and other income $1,086 $7,457 $330 $8,873 ====== ====== ====== ====== Segment income $356 $529 $- $885 ====== ====== ====== ====== (a)Intersegment and intergroup sales and transfers were conducted under terms comparable to those with unrelated parties.
53 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 8. (Continued)
Total (In millions) E&P RM&T OERB Segments - ----------------------------------------------------------------------- SIX MONTHS 2001 - --------------- Revenues and other income: Customer $2,378 $14,278 $1,065 $17,721 Intersegment (a) 270 13 44 327 Intergroup (a) 15 - 5 20 Equity in earnings of unconsolidated investees 36 14 11 61 Other 17 32 7 56 ------ ------ ------ ------ Total revenues and other income $2,716 $14,337 $1,132 $18,185 ====== ====== ====== ====== Segment income $1,059 $1,118 $18 $2,195 ====== ====== ====== ====== SIX MONTHS 2000 - --------------- Revenues and other income: Customer $1,909 $13,833 $655 $16,397 Intersegment (a) 188 55 32 275 Intergroup (a) 11 - 11 22 Equity in earnings (losses) of unconsolidated investees (4) 10 8 14 Other 10 21 6 37 ------ ------ ------ ------ Total revenues and other income $2,114 $13,919 $712 $16,745 ====== ====== ====== ====== Segment income $665 $669 $13 $1,347 ====== ====== ====== ====== (a)Intersegment and intergroup sales and transfers were conducted under terms comparable to those with unrelated parties.
54 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 8. (Continued) The following schedules reconcile segment amounts to amounts reported in the Marathon Group financial statements: Second Quarter Ended June 30 (In millions) 2001 2000 - ----------------------------------------------------------------------- Revenues and other income: Revenues and other income of reportable segments $9,345 $8,873 Items not allocated to segments - Gain (loss) on ownership change in MAP (7) 4 Elimination of intersegment revenues (162) (167) ------ ------ Total Group revenues and other income $9,176 $8,710 ====== ====== Income: Income for reportable segments $1,311 $885 Items not allocated to segments: Gain (loss) on ownership change in MAP (7) 4 Administrative expenses (34) (29) Costs related to Proposed Separation (15) - ------ ------ Total Group income from operations $1,255 $860 ====== ====== PAGE> 55 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 8. (Continued)
Six Months Ended June 30 (In millions) 2001 2000 - ---------------------------------------------------------------------- Revenues and other income: Revenues and other income of reportable segments $18,185 $16,745 Items not allocated to segments: Gain (loss) on ownership change in MAP (6) 8 Other (a) 59 87 Elimination of intersegment revenues (327) (275) ------ ------ Total Group revenues and other income $17,911 $16,565 ====== ====== Income: Income for reportable segments $2,195 $1,347 Items not allocated to segments: Gain (loss) on ownership change in MAP (6) 8 Administrative expenses (65) (57) Costs related to Proposed Separation (16) - Other (a) 59 87 ------ ------ Total Group income from operations $2,167 $1,385 ====== ====== (a)Represents in 2001, gain on offshore lease resolution with the U.S. Government and in 2000, gain on disposition of Angus/Stellaria.
9. Inventories are carried at the lower of cost or market. Cost of inventories of crude oil and refined products is determined under the last-in, first-out (LIFO) method.
(In millions) ---------------------- June 30 December 31 2001 2000 -------------------- Crude oil and natural gas liquids $763 $701 Refined products and merchandise 1,152 1,069 Supplies and sundry items 95 97 ------ ------ Total $2,010 $1,867 ====== ======
56 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 10. At June 30, 2001, and December 31, 2000, income taxes payable represents an estimated income tax payable to the U. S. Steel Group. In addition, included in deferred credits and other liabilities at June 30, 2001, and December 31, 2000, respectively, are $43 million and $97 million of income taxes payable to the U. S. Steel Group. These amounts have been determined in accordance with the tax allocation policy discussed in Note 2. 11. Interest and other financial costs in the six months of 2001 included a favorable adjustment of $9 million and provision for income taxes included an unfavorable adjustment of $5 million related to certain prior years' taxes. In the second quarter of 2001, the income tax provision included a foreign deferred tax benefit of $9 million related to a reduction in the statutory rate enacted in the Canadian province of Alberta. 12. The method of calculating net income (loss) per common share for the Marathon Stock and Steel Stock reflects the Board's intent that the separately reported earnings and surplus of the Marathon Group and the U. S. Steel Group, as determined consistent with the USX Restated 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. Basic net income per share is based on the weighted average number of common shares outstanding. Diluted net income per share assumes exercise of stock options, provided the effect is not antidilutive. See Note 8 of the Notes to USX Consolidated Financial Statements for the computation of income per share. 13. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Marathon Group involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Marathon Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Marathon Group. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. The Marathon Group is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At June 30, 2001, and December 31, 2000, accrued liabilities for remediation totaled $78 million and $75 million, respectively. It is not presently possible to estimate the ultimate amount of 57 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 13. (Continued) 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 $60 million at June 30, 2001, and $57 million at December 31, 2000. For a number of years, the Marathon Group has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the six months of 2001 and for the years 2000 and 1999, such capital expenditures totaled $17 million, $73 million and $46 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. On May 11, 2001, MAP entered into a consent decree with the U.S. Environmental Protection Agency which commits it to complete certain agreed upon environmental capital projects over the next eight years primarily aimed at reducing air emissions at its seven refineries. The current estimated cost to complete these projects is approximately $270 million. In addition, MAP is required to complete certain agreed upon supplemental environmental projects as part of an enforcement action for alleged Clean Air Act violations, at a current estimated cost of $8 million. The consent decree is currently awaiting court approval. At June 30, 2001, and December 31, 2000, accrued liabilities for platform abandonment and dismantlement totaled $178 million and $162 million, respectively. At June 30, 2001, the Marathon Group's pro rata share of obligations of LOOP LLC and various pipeline affiliates secured by throughput and deficiency agreements totaled $119 million. Under the agreements, the Marathon Group is required to advance funds if the affiliates are unable to service debt. Any such advances are prepayments of future transportation charges. The Marathon Group's contract commitments to acquire property, plant and equipment and long-term investments at June 30, 2001, totaled $459 million compared with $457 million at December 31, 2000. 14. On July 31, 2001, USX announced that its board of directors approved the definitive plan of reorganization to separate the energy and steel businesses of USX (Proposed Separation). The Proposed Separation envisions a tax-free spin-off of the steel business of USX into a freestanding, publicly traded company to be known as United States Steel Corporation. Holders of current USX- U. S. Steel Group Common Stock will become holders of United States Steel Corporation Common Stock. Holders of current USX- Marathon Group Common Stock will become holders of Marathon Oil Corporation Common Stock. The Proposed Separation does not contemplate a cash distribution to stockholders. Each new 58 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 14. (Continued) company will carry approximately the same assets and liabilities now associated with its existing business, except for a value transfer of approximately $900 million from Marathon Oil Corporation to United States Steel Corporation, intended to maintain United States Steel Corporation as a strong, independent company. The form of the value transfer will be a reattribution of USX corporate debt between the USX-Marathon Group and the USX- U. S. Steel Group. The Proposed Separation is subject to the approval of the holders of a majority of the outstanding shares of each class of current USX common stock, receipt of a favorable private letter ruling from the Internal Revenue Service ("IRS") on the tax-free nature of the transaction, completion of necessary financing arrangements and receipt of necessary regulatory and third party consents. The transaction is expected to occur on or about December 31, 2001, subject to the absence of any materially adverse change in business conditions for the energy and/or steel business, delay in obtaining the IRS ruling or other unfavorable circumstances. Costs related to the Proposed Separation include professional fees and other expenses and are included in selling, general and administrative expenses. These costs in the second quarter and six months of 2001 were $15 million and $16 million, respectively. 15. On July 2, 2001, a corporate reorganization was implemented to create a new holding company structure. USX became a holding company that owns all of the outstanding equity of Marathon Oil Company, an Ohio Corporation which, directly and indirectly, owns and operates the businesses of the USX-Marathon Group, and United States Steel LLC, a Delaware limited liability company which owns and operates the businesses of the USX-U. S. Steel Group. The reorganization will not have any impact on the results of operations or financial position of USX Corporation, the Marathon Group or the U. S. Steel Group. This reorganization in corporate form is independent of the Proposed Separation of the energy and steel businesses of USX Corporation. 59 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The Marathon Group includes Marathon Oil Company ("Marathon") and certain other subsidiaries of USX Corporation ("USX"), which are engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of petroleum products primarily through Marathon Ashland Petroleum ("MAP"), owned 62 percent by Marathon; and other energy related businesses. The Management's Discussion and Analysis should be read in conjunction with the Marathon Group's Financial Statements and Selected Notes to Financial Statements. The discussion of Results of Operations should be read in conjunction with the Supplemental Statistics provided on page 73. On July 31, 2001, USX announced that its board of directors approved the definitive plan of reorganization to separate the energy and steel businesses of USX ("Proposed Separation"). The Proposed Separation envisions a tax-free spin-off of the steel business of USX into a freestanding, publicly traded company to be known as United States Steel Corporation. The Proposed Separation is subject to certain conditions and is expected to occur on or about December 31, 2001. For further discussion, see Management's Discussion and Analysis for USX Corporation on page 29. 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", "targets", "scheduled" 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 the USX Annual Report on Form 10-K for the year ended December 31, 2000 and subsequent filings. 60 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Results of Operations - --------------------- Revenues and other income for the second quarter and first six months of 2001 and 2000 are summarized in the following table:
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 2001 2000 2001 2000 ----- ----- ----- ----- Exploration & production ("E&P") $1,306 $1,086 $2,716 $2,114 Refining, marketing & transportation ("RM&T") 7,568 7,457 14,337 13,919 Other energy related businesses (a) 471 330 1,132 712 ------ ------ ------ ------ Revenues and other income of reportable segments $9,345 $8,873 $18,185 $16,745 Revenues and other income not allocated to segments: Gain/(loss) on ownership change in MAP (7) 4 (6) 8 Other (b) - - 59 87 Elimination of intersegment revenues (162) (167) (327) (275) ------ ------ ------ ------ Total Group revenues and other income $9,176 $8,710 $17,911 $16,565 ====== ====== ====== ====== Items included in both revenues and costs and expenses, resulting in no effect on income: Consumer excise taxes on petroleum products and merchandise $1,132 $1,108 $2,170 $2,147 Matching crude oil and refined product buy/sell transactions settled in cash: E&P $127 $228 $233 $389 RM&T 904 1,094 1,897 1,906 ----- ----- ----- ----- Total buy/sell transactions $1,031 $1,322 $2,130 $2,295 - --------- (a)Includes domestic natural gas and crude oil marketing and transportation, and power generation. (b)Represents a gain on the offshore lease resolution with the U.S. Government in 2001 and a gain on the disposition of Angus/Stellaria in 2000.
E&P segment revenues increased by $220 million in the second quarter of 2001 from the comparable prior-year period. For the first six months of 2001, revenues increased by $602 million from the prior- year period. The increase in both periods primarily reflected higher worldwide natural gas prices, higher international liquid hydrocarbon volumes and gains from derivative activities, partially offset by lower domestic liquid hydrocarbon prices. RM&T segment revenues increased by $111 million in the second quarter of 2001 from the comparable prior-year period. For the first six months of 2001, revenues increased by $418 million from the prior- year period. The increase in both periods primarily reflected higher refined product prices, partially offset by a decrease in refined product sales volumes. 61 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Other energy related businesses segment revenues increased by $141 million in the second quarter of 2001 from the comparable prior-year period. For the first six months of 2001, revenues increased by $420 million from the prior-year period. The increase in both periods primarily reflected higher natural gas and crude oil purchase and resale activity accompanied by higher natural gas prices. Income from operations for the second quarter and first six months of 2001 and 2000 is summarized in the following table:
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 2001 2000 2001 2000 ----- ----- ----- ----- E&P Domestic $374 $277 $816 $478 International 85 79 243 187 ------ ------ ------ ------ Income for E&P reportable segment 459 356 1,059 665 RM&T 842 529 1,118 669 Other energy related businesses 10 - 18 13 ------ ------ ------ ------ Income for reportable segments $1,311 $885 $2,195 $1,347 Items not allocated to segments: Administrative expenses (a) $(34) $(29) $(65) $(57) Gain on disposition of Angus/Stellaria (b) - - - 87 Gain on lease resolution with U.S. Government - - 59 - Gain/(loss) on ownership change in MAP (7) 4 (6) 8 Costs related to proposed separation (c) (15) - (16) - ------ ------ ------ ------ Total Group income from operations $1,255 $860 $2,167 $1,385 - -------- (a) Includes the portion of the Marathon Group's administrative costs not charged to the operating segments and the portion of USX corporate general and administrative costs allocated to the Marathon Group. (b) Resulted from the disposition of Marathon's 33.34 percent interest in the Angus/Stellaria development located in the Gulf of Mexico. (c) Includes professional fees and expenses, and certain other costs related to the proposed separation.
62 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Income for reportable segments in the second quarter of 2001 increased by $426 million from last year's second quarter. Income for reportable segments in the first six months of 2001 increased by $848 million from the first six months of 2000. The increase in both periods was primarily due to higher worldwide natural gas prices and higher refining and wholesale marketing margins. Worldwide E&P segment income in the second quarter of 2001 increased by $103 million from last year's second quarter. Results in the first six months of 2001 increased by $394 million from the same period in 2000. Domestic E&P income in the second quarter of 2001 increased by $97 million from last year's second quarter. Results in the first six months of 2001 increased by $338 million from the same period in 2000. These increases were mainly due to higher natural gas prices and volumes, and gains from derivative activities primarily related to Pennaco Energy, Inc. ("Pennaco") production, partially offset by increased depreciation and decreased liquid hydrocarbon prices. International E&P income in the second quarter of 2001 increased by $6 million from last year's second quarter. Results in the first six months of 2001 increased by $56 million from the same period in 2000. The increase in both periods was mainly due to higher natural gas prices and liquid hydrocarbon volumes, partially offset by a decrease in natural gas volumes, and increased depreciation and gas transportation charges. RM&T segment income in the second quarter of 2001 increased by $313 million from last year's second quarter. Results in the first six months of 2001 increased by $449 million from the same period in 2000. These increases were mainly due to higher refining and wholesale marketing margins, partially offset by lower Speedway SuperAmerica LLC ("SSA") gasoline and distillate gross margins. Other energy related businesses segment income in the second quarter of 2001 increased by $10 million from last year's second quarter. Results in the first six months of 2001 increased by $5 million from the same period in 2000. The increases were primarily due to higher liquefied natural gas prices, higher margins on natural gas and crude oil purchase and resale activity, higher equity earnings as a result of increased pipeline throughput and prices, and higher gas plant income, partially offset by losses on derivative activities. 63 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Net interest and other financial costs in the first six months of 2001 decreased by $66 million from the comparable 2000 period. The first six months of 2001 included a favorable adjustment of $9 million related to prior years' taxes. Excluding this adjustment, the decrease of $57 million was primarily due to lower average debt levels and increased capitalized interest on E&P projects. The minority interest in income of MAP, which represents Ashland's 38 percent ownership interest, increased by $169 million in the first six months of 2001 from the comparable 2000 period, due to higher MAP income. The provision for estimated income taxes in the first six months of 2001 increased by $210 million from the comparable 2000 period primarily due to an increase in income before taxes. In the first six months of 2001, the provision for income taxes included a foreign deferred tax benefit of $9 million related to a reduction in the statutory rate enacted in the Canadian province of Alberta and an unfavorable adjustment of $5 million primarily related to the settlement of prior years' taxes. The cumulative effect of change in accounting principle of $8 million, net of a tax benefit of $5 million, in the first six months of 2001 was an unfavorable transition adjustment related to adopting SFAS No. 133. For further discussion, see Note 3 to the Marathon Group Financial Statements. Net income for the second quarter and first six months increased by $215 million and $461 million, respectively, in 2001 from 2000, primarily reflecting the factors discussed above. Balance Sheet - ------------- Current assets decreased $150 million from year-end 2000, primarily due to a decrease in assets held for sale and receivables, partially offset by an increase in cash and cash equivalents, and inventories. The decrease in assets held for sale resulted from the reclassification of the Yates field assets to investments and long-term receivables. The decrease in receivables was mainly due to a decrease in accounts receivable related to lower commodity prices, partially offset by an increase in other receivables related to derivative activity. The increase in inventories primarily resulted from an increase in refined products and crude oil inventories. Investments and long-term receivables increased $347 million from year-end 2000, primarily due to the reclassification of the Yates field assets from assets held for sale to an investment in MKM Partners L.P. Net property, plant and equipment increased $504 million from year- end 2000, primarily due to the acquisition of Pennaco. Total long-term debt and notes payable at June 30, 2001 were $1,927, a decrease of $238 million from year-end 2000. This decrease in debt is mainly due to higher cash flow provided from operating activities, partially offset by the acquisition of Pennaco. Most of the debt is a direct obligation of, or is guaranteed by, USX. Minority interest in Marathon Ashland Petroleum LLC increased by $170 million from year-end 2000 due to Ashland's share of recorded MAP income exceeding cash distributions to Ashland. 64 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Stockholders' equity increased $989 million from year-end 2000, mainly reflecting increased net income, partially offset by dividends declared. Cash Flows - ---------- Net cash provided from operating activities was $1,798 million in the first six months of 2001, compared with $1,009 million in the first six months of 2000. The $789 million increase mainly reflected the favorable effects of improved net income (excluding noncash items) and favorable working capital changes, excluding the intergroup tax payment to the U. S. Steel Group made in accordance with the group tax allocation policy. This payment was $379 million in the first six months of 2001 compared to $97 million in the first six months of 2000. For additional information on the group tax allocation policy, see Note 2 to the Marathon Group Financial Statements. Capital expenditures in the first six months of 2001 totaled $628 million, compared with $576 million in the comparable 2000 period. For additional information regarding capital expenditures, refer to the Supplemental Statistics on page 73. Contract commitments for property, plant and equipment acquisitions and long-term investments at June 30, 2001 totaled $459 million compared with $457 million at December 31, 2000. In addition, MAP has a commitment to spend approximately $270 million over the next eight years for future environmental projects. The acquisition of Pennaco Energy, Inc. included net cash payments of $506 million. For further discussion of Pennaco, see Note 6 to the Marathon Group Financial Statements. Cash from disposal of assets was $106 million in the first six months of 2001, compared with $214 million in the comparable 2000 period. Proceeds in 2001 were mainly from the sale of various Canadian oil fields, SSA stores, and various domestic producing properties. Proceeds in 2000 were mainly from the disposition of Marathon's 33.34 percent interest in the Angus/Stellaria development in the Gulf of Mexico. The net change in restricted cash was a net withdrawal of $10 million in the first six months of 2001, compared to a net deposit of $35 million in the comparable 2000 period. Restricted cash in both periods primarily reflected the net effects of cash deposited and withdrawn from domestic production property dispositions and acquisitions. Financial obligations, which 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, decreased by $238 million in the first six months of 2001. Financial obligations decreased primarily because cash from operating activities and asset sales exceeded capital expenditures, acquisitions and dividend payments. For further details, see Management's Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and Liquidity. Distributions to minority shareholder of MAP were $244 million in the first six months of 2001, compared with $73 million in the comparable 2000 period. 65 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Derivative Instruments - ---------------------- See Quantitative and Qualitative Disclosure About Market Risk for discussion of derivative instruments and associated market risk for the Marathon 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. Environmental Matters, Contingencies and Commitments - ---------------------------------------------------- The Marathon Group has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the Marathon Group's products and services, operating results will be adversely affected. The Marathon Group believes that substantially all of its competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and whether or not it is engaged in the petrochemical business, power business or the marine transportation of crude oil and refined products. USX has been notified that it is a potentially responsible party ("PRP") at 11 waste sites related to the Marathon Group under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of June 30, 2001. In addition, there are 4 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 116 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. Of these sites, 14 were associated with properties conveyed to MAP by Ashland for which Ashland has retained liability for substantially all costs associated with remediation. 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. New Tier II gasoline rules, which were finalized by the U.S. Environmental Protection Agency ("EPA") in February 2000, and the diesel fuel rules, which were finalized in January 2001, require substantially reduced sulfur levels. The combined capital cost to achieve compliance with the gasoline and diesel regulations could amount to approximately $700 million between 2003 and 2005. This is a forward-looking statement and can only be a broad-based estimate due to the ongoing evolution of regulatory requirements. Some factors (among others) that could potentially affect gasoline and diesel fuel compliance costs include obtaining the necessary construction and environmental permits, operating and logistical considerations, and unforeseen hazards such as weather conditions. 66 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- In October 1996, EPA Region V issued a Finding of Violation against the Robinson refinery alleging that it does not qualify for an exemption under the National Emission Standards for Benzene Waste Operations pursuant to the CAA, because the refinery's Total Annual Benzene releases exceed the limitation of 10 megagrams per year, and as a result, the refinery is in violation of the emission control, record keeping, and reports requirements. The Marathon Group contends that it does qualify for the exemption. However, in February 1999, the U.S. Department of Justice ("DOJ") in Chicago, Illinois, filed a civil complaint in the U.S. District Court for the Southern District of Illinois alleging six counts of violations of the CAA with respect to the benzene releases. The case has been settled in concept with Marathon and MAP agreeing to pay a combined $1.6 million civil penalty and the performance of $125,000 in supplemental environmental projects as part of an enforcement action for alleged Clean Air Act violations. A negotiated consent decree was filed with the Court May 11, 2001 and approval by the Court is anticipated in the third quarter 2001. In 1998, the EPA conducted multi-media inspections of MAP's Detroit and Robinson refineries covering compliance with the Clean Air Act, the Clean Water Act, reporting obligations under the Emergency Planning and Community Right to Know Act, CERCLA and the handling of process waste. The EPA served a total of six Notices of Violation ("NOV") and Findings of Violation as a result of these inspections. On May 11, 2001, a consent decree was lodged with a federal court in Detroit, Michigan, settling with the EPA certain New Source Review ("NSR") and other air compliance issues as well as issues related to the EPA's 1998 multi-media inspections of the Detroit and Robinson refineries. MAP's settlement with the EPA includes all of MAP's refineries and commits MAP to specific control technologies and implementation schedules for approximately $270 million in environmental capital expenditures and improvements to MAP's refineries over approximately an eight year period that are consistent with MAP's current capital spending plans. It also commits MAP to payment of an aggregate civil penalty in the amount of $3.8 million and the performance of about $8 million in supplemental environmental projects as part of an enforcement action for alleged Clean Air Act violations. MAP believes that the settlement will provide MAP with increased permitting and operating flexibility while achieving significant emission reductions. Approval of the consent decree by the court is expected in the third quarter of 2001. In 2000, the Kentucky Natural Resources and Environmental Cabinet sent Marathon Ashland Pipe Line LLC a NOV seeking a civil penalty associated with a pipeline spill earlier that year in Winchester, Kentucky. MAP has settled this NOV in concept for a $170,000 penalty and reimbursement of response costs up to $131,000. A final consent decree is expected in the third quarter 2001. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Marathon Group involving a variety of matters, including laws and regulations relating to the environment. See Note 13 to the Marathon Group Financial Statements for a discussion of certain of these matters. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Marathon Group Financial Statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Marathon Group. See Management's Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and Liquidity. 67 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Outlook - ------- The outlook regarding the Marathon Group's upstream revenues and income is largely dependent upon future prices and volumes of liquid hydrocarbons and natural gas. Prices have historically been volatile and have frequently been affected by unpredictable changes in supply and demand resulting from fluctuations in worldwide economic activity and political developments in the world's major oil and gas producing and consuming areas. Any significant decline in 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. Marathon's third quarter and full year 2001 production is expected to be approximately 392 and 420 thousand barrels of oil equivalent per day, respectively. The full year estimate reflects reduced heavy oil investment in Canada, a higher than expected level of asset sales and delays in new project start-ups. Marathon's high impact drilling program in the Gulf of Mexico will be delayed due to the cancellation of the contract for the Cajun Express rig. With the Cajun Express rig, Marathon expected to drill two deepwater Gulf of Mexico wells before year-end 2001. Marathon has contracted the Max Smith rig, which is on location, to drill the Deep Ozona prospect with the Paris Carver prospect expected to follow in the fourth quarter of 2001. The above discussion includes forward-looking statements with respect to the expected levels of Marathon's worldwide liquid hydrocarbon and natural gas production and the drilling program. Some factors that could potentially affect worldwide liquid hydrocarbon and natural gas production include pricing, supply and demand for petroleum products, amount of capital available for exploration and development, regulatory constraints, timing of commencing production from new wells, and other geological, operating and economic considerations. Some factors that affect the drilling program include the timing and results of future development drilling and drilling rig availability. 68 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Downstream income of the Marathon Group is largely dependent upon the refining and wholesale marketing margin for refined products and the retail gross margin for gasoline and distillates. The refining and wholesale marketing margin reflects the difference between the wholesale selling prices of refined products and the cost of raw materials refined, purchased product costs and manufacturing expenses. Refining and wholesale marketing margins have been historically volatile and vary with the level of economic activity in the various marketing areas, the regulatory climate, the seasonal pattern of certain product sales, crude oil costs, manufacturing costs, the available supply of crude oil and refined products, and logistical constraints. The retail gross margin for gasoline and distillates reflects the difference between the retail selling prices of these products and their wholesale cost. Retail gasoline and distillate margins have also been historically volatile, but tend to be counter cyclical to the refining and wholesale marketing margin. Factors affecting the retail gasoline and distillate margin include seasonal demand fluctuations, the available wholesale supply, the level of economic activity in the marketing areas and weather situations which impact driving conditions. In June 2001, MAP acquired an interest in approximately 50 convenience stores located in Indiana and Michigan from Welsh, Inc. The acquisition of these retail outlets increases MAP's presence in these markets and should provide more than 80 million gallons of new annual gasoline sales. MAP is targeting a third quarter closing on a combination to create the largest nationwide travel center network, which includes the travel center operations of SSA, MAP's wholly owned subsidiary, and those of Pilot Corporation. MAP will have a 50 percent interest in the new company, Pilot Travel Centers LLC. MAP is also working to improve its logistics network and has been designated operator of the Centennial Pipeline, owned jointly by Panhandle Eastern Pipe Line Company, a subsidiary of CMS Energy Corporation, MAP, and TE Products Pipe Line Company, Limited Partnership. All of the permits and rights-of-way have been obtained for the new pipeline, which will connect the Gulf Coast refiners with the Midwest market. The Centennial Pipeline system is expected to be operational in first quarter 2002. A MAP subsidiary, Ohio River Pipe Line LLC ("ORPL"), plans to build a pipeline from Kenova, West Virginia to Columbus, Ohio. ORPL is a common carrier pipeline company and the pipeline will be an interstate common carrier pipeline. The pipeline will be named Cardinal Pipeline and is expected to initially move about 50,000 barrels per day of refined petroleum into the central Ohio region. MAP has secured over 95 percent of the rights-of-way required to build the pipeline and negotiations are continuing with most of the remaining landowners. Eminent domain proceedings are in progress in several cases as well. Permitting issues have been encountered which could delay the start-up of this pipeline until the first quarter of 2003. MAP continues to vigorously pursue the permits and remaining rights-of- way required to complete this project. The Garyville, Louisiana coker project is nearing completion and is anticipated to be at full production during the fourth quarter of this year. The total cost of this major improvement program is approximately $280 million. In connection with the Proposed Separation described on page 59, Standard & Poor's reported that they had assigned a BBB+ corporate credit rating to Marathon Oil Corporation with a stable outlook assuming the Proposed Separation is completed. 69 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The above discussion includes forward-looking statements with respect to the expected successful completion and timing of the Pilot Travel Center transaction, the expected completion of the Centennial Pipeline system, the expected completion of the Cardinal Pipeline, the coker project and the Proposed Separation. Some factors which could affect the successful completion of the Pilot Travel Center transaction are the closing of definitive agreements, obtaining the necessary financing and the receipt of third party approvals. Some factors which could impact the Centennial Pipeline system include delivery of equipment and materials, contractor performance and unforeseen hazards such as weather conditions. Some factors which could impact the Cardinal Pipeline include obtaining the necessary permits and remaining rights-of-way, and completion of construction. Some factors which could impact the coker project include unforeseen hazards such as weather conditions, and unanticipated commissioning and start-up issues. Some factors that could affect the Proposed Separation include approval of a majority of the outstanding shares of each class of the current USX common stock, receipt of a favorable tax ruling from the IRS on the tax-free nature of the transaction, completion of necessary financing arrangements, receipt of necessary regulatory and third party consents, any materially adverse changes in business conditions for the energy and/or steel businesses or other unfavorable circumstances. These factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements. 70 MARATHON GROUP OF USX CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------- Commodity Price Risk and Related Risks - -------------------------------------- Sensitivity analysis of the incremental effects on income before income taxes of hypothetical 10% and 25% changes in commodity prices for open derivative commodity instruments as of June 30, 2001, are provided in the following table(a):
Incremental Decrease in Income Before Income Taxes Assuming a Hypothetical Price Change of: (Dollars in millions) 10% 25% - --------------------------------------------------------------------- Commodity-Based Derivative Instruments Marathon Group(b)(c) Crude oil (f)(g) $8.0 $22.6 (d) Natural gas (f)(g) 10.4 25.3 (d) Refined products (f)(g) 0.3 1.8 (d) (a) With the adoption of SFAS No. 133, the definition of a derivative instrument has been expanded to include certain fixed price physical commodity contracts. Such instruments are included in the above table. Amounts reflect the estimated incremental decrease in income before income taxes of hypothetical 10% and 25% changes in closing commodity prices for each open contract position at June 30, 2001. Management evaluates the portfolios of derivative commodity instruments on an ongoing basis and adjusts strategies to reflect anticipated market conditions, changes in risk profiles and overall business objectives. Changes to the portfolios subsequent to June 30, 2001, may cause future income before income tax effects to differ from those presented in the table. (b) The number of net open contracts varied throughout second quarter 2001, from a low of 19,657 contracts at June 30, to a high of 30,633 contracts at May 30, and averaged 24,710 for the quarter. The derivative commodity instruments used and hedging positions taken also varied throughout second quarter 2001, 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. (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 changes in intrinsic value only. (d) Price increase. (e) Price decrease. (f) 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 income before income taxes when applied to the derivative commodity instruments used to hedge that commodity. (g) Adjusted to reflect Marathon's 62 percent ownership of MAP.
71 MARATHON GROUP OF USX CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK --------------------------------- 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 June 30, 2001, 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 both groups, is provided in the following table:
(Dollars in millions) - ------------------------------------------------------------------------ As of June 30, 2001 Incremental Increase in Non-Derivative Fair Fair Financial Instruments(a) Value Value(b) - ------------------------------------------------------------------------ Financial assets: Investments and long-term receivables $186 $- - ------------------------------------------------------------------------ Financial liabilities: Long-term debt (c)(d) $1,981 $71 Preferred stock of subsidiary 184 14 ------ ------ Total liabilities $2,165 $85 - ------------------------------------------------------------------------ (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)Reflects, by class of financial instrument, the estimated incremental effect of a hypothetical 10% decrease in interest rates at June 30, 2001, 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 June 30, 2001. (c)Includes amounts due within one year. (d)Fair value was based on market prices where available, or current borrowing rates for financings with similar terms and maturities.
72 MARATHON GROUP OF USX CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------- 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 June 30, 2001, USX had open Canadian dollar forward purchase contracts with a total carrying value of approximately $9 million. A 10% increase in the Canadian dollar to U.S. dollar forward rate would result in a charge to income of approximately $1 million. The entire amount of these contracts is attributed to the Marathon Group. Equity Price Risk - ----------------- As of June 30, 2001, the Marathon Group had no material exposure to equity price risk. Safe Harbor - ----------- The Marathon Group's Quantitative and Qualitative Disclosures About Market Risk include forward-looking statements with respect to management's opinion about risks associated with the Marathon Group's use of derivative instruments. These statements are based on certain assumptions with respect to market prices and industry supply and demand for crude oil, natural gas and refined products. To the extent that these assumptions prove to be inaccurate, future outcomes with respect to the Marathon Group's derivative usage may differ materially from those discussed in the forward-looking statements. 73 MARATHON GROUP OF USX CORPORATION SUPPLEMENTAL STATISTICS (Unaudited) -------------------------------------
Second Quarter Six Months Ended June 30 Ended June 30 (Dollars in millions) 2001 2000 2001 2000 - ----------------------------------------------------------------------- INCOME (LOSS) FROM OPERATIONS Exploration & Production ("E&P") Domestic $374 $277 $816 $478 International 85 79 243 187 ----- ----- ----- ----- Income For E&P Reportable Segment 459 356 1,059 665 Refining, Marketing & Transportation 842 529 1,118 669 Other Energy Related Businesses(a) 10 - 18 13 ----- ----- ----- ----- Income For Reportable Segments $1,311 $885 $2,195 $1,347 Items Not Allocated To Segments: Administrative Expenses $(34) $(29) $(65) $(57) Gain on disposition of Angus/Stellaria - - - 87 Gain on lease resolution with U.S. Government - - 59 - Gain/(loss) on ownership change - MAP (7) 4 (6) 8 Costs related to proposed separation(b) (15) - (16) - ------ ------ ------ ------ Marathon Group Income From Operations $1,255 $860 $2,167 $1,385 CAPITAL EXPENDITURES Exploration & Production $217 $129 $374 $400 Refining, Marketing & Transportation 115 106 212 166 Other(c) 20 4 42 10 ----- ----- ----- ----- Total $352 $239 $628 $576 EXPLORATION EXPENSE Domestic $12 $20 $25 $51 International 14 26 24 40 ----- ----- ----- ----- Total $26 $46 $49 $91 OPERATING STATISTICS Net Liquid Hydrocarbon Production(d): United States 126.3 137.1 125.4 132.9 Europe 34.7 28.9 44.2 29.1 Other International 32.2 32.8 33.2 34.6 ------ ------ ------ ------ Total Consolidated 193.2 198.8 202.8 196.6 Domestic Equity Investee (MKM Partners L.P.) 9.4 - 9.8 - International Equity Investees (CLAM & Sakhalin Energy)(e) 0.1 2.6 0.1 1.3 ------ ------ ------ ------ Worldwide 202.7 201.4 212.7 197.9 Net Natural Gas Production(f): United States 773.7 711.6 781.3 731.5 Europe(g) 319.6 331.8 332.5 346.6 Other International 127.2 154.6 128.6 144.8 ------ ------ ------ ------ Total Consolidated 1,220.5 1,198.0 1,242.4 1,222.9 International Equity Investee (CLAM) 33.8 25.9 34.3 31.4 ------ ------ ------ ------- Worldwide 1,254.3 1,223.9 1,276.7 1,254.3 Average Equity Sales Prices(h)(i): Liquid Hydrocarbons (per Bbl) Domestic $21.11 $23.88 $22.23 $24.00 International 26.12 25.74 25.33 25.80 Natural Gas (per Mcf) Domestic $3.90 $2.95 $4.71 $2.55 International 3.00 2.41 3.43 2.41
74 MARATHON GROUP OF USX CORPORATION SUPPLEMENTAL STATISTICS (Unaudited) ------------------------------------------------
Second Quarter Six Months Ended June 30 Ended June 30 2001 2000 2001 2000 -------------------------------- OPERATING STATISTICS (continued) MAP: Crude Oil Refined(d) 958.2 965.0 914.3 908.2 Consolidated Refined Products Sold(d)(m) 1,303.1 1,344.7 1,278.2 1,281.7 Matching buy/sell volumes included in refined products sold(d) 35.3 73.5 44.3 61.3 Refining and Wholesale Marketing Margin(j)(k) $0.1839 $0.1122 $0.1364 $0.0797 Number of SSA retail outlets 2,272 2,416 - - SSA Gasoline and Distillate Sales(l) 1,102 1,145 2,156 2,258 SSA Gasoline and Distillate Gross Margin(j) $0.1168 $0.1239 $0.1066 $0.1160 SSA Merchandise Sales $620 $600 $1,149 $1,133 SSA Merchandise Gross Margin $154 $152 $283 $281 - -------------- (a) Includes domestic natural gas and crude oil marketing and transportation, and power generation. (b) Includes professional fees and expenses, and certain other costs related to the proposed separation. (c) Includes other energy related businesses and corporate capital expenditures. (d) Thousands of barrels per day (e) In 2001, equity investee is CLAM and in 2000, equity investees are CLAM and Sakhalin Energy. (f) Millions of cubic feet per day (g) Includes gas acquired for injection and subsequent resale of 9.0, 11.9, 9.1 and 12.9 mmcfd in the second quarter and six month year-to-date 2001 and 2000, respectively. (h) Prices exclude gains and losses from hedging activities. (i) Prices exclude equity affiliates and purchase/resale gas. (j) Per gallon (k) Sales revenue less cost of refinery inputs, purchased products and manufacturing expenses, including depreciation. (l) Millions of gallons (m) Total average daily volume of all refined product sales to MAP's wholesale, branded and retail (SSA) customers.
75 Part I - Financial Information (Continued): C. U. S. Steel Group U. S. STEEL GROUP OF USX CORPORATION STATEMENT OF OPERATIONS (Unaudited) ------------------------------------
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions, except per share amounts) 2001 2000 2001 2000 - --------------------------------------------------------------------------- REVENUES AND OTHER INCOME: Revenues $1,733 $1,629 $3,243 $3,211 Income (loss) from investees (7) 14 40 7 Net gains on disposal of assets 10 13 16 28 Other income (loss) 1 - 2 (2) ------ ------ ------ ------ Total revenues and other income 1,737 1,656 3,301 3,244 ------ ------ ------ ------ COSTS AND EXPENSES: Cost of revenues (excludes items shown below) 1,599 1,462 3,148 2,890 Selling, general and administrative expenses (credits) 19 (57) 3 (120) Depreciation, depletion and amortization 79 78 152 153 Taxes other than income taxes 67 61 126 118 ------ ------ ------ ------ Total costs and expenses 1,764 1,544 3,429 3,041 ------ ------ ------ ------ INCOME (LOSS) FROM OPERATIONS (27) 112 (128) 203 Net interest and other financial costs 48 24 36 48 ------ ------ ------ ------ INCOME (LOSS) BEFORE INCOME TAXES (75) 88 (164) 155 Provision (credit) for income taxes (45) 32 (143) 56 ------ ------ ------ ------ NET INCOME (LOSS) (30) 56 (21) 99 Dividends on preferred stock 2 2 4 4 ------ ------ ------ ------ NET INCOME (LOSS) APPLICABLE TO STEEL STOCK $(32) $54 $(25) $95 ====== ====== ====== ====== STEEL STOCK DATA: Net income (loss) $(32) $54 $(25) $95 - Per share - basic (.36) .62 (.28) 1.08 - diluted (.36) .62 (.28) 1.07 Dividends paid per share .10 .25 .35 .50 Weighted average shares, in thousands - Basic 89,005 88,499 88,906 88,461 - Diluted 89,005 92,755 88,906 92,721 Selected notes to financial statements appear on pages 78-88.
76 U. S. STEEL GROUP OF USX CORPORATION BALANCE SHEET (Unaudited) ------------------------------------
June 30 December 31 (Dollars in millions) 2001 2000 - ----------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $254 $219 Receivables, less allowance for doubtful accounts of $128 and $57 652 627 Receivables subject to a security interest 350 350 Income taxes receivable 320 364 Inventories 916 946 Deferred income tax benefits 171 201 Other current assets 13 10 ------ ------ Total current assets 2,676 2,717 Investments and long-term receivables, less reserves of $39 and $38 375 536 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $6,708 and $6,531 3,098 2,739 Prepaid pensions 2,711 2,672 Other noncurrent assets 94 47 ------ ------ Total assets $8,954 $8,711 ====== ====== LIABILITIES Current liabilities: Notes payable $123 $70 Accounts payable 778 760 Payroll and benefits payable 242 202 Accrued taxes 242 173 Accrued interest 51 47 Long-term debt due within one year 224 139 ------ ------ Total current liabilities 1,660 1,391 Long-term debt, less unamortized discount 2,085 2,236 Deferred income taxes 709 666 Employee benefits 1,916 1,767 Deferred credits and other liabilities 475 483 Preferred stock of subsidiary 66 66 USX obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely junior subordinated convertible debentures of USX 183 183 STOCKHOLDERS' EQUITY Preferred stock 2 2 Common stockholders' equity 1,858 1,917 ------ ------ Total stockholders' equity 1,860 1,919 ------ ------ Total liabilities and stockholders' equity $8,954 $8,711 ====== ====== Selected notes to financial statements appear on pages 78-88.
77 U. S. STEEL GROUP OF USX CORPORATION STATEMENT OF CASH FLOWS (Unaudited) ------------------------------------
Six Months Ended June 30 (Dollars in millions) 2001 2000 - --------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income (loss) $(21) $99 Adjustments to reconcile to net cash provided from operating activities: Depreciation, depletion and amortization 152 153 Pensions and other postretirement benefits (51) (163) Deferred income taxes 56 146 Net gains on disposal of assets (16) (28) Changes in: Current receivables 64 13 Inventories 57 (29) Current accounts payable and accrued expenses 61 (90) All other - net (77) (2) ------ ------ Net cash provided from operating activities 225 99 ------ ------ INVESTING ACTIVITIES: Capital expenditures (141) (97) Disposal of assets 9 16 Restricted cash - withdrawals 3 3 - deposits (2) (1) Investees - investments (1) (11) All other - net 10 3 ------ ------ Net cash used in investing activities (122) (87) ------ ------ FINANCING ACTIVITIES: Increase (decrease) in U. S. Steel Group's portion of USX consolidated debt (26) 37 Specifically attributed debt repayments (6) (6) Preferred stock repurchased - (12) Dividends paid (35) (48) ------ ------ Net cash used in financing activities (67) (29) ------ ------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (1) - ------ ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 35 (17) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 219 22 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $254 $5 ====== ====== Cash provided from (used in) operating activities included: Interest and other financial costs paid (net of amount capitalized) $(93) $(41) Income taxes refunded, including settlements with the Marathon Group 387 85 Selected notes to financial statements appear on pages 78-88.
78 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS -------------------------------------- (Unaudited) 1. The information furnished in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. Certain reclassifications of prior year data have been made to conform to 2001 classifications. Additional information is contained in the USX Annual Report on Form 10-K for the year ended December 31, 2000. Effective January 1, 2001, USX adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended by SFAS Nos. 137 and 138. This Standard, as amended, requires recognition of all derivatives at fair value as either assets or liabilities. The U. S. Steel Group uses commodity-based and foreign currency derivative instruments to manage its exposure to price risk. Management has authorized the use of futures, forwards, swaps and options to reduce the effects of fluctuations related to the purchase of natural gas and nonferrous metals and also certain business transactions denominated in foreign currencies. The U. S. Steel Group has not elected to designate derivative instruments as qualifying for hedge accounting treatment. As a result, the changes in fair value of all derivatives are recognized immediately in earnings. The cumulative effect adjustment relating to the adoption of SFAS No. 133 was recognized in other comprehensive income. The cumulative effect adjustment relates only to deferred gains or losses existing as of the close of business on December 31, 2000, for hedge transactions under prior accounting rules. The effect of adoption of SFAS No. 133 was less than $1 million, net of tax. In June 2001, the Financial Accounting Standards Board approved Statements of Financial Accounting Standards No. 141 "Business Combinations" (SFAS 141), No. 142 "Goodwill and Other Intangible Assets" (SFAS 142) and No. 143 "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 141 requires all business combinations completed after June 30, 2001, be accounted for under the purchase method. This standard also establishes for all business combinations made after June 30, 2001, specific criteria for the recognition of intangible assets separately from goodwill. SFAS 141 also requires that the excess of fair value of acquired assets over cost (negative goodwill) be recognized immediately as an extraordinary gain, rather than deferred and amortized. The U. S. Steel Group will account for all future business combinations under SFAS 141. 79 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 1. (Continued) SFAS 142 addresses the accounting for goodwill and other intangible assets after an acquisition. The most significant changes made by SFAS 142 are: 1) goodwill and intangible assets with indefinite lives will no longer be amortized; 2) goodwill and intangible assets with indefinite lives must be tested for impairment at least annually; and 3) the amortization period for the intangible assets with finite lives will no longer be limited to forty years. USX will adopt SFAS 142 effective January 1, 2002, as required. At that time, amortization of existing goodwill will cease on the unamortized portion associated with previous acquisitions and certain investments accounted for under the equity method. This provision of SFAS 142 is not expected to have a material impact on the results of operations for the U. S. Steel Group. Additionally, SFAS 142 requires that unamortized negative goodwill associated with investments accounted for under the equity method and acquired before July 1, 2001, be recognized in income as a cumulative effect of change in accounting principle. The U. S. Steel Group expects to recognize a favorable cumulative effect of a change in accounting principle of approximately $20 million, net of tax, upon adoption. USX continues to evaluate the financial effects of the provisions of SFAS No. 142 pertaining to intangible assets other than goodwill. SFAS 143 provides accounting requirements for retirement obligations associated with tangible long-lived assets, including: 1) the timing of liability recognition; 2) initial measurement of the liability; 3) allocation of asset retirement cost to expense; 4) subsequent measurement of the liability; and 5) financial statement disclosures. SFAS 143 requires that an asset retirement cost should be capitalized as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method. USX will adopt the Statement effective January 1, 2003. The transition adjustment resulting from the adoption of SFAS 143 will be reported as a cumulative effect of a change in accounting principle. At this time, the U. S. Steel Group cannot reasonably estimate the effect of the adoption of this Statement on either its financial position or results of operations. 2. The financial statements of the U. S. Steel Group include the financial position, results of operations and cash flows for all businesses of USX other than the businesses, assets and liabilities included in the Marathon Group and a portion of the corporate assets and liabilities and related transactions which are not separately identified with ongoing operating units of USX. These financial statements are prepared using the amounts included in the USX consolidated financial statements. Corporate amounts reflected in these financial statements are determined based upon methods which management believes to be reasonable. The accounting policies applicable to the preparation of the financial statements of the U. S. Steel Group may be modified or rescinded in the sole discretion of the Board of Directors of USX (Board), although the Board has no present intention to do so. The Board may also adopt additional policies depending on the circumstances. 80 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 2. (Continued) 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 between the U. S. Steel Group and the Marathon Group for purposes of preparing their respective financial statements does not affect legal title to such assets and responsibility for such liabilities. Holders of USX-U. S. Steel Group Common Stock (Steel Stock) and USX-Marathon Group Common Stock (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 or distributions on any class of USX Common Stock or series of Preferred Stock and repurchases of any class of USX Common Stock or series of Preferred Stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on both classes of Common Stock. Accordingly, the USX consolidated financial information should be read in connection with the U. S. Steel Group financial information. The financial statement provision for income taxes and related tax payments or refunds have been reflected in the U. S. Steel Group and the Marathon Group financial statements in accordance with USX's tax allocation policy for such groups. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated between the U. S. Steel Group and the Marathon Group for group financial statement purposes, based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to the respective groups. The provision for income taxes for the U. S. Steel Group is based on tax rates and amounts which recognize management's best estimate of current and deferred tax assets and liabilities. Differences between the combined interim tax provisions of the U. S. Steel and Marathon Groups and USX consolidated are allocated to each group based on the relationship of the individual group provisions to the combined interim provisions. 3. On November 24, 2000, USX acquired U. S. Steel Kosice, s.r.o. (USSK), which is primarily located in the Slovak Republic. USSK was formed in June 2000 to hold the steel operations and related assets of VSZ a.s. (VSZ), a diversified Slovak corporation. The acquisition was accounted for under the purchase method of accounting. 81 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 3. (Continued) On March 1, 2001, USX completed the purchase of the tin mill products business of LTV Corporation (LTV), which is now operated as East Chicago Tin. In this noncash transaction, USX assumed approximately $66 million of certain employee related obligations from LTV. The acquisition was accounted for using the purchase method of accounting. Results of operations for the six months of 2001 include the operations of East Chicago Tin from the date of acquisition. On March 23, 2001, Transtar, Inc. (Transtar) completed its previously announced reorganization with its two voting shareholders, USX and Transtar Holdings, L.P. (Holdings), an affiliate of Blackstone Capital Partners L.P. As a result of this transaction, USX became sole owner of Transtar and certain of its subsidiaries. Holdings became owner of the other subsidiaries of Transtar. USX accounted for the change in its ownership interest in Transtar using the purchase method of accounting. The U. S. Steel Group recognized in the six months of 2001 a pretax gain of $68 million (included in income (loss) from investees) and a favorable deferred tax adjustment of $33 million related to this transaction. USX previously accounted for its investment in Transtar under the equity method of accounting. The following unaudited pro forma data for the U. S. Steel Group includes the results of operations of the above acquisitions giving effect to them as if they had been consummated at the beginning of the periods presented. The six months 2001 pro forma results exclude the $68 million gain and $33 million tax benefit recorded as a result of the Transtar transaction. In addition, VSZ did not historically provide carve-out financial information for its steel activities prepared in accordance with generally accepted accounting principles in the United States. Therefore, USX made certain estimates and assumptions regarding revenues and costs in the preparation of the unaudited pro forma data relating to USSK for the six months of 2000. The following 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.
Six Months Ended June 30 (In millions, except per share amounts) 2001 2000 ---------------------------------------------------------------- Revenues and other income $3,279 $3,850 Net income (loss) (123) 137 Per share - basic (1.43) 1.51 - diluted (1.43) 1.48
82 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 4. The U. S. Steel Group consists of two reportable operating segments: 1) Domestic Steel and 2) U. S. Steel Kosice (USSK). Domestic Steel includes the United States operations of U. S. Steel while USSK includes the U. S. Steel Kosice operations primarily located in the Slovak Republic. Domestic Steel is engaged in the domestic production, sale and transportation of steel mill products, coke, taconite pellets and coal; the management of mineral resources; real estate development; and engineering and consulting services. USSK is engaged in the production and sale of steel mill products and coke and primarily serves central European markets. The results of segment operations are as follows:
Domestic Total (In millions) Steel USSK Segments - ----------------------------------------------------------------------------- SECOND QUARTER 2001 - ------------------- Revenues and other income: Customer $1,447 $284 $1,731 Intersegment (a) 2 - 2 Intergroup (a) 2 - 2 Equity in earnings (losses) of unconsolidated investees (8) 1 (7) Other 11 - 11 ------ ------ ------ Total revenues and other income $1,454 $285 $1,739 ====== ====== ====== Segment income (loss) $(69) $41 $(28) ====== ====== ====== SECOND QUARTER 2000 - ------------------- Revenues and other income: Customer $1,625 $- $1,625 Intergroup (a) 4 - 4 Equity in earnings of unconsolidated investees 14 - 14 Other 13 - 13 ------ ------ ------ Total revenues and other income $1,656 $- $1,656 ====== ====== ====== Segment income $68 $- $68 ====== ====== ====== (a)Intersegment and intergroup sales and transfers were conducted under terms comparable to those with unrelated parties.
83 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 4. (Continued)
Domestic Total (In millions) Steel USSK Segments - ----------------------------------------------------------------- SIX MONTHS 2001 - --------------- Revenues and other income: Customer $2,709 $530 $3,239 Intersegment (a) 3 - 3 Intergroup (a) 4 - 4 Equity in earnings of unconsolidated investees 39 1 40 Other 17 1 18 ------ ------ ------ Total revenues and other income $2,772 $532 $3,304 ====== ====== ====== Segment income (loss) $(220) $82 $(138) ====== ====== ====== SIX MONTHS 2000 - --------------- Revenues and other income: Customer $3,203 $- $3,203 Intergroup (a) 8 - 8 Equity in earnings of unconsolidated investees 7 - 7 Other 26 - 26 ------ ------ ------ Total revenues and other income $3,244 $- $3,244 ====== ====== ====== Segment income $122 $- $122 ====== ====== ====== (a)Intersegment and intergroup sales and transfers were conducted under terms comparable to those with unrelated parties.
84 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 4. (Continued) The following schedules reconcile segment amounts to amounts reported in the U. S. Steel Group's financial statements:
Second Quarter Ended June 30 (In millions) 2001 2000 ------------------------------------------------------------------------- Revenues and other income: Revenues and other income of reportable segments $1,739 $1,656 Elimination of intersegment revenues (2) - ------ ------ Total Group revenues and other income $1,737 $1,656 ====== ====== Income: Income (loss) for reportable segments $(28) $68 Items not allocated to segments: Administrative expenses (8) (5) Net pension credits 31 67 Costs related to former business activities (14) (18) Costs related to Proposed Separation (8) - ------ ------ Total Group income (loss) from operations $(27) $112 ====== ======
Six Months Ended June 30 (In millions) 2001 2000 --------------------------------------------------------------------- Revenues and other income: Revenues and other income of reportable segments $3,304 $3,244 Elimination of intersegment revenues (3) - ------ ------ Total Group revenues and other income $3,301 $3,244 ====== ====== Income: Income (loss) for reportable segments $(138) $122 Items not allocated to segments: Administrative expenses (15) (11) Net pension credits 72 132 Costs related to former business activities (38) (40) Costs related to Proposed Separation (9) - ------ ------ Total Group income (loss) from operations $(128) $203 ====== ======
85 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 5. The U. S. Steel Group's total comprehensive income (loss) was $(31) million for the second quarter of 2001, $54 million for the second quarter of 2000, $(24) million for the six months of 2001 and $98 million for the six months of 2000. 6. USX has a 16% investment in Republic Technologies International LLC (Republic) which was accounted for under the equity method of accounting. During the first quarter of 2001, USX discontinued applying the equity method since investments in and advances to Republic had been reduced to zero. Also, USX has recognized certain debt obligations of $14 million previously assumed by Republic. On April 2, 2001, Republic filed a voluntary petition with the U.S. Bankruptcy Court to reorganize its operations under Chapter 11 of the U.S. Bankruptcy Code. In the first quarter of 2001, as a result of Republic's action, the U. S. Steel Group recorded a pretax charge of $74 million for potentially uncollectible receivables from Republic. 7. Inventories are carried at the lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method.
(In millions) ---------------------- June 30 December 31 2001 2000 -------------------- Raw materials $170 $214 Semi-finished products 378 429 Finished products 259 210 Supplies and sundry items 109 93 ---- ---- Total $916 $946 ==== ====
86 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 8. The method of calculating net income (loss) per common share for the Steel Stock and Marathon Stock reflects the Board's intent that the separately reported earnings and surplus of the U. S. Steel Group and the Marathon Group, as determined consistent with the USX Restated 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. Basic net income (loss) per share is calculated by adjusting net income for dividend requirements of preferred stock and is based on the weighted average number of common shares outstanding. 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. See Note 8 of the Notes to USX Consolidated Financial Statements for the computation of income per share. 9. At June 30, 2001, and December 31, 2000, income taxes receivable represents an estimated income tax receivable from the Marathon Group. In addition, included in investments and long-term receivables at June 30, 2001, and December 31, 2000, respectively, are $43 million and $97 million of income taxes receivable from the Marathon Group. These amounts have been determined in accordance with the tax allocation policy discussed in Note 2. 10. Interest and other financial costs in the six months of 2001 included a favorable adjustment of $67 million and provision for income taxes included an unfavorable adjustment of $15 million, both of which are related to prior years' taxes. 11. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the U. S. Steel Group involving a variety of matters including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the U. S. Steel Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the U. S. Steel Group. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. 87 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 11. (Continued) The U. S. Steel 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 June 30, 2001, and December 31, 2000, accrued liabilities for remediation totaled $138 million and $137 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. For a number of years, the U. S. Steel Group has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the first six months of 2001 and for the years 2000 and 1999, such capital expenditures totaled $6 million, $18 million and $32 million, respectively. The U. S. Steel Group anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. Guarantees by USX of the liabilities of affiliated entities of the U. S. Steel Group totaled $58 million at June 30, 2001. In the event that any defaults of guaranteed liabilities occur, USX has access to its interest in the assets of the affiliates to reduce U. S. Steel Group losses resulting from these guarantees. As of June 30, 2001, the largest guarantee for a single affiliate was $48 million. The U. S. Steel Group's contract commitments to acquire property, plant and equipment at June 30, 2001, totaled $109 million compared with $206 million at December 31, 2000. 12. On July 31, 2001, USX announced that its board of directors approved the definitive plan of reorganization to separate the energy and steel businesses of USX (Proposed Separation). The Proposed Separation envisions a tax-free spin-off of the steel business of USX into a freestanding, publicly traded company to be known as United States Steel Corporation. Holders of current USX-U. S. Steel Group Common Stock will become holders of United States Steel Corporation Common Stock. Holders of current USX- Marathon Group Common Stock will become holders of Marathon Oil Corporation Common Stock. The Proposed Separation does not contemplate a cash distribution to stockholders. Each new company will carry approximately the same assets and liabilities now associated with its existing business, except for a value transfer of approximately $900 million from Marathon Oil Corporation to United States Steel Corporation, intended to maintain United States Steel Corporation as a 88 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 12. (Continued) strong, independent company. The form of the value transfer will be a reattribution of USX corporate debt between the USX-Marathon Group and the USX-U. S. Steel Group. The Proposed Separation of reorganization is subject to the approval of the holders of a majority of the outstanding shares of each class of current USX common stock, receipt of a favorable private letter ruling from the Internal Revenue Service ("IRS") on the tax- free nature of the transaction, completion of necessary financing arrangements and receipt of necessary regulatory and third party consents. The transaction is expected to occur on or about December 31, 2001, subject to the absence of any materially adverse change in business conditions for the energy and/or steel business, delay in obtaining the IRS ruling or other unfavorable circumstances. Costs related to the Proposed Separation include professional fees and other expenses and are included in selling, general and administrative expenses (credits). These costs in the second quarter and six months of 2001 were $8 million and $9 million, respectively. 13. On July 2, 2001, a corporate reorganization was implemented to create a new holding company structure. USX became a holding company that owns all of the outstanding equity of Marathon Oil Company, an Ohio Corporation which, directly and indirectly, owns and operates the businesses of the USX- Marathon Group, and United States Steel LLC, a Delaware limited liability company which owns and operates the businesses of the USX-U. S. Steel Group. The reorganization will not have any impact on the results of operations or financial position of USX Corporation, the Marathon Group or the U. S. Steel Group. This reorganization in corporate form is independent of the Proposed Separation of the energy and steel businesses of USX Corporation. 89 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The U. S. Steel Group, through its Domestic Steel segment, is engaged in the production, sale and transportation of steel mill products, coke, taconite pellets and coal; the management of mineral resources; real estate development; and engineering and consulting services and, through its U. S. Steel Kosice ("USSK") segment, primarily located in the Slovak Republic, in the production and sale of steel mill products and coke for the central European market. Certain business activities are conducted through joint ventures and partially owned companies, such as USS-POSCO Industries ("USS-POSCO"), PRO-TEC Coating Company ("PRO-TEC"), Clairton 1314B Partnership, Republic Technologies International, LLC ("Republic") and Rannila Kosice, s.r.o. Management's Discussion and Analysis should be read in conjunction with the U. S. Steel Group's Financial Statements and Notes to Financial Statements. The discussion of Results of Operations should be read in conjunction with the Supplemental Statistics provided on page 102. On July 31, 2001, USX announced that its board of directors approved the definitive plan of reorganization to separate the energy and steel businesses of USX ("Proposed Separation"). The Proposed Separation envisions a tax-free spin- off of the steel business of USX into a freestanding, publicly traded company to be known as United States Steel Corporation. The Proposed Separation is subject to certain conditions and is expected to occur on or about December 31, 2001. For further discussion, see Management's Discussion and Analysis for USX Corporation on page 29. On July 2, 2001, a corporate reorganization was implemented to create a new holding company structure. USX became a holding company that owns all of the outstanding equity of Marathon Oil Company, a Ohio Corporation which, directly and indirectly, owns and operates the businesses of the USX-Marathon Group, and United States Steel LLC, a Delaware limited liability company which owns and operates the businesses of the USX-U. S. Steel Group. The reorganization will not have any impact on the results of operations or financial position of USX Corporation, the Marathon Group or the U. S. Steel Group. This reorganization in corporate form is independent of the Proposed Separation of the energy and steel businesses of USX Corporation. 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", "intends" 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 U. S. Steel Group, see Supplementary Data -- Disclosures About Forward-Looking Information in the USX Annual Report on Form 10-K for the year ended December 31, 2000 and subsequent filings. 90 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- Results of Operations - --------------------- Revenues and other income increased by $81 million and $57 million in the second quarter and first six months of 2001, respectively, compared with the same periods in 2000. The increases primarily reflected the inclusion of USSK revenues, partially offset by lower domestic shipment volumes (shipments decreased 293,000 tons and 841,000 tons in the second quarter and first six months of 2001, respectively) and lower average domestic steel product prices (average prices decreased $22/ton and $11/ton for the second quarter and first six months of 2001, respectively). Income from operations for the U. S. Steel Group for the second quarter and first six months of 2001 and 2000 is set forth in the following table:
Second Quarter Six Months Ended June 30 Ended June 30 (Dollars in millions) 2001 2000 2001 2000 - ------------------------------------------------------------------------ Segment income (loss) for Domestic Steel(a)(b) $(69) $68 $(220) $122 Segment income for U. S. Steel Kosice(c) 41 - 82 - ----- ----- ----- ----- Income (loss) for reportable segments (28) 68 (138) 122 Items not allocated to segment: Net pension credits 31 67 72 132 Administrative expenses (8) (5) (15) (11) Costs related to former business activities(d) (14) (18) (38) (40) Costs related to proposed separation(e) (8) - (9) - ----- ----- ----- ----- Total income (loss) from operations $(27) $112 $(128) $203 ===== ===== ===== ===== - ----- (a) The first six months of 2001 include a favorable $68 million for U. S. Steel Group's share of gain on the Transtar reorganization and a $74 million charge for a substantial portion of accounts receivable from Republic. The second quarter and first six months of 2000 include charges totaling $15 million for certain environmental and legal accruals. (b) Includes income from the sale and domestic production and transportation of steel products, coke, taconite pellets and coal; the management of mineral resources; real estate development; engineering and consulting services; and equity income from joint ventures and partially owned companies. (c) Includes the sale and production of steel products and coke from facilities primarily located in the Slovak Republic. (d) Includes other postretirement benefit costs and certain other expenses principally attributable to former business units of the U. S. Steel Group. (e) Includes professional fees and expenses, and certain other costs related to the proposed separation.
91 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION SEGMENT INCOME FOR DOMESTIC STEEL Segment income for Domestic Steel decreased $137 million and $342 million in the second quarter and first six months of 2001, respectively, compared with the same periods in 2000. The decrease in segment income in second quarter 2001 compared to second quarter 2000 was primarily due to lower average steel prices, higher costs per ton from operating inefficiencies due to lower throughput for sheet products, and lower shipment volumes, partially offset by a better product mix. The decrease in segment income in the first six months of 2001 compared to the same period last year was primarily due to lower average steel prices, higher costs per ton from operating inefficiencies due to lower throughput for sheet products, higher energy costs, lower shipment volumes and lower results at iron ore and coal operations. The first six months of 2001 also include a favorable $68 million for U. S. Steel Group's share of gain on the Transtar reorganization and a $74 million charge for a substantial portion of accounts receivable from Republic. In addition, the second quarter and first six months of 2000 included charges totaling $15 million for certain environmental and legal contingencies and were unfavorably impacted by a two-week unplanned blast furnace outage at Fairfield Works. SEGMENT INCOME FOR U. S. STEEL KOSICE Segment income for USSK was $41 million in the second quarter of 2001 and $82 million for the first six months of 2001. ITEM NOT ALLOCATED TO SEGMENT Net pension credits associated with all of U. S. Steel Group's domestic pension plans are not included in segment income for domestic operations. These net pension credits, which are primarily noncash, totaled $31 million and $72 million in the second quarter and first six months of 2001, respectively, compared to $67 million and $132 million in the same periods in 2000. The $36 million and $60 million decrease in net pension credits for the second quarter and first six months 2001, respectively, from the same periods in 2000 was primarily due to the transition asset being fully amortized at the end of 2000. Currently, the net pension credit for 2001 is expected to be approximately $145 million, excluding any potential impacts from the Proposed Separation. Future net pension credits will no longer benefit from the now fully amortized transition asset and can vary depending upon the market performance of plan assets, changes in actuarial assumptions regarding such factors as a selection of a discount rate and rate of return on assets, changes in the amortization levels of prior period service costs, plan amendments affecting benefit payout levels, business combinations and profile changes in the beneficiary populations being valued. To the extent net pension credits decline in the future, income from operations would be adversely affected. Net interest and other financial costs for the second quarter and first six months of 2001 increased $24 million in the second quarter and, excluding a favorable adjustment of $67 million related to prior years' taxes, increased $55 million in the first six months of 2001 as compared with the same period in 2000. These increases were primarily due to higher average debt levels. 92 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The credit for income taxes in the second quarter and first six months of 2001 increased compared to the provision for income taxes in the same periods in 2000 due to a decrease in income before income taxes. The credit for the first six months of 2001 contained a $33 million tax benefit associated with the Transtar reorganization and an unfavorable adjustment of $15 million primarily related to the settlement of prior years' taxes. In addition, as a result of tax credit provisions of laws of the Slovak Republic and certain tax planning strategies, virtually no income tax provision is recorded for income related to USSK. Net income decreased $86 million and $120 million in the second quarter and first six months of 2001, respectively, compared to the same periods in 2000, primarily reflecting the factors discussed above. Operating Statistics - -------------------- For the U. S. Steel Group, second quarter and first six months 2001 shipments of 3.7 million tons and 6.9 million tons increased 27% and 17%, respectively, from the same periods in 2000. Domestic Steel shipments of 2.6 million tons and 5.0 million tons for the second quarter and first six months of 2001 decreased 10% and 14% from the same periods in 2000. Domestic Steel raw steel production in the second quarter of 2001 of 2.6 million tons was down 14% compared to the same period in 2000. Domestic Steel raw steel production in the first six months of 2001 of 5.2 million tons decreased 15% from the same period in 2000. Domestic Steel raw steel capability utilization in the second quarter of 2001 averaged 82.1%, compared to 95.4% in the same period in 2000. Domestic Steel raw steel capability utilization in the first six months of 2001 averaged 82.6%, compared to 97.2% in the same period in 2000. Domestic Steel shipments, raw steel production and raw steel capability utilization in the second quarter and first six months of 2000 were negatively impacted by the blast furnace outage at Fairfield Works. At USSK, second quarter and first six month 2001 shipments were 1.1 million net tons and 1.8 million net tons, respectively. Balance Sheet - ------------- Current assets at June 30, 2001 decreased $41 million from year-end 2000 primarily due to decreases in inventories, deferred income tax benefits and income taxes receivable, partially offset by increases in cash and cash equivalents and accounts receivable. Net property, plant and equipment at June 30, 2001 increased $359 million from year-end 2000 primarily due to the consolidation of Transtar and the acquisition of East Chicago Tin. Current liabilities at June 30, 2001 increased $269 million compared to year-end 2000 primarily due to increases in notes payable, debt due within one year and accrued taxes. The increase in debt due within one year was due to a reclassification from long-term debt. Employee benefits at June 30, 2001 increased $149 million compared to year- end 2000 primarily due to the addition of employees with the Transtar consolidation and the acquisition of the tin mill products business of LTV Corporation. 93 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Cash Flow - --------- Net cash provided from operating activities increased $126 million in the first six months of 2001, compared with the first six months of 2000. The increase was due primarily to favorable working capital changes, which included a favorable intergroup income tax settlement of $379 million compared to a favorable intergroup settlement of $97 million in the same period in 2000, partially offset by decreased net income (excluding noncash items). Capital expenditures in the first six months of 2001 were $141 million, compared with $97 million in the same period in 2000. The increase was primarily due to exercising a buyout option of a lease for the balance of the Gary Works No. 2 Slab Caster. Contract commitments for capital expenditures at June 30, 2001, totaled $109 million, compared with $206 million at December 31, 2000. Financial obligations were reduced by $32 million in the first six months of 2001. The decrease in financial obligations resulted from cash from operating activities exceeding capital expenditures and dividend payments. 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. Dividends paid decreased $13 million in the first six months of 2001 from the same period in 2000, due to a decrease in the dividend rate paid to U. S. Steel Group common stockholders. 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. In addition, on July 27, 2001, in order to provide a portion of the funding that will be needed to implement the Proposed Separation, United States Steel LLC issued $385 million of seven-year Senior Notes ("Notes") at an interest rate of 10.75 percent per annum and maturing on August 1, 2008. These Notes are guaranteed by USX Corporation until completion of the Proposed Separation, at which time they will be solely the obligation of United States Steel Corporation. These Notes include financial covenants that substantially limit the rights of United States Steel Corporation after the Proposed Separation. Most of these covenants apply only when the Notes are not rated investment grade. Standard & Poor's and Moody's have assigned BB and Ba2 ratings, respectively, to these Notes, post-separation. Among other things these covenants may: 94 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- - impose restrictions on payment of dividends; - limit additional borrowings by United States Steel Corporation, including limiting the amount of borrowings secured by inventories or accounts receivable; - limit asset sales and sale of the stock of subsidiaries; and - restrict the ability to make capital expenditures or certain acquisitions. The Notes also contain covenants that require, immediately following the Proposed Separation and after giving pro forma effect to any subsequent payments to be made as part of the Proposed Separation, United States Steel Corporation and its subsidiaries to have an aggregate of at least $400 million in undrawn financings and cash, of which at least $300 million shall be available under facilities with terms extending at least three years after the date such facilities are put in place, and that the United States Steel Corporation shall not be in default under any of the covenants under the Notes. The Notes also carry registration rights requiring the filing of a registration statement by March 31, 2002. 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. In addition, the U. S. Steel Group expects to incur capital expenditures for its USSK operation to meet environmental standards under the Slovak Republic's environmental laws. USX has been notified that it is a potential responsible party ("PRP") at 22 waste sites related to the U. S. Steel Group under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of June 30, 2001. 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 29 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. 95 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- In October 1996, USX was notified by the Indiana Department of Environmental Management ("IDEM"), acting as lead trustee, that IDEM and the U.S. Department of the Interior had concluded a preliminary investigation of potential injuries to natural resources related to the releases of hazardous substances from various municipal and industrial sources along the east branch of the Grand Calumet River and Indiana Harbor Canal. The public trustees completed a pre-assessment screen pursuant to federal regulations and have determined to perform a Natural Resource Damages Assessment. USX was identified as a PRP along with 15 other companies owning property along the river and harbor canal. USX and eight other PRPs have formed a joint defense group. In 2000, the trustees concluded their assessment of sediment injuries, which includes a technical review of environmental conditions. The PRP joint defense group has proposed terms for the settlement of this claim which have been endorsed by representatives of the trustees and the U.S. Environmental Protection Agency ("EPA") to be included in a consent decree that USX expects will resolve this claim. A reserve has been established for the USX share of this anticipated settlement. The Berks Associates/Douglassville Site ("Berks Site") is situated on a 50- acre parcel located on the Schuylkill River in Berks County, Pa. Used oil and solvent reprocessing operations were conducted on the Berks Site between 1941 and 1986. In September 1997, USX signed a consent decree to conduct a feasibility study at the site relating to the alternative remedy. In 1999, a new Record of Decision was approved by the EPA and the U.S. Department of Justice. On January 19, 2001, USX signed a consent decree with the EPA to remediate this site. On April 6, 2001, USX paid $.4 million for costs associated with this site. The only remaining outstanding claim is the natural resource damages claim filed by the Commonwealth of Pennsylvania. In 1987, the California Department of Health Services ("DHS") issued a remedial action order for the GBF/Pittsburg landfill near Pittsburg, California. DHS alleged that from 1972 through 1974, Pittsburg Works arranged for the disposal of approximately 2.6 million gallons of waste oil, sludge, caustic mud and acid, which were eventually taken to this landfill for disposal. In 2000, the parties reached a buyout arrangement with a third party remediation firm, whereby the firm agreed to take title to and remediate the site and also indemnify the PRPs. This commitment was backed by pollution insurance. USX's share to participate in the buyout was approximately $1.1 million. Payment of the USX buyout amount was made December 2000. Title to the site was transferred to the remediation firm on January 31, 2001. In November 2000, a NOV was issued by the Jefferson County Health Department ("JCHD") alleging violation of the Halogenated Solvent National Emission Standards for Hazardous Air Pollutants and the JCHD Volatile Organic Compound ("VOC") regulations at the sheet mill stretch leveler at Fairfield Works. U. S. Steel Group proposed a civil penalty of $100,000 and a VOC emission limit, which have been agreed to by JCHD. A consent order was executed and approved by the court in May 2001. The penalty was paid by U. S. Steel Group in June 2001. 96 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- 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 11 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. Outlook - ------- Over the last few months, domestic orders for steel have strengthened and prices have stabilized. In the third quarter, we expect Domestic Steel shipments to be somewhat higher and realized prices to be flat or modestly higher. On the cost side, there has been a declining trend in domestic natural gas prices compared to the same period last year. Continuation of this trend could provide a significant positive impact on our costs over the balance of the year. Late in the second quarter, work began on the refurbishment of the Mon Valley No. 3 blast furnace, which is expected to be available to resume production in September, business conditions permitting. On May 31, 2001, a major fire damaged the cold-rolling mill at USS-POSCO, which is fifty percent owned by U. S. Steel Group. Damage was predominantly limited to the cold-rolling mill area of the plant. USS-POSCO maintains insurance coverage against such losses, including coverage for business interruption. The mill is expected to resume production in the first quarter of 2002, although full-production may not be achieved until mid-2002. Until such time, the plant will continue customer shipments using cold-rolled coils from U. S. Steel Group and POSCO as substitute feedstock. For USSK, we expect third quarter shipments to be slightly lower than the second quarter and third quarter average realized price to be flat compared to the second quarter. Based on continued improvement in production performance since acquisition, USSK raw steel production capability for the second half of 2001 will be increased to 2.5 million net tons, for an annualized rate of 5.0 million net tons. For the full year 2001, total shipments are expected to be approximately 14 to 14.5 million net tons with Domestic Steel shipments of approximately 10.5 to 11 million net tons and USSK shipments of approximately 3.5 million net tons. USX owns a 16 percent equity method investment in Republic (through USX's ownership in Republic Technologies International Holdings, LLC, which is the sole owner of Republic), which is a major purchaser of raw materials from U. S. Steel Group and the primary supplier of rounds for the tubular facility in Lorain, Ohio. On April 2, 2001, Republic filed to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Republic has continued to supply the Lorain mill since filing for bankruptcy and no supply interruptions are anticipated. At June 30, 2001, U. S. Steel Group's remaining pre-petition financial exposure to Republic, after recording various losses and reserves, totaled approximately $30 million. 97 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- The above discussion includes forward-looking statements concerning shipments, pricing, and production resumption at the Mon Valley No. 3 blast furnace and at USS-POSCO. These statements are based on assumptions as to future product demand, prices and mix, production, completion of refurbishment of the Mon Valley No. 3 blast furnace and completion of repairs at USS-POSCO. Steel shipments and prices can be affected by imports and actions of the U.S. Government and its agencies pertaining to trade, domestic and international economies, domestic production capacity, and customer demand. Factors that may affect USSK results are similar to domestic factors, including excess world supply and foreign currency fluctuations, and also can be influenced by matters peculiar to international marketing such as tariffs. In the event these assumptions prove to be inaccurate, actual results may differ significantly from those presently anticipated. One factor that could potentially affect the completion or timing of the resumption of operations at the USS-POSCO cold- rolling mill, among others, is the complexity of repairs. Steel imports to the United States accounted for an estimated 23%, 27% and 26% of the domestic steel market in the first five months of 2001, and for the years 2000 and 1999, respectively. On November 13, 2000, U. S. Steel Group joined with eight other producers and the Independent Steelworkers Union to file trade cases against hot-rolled carbon steel flat products from 11 countries (Argentina, India, Indonesia, Kazakhstan, the Netherlands, the People's Republic of China, Romania, South Africa, Taiwan, Thailand and Ukraine). Three days later, the USWA also entered the cases as a petitioner. Antidumping ("AD") cases were filed against all the countries and countervailing duty ("CVD") cases were filed against Argentina, India, Indonesia, South Africa, and Thailand. The U.S. International Trade Commission ("ITC") made a preliminary determination that there is a reasonable indication that the domestic industry is being materially injured by the imports in question. The U.S. Department of Commerce ("Commerce") made preliminary findings of margins in all of the cases. Commerce has also found final margins in the AD cases against Argentina and South Africa and in the CVD cases against Argentina, while final determinations in the other cases will be made at a later date. Both the ITC and Commerce are continuing their investigations in all the cases in which their final determinations have not yet been made. On June 5, 2001, President Bush announced a three-part program to address the excessive imports of steel that have been depressing markets in the United States. The program involves (1) negotiations with foreign governments seeking near-term elimination of inefficient excess steel production capacity throughout the world, (2) negotiations with foreign governments to establish rules that will govern steel trade in the future and eliminate subsidies, and (3) an investigation by the ITC under section 201 of the Trade Act of 1974 to determine whether steel is being imported into the U.S. in such quantities as to be a substantial cause of serious injury to the U.S. steel industry. 98 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- On June 22, 2001, the Bush Administration requested that the ITC initiate investigations under section 201 of the Trade Act of 1974. Products included in the request are in the following categories, subject to exclusion of certain products: (1) Carbon and alloy flat products; (2) Carbon and alloy long products; (3) Carbon and alloy pipe and tube; and (4) Stainless steel and alloy tool steel products. U. S. Steel Group believes that the remedies provided by AD and CVD litigation are insufficient to correct the widespread dumping and subsidy abuses that currently characterize steel imports into our country and has, therefore, urged the U.S. government to take actions such as those described above. U. S. Steel Group, nevertheless, intends to file additional AD and CVD petitions against unfairly traded imports that adversely impact, or threaten to adversely impact, the results of the U. S. Steel Group. On July 3, 2000, Commerce and the ITC initiated mandatory five-year "sunset" reviews of AD orders issued in 1995 against seamless pipe from Argentina, Brazil, Germany and Italy and oil country tubular goods ("OCTG") from Argentina, Italy, Japan, Mexico and South Korea. The reviews also encompass the 1995 CVD orders against the same two products from Italy. The "sunset" review procedures require that an order must be revoked after five years unless Commerce and the ITC determine that, if the orders would be discontinued, dumping or a countervailable subsidy would be likely to continue or recur. In all of the cases, Commerce has concluded its review and has determined that dumping or countervailable subsidies would be likely to continue or recur if the orders are discontinued. In the seamless pipe cases, the ITC voted on June 7, 2001 to continue the orders as to Argentina, Brazil and Germany and to discontinue the orders pertaining to Italy. The ITC voted on June 15, 2001 to continue the orders against all five countries pertaining to OCTG other than drill pipe. The ITC's votes on drill pipe will continue the order in effect against Japan and discontinue the orders against Argentina and Mexico. On June 29, 2001, various domestic producers of coke and the United Steelworkers of America filed antidumping cases against blast furnace coke from China and Japan. The U. S. Steel Group produces coke and also imports coke from both China and Japan. The U. S. Steel Group is not a petitioner in these cases. 99 U. S. STEEL GROUP OF USX CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ------------------------------------ Commodity Price Risk and Related Risks - -------------------------------------- Sensitivity analysis of the incremental effects on pretax income of hypothetical 10% and 25% changes in commodity prices for commodity-based derivative instruments are provided in the following table(a):
Incremental Decrease in Income Before Income Taxes Assuming a Hypothetical Price Change of: (Dollars in millions) 10% 25% - ------------------------------------------------------------------------ Commodity-Based Derivative Instruments U. S. Steel Group Natural Gas 0.9 2.2 (b) Zinc 1.8 4.6 (b) Tin 0.1 0.3 (b) (a) With the adoption of SFAS No. 133, the definition of a derivative instrument has been expanded to include certain fixed price physical commodity contracts. Such instruments are included in the above table. Amounts reflect the estimated incremental effects on pretax income of hypothetical 10% and 25% changes in closing commodity prices at June 30, 2001. Management evaluates the portfolios of commodity-based derivative instruments on an ongoing basis and adjusts strategies to reflect anticipated market conditions, changes in risk profiles and overall business objectives. Changes to the portfolios subsequent to June 30, 2001, may cause future pretax income effects to differ from those presented in the table. (b) Price decrease.
100 U. S. STEEL GROUP OF USX CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ------------------------------------- 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 June 30, 2001, 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 both groups, is provided in the following table:
(Dollars in millions) - ---------------------------------------------------------------------------- As of June 30, 2001 Incremental Increase in Non-Derivative Fair Fair Financial Instruments(a) Value Value(b) - ---------------------------------------------------------------------------- Financial assets: Investments and long-term receivables $86 $- - --------------------------------------------------------------------------- Financial liabilities: Long-term debt (c)(d) $2,415 $75 Preferred stock of subsidiary 66 5 USX obligated mandatorily redeemable convertible preferred securities of a subsidiary trust 182 13 ------ ------ Total liabilities $2,663 $93 - --------------------------------------------------------------------------- (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) Reflects, by class of financial instrument, the estimated incremental effect of a hypothetical 10% decrease in interest rates at June 30, 2001, 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 June 30, 2001. (c) Includes amounts due within one year. (d) Fair value was based on market prices where available, or current borrowing rates for financings with similar terms and maturities.
101 U. S. STEEL GROUP OF USX CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ------------------------------------ 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 June 30, 2001, the U. S. Steel Group had open Euro forward sale contracts for Slovak Koruna with a total carrying value of approximately $20 million. A 10% increase in the June 30, 2001 Euro forward rates would result in a $2 million charge to income. The entire amount of these contracts is attributed to the U. S. Steel Group. Equity Price Risk - ----------------- As of June 30, 2001, USX was subject to equity price risk and liquidity risk related to its investment in VSZ a.s., the former parent of U. S. Steel Kosice, s.r.o., which is attributed to the U. S. Steel Group. These risks are not readily quantifiable. Safe Harbor - ----------- The U. S. Steel Group's Quantitative and Qualitative Disclosures About Market Risk include forward-looking statements with respect to management's opinion about risks associated with the U. S. Steel Group's use of derivative instruments. These statements are based on certain assumptions with respect to market prices and industry supply 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. 102 U. S. STEEL GROUP OF USX CORPORATION SUPPLEMENTAL STATISTICS (Unaudited) -------------------------------------
Second Quarter Six Months Ended June 30 Ended June 30 (Dollars in millions) 2001 2000 2001 2000 - ------------------------------------------------------------------------- INCOME (LOSS) FROM OPERATIONS Domestic Steel(a)(b) $(69) $68 $(220) $122 U. S. Steel Kosice(c) 41 - 82 - ----- ----- ----- ----- Income (loss) from Reportable Segments $(28) $68 $(138) $122 Items not allocated to segment: Net Pension Credits 31 67 72 132 Administrative Expenses (8) (5) (15) (11) Costs related to former business activities(d) (14) (18) (38) (40) Costs related to proposed separation(e) (8) - (9) - ----- ----- ----- ----- Total U. S. Steel Group $(27) $112 $(128) $203 CAPITAL EXPENDITURES Domestic Steel $95 $52 $127 $97 U. S. Steel Kosice 9 - 14 - ----- ----- ----- ----- Total U. S. Steel Group $104 $52 $141 $97 OPERATING STATISTICS Average steel price per ton: ($/net ton) Domestic Steel $429 $451 $434 $445 U. S. Steel Kosice 249 - 267 - Steel Shipments:(f) Domestic Steel 2,611 2,904 5,043 5,884 U. S. Steel Kosice 1,069 - 1,818 - ----- ----- ----- ----- Total Steel Shipments 3,680 2,904 6,861 5,884 Raw Steel-Production:(f) Domestic Steel 2,621 3,034 5,244 6,186 U. S. Steel Kosice 1,131 - 2,083 - ----- ----- ----- ----- Total Raw Steel-Production 3,752 3,034 7,327 6,186 Raw Steel-Capability Utilization:(g) Domestic Steel 82.1% 95.4% 82.6% 97.2% U. S. Steel Kosice 100.8% - 93.4% - Iron ore shipments - Domestic Steel(f) 5,189 4,656 7,100 6,685 - ----------- (a) The first six months of 2001 include a favorable $68 million for USX's share of gain on the Transtar reorganization and a $74 million charge for a substantial portion of accounts receivable from Republic. Results in the second quarter and first six months of 2000 include charges totaling $15 million for certain environmental and legal accruals. (b) Includes the sale, domestic production and transportation of steel products, coke, taconite pellets and coal; the management of mineral resources; real estate development; engineering and consulting services; and equity income from joint ventures and partially owned companies. (c) Includes the production and sale of steel products and coke from facilities primarily located in the Slovak Republic. (d) Includes other postretirement benefit costs and certain other expenses principally attributable to former business units of the U. S. Steel Group. (e) Includes professional fees and expenses and certain other costs related to the proposed separation. (f) Thousands of net tons. (g) Based on annual raw steel production capability of 12.8 million tons for Domestic Steel and 4.5 million tons for U. S. Steel Kosice.
103 Part II - Other Information: - --------------------------- Item 1. LEGAL PROCEEDINGS MARATHON GROUP Environmental Proceedings In October 1996, EPA Region V issued a Finding of Violation against the Robinson refinery alleging that it does not qualify for an exemption under the National Emission Standards for Benzene Waste Operations pursuant to the CAA, because the refinery's Total Annual Benzene releases exceed the limitation of 10 megagrams per year, and as a result, the refinery is in violation of the emission control, record keeping, and reports requirements. The Marathon Group contends that it does qualify for the exemption. However, in February 1999, the U.S. Department of Justice ("DOJ") in Chicago, Illinois, filed a civil complaint in the U.S. District Court for the Southern District of Illinois alleging six counts of violations of the CAA with respect to the benzene releases. The case has been settled in concept with Marathon and MAP agreeing to pay a combined $1.6 million civil penalty and the performance of $125,000 in supplemental environmental projects as part of an enforcement action for alleged Clean Air Act violations. A negotiated consent decree was filed with the Court May 11, 2001 and approval by the Court is anticipated in the third quarter 2001. In 1998, the U.S. Environmental Protection Agency ("EPA") conducted multi- media inspections of MAP's Detroit and Robinson refineries covering compliance with the Clean Air Act, the Clean Water Act, reporting obligations under the Emergency Planning and Community Right to Know Act, and CERCLA and the handling of process waste. The EPA served a total of six Notices of Violation ("NOV") and Findings of Violation as a result of these inspections. On May 11, 2001, a consent decree was lodged with a federal court in Detroit, Michigan, where MAP settled with the EPA certain New Source Review ("NSR") and other air compliance issues as well as issues related to the EPA's 1998 multi-media inspections of the Detroit and Robinson refineries. MAP's settlement with the EPA includes all of MAP's refineries and commits MAP to specific control technologies and implementation schedules for approximately $270 million in environmental capital expenditures and improvements to MAP's refineries over approximately an eight year period that are consistent with MAP's current capital spending plans. It also commits MAP to payment of an aggregate civil penalty in the amount of $3.8 million and the performance of about $8 million in supplemental environmental projects as part of an enforcement action for alleged Clean Air Act violations. MAP believes that the settlement will provide MAP with increased permitting and operating flexibility while achieving significant emission reductions. Approval of the consent decree by the court is expected in the third quarter of 2001. In 2000, the Kentucky Natural Resources and Environmental Cabinet sent Marathon Ashland Pipe Line LLC a NOV seeking a civil penalty associated with a pipeline spill earlier that year in Winchester, Kentucky. MAP has settled this NOV in concept for a $170,000 penalty and reimbursement of response costs up to $131,000. A final consent decree is expected in the third quarter 2001. 104 Part II - Other Information (Continued): - ---------------------------------------- Item 1. LEGAL PROCEEDINGS (Continued) U. S. STEEL GROUP Environmental Proceedings In October 1996, USX was notified by the Indiana Department of Environmental Management ("IDEM"), acting as lead trustee, that IDEM and the U.S. Department of the Interior had concluded a preliminary investigation of potential injuries to natural resources related to the releases of hazardous substances from various municipal and industrial sources along the east branch of the Grand Calumet River and Indiana Harbor Canal. The public trustees completed a pre-assessment screen pursuant to federal regulations and have determined to perform a Natural Resource Damages Assessment. USX was identified as a PRP along with 15 other companies owning property along the river and harbor canal. USX and eight other PRPs have formed a joint defense group. In 2000, the trustees concluded their assessment of sediment injuries, which includes a technical review of environmental conditions. The PRP joint defense group has proposed terms for the settlement of this claim which have been endorsed by representatives of the trustees and the U.S. Environmental Protection Agency ("EPA") to be included in a consent decree that USX expects will resolve this claim. A reserve has been established for the USX share of this anticipated settlement. The Berks Associates/Douglassville Site ("Berks Site") is situated on a 50- acre parcel located on the Schuylkill River in Berks County, Pa. Used oil and solvent reprocessing operations were conducted on the Berks Site between 1941 and 1986. In September 1997, USX signed a consent decree to conduct a feasibility study at the site relating to the alternative remedy. In 1999, a new Record of Decision was approved by the EPA and the U.S. Department of Justice. On January 19, 2001, USX signed a consent decree with the EPA to remediate this site. On April 6, 2001, USX paid $.4 million for costs associated with this site. The only remaining outstanding claim is the natural resource damages claim filed by the Commonwealth of Pennsylvania. In 1987, the California Department of Health Services ("DHS") issued a remedial action order for the GBF/Pittsburg landfill near Pittsburg, California. DHS alleged that from 1972 through 1974, Pittsburg Works arranged for the disposal of approximately 2.6 million gallons of waste oil, sludge, caustic mud and acid, which were eventually taken to this landfill for disposal. In 2000, the parties reached a buyout arrangement with a third party remediation firm, whereby the firm agreed to take title to and remediate the site and also indemnify the PRPs. This commitment was backed by pollution insurance. USX's share to participate in the buyout was approximately $1.1 million. Payment of the USX buyout amount was made December 2000. Title to the site was transferred to the remediation firm on January 31, 2001. In November 2000, a NOV was issued by the Jefferson County Health Department ("JCHD") alleging violation of the Halogenated Solvent National Emission Standards for Hazardous Air Pollutants and the JCHD Volatile Organic Compound ("VOC") regulations at the sheet mill stretch leveler at Fairfield Works. U. S. Steel Group proposed a civil penalty of $100,000 and a VOC emission limit, which have been agreed to by JCHD. A consent order was executed and approved by the court in May 2001. The penalty was paid by U. S. Steel Group in June 2001. 105 Part II - Other Information (Continued): - ---------------------------------------- Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of stockholders was held April 24, 2001. In connection with the meeting, proxies were solicited pursuant to the Securities Exchange Act. The following are the voting results on proposals considered and voted upon at the meeting, all of which were described in the proxy statement. 1. All nominees for director listed in the proxy statement were elected. 2. PricewaterhouseCoopers LLC was elected as the independent accountants for 2001. (For, 314,783,844; against, 2,333,137; abstained, 1,801,884). 106 Part II - Other Information (Continued): - ---------------------------------------- Item 5. OTHER INFORMATION Marathon Group SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION OF MARATHON OIL COMPANY Supplementary Data --------------------------------------------------------------------- (Unaudited) The following summarized consolidated financial information of Marathon Oil Company, a wholly owned subsidiary of USX, is included in this Form 10-Q in satisfaction of the reporting obligation of Marathon which has debt securities registered under the Securities Exchange Act. All such securities are guaranteed by USX.
(In millions) ----------------------------- Second Quarter Six Months Ended Ended June 30 June 30 2001 2000 2001 2000 ---- ---- ---- ---- INCOME DATA: Revenues $9,176 $8,893 $17,911 $16,564 Income from operations 1,278 866 2,202 1,399 Net income 613 355 1,126 617
(In millions) -------------------- June 30 December 31 2001 2000 ------------------- BALANCE SHEET DATA: Assets: Current assets $7,318 $7,397 Noncurrent assets 11,063 10,135 ------ ------ Total assets $18,381 $17,532 ====== ====== Liabilities and Stockholder's Equity: Current liabilities $4,376 $3,951 Noncurrent liabilities 7,197 8,110 Preferred stock of subsidiary 9 9 Minority interest in income of Marathon Ashland Petroleum LLC 2,010 1,840 Stockholder's equity 4,789 3,622 ------ ------ Total liabilities and stockholder's equity $18,381 $17,532 ====== ======
107 Part II - Other Information (Continued): - ---------------------------------------- Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 2.1 Holding Company Reorganization Agreement, dated as of July 1, 2001, by and among USX Corporation, USX HoldCo, Inc. and United States Steel LLC Incorporated by reference to Exhibit 2.1 to USX's Form 8-K filed on July 2, 2001. 4.1 USX Certificate of Incorporation effective on July 2, 2001 Incorporated by reference to Exhibit 3.1 to USX's Form 8-K filed on July 2, 2001. 3.2 USX By-Laws dated May 30, 2001 Incorporated by reference to Exhibit 3.2 to USX's form 8-K filed on July 2, 2001. 4.1 Amendment to Rights Agreement, dated July 2, 2001, among USX Corporation, USX HoldCo., Inc. and ChaseMellon Shareholder Services, L.L.C. Incorporated by reference to Exhibit 4.1 to USX's Form 8-K filed on July 2, 2001. 4.2 Indenture dated as of July 27, 2001, among United States Steel LLC and United States Steel Financing Corp., Issuers, USX Corporation, Guarantor, and The Bank of New York, Trustee 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 (b) REPORTS ON FORM 8-K Form 8-K dated April 24, 2001, reporting under Item 9. Regulation FD Disclosure, that USX Corporation is furnishing information under Regulation FD for the April 24, 2001 press releases titled "USX Announces Plan of Reorganization" and "USX Corporation Declares First Quarter Marathon Dividend and Reduced U. S. Steel Group Dividend." Form 8-K dated April 24, 2001, reporting under Item 5. Other Events, that USX Corporation is filing information for the April 24, 2001 press releases titled "USX Announces Plan of Reorganization" and "USX Corporation Declares First Quarter Marathon Dividend and Reduced U. S. Steel Group Dividend." 108 Part II - Other Information (Continued): - ---------------------------------------- (b) REPORTS ON FORM 8-K (Continued): Form 8-K dated May 8, 2001, reporting under Item 9. Regulation FD Disclosure, that USX Corporation is furnishing information under Regulation FD for the May 8, 2001 statement concerning the impact of the plan of reorganization on preferred securities and industrial revenue bonds. Form 8-K dated May 29, 2001, reporting under Item 9. Regulation FD Disclosure, that USX Corporation is furnishing information under Regulation FD for the May 29, 2001 press release titled "Thomas J. Usher Named President of U. S. Steel Group". Form 8-K/A dated May 29, 2001, reporting under Item 9. Regulation FD Disclosure, that USX Corporation furnished information under Regulation FD for the press release titled "Thomas J. Usher Named Acting President of U. S. Steel Group". The filing of this announcement supercedes USX Corporation's earlier filing of such announcement. Form 8-K dated June 15, 2001, reporting under Item 5. Other Events, that USX Corporation is furnishing information for the June 15, 2001 press release titled "USX Corporation Files Preliminary Proxy with SEC relating to Separation of Energy and Steel Businesses". Form 8-K dated July 2, 2001, reporting under Item 5. Other Events, that on July 2, 2001, USX Corporation completed a corporate reorganization to implement a new holding company structure. Form 8-K dated July 13, 2001, reporting under Item 9. Regulation FD Disclosure, that USX Corporation is furnishing information under Regulation FD for the July 13, 2001 press release titled "U. S. Steel Group Sees Results Improved Over First Quarter". Form 8-K dated July 31, 2001, reporting under Item 5. Other Events, that USX Corporation is furnishing information for the July 31, 2001 press release titled "USX Announces Board Approval of Plan of Reorganization and Identification of Directors for Marathon Oil Corporation and United States Steel Corporation Effective January 1, 2002". Form 8-K dated August 1, 2001, reporting under Item 5. Other Events, that USX Corporation is furnishing information for the August 1, 2001 press releases titled "Surma Named Assistant to Chairman of USX" and "New Executive Positions Named for United States Steel". Form 8-K dated August 2, 2001, reporting under Item 5. Other Events, that USX Corporation is furnishing information for the August 2, 2001 press release titled "Marathon Names Five New Officers in Preparation for USX Reorganization". Form 8-K dated August 6, 2001, reporting under Item 5. Other Events, that USX Corporation is furnishing information for the August 6, 2001 press release titled "Four Financial Posts Identified for United States Steel". 109 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned chief accounting officer thereunto duly authorized. USX CORPORATION By /s/ Larry G. Schultz -------------------- Larry G. Schultz Vice President - Accounting August 6, 2001 EX-4.2 3 exh4201.txt Exhibit 4.2 EXECUTION VERSION ============================================================ UNITED STATES STEEL LLC and UNITED STATES STEEL FINANCING CORP., Issuers and USX CORPORATION, Guarantor 10-3/4% Senior Notes due August 1, 2008 ===================== INDENTURE Dated as of July 27, 2001 ==================== The Bank of New York, Trustee ============================================================= TABLE OF CONTENTS Page ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE 1 SECTION 1.1. DEFINITIONS 1 SECTION 1.2. OTHER DEFINITIONS 28 SECTION 1.3. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT 29 SECTION 1.4. RULES OF CONSTRUCTION 29 SECTION 1.5. ONE CLASS OF NOTES 30 ARTICLE II THE NOTES 30 SECTION 2.1. FORM AND DATING 30 SECTION 2.2. EXECUTION AND AUTHENTICATION 31 SECTION 2.3. REGISTRAR AND PAYING AGENT 32 SECTION 2.4. PAYING AGENT TO HOLD MONEY IN TRUST 32 SECTION 2.5. NOTEHOLDER LISTS 33 SECTION 2.6. TRANSFER AND EXCHANGE 33 SECTION 2.7. REPLACEMENT NOTES 45 SECTION 2.8. OUTSTANDING NOTES 45 SECTION 2.9. TREASURY NOTES 46 SECTION 2.10. TEMPORARY NOTES 46 SECTION 2.11. CANCELLATION 46 SECTION 2.12. DEFAULTED INTEREST 46 SECTION 2.13. CUSIP NUMBERS 47 ARTICLE III REDEMPTION 47 SECTION 3.1. NOTICES TO TRUSTEE 47 SECTION 3.2. SELECTION OF NOTES TO BE REDEEMED 48 SECTION 3.3. NOTICE OF REDEMPTION 48 SECTION 3.4. EFFECT OF NOTICE OF REDEMPTION 48 SECTION 3.5. DEPOSIT OF REDEMPTION PRICE 49 SECTION 3.6. NOTES REDEEMED IN PART 49 SECTION 3.7. OPTIONAL REDEMPTION 49 SECTION 3.8. MANDATORY REDEMPTION 50 ARTICLE IV COVENANTS 50 SECTION 4.1. PAYMENT OF NOTES 50 SECTION 4.2. MAINTENANCE OF OFFICE OR AGENCY 51 SECTION 4.3. CORPORATE EXISTENCE 51 SECTION 4.4. SEC REPORTS 51 SECTION 4.5. COMPLIANCE CERTIFICATE 52 SECTION 4.6. STAY, EXTENSION AND USURY LAWS 52 SECTION 4.7. PAYMENT OF TAXES AND OTHER CLAIMS 52 SECTION 4.8. MAINTENANCE OF PROPERTIES AND INSURANCE 53 SECTION 4.9. INVESTMENT GRADE RATING 53 SECTION 4.10. CONDITIONS TO SEPARATION 54 i SECTION 4.11. CHANGE OF CONTROL 54 SECTION 4.12. LIMITATION ON INDEBTEDNESS 55 SECTION 4.13. LIMITATION ON RESTRICTED PAYMENTS 58 SECTION 4.14. LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES 62 SECTION 4.15. LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK 62 SECTION 4.16. LIMITATION ON AFFILIATE TRANSACTIONS 65 SECTION 4.17. LIMITATION ON THE SALE OR ISSUANCE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES 67 SECTION 4.18. LIMITATION ON LIENS 67 SECTION 4.19. LIMITATION ON SALE/LEASEBACK TRANSACTIONS 67 SECTION 4.20. CERTAIN COVENANTS OF USS FINANCING 68 SECTION 4.21. FURTHER INSTRUMENTS AND ACTS 68 ARTICLE V SUCCESSOR COMPANY AND SUCCESSOR GUARANTOR 68 SECTION 5.1. WHEN COMPANY MAY MERGE OR TRANSFER ASSETS 68 SECTION 5.2. WHEN GUARANTOR MAY MERGE OR TRANSFER ASSETS 69 ARTICLE VI DEFAULTS AND REMEDIES 70 SECTION 6.1. EVENTS OF DEFAULT 70 SECTION 6.2. ACCELERATION 72 SECTION 6.3. OTHER REMEDIES 72 SECTION 6.4. WAIVER OF PAST DEFAULTS 73 SECTION 6.5. CONTROL BY MAJORITY 73 SECTION 6.6. LIMITATION ON SUITS 73 SECTION 6.7. RIGHTS OF HOLDERS TO RECEIVE PAYMENT 74 SECTION 6.8. COLLECTION SUIT BY TRUSTEE 74 SECTION 6.9. TRUSTEE MAY FILE PROOFS OF CLAIM 74 SECTION 6.10. PRIORITIES 74 SECTION 6.11. UNDERTAKING FOR COSTS 74 SECTION 6.12. WAIVER OF STAY OR EXTENSION LAWS 75 ARTICLE VII TRUSTEE 75 SECTION 7.1. DUTIES OF TRUSTEE 75 SECTION 7.2. RIGHTS OF TRUSTEE 76 SECTION 7.3. INDIVIDUAL RIGHTS OF TRUSTEE 77 SECTION 7.4. MONEY HELD IN TRUST 77 SECTION 7.5. TRUSTEE'S DISCLAIMER 77 SECTION 7.6. NOTICE OF DEFAULTS 77 SECTION 7.7. REPORTS BY TRUSTEE TO HOLDERS 78 SECTION 7.8. COMPENSATION AND INDEMNITY 78 SECTION 7.9. REPLACEMENT OF TRUSTEE 79 SECTION 7.10. SUCCESSOR TRUSTEE BY MERGER 79 SECTION 7.11. ELIGIBILITY; DISQUALIFICATION 80 SECTION 7.12. PREFERENTIAL COLLECTION OF CLAIMS AGAINST ISSUERS 80 ARTICLE VIII DISCHARGE OF INDENTURE; DEFEASANCE 80 SECTION 8.1. DISCHARGE OF LIABILITY ON NOTES; DEFEASANCE 80 ii SECTION 8.2. CONDITIONS TO DEFEASANCE 81 SECTION 8.3. APPLICATION OF TRUST MONEY 82 SECTION 8.4. REPAYMENT TO ISSUERS 83 SECTION 8.5. INDEMNITY FOR GOVERNMENT OBLIGATIONS 83 SECTION 8.6. REINSTATEMENT 83 ARTICLE IX AMENDMENTS 83 SECTION 9.1. WITHOUT CONSENT OF HOLDERS 83 SECTION 9.2. WITH CONSENT OF HOLDERS 84 SECTION 9.3. COMPLIANCE WITH TRUST INDENTURE ACT 85 SECTION 9.4. REVOCATION AND EFFECT OF CONSENTS AND WAIVERS 85 SECTION 9.5. NOTATION ON OR EXCHANGE OF NOTES 85 SECTION 9.6. TRUSTEE TO SIGN AMENDMENTS 86 SECTION 9.7. PAYMENT FOR CONSENT 86 ARTICLE X GUARANTEE 86 SECTION 10.1. GUARANTEE 86 SECTION 10.2. RELEASE OF GUARANTOR 87 ARTICLE XI MISCELLANEOUS 88 SECTION 11.1. TRUST INDENTURE ACT CONTROLS 88 SECTION 11.2. NOTICES 88 SECTION 11.3. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS 88 SECTION 11.4. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT 89 SECTION 11.5. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION 89 SECTION 11.6. WHEN NOTES DISREGARDED 89 SECTION 11.7. RULES BY TRUSTEE, PAYING AGENT AND REGISTRAR 89 SECTION 11.8. LEGAL HOLIDAYS 90 SECTION 11.9. GOVERNING LAW 90 SECTION 11.10. NO RECOURSE AGAINST OTHERS 90 SECTION 11.11. SUCCESSORS 90 SECTION 11.12. MULTIPLE ORIGINALS 90 SECTION 11.13. QUALIFICATION OF INDENTURE 90 SECTION 11.14. TABLE OF CONTENTS; CROSS-REFERENCE SHEET; HEADINGS 91 SECTION 11.15. SEVERABILITY 91 Exhibit A - Form of Note Exhibit B - Form of Certificate of Transfer Exhibit C - Form of Certificate of Exchange iii CROSS-REFERENCE TABLE* Trust Indenture Act Section Indenture Section 310(a)(1) 7.9, 7.10 (a)(2) N.A. (a)(3) N.A. (a)(4) N.A. (a)(5) N.A. (b) 7.10 (b)(1) 7.10 (c) N.A. 311(a) 7.11 (b) 7.11 (c) N.A. 312(a) N.A. (b) 11.3 (c) 11.3 313(a) 7.6 (b) 7.6 (b)(1) N.A. (b)(2) N.A. (c) N.A. (d) N.A. 314(a)(1) N.A. (a)(2) N.A. (a)(3) N.A. (a)(4) 4.5. (b) N.A. (c)(1) N.A. (c)(2) N.A. (c)(3) N.A. (e) N.A. (f) N.A. 315(a) N.A. (b) N.A. (c) N.A. (d) N.A. (e) N.A. 316(a) N.A. (a)(1) N.A. (a)(2) N.A. (b) N.A. (c) N.A. 317(a)(1) N.A. (a)(2) N.A. (b) N.A. 318(a) N.A. (b) N.A. (c) N.A. N.A. means not applicable. *This Cross-Reference Table is not part of the Indenture. i INDENTURE, dated as of July 27, 2001, among United States Steel LLC, a Delaware limited liability company (the "Company"), United States Steel Financing Corp., a Delaware corporation ("USS Financing", and together with the Company, the "Issuers"), USX Corporation, a Delaware corporation (the "Guarantor"), and The Bank of New York, a New York banking corporation, as trustee (the "Trustee"). Each party agrees as follows for the benefit of the other parties and for the equal and ratable benefit of the Holders of the Issuers' $385,000,000 aggregate principal amount at maturity 10% Senior Notes due August 1, 2008 (the "Initial Notes") and, if and when issued in exchange for Initial Notes as provided in the Registration Rights Agreement (as defined herein), the Issuers' 10% Senior Notes due August 1, 2008 (the "Exchange Notes") and, if and when issued pursuant to a private exchange for Initial Notes, the Issuers' 10% Senior Notes due August 1, 2008 (the "Private Exchange Notes", and together with the Initial Notes, any Additional Notes (as defined herein) actually issued, and the Exchange Notes, the "Notes"): ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.1. Definitions "Additional Assets" means: (i) any property, plant or equipment used in a Related Business; (ii) the Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Company or another Restricted Subsidiary; or (iii) Capital Stock constituting a minority interest in any Person that at such time is a Restricted Subsidiary; provided, however, that any such Restricted Subsidiary described in clause (ii) or (iii) above is primarily engaged in a Related Business. "Additional Notes" means Notes (other than the Initial Notes and the Exchange Notes) issued under this Indenture in accordance with Section 2.1 hereof. "Affiliate" of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of Sections 4.13, 4.15 and 4.16 only, "Affiliate" shall also mean any beneficial owner of Capital Stock representing 10% or more of the total voting power of the Voting Stock (on a fully diluted basis) of the Company or of rights or warrants to purchase such Capital Stock (whether or not currently exercisable) and any Person who would be an Affiliate of any such beneficial owner pursuant to the first sentence hereof. 2 "Applicable Procedures" means, with respect to any transfer or exchange of or for beneficial interests in any Global Note, the rules and procedures of the Depositary, Euroclear and Clearstream that apply to such transfer or exchange. "Asset Disposition" means any sale, lease, transfer or other disposition (or series of related sales, leases, transfers or dispositions) by the Company or any Restricted Subsidiary, including any disposition by means of a Like-Kind Exchange, an Excluded Real Property Sale or a merger, consolidation or similar transaction (each referred to for the purposes of this definition as a "disposition"), of: (i) any shares of Capital Stock of a Restricted Subsidiary (other than directors' qualifying shares or shares required by applicable law to be held by a Person other than the Company or a Restricted Subsidiary); (ii) all or substantially all the assets of any division or line of business of the Company or any Restricted Subsidiary; or (iii)any other assets of the Company or any Restricted Subsidiary outside of theordinary course of business of the Company or such Restricted Subsidiary. For purposes of this definition, any transfer of assets of the U. S. Steel Group to the Marathon Group in accordance with the Management and Allocation Policies prior to the Separation shall be deemed to be a transfer of assets of the Company. Notwithstanding the foregoing, an "Asset Disposition" shall not include: (A) a disposition by a Restricted Subsidiary to the Company or by the Company or a Restricted Subsidiary to a Wholly Owned Subsidiary; (B) for purposes of Section 4.15 only, (x) a disposition that constitutes a Restricted Payment under Section 4.13 or a Permitted Investment and (y) a disposition of all or substantially all the assets of the Company in accordance with Article V; (C) a disposition of assets if Additional Assets were acquired within one year prior to such disposition for the purpose of replacing the assets disposed of; and (D) a disposition of assets with a fair market value of less than $10,000,000. "Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at the time of determination, the present value (discounted at the interest rate borne by the Notes, compounded annually) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such Sale/Leaseback Transaction (including any period for which such lease has been extended); provided, however, that if such Sale/Leaseback Transaction results in a Capital Lease Obligation, the amount of Indebtedness represented thereby shall be determined in accordance with the definition of "Capital Lease Obligation". 3 "Attributed to the U. S. Steel Group" means attributed to the U. S. Steel Group in accordance with the Management and Accounting Policies. "Average Life" means, as of the date of determination, with respect to any Indebtedness, the quotient obtained by dividing: (i) the sum of the products of the numbers of years from the date of determination to the dates of each successive scheduled principal payment of or redemption or similar payment with respect to such Indebtedness multiplied by the amount of such payment by (ii) the sum of all such payments. "Board of Directors" means, until the Separation Date, the Board of Directors of the Guarantor or any committee thereof duly authorized to act on behalf of such Board, and after the Separation Date, the Board of Directors of the Company or any committee thereof duly authorized to act on behalf of such Board. "Business Day" means a day other than a Saturday, Sunday or other day on which banking institutions in New York State are authorized or required by law to close. "Broker-Dealer" has the meaning set forth in the Registration Rights Agreement. "Capital Lease Obligation" means an obligation that is required to be classified and accounted for as a capital lease for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligation shall be the capitalized amount of such obligation determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. For purposes of Section 4.18, a Capital Lease Obligation will be deemed to be secured by a Lien on the property being leased. "Capital Stock" of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including, without limitation, membership interests in limited liability companies and any Preferred Stock, but excluding any debt securities convertible into such equity. "Change of Control", so long as the Guarantee in Article X is in effect, means the occurrence of any of the following: (i) any "person" or "group" of persons shall have acquired "beneficial ownership" (within the meaning of Section 13(d) or 14(d) of the Securities and Exchange Act) of 1934 as amended, and the applicable rules and regulations thereunder), of shares of Voting Stock representing 35% or more of the Voting Power of the Guarantor; (ii) during any period of 25 consecutive months, commencing before or after the Issue Date, individuals who at the beginning of such 25- month period were directors of the Guarantor (together with any replacement or 4 additional directors whose election was recommended by incumbent management of the Guarantor or who were elected by a majority of directors then in office) cease to constitute a majority of the Board of Directors of the Guarantor; (iii) the merger or consolidation of the Guarantor with or into another Person or the merger of another Person with or into the Guarantor, or the sale of all or substantially all the assets of the Guarantor (determined on a consolidated basis) to another Person, other than a merger or consolidation transaction in which holders of securities that represented 100% of the Voting Stock of the Guarantor immediately prior to such transaction (or other securities into which such securities are converted as part of such merger or consolidation transaction) own directly or indirectly at least a majority of the voting power of the Voting Stock of the surviving Person in such merger or consolidation transaction immediately after such transaction and in substantially the same proportion as before the transaction; or (iv) the disposition, transfer or sale of the interests held in United States Steel LLC by the Guarantor, except in accordance with the Separation consummated in compliance with Section 4.10; provided, however, that in no event shall the Separation, as described in the Offering Circular, or any transfer or reorganization in connection therewith, be deemed to be a Change of Control for the purposes of this covenant. The following definition of Change of Control shall be effective following the Separation Date: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that for purposes of this clause (1) such person shall be deemed to have "beneficial ownership" of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 35% of the total voting power of the Voting Stock of the Company; (ii) individuals who on the Separation Date constituted the Board of Directors (together with any new directors whose election by such Board of Directors or whose nomination for election by the shareholders of the company as approved by a vote of 66% of the directors of the Company then still in office who were either directors on the Separation Date or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors then in office; (iii)the adoption of a plan relating to the liquidation or dissolution of the Company; or 5 (iv) the merger or consolidation of the Company with or into another Person or the merger of another Person with or into the Company, or the sale of all or substantially all the assets of the Company (determined on a consolidated basis) to another Person, other than a merger or consolidation transaction in which holders of securities that represented 100% of the Voting Stock of the Company immediately prior to such transaction (or other securities into which such securities are converted as part of such merger or consolidation transaction) own directly or indirectly at least a majority of the voting power of the Voting Stock of the surviving Person in such merger or consolidation transaction immediately after such transaction and in substantially the same proportion as before the transaction. "Clearstream" means Clearstream Banking, S.A. "Code" means the Internal Revenue Code of 1986, as amended. "Company" means United States Steel LLC, a Delaware limited liability company, until a successor replaces it in accordance with the applicable provisions of this Indenture, and thereafter, means such successor. "Consolidated Coverage Ratio" as of any date of determination means the ratio of (x) the aggregate amount of EBITDA for the period of the most recent four consecutive fiscal quarters for which financial results are publicly available to (y) Consolidated Interest Expense for such four fiscal quarters; provided, however, that: (i) if the Company or any Restricted Subsidiary has Incurred any Indebtedness since the beginning of such period that remains outstanding or if the transaction giving rise to the need to calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such Indebtedness as if such Indebtedness had been Incurred on the first day of such period; (ii) if the Company or any Restricted Subsidiary has repaid, repurchased, defeased or otherwise discharged any Indebtedness since the beginning of such period or if any Indebtedness is to be repaid, repurchased, defeased or otherwise discharged (in each case other than Indebtedness Incurred under any revolving credit facility unless such Indebtedness has been permanently repaid and has not been replaced) on the date of the transaction giving rise to the need to calculate the Consolidated Coverage Ratio, EBITDA and Consolidated Interest Expense for such period shall be calculated on a pro forma basis as if such discharge had occurred on the first day of such period and as if the Company or such Restricted Subsidiary has not earned the interest income actually earned during such period in respect of cash or Temporary Cash Investments used to repay, repurchase, defease or otherwise discharge such Indebtedness; 6 (iii)if since the beginning of such period the Company or any Restricted Subsidiary shall have made any Asset Disposition, EBITDA for such period shall be reduced by an amount equal to EBITDA (if positive) directly attributable to the assets which are the subject of such Asset Disposition for such period, or increased by an amount equal to EBITDA (if negative), directly attributable thereto for such period and Consolidated Interest Expense for such period shall be reduced by an amount equal to the Consolidated Interest Expense directly attributable to any Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the Company and its continuing Restricted Subsidiaries in connection with such Asset Disposition for such period (or, if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated Interest Expense for such period directly attributable to the Indebtedness of such Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries are no longer liable for such Indebtedness after such sale); (iv) if since the beginning of such period the Company or any Restricted Subsidiary (by merger or otherwise) shall have made an Investment in any Restricted Subsidiary (or any person which becomes a Restricted Subsidiary) or an acquisition of assets, including any acquisition of assets occurring in connection with a transaction requiring a calculation to be made hereunder, which constitutes all or substantially all of an operating unit of a business, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Indebtedness) as if such Investment or acquisition occurred on the first day of such period; and (v) if since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) shall have made any Asset Disposition, any Investment or acquisition of assets that would have required an adjustment pursuant to clause (iii) or (iv) above if made by the Company or a Restricted Subsidiary during such period, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Asset Disposition, Investment or acquisition occurred on the first day of such period. For purposes of this definition, whenever pro forma effect is to be given to an acquisition of assets, the amount of income or earnings relating thereto and the amount of Consolidated Interest Expense associated with any Indebtedness Incurred in connection therewith, the pro forma calculations shall be determined in good faith by a responsible financial or accounting Officer of the Company. For purposes of this definition, any assets, properties, Indebtedness or other liabilities or obligations that are Attributed to the U. S. Steel Group prior to the Separation are deemed to be assets, properties, Indebtedness, liabilities or obligations of the Company. If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest on such Indebtedness shall be calculated as if the rate in effect on the date of determination had 7 been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term in excess of 12 months). "Consolidated Interest Expense" means, for any period, the total interest expense of the Company and its consolidated Restricted Subsidiaries (prior to the Separation, as Attributed to the U. S. Steel Group) plus, to the extent not included in such total interest expense, and to the extent incurred by the Company or its Restricted Subsidiaries, without duplication: (i) interest expense attributable to capital leases and the interest expense attributable to leases constituting part of a Sale/Leaseback Transaction; (ii) amortization of debt discount and debt issuance cost; (iii)capitalized interest; (iv) non-cash interest expenses; (v) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing; (vi) net payments pursuant to Hedging Obligations in respect of Indebtedness; (vii)Preferred Stock dividends in respect of all Preferred Stock held by Persons other than the Company or a Wholly Owned Subsidiary (other than dividends payable solely in Capital Stock (other than Disqualified Stock) of the issuer of such Preferred Stock); (viii)interest incurred in connection with Investments in discontinued operations; (ix) interest accruing on any Indebtedness of any other Person to the extent such Indebtedness is Guaranteed by (or secured by the assets of) the Company or any Restricted Subsidiary; and (x) the cash contributions to any employee stock ownership plan or similar trust to the extent the proceeds of such contributions are used by such plan or trust to pay interest or fees to any Person (other than the Company) in connection with Indebtedness Incurred by such plan or trust in each case for such period and, prior to Separation, as such amounts are Attributed to the U. S. Steel Group. "Consolidated Net Income" means, for any period, the net income of the Company and its consolidated Restricted Subsidiaries determined in accordance of GAAP (prior to the Separation, as Attributed to U. S. Steel Group); provided, however, that there shall not be included in such Consolidated Net Income: (i) any net income of any Person (other than the Company) if such Person is not a Restricted Subsidiary, except that: 8 (A)subject to the exclusion contained in clause (iv) below, the Company's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such period to the Company or a Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution paid to a Restricted Subsidiary, to the limitations contained in clause (iii) below); and (B) the Company's equity in a net loss of any such Person for such period shall be included in determining such Consolidated Net Income; (ii) any net income (or loss) of any Person acquired by the Company or a Subsidiary in a pooling of interests transaction for any period prior to the date of such acquisition; (iii) any net income of any Restricted Subsidiary if such Restricted Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of distributions by such Restricted Subsidiary, directly or indirectly, to the Company, except that: (A) subject to the exclusion contained in clause (iv) below, the Company's equity in the net income of any such Restricted Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Restricted Subsidiary during such period to the Company or another Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution paid to another Restricted Subsidiary, to the limitation contained in this clause); and (B) the Company's equity in a net loss of any such Restricted Subsidiary for such period shall be included in determining such Consolidated Net Income; (iv) any gain (but not loss) realized upon the sale or other disposition of any assets of the Company, its consolidated Subsidiaries or any other Person (including pursuant to any sale-and-leaseback arrangement) which is not sold or otherwise disposed of in the ordinary course of business and any gain (but not loss) realized upon the sale or other disposition of any Capital Stock of any Person; (v) extraordinary gains or losses; and (vi)the cumulative effect of a change in accounting principles in each case for such period and, prior to Separation, as such amounts are Attributed to the U.S. Steel Group. Notwithstanding the foregoing, for the purposes of Section 4.13 only, there shall be 9 excluded from Consolidated Net Income any repurchases, repayments or redemptions of Investments, proceeds realized on the sale of Investments or return of capital to the Company or a Restricted Subsidiary to the extent such repurchases, repayments, redemptions, proceeds or returns increase the amount of Restricted Payments permitted under such covenant pursuant to clause (a)(3)(D) thereof. "Consolidated Net Worth" means the total of the amounts shown on the balance sheet of the Company and its consolidated Subsidiaries (or, prior to the Separation, of the U. S. Steel Group), determined on a consolidated basis in accordance with GAAP, as of the end of the most recent fiscal quarter of the Company ending at least 45 days prior to the taking of any action for the purpose of which the determination is being made, as the sum of: (i) the par or stated value of all outstanding Capital Stock of the Company plus (ii) paid-in capital or capital surplus relating to such Capital Stock plus (iii)any retained earnings or earned surplus (or, prior to the Separation, the amount shown as "USX's net investment" instead of the sum of clauses (i), (ii) and (iii)) less (A) any accumulated deficit and (B) any amounts attributable to Disqualified Stock. "Corporate Trust Office of the Trustee" means the address of the Trustee specified in Section 11.2 hereof or such other address as to which the Trustee may give notice to the Issuers. "Credit Facility" means any senior credit facility to be entered into by and among one or more of the Company and certain of its Foreign Restricted Subsidiaries and the lenders referred to therein, together with the related documents thereto (including the revolving loans thereunder, any guarantees and security documents), as amended, extended, renewed, restated, supplemented or otherwise modified (in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions) from time to time, and any agreement (and related document) governing Indebtedness incurred to Refinance, in whole or in part, the borrowings and commitments then outstanding or permitted to be outstanding under such Credit Facility or a successor Credit Facility, whether by the same or any other lender or group of lenders. "Currency Agreement" means in respect of a Person any foreign exchange contract, currency swap agreement or other similar agreement designed to protect such Person against fluctuations in currency values. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Definitive Note" means a certificated Note registered in the name of the Holder thereof and issued in accordance with Section 2.6 hereof in the form of Exhibit A hereto, except that such Note shall not bear the Global Note Legend and shall not have the "Schedule of Exchanges of Interests in the Global Note" attached thereto. 10 "Depositary" means, with respect to the Notes issuable or issued in whole or in part in global form, the Person specified in Section 2.3 hereof as the Depositary with respect to the Notes, and any and all successors thereto appointed as depositary hereunder and having become such pursuant to the applicable provision of this Indenture. "Directors" means, until the Separation Date, the persons who are members of the Board of Directors of USX Corporation, and after the Separation Date, the persons who are members of the Board of Directors of the Company. "Disqualified Stock" means, with respect to any Person, any Capital Stock which by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable at the option of the holder) or upon the happening of any event: (i) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise; (ii) is convertible or exchangeable at the option of the holder for Indebtedness or Disqualified Stock; or (iii)is mandatorily redeemable or must be purchased upon the occurrence of certain events or otherwise, in whole or in part; in each case on or prior to the first anniversary of the Stated Maturity of any series of Notes then outstanding; provided, however, that any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require such Person to purchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the first anniversary of the Stated Maturity of any series of Notes then outstanding shall not constitute Disqualified Stock if: (i) the "asset sale" or "change of control" provisions applicable to such Capital Stock are not more favorable to the holders of such Capital Stock than the terms applicable to the Notes and described under Sections 4.11 and 4.15; and (ii) any such requirement only becomes operative after compliance with such terms applicable to the Notes, including the purchase of any Notes tendered pursuant thereto. The amount of any Disqualified Stock that does not have a fixed redemption, repayment or repurchase price will be calculated in accordance with the terms of such Disqualified Stock as if such Disqualified Stock were redeemed, repaid or repurchased on any date on which the amount of such Disqualified Stock is to be determined pursuant to the Indenture; provided, however, that if such Disqualified Stock could not be required to be redeemed, repaid or repurchased at the time of such determination, the redemption, repayment or repurchase price will be the book value of such Disqualified Stock as reflected in the most recent financial statements of such Person. "Distribution Compliance Period" means the 40-day period commencing on the date Notes are first issued under this Indenture. 11 "EBITDA" for any period means the sum of Consolidated Net Income (but without giving effect to any gains or losses from Asset Dispositions), minus noncash net pension credits to the extent included in calculating such Consolidated Net Income and plus the following to the extent deducted in calculating such Consolidated Net Income: (i) all income tax expense of the Company and its consolidated Restricted Subsidiaries; (ii) Consolidated Interest Expense; (iii) depreciation, depletion and amortization expense of the Company and its consolidated Restricted Subsidiaries (excluding amortization expense attributable to a prepaid operating activity item that was paid in cash in a prior period); (iv) all other non-cash charges of the Company and its consolidated Restricted Subsidiaries (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash expenditures in any future period); and (v) net periodic benefit cost recorded for postretirement benefits other than pensions, to the extent such cost exceeds (x) payments made by the Company for such benefits that are not reimbursed by plan assets and (y) any funding by the Company to the VEBA trust in each case for such period and, prior to the Separation, as such amounts are Attributed to the U. S. Steel Group. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization and non-cash charges of, a Restricted Subsidiary shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income and only if a corresponding amount would be permitted at the date of determination to be dividended to the Company by such Restricted Subsidiary without prior approval (that has not been obtained), pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such Restricted Subsidiary or its stockholders. "Euroclear" means Euroclear Bank S.A./N.V., as operator of the Euroclear system. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Notes" means the debt securities of the Company issued pursuant to the Indenture in exchange for, and in an aggregate principal amount at maturity equal to, the Initial Notes, in compliance with the terms of the Registration Rights Agreement. "Exchange Offer" has the meaning set forth in the Registration Rights Agreement. "Exchange Offer Registration Statement" has the meaning set forth in the Registration Rights Agreement. 12 "Excluded Real Property Sales" means sales of real property by installment either: (a) in the ordinary course of the business of the Company or a Restricted Subsidiary or (b) of real property that has not been used by the Company or a Restricted Subsidiary in the production of steel or steel products at any time within 90 days prior to the date of sale. "Financial Matters Agreement" means the financial matters agreement to be entered into by USX Corporation and the Company in connection with the Separation, as described in the Offering Circular. "Foreign Restricted Subsidiary" means any Restricted Subsidiary of the Company that is organized in a jurisdiction outside the United States of America. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the Issue Date, including those set forth in (i) the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants; (ii) statements and pronouncements of the Financial Accounting Standards Board; (iii) such other statements by such other entity as approved by a significant segment of the accounting profession; and (iv) the rules and regulations of the SEC governing the inclusion of financial statements (including pro forma financial statements) in periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the SEC. "Global Notes" means, individually and collectively, each of the Restricted Global Notes and the Unrestricted Global Notes. "Global Note Legend" means the legend set forth in Section 2.6(g)(ii), which is required to be placed on all Global Notes issued under this Indenture. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any Person and any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay or to maintain financial statement conditions or otherwise) but shall not include take-or-pay-arrangements entered into for the purpose of purchasing or paying such Indebtedness to such Person or (ii) entered into for the purpose of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, however, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing any obligation. "Guarantor" means USX Corporation or any successor thereto, so long as the Guarantee of the Notes is in effect. "Hedging Obligations" of any Person means the obligations of such Person pursuant to any Interest Rate Agreement or Currency Agreement. 13 "Holder" or "Noteholder" means the Person in whose name a Note is registered on the Registrar's books. "Incur" means issue, assume, Guarantee, incur or otherwise become liable for; provided, however, that any Indebtedness or Capital Stock of a Person existing at the time such Person becomes a Restricted Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred by such Person at the time it becomes a Restricted Subsidiary. The term "Incurrence" when used as a noun shall have a correlative meaning. Solely for purposes of determining compliance with Section 4.12, amortization of debt discount or the accretion of principal with respect to a non-interest bearing or other discount security and (2) the payment of regularly scheduled interest in the form of additional Indebtedness of the same instrument or the payment of regularly scheduled dividends on Capital Stock in the form of additional Capital Stock of the same clause and with the same terms will not be deemed to be the Incurrence of Indebtedness. For purposes of this definition, the Company (i) shall be deemed to Incur any Indebtedness of other Persons of the type referred to in clause (vi) of the definition of "Indebtedness" at such time it becomes responsible or liable, directly or indirectly, for its payment pursuant to the terms of the Financial Matters Agreement and (ii) shall not be deemed to Incur any Indebtedness for which it is indemnified by Marathon Oil Corporation pursuant to the terms of the Financial Matters Agreement at the time that such Indebtedness is deemed to become Indebtedness of the Company as a result of Marathon Oil Corporation no longer having an Investment Grade Rating from both Rating Agencies. "Indebtedness" means, with respect to any Person on any date of determination (without duplication): (i) the principal in respect of (A) indebtedness of such Person for money borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable, including, in each case, any premium on such indebtedness to the extent such premium has become due and payable; (ii) all Capital Lease Obligations of such Person and all Attributable Debt in respect of Sale/Leaseback Transactions entered into by such Person; (iii) all Purchase Money Indebtedness of such Person; (iv) all obligations of such Person for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in clauses (i) through (iii) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the tenth Business Day following payment on the letter of credit); (v) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock of such Person or, with respect to any Preferred Stock of any Subsidiary of such Person, the principal amount of such Preferred Stock to be 14 determined in accordance with the Indenture (but excluding, in each case, any accrued dividends); (vi) all obligations of the type referred to in clauses (i) through (v) of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any Guarantee or pursuant to the terms of the Financial Matters Agreement; (vii) all obligations of the type referred to in clauses (i) through (vi) of other Persons secured by any Lien on any property or asset of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the value of such property or assets or the amount of the obligation so secured; (viii)to the extent not otherwise included in this definition, any financing of accounts receivable or inventory of such Person; and (ix) to the extent not otherwise included in this definition, Hedging Obligations of such Person. Notwithstanding the foregoing, in connection with the purchase by the Company or any Restricted Subsidiary of any business, the term "Indebtedness" will exclude post-closing payment adjustments to which the seller may become entitled to the extent such payment is determined by a final closing balance sheet or such payment depends on the performance of such business after the closing; provided, however, that, at the time of closing, the amount of any such payment is not determinable and, to the extent such payment thereafter becomes fixed and determined, the amount is paid within 30 days thereafter (or, in the case of the acquisition of USSK, when due). Notwithstanding the foregoing, the term "Indebtedness" will exclude (x) any indebtedness for which Marathon Oil Corporation indemnifies the Company pursuant to the terms of the Financial Matters Agreement, so long as such indebtedness (i) has not been Refinanced and (ii) Marathon Oil Corporation has an Investment Grade Rating from both of the Rating Agencies and (y) Industrial Revenue Bond Obligations to the extent the Company (i) has delivered to the holders of such obligations an irrevocable notice of redemption or directed delivery of such a notice and (ii) has set aside cash or U.S. Government Obligations, pursuant to a defeasance mechanism or otherwise, sufficient to redeem such obligations. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date; provided, however, that in the case of Indebtedness sold at a discount, the amount of such Indebtedness at any time will be the accreted value thereof at such time. "Indenture" means this Indenture, as amended or supplemented from time to time. 15 "Independent Qualified Party" means an investment banking firm, accounting firm or appraisal firm of national standing; provided, however, that such firm is not an Affiliate of the Company. "Indirect Participant" means a Person who holds a beneficial interest in a Global Note through a Participant. "Industrial Revenue Bond Obligations" means an obligation to a state or local government unit that secures the payment of bonds issued by a state or local government unit or any obligation under the Financial Matters Agreement relating to Industrial Revenue Bond Obligations or any Indebtedness incurred to Refinance, in whole or in part, such obligations. "Interest Rate Agreement" means in respect of a Person any interest rate swap agreement, interest rate cap agreement or other financial agreement or arrangement designed to protect such Person against fluctuations in interest rates. "Investment" in any Person means any direct or indirect advance, loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of the lender) or other extension of credit (including by way of Guarantee or similar arrangement) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, Indebtedness or other similar instruments issued by such Person. Except as otherwise provided for herein, the amount of an Investment shall be its fair value at the time the Investment is made and without giving effect to subsequent changes in value. Prior to the Separation, any Investment made by another Person that is Attributed to the U.S. Steel Group shall be deemed to be made by the Company. For purposes of the definition of "Unrestricted Subsidiary", the definition of "Restricted Payment" and Section 4.13: (i) "Investment" shall include the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of any Subsidiary of the Company at the time that such Subsidiary is designated an Unrestricted Subsidiary; provided, however, that upon a redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue to have a permanent "Investment" in an Unrestricted Subsidiary equal to an amount (if positive) equal to (A) the Company's "Investment" in such Subsidiary at the time of such redesignation less (B) the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of such Subsidiary at the time of such redesignation; and (ii) any property transferred to or from an Unrestricted Subsidiary shall be valued at its fair market value at the time of such transfer, in each case as determined in good faith by the Board of Directors. "Investment Grade Rating" means a rating equal to or higher than Baa3 (or the equivalent) by Moody's Investor Service, Inc. and BBB- (or the equivalent) by Standard & Poor's Rating Group, Inc. 16 "Issue Date" means the date on which the Notes are originally issued. "Legal Holiday" has the meaning ascribed in Section 11.8. "Letter of Transmittal" means the letter of transmittal to be prepared by the Company and sent to all Holders of the Notes for use by such Holders in connection with the Exchange Offer. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof). "Like-Kind Exchange" means the disposition of property in exchange for similar property or for cash proceeds where the proceeds are deposited in a trust and employed to acquire similar property in a transaction qualifying as a like-kind exchange pursuant to Section 1031 of the Internal Revenue Code of 1986 (or any successor provision). "Management and Allocation Policies" means the policies and procedures adopted by the board of directors of USX Corporation or otherwise used by USX Corporation for the purpose of preparing financial statements of the U. S. Steel Group. "Marathon Group" means the Marathon Group of USX Corporation, as defined in the Certificate of Incorporation of USX Corporation. "Net Available Cash" from an Asset Disposition means cash payments received therefrom (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise and proceeds from the sale or other disposition of any securities received as consideration, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Indebtedness or other obligations relating to such properties or assets or received in any other noncash form), in each case net of: (i) all legal, title and recording tax expenses, commissions and other fees and expenses incurred, and all Federal, state, provincial, foreign and local taxes required to be accrued as a liability under GAAP, as a consequence of such Asset Disposition; (ii) all payments made on any Indebtedness which is secured by any assets subject to such Asset Disposition, in accordance with the terms of any Lien upon or other security agreement of any kind with respect to such assets, or which must by its terms, or in order to obtain a necessary consent to such Asset Disposition, or by applicable law, be repaid out of the proceeds from such Asset Disposition; (iii)all distributions and other payments required to be made to minority interest holders in Restricted Subsidiaries as a result of such Asset Disposition; and (iv) the deduction of appropriate amounts provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the 17 property or other assets disposed in such Asset Disposition and retained by the Company or any Restricted Subsidiary after such Asset Disposition. "Net Cash Proceeds", with respect to any issuance or sale of Capital Stock, means the cash proceeds of such issuance or sale net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Obligations" means with respect to any Indebtedness all obligations for principal, premium, interest, penalties, fees, indemnifications, reimbursements, and other amounts payable pursuant to the documentation governing such Indebtedness. "Offering Circular" means the final offering circular of the Issuers relating to the offering of the Notes. "Officer" means the Chairman of the Board, the President, the Chief Executive Officer, any Vice President, the Chief Financial Officer, the Treasurer or the Secretary of the Company and USS Financing, as applicable. "Officers' Certificate" means a certificate that meets the requirements of Section 11.5 signed by any Officer of each of the Company and USS Financing, as applicable. "Opinion of Counsel" means a written opinion that meets the requirements of Section 11.5 from legal counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of or counsel to the Issuers. "Parent" means until the Separation Date, USX Corporation. "Participant" means, with respect to the Depositary, Euroclear or Clearstream, a Person who has an account with the Depositary, Euroclear or Clearstream, respectively (and, with respect to The Depository Trust Company, shall include Euroclear and Clearstream). "Permitted Investment" means an Investment by the Company or any Restricted Subsidiary in: (i) the Company, a Restricted Subsidiary or a Person that will, upon the making of such Investment, become a Restricted Subsidiary; provided, however, that the primary business of such Restricted Subsidiary is a Related Business; (ii) another Person if as a result of such Investment such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all its assets to, the Company or a Restricted Subsidiary; provided, however, that such Person's primary business is a Related Business; (iii) cash and Temporary Cash Investments; 18 (iv) receivables owing to the Company or any Restricted Subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms may include such concessionary trade terms as the Company or any such Restricted Subsidiary deems reasonable under the circumstances; (v) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business; (vi) loans or advances to employees made in the ordinary course of business consistent with past practices of the Company or such Restricted Subsidiary; (vii) stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Company or any Restricted Subsidiary or in satisfaction of judgments; (viii)any Person to the extent such Investment represents the non-cash portion of the consideration received for an Asset Disposition as permitted in Section 4.15; (ix) any Person where such Investment was acquired by the Company or any of its Restricted Subsidiaries (a) in exchange for any other Investment or accounts receivable held by the Company or any such Restricted Subsidiary in connection with or as a result of a bankruptcy, workout, reorganization or recapitalization of the issuer of such other Investment or accounts receivable or (b) as a result of a foreclosure by the Company or any of its Restricted Subsidiaries with respect to any secured Investment or other transfer of title with respect to any secured Investment in default; (x) loans or advances to USS/POSCO Industries for repairs of damages and business interruption caused by the fire that occurred on May 31, 2001 in an amount not to exceed $25 million; provided that to the extent such amounts are not repaid with the proceeds of insurance on or before June 30, 2003, such amounts will be included as a Restricted Payment in the calculation of Restricted Payments; and (xi) so long as no Default has occurred and is continuing, an Unrestricted Subsidiary the assets of which shall primarily be located outside the United States of America, which Investment is made on or prior to December 31, 2003 and does not exceed $50 million; provided that such Unrestricted Subsidiary shall be treated as a Restricted Subsidiary as of the first date the Board of Directors would be permitted to designate it as such under the definition of "Unrestricted Subsidiary". 19 "Permitted Liens" means, with respect to any Person: (i) pledges or deposits by such Person under worker's compensation laws, unemployment insurance laws or similar legislation, or good faith deposits in connection with bids, tenders, contracts (other than for the payment of Indebtedness) or leases to which such Person is a party, or deposits to secure public or statutory obligations of such Person or deposits of cash or United States government bonds to secure surety or appeal bonds to which such Person is a party, or deposits as security for contested taxes or import duties or for the payment of rent, in each case Incurred in the ordinary course of business; (ii) Liens imposed by law, such as carriers', warehousemen's and mechanics' Liens, in each case for sums not yet due or being contested in good faith by appropriate proceedings or other Liens arising out of judgments or awards against such Person with respect to which such Person shall then be proceeding with an appeal or other proceedings for review and Liens arising solely by virtue of any statutory or common law provision relating to banker's Liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution; provided, however, that (A) such deposit account is not a dedicated cash collateral account and is not subject to restrictions against access by the Company in excess of those set forth by regulations promulgated by the Federal Reserve Board and (B) such deposit account is not intended by the Company or any Restricted Subsidiary to provide collateral to DTC; (iii)Liens for property taxes not yet subject to penalties for non-payment or which are being contested in good faith by appropriate proceedings; (iv) Liens in favor of issuers of surety bonds or letters of credit issued pursuant to the request of and for the account of such Person in the ordinary course of its business; provided, however, that such letters of credit do not constitute Indebtedness; (v) minor survey exceptions, minor encumbrances, easements or reservations of, or rights of others for, licenses, rights-of-way, sewers, electric lines, telegraph and telephone lines and other similar purposes, or zoning or other restrictions as to the use of real property or Liens incidental to the conduct of the business of such Person or to the ownership of its properties which were not Incurred in connection with Indebtedness and which do not in the aggregate materially adversely affect the value of said properties or materially impair their use in the operation of the business of such Person; (vi) Liens securing Indebtedness Incurred to finance the construction, purchase or lease of, or repairs, improvements or additions to, property, plant or equipment of such Person; provided, however, that the Lien may not extend to any other property owned by such Person or any of its Restricted 20 Subsidiaries at the time the Lien is Incurred (other than assets and property affixed or appurtenant thereto), and the Indebtedness (other than any interest thereon) secured by the Lien may not be Incurred more than 180 days after the later of the acquisition, completion of construction, repair, improvement, addition or commencement of full operation of the property subject to the Lien; (vii)Liens existing on the Issue Date; (viii)Liens on property or shares of Capital Stock of another Person at the time such other Person becomes a Subsidiary of such Person; provided, however, that the Liens may not extend to any other property owned by such Person or any of its Restricted Subsidiaries (other than assets and property affixed or appurtenant thereto); (ix) Liens on the inventory or accounts receivable of the Company or any Restricted Subsidiary securing Indebtedness permitted under the provisions described in clause (b)(1) under Section 4.12; (x) Liens securing industrial revenue or pollution control bonds issued by the Company, or prior to the Separation, by the USX Corporation; provided, however, that such Liens relate solely to the project being financed and are removed within 90 days following completion of the project being financed; (xi) Liens on property at the time such Person or any of its Subsidiaries acquires the property, including any acquisition by means of a merger or consolidation with or into such Person or a Subsidiary of such Person; provided, however, that the Liens may not extend to any other property owned by such Person or any of its Restricted Subsidiaries (other than assets and property affixed or appurtenant thereto); (xii)Liens securing Indebtedness or other obligations of a Subsidiary of such Person owing to such Person or a wholly owned Subsidiary of such Person; (xiii)Liens securing Hedging Obligations so long as such Hedging Obligations relate to Indebtedness that is, and is permitted to be under the Indenture, secured by a Lien on the same property securing such Hedging Obligations; (xiv)Liens to secure any Refinancing (or successive Refinancings) as a whole, or in part, of any Indebtedness secured by any Lien referred to in the foregoing clause (vi), (viii), (ix) or (x); provided, however, that: (A) such new Lien shall be limited to all or part of the same property and assets that secured or, under the written agreements pursuant to which the original Lien arose, could secure the original Lien 21 (plus improvements and accessions to, such property or proceeds or distributions thereof); and (B) the Indebtedness secured by such Lien at such time is not increased to any amount greater than the sum of (x) the outstanding principal amount or, if greater, committed amount of the Indebtedness described under clause (vi), (viii), (ix) or (x) at the time the original Lien became a Permitted Lien and (y) an amount necessary to pay any fees and expenses, including premiums, related to such refinancing, refunding, extension, renewal or replacement; and (xv) Liens on assets subject to a Sale/Leaseback Transaction securing Attributable Debt permitted to be Incurred under Section 4.12. Notwithstanding the foregoing, "Permitted Liens" will not include any Lien described in clauses (vi), (ix) or (x) above to the extent such Lien applies to any Additional Assets acquired directly or indirectly from Net Available Cash under Section 4.15. "Person" means any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Plan of Reorganization" means the Agreement and Plan of Reorganization to be entered into among USX Corporation, the Company and certain subsidiaries in connection with the Separation, as described in the Offering Circular. "Preferred Stock", as applied to the Capital Stock of any Person, means Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of Capital Stock of any other class of such Person. "Principal" of a Note means the principal of the Note plus the premium, if any, payable on the Note which is due or overdue or is to become due at the relevant time. "Private Exchange" means the offer by the Issuers, pursuant to the Registration Rights Agreement, to the Initial Purchasers to issue and deliver to each Initial Purchaser, in exchange for the Initial Notes held by the Initial Purchaser as part of its initial distribution, a like aggregate principal amount at maturity of Private Exchange Notes. "Private Exchange Notes" means the 10% Senior Notes due August 1, 2008, if any, to be issued pursuant to this Indenture to the Initial Purchasers in a Private Exchange. "Private Placement Legend" means the legend set forth in Section 2.6(g)(i)(A) to be placed on all Notes issued under this Indenture except where otherwise permitted by the provisions of this Indenture. 22 "Public Equity Offering" means an underwritten primary public offering of common stock of the Company pursuant to an effective registration statement under the Securities Act. "Purchase Money Indebtedness" means Indebtedness Incurred or assumed as the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property). "Rating Agency" means Standard & Poor's Ratings Group, Inc. and Moody's Investors Service, Inc. or if Standard & Poor's Ratings Group, Inc. or Moody's Investors Service, Inc. or both shall not make a rating on the Notes publicly available, a nationally recognized statistical rating agency or agencies, as the case may be, selected by the Company (as certified by a resolution of the Board of Directors) which shall be substituted for Standard & Poor's Ratings Group, Inc. or Moody's Investors Service, Inc. or both, as the case may be. "Refinance" means, in respect of any Indebtedness, to refinance, extend, renew, refund, repay, prepay, redeem, purchase, defease or retire, or to issue other Indebtedness in exchange or replacement for, such indebtedness. "Refinanced" and "Refinancing" shall have correlative meanings. "Refinancing Indebtedness" means Indebtedness that Refinances any Indebtedness of the Company or any Restricted Subsidiary existing on the Issue Date or Incurred in compliance with the Indenture, including Indebtedness that Refinances Refinancing Indebtedness; provided, however, that: (i) such Refinancing Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the Indebtedness being Refinanced; (ii) such Refinancing Indebtedness has an Average Life at the time such Refinancing Indebtedness is Incurred that is equal to or greater than the Average Life of the Indebtedness being Refinanced; and (iii)such Refinancing Indebtedness has an aggregate principal amount (or if Incurred with original issue discount, an aggregate issue price) that is equal to or less than the aggregate principal amount (or if Incurred with original issue discount, the aggregate accreted value) then outstanding or committed (plus fees and expenses, including any premium and defeasance costs) under the Indebtedness being Refinanced; provided further, however, that Refinancing Indebtedness shall not include (A) Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or (B) Indebtedness of the Company or a Restricted Subsidiary that Refinances Indebtedness of an Unrestricted Subsidiary. "Registration Rights Agreement" means the Registration Rights Agreement among the Issuers, Credit Suisse First Boston Corporation, J.P. Morgan Securities Inc., Lehman Brothers Inc., Salomon Smith Barney Inc., BNY Capital Markets, Inc., Mellon Financial Markets, LLC, NatCity Investments, Inc., PNC Capital Markets, Inc. and Scotia Capital Inc. related to the Notes. 23 "Regulation S" means Regulation S promulgated under the Securities Act. "Related Business" means any business in which the Company was engaged on the Issue Date and any business related, ancillary or complementary to any business of the Company in which the Company was engaged on the Issue Date. "Representative" means with respect to a Person any trustee, agent or representative (if any) for an issue of Senior Indebtedness of such Person. "Restricted Definitive Note" means a Definitive Note bearing the Private Placement Legend. "Restricted Global Note" means a global Note in the form of Exhibit A attached hereto that bears the Global Note Legend and the Private Placement Legend and that is deposited with or on behalf of and registered in the name of the Depositary. "Rule 144" means Rule 144 promulgated under the Securities Act. "Rule 144A" means Rule 144A promulgated under the Securities Act. "Rule 903" means Rule 903 promulgated under the Securities Act. "Rule 904" means Rule 904 promulgated under the Securities Act. "Restricted Payment" with respect to any Person means: (i) the declaration or payment of any dividends or any other distributions of any sort in respect of its Capital Stock (including any payment in connection with any merger or consolidation involving such Person) or similar payment to the direct or indirect holders of its Capital Stock (other than dividends or distributions payable solely in its Capital Stock (other than Disqualified Stock) and dividends or distributions payable solely to the Company or a Restricted Subsidiary, and other than pro rata dividends or other distributions made by a Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or owners of an equivalent interest in the case of a Subsidiary that is an entity other than a corporation)); (ii) the purchase, redemption or other acquisition or retirement for value of any Capital Stock of the Company held by any Person or of any Capital Stock of a Restricted Subsidiary held by any Affiliate of the Company (other than a Restricted Subsidiary), including the exercise of any option to exchange any Capital Stock (other than into Capital Stock of the Company that is not Disqualified Stock); (iii) the purchase, repurchase, redemption, defeasance or other acquisition or retirement for value, prior to scheduled maturity, scheduled repayment or scheduled sinking fund payment of any Subordinated Obligations of such Person (other than the purchase, repurchase or other acquisition of Subordinated Obligations purchased in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due 24 within one year of the date of such purchase, repurchase or other acquisition); or (iv) the making of any Investment (other than a Permitted Investment) in any Person; provided, however, that prior to the Separation (x) any reduction of Indebtedness that is Attributed to the U. S. Steel Group shall be deemed not to be a Restricted Payment, (y) Capital Stock or Subordinated Obligations of the Company shall be deemed to include Capital Stock or Subordinated Obligations of any Person that is Attributed to the U. S. Steel Group (including Steel Stock, but excluding any Preferred Stock or Subordinated Obligations of other Persons outstanding as of the Issue Date) and the Company shall be deemed to make any Restricted Payment made in respect of such Capital Stock or Subordinated Obligations; provided further, however, that any purchase or other acquisition for value of common stock of the Company with (x) funds provided by the participants of the Company's dividend reinvestment plan or (y) cash dividends permitted to be paid under Section 4.13 pursuant to the Company's dividend reinvestment plan shall not, in either case, be a "Restricted Payment". "Restricted Subsidiary" means (i) any Subsidiary of the Company that is not an Unrestricted Subsidiary and (ii) USS Financing. "Sale/Leaseback Transaction" means an arrangement relating to property owned by the Company or a Restricted Subsidiary on the Issue Date or thereafter acquired by the Company or a Restricted Subsidiary whereby the Company or a Restricted Subsidiary transfers such property to a Person and the Company or a Restricted Subsidiary leases it from such Person. "SEC" means the U.S. Securities and Exchange Commission. "Secured Indebtedness" means any Indebtedness of the Issuer secured by a Lien. "Securities Act" means the Securities Act of 1933, as amended. "Senior Indebtedness" means with respect to any Person: (i) Indebtedness of such Person (including, prior to the Separation, any Indebtedness to the extent it is Attributed to the U. S. Steel Group), whether outstanding on the Issue Date or thereafter Incurred; and (ii) accrued and unpaid interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to such Person whether or not post-filing interest is allowed in such proceeding) in respect of (A) indebtedness of such Person for money borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable (in each case including, prior to Separation, any such Indebtedness to the extent it is Attributed to the U. S. Steel Group) unless, in the case of clauses (i) and (ii), in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such obligations are subordinate in 25 right of payment to the Notes or the Guarantee of such Person, as the case may be; provided, however, that Senior Indebtedness shall not include: (i) any obligation of such Person to any Subsidiary; (ii) any liability for Federal, state, local or other taxes owed or owing by such Person; (iii) any accounts payable or other liability to trade creditors arising in the ordinary course of business (including guarantees thereof or instruments evidencing such liabilities); (iv) any Indebtedness of such Person (and any accrued and unpaid interest in respect thereof) which is subordinate or junior in any respect to any other Indebtedness or other obligation of such Person; or (v) that portion of any Indebtedness which at the time of Incurrence is Incurred in violation of the Indenture. "Separation" means the separation of the Company from USX Corporation pursuant to the Plan of Reorganization. "Separation Date" means the date the Separation occurs; provided such date is on or prior to December 31, 2002. "Separation Documents" means the Plan of Reorganization, the Financial Matters Agreement and the Tax Sharing Agreement. "Shelf Registration Statement" means the Shelf Registration Statement as defined in the Registration Rights Agreement. "Significant Subsidiary" means any Restricted Subsidiary that would be a "Significant Subsidiary" of the Issuer within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC. "Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency beyond the control of the issuer unless such contingency has occurred). "Steel Stock" means USX-U. S. Steel Group Common Stock of USX Corporation. "Subordinated Obligation" means, with respect to a Person, any Indebtedness of such Person (whether outstanding on the Issue Date or thereafter Incurred) which is subordinate or junior in right of payment to the Notes or a Guaranty of such Person, as the case may be, pursuant to a written agreement to that effect. 26 "Subsidiary" means, with respect to any Person, any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of Voting Stock is at the time owned or controlled, directly or indirectly, by: (i) such Person; (ii) such Person and one or more Subsidiaries of such Person; or (iii) one or more Subsidiaries of such Person; provided that, prior to the Separation, any Subsidiary of another Person that is Attributed to the U. S. Steel Group shall be deemed a Subsidiary of the Company, and any Voting Stock of that Subsidiary owned by such Person shall be deemed to be owned by the Company. "Tax Sharing Agreement" means the tax sharing agreement to be entered into by USX Corporation and the Company its connection with the Separation, as described in the Offering Circular. "Temporary Cash Investments" means any of the following: (i) any investment in direct obligations of the United States of America or any agency thereof or obligations Guaranteed by the United States of America or any agency thereof; (ii) investments in time deposit accounts, certificates of deposit and money market deposits maturing within 180 days of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America, any state thereof or any foreign country recognized by the United States of America, and which bank or trust company has capital, surplus and undivided profits aggregating in excess of $50.0 million (or the foreign currency equivalent thereof) and whose long-term debt is rated "A" (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act) or any money market fund sponsored by a registered broker dealer or mutual fund distributor; (iii) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (i) above entered into with a bank meeting the qualifications described in clause (ii) above; (iv) investments in commercial paper, maturing not more than 90 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America or any foreign country recognized by the United States of America with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or higher) according to Standard & Poor's Ratings Group; (v) investments in securities with maturities of six months or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by Standard & Poor's Ratings Group or "A" by Moody's Investors Service, Inc.; (vi) overnight investments with banks rated "B" or better by Fitch, Inc.; (vii) in the case of a Foreign Restricted Subsidiary, investments of the type and maturity described in clauses (i) through (vi) above of foreign obligors, which investments or obligors (or the parents of such obligors) have ratings described in such clauses or equivalent ratings from comparable foreign rating agencies; and (viii) deposits in Slovak financial institutions that do not at any time exceed $5 million in the aggregate. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa- 77bbbb) as in effect on the date of this Indenture. 27 "Trustee" means the party named as such in this Indenture until a successor replaces it and, thereafter, means such successor. "Trust Officer" means, when used with respect to the Trustee, any officer within the corporate trust department of the Trustee, including any vice president, assistant vice president, assistant secretary, assistant treasurer, trust officer or any other officer of the Trustee who customarily performs functions similar to those performed by the Persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of such person's knowledge of and familiarity with the particular subject and who shall have direct responsibility for the administration of this Indenture. "Tubular Business" means the business of Lorain Tubular Company LLC and any other assets and liabilities of the Company or any of its Subsidiaries primarily related to its tubular products business. "Uniform Commercial Code" means the New York Uniform Commercial Code as in effect from time to time. "Unrestricted Definitive Note" means one or more Definitive Notes that do not bear and are not required to bear the Private Placement Legend. "Unrestricted Global Note" means a permanent global Note in the form of Exhibit A attached hereto that bears the Global Note Legend but not the Private Placement Legend and that is deposited with or on behalf of and registered in the name of the Depositary. "Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of the Company (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness of, or holds any Lien on any property of, the Company or any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so designated; provided, however, that either (A) the Subsidiary to be so designated has total assets of $1,000 or less or (B) if such Subsidiary has consolidated assets greater than $1,000, such designation would be permitted under Section 4.13. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that immediately after giving effect to such designation (x) the Company could incur $1.00 of additional Indebtedness pursuant to paragraph Section 4.12(a) and (y) no Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the board resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "U.S. Dollar Equivalent" means with respect to any monetary amount in a currency other than U.S. dollars, at any time for determination thereof, the amount of U.S. dollars obtained by converting such foreign currency involved in such computation into U.S. dollars at the spot rate for the purchase of U.S. dollars with the applicable foreign currency as published in The Wall Street Journal in the "Exchange Rates" column under the heading "Currency Trading" on the date two Business Days prior to such determination. 28 Except as described under Section 4.12, whenever it is necessary to determine whether the Company has complied with any covenant in the Indenture or a Default has occurred and an amount is expressed in a currency other than U.S. dollars, such amount will be treated as the U.S. Dollar Equivalent determined as of the date such amount is initially determined in such currency. "U.S. Government Obligations" means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the issuer's option. "U.S. Person" means a U.S. person as defined in Rule 902(k) under the Securities Act. "U. S. Steel Group" means the United States Steel Group of USX Corporation, as defined in the Restated Certificate of Incorporation of USX Corporation. "USS Financing" means United States Steel Financing Corp., a Delaware corporation, until a successor replaces it in accordance with the applicable provisions of this Indenture, and thereafter, means such successor. "USSK" means U.S. Steel Kosice, s.r.o., a company organized under the laws of the Slovak Republic. "USS-POSCO Industries" means USS-POSCO Industries, a California general partnership whose general partners are POSCO-CALIFORNIA CORPORATION, a Delaware corporation, and PITCAL, INC., a Delaware corporation. "Voting Power" as applied to the stock of any Person means the total voting power represented by all outstanding Voting Stock of such corporation. "Voting Stock" of a Person means all classes of Capital Stock or other interests (including partnership interests) of such Person then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers, or trustee thereof. "Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company all the Capital Stock of which (other than directors' qualifying shares) is owned by the Company or one or more Wholly Owned Subsidiaries. SECTION 1.2. Other Definitions Term Defined ---- in Section ------- "Affiliate Transaction" 4.16 "Authenticating Agent" 2.2 "Authentication Order" 2.2 29 "Bankruptcy Law" 6.1 "Change of Control Offer" 4.11 "covenant defeasance option" 8.1(b) "Custodian" 6.1 "Event of Default" 6.1 "Initial Lien" 4.18 "legal defeasance option" 8.1(b) "Notice of Default" 6.1 "Paying Agent" 2.3 "Registrar" 2.3 "Successor Company" 5.1 "Successor Guarantor" 5.2 "Suspended Covenants" 4.9 SECTION 1.3. Incorporation by Reference of Trust Indenture Act The mandatory provisions of the TIA are incorporated by reference in and made a part of this Indenture. The following TIA terms have the following meanings: "Commission" means the SEC. "indenture securities" means the Notes. "indenture security holder" means a Holder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means the Issuers and any other obligor on the indenture securities. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule have the meanings assigned to them by such definitions. SECTION 1.4. Rules of Construction Unless the context otherwise requires: 1. a term has the meaning assigned to it; 2. an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; 3. "or" is not exclusive; 4. "including" means including without limitation; 30 5. words in the singular include the plural and words in the plural include the singular; 6. unsecured Indebtedness shall not be deemed to be subordinate or junior to Secured Indebtedness merely by virtue of its nature as unsecured Indebtedness; 7. except as otherwise expressly provided, the principal amount of any noninterest bearing or other discount security at any date shall be the principal amount thereof that would be shown on a balance sheet of the issuer dated such date prepared in accordance with GAAP; 8. the principal amount of any Preferred Stock shall be (i) the maximum liquidation preference of such Preferred Stock or (ii) the maximum mandatory redemption or mandatory repurchase price with respect to such Preferred Stock, whichever is greater; and 9. except as otherwise expressly provided, all references to the date the Notes were originally issued shall refer to the date the Initial Notes were originally issued. SECTION 1.5. One Class of Notes The Initial Notes, the Additional Notes, the Private Exchange Notes and the Exchange Notes shall vote and consent together on all matters as one class and none of the Initial Notes, the Additional Notes, the Private Exchange Notes or the Exchange Notes shall have the right to vote or consent as a separate class on any matter. ARTICLE II THE NOTES SECTION 2.1. Form and Dating (a) General. The Notes will initially be issued in an aggregate principal amount of $385,000,000, except for Notes authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Notes pursuant to Section 2.6, 2.7, 2.10, 3.6 or 9.5. The Issuers may create and issue Additional Notes in such an aggregate principal amount as would be permitted on the date of issuance to be incurred under Section 4.12(b)(iv). The Additional Notes will rank equally with the Initial Notes and otherwise similar in all respects so that the Additional Notes shall be consolidated and form a single series with the Initial Notes. The Trustee shall authenticate Additional Notes upon receipt of an Authentication Order and an Officers' Certificate and Opinion of Counsel, both meeting the requirements of Section 11.5, subject to Section 2.2, specifying the amount of Additional Notes to be authenticated. The Issuers may issue Exchange Notes or Private Exchange Notes pursuant to an Exchange Offer or a Private Exchange and a Board Resolution, subject to Section 2.2, included in an Officers' Certificate and an Opinion of Counsel both meeting the requirements of Section 11.5 delivered to the Trustee, in authorized denominations in exchange for a like principal 31 amount of Initial Notes. Upon any such exchange, any Initial Notes and Additional Notes exchanged for Exchange Notes or Private Exchange Notes shall be canceled in accordance with Section 2.11 and shall no longer be deemed outstanding for any purpose. The Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A hereto. The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Note shall be dated the date of its authentication. The Notes shall be issuable only in fully registered form, without coupons, in denominations of $1,000 and integral multiples thereof. Interest on the Notes shall be computed on the basis of a 360-day year consisting of twelve 30-day months. The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Indenture and the Issuers and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. However, to the extent any provision of any Note conflicts with the express provisions of this Indenture, the provisions of this Indenture shall govern and be controlling. (b) Global Notes and Definitive Notes. Notes issued in global form shall be substantially in the form of Exhibit A attached hereto (including the Global Note Legend thereon and the "Schedule of Exchanges of Interests in the Global Note" attached thereto). Notes issued in definitive form shall be substantially in the form of Exhibit A attached hereto (but without the Global Note Legend thereon and without the "Schedule of Exchanges of Interests in the Global Note" attached thereto). Each Global Note shall represent such of the outstanding Notes as shall be specified therein and each shall provide that it shall represent the aggregate principal amount of outstanding Notes from time to time endorsed thereon and that the aggregate principal amount of outstanding Notes represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions. Any endorsement of a Global Note to reflect the amount of any increase or decrease in the aggregate principal amount of outstanding Notes represented thereby shall be made by the Trustee or the Custodian, at the direction of the Trustee, in accordance with instructions given by the Holder thereof as required by Section 2.6 hereof. (c) Euroclear, Clearstream Procedures Applicable. The provisions of the "Operating Procedures of the Euroclear System" and "Terms and Conditions Governing Use of Euroclear" and the "General Terms and Conditions of Clearstream Banking" and "Customer Handbook" of Clearstream shall be applicable to transfers of beneficial interests in the Regulation S Global Notes that are held by Participants through Euroclear or Clearstream. SECTION 2.2. Execution and Authentication An Officer of each Issuer shall sign the Notes for the Issuers by manual or facsimile signature. If an Officer whose signature is on a Note no longer holds that office at the time the Trustee authenticates the Note, the Note shall be valid nevertheless. 32 A Note shall not be valid until an authorized signatory of the Trustee, upon a written order of the Issuers signed by an Officer of each of the Issuers (an "Authentication Order"), manually authenticates the Note. The signature of the Trustee on a Note shall be conclusive evidence that such Note has been duly and validly authenticated and issued under this Indenture. The Trustee may appoint an agent (the "Authenticating Agent") reasonably acceptable to the Issuers to authenticate the Notes. Unless limited by the terms of such appointment, any such Authenticating Agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. SECTION 2.3. Registrar and Paying Agent The Company shall (i) appoint an agent (the "Registrar") who shall maintain an office or agency where Notes may be presented for registration of transfer or for exchange and (ii) an agent (the "Paying Agent") who shall maintain an office or agency where Notes may be presented for payment. The Registrar shall keep a register of the Notes and of their transfer and exchange. The Registrar and the Paying Agent shall initially be the Company. The Company may have one or more co-registrars and one or more additional paying agents. The term "Paying Agent" includes any such additional paying agent. In the event the Company shall retain any Person not a party to this Indenture as an agent hereunder, the Company shall enter into an appropriate agency agreement with any Registrar, Paying Agent or co-registrar not a party to this Indenture, which shall incorporate the terms of the TIA. The agreement shall implement the provisions of this Indenture that relate to such agent. The Company shall promptly notify the Trustee of the name and address of each such agent. If the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 7.7. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent. The Issuers initially appoint The Depository Trust Company to act as depositary with respect to the Global Notes. SECTION 2.4. Paying Agent to Hold Money in Trust By at least 11:00 a.m. prevailing Eastern (U.S.) time on the date on which any principal or interest on any Note is due and payable, the Issuers shall deposit with the Paying Agent a sum sufficient to pay such principal or interest when due. The Issuers shall require each Paying Agent (other than the Trustee) to agree in writing that such Paying Agent shall hold in trust for the benefit of Noteholders or the Trustee all money held by such Paying Agent for the payment of principal or interest on the Notes and shall notify the Trustee of any default by the Issuers in making any such payment. If the Company or any of its Subsidiaries acts as Paying Agent, it shall segregate the money held by it as Paying Agent and hold it as a separate trust fund. The Issuers at any time may require a Paying Agent (other than the Trustee) to pay all money held by it to the Trustee and to account for any funds disbursed by such Paying Agent. Upon complying with this Section 2.4, the Paying Agent (if other than either Issuer or any of its Subsidiaries) shall have no further liability for the money delivered to the Trustee. Upon any 33 bankruptcy, reorganization or similar proceeding with respect to the Issuers, the Trustee shall serve as Paying Agent for the Notes. SECTION 2.5. Noteholder Lists The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Noteholders. If the Trustee or any Paying Agent is not the Registrar, the Issuers shall cause the Registrar to furnish to the Trustee or any such Paying Agent, in writing at least five Business Days before each interest payment date and at such other times as the Trustee or any such Paying Agent may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Noteholders. SECTION 2.6. Transfer and Exchange (a) Transfer and Exchange of Global Notes. A Global Note may not be transferred except as a whole by the Depositary to a nominee of the Depositary, by a nominee of the Depositary to the Depositary or to another nominee of the Depositary, or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. All Global Notes will be exchanged by the Issuers for Definitive Notes if (i) the Depositary notifies the Issuers that it is unwilling or unable to continue to act as Depositary or that it is no longer a clearing agency registered under the Exchange Act and, in either case, the Issuers are unable to locate a qualified successor Depositary within 90 days after the date of such notice from the Depositary or (ii) the Issuers, in their discretion at any time, determine not to have all the Notes represented by Global Notes or (iii) a Default entitling the Holders to accelerate the maturity of the Notes has occurred and is continuing. Upon the occurrence of either of the preceding events in (i), (ii) or (iii) above, Definitive Notes shall be issued in such names as the Depositary shall instruct the Trustee in writing. Global Notes also may be exchanged or replaced, in whole or in part, as provided in Sections 2.7 and 2.11 hereof. Every Note authenticated and delivered in exchange for, or in lieu of, a Global Note or any portion thereof, pursuant to this Section 2.6 or Section 2.7 or 2.10 hereof, shall be authenticated and delivered in the form of, and shall be, a Global Note, except as otherwise provided herein. A Global Note may not be exchanged for another Note other than as provided in this Section 2.6(a), however, beneficial interests in a Global Note may be transferred and exchanged as provided in Section 2.6(b), (c) or (f) hereof. (b) Transfer and Exchange of Beneficial Interests in the Global Notes. The transfer and exchange of beneficial interests in the Global Notes shall be effected through the Depositary, in accordance with the provisions of this Indenture and the Applicable Procedures. Beneficial interests in the Restricted Global Notes shall be subject to restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. Transfers of beneficial interests in the Global Notes also shall require compliance with either subparagraph (i) or (ii) below, as applicable, as well as one or more of the other following subparagraphs, as applicable: (i) Transfer of Beneficial Interests in the Same Global Note. Beneficial interests in any Restricted Global Note may be transferred to Persons who take delivery thereof in the form of a beneficial interest in the same Restricted Global Note in accordance with the transfer restrictions set forth in the Private Placement Legend. Beneficial interests in any Unrestricted Global Note may be transferred to Persons who take 34 delivery thereof in the form of a beneficial interest in an Unrestricted Global Note. No written orders or instructions shall be required to be delivered to the Registrar to effect the transfers described in this Section 2.6(b)(i). (ii) All Other Transfers and Exchanges of Beneficial Interests in Global Notes. In connection with all transfers and exchanges of beneficial interests that are not subject to Section 2.6(b)(i) above, the transferor of such beneficial interest must deliver to the Registrar either (A) (1) a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to credit or cause to be credited a beneficial interest in another Global Note in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions given in accordance with the Applicable Procedures containing information regarding the Participant account to be credited with such increase or (B) (1) a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to cause to be issued a Definitive Note in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions given by the Depositary to the Registrar containing information regarding the Person in whose name such Definitive Note shall be registered to effect the transfer or exchange referred to in (B)(1) above. Upon consummation of an Exchange Offer by the Issuers in accordance with Section 2.6(f) hereof, the requirements of this Section 2.6(b)(ii) shall be deemed to have been satisfied upon receipt by the Registrar of the instructions contained in the Letter of Transmittal delivered by the Holder of such beneficial interests in the Restricted Global Notes. Upon satisfaction of all of the requirements for transfer or exchange of beneficial interests in Global Notes contained in this Indenture and the Notes or otherwise applicable under the Securities Act, the Trustee shall adjust the principal amount of the relevant Global Note(s) pursuant to Section 2.6(h) hereof. (iii) Transfer of Beneficial Interests to Another Restricted Global Note. A beneficial interest in any Restricted Global Note may be transferred to a Person who takes delivery thereof in the form of a beneficial interest in another Restricted Global Note if the transfer complies with the requirements of Section 2.6(b)(ii) above and the Registrar receives a certificate in the form of Exhibit B hereto, including the certifications in item (1) or (2) thereof, as applicable. (iv) Transfer and Exchange of Beneficial Interests in a Restricted Global Note for Beneficial Interests in an Unrestricted Global Note. A beneficial interest in any Restricted Global Note may be exchanged by any holder thereof for a beneficial interest in an Unrestricted Global Note or transferred to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note if the exchange or transfer complies with the requirements of Section 2.6(b)(ii) above and: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the holder of the beneficial interest to be transferred, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the 35 applicable Letter of Transmittal that it is not (1) a Broker-Dealer, (2) a Person participating in the distribution of the Exchange Notes or (3) a Person who is an Affiliate of the Company; (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) such transfer is effected by a Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a beneficial interest in an Unrestricted Global Note, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (1)(a) thereof; or (2) if the holder of such beneficial interest in a Restricted Global Note proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of a beneficial interest in an Unrestricted Global Note, a certificate from such holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. If any such transfer is effected pursuant to subparagraph (B) or (D) above at a time when an Unrestricted Global Note has not yet been issued, the Issuers shall issue and, upon receipt of an Authentication Order in accordance with Section 2.2 hereof, the Trustee shall authenticate one or more Unrestricted Global Notes in an aggregate principal amount equal to the aggregate principal amount of beneficial interests transferred pursuant to subparagraph (B) or (D) above. (v) Beneficial interests in an Unrestricted Global Note cannot be exchanged for, or transferred to Persons who take delivery thereof in the form of, a beneficial interest in a Restricted Global Note. (c) Transfer or Exchange of Beneficial Interests for Definitive Notes. (i) Beneficial Interests in Restricted Global Notes to Restricted Definitive Notes. If any holder of a beneficial interest in a Restricted Global Note 36 proposes to exchange such beneficial interest for a Restricted Definitive Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Restricted Definitive Note, then, upon receipt by the Registrar of the following documentation: (A) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Restricted Definitive Note, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (2)(a) thereof; (B) if such beneficial interest is being transferred to a Qualified Institutional Buyer in accordance with Rule 144A under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (1) thereof; (C) if such beneficial interest is being transferred to a Non-U.S. Person in an offshore transaction in accordance with Rule 903 or Rule 904 under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (2) thereof; (D) if such beneficial interest is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144 under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(a) thereof; (E) if such beneficial interest is being transferred to the Issuers or any of their respective Subsidiaries, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(b) thereof; or (F) if such beneficial interest is being transferred pursuant to an effective registration statement under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(c) thereof, the Trustee shall cause the aggregate principal amount of the applicable Global Note to be reduced accordingly pursuant to Section 2.6(h) hereof, and the Issuers shall execute and the Trustee shall upon receipt of an Authentication Order authenticate and deliver to the Person designated in the instructions a Definitive Note in the appropriate principal amount. Any Definitive Note issued in exchange for a beneficial interest in a Restricted Global Note pursuant to this Section 2.6(c) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Registrar through instructions from the Depositary and the Participant or Indirect Participant. The Trustee shall (at the expense of the Issuers) deliver such Definitive Notes to the Persons in whose names such Notes are so registered. Any Definitive Note issued in exchange for a beneficial interest in a Restricted Global Note pursuant to this Section 2.6(c)(i) shall bear the Private Placement Legend and shall be subject to all restrictions on transfer contained therein. (ii) Beneficial Interests in Restricted Global Notes to Unrestricted Definitive Notes. A holder of a beneficial interest in a Restricted Global Note may exchange such beneficial interest for an Unrestricted Definitive Note or may transfer such 37 beneficial interest to a Person who takes delivery thereof in the form of an Unrestricted Definitive Note only if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the holder of such beneficial interest, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the Letter of Transmittal that it is not (1) a Broker-Dealer, (2) a Person participating in the distribution of the Exchange Notes or (3) a Person who is an Affiliate of the Issuers; (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) such transfer is effected by a Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Definitive Note that does not bear the Private Placement Legend, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (1)(b) thereof; or (2) if the holder of such beneficial interest in a Restricted Global Note proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of a Definitive Note that does not bear the Private Placement Legend, a certificate from such holder in the form of Exhibit B hereto, including the certifications in item (4) thereof, and, in each such case set forth in this subparagraph (D), if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. (iii) Beneficial Interests in Unrestricted Global Notes to Unrestricted Definitive Notes. If any holder of a beneficial interest in an Unrestricted Global Note proposes to exchange such beneficial interest for a Definitive Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Definitive Note, then, upon satisfaction of the conditions set forth in Section 2.6(b)(ii) hereof, the Trustee shall cause the aggregate principal amount of the applicable Global Note to be reduced accordingly pursuant to Section 2.6(h) hereof, and the Issuers shall execute and the Trustee shall upon receipt of an Authentication Order authenticate and (at the expense of 38 the Company) deliver to the Person designated in the instructions a Definitive Note in the appropriate principal amount. Any Definitive Note issued in exchange for a beneficial interest pursuant to this Section 2.6(c)(iii) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Registrar through instructions from the Depositary and the Participant or Indirect Participant. The Trustee shall (at the expense of the Issuers) deliver such Definitive Notes to the Persons in whose names such Notes are so registered. Any Definitive Note issued in exchange for a beneficial interest pursuant to this Section 2.6(c)(iii) shall not bear the Private Placement Legend. (d) Transfer and Exchange of Definitive Notes for Beneficial Interests in Global Notes. (i) Restricted Definitive Notes to Beneficial Interests in Restricted Global Notes. If any Holder of a Restricted Definitive Note proposes to exchange such Note for a beneficial interest in a Restricted Global Note or to transfer such Restricted Definitive Note to a Person who takes delivery thereof in the form of a beneficial interest in a Restricted Global Note, then, upon receipt by the Registrar of the following documentation: (A) if the Holder of such Restricted Definitive Note proposes to exchange such Note for a beneficial interest in a Restricted Global Note, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (2)(b) thereof; (B) if such Restricted Definitive Note is being transferred to a Qualified Institutional Buyer in accordance with Rule 144A under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (1) thereof; (C) if such Restricted Definitive Note is being transferred to a Non-U.S. Person in an offshore transaction in accordance with Rule 903 or Rule 904 under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (2) thereof; (D) if such Restricted Definitive Note is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144 under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(a) thereof; (E) if such Restricted Definitive Note is being transferred to the Issuers or any of their respective Subsidiaries, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(b) thereof; or (F) if such Restricted Definitive Note is being transferred pursuant to an effective registration statement under the Securities Act, a 39 certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(c) thereof; the Trustee shall cancel the Restricted Definitive Note and increase or cause to be increased the aggregate principal amount of the appropriate Restricted Global Note. (ii) Restricted Definitive Notes to Beneficial Interests in Unrestricted Global Notes. A Holder of a Restricted Definitive Note may exchange such Note for a beneficial interest in an Unrestricted Global Note or transfer such Restricted Definitive Note to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note only if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the Holder, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the Letter of Transmittal that it is not (1) a Broker-Dealer, (2) a Person participating in the distribution of the Exchange Notes or (3) a Person who is an Affiliate of the Issuers; (B) such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) such transfer is effected by a Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1)if the Holder of such Definitive Notes proposes to exchange such Notes for a beneficial interest in the Unrestricted Global Note, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (1)(c) thereof; or (2)if the Holder of such Definitive Notes proposes to transfer such Notes to a Person who shall take delivery thereof in the form of a beneficial interest in the Unrestricted Global Note, a certificate from such Holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. Upon satisfaction of the conditions of any of the subparagraphs in this Section 2.6(d)(ii), the Trustee shall cancel the Definitive Notes and increase or cause to be increased the aggregate principal amount of the Unrestricted Global Note. 40 (iii) Unrestricted Definitive Notes to Beneficial Interests in Unrestricted Global Notes. A Holder of an Unrestricted Definitive Note may exchange such Note for a beneficial interest in an Unrestricted Global Note or transfer such Definitive Notes to a Person who takes delivery thereof in the form of a beneficial interest in an Unrestricted Global Note at any time. Upon receipt of a written request for such an exchange or transfer, the Trustee shall cancel the applicable Unrestricted Definitive Note and increase or cause to be increased the aggregate principal amount of one of the Unrestricted Global Notes. (iv) If any such exchange or transfer from a Definitive Note to a beneficial interest in an Unrestricted Global Note is effected pursuant to subparagraphs (ii)(B), (ii)(D) or (iii) above at a time when an Unrestricted Global Note has not yet been issued, the Issuers shall issue and, upon receipt of an Authentication Order in accordance with Section 2.2 hereof, the Trustee shall authenticate one or more Unrestricted Global Notes in an aggregate principal amount equal to the principal amount of Definitive Notes so transferred. (e) Transfer and Exchange of Definitive Notes for Definitive Notes. Upon request by a Holder of Definitive Notes and such Holder's compliance with the provisions of this Section 2.6(e), the Registrar shall register the transfer or exchange of Definitive Notes. Prior to such registration of transfer or exchange, the requesting Holder shall present or surrender to the Registrar the Definitive Notes duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar duly executed by such Holder or by his attorney, duly authorized in writing. In addition, the requesting Holder shall provide any additional certifications, documents and information, as applicable, required pursuant to the following provisions of this Section 2.6(e). (i) Restricted Definitive Notes to Restricted Definitive Notes. Any Restricted Definitive Note may be transferred to and registered in the name of Persons who take delivery thereof in the form of a Restricted Definitive Note if the Registrar receives the following: (A) if the transfer will be made pursuant to Rule 144A under the Securities Act, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (1) thereof; (B) if the transfer will be made pursuant to Rule 903 or Rule 904, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (2) thereof; and (C) if the transfer will be made pursuant to any other exemption from the registration requirements of the Securities Act, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications required by item (3) thereof. (ii) Restricted Definitive Notes to Unrestricted Definitive Notes. Any Restricted Definitive Note may be exchanged by the Holder thereof for an Unrestricted 41 Definitive Note or transferred to a Person or Persons who take delivery thereof in the form of an Unrestricted Definitive Note if: (A) such exchange or transfer is effected pursuant to the Exchange Offer in accordance with the Registration Rights Agreement and the Holder, in the case of an exchange, or the transferee, in the case of a transfer, certifies in the Letter of Transmittal that it is not (1) a Broker-Dealer, (2) a Person participating in the distribution of the Exchange Notes or (3) a Person who is an Affiliate of the Company; (B) any such transfer is effected pursuant to the Shelf Registration Statement in accordance with the Registration Rights Agreement; (C) any such transfer is effected by a Broker-Dealer pursuant to the Exchange Offer Registration Statement in accordance with the Registration Rights Agreement; or (D) the Registrar receives the following: (1) if the Holder of such Restricted Definitive Notes proposes to exchange such Notes for an Unrestricted Definitive Note, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (1)(d) thereof; or (2) if the Holder of such Restricted Definitive Notes proposes to transfer such Notes to a Person who shall take delivery thereof in the form of an Unrestricted Definitive Note, a certificate from such Holder in the form of Exhibit B hereto, including the certifications in item (4) thereof; and, in each such case set forth in this subparagraph (D), if the Registrar so requests, an Opinion of Counsel in form reasonably acceptable to the Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Private Placement Legend are no longer required in order to maintain compliance with the Securities Act. (iii) Unrestricted Definitive Notes to Unrestricted Definitive Notes. A Holder of Unrestricted Definitive Notes may transfer such Notes to a Person who takes delivery thereof in the form of an Unrestricted Definitive Note. Upon receipt of a request to register such a transfer, the Registrar shall register the Unrestricted Definitive Notes pursuant to the instructions from the Holder thereof. (f) Exchange Offer. Upon the occurrence of the Exchange Offer in accordance with the Registration Rights Agreement, the Issuers shall issue and, upon receipt of an Authentication Order in accordance with Section 2.2, the Trustee shall authenticate (i) one or more Unrestricted Global Notes 42 in an aggregate principal amount equal to the principal amount of the beneficial interests in the Restricted Global Notes tendered for acceptance by Persons that certify in the Letters of Transmittal that (x) they are not Broker- Dealers, (y) they are not participating in a distribution of the Exchange Notes and (z) they are not Affiliates of the Issuers, and accepted for exchange in the Exchange Offer and (ii) Definitive Notes in an aggregate principal amount equal to the principal amount of the Restricted Definitive Notes accepted for exchange in the Exchange Offer. Concurrently with the issuance of such Notes, the Trustee shall cause the aggregate principal amount of the applicable Restricted Global Notes to be reduced accordingly, and the Issuers shall execute and the Trustee shall authenticate and (at the expense of the Issuers) deliver to the Persons designated by the Holders of Definitive Notes so accepted Definitive Notes in the appropriate principal amount. (g) Legends. The following legends shall appear on the face of all Global Notes and Definitive Notes issued under this Indenture unless specifically stated otherwise in the applicable provisions of this Indenture. (i) Private Placement Legend. (A) Except as permitted by subparagraph (B) below, each Global Note and each Definitive Note (and all Notes issued in exchange therefor or substitution thereof) shall bear the legend in substantially the following form: "THIS NOTE (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THIS NOTE MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS NOTE IS HEREBY NOTIFIED THAT THE SELLER OF THIS NOTE MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS NOTE AGREES FOR THE BENEFIT OF THE ISSUERS THAT (A) THIS NOTE MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (I) IN THE UNITED STATES TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 904 UNDER THE SECURITIES ACT, (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (IV) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH OF CASES (I) THROUGH (IV) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED 43 STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS NOTE FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE". (B) Notwithstanding the foregoing, any Global Note or Definitive Note issued pursuant to subparagraphs (b)(iv), (c)(ii), (c)(iii), (d)(ii), (d)(iii), (e)(ii), (e)(iii) or (f) to this Section 2.6 (and all Notes issued in exchange therefor or substitution thereof) shall not bear the Private Placement Legend. (ii) Global Note Legend. Each Global Note shall bear a legend in substantially the following form: "THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.6 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.6(a) OF THE INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE ISSUERS. UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUERS OR THEIR AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN". (h) Cancellation and/or Adjustment of Global Notes. At such time as all beneficial interests in a particular Global Note have been exchanged for Definitive Notes or a particular Global Note has been redeemed, repurchased or canceled in whole and not in part, each such Global Note shall be returned to or retained and canceled by the Trustee in accordance with Section 2.11 hereof. At any time prior to such cancellation, if any beneficial interest in a Global Note is exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note or for Definitive Notes, the principal amount of Notes represented by such Global Note shall be 44 reduced accordingly and an endorsement shall be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such reduction; and if the beneficial interest is being exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note, such other Global Note shall be increased accordingly and an endorsement shall be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such increase. (i) Upon the consummation of a Private Exchange with respect to the Initial Notes pursuant to which Holders of such Initial Notes are offered Private Exchange Notes in exchange for their Initial Notes, all requirements pertaining to such Initial Notes that Initial Notes issued to certain Holders be issued in global form will still apply, and Private Exchange Notes in global form will be available to Holders that exchange such Initial Notes in such Private Exchange. (j) General Provisions Relating to Transfers and Exchanges. (i) To permit registrations of transfers and exchanges, the Issuers shall execute and the Trustee shall authenticate Global Notes and Definitive Notes upon receipt of an Authentication Order in accordance with Section 2.2 hereof or upon receipt of a written request of the Registrar. (ii) No service charge shall be made to a holder of a beneficial interest in a Global Note or to a Holder of a Definitive Note for any registration of transfer or exchange, but the Issuers may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchange or transfer pursuant to Sections 2.10, 3.6 and 9.5 hereof). (iii) The Registrar shall not be required to register the transfer of or exchange any Note selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. (iv) All Global Notes and Definitive Notes issued upon any registration of transfer or exchange of Global Notes or Definitive Notes shall be the valid obligations of the Issuers, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Global Notes or Definitive Notes surrendered upon such registration of transfer or exchange. (v) The Issuers shall not be required (A) to issue, to register the transfer of or to exchange any Notes during a period beginning at the opening of business 15 days before the day of any selection of Notes for redemption under Section 3.2 hereof and ending at the close of business on the day of selection, (B) to register the transfer of or to exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part or (c) to register the transfer of or to exchange a Note between a record date and the next succeeding interest payment date. (vi) Prior to due presentment for the registration of a transfer of any Note, the Trustee, any Agent and the Issuers may deem and treat the Person in whose 45 name any Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of and interest on such Note and for all other purposes, and none of the Trustee, any Agent or the Issuers shall be affected by notice to the contrary. (vii) Each Holder of a Security agrees to indemnify the Company and the Trustee against any liability that may result from the transfer, exchange or assignment of such Holder's Security in violation of any provision of this Indenture and/or applicable United States Federal or state securities law. The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Security (including any transfers between or among Depositary Participants or beneficial owners of interests in any Global Security) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by the terms of, this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. (viii) The Trustee shall authenticate Global Notes and Definitive Notes in accordance with the provisions of Section 2.2 hereof. (ix) All certifications, certificates and Opinions of Counsel required to be submitted to the Registrar pursuant to this Section 2.6 to effect a registration of transfer or exchange may be submitted by facsimile. SECTION 2.7. Replacement Notes If a mutilated Note is surrendered to the Registrar or if the Holder of a Note shall provide the Issuers and the Trustee with evidence to their satisfaction that the Note has been lost, destroyed or wrongfully taken, the Issuers shall issue and the Trustee shall authenticate a replacement Note if the requirements of Section 8-405 of the Uniform Commercial Code are met and the Holder satisfies any other reasonable requirements of the Trustee. If required by the Trustee or either of the Issuers, such Holder shall furnish an indemnity bond sufficient in the judgment of the Issuers and the Trustee to protect the Issuers, the Trustee, the Paying Agent, the Registrar and any co-registrar from any loss which any of them may suffer if a Note is replaced. The Issuers and the Trustee may charge the Holder for their expenses in replacing a Note, including reasonable fees and expenses of counsel. Every replacement Note is an additional Obligation of the Issuers. SECTION 2.8. Outstanding Notes Notes outstanding at any time are all Notes authenticated by the Trustee except for those canceled, those delivered for cancellation and those described in this Section 2.8 as not outstanding. A Note does not cease to be outstanding because an Issuer or an Affiliate of an Issuer holds the Note. 46 If a Note is replaced pursuant to Section 2.7, it ceases to be outstanding unless the Trustee and the Issuers receive proof satisfactory to them that the replaced Note is held by a bona fide purchaser. If the Paying Agent segregates and holds in trust, in accordance with this Indenture, on a redemption date or maturity date money sufficient to pay all principal and interest payable on that date with respect to the Notes (or portions thereof) to be redeemed or maturing, as the case may be, and the Paying Agent is not prohibited from paying such money to the Noteholders on that date pursuant to the terms of this Indenture, then on and after that date such Notes (or portions thereof) cease to be outstanding and interest on them ceases to accrue. SECTION 2.9. Treasury Notes In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by any Issuer, the Guarantor or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with any Issuer or the Guarantor shall be considered as though not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes that a Trust Officer actually knows are so owned shall be so disregarded. SECTION 2.10. Temporary Notes Until Definitive Notes are ready for delivery, the Issuers may prepare and the Trustee, upon receipt of an Authentication Order, shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of Definitive Notes but may have variations that the Issuers and the Trustee consider appropriate for temporary Notes. Without unreasonable delay, the Issuers shall prepare and the Trustee shall authenticate Definitive Notes. After the preparation of Definitive Notes, the temporary Notes shall be exchangeable for Definitive Notes upon surrender of the temporary Notes at any office or agency maintained by the Issuers for that purpose and such exchange shall be without charge to the Holder. Upon surrender for cancellation of any one or more temporary Notes, the Issuers shall execute, and the Trustee shall authenticate and deliver in exchange therefor, one or more Definitive Notes representing an equal principal amount of Notes. Until so exchanged, the Holder of temporary Notes shall in all respects be entitled to the same benefits under this Indenture as a Holder of Definitive Notes. SECTION 2.11. Cancellation The Issuers at any time may deliver Notes to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee for cancellation any Notes surrendered to them for registration of transfer or exchange or payment. The Trustee shall cancel and dispose of (subject to the record retention requirements of the Exchange Act) all Notes surrendered for registration of transfer or exchange, payment or cancellation according to its normal operating procedures and deliver a certificate of such destruction to the Issuers unless the Issuers direct the Trustee to deliver canceled Notes to the Issuers. The Issuers may not issue new Notes to replace Notes they have redeemed, paid or delivered to the Trustee for cancellation. SECTION 2.12. Defaulted Interest 47 If the Issuers default in a payment of interest on the Notes, the Issuers shall pay defaulted interest (plus interest on such defaulted interest to the extent lawful) at the rate specified therefor in the Notes in any lawful manner. The Issuers may pay the defaulted interest to the Persons who are Noteholders on a subsequent special record date. The Issuers shall fix or cause to be fixed (or upon the Issuers' failure to do so the Trustee shall fix) any such special record date and payment date which specified record date shall not be less than 10 days prior to the payment date for such defaulted interest and shall promptly mail or cause to be mailed to each Noteholder a notice that states the special record date, the payment date and the amount of defaulted interest to be paid. The Issuers shall notify the Trustee in writing of the amount of defaulted interest proposed to be paid on each Note and the date of the proposed payment, and at the same time the Issuers shall deposit with the Paying Agent an amount of money equal to the aggregate amount proposed to be paid in respect of such defaulted interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when so deposited to be held in trust for the benefit of the Person entitled to such defaulted interest as provided in this Section 2.12. SECTION 2.13 CUSIP Numbers The Issuers in issuing the Notes may use "CUSIP" numbers (if then generally in use) and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided, however, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Notes or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Notes, and any such redemption shall not be affected by any defect in or omission of such numbers. ARTICLE III REDEMPTION SECTION 3.1. Notices to Trustee If the Issuers elect to redeem Notes pursuant to the provisions of Section 3.7, they shall notify the Trustee and the Paying Agent in writing of the redemption date and the principal amount at maturity of Notes to be redeemed and the redemption price. The Issuers shall give each notice to the Trustee and the Paying Agent provided for in this Section 3.1 at least 15 days prior to the date notice of redemption is to be delivered to Holders of Notes unless the Trustee and the Paying Agent consent to a shorter period. Such notice shall be accompanied by an Officers' Certificate from the Issuers to the effect that such redemption will comply with the conditions herein. The record date relating to such redemption shall be selected by the Issuers and set forth in the related notice given to the Trustee and the Paying Agent, which record date shall be not less than 15 days prior to the date selected for redemption by the Issuers. 48 SECTION 3.2. Selection of Notes to Be Redeemed In the case of any partial redemption, selection of the Notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by lot or by such other method as the Trustee in its sole discretion shall deem to be fair and appropriate, although no Note of $1,000 in original principal amount or less will be redeemed in part. Provisions of this Indenture that apply to Notes called for redemption also apply to portions of Notes called for redemption. Upon request of the Issuers, the Trustee shall notify the Issuers of the Notes or portions of Notes to be redeemed. SECTION 3.3. Notice of Redemption At least 30 days but not more than 60 days before a date for redemption of Notes, the Trustee at the expense of the Issuers shall mail a notice of redemption by first-class mail to each Holder of Notes to be redeemed. The notice shall identify the Notes to be redeemed and shall state: (i) the redemption date; (ii) the redemption price; (iii) the name and address of the Paying Agent; (iv) that Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price plus accrued and unpaid interest, if any; (v) if fewer than all the outstanding Notes are to be redeemed, the identification and principal amounts of the particular Notes to be redeemed; (vi) that, unless the Issuers default in making such redemption payment or the Paying Agent is prohibited from making such payment pursuant to the terms of this Indenture, interest on Notes (or portion thereof) called for redemption ceases to accrue on and after the redemption date; (vii) the CUSIP number, if any, printed on the Notes being redeemed; and (viii) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Notes. The Trustee shall give the notice of redemption in the Issuers' name and at the Issuers' expense. In such event, the Issuers shall provide the Trustee with the information required by this Section 3.3. SECTION 3.4. Effect of Notice of Redemption Once notice of redemption is mailed, Notes called for redemption shall become due and payable on the redemption date and at the redemption price stated in the notice. Upon surrender to the Paying Agent, such Notes shall be paid at the redemption price stated in the 49 notice, plus accrued and unpaid interest, if any, to the redemption date; provided that the Issuers shall have deposited the redemption price with the Paying Agent or the Trustee on or before 11:00 a.m. prevailing Eastern (U.S.) time on the date of redemption; provided, further, that if the redemption date is after a regular record date and on or prior to the related interest payment date, the accrued and unpaid interest shall be payable to the Noteholder of the redeemed Notes registered on that record date. Failure to give notice or any defect in the notice to any Holder shall not affect the validity of the notice to any other Holder. SECITON 3.5. Deposit of Redemption Price By at least 11:00 a.m. Prevailing Eastern (U.S. time) on the date on which any principal of or interest on any Note is due and payable, the Issuers shall deposit with the Paying Agent (or, if an Issuer or a Subsidiary is the Paying Agent, shall segregate and hold in trust) money sufficient to pay the redemption price of and accrued and unpaid interest, if any, on all Notes to be redeemed on that date other than Notes or portions of Notes called for redemption which are owned by the Issuers or any of their Subsidiaries and have been delivered by the Issuers or any such Subsidiary to the Trustee for cancellation. If the Issuers comply with the preceding paragraph, then, unless the Issuers default in the payment of such redemption price, interest on the Notes to be redeemed will cease to accrue on and after the applicable redemption date, whether or not such Notes are presented for payment. SECTION 3.6. Notes Redeemed in Part Upon surrender of a Note that is redeemed in part, the Issuers shall execute and the Trustee shall authenticate for the Holder (at the Issuers' expense) a new Note equal in a principal amount at maturity to the unredeemed portion of the Note surrendered. SECTION 3.7. Optional Redemption Except as set forth in the following paragraphs, the Notes will not be redeemable at the option of the Issuers prior to the Stated Maturity. Before August 1, 2004, the Issuers may at their option on one or more occasions, upon not less than 30 nor more than 60 days' notice, redeem the Notes in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the relevant series of Notes originally issued at a redemption price (expressed as a percentage of principal amount) of 110.75%, plus accrued and unpaid interest to the redemption date, with the net cash proceeds from one or more Public Equity Offerings; provided that (i) at least 65% of such aggregate principal amount originally issued of the Notes remains outstanding immediately after the occurrence of each such redemption (other than Notes held, directly or indirectly, by the Company or its Affiliates); and (ii) each such redemption occurs within 60 days after the date of the related Public Equity Offering. 50 Further, at any time on or prior to December 31, 2002, the Issuers may, at their option, give written notice to redeem the Notes, which notice shall be no less than 30 nor more than 60 days prior to the redemption date, in whole or in part at a redemption price (expressed as a percentage of principal amount) of 101%, plus accrued and unpaid interest to the redemption date; provided that (i) the Board of Directors shall have determined not to proceed with the Separation (and the Guarantee of the Guarantor will stay in effect until the Notes are fully paid); (ii) if the Issuers elect to redeem the Notes in part, they may redeem up to an aggregate principal amount not to exceed 35% of the aggregate principal amount of the Notes originally issued; and (iii) at least 65% of such aggregate principal amount originally issued of the Notes remains outstanding immediately after the occurrence of each such redemption (other than Notes held, directly or indirectly, by the Company or its Affiliates). SECTION 3.8. Mandatory Redemption Except as set forth in Sections 4.11 and 4.15, the Issuers shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes. ARTICLE IV COVENANTS SECTION 4.1. Payment of Notes The Issuers shall promptly pay the principal of and interest on the Notes on the dates and in the manner provided in the Notes and in this Indenture. Principal and interest shall be considered paid on the date due if on or before 11:00 a.m. prevailing Eastern (U.S.) time on such date the Trustee or the Paying Agent holds (or, if an Issuer or a Subsidiary of an Issuer is the Paying Agent, the segregated account or separate trust fund maintained by such Issuer or such Subsidiary pursuant to Section 2.4) in accordance with this Indenture money sufficient to pay all principal and interest then due and the Trustee or the Paying Agent (or, if an Issuer or a Subsidiary of an Issuer is the Paying Agent, such Issuer or such Subsidiary), as the case may be, is not prohibited from paying such money to the Noteholders on that date pursuant to the terms of this Indenture. The Issuers shall pay interest on overdue principal at the rate specified therefor in the Notes, and they shall pay interest on overdue installments of interest at the same rate to the extent lawful as provided in Section 2.11. Notwithstanding anything to the contrary contained in this Indenture, the Issuers or the Paying Agent may, to the extent it is required to do so by law, deduct or withhold income or other similar taxes imposed by the United States of America or other domestic or foreign taxing authorities from principal or interest payments hereunder. 51 SECTION 4.2. Maintenance of Office or Agency The Issuers shall maintain an office or agency (which may be an office of the Trustee or an affiliate of the Trustee or Registrar) where Notes may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Issuers in respect of the Notes and this Indenture may be served. The Issuers shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Issuers shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. The Issuers may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Issuers of their obligations to maintain an office or agency for such purposes. The Issuers shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Issuers hereby designate the Corporate Trust Office of the Trustee as one such office or agency of the Issuers in accordance with Section 2.3. SECTION 4.3. Corporate Existence Except as otherwise permitted by Article V and Section 4.11, each of the Issuers shall do or cause to be done, at its own cost and expense, all things necessary to preserve and keep in full force and effect its corporate existence and the corporate, partnership or limited liability company existence of each of its Significant Subsidiaries in accordance with the respective organizational documents of each such Subsidiary and the material rights (charter and statutory) and franchises of such Issuer and each such Subsidiary; provided, however, that an Issuer shall not be required to preserve, with respect to itself, any material right or franchise and, with respect to any of its Significant Subsidiaries, any such existence, material right or franchise, if the Board of Directors of such Issuer shall determine in good faith (such determination to be evidenced by a board resolution), that the preservation thereof is no longer desirable in the conduct of the business of such Issuer and the Subsidiaries, taken as a whole. SECTION 4.4. SEC Reports (a) So long as the Guarantee in Article X is in effect, the Issuers shall cause the Guarantor to file with the SEC such annual reports and such information, documents and other reports as are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a U.S. corporation subject to such Sections, such information, documents and other reports to be so filed and provided at the times specified for the filings of such information, documents and reports under such Sections and to include financial statements and other information with respect to the U. S. Steel Group in form and substance consistent with the information provided in its previous Exchange Act filings, subject to the requirements of the SEC. (b) Following the Separation, the Issuers will file with the SEC such annual reports and such information, documents and other reports as are specified in Sections 13 and 52 15(d) of the Exchange Act and applicable to a U.S. corporation subject to such Sections, such information, documents and other reports to be so filed and provided at the times specified for the filings of such information, documents and reports under such Sections. (c) In addition, the Issuers shall furnish to the Holders of the Notes and to prospective investors, upon the requests of such Holders, any information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act so long as the Notes are not freely transferable under the Securities Act. SECTION 4.5. Compliance Certificate (a) Each of the Issuers shall deliver to the Trustee, within 120 days after the end of each fiscal year, an Officers' Certificate stating that a review of the activities of the Issuers and their respective Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether each of the Issuers and their respective Subsidiaries has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to such Officers signing such certificate, that to the best of his or her knowledge each Issuer and their respective Subsidiaries has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions hereof (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action each Issuer and their respective Subsidiaries is taking or propose to take with respect thereto) and that to the best of his or her knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of or interest on the Notes are prohibited (or if such event has occurred, a description of the event and what action each is taking or proposes to take with respect thereto). (b) Each of the Issuers shall, so long as any of the Notes are outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware of any Default or Event of Default an Officers' Certificate specifying such Default or Event of Default and what action the Issuers are taking or propose to take with respect thereto. (c) The Issuers shall comply with TIA Section 314(a)(4). SECTION 4.6. Stay, Extension and Usury Laws Each of the Issuers and the Guarantor covenant that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture. Each of the Issuers and the Guarantor (to the extent it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law has been enacted. SECTION 4.7. Payment of Taxes and Other Claims Each of the Issuers shall pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (i) all material taxes, assessments and governmental 53 charges (including withholding taxes and any penalties, interest and additions to taxes) levied or imposed upon it or any of its Restricted Subsidiaries or properties of it or any of its Restricted Subsidiaries and (ii) all lawful claims for labor, materials and supplies that, if unpaid, might by law become a Lien upon the property of it or any of its Restricted Subsidiaries; provided, however, that the Issuers shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings properly instituted and diligently conducted for which adequate reserves, to the extent required under GAAP, have been taken. SECTION 4.8. Maintenance of Properties and Insurance (a) Each of the Issuers shall, and shall cause each of its Significant Subsidiaries to, maintain its material properties in good working order and condition (subject to ordinary wear and tear) and make or cause to be made all necessary repairs, renewals, replacements, additions, betterments and improvements thereto and actively conduct and carry on its business, all as in the reasonable judgment of such Issuer is necessary so that the business carried on by such Issuer and its Significant Subsidiaries may be actively conducted; provided, however, that nothing in this Section 4.19 shall prevent such Issuer or any of its Subsidiaries from discontinuing the operation and maintenance of any of its properties, if such discontinuance is, in the good faith judgment of each Issuer or the Subsidiary, as the case may be, desirable in the conduct of their respective businesses and is not disadvantageous in any material respect to the Holders. (b) Each of the Issuers shall provide or cause to be provided, for itself and each of its Significant Subsidiaries, insurance (including appropriate self-insurance) against loss or damage of the kinds that, in the good faith judgment of such Issuer, are adequate and appropriate for the conduct of the business of such Issuer and such Subsidiaries in a prudent manner, with reputable insurers or with the government of the United States of America, any state thereof or any agency or instrumentality of such governments, in such amounts, with such deductibles, and by such methods as shall be customary, in the good faith judgment of such Issuer, for companies similarly situated in the industry. SECTION 4.9. Investment Grade Rating Following the first day: (i) that is after the earliest to occur of (A) the day the Separation shall have occurred, (B) December 31, 2002 or (C) the day the Board of Directors of USX Corporation shall have determined not to proceed with the Separation, (ii) the Notes have an Investment Grade Rating from both of the Rating Agencies, and (iii) no Default has occurred and is continuing under the Indenture, the Company and its Restricted Subsidiaries will not be subject to Sections 4.12, 4.13, 4.14, 4.15, 4.16, 4.17 and clause (iii) of Section 5.1 (collectively, the "Suspended Covenants"). 54 The Issuers will notify the Trustee by delivery of an Officer's Certificate of the suspension of the Suspended Covenants. In the event that the Company and its Restricted Subsidiaries are not subject to the Suspended Covenants for any period of time as a result of the preceding sentence, and subsequently one or both of the Rating Agencies withdraws its rating or downgrades the rating assigned to the Notes below an Investment Grade Rating, then the Company and the Restricted Subsidiaries will thereafter again be subject to the Suspended Covenants, and compliance with the Suspended Covenants with respect to Restricted Payments made after the time of such withdrawal or downgrade will be calculated in accordance with Section 4.13 as though such section had been in effect since the date the Notes were originally issued. SECTION 4.10. Conditions to Separation The Company shall not permit the Separation to occur, unless: (i) USX Corporation shall have received a private letter ruling from the IRS that the Separation will qualify as a tax-free transaction within the meaning of Section 355 of the Code, (ii) the transactions that give effect to the Value Transfer as described in the Offering Circular shall have occurred, (iii) USX Corporation shall not have amended (x) the definition of U. S. Steel Group in its certificate of incorporation or by-laws or (y) its Management and Allocation Policies, in either case, in any manner adverse to the holders of the Notes, (iv) immediately following the Separation and after giving pro forma effect to any subsequent payments to be made as part of the Separation, (x) the Company and its Subsidiaries shall have an aggregate of at least $400 million available in undrawn financings and cash, of which at least $300 million shall be available under facilities with terms extending at least three years after the date such facilities are put in place, and (y) no Default shall have occurred and be continuing, and (v) any differences between the Separation Documents (x) as executed and delivered and (y) as described in the Offering Circular do not have a material adverse effect on the Holders of the Notes. SECTION 4.11. Change of Control Upon the occurrence of a Change of Control, each Holder shall have the right to require that the Company repurchase such Holder's Notes at a purchase price in cash equal to 101% of the principal amount thereof on the date of purchase plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date). 55 Within 30 days following any Change of Control, the Company shall mail a notice to each Holder at its registered address with a copy to the Trustee (the "Change of Control Offer") stating: (i) that a Change of Control has occurred and that such Holder has the right to require us to purchase such Holder's Notes at a purchase price in cash equal to 101% of the principal amount thereof on the date of purchase, plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of Holders of record on the relevant record date to receive interest on the relevant interest payment date); (ii) the circumstances and relevant facts regarding such Change of Control (including information with respect to pro forma historical income, cash flow and capitalization, in each case after giving effect to such Change of Control); (iii) the purchase date (which shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed); and (iv) the instructions, as determined by the Company, consistent with this Section 4.11, that a Holder must follow in order to have its Notes purchased. The Company shall not be required to make a Change of Control Offer following a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of Control Offer made by us and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer. The Company shall comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Notes as a result of a Change of Control. To the extent that the provisions of any securities laws or regulations conflict with the provisions of this Section 4.11, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached our obligations under this Section 4.11 by virtue of its compliance with such securities laws or regulations. SECTION 4.12. Limitation on Indebtedness (a) The Company shall not, and shall not permit any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness; provided, however, that the Company shall be entitled to Incur Indebtedness if, on the date of such Incurrence and after giving effect thereto on a pro forma basis no Default has occurred and is continuing and, the Consolidated Coverage Ratio exceeds 2.0 to 1. (b) Notwithstanding the foregoing paragraph (a), the Company and the Restricted Subsidiaries shall be entitled to Incur any or all of the following Indebtedness: 56 (i) Indebtedness Incurred by the Company and any Foreign Restricted Subsidiary pursuant to any Credit Facilities or, provided, however, that, immediately after giving effect to any such Incurrence, the aggregate principal amount of all Indebtedness Incurred under this clause (b) and then outstanding does not exceed the greater of (A) $750 million less the sum of all principal payments with respect to such Indebtedness pursuant to Section 4.15(a)(iii)(1) and (B) the sum of (x) 60% of the book value of the inventory of the Company and its Restricted Subsidiaries and (y) 85% of the book value of the accounts receivable of the Company and its Restricted Subsidiaries, provided further, however, that in no event shall the aggregate principal amount of all Indebtedness Incurred under this clause (i) at any time outstanding exceed $1.2 billion; (ii) Indebtedness owed to and held by the Company or a Wholly Owned Subsidiary; provided, however, that (A) any subsequent issuance or transfer of any Capital Stock which results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of such Indebtedness (other than to the Company or a Wholly Owned Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Indebtedness by the obligor thereon and (B) if the Company is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all obligations with respect to the Notes; (iii) the Notes and the Exchange Notes (other than any Additional Notes) and any other Indebtedness of the Company or any Restricted Subsidiary outstanding on the Issue Date; (iv) Indebtedness Incurred or outstanding on or before the Separation Date (other than Indebtedness described in clause (i) or any other clause (other than clause (xvii)) of this Section 4.12(b)), to the extent it does not exceed (w) the amount of indebtedness that is Attributed to the U. S. Steel Group on its balance sheet as of March 31, 2001 less (x) the amount of any Indebtedness described in clause (iii) of this Section 4.12(b) or any Indebtedness described in clause (vi) or (vii) of this Section 4.12(b) that is Incurred by the Company pursuant to the Financial Matters Agreement less (y) $629 million plus (z) $40 million; (v) Indebtedness of a Restricted Subsidiary Incurred and outstanding on or prior to the date on which such Subsidiary was acquired by the Company (other than Indebtedness Incurred in connection with, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of related transactions pursuant to which such Subsidiary became a Subsidiary or was acquired by the Company); provided, however, that on the date of such acquisition and after giving pro forma effect thereto, the Company would have been able to Incur at least $1.00 of additional Indebtedness pursuant to Section 4.12(a); 57 (vi) Industrial Revenue Bond Obligations, so long as the aggregate principal amount of all Industrial Revenue Bond Obligations (inclusive of any in respect of which the Company becomes directly or indirectly liable pursuant to the Financial Matters Agreement) does not exceed $600 million; (vii) Indebtedness to Marathon Oil Corporation Incurred pursuant to the Financial Matters Agreement in respect of Capital Lease Obligations, in an aggregate principal amount not to exceed $92 million; (viii) Indebtedness to Marathon Oil Corporation Incurred pursuant to the Financial Matters Agreement in respect of Guarantees of USX Corporation, in an aggregate principal amount not to exceed $145 million; (ix) Refinancing Indebtedness in respect of Indebtedness Incurred pursuant to Section 4.12(a) or pursuant to clause (iii), (iv), (v) or (vii) of this Section 4.12(b) or this clause (ix); provided, however, that to the extent such Refinancing Indebtedness directly or indirectly Refinances Indebtedness of a Subsidiary Incurred pursuant to clause (v) of this Section 4.12(b), such Refinancing Indebtedness shall be Incurred only by such Subsidiary or by the Company; (x) Hedging Obligations directly related to Indebtedness permitted to be Incurred by the Company pursuant to the Indenture or to mitigate currency or business risk; (xi) obligations in respect of performance, bid and surety bonds and completion guarantees provided by the Company or any Restricted Subsidiary in the ordinary course of business; (xii) Indebtedness arising from overdraft conditions honored by a bank or other financial institution in the ordinary course of business; provided, however, that such Indebtedness is extinguished within two Business Days of its Incurrence; (xiii) Guarantees by the Company of obligations of any of its joint ventures in an aggregate amount not to exceed $100 million; (xiv) Subordinated Obligations not to exceed $200 million which (x) are convertible into equity securities of the Company, (y) have a Stated Maturity after the first anniversary of the Stated Maturity of any series of Notes then outstanding and (z) have an Average Life that is greater than the Average Life of any series of Notes then outstanding; (xv) Attributable Debt related to Sale/Leaseback Transactions in an amount not to exceed $150 million; (xvi) Purchase Money Indebtedness and Capital Lease Obligations Incurred to acquire property in the ordinary course of business in an aggregate amount 58 not to exceed $75 million in each of the first three years following the Issue Date and $50 million in each of the years thereafter; and (xvii) Indebtedness of the Company and its Restricted Subsidiaries in an aggregate principal amount which, when taken together with all other Indebtedness of the Company and its Restricted Subsidiaries outstanding on the date of such Incurrence (other than Indebtedness permitted by clauses (i) through (xvi) of this Section 4.12(b) above or Section 4.12(a)) does not exceed $150 million. (c) Notwithstanding the foregoing, the Company shall not incur any Indebtedness under Section 4.12(b) if the proceeds thereof are used, directly or indirectly, to Refinance any Subordinated Obligations of the Company unless such Indebtedness shall be subordinated to the Notes or the Guarantee to at least the same extent as such Subordinated Obligations. (d) For purposes of determining compliance with this Section 4.12, in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described above, the Company, in its sole discretion, (1) shall classify such item of Indebtedness at the time of Incurrence and will be entitled to either include the amount and type of such Indebtedness in only one of the above clauses or divide and classify such item of Indebtedness in more than one of the types of Indebtedness described above and (2) will be entitled from time to time to reclassify all or a portion of such item of Indebtedness classified in one of the clauses in Section 4.12(b) into another clause in Section 4.12(b) that it meets the criteria of. (e) For purposes of determining compliance with any U.S. dollar restriction on the Incurrence of Indebtedness where the Indebtedness Incurred is denominated in a different currency, the amount of such Indebtedness shall be the U.S. Dollar Equivalent determined on the date of the Incurrence of such Indebtedness, provided, however, that if any such Indebtedness denominated in a different currency is subject to a Currency Agreement with respect to U.S. dollars covering all principal, premium, if any, and interest payable on such Indebtedness, the amount of such Indebtedness expressed in U.S. dollars shall be as provided in such Currency Agreement. The principal amount of any Refinancing Indebtedness Incurred in the same currency as the Indebtedness being Refinanced shall be the U.S. Dollar Equivalent, as appropriate, of the Indebtedness Refinanced, except to the extent that (i) such U.S. Dollar Equivalent was determined based on a Currency Agreement, in which case the Refinancing Indebtedness shall be determined in accordance with the preceding sentence, and (ii) the principal amount of the Refinancing Indebtedness exceeds the principal amount of the Indebtedness being Refinanced, in which case the U.S. Dollar Equivalent of such excess shall be determined on the date such Refinancing Indebtedness is Incurred. SECTION 4.13. Limitation on Restricted Payments (a) The Company shall not, and shall not permit any Restricted Subsidiary, directly or indirectly, to make a Restricted Payment if at the time the Company or such Restricted Subsidiary makes such Restricted Payment: (1) a Default shall have occurred and be continuing (or would result therefrom); (2) the Company is not entitled to Incur an additional $1.00 of Indebtedness pursuant to Section 4.12(a); or (3) the aggregate amount of such Restricted 59 Payment and all other Restricted Payments since the Issue Date would exceed the sum of (without duplication): (A) 50% of the Consolidated Net Income accrued during the period (treated as one accounting period) from the beginning of the fiscal quarter immediately following the fiscal quarter during which the Issue Date occurs to the end of the most recent fiscal quarter for which financial results are publicly available prior to the date of such Restricted Payment (or, in case such Consolidated Net Income shall be a deficit, minus 100% of such deficit); plus (B) 100% of the aggregate Net Cash Proceeds received by the Company from the issuance or sale of its Capital Stock (other than Disqualified Stock) subsequent to the Issue Date (other than an issuance or sale to a Subsidiary of the Company and other than an issuance or sale to an employee stock ownership plan or to a trust established by the Company or any of its Subsidiaries for the benefit of their employees) and 100% of any cash capital contribution received by the Company from its shareholders subsequent to the Issue Date; plus (C) the amount by which Indebtedness of the Company (other than Subordinated Obligations) is reduced on the Company's balance sheet (or, prior to the Separation, on the balance sheet of the U.S. Steel Group) upon the conversion or exchange (other than by a Subsidiary of the Company) subsequent to the Issue Date of any Indebtedness of the Company convertible or exchangeable for Capital Stock (other than Disqualified Stock) of the Company (less the amount of any cash, or the fair value of any other property, distributed by the Company upon such conversion or exchange); plus (D) an amount equal to the sum of (i) the net reduction in the Investments (other than Permitted Investments) made by the Company or any Restricted Subsidiary in any Person resulting from repurchases, repayments or redemptions of such Investments by such Person, proceeds realized on the sale of such Investment and proceeds representing the return of capital (excluding dividends and distributions), in each case received by the Company or any Restricted Subsidiary, and (ii) to the extent such Person is an Unrestricted Subsidiary, the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of such Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted Subsidiary; provided, however, that the foregoing sum shall not exceed, in the case of any such Person or Unrestricted Subsidiary, the amount of Investments (excluding Permitted Investments) previously made (and treated as a Restricted Payment) by the Company or any Restricted Subsidiary in such Person or Unrestricted Subsidiary. (b) The preceding provisions shall not prohibit: 60 (i) any Restricted Payment made out of the Net Cash Proceeds of the substantially concurrent sale of, or made by exchange for, Capital Stock of the Company (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary of the Company or an employee stock ownership plan or to a trust established by the Company or any of its Subsidiaries for the benefit of their employees) or a substantially concurrent cash capital contribution received by the Company from its shareholders; provided, however, that (A) such Restricted Payment shall be excluded in the calculation of the amount of Restricted Payments and (B) the Net Cash Proceeds from such sale or such cash capital contribution (to the extent so used for such Restricted Payment) shall be excluded from the calculation of amounts under clause (3)(B) of paragraph (a) above; (ii) any purchase, repurchase, redemption, defeasance or other acquisition or retirement for value of Subordinated Obligations made by exchange for, or out of the proceeds of the substantially concurrent sale of, Indebtedness which is permitted to be Incurred under Section 4.12; provided, however, that such purchase, repurchase, redemption, defeasance or other acquisition or retirement for value shall be excluded in the calculation of the amount of Restricted Payments; (iii) dividends paid within 60 days after the date of declaration thereof if at such date of declaration such dividend would have complied with this Section 4.13(b); provided, however, that at the time of payment of such dividend, no other Default shall have occurred and be continuing (or result therefrom); provided further, however, that such dividend shall be included in the calculation of the amount of Restricted Payments; (iv) so long as no Default has occurred and is continuing, the repurchase or other acquisition of shares of Capital Stock of the Company or any of its Subsidiaries from employees, former employees, directors or former directors of the Company or any of its Subsidiaries (or permitted transferees of such employees, former employees, directors or former directors), pursuant to the terms of the agreements 61 (including employment agreements) or plans (or amendments thereto) approved by the Board of Directors under which such individuals purchase or sell or are granted the option to purchase or sell, shares of such Capital Stock; provided, however, that the aggregate amount of such repurchases and other acquisitions (other than any acquisition of shares of common stock of the Company that are used as payment for the exercise price of outstanding options) shall not exceed $5.0 million in any calendar year; provided further, however, that such repurchases and other acquisitions shall be excluded in the calculation of the amount of Restricted Payments; (v) prior to the Separation Date, dividends, distributions or other payments to USX Corporation to the extent such amounts, after such dividend, distribution or other payment, are still attributed to, or used to reduce Indebtedness attributed to, the U. S. Steel Group in accordance with the Management and Allocation Policies of USX Corporation; provided, however, that such dividends, distributions or other payments shall be excluded in the calculation of the amount of Restricted Payments; (vi) so long as no Default has occurred and is continuing, the declaration and payment of one or more dividends on Steel Stock or common stock of United States Steel Corporation with respect to the period ending on December 31, 2003 in an aggregate amount not to exceed $50.0 million; provided that such dividends shall be excluded in the calculation of the amount of Restricted Payments; or (vii) so long as no Default has occurred and is continuing, any Restricted Payment which, together with all other Restricted Payments made pursuant to this clause (vii) on or after the Issue Date, does not exceed $30 million; provided, however, that such Restricted Payments shall be included in the calculation of the amount of Restricted Payments. (c) For purposes of this Section 4.13, Capital Stock or Indebtedness (including Subordinated Obligations) of the Company shall be deemed to include Capital Stock or Indebtedness (including Subordinated Obligations) of any Person that is Attributed to the U. S. Steel Group (including Steel Stock, but excluding any Preferred Stock or Subordinated Obligations of other Persons outstanding as of the Issue Date) and proceeds of the issuance of 62 any such Capital Stock shall be deemed received by the Company to the extent they are Attributed to the U. S. Steel Group. SECTION 4.14. Limitation on Restrictions on Distributions from Restricted Subsidiaries The Company shall not, and shall not permit any Restricted Subsidiary to, create or otherwise cause or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to (i) pay dividends or make any other distributions on its Capital Stock to the Company or a Restricted Subsidiary or pay any Indebtedness owed to the Company, (ii) make any loans or advances to the Company or (iii) transfer any of its property or assets to the Company, except: (A) with respect to clause (i), (ii) and (iii): (1) any encumbrance or restriction pursuant to an agreement in effect at or entered into on the Issue Date; (2) any encumbrance or restriction with respect to a Restricted Subsidiary pursuant to an agreement relating to any Indebtedness Incurred by such Restricted Subsidiary on or prior to the date on which such Restricted Subsidiary was acquired by the Company (other than Indebtedness Incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of related transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was acquired by the Company) and outstanding on such date; (3) any encumbrance or restriction pursuant to an agreement effecting a Refinancing of Indebtedness Incurred pursuant to an agreement referred to in clause (1) or (2) of clause (A) of this Section 4.14 or this clause (3) or contained in any amendment to an agreement referred to in clause (1) or (2) of clause (A) of this Section 4.14 or this clause (3); provided, however, that the encumbrances and restrictions with respect to such Restricted Subsidiary contained in any such refinancing agreement or amendment are no less favorable to the Noteholders than encumbrances and restrictions with respect to such Restricted Subsidiary contained in such predecessor agreements; and (B) with respect to clause (iii) only: (1) any such encumbrance or restriction consisting of customary nonassignment provisions in leases governing leasehold interests to the extent such provisions restrict the transfer of the lease or the property leased thereunder; (2) restrictions contained in security agreements or mortgages securing Indebtedness of a Restricted Subsidiary to the extent such restrictions restrict the transfer of the property subject to such security agreements or mortgages; and (3) any restriction with respect to a Restricted Subsidiary imposed pursuant to an agreement entered into for the sale or disposition of all or substantially all the Capital Stock or assets of such Restricted Subsidiary pending the closing of such sale or disposition. SECTION 4.15. Limitation on Sales of Assets and Subsidiary Stock 63 (a) The Company shall not, and shall not permit any restricted Subsidiary to, directly or indirectly, sell, transfer or otherwise dispose of (collectively, a "disposition") any Capital Stock of any Person that owns, directly or indirectly, all or a significant portion of the Tubular Business, unless: (i) the Company or such Restricted Subsidiary receives consideration at the time of such disposition at least equal to the fair market value (including as to the value of all non-cash consideration), as determined in good faith by the Board of Directors, of the Capital Stock subject to such disposition; (ii) at least 75% of the consideration thereof received by the Company or such Restricted Subsidiary is in the form of cash or cash equivalents; and (iii) an amount equal to 75% of the Net Available Cash from such disposition is applied by the Company (or such Restricted Subsidiary, as the case may be) to make an offer to the holders of the Notes to purchase Notes pursuant to and subject to the conditions contained in the Indenture within 30 days from the later of the date of such disposition or the receipt of such Net Available Cash; provided, however, that the Company or such Restricted Subsidiary shall permanently retire such Notes. Pending application of Net Available Cash pursuant to this paragraph (a), such Net Available Cash shall be invested in Temporary Cash Investments or applied to temporarily reduce indebtedness under Credit Facilities. (b) The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, consummate any other Asset Disposition unless: (i) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Disposition at least equal to the fair market value (including as to the value of all non cash consideration), as determined in good faith by the Board of Directors of the Issuer of the shares and assets subject to such Asset Disposition and (ii) with respect to Asset Dispositions other than Like-Kind Exchanges or Excluded Real Property Sales, at least 75% of the consideration thereof received by the Company or such Restricted Subsidiary is in the form of cash or cash equivalents; and 64 (iii) an amount equal to 100% of the Net Available Cash from such Asset Disposition is applied by the Company (or such Restricted Subsidiary, as the case may be): (1) first, to the extent the Company elects (or is required by the terms of any Indebtedness), to prepay, repay, redeem or purchase Senior Indebtedness of the Company or Indebtedness (other than any Disqualified Stock) of a Wholly Owned Subsidiary (in each case other than Indebtedness owed to the Company or an Affiliate of the Company) within one year from the later of the date of such Asset Disposition or the receipt of such Net Available Cash; (2) second, to the extent of the balance of such Net Available Cash after application in accordance with clause (1), to the extent the Company elects, to acquire Additional Assets within one year from the later of the date of such Asset Disposition or the receipt of such Net Available Cash; and (3) third, to the extent of the balance of such Net Available Cash after application in accordance with clauses (1) and (2), to make an offer to the holders of the Notes (and to holders of other Senior Indebtedness of the Company designated by the Company to purchase Notes (and such other Senior Indebtedness of the Company) pursuant to and subject to the conditions contained in the Indenture; provided, however, that in connection with any prepayment, repayment or purchase of Indebtedness pursuant to clause (1) or (3) above, the Company or such Restricted Subsidiary shall permanently retire such Indebtedness and shall cause the related loan commitment (if any) to be permanently reduced in an amount equal to the principal amount so prepaid, repaid or purchased. Notwithstanding the foregoing provisions of Section 4.15(b), the Company and the Restricted Subsidiaries shall not be required to apply any Net Available Cash in accordance with Section 4.15(b) except to the extent that the aggregate Net Available Cash from all Asset Dispositions which are not applied in accordance with Section 4.15(b) exceeds $25 million. Pending application of Net Available Cash pursuant to Section 4.15(b), such Net Available Cash shall be invested in Temporary Cash Investments or applied to temporarily reduce indebtedness under Credit Facilities. (c) For the purposes of Sections 4.15(a) and (b), the following are deemed to be cash or cash equivalents: (A) the assumption of Senior Indebtedness of the Company, or Indebtedness of any Restricted Subsidiary, and the release of the Company or such Restricted Subsidiary from all liability on such Indebtedness in connection with such Asset Disposition; (B) securities received by the Company or any Restricted Subsidiary from the transferee that are promptly converted by the Company or such Restricted Subsidiary into cash; and (C) any 65 reduction of Indebtedness Attributed to the U. S. Steel Group in connection with such Asset Disposition. (d) In the event of an Asset Disposition that requires the purchase of Notes (and other Senior Indebtedness) pursuant to Section (a)(iii) or (b) (iii)(3) above, the Company shall purchase Notes tendered pursuant to an offer by the Company for the Notes (and such other Senior Indebtedness) at a purchase price of 100% of their principal amount (or, in the event such other Senior Indebtedness was issued with significant original issue discount, 100% of the accreted value thereof), without premium, plus accrued but unpaid interest (or, in respect of such other Senior Indebtedness, such lesser price, if any, as may be provided for by the terms of such Senior Indebtedness) in accordance with the procedures (including prorating in the event of oversubscription) set forth in the Indenture. If the aggregate purchase price of the securities tendered exceeds the Net Available Cash allotted to their purchase, the Company shall select the securities to be purchased on a pro rata basis but in round denominations, which in the case of the Notes will be denominations of $1,000 principal amount or multiples thereof. The Company shall not be required to make such an offer to purchase Notes (and other Senior Indebtedness) pursuant to Section 4.15(b) if the Net Available Cash available therefor is less than $25 million (which lesser amount shall be carried forward for purposes of determining whether such an offer is required with respect to the Net Available Cash from any subsequent Asset Disposition). (e) The Company shall comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Notes pursuant to this Section 4.15. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Section 4.15, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this clause by virtue of its compliance with such securities laws or regulations. SECTION 4.16. Limitation on Affiliate Transactions (a) The Company shall not, and shall not permit any Restricted Subsidiary to, enter into, permit to exist, renew or extend any transaction (including the purchase, sale, lease or exchange of any property, employee compensation arrangements or the rendering of any service) with, or for the benefit of, any Affiliate of the Company (an "Affiliate Transaction") unless: (i) the terms of the Affiliate Transaction are no less favorable to the Company or such Restricted Subsidiary than those that could be obtained at the time of the Affiliate Transaction in arm's- length dealings with a Person who is not an Affiliate; (ii) if such Affiliate Transaction involves an amount in excess of $10 million, the terms of the Affiliate Transaction are set forth in writing and a majority of the non-employee Directors of the Company disinterested with respect to such Affiliate Transactions have determined in good faith that the criteria set forth in clause (i) are satisfied and have 66 approved the relevant Affiliate Transaction as evidenced by a Board resolution; and (iii) if such Affiliate Transaction involves an amount in excess of $25 million, the Board of Directors shall also have received a written opinion from an Independent Qualified Party to the effect that such Affiliate Transaction is fair, from a financial standpoint, to the Company and its Restricted Subsidiaries or not less favorable to the Company and its Restricted Subsidiaries than could reasonably be expected to be obtained at the time in an arm's-length transaction with a Person who was not an Affiliate. (b) The provisions of the preceding paragraph (a) shall not prohibit: (i) any Investment (other than a Permitted Investment) or other Restricted Payment, in each case permitted to be made under Section 4.13; (ii) any issuance of securities, or other payments, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment arrangements, stock options and stock ownership plans approved by the Board of Directors; (iii) loans or advances to employees in the ordinary course of business in accordance with the past practices of the Company or its Restricted Subsidiaries, but in any event not to exceed $5.0 million in the aggregate outstanding at any one time; (iv) the payment of reasonable fees to Directors of the Company and its Restricted Subsidiaries who are not employees of the Company or its Restricted Subsidiaries; (v) any transaction with a Restricted Subsidiary or joint venture or similar entity which would constitute an Affiliate Transaction solely because the Company or a Restricted Subsidiary owns an equity interest in or otherwise controls such Restricted Subsidiary, joint venture or similar entity; (vi) the issuance or sale of any Capital Stock (other than Disqualified Stock) of the Company; 67 (vii) any transaction in connection with Separation, as described in the Offering Circular; and (viii) any transaction pursuant to any contract or agreement in effect on the Issue Date, in each case as amended, modified or replaced from time to time so long as the amended, modified or new agreement, taken as a whole, is no less favorable to the Company and its Restricted Subsidiaries than that in effect on the Issue Date. SECTION 4.17. Limitation on the Sale or Issuance of Capital Stock of Restricted Subsidiaries The Company (i) shall not, and shall not permit any Restricted Subsidiary to, sell, transfer or otherwise dispose of any Capital Stock of any other Restricted Subsidiary to any Person (other than the Company or a Wholly Owned Subsidiary); and (ii) shall not permit any Restricted Subsidiary to issue any of its Capital Stock (other than, if necessary, shares of its Capital Stock constituting directors' or other legally required qualifying shares) to any Person (other than to the Company or a Wholly Owned Subsidiary); unless (a) Company complies with Section 4.15 with respect to any such sale, transfer or other disposition; and (b) immediately after giving effect to such issuance, sale, transfer or other disposition, (x) such Restricted Subsidiary remains a Restricted Subsidiary or (y) such Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any Investment in such Person remaining after giving effect thereto is treated as a new Investment by the Company and such Investment would be permitted to be made under Section 4.13 if made on the date of such issuance, sale, transfer or other disposition. SECTION 4.18. Limitation on Liens The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any Lien (the "Initial Lien") of any nature whatsoever on any of its properties (including Capital Stock of a Restricted Subsidiary), whether owned at the Issue Date or thereafter acquired, securing any Indebtedness, other than Permitted Liens, without effectively providing that the Notes shall be secured equally and ratably with (or prior to) the obligations so secured for so long as such obligations are so secured. Any Lien created for the benefit of the Holders of the Notes pursuant to the preceding sentence shall provide by its terms that such Lien shall be automatically and unconditionally released and discharged upon the release and discharge of the Initial Lien. SECTION 4.19. Limitation on Sale/Leaseback Transactions The Company shall not, and shall not permit any Restricted Subsidiary to, enter into, Guarantee or otherwise become liable with respect to any Sale/Leaseback Transaction with respect to any property unless: (i) the Company or such Restricted Subsidiary would be entitled to (A) Incur Indebtedness in an amount equal to the Attributable Debt with respect to such Sale/Leaseback Transaction under Section 4.12 and (B) create a Lien on such property securing such Attributable Debt without equally and ratably securing the Notes under Section 4.18; 68 (ii) the net proceeds received by the Company or any Restricted Subsidiary in connection with such Sale/Leaseback Transaction are at least equal to the fair value (as determined by the Board of Directors) of such property; and (iii) the Company applies the proceeds of such transaction to the extent required by Section 4.15. SECTION 4.20. Certain Covenants of USS Financing USS Financing shall not (a) own any assets other than nominal equity capital, (b) incur any Indebtedness other than the Notes, (c) engage in any business other than the co-issuance of the Notes or (d) consolidate with or merge into any Person other than United States Steel Corporation. SECTION 4.21. Further Instruments and Acts Upon reasonable request of the Trustee, the Issuers shall execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of this Indenture. ARTICLE V SUCCESSOR COMPANY AND SUCCESSOR GUARANTOR SECTION 5.1. When Company May Merge or Transfer Assets The Company shall not consolidate with or merge with or into, or convey, transfer or lease, in one transaction or a series of transactions, directly or indirectly, all or substantially all its assets to, any Person, unless: (i) the resulting, surviving or transferee Person (the "Successor Company") shall be a Person organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and the Successor Company (if not the Company) will expressly assume, by supplemental indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the Notes or the Guarantee thereof, as the case may be, and this Indenture; (ii) immediately after giving pro forma effect to such transaction (and treating any Indebtedness which becomes an obligation of the Successor Company or any Subsidiary as a result of such transaction as having been Incurred by the Successor Company or such Subsidiary at the time of such transaction), no Default or Event of Default shall have occurred and be continuing; (iii) immediately after giving pro forma effect to such transaction, the Successor Company would be able to Incur an additional $1.00 of Indebtedness under Section 4.12(a); (iv) immediately after giving pro forma effect to such transaction, the Successor Company shall have Consolidated Net Worth in an amount that 69 is not less than the Consolidated Net Worth of the Company immediately prior to such transaction; (v) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indenture (if any) comply with the Indenture; and (vi) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders will not recognize income, gain or loss for Federal income tax purposes as a result of such transaction and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such transaction had not occurred; provided, however, that clauses (iii) and (iv) will not be applicable to (A) a Restricted Subsidiary consolidating with, merging into or transferring all or part of its properties and assets to the Company or (B) the Company merging with an Affiliate of the Company solely for the purpose and with the sole effect of reincorporating the Company in another jurisdiction. The Successor Company shall be the successor to the Company and shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture, and the Company, except in the case of a lease, shall be released from the obligation to pay the principal of and interest on the Notes. SECTION 5.2. When Guarantor May Merge or Transfer Assets So long as the Guarantee in Article X is in effect, the Guarantor shall not consolidate with or merge with or into, or convey, transfer or lease, in one transaction or a series of transactions, directly or indirectly, all or substantially all its assets to, any Person, unless: (i) the resulting, surviving or transferee Person (the "Successor Guarantor") shall be a Person organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and the Successor Guarantor (if not the Guarantor) shall expressly assume, by an indenture supplemental thereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Guarantor under the Notes and the Indenture; (ii) immediately after such transaction, no Default shall have occurred and be continuing; (iii) immediately after giving pro forma effect to such transaction, the Successor Guarantor shall have Consolidated Net Worth in an amount that is not less than the Consolidated Net Worth of the Guarantor immediately prior to such transaction; (iv) the Guarantor shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or 70 transfer and such supplemental indenture (if any) comply with the Indentures; and (v) the Guarantor shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders will not recognize income, gain or loss for Federal income tax purposes as a result of such transaction and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such transaction had not occurred; provided, however, that clause (iii) will not be applicable to (A) a Restricted Subsidiary consolidating with, merging into or transferring all or part of its properties and assets to the Guarantor or (B) the Guarantor merging with an Affiliate of the Guarantor solely for the purpose and with the sole effect of reincorporating the Guarantor in another jurisdiction. The Successor Guarantor will be the successor to the Guarantor and shall succeed to, and be substituted for, and may exercise every right and power of, the Guarantor under the Indenture, and the predecessor Guarantor, except in the case of a lease, shall be released from its obligations under the Guarantee of the Notes. ARTICLE VI DEFAULTS AND REMEDIES SECTION 6.1. Events of Default An "Event of Default" occurs if: (i) the Company defaults in any payment of interest on any Note when the same becomes due and payable, and such default continues for a period of 30 days; (ii) the Company defaults in the payment of the principal of any Note when the same becomes due and payable at its Stated Maturity, upon optional redemption, upon required repurchase, upon declaration or otherwise; (iii) the Company fails to comply with its obligations under Article V; (iv) the Company fails to comply with Section 4.4, any of Sections 4.9 through 4.19 (other than a failure to repurchase Notes when required pursuant to Section 4.11 or 4.15, which failure shall constitute an Event of Default under Section 6.1(ii)) and such failure continues for 30 days after the notice specified below; (v) the Company or the Guarantor fails to comply with any of its agreements in the Notes, the Guarantee or this Indenture (other than those referred to in (i), (ii), (iii) or (iv) above) and such failure continues for 60 days after the notice specified below; 71 (vi) the Company or any Significant Subsidiary of the Company fails to pay any Indebtedness within any applicable grace period provided in such Indebtedness after final maturity or the acceleration of any such Indebtedness by the holders thereof because of a default if the total amount of such Indebtedness unpaid or accelerated exceeds $50 million or its foreign currency equivalent at the time; (vii) the Company, the Guarantor or a Significant Subsidiary of the Company pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case; (B) consents to the entry of an order for relief against it in an involuntary case in which it is the debtor; (C) consents to the appointment of a Custodian of it or for any substantial part of its property; or (D) makes a general assignment for the benefit of its creditors; or takes any comparable action under any foreign laws relating to insolvency; (viii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company, the Guarantor or any Significant Subsidiary of the Company in an involuntary case; (B) appoints a Custodian of the Company, the Guarantor or any Significant Subsidiary or for any substantial part of its property of the Company, the Guarantor or any Significant Subsidiary; or (C) orders the winding up or liquidation of the Company, the Guarantor or any Significant Subsidiary of the Company; (or any similar relief is granted under any foreign laws) and the order, decree or relief remains unstayed and in effect for 90 days; (ix) any judgment or decree for the payment of money in excess of $50 million is rendered against the Company or any Significant Subsidiary of the Company, remains outstanding for a period of 60 days following such judgment and is not discharged, waived or stayed within 10 days after notice; or (x) prior to the Separation, the Guarantee with respect to the Notes shall cease for any reason to be in full force and effect (other than in accordance with its terms) or the Guarantor (or its successors or assigns) or any Person acting on behalf of the Guarantor (or its successors or assigns) shall deny or disaffirm its obligations under the Guarantee. 72 The foregoing will constitute Events of Default whatever the reason for any such Event of Default and whether it is voluntary or involuntary or is effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body. The term "Bankruptcy Law" means Title 11, United States Code, or any similar Federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law. A Default under clause (iv) and (v) of this Section 6.1 is not an Event of Default until the Trustee by notice to the Issuers or the Holders of at least 25% in aggregate principal amount of the outstanding Notes by notice to the Company give notice of the Default and the Company does not cure such Default within the time specified in said clause (iv) and (v) after receipt of such notice. Such notice must specify the Default, demand that it be remedied and state that such notice is a "Notice of Default". The Issuers shall deliver to the Trustee, within 30 days after its knowledge of the occurrence thereof, written notice in the form of an Officers' Certificate of any Event of Default under clause (vi) or (x) of this Section 6.1 and any event which with the giving of notice or the lapse of time would become an Event of Default under clause (iv), (v) or (ix) of this Section 6.1 and what action the Issuers is taking or proposes to take with respect thereto. SECTION 6.2. Acceleration If an Event of Default (other than an Event of Default specified in Section 6.1(vii) or (viii) with respect to the Issuers) occurs and is continuing, the Trustee by notice to the Issuers, or the Holders of at least 25% in aggregate principal amount at maturity of the outstanding Notes by notice to the Issuers, may declare the principal of and accrued but unpaid interest on all the Notes to be due and payable. Upon such a declaration, such principal and interest shall be due and payable immediately. If an Event of Default specified in Section 6.1(vii) or (viii) with respect to the Issuers occurs and is continuing, the principal of and accrued interest on all the Notes shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holders. The Holders of a majority in aggregate principal amount at maturity of the outstanding Notes by notice to the Trustee may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of acceleration and the Trustee has been paid all amounts then due to it pursuant to Section 7.7. No such rescission shall affect any subsequent Default or impair any right consequent thereto. SECTION 6.3. Other Remedies If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal of or interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Noteholder in exercising any right or remedy accruing upon an Event of Default shall not 73 impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are, to the extent permitted by law, cumulative. SECTION 6.4. Waiver of Past Defaults The Holders of a majority in aggregate principal amount at maturity of the Notes then outstanding by notice to the Trustee may waive any past or existing Default and its consequences except (i) a Default in the payment of the principal of or interest on a Note or (ii) a Default in respect of a provision that under Section 9.2 cannot be amended without the consent of each Noteholder affected. When a Default is waived, it is deemed cured, and any Event of Default arising therefrom shall be deemed to have been cured, but no such waiver shall extend to any subsequent or other Default or impair any consequent right. SECTION 6.5. Control by Majority Upon provision of reasonable indemnity to the Trustee satisfactory to the Trustee, the Holders of a majority in aggregate principal amount of the Notes then outstanding may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. However, the Trustee, which may conclusively rely on opinions of counsel, may refuse to follow any direction that conflicts with law or this Indenture or, subject to Section 7.1, that the Trustee determines is unduly prejudicial to the rights of other Noteholders or would involve the Trustee in personal liability; provided, however, that the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction. SECTION 6.6. Limitation on Suits A Holder may not pursue any remedy with respect to this Indenture or the Notes unless: (i) the Holder gives to the Trustee previous written notice stating that an Event of Default is continuing; (ii) the Holders of at least 25% in aggregate principal amount at maturity of the Notes then outstanding make a written request to the Trustee to pursue the remedy; (iii) such Holder or Holders offer to the Trustee reasonable security or indemnity satisfactory to it against any loss, liability or expense; (iv) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of security or indemnity; and (v) the Holders of a majority in aggregate principal amount of the Notes then outstanding do not give the Trustee a direction inconsistent with such request within such 60-day period. A Noteholder may not use this Indenture to prejudice the rights of another Noteholder or to obtain a preference or priority over another Noteholder. 74 SECTION 6.7. Rights of Holders to Receive Payment Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of the principal of and interest on the Notes held by such Holder, on or after the respective due dates expressed in the Notes, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 6.8. Collection Suit by Trustee If an Event of Default specified in Section 6.1(i) or (ii) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against any Issuer or the Guarantor for the whole amount then due and owing (together with interest on any unpaid interest to the extent lawful) and the amounts provided for in Section 7.7. SECTION 6.9. Trustee May File Proofs of Claim The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Noteholders allowed in any judicial proceedings relative to any Issuer, the Guarantor, its creditors or its property and shall be entitled and empowered to collect, receive and distribute any money or other securities or property payable or deliverable on any such claims and to distribute the same, and any Custodian in any such judicial proceeding is hereby authorized by each Holder to make payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and its counsel, and any other amounts then due the Trustee under Section 7.7. SECTION 6.10. Priorities If the Trustee collects any money or property pursuant to this Article VI, it shall pay out the money or property in the following order: FIRST: to the Trustee for amounts then due under Section 7.7; SECOND: to Noteholders for amounts due and unpaid on the Notes for the principal, premium, if any, and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for the principal and interest, respectively; and THIRD: to the Issuers or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Noteholders pursuant to this Section 6.10. At least 15 days before such record date, the Issuers shall mail to each Noteholder and the Trustee a notice that states the record date, the payment date and amount to be paid. SECTION 6.11. Undertaking for Costs 75 In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee or a suit by a Holder pursuant to Section 6.7. SECTION 6.12. Waiver of Stay or Extension Laws The Issuers (to the extent it may lawfully do so) shall not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Issuers (to the extent that it may lawfully do so) hereby expressly waive all benefit or advantage of any such law, and shall not hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE VII TRUSTEE SECTION 7.1. Duties of Trustee (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent Person would exercise or use under the circumstances in the conduct of such Person's own affairs. (b) Except during the continuance of an Event of Default: (i) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and the TIA and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own wilful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section 7.1; 76 (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.5. (d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section 7.1. (e) Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. (f) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds to believe that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (g) Every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section 7.1 and to the provisions of the TIA. SECTION 7.2. Rights of Trustee (a) The Trustee may conclusively rely upon, and shall be fully protected from acting or refraining from acting, on any document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may request an Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on the Officers' Certificate or Opinion of Counsel. (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers; provided, however, that the Trustee's conduct does not constitute wilful misconduct or negligence. (e) The Trustee may consult with counsel of its selection, and the advice or opinion of counsel with respect to legal matters relating to this Indenture and the Notes shall be full and complete authorization and protection from liability in respect to any action taken, omitted or suffered by it hereunder in good faith and in accordance with the advice or opinion of such counsel. 77 (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity satisfactory to the Trustee against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction. (g) The Trustee shall not be charged with knowledge of any Default or Event of Default with respect to the Notes unless either (1) a Trust Officer shall have actual knowledge of such Default or Event of Default or (2) written notice of such Default or Event of Default making reference to this Indenture and to the Notes shall have been given to the Trustee by the Issuer or by any Holder of the Notes. (h) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney at the sole cost of the Company and shall incur no liability or additional liability of any kind by reason of such inquiry or investigation. (i) The Trustee may require any Paying Agent(s) to pay to it all sums held by such Agent upon the occurrences of an Event of Default. SECTION 7.3. Individual Rights of Trustee The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Issuers or their respective Affiliates with the same rights it would have if it were not Trustee. Any Paying Agent, Registrar, co-registrar or co-paying agent may do the same with like rights. However, the Trustee must comply with Sections 7.10 and 7.11. SECTION 7.4. Money Held in Trust Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company. SECTION 7.5. Trustee's Disclaimer The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Notes. It shall not be accountable for the Issuers' use of the proceeds from the Notes, and it shall not be responsible for any statement of the Issuers in this Indenture or in any document issued in connection with the sale of the Notes or in the Notes other than the Trustee's certificate of authentication. SECTION 7.6. Notice of Defaults 78 If a Default or an Event of Default occurs and is continuing and if it is known to the Trustee, the Trustee must mail to each Noteholder notice of the Default within 90 days after it occurs. Except in the case of a Default in payment of principal of, premium (if any) or interest on any Note, the Trustee may withhold notice if and so long as a committee of its Trust Officers in good faith determines that withholding notice is not opposed to the interests of Noteholders. SECTION 7.7. Reports by Trustee to Holders As promptly as practicable after each May 15 beginning with May 15 following the date of this Indenture, the Trustee shall mail to each Noteholder a brief report dated as of such May 15 that complies with TIA Section 313(a). The Trustee also shall comply with TIA Section 313(b). The Trustee shall promptly deliver to the Issuer a copy of any report it delivers to Holders pursuant to this Section 7.6. A copy of each report at the time of its mailing to Noteholders shall be filed by the Trustee with the SEC and each stock exchange (if any) on which the Notes are listed. The Issuers agree to notify promptly the Trustee whenever the Notes become listed on any stock exchange and of any delisting thereof. SECTION 7.8. Compensation and Indemnity The Issuers shall pay to the Trustee from time to time such compensation for its services as the Issuers and the Trustee shall from time to time agree in writing. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Issuers shall reimburse the Trustee upon request for all reasonable and documented fees and expenses, including out-of-pocket expenses, incurred or made by it in connection with the performance of its duties hereunder, including costs of collection, in addition to such compensation for its services, except any such expense, disbursement or advance as may arise from its negligence, wilful misconduct or bad faith, unless the Trustee shall have complied with the applicable standard of care required by the TIA. Such expenses shall include the reasonable compensation and documented out-of-pocket expenses, disbursements and advances of the Trustee's agents, counsel, accountants and experts. The Trustee shall provide the Issuers reasonable notice of any expenditure not in the ordinary course of business; provided that prior approval by the Issuers of any such expenditure shall not be a requirement for the making of such expenditure nor for reimbursement by the Issuers thereof. The Issuers shall jointly and severally indemnify each of the Trustee and any predecessor Trustees against any and all loss, damage, claim, liability or expense and tax (including reasonable and documented attorneys' fees and out-of-pocket expenses) (other than taxes applicable to the Trustee's compensation hereunder) incurred by it in connection with the acceptance or administration of this trust and the performance of its duties hereunder. The Trustee shall notify the Issuers promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Issuers shall not relieve the Issuers of their obligations hereunder. The Issuers shall defend the claim and the Trustee may have separate counsel, and the Issuers will pay the reasonable fees and expenses of such counsel. The Issuers need not reimburse any expense or indemnify against any loss, liability or expense incurred by the Trustee through the Trustee's own wilful misconduct, negligence or bad faith, unless the Trustee shall have complied with the applicable standard of care required by the TIA. 79 To secure the Issuers' payment obligations in this Section 7.7, the Trustee shall have a lien prior to the Notes on all money or property held or collected by the Trustee other than money or property held in trust to pay principal of and interest on particular Notes. When the Trustee incurs expenses after the occurrence of a Default specified in Section 6.1(vii) or (viii) with respect to the Issuers, the expenses are intended to constitute expenses of administration under the Bankruptcy Law, provided, however, that this shall not affect the Trustee's rights as set forth in the preceding paragraph or Section 6.10. The terms of this Section 7.8 shall survive the termination of this Indenture and the removal or resignation of the Trustee. SECTION 7.9. Replacement of Trustee The Trustee may resign at any time with 30 days notice to the Issuers. The Holders of a majority in principal amount of the Notes then outstanding, may remove the Trustee with 30 days notice to the Trustee and the Issuers and may appoint a successor Trustee. So long as no Default or Event of Default shall have occurred and been outstanding within the previous 12 month period, the Issuers may remove the Trustee at any time by appointing a successor Trustee that complies with Section 7.10. If the Trustee resigns, is removed by the Issuers or by the Holders of a majority in principal amount of the Notes and such Holders do not reasonably promptly appoint a successor Trustee, or if a vacancy exists in the office of Trustee for any reason (the Trustee in such event being referred to herein as the retiring Trustee), the Issuers shall promptly appoint a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Issuers. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Noteholders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 7.7. If a successor Trustee does not take office and deliver the written notice contemplated by this Section 7.9 within 30 days after the retiring Trustee resigns or is removed, the retiring Trustee or the Holders of 10% in principal amount of the Notes may, at the expense of the Issuers petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10, any Noteholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. SECTION 7.10. Successor Trustee by Merger If the Trustee consolidates with, merges or converts into, or transfers all or substantially all its corporate trust business or assets to, another corporation or banking association, the resulting, surviving or transferee corporation without any further act shall be the 80 successor Trustee, provided that such corporation shall be eligible under this Article VII and TIA Section 3.10(a). In case at the time such successor or successors by merger, conversion or consolidation to the Trustee shall succeed to the trusts created by this Indenture any of the Notes shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Notes so authenticated; and in case at that time any of the Notes shall not have been authenticated, any successor to the Trustee may authenticate such Notes either in the name of any predecessor hereunder or in the name of the successor to the Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Notes or in this Indenture provided that the certificate of the Trustee shall have. SECTION 7.11. Eligibility; Disqualification The Trustee shall at all times satisfy the requirements of TIA Section 310(a). The Trustee shall have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA Section 310(b); provided, however, that there shall be excluded from the operation of TIA Section 310(b)(1) any indenture or indentures under which other securities or certificates of interest or participation in other securities of the Issuers are outstanding if the requirements for such exclusion set forth in TIA Section 310(b)(1) are met. SECTION 7.12. Preferential Collection of Claims Against Issuers The Trustee shall comply with TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated. ARTICLE VIII DISCHARGE OF INDENTURE; DEFEASANCE SECTION 8.1. Discharge of Liability on Notes; Defeasance (a) When (i) the Issuers deliver to the Trustee all outstanding Notes (other than Notes replaced pursuant to Section 2.7) for cancellation or (ii) all outstanding Notes have become due and payable, whether at maturity or as a result of the mailing of a notice of redemption pursuant to Article III hereof or the Notes will become due and payable at their Stated Maturity within 91 days, or the Notes are to be called for redemption within 91 days under arrangements satisfying the terms of this Indenture, and, in each case of this clause (ii), the Issuers irrevocably deposit or cause to be deposited with the Trustee funds sufficient to pay at maturity or upon redemption all outstanding Notes, including interest thereon to maturity or such redemption date (other than Notes replaced pursuant to Section 2.7), and if in either case the Issuers pay all other sums payable hereunder by the Issuers, then this Indenture shall, subject to Section 8.1(c), cease to be of further effect. The Trustee shall acknowledge satisfaction and discharge of this Indenture on demand of the Issuers accompanied by an Officers' Certificate and an Opinion of Counsel from the Issuers that all conditions precedent provided herein for relating 81 to satisfaction and discharge of this Indenture have been complied with and at the cost and expense of the Issuers. (b) Subject to Sections 8.1(c) and 8.2, the Issuers at any time may terminate (i) all of their obligations (and the obligations of the Guarantor in respect of the Guarantee with respect to the Notes) under the Notes and this Indenture ("legal defeasance option") or (ii) their obligations under Sections 4.2 through 4.19 and the operation of Sections 5.1(iii), 6.1(vi), 6.1(vii) (but only with respect to a Significant Subsidiary), 6.1(viii) (but only with respect to a Significant Subsidiary) and 6.1(ix) ("covenant defeasance option"). The Issuers may exercise their legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If the Issuers exercise their legal defeasance option, payment of the Notes may not be accelerated because of an Event of Default. If the Issuers exercise its covenant defeasance option, payment of the Notes may not be accelerated because of an Event of Default specified in Section 6.1(iv), 6.1(vi), 6.1(vii) (but only with respect to a Significant Subsidiary), 6.1(viii) (but only with respect to a Significant Subsidiary), 6.1(ix) or because of the failure of the Issuers to comply with Section 5.1(iii). Upon satisfaction of the conditions set forth herein and upon request of the Issuers, the Trustee shall acknowledge in writing the discharge of those obligations that the Issuers terminate. (c) Notwithstanding clauses (a) and (b) above, the Issuers' obligations in Sections 2.3, 2.4, 2.5, 2.7, 4.1, Sections 4.2 through 4.19, 7.7, 7.8, 8.4, 8.5 and 8.6 (and the obligations of the Guarantor in respect of the Guarantee with respect to the Notes) shall survive until the Notes have been paid in full. Thereafter, the Issuers' obligations in Sections 7.7, 8.4 and 8.5 shall survive. SECTION 8.2. Conditions to Defeasance The Issuers may exercise the legal defeasance option or the covenant defeasance option only if: (i) the Issuers irrevocably deposit or cause to be deposited in trust with the Trustee money or U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide cash at such times and in such amounts as will be sufficient to pay principal and interest when due on all outstanding Notes (except Notes replaced pursuant to Section 2.7) to maturity or redemption, as the case may be; (ii) the Issuers deliver to the Trustee a certificate from a nationally recognized firm of independent accountants expressing their opinion that the payments of principal and interest when due and without reinvestment on the deposited U.S. Government Obligations plus any deposited money without investment will provide cash at such times and in such amounts as will be sufficient to pay principal and interest when due on all outstanding Notes (except Notes replaced pursuant to Section 2.7) to maturity or redemption, as the case may be; 82 (iii) 123 days pass after the deposit is made and during the 123-day period no Default specified in Section 6.1(7) or (8) with respect to the Issuers occurs which is continuing at the end of the period; (iv) the deposit does not constitute a default under any other material agreement binding on the Issuers; (v) the Issuers deliver to the Trustee an Opinion of Counsel to the effect that the trust resulting from the deposit does not constitute, or is qualified as, a regulated investment company under the Investment Company Act of 1940; (vi) in the case of the legal defeasance option, the Issuers shall have delivered to the Trustee an Opinion of Counsel stating that (i) the Issuers have received from, or there has been published by, the Internal Revenue Service a ruling, or (ii) since the date of this Indenture there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Noteholders will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred; (vii) in the case of the covenant defeasance option, the Issuers shall have delivered to the Trustee an Opinion of Counsel to the effect that the Noteholders will not recognize income, gain or loss for federal income tax purposes as a result of such covenant defeasance and will be subject to federal income tax on the same amounts and in the same manner and at the same times as would have been the case if such deposit and covenant defeasance had not occurred; and (viii) the Issuers deliver to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent to the defeasance and discharge of the Notes as contemplated by this Article VIII have been complied with. Before or after a deposit, the Issuers may make arrangements satisfactory to the Trustee for the redemption of Notes at a future date in accordance with Article III. SECTION 8.3. Application of Trust Money The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to this Article VIII. It shall apply the deposited money and the money from U.S. Government Obligations either directly or through the Paying Agent as the Trustee may determine and in accordance with this Indenture to the payment of principal of and interest on the Notes. 83 SECTION 8.4. Repayment to Issuers The Trustee and the Paying Agent shall promptly turn over to the Issuers upon request any excess money or securities held by them at any time. Subject to any applicable abandoned property law, the Trustee and the Paying Agent shall pay to the Issuers upon written request any money held by them for the payment of principal or interest that remains unclaimed for one year after such principal and interest have become due and payable, and, thereafter, Noteholders entitled to the money must look to the Issuers for payment as general creditors. SECTION 8.5. Indemnity for Government Obligations The Issuers and the Guarantor shall pay and shall indemnify the Trustee against any tax, fee or other charge imposed on or assessed against deposited U.S. Government Obligations or the principal and interest received on such U.S. Government Obligations other than any such tax, fee or other charge which by law is for the account of the Holders of the defeased Notes; provided that the Trustee shall be entitled to charge any such tax, fee or other charge to such Holder's account. SECTION 8.6. Reinstatement If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with this Article VIII by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Issuers' and the Guarantor's obligations under this Indenture, the Notes and the Guarantee with respect to the Notes shall be revived and reinstated as though no deposit had occurred pursuant to this Article VIII until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with this Article VIII; provided, however, that, (a) if the Issuers or the Guarantor have made any payment of interest on or principal of any Notes following the reinstatement of their obligations, the Issuers or the Guarantor shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent and (b) unless otherwise required by any legal proceeding or any order or judgment of any court or governmental authority, the Trustee or Paying Agent shall return all such money and U.S. Government Obligations to the Issuers or the Guarantor promptly after receiving a written request therefor at any time, if such reinstatement of the Issuers' and the Guarantor's obligations has occurred and continues to be in effect. ARTICLE IX AMENDMENTS SECTION 9.1. Without Consent of Holders The Issuers, the Guarantor and the Trustee may amend this Indenture, the Notes or the Guarantee with respect to the Notes without notice to or consent of any Noteholder: (i) to cure any ambiguity, omission, defect or inconsistency; 84 (ii) to comply with Article V; (iii) to provide for uncertificated Notes in addition to or in place of certificated Notes (provided, however, that the uncertificated Notes are issued in registered form for purposes of Section 163(f) of the Code or in a manner such that the uncertificated Notes are as described in Section 163(f)(2)(B) of the Code); (iv) to add Guarantees with respect to the Notes; (v) to secure the Notes; (vi) to add to the covenants of the Issuers for the benefit of the Noteholders or to surrender any right or power herein conferred upon the Issuers; (vii) to make any change that does not materially and adversely affect the rights of any Noteholder; and (viii) to comply with any requirements of the SEC in connection with qualifying this Indenture under the TIA. After an amendment under this Section 9.1 becomes effective, the Issuers shall mail to Noteholders a notice briefly describing such amendment. The failure to give such notice to all Noteholders, or any defect therein, shall not impair or affect the validity of an amendment under this Section 9.1. SECTION 9.2. With Consent of Holders The Issuers, the Guarantor and the Trustee may amend this Indenture, the Notes or the Guarantee with respect to the Notes without notice to any Noteholder but with the written consent of the Holders of at least a majority in principal amount at maturity of the Notes then outstanding (including consents obtained in connection with a tender offer or exchange for Notes). However, without the consent of each Noteholder of an outstanding Note affected, an amendment may not: (i) reduce the amount of Notes whose Holders must consent to an amendment; (ii) reduce the rate of or extend the time for payment of interest on any Note; (iii) reduce the principal of or extend the Stated Maturity of any Note; (iv) reduce the amount payable upon the redemption of any Note or change the time at which any Note may be redeemed in accordance with Article III; (v) make any Note payable in currency other than that stated in the Note; (vi) impair the right of any Holder to receive payment of principal of and interest on such Holder's Notes on or after the due dates therefor or to 85 institute suit for the enforcement of any payment on or with respect to such Holder's Notes; (vii) make any change in this second sentence of Section 9.2; (viii) make any change in the ranking or priority of the Notes that would adversely affect the Noteholders; and (ix) make any change in the Guarantee that would adversely affect the Holders. It shall not be necessary for the consent of the Holders under this Section 9.2 to approve the particular form of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof. After an amendment under this Section 9.2 becomes effective, the Issuers shall mail to Noteholders a notice briefly describing such amendment. The failure to give such notice to all Noteholders, or any defect therein, shall not impair or affect the validity of an amendment under this Section 9.2. SECTION 9.3. Compliance with Trust Indenture Act Every amendment to this Indenture or the Notes shall comply with the TIA as then in effect. SECTION 9.4. Revocation and Effect of Consents and Waivers A consent to an amendment or a waiver by a Holder of a Note shall bind the Holder and every subsequent Holder of that Note or portion of the Note that evidences the same debt as the consenting Holder's Note, even if notation of the consent or waiver is not made on the Note. After an amendment or waiver becomes effective, it shall bind every Noteholder. The Issuers may, but shall not be obligated to, fix a record date for the purpose of determining the Noteholders entitled to give their consent or take any other action described above or required or permitted to be taken pursuant to this Indenture. If a record date is fixed, then notwithstanding the immediately preceding paragraph, those Persons who were Noteholders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to give such consent or to revoke any consent previously given or to take any such action, whether or not such Persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 120 days after such record date. SECTION 9.5. Notation on or Exchange of Notes If an amendment changes the terms of a Note, the Trustee may require the Holder of the Note to deliver it to the Trustee. The Trustee may place an appropriate notation on the Note regarding the changed terms and return it to the Holder. Alternatively, if the Issuers or the Trustee so determine, the Issuers in exchange for the Note shall issue and the Trustee shall authenticate a new Note that reflects the changed terms. Failure to make the appropriate notation or to issue a new Note shall not affect the validity of such amendment. 86 SECTION 9.6. Trustee to Sign Amendments The Trustee shall sign any amendment authorized pursuant to this Article IX if the amendment does not materially and adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may but need not sign it. In signing such amendment the Trustee shall be entitled to receive indemnity reasonably satisfactory to it and to receive, and (subject to Section 7.1) shall be fully protected in relying upon, in addition to the documents required by Section 10.4, an Officers' Certificate and an Opinion of Counsel stating that such amendment complies with the provisions of this Article IX; provided, however, that Holders who do not consent, waive or agree to amend this Indenture in the time frame set forth in such solicitation documents shall not be entitled to any consideration offered for timely consent, waiver or amendment, even if the consent, waiver or amendment is agreed to by sufficient Holders to approve such consent, waiver or amendment to this Indenture. SECTION 9.7. Payment for Consent Neither the Issuers, the Guarantor nor any affiliate of any Issuer shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder for, or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this Indenture or the Notes unless such consideration is offered to be paid to all Holders that so consent, waive or agree to amend in the time frame set forth in solicitation documents relating to such consent, waiver or agreement. ARTICLE X GUARANTEE SECTION 10.1. Guarantee Subject to the next paragraph, until the Separation Date, the Guarantor shall fully and unconditionally guarantee, on a senior unsecured basis, to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of this Indenture, the Notes or the Obligations of the Issuers under this Indenture or the Notes, that: (i) the principal of, premium, if any, and interest, if any, on the Notes will be paid in full when due, whether at the maturity or interest payment or redemption date, by acceleration, call for redemption, offer to purchase or otherwise, and interest on the overdue principal of, premium, and interest, if any, on the Notes and all other Obligations of the Issuers to the Holders or the Trustee under this Indenture or the Notes will be promptly paid in full or performed, all in accordance with the terms of this Indenture and the Notes; (ii) in case of any extension of time of payment or renewal of any Notes or any of such other Obligations, they will be paid in full when due or performed in accordance with the terms of the extension or renewal, whether at maturity, by acceleration or otherwise; and (iii) any and all costs and expenses (including reasonable and documented attorneys' fees) incurred by the Trustee or any Holder in enforcing any rights under the Guarantee with respect to the Notes will be paid. Failing payment when due of any amount so guaranteed for whatever reason, the Guarantor will be obligated (subject to any grace periods allowed pursuant to Section 6.1 hereof) to pay the same whether or not such failure to pay has become an Event of Default which could cause acceleration pursuant to Section 6.2 hereof. An Event of Default under this Indenture or the Notes shall constitute an event of default under the Guarantee of the Notes, and shall entitle 87 the Holders of Notes to accelerate the Obligations of the Guarantor hereunder in the same manner and to the same extent as the Obligations of the Issuers. The Guarantor agrees that its Obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Notes or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Notes with respect to any provisions hereof or thereof, the recovery of any judgment against the Issuers, any action to enforce the same or any other circumstance (other than payment) that might otherwise constitute a legal or equitable discharge or defense of the Guarantor. The Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of either or both of the Issuers, protest, notice and all demands whatsoever and covenants that its Guarantee with respect to the Notes will not be discharged except by complete performance of its Obligations under the Notes and this Indenture. Notwithstanding the provisions of Section 10.2, if any Holder or the Trustee is required by any court or otherwise to return to any Issuer, the Guarantor or any custodian, trustee, liquidator or other similar official acting in relation to either any Issuer or the Guarantor any amount paid by any such entity to the Trustee or such Holder, this Guarantee of the Notes, to the extent theretofore discharged, shall be reinstated in full force and effect. The Guarantor agrees that it shall not be entitled to any right of subrogation in relation to the Holder in respect of any Obligations guaranteed hereby until payment in full of all Obligations guaranteed hereby. The Guarantor agrees that, as between it, on the one hand, and the Holders of Notes and the Trustee, on the other hand, (x) the maturity of the Obligations guaranteed hereby may be accelerated as provided in Article 6 hereof for the purposes hereof, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Obligations guaranteed hereby, and (y) in the event of any acceleration of such Obligations as provided in Article 6 hereof, such Obligations (whether or not due and payable) shall forthwith become due and payable by the Guarantor for the purpose of such Guarantee of the Notes. If the Separation Date does not occur on or before December 31, 2002 or if the Board of Directors determines not to proceed with the Separation, the Guarantee of the Notes by the Guarantor shall stay in effect until the Notes have been paid in full. Each Holder of a Note by its acceptance thereof agrees to and shall be bound by the provisions of this Section 10.1. SECTION 10.2. Release of Guarantor Upon the occurrence of the earlier of (i) the Separation Date (if the Separation Date occurs on or prior to December 31, 2002) or (ii) the payment in full of all of the Issuers' Obligations under the Notes and this Indenture (other than with respect to any indemnification obligations), the Guarantor shall be released from and relieved of its Obligations with respect to the Notes under this Article X. 88 ARTICLE XI MISCELLANEOUS SECTION 11.1. Trust Indenture Act Controls If any provision of this Indenture limits, qualifies or conflicts with another provision which is required to be included in this Indenture by the TIA, the provision required by the TIA shall control. SECTION 11.2. Notices Any notice or communication shall be in writing and be effective upon receipt or refusal of delivery at the following addresses: if to any Issuer: United States Steel LLC 600 Grant Street Pittsburgh, PA 15219-4776 Attention: Vice President - Finance and Accounting Facsimile: 412-433-1131 if to the Trustee: The Bank of New York 101 Barclay Street Floor 21 West New York, New York 10286 Attention: Corporate Trust Trustee Administration Facsimile: (212) 815-5915 or (212) 815-5917 The Issuers or the Trustee by notice to the others may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Noteholder shall be mailed to the Noteholder at the Noteholder's address as it appears on the registration books of the Registrar and shall be sufficiently given if so mailed within the time prescribed. Failure to mail a notice or communication to a Noteholder or any defect in it shall not affect its sufficiency with respect to other Noteholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. SECTION 11.3. Communication by Holders with Other Holders Noteholders may communicate pursuant to TIA Section 312(b) with other Noteholders with respect to their rights under this Indenture or the Notes. The Issuers, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). 89 SECTION 11.4. Certificate and Opinion as to Conditions Precedent Upon any request or application by the Issuers to the Trustee to take or refrain from taking any action under this Indenture, the Issuers shall furnish to the Trustee: (i) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of the signer, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (ii) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of such counsel, all such conditions precedent have been complied with. SECTION 11.5. Statements Required in Certificate or Opinion Each certificate or opinion with respect to compliance with a covenant or condition provided for in this Indenture shall include: (i) a statement that the individual making such certificate or opinion has read such covenant or condition; (ii) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (iii) a statement that, in the opinion of such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (iv) a statement as to whether or not, in the opinion of such individual, such covenant or condition has been complied with. SECTION 11.6. When Notes Disregarded In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Issuers or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuers shall be disregarded and deemed not to be outstanding, except that, for the purpose of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes which a Trust Officer of the Trustee knows are so owned shall be so disregarded. Also, subject to the foregoing, only Notes outstanding at the time shall be considered in any such determination. SECTION 11.7. Rules by Trustee, Paying Agent and Registrar The Trustee may make reasonable rules for action by or at a meeting of Noteholders. The Registrar and the Paying Agent may make reasonable rules for their functions. 90 SECTION 11.8. Legal Holidays A "Legal Holiday" is a Saturday, a Sunday or a day on which banking institutions are not required to be open in the State of New York. If a payment date is a Legal Holiday, payment shall be made on the next succeeding day that is not a Legal Holiday, and no interest shall accrue on such payment for the intervening period. If a regular record date is a Legal Holiday, the record date shall not be affected. SECTION 11.9. GOVERNING LAW. THIS INDENTURE, THE NOTES AND THE GUARANTEE OF THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. SECTION 11.10. No Recourse Against Others No director, officer, employee, member, incorporator or stockholder of any Issuer or the Guarantor, as such, shall have any liability for any obligations of any Issuer or the Guarantor under the Notes, this Indenture or for any claim based on, in respect of, or by reason of such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. This waiver and release are part of the consideration for issuance of the Notes. SECTION 11.11. Successors All agreements of the Issuers and the Guarantor in this Indenture and the Notes shall bind their successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 11.12. Multiple Originals The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. One signed copy is enough to prove this Indenture. SECTION 11.13. Qualification of Indenture The Issuers shall qualify this Indenture under the TIA in accordance with the terms and conditions of the Registration Rights Agreement and shall pay all reasonable costs and expenses (including attorneys' fees for the Issuers, the Trustee and the Holders) incurred in connection therewith, including, but not limited to, costs and expenses of qualification of this Indenture and the Notes. The Trustee shall be entitled to receive from the Issuers any such Officers' Certificates, Opinions of Counsel or other documentation as it may reasonably request in connection with any such qualification of this Indenture under the TIA. 91 SECTION 11.14. Table of Contents; Cross-Reference Sheet; Headings The table of contents, cross-reference sheet and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not intended to be considered a part hereof and shall not modify or restrict any of the terms or provisions hereof. SECTION 11.15. Severability In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions shall not in any way be affected or impaired thereby. 92 IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed as of the date first written above. Issuers: UNITED STATES STEEL LLC /s/ G. R. Haggerty By:--------------------------- Name: G. R. Haggerty Title: Vice President-Accounting & Finance UNITED STATES STEEL FINANCING CORP. /s/ R. M. Stanton By:--------------------------- Name: R. M. Stanton Title: President Guarantor: USX CORPORATION /s/ M. J. Hatcher By:--------------------------- Name: M. J. Hatcher Title: Assistant Treasurer-Corporate Finance Trustee: THE BANK OF NEW YORK By: Name: Title: EXHIBIT A (Face of Note) [Insert the Global Note Legend, if applicable pursuant to the provisions of the Indenture] [Insert the Private Placement Legend, if applicable pursuant to the provisions of the Indenture] UNITED STATES STEEL LLC and UNITED STATES STEEL FINANCING CORP. No. ___ Principal Amount $________ CUSIP NO. _____________ 10-3/4% Senior Notes due August 1, 2008 United States Steel LLC, a Delaware limited liability company, and United States Steel Financing Corp., a Delaware corporation, promise to pay to Cede & Co., or registered assigns, the principal sum of ________________________ Dollars on August 1, 2008. Interest Payment Dates: February 1 and August 1. Record Dates: January 15 and July 15. Additional provisions of this Note are set forth on the other side of this Note. Dated: UNITED STATES STEEL LLC By: Name: Title: UNITED STATES STEEL FINANCING CORP. By: Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Notes referred to in the Indenture. A-1 THE BANK OF NEW YORK as Trustee By: Authorized Signatory A-2 (Reverse of Note) 10-3/4% Senior Notes due August 1, 2008 1. Interest United States Steel LLC, a Delaware limited liability company (the "Company"), and United States Steel Financing Corp., a Delaware corporation ("USS Financing", and together with the Company, the "Issuers"), promise to pay interest on the principal amount of this Note at the rate per annum shown above; provided, however, that if a Registration Default (as defined in the Registration Rights Agreement) occurs, additional cash interest will accrue on this Note at a rate of 0.25% per annum for the first 90-day period immediately following the occurrence of the Registration Default, and such rate shall increase by an additional 0.25% per annum until all Registration Defaults have been cured, calculated on the principal of this Note as of the date on which such interest is payable; provided, however, that in no event shall the aggregate amount of such additional interest exceed 1.0% per annum. Such interest is payable in addition to any other interest payable from time to time with respect to this Note. The Trustee will not be deemed to have notice of a Registration Default until it shall have received actual notice of such Registration Default from the Issuers. The Issuers shall pay accrued interest semi-annually on each February 1 and August 1 commencing February 1, 2002 or if any such day is not a Business Day (as defined in the Indenture referred to below), on the next Business Day. The Issuers shall pay interest on overdue principal at 1% per annum in excess of the rate borne by the Notes to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment By at least 11:00 a.m. prevailing Eastern (U.S.) time on the date on which any principal of or interest on any Note is due and payable, the Issuers shall irrevocably deposit with the Trustee or the Paying Agent money sufficient to pay such principal and/or interest. The Issuers will pay interest (except defaulted interest) to the Persons who are registered Holders of Notes at the close of business on January 15 or July 15 next preceding the interest payment date even if Notes are cancelled, repurchased or redeemed after the record date and on or before the interest payment date. Holders must surrender Notes to a Paying Agent to collect principal payments. The Issuers will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts by wire transfer of immediately available funds to the U.S. dollar accounts with a bank in the United States specified by the Holder hereof or, if no such account is specified, by mailing a check to the Holder's registered address. 3. Paying Agent and Registrar Initially, the Company will act as Paying Agent and Registrar. The Company may appoint and change any Paying Agent, Registrar or co-registrar without notice to any Noteholder. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent. A-3 4. Indenture The Issuers issued the Notes under an Indenture dated as of July 27, 2001 (as it may be amended or supplemented from time to time in accordance with the terms thereof, the "Indenture"), among the Issuers, USX Corporation, a Delaware corporation (the "Guarantor") and The Bank of New York, a New York banking corporation ("the Trustee"). The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date of the Indenture (the "TIA"). Capitalized terms used herein and not defined herein have the meanings ascribed thereto in the Indenture. The Notes are subject to all such terms, and Noteholders are referred to the Indenture and the TIA for a statement of those terms. The Notes are senior unsecured obligations of the Issuers limited to $385,000,000 aggregate principal amount at maturity (subject to Section 2.1(a) of the Indenture, which, inter alia, allows for the issuance of Additional Notes in some circumstances). The Notes include the Initial Notes, any Private Exchange Note and Exchange Notes issued in exchange for the Initial Notes pursuant to the Indenture and the Registration Rights Agreement, and any Additional Notes actually issued. The Initial Notes, the Private Exchange Notes, the Exchange Notes and any Additional Notes actually issued are treated as a single class of securities under the Indenture. The Indenture imposes certain limitations on the Incurrence of Indebtedness by the Company and its Restricted Subsidiaries, the payment of dividends and other distributions on the Capital Stock of Company and its Restricted Subsidiaries, the purchase or redemption of Capital Stock of the Company and Capital Stock of its Restricted Subsidiaries, the sale or transfer of assets and Capital Stock of Restricted Subsidiaries, the issuance or sale of Capital Stock of Restricted Subsidiaries, transactions with Affiliates, the incurrence of Liens and certain Sale/Leaseback Transactions. In addition, the Indenture limits the ability of the Company and its Restricted Subsidiaries to restrict distributions and dividends from Restricted Subsidiaries. 5. Optional Redemption Except as set forth in the following paragraphs, the Notes will not be redeemable at the option of the Issuers prior to the Stated Maturity. Before August 1, 2004, the Issuers may at their option on one or more occasions, upon not less than 30 nor more than 60 days' notice, redeem the Notes in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the Notes originally issued at a redemption price (expressed as a percentage of principal amount) of 110.75%, plus accrued and unpaid interest to the redemption date, with the net cash proceeds from one or more Public Equity Offerings; provided that (i) at least 65% of such aggregate principal amount originally issued of the Notes remains outstanding immediately after the occurrence of each such redemption (other than Notes held, directly or indirectly, by the Company or its Affiliates); and A-4 (ii) each such redemption occurs within 60 days after the date of the related Public Equity Offering. Further, at any time on or prior to December 31, 2002, the Issuers may, at their option, give written notice to redeem the Notes, which notice shall be no less than 30 nor more than 60 days prior to the redemption date, in whole or in part at a redemption price (expressed as a percentage of principal amount) of 101%, plus accrued and unpaid interest to the redemption date; provided that (i) the Board of Directors shall have determined not to proceed with the Separation (and the Guarantee of the Guarantor shall stay in effect until the Notes are fully paid); (ii) if the Issuers elect to redeem the Notes in part, they may redeem up to an aggregate principal amount not to exceed 35% of the aggregate principal amount of the Notes originally issued; and (iii) at least 65% of such aggregate principal amount originally issued of the Notes remains outstanding immediately after the occurrence of each such redemption (other than Notes held, directly or indirectly, by the Issuers or their Affiliates). 6. Notice of Redemption Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date by first-class mail to each Holder of Notes to be redeemed at his registered address. Notes in denominations of principal amount larger than $1,000 may be redeemed in part but only in whole multiples of $1,000. If money sufficient to pay the redemption price of and accrued and unpaid interest on all Notes (or portions thereof) to be redeemed on the redemption date is deposited with the Paying Agent on or before the redemption date and certain other conditions are satisfied, on and after such date interest ceases to accrue on such Notes (or such portions thereof) called for redemption. 7. Put Provisions Upon a Change of Control, any Holder of Notes will have the right to cause the Issuers to repurchase all or any part of the Notes of such Holder at a repurchase price equal to 101% of the principal amount thereof as of the date of repurchase, plus accrued and unpaid interest, if any, to the date of repurchase as provided in, and subject to the terms of, the Indenture. 8. Registration Rights The Issuers are parties to a Registration Rights Agreement, dated as of July 27, 2001, among the Issuers, Credit Suisse First Boston Corporation, J.P. Morgan Securities Inc., Lehman Brothers Inc., Salomon Smith Barney Inc., BNY Capital Markets, Inc., Mellon Financial Markets, Inc., NatCity Investments, Inc., PNC Capital Markets, Inc. and Scotia Capital A-5 (USA) Inc. pursuant to which they are obligated to pay additional interest upon the occurrence of certain Registration Defaults (as defined therein). 9. Denominations; Transfer; Exchange The Notes are in registered form without coupons in denominations of principal amount of $1,000 and whole multiples of $1,000. A Holder may register, transfer or exchange Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange (i) any Notes selected for redemption (except, in the case of a Note to be redeemed in part, the portion of the Note not to be redeemed) for a period beginning 15 business days before a selection of Notes to be redeemed and ending on the date of such selection or (ii) any Notes for a period beginning on a record date and ending on the next succeeding interest payment date. 10. Persons Deemed Owners The registered holder of this Note may be treated as the owner of it for all purposes. 11. Unclaimed Money If money for the payment of principal or interest remains unclaimed for one year after the date of payment of principal and interest, the Trustee or Paying Agent shall pay the money back to the Issuers at their request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Issuers and not to the Trustee for payment. 12. Defeasance Subject to certain conditions set forth in the Indenture, the Issuers at any time may terminate some or all of their obligations under the Notes and the Indenture if the Issuers deposit with the Trustee money or U.S. Government Obligations for the payment of principal of and interest on the Notes to redemption or maturity, as the case may be. 13. Amendment, Waiver Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Notes may be amended with the written consent of the Holders of at least a majority in principal amount at maturity of the outstanding Notes and (ii) any default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in principal amount at maturity of the outstanding Notes. Subject to certain exceptions set forth in the Indenture, without the consent of any Noteholder, the Issuers and the Trustee may amend the Indenture or the Notes to cure any ambiguity, omission, defect or inconsistency, or to comply with Article V of the Indenture, or to provide for uncertificated Notes in addition to or in place of certificated Notes, or to add guarantees with respect to the Notes or to secure the Notes, or to add additional covenants of or surrender rights and powers conferred on the Issuers, or to make any A-6 change that does not materially and adversely affect the rights of any Noteholder, or to comply with any request of the SEC in connection with qualifying the Indenture under the TIA. 14. Defaults and Remedies Under the Indenture, Events of Default include (i) a default in any payment of interest on any Note when due, continued for 30 days, (ii) a default in the payment of principal of any Note when due at its Stated Maturity, upon optional redemption, upon required repurchase, upon declaration of acceleration or otherwise, (iii) the failure by the Company to comply with its obligations under Article V of the Indenture, (iv) the failure by the Company to comply for 30 days after notice with any of its obligations under Section 4.4 or any of Sections 4.9 through 4.19 of the Indenture (in each case, other than a failure to repurchase Notes), (v) the failure by the Company or the Guarantor to comply for 60 days after notice with its other agreements contained in the Indenture, (vi) the failure by the Company or any Significant Subsidiary of the Company to pay any Indebtedness within any applicable grace period after final maturity or the acceleration of any such Indebtedness by the holders thereof because of a default if the total amount of such Indebtedness unpaid or accelerated exceeds $50 million or its foreign currency equivalent, (vii) certain events of bankruptcy, insolvency or reorganization of the Company, the Guarantor or any Significant Subsidiary of the Company, (viii) any judgment or decree for the payment of money in excess of $50 million is rendered against the Company or any Significant Subsidiary of the Company, remains outstanding for a period of 60 days following such judgment and is not discharged, waived or stayed within 10 days after notice, or (ix) prior to the Separation, the Guarantee with respect to the Notes ceases for any reason to be in full force and effect (other than in accordance with its terms) or the Guarantor denies or disaffirms its obligations under the Guarantee. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in aggregate principal amount of the outstanding Notes may declare all the Notes to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default that will result in the Notes being due and payable immediately upon the occurrence of such Events of Default. Noteholders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Notes unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount of the Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Noteholders notice of any continuing Default or Event of Default (except a Default or Event of Default in payment of principal or interest) if it determines that withholding notice is not opposed to their interest. 15. Guarantee of the Notes Subject to the next paragraph, prior to the Separation, payment of principal, premium, if any, and interest, if any (including interest on overdue principal and overdue interest, if lawful), on the Notes is fully and unconditionally guaranteed by the Guarantor pursuant to, and subject to the terms of, Article X of the Indenture. If the Separation Date does not occur on or before December 31, 2002 or if the Board of Directors determines not to proceed with the Separation, the Guarantee of the Notes by the Guarantor shall stay in effect until the Notes have been paid in full. A-7 16. Trustee Dealings with the Issuers Subject to certain limitations set forth in the Indenture, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with and collect obligations owed to it by the Issuers or their respective Affiliates and may otherwise deal with the Issuers or their respective Affiliates with the same rights it would have if it were not Trustee. 17. No Recourse Against Others No director, officer, employee, member, incorporator or stockholder of the Issuers or the Guarantor, as such, shall have any liability for any obligations of the Issuers under the Notes, the Guarantee, the Indenture or for any claim based on, in respect of, or by reason of such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. This waiver and release are part of the consideration for issuance of the Notes. 18. Authentication This Note shall not be valid until an authorized signatory of the Trustee (or an authenticating agent acting on its behalf) manually signs the certificate of authentication on the other side of this Note. 19. Abbreviations Customary abbreviations may be used in the name of a Noteholder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entirety), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=custodian) and U/G/M/A (=Uniform Gift to Minors Act). 20. CUSIP Numbers Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures the Issuers have caused CUSIP numbers to be printed on the Notes and have directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Noteholders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 21. GOVERNING LAW THIS NOTE AND THE GUARANTEE OF THE NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. A-8 NOTATION RELATING TO GUARANTEE The undersigned (the "Guarantor") has fully and unconditionally guaranteed, on a senior unsecured basis (the "Guarantee"), that: (i) the principal of, premium, if any, and interest, if any, on the Notes will be paid in full when due, whether at the maturity or interest payment or redemption date, by acceleration, call for redemption, offer to purchase or otherwise, and interest on the overdue principal of, premium, and interest, if any, on the Notes and all other Obligations of the Issuers to the Holders of the Notes or the Trustee under the Indenture or the Notes will be promptly paid in full or performed, all in accordance with Article X of the Indenture and the Notes; (ii) in case of any extension of time of payment or renewal of any Notes or any of such other Obligations, they will be paid in full when due or performed in accordance with the terms of the extension or renewal, whether at maturity, by acceleration or otherwise; and (iii) any and all costs and expenses (including reasonable and documented attorneys' fees) incurred by the Trustee or any Holder of the Notes in enforcing any rights under this Guarantee with respect to the Notes will be paid. If the Separation Date does not occur on or before December 31, 2002 or if the Board of Directors determines not to proceed with the Separation, this Guarantee shall stay in effect until the Notes have been paid in full. The obligations of the undersigned to the Holders of the Notes and to the Trustee are expressly set forth in Article X to the Indenture and reference is hereby made to the Indenture for the precise terms of the Guarantee. Date: July 27, 2001 USX CORPORATION ____________________ By: Title: A-9 ASSIGNMENT FORM To assign this Note, fill in the form below: I or we assign and transfer this Note to: -------------------------------------- -------------------------------------- -------------------------------------- (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint ______________ as agent to transfer this Note on the books of the Issuers. The agent may substitute another to act for him. Date: Your Signature: Sign exactly as your name appears on the face of this Note. Signature Guarantee: (Signature must be guaranteed by a participant in a recognized Signature Guarantee Medallion Program or other signature guarantor program reasonably acceptable to the Trustee) A-10 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Note purchased by the Issuers pursuant to Section 4.11 or 4.15 of the Indenture, check the appropriate box: Section 4.11 [ ] Section 4.15 [ ] If you want to elect to have only part of this Note purchased by the Issuers pursuant to Section 4.11 or 4.15 of the Indenture, state the amount you elect to have purchased (must be integral multiple of $1,000): $ Date: Your Signature: Sign exactly as your name appears on the face of this Note. Signature Guarantee: (Signature must be guaranteed by a participant in a recognized Signature Guarantee Medallion Program or other signature guarantor program reasonably acceptable to the Trustee) A-11 [TO BE ATTACHED TO GLOBAL NOTES] SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE The following increases or decreases in this Global Note have been made: Amount of Amount of Principal Amount Signature of decrease in increase in of this Global authorized Principal Principal Note following officer of Date of Amount of this Amount of this such decrease or Trustee or Notes Exchange Global Note Global Note increase Custodian - -------- -------------- -------------- ---------------- ---------------- A-12 EXHIBIT B FORM OF CERTIFICATE OF TRANSFER United States Steel LLC 600 Grant Street Pittsburgh, PA 15219-4776 Attention: Vice President - Finance and Accounting The Bank of New York 101 Barclay Street Floor 21 West New York, NY 10286 Attention: Corporate Trust Trustee Administration Re: 10-3/4% Senior Notes due August 1, 2008 Reference is hereby made to the Indenture, dated as of July [ ], 2001 (the "Indenture"), among United States Steel LLC (the "Company"), United States Steel Financing Corp. ("USS Financing", and together with the Company, the "Issuers"), USX Corporation (the "Guarantor") and The Bank of New York, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. __________________ (the "Transferor") owns and proposes to transfer the Note[s] or interest in such Note[s] specified in Annex A hereto, in the principal amount of $_______ in such Note[s] or interests (the "Transfer"), to ___________ (the "Transferee"), as further specified in Annex A hereto. In connection with the Transfer, the Transferor hereby certifies that: [CHECK ALL THAT APPLY] 1. [ ] Check if Transferee will take delivery of a beneficial interest in the 144A Global Note or a Definitive Note Pursuant to Rule 144A. The Transfer is being effected pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, the Transferor hereby further certifies that the beneficial interest or Definitive Note is being transferred to a Person that the Transferor reasonably believed and believes is purchasing the beneficial interest or Definitive Note for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A and such Transfer is in compliance with any applicable blue sky securities laws of any state of the United States. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the 144A Global Note and/or the Definitive Note and in the Indenture and the Securities Act. 2. [ ] Check if Transferee will take delivery of a beneficial interest in the Regulation S Global Note or a Definitive Note pursuant to Regulation S. The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and, accordingly, the Transferor hereby further certifies that (i) the Transfer is not being made to a person in the United States and (x) at the time B-1 the buy order was originated, the Transferee was outside the United States or such Transferor and any Person acting on its behalf reasonably believed and believes that the Transferee was outside the United States or (y) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither such Transferor nor any Person acting on its behalf knows that the transaction was prearranged with a buyer in the United States, (ii) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S under the Securities Act, (iii) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act and (iv) if the proposed transfer is being made prior to the expiration of the Distribution Compliance Period, the transfer is not being made to a U.S. Person or for the account or benefit of a U.S. Person (other than an Initial Purchaser). Upon consummation of the proposed transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will be subject to the restrictions on Transfer enumerated in the Private Placement Legend printed on the Regulation S Global Note and/or the Definitive Note and in the Indenture and the Securities Act. 3. [ ] Check and complete if Transferee will take delivery of a beneficial interest in a Definitive Note pursuant to any provision of the Securities Act other than Rule 144A or Regulation S. The Transfer is being effected in compliance with the transfer restrictions applicable to beneficial interests in Restricted Global Notes and Restricted Definitive Notes and pursuant to and in accordance with the Securities Act and any applicable blue sky securities laws of any state of the United States, and accordingly the Transferor hereby further certifies that (check one): (a) [ ] such Transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act; or (b) [ ] such Transfer is being effected to the Issuers or any of their respective subsidiaries thereof; or (c) [ ] such Transfer is being effected pursuant to an effective registration statement under the Securities Act and in compliance with the prospectus delivery requirements of the Securities Act. 4. [ ]Check if Transferee will take delivery of a beneficial interest in an Unrestricted Global Note or of an Unrestricted Definitive Note. (a)[ ]Check if Transfer is Pursuant to Rule 144. (i)The Transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will no longer be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Notes, on Restricted Definitive Notes and in the Indenture. B-2 (b)[ ]Check if Transfer is Pursuant to Regulation S. (i)The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will no longer be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Notes, on Restricted Definitive Notes and in the Indenture. (c)[ ]Check if Transfer is Pursuant to Other Exemption. (i) The Transfer is being effected pursuant to and in compliance with an exemption from the registration requirements of the Securities Act other than Rule 144, Rule 903 or Rule 904 and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any State of the United States and (ii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Definitive Note will not be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Global Notes or Restricted Definitive Notes and in the Indenture. This certificate and the statements contained herein are made for your benefit and the benefit of the Issuers. ______________________ [Insert Name of Transferor] By:__________________ Name: Title: Dated: _______ __, ___ B-3 ANNEX A TO CERTIFICATE OF TRANSFER 1. The Transferor owns and proposes to transfer the following: [CHECK ONE OF (a) OR (b)] (a) [ ] a beneficial interest in the: (i) [ ] 144A Global Note (CUSIP _______), or (ii) [ ] Regulation S Global Note (CUSIP _______); or (b) [ ] a Restricted Definitive Note. 2. After the Transfer the Transferee will hold: [CHECK ONE] (c) [ ] a beneficial interest in the: (i) [ ] 144A Global Note (CUSIP _______), or (ii) [ ] Regulation S Global Note (CUSIP _______), or (iii) [ ] Unrestricted Global Note (CUSIP _______); or (d) [ ] a Restricted Definitive Note; or (e) [ ] an Unrestricted Definitive Note, in accordance with the terms of the Indenture. B-4 EXHIBIT C FORM OF CERTIFICATE OF EXCHANGE United States Steel LLC 600 Grant Street Pittsburgh, PA 15219-4776 Attention: Vice President - Finance and Accounting The Bank of New York 101 Barclay Street Floor 21 West New York, NY 10286 Attention: Corporate Trust Trustee Administration] Re: 10-3/4% Senior Notes due August 1, 2008 (CUSIP ____________________) Reference is hereby made to the Indenture, dated as of July [ ], 2001 (the "Indenture"), among United States Steel LLC (the "Company"), United States Steel Financing Corp. ("USS Financing", and together with the Company, the "Issuers"), USX Corporation (the "Guarantor") and The Bank of New York, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. ________________ (the "Owner") owns and proposes to exchange the Note[s] or interest in such Note[s] specified herein, in the principal amount of $________ in such Note[s] or interests (the "Exchange"). In connection with the Exchange, the Owner hereby certifies that: 1. Exchange of Restricted Definitive Notes or Beneficial Interests in a Restricted Global Note for Unrestricted Definitive Notes or Beneficial Interests in an Unrestricted Global Note (a)[ ]Check if Exchange is from beneficial interest in a Restricted Global Note to beneficial interest in an Unrestricted Global Note. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Note for a beneficial interest in an Unrestricted Global Note in an equal principal amount, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Global Notes and pursuant to and in accordance with the United States Securities Act of 1933, as amended (the "Securities Act"), (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the beneficial interest in an Unrestricted Global Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (b)[ ]Check if Exchange is from beneficial interest in a Restricted Global Note to Unrestricted Definitive Note. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Note for an Unrestricted Definitive Note, the Owner hereby certifies (i) the Definitive Note is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Restricted Global Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the C-1 Securities Act and (iv) the Definitive Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (c)[ ]Check if Exchange is from Restricted Definitive Note to beneficial interest in an Unrestricted Global Note. In connection with the Owner's Exchange of a Restricted Definitive Note for a beneficial interest in an Unrestricted Global Note, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to Restricted Definitive Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the beneficial interest is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. (d)[ ]Check if Exchange is from Restricted Definitive Note to Unrestricted Definitive Note. In connection with the Owner's Exchange of a Restricted Definitive Note for an Unrestricted Definitive Note, the Owner hereby certifies (i) the Unrestricted Definitive Note is being acquired for the Owner's own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to Restricted Definitive Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Private Placement Legend are not required in order to maintain compliance with the Securities Act and (iv) the Unrestricted Definitive Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States. 2. Exchange of Restricted Definitive Notes or Beneficial Interests in Restricted Global Notes for Restricted Definitive Notes or Beneficial Interests in Restricted Global Notes (a)[ ]Check if Exchange is from beneficial interest in a Restricted Global Note to Restricted Definitive Note. In connection with the Exchange of the Owner's beneficial interest in a Restricted Global Note for a Restricted Definitive Note with an equal principal amount, the Owner hereby certifies that the Restricted Definitive Note is being acquired for the Owner's own account without transfer. Upon consummation of the proposed Exchange in accordance with the terms of the Indenture, the Restricted Definitive Note issued will continue to be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the Restricted Definitive Note and in the Indenture and the Securities Act. (b)[ ]Check if Exchange is from Restricted Definitive Note to beneficial interest in a Restricted Global Note. In connection with the Exchange of the Owner's Restricted Definitive Note for a beneficial interest in the [CHECK ONE] 144A Global Note, Regulation S Global Note, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner's own account without transfer and (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Restricted Global Notes and pursuant to and in accordance with the Securities Act, and in compliance with any applicable blue sky securities laws of any state of the United States. Upon consummation of the proposed Exchange in accordance with the terms of the Indenture, the beneficial interest issued will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the relevant Restricted Global Note and in the Indenture and the Securities Act. C-2 This certificate and the statements contained herein are made for your benefit and the benefit of the Company. _____________________ [Insert Name of Owner] By:___________________ Name: Title: Dated:_______, ___ C-3 EX-12.1 4 ex1212q.txt Exhibit 12.1 USX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS TOTAL ENTERPRISE BASIS - (Unaudited) CONTINUING OPERATIONS ---------------------------------------------------------- (Dollars in Millions)
Six Months Ended Year Ended December 31 June 30 ---------------------------- 2001 2000 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- ---- ---- Portion of rentals representing interest $46 $48 $100 $95 $105 $82 $78 Capitalized interest 13 4 19 26 46 31 11 Other interest and fixed charges 120 195 375 365 318 352 428 Pretax earnings which would be required to cover preferred stock dividend requirements of parent 6 6 12 14 15 20 37 ---- ---- ---- ---- ---- ---- ---- Combined fixed charges and preferred stock dividends (A) $185 $253 $506 $500 $484 $485 $554 ==== ==== ==== ==== ==== ==== ==== Earnings-pretax income with applicable adjustments (B) $2069 $1666 $1920 $2098 $1671 $1761 $1887 ==== ==== ==== ==== ==== ==== ==== Ratio of (B) to (A) 11.18 6.58 3.79 4.20 3.45 3.63 3.41 ==== ==== ==== ==== ==== ==== ====
EX-12.2 5 ex1222q.txt Exhibit 12.2 USX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES TOTAL ENTERPRISE BASIS - (Unaudited) CONTINUING OPERATIONS ------------------------------------------------- (Dollars in Millions)
Six Months Ended Year Ended December 31 June 30 ---------------------------- 2001 2000 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- ---- ---- Portion of rentals representing interest $46 $48 $100 $95 $105 $82 $78 Capitalized interest 13 4 19 26 46 31 11 Other interest and fixed charges 120 195 375 365 318 352 428 ---- ---- ---- ---- ---- ---- ----- Total fixed charges (A) $179 $247 $494 $486 $469 $465 $517 ==== ==== ==== ==== ==== ==== ==== Earnings-pretax income with applicable adjustments (B) $2069 $1666 $1920 $2098 $1671 $1761 $1887 ==== ==== ==== ==== ==== ==== ==== Ratio of (B) to (A) 11.56 6.74 3.89 4.32 3.56 3.79 3.65 ==== ==== ==== ==== ==== ==== ====
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