-----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, IjdYgZXRAkzxW195l9PUyayENdTj+w5E3TOPHcPnjgmMbbGxOCCRCrusmGKYW8nv si3R3jk9IKC3dg5FQp4ukQ== 0000101778-97-000002.txt : 19970513 0000101778-97-000002.hdr.sgml : 19970513 ACCESSION NUMBER: 0000101778-97-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970512 SROS: CSX SROS: NYSE SROS: PSE 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: 97600993 BUSINESS ADDRESS: STREET 1: 600 GRANT ST CITY: PITTSBURGH STATE: PA ZIP: 15219-4776 BUSINESS PHONE: 4124331121 FORMER COMPANY: FORMER CONFORMED NAME: UNITED STATES STEEL CORP/DE DATE OF NAME CHANGE: 19860714 10-Q 1 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ------------ to ------------ USX CORPORATION - -------------------------------------------------------------------------------- ---- (Exact name of registrant as specified in its charter) Delaware 1-5153 25-0996816 --------------- ------------ ------------------- (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 April 30, 1997 follows: USX-Marathon Group - 287,745,235 shares USX-U. S. Steel Group - 85,616,168 shares USX-Delhi Group - 9,451,269 shares 2 USX CORPORATION SEC FORM 10-Q QUARTER ENDED March 31, 1997 --------------------------- 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 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Financial Statistics 21 B. Marathon Group Item 1. Financial Statements: Marathon Group Statement of Operations 22 Marathon Group Balance Sheet 23 Marathon Group Statement of Cash Flows 24 Selected Notes to Financial Statements 25 Item 2. Marathon Group Management's Discussion and Analysis of Financial Condition and Results of Operations 29 Supplemental Statistics 35 3 USX CORPORATION SEC FORM 10-Q QUARTER ENDED March 31, 1997 --------------------------- INDEX Page ----- ---- PART I - FINANCIAL INFORMATION (Continued) C. U. S. Steel Group Item 1. Financial Statements: U. S. Steel Group Statement of Operations 36 U. S. Steel Group Balance Sheet 37 U. S. Steel Group Statement of Cash Flows 38 Selected Notes to Financial Statements 39 Item 2. U. S. Steel Group Management's Discussion and Analysis of Financial Condition and Results of Operations 43 Supplemental Statistics 47 D. Delhi Group Item 1. Financial Statements: Delhi Group Statement of Operations 48 Delhi Group Balance Sheet 49 Delhi Group Statement of Cash Flows 50 Selected Notes to Financial Statements 51 Item 2. Delhi Group Management's Discussion and Analysis of Financial Condition and Results of Operations 55 Supplemental Statistics 59 PART II - OTHER INFORMATION Item 1. Legal Proceedings 60 Item 5. Other Information 60 Item 6. Exhibits and Reports on Form 8-K 70 4 Part I - Financial Information A. Consolidated Corporation USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) ------------------------------------------------
First Quarter Ended March 31 (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- REVENUES $5,997 $5,473 OPERATING COSTS: Cost of sales (excludes items shown below) 4,432 4,076 Inventory market valuation charges (credits) 114 (155) Selling, general and administrative expenses 54 44 Depreciation, depletion and amortization 253 267 Taxes other than income taxes 769 742 Exploration expenses 33 33 ------ ------ Total operating costs 5,655 5,007 ------ ------ OPERATING INCOME 342 466 Other income 27 34 Interest and other financial income 3 5 Interest and other financial costs (85) (120) ------ ------ INCOME BEFORE INCOME TAXES 287 385 Less provision for estimated income taxes 91 120 ------ ------ NET INCOME 196 265 Dividends on preferred stock (6) (6) ------ ------ NET INCOME APPLICABLE TO COMMON STOCKS $190 $259 ====== ====== Selected notes to financial statements appear on pages 9-12.
5 USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF OPERATIONS (Continued) (Unaudited) INCOME PER COMMON SHARE ------------------------------------------------------------
First Quarter Ended March 31 (Dollars in millions, except per share amounts) 1997 1996 - -------------------------------------------------------------------------------- APPLICABLE TO MARATHON STOCK: Net income $108 $216 - Per share - primary .37 .75 - fully diluted .37 .74 Dividends paid per share .19 .17 Weighted average shares, in thousands - Primary 287,987 287,460 - Fully diluted 294,661 297,251 APPLICABLE TO STEEL STOCK: Net income $81 $40 - Per share - primary .96 .49 - fully diluted .93 .48 Dividends paid per share .25 .25 Weighted average shares, in thousands - Primary 85,006 83,197 - Fully diluted 94,581 85,030 APPLICABLE TO DELHI STOCK: Net income $1 $2 - Per share - primary and fully diluted .15 .25 Dividends paid per share .05 .05 Weighted average shares, in thousands - Primary 9,466 9,447 - Fully diluted 9,467 9,447 Selected notes to financial statements appear on pages 9-12.
6 USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET (Unaudited) ----------------------------------------
ASSETS March 31 December 31 (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $78 $55 Receivables, less allowance for doubtful accounts of $8 and $26 1,019 1,270 Inventories 1,855 1,939 Deferred income tax benefits 57 57 Other current assets 84 81 ------ ------ Total current assets 3,093 3,402 Investments and long-term receivables, less reserves of $17 and $17 931 854 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $15,426 and $15,280 10,323 10,404 Prepaid pensions 2,064 2,014 Other noncurrent assets 308 306 ------ ------ Total assets $16,719 $16,980 ====== ====== Selected notes to financial statements appear on pages 9-12.
7 USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET (Continued) (Unaudited) --------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY March 31 December 31 (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- LIABILITIES Current liabilities: Notes payable $103 $81 Accounts payable 1,862 2,204 Payroll and benefits payable 514 475 Accrued taxes 306 304 Accrued interest 63 102 Long-term debt due within one year 521 353 ------ ------ Total current liabilities 3,369 3,519 Long-term debt, less unamortized discount 3,535 3,859 Long-term deferred income taxes 1,147 1,097 Employee benefits 2,797 2,797 Deferred credits and other liabilities 469 436 Preferred stock of subsidiary 250 250 ------ ------ Total liabilities 11,567 11,958 ------ ------ STOCKHOLDERS' EQUITY Preferred stock - 6.50% Cumulative Convertible issued - 6,900,000 shares ($345 liquidation preference) 7 7 Common stocks: Marathon Stock issued - 287,686,738 shares and 287,525,213 shares 288 288 Steel Stock issued - 85,281,513 shares and 84,885,473 shares 85 85 Delhi Stock issued - 9,451,269 shares and 9,448,269 shares 9 9 Additional paid-in capital 4,166 4,150 Retained earnings 631 517 Other equity adjustments (34) (34) ------ ------ Total stockholders' equity 5,152 5,022 ------ ------ Total liabilities and stockholders' equity $16,719 $16,980 ====== ====== Selected notes to financial statements appear on pages 9-12.
8 USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) ------------------------------------------------
First Quarter Ended March 31 (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income $196 $265 Adjustments to reconcile to net cash provided from operating activities: Depreciation, depletion and amortization 253 267 Exploratory dry well costs 14 14 Inventory market valuation charges (credits) 114 (155) Pensions (47) (46) Postretirement benefits other than pensions 9 6 Deferred income taxes 39 74 Gain on disposal of assets (14) (25) Changes in: Current receivables 239 (20) Inventories (30) 21 Current accounts payable and accrued expenses (331) (130) All other - net (23) (6) ------ ------ Net cash provided from operating activities 419 265 ------ ------ INVESTING ACTIVITIES: Capital expenditures (185) (178) Disposal of assets 19 175 Investments in equity affiliates - net (56) 5 All other - net 5 (7) ------ ------ Net cash used in investing activities (217) (5) ------ ------ FINANCING ACTIVITIES: Commercial paper and revolving credit arrangements - net 22 60 Other debt repayments (134) (263) Common stock issued 14 7 Dividends paid (81) (75) ------ ------ Net cash used in financing activities (179) (271) ------ ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 23 (11) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 55 131 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $78 $120 ====== ====== Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $(132) $(170) Income taxes paid (44) (23) Selected notes to financial statements appear on pages 9-12.
9 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------------------------------------------- (Unaudited) 1. The information furnished in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. Additional information is contained in the USX Annual Report on Form 10-K for the year ended December 31, 1996. Effective January 1, 1997, USX adopted American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" (SOP 96-1), which provides additional interpretation of existing accounting standards related to recognition, measurement and disclosure of environmental remediation liabilities. As a result of adopting SOP 96-1, USX identified additional environmental remediation liabilities of $46 million, of which $28 million was discounted to a present value of $13 million and $18 million was not discounted. Assumptions used in the calculation of the present value amount included an inflation factor of 2% and an interest rate of 7% over a range of 22 to 30 years. Estimated receivables for recoverable costs related to adoption of SOP 96-1 were $4 million. The net unfavorable effect on first quarter 1997 operating income was $27 million. 2. The method of calculating net income per share for the Marathon Stock, Steel Stock and Delhi Stock reflects the USX Board of Directors' intent that the separately reported earnings and surplus of the Marathon Group, the U. S. Steel Group and the Delhi Group, as determined consistent with the USX Certificate of Incorporation, are available for payment of dividends on the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. The financial statements of the Marathon Group, the U. S. Steel Group and the Delhi Group, taken together, include all accounts which comprise the corresponding consolidated financial statements of USX. Primary net income per share is calculated by adjusting net income for dividend requirements of preferred stock and is based on the weighted average number of common shares outstanding plus common stock equivalents, provided they are not antidilutive. Common stock equivalents result from assumed exercise of stock options, where applicable. Fully diluted net income per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options, provided in each case, the effect is not antidilutive. 10 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 3. The items below are included in both revenues and operating costs, resulting in no effect on income.
(In millions) ------------------- First Quarter Ended March 31 1997 1996 ---- ---- Matching crude oil and refined product buy/sell transactions settled in cash $755 $599 Consumer excise taxes on petroleum products and merchandise 655 633
4. Operating income includes net periodic pension credits of $38 million and $37 million in the first quarter of 1997 and 1996, respectively. These pension credits are primarily noncash and for the most part are included in selling, general and administrative expenses. 5. The provision for estimated income taxes for the periods reported is based on tax rates and amounts which recognize management's best estimate of current and deferred tax assets and liabilities. 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) ---------------------- March 31 December 31 1997 1996 -------- ----------- Raw materials $532 $594 Semi-finished products 317 309 Finished products 993 908 Supplies and sundry items 127 128 ------ ------ Total (at cost) 1,969 1,939 Less inventory market valuation reserve 114 - ------ ------ Net inventory carrying value $1,855 $1,939 ====== ======
The inventory market valuation reserve reflects the extent that the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. The reserve is decreased to reflect increases in market prices and inventory turnover and increased to reflect decreases in market prices. Changes in the inventory market valuation reserve result in noncash charges or credits to operating income. For additional information, see Outlook in the Marathon Group's Management's Discussion and Analysis of Financial Condition and Results of Operations. 11 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 7. At March 31, 1997, USX had no borrowings against its $2,350 million long- term revolving credit agreement. USX had $30 million in outstanding borrowings at March 31, 1997, against its short-term lines of credit totaling $200 million, which require maintenance of compensating balances of 3%. In addition, USX had other outstanding short-term borrowings of $73 million. In the event of a change in control of USX, debt obligations totaling $3,212 million at March 31, 1997, may be declared immediately due and payable. 8. During the first quarter of 1997, USX called for redemption on April 4, 1997 and April 15, 1997, respectively, Zero Coupon Convertible Senior Debentures Due 2005 with a carrying value of $41 million and the aggregate principal amount of $227 million 7% Convertible Subordinated Debentures Due 2017. Also during the quarter, USX redeemed $120 million aggregate principal amount of 8.50% Sinking Fund Debentures Due November 1, 2006. 9. USX has agreements (the programs) to sell an undivided interest in certain accounts receivable subject to limited recourse. Payments are collected from the sold accounts receivable; the collections are reinvested in new accounts receivable for the buyers; and a yield, based on defined short- term market rates, is transferred to the buyers. At March 31, 1997, the amount sold under the programs that had not been collected was $740 million, which will be forwarded to the buyers at the end of the agreements, or in the event of earlier contract termination. If USX does not have a sufficient quantity of eligible accounts receivable to reinvest in for the buyers, the size of the programs will be reduced accordingly. The buyers have rights to a pool of receivables that must be maintained at a level of 110% to 115% of the programs' size. In the event of a change in control of USX, as defined in one of the agreements, USX may be required to forward to the buyers, payments collected on sold accounts receivable of $350 million. Prior to 1993, USX Credit, a division of USX, sold certain of its loans receivable subject to limited recourse under an agreement that expires in 1997. USX Credit continues to collect payments from the loans and transfer to the buyers principal collected plus yield based on defined short-term market rates. At March 31, 1997, the balance of sold loans receivable subject to recourse was $35 million. USX Credit is not actively seeking new loans at this time. In the event of a change in control of USX, as defined in the agreement, USX may be required to provide cash collateral in the amount of the uncollected loans receivable to assure compliance with the limited recourse provisions. 10. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the consolidated financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. 12 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 10. (Continued) USX is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At March 31, 1997, and December 31, 1996, accrued liabilities for remediation totaled $171 million and $144 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in cleanup efforts related to underground storage tanks at retail marketing outlets, were $42 million at March 31, 1997, and $23 million at December 31, 1996. For a number of years, USX has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the first quarter of 1997 and for the years 1996 and 1995, such capital expenditures totaled $31 million, $165 million and $111 million, respectively. USX anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. At March 31, 1997, and December 31, 1996, accrued liabilities for platform abandonment and dismantlement totaled $122 million and $118 million, respectively. Guarantees by USX of the liabilities of affiliated entities totaled $70 million at March 31, 1997. In the event that any defaults of guaranteed liabilities occur, USX has access to its interest in the assets of most of the affiliates to reduce losses resulting from these guarantees. As of March 31, 1997, the largest guarantee for a single affiliate was $28 million. At March 31, 1997, USX's pro rata share of obligations of LOOP LLC and various pipeline affiliates secured by throughput and deficiency agreements totaled $176 million. Under the agreements, USX is required to advance funds if the affiliates are unable to service debt. Any such advances are prepayments of future transportation charges. Contract commitments for capital expenditures for property, plant and equipment at March 31, 1997, totaled $596 million compared with $526 million at December 31, 1996. 13
USX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS TOTAL ENTERPRISE BASIS - (Unaudited) ---------------------------------------------------------- First Quarter Ended March 31 Year Ended December 31 - --------------------- ------------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- ---- 3.31 3.78 3.55 1.50 1.92 (a) (a) ==== ==== ==== ==== ==== ==== ==== (a) Earnings did not cover combined fixed charges and preferred stock dividends by $325 million for 1993 and by $211 million for 1992.
USX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES TOTAL ENTERPRISE BASIS - (Unaudited) ------------------------------------------------- First Quarter Ended March 31 Year Ended December 31 - --------------------- ------------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- ---- 3.57 4.04 3.81 1.63 2.08 (a) (a) ==== ==== ==== ==== ==== ==== ==== (a) Earnings did not cover fixed charges by $281 million for 1993 and by $197 million for 1992.
PAGE> 14 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- USX Corporation ("USX") is a diversified company engaged primarily in the energy business through its Marathon Group, in the steel business through its U. S. Steel Group and in the gas gathering and processing business through its Delhi Group. The following discussion should be read in conjunction with the first quarter 1997 USX consolidated financial statements and selected notes. For income per common share amounts applicable to each of USX's three classes of common stock, USX-Marathon Group Common Stock ("Marathon Stock"), USX-U. S. Steel Group Common Stock ("Steel Stock") and USX-Delhi Group Common Stock ("Delhi Stock"), see Consolidated Statement of Operations - Income per Common Share. For Group results, see Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group, the U. S. Steel Group and the Delhi Group. For operating statistics, see Supplemental Statistics following Management's Discussion and Analysis of Financial Condition and Results of Operations for the respective Groups. Certain sections of the discussion include forward-looking statements concerning trends or events potentially affecting USX. These statements typically contain words such as "anticipates", "believes", "estimates", "expects" or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in forward-looking statements. For additional cautionary language related to USX, see Item 5. herein. Results of Operations - --------------------- Revenues for the first quarter of 1997 and 1996 are set forth in the following table:
First Quarter Ended March 31 (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- Revenues Marathon Group $4,082 $3,627 U. S. Steel Group 1,620 1,591 Delhi Group 339 278 Eliminations (44) (23) ------ ------ Total USX Corporation Revenues 5,997 5,473 Less: Matching crude oil and refined product buy/sell transactions settled in cash (a) 755 599 Consumer excise taxes on petroleum products and merchandise (a) 655 633 ------ ------ Revenues adjusted to exclude above items $4,587 $4,241 ====== ====== (a) Included in both revenues and operating costs for the Marathon Group and USX Consolidated.
15 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Adjusted revenues increased by $346 million, or 8%, in the first quarter of 1997 as compared with the first quarter of 1996. The improvement reflected increases of 12% for the Marathon Group, 22% for the Delhi Group and 2% for the U. S. Steel Group. The increase for the Marathon Group was due primarily to higher average refined product prices and higher average worldwide natural gas and liquid hydrocarbon prices, partially offset by reduced worldwide liquid hydrocarbon volumes. The increase for the Delhi Group was due primarily to higher average sales prices for natural gas and natural gas liquids, partially offset by lower natural gas sales volumes. The increase for the U. S. Steel Group was due primarily to higher average realized prices. Operating income and certain items included in operating income for the first quarter of 1997 and 1996 are set forth in the following table:
First Quarter Ended March 31 (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- Operating income $342 $466 Less: certain favorable (unfavorable) items for Marathon Group Inventory market valuation reserve adjustment (a) (114) 155 Charges for withdrawal from MPA (b) - (10) U. S. Steel Group Effect of adoption of SOP 96-1 (c) (20) - Other environmental accrual adjustments - net 11 - ---- ---- Subtotal (123) 145 ---- ---- Operating income adjusted to exclude above items $465 $321 ==== ==== (a) The inventory market valuation reserve reflects the extent to which the recorded LIFO cost basis of crude oil and refined product inventories exceeds net realizable value. For additional discussion of this noncash adjustment, see Outlook in Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group. (b) Marine Preservation Association ("MPA") is a non-profit oil spill response group. (c) American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" ("SOP 96-1") provides additional guidance on recognition, measurement and disclosure of remediation liabilities.
Adjusted operating income increased by $144 million, or 45%, in the first quarter of 1997 as compared with the first quarter of 1996, reflecting increases of $96 million for the Marathon Group and $48 million for the U. S. Steel Group. The increase for the Marathon Group was due primarily to higher average worldwide natural gas and liquid hydrocarbon prices and higher average refined product margins, partially offset by reduced worldwide liquid hydrocarbon volumes. The increase for the U. S. Steel Group was due primarily to higher average realized prices, a partial recovery of insurance proceeds related to the April 1996 break-out at the Gary Works' No. 13 blast furnace and an improved product mix, partially offset by higher natural gas costs. 16 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Other income for the first quarter of 1997 and 1996 is set forth in the following table:
First Quarter Ended March 31 (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- Income from affiliates - equity method $15 $12 Gain on sale of investments (a) 11 21 Other income 1 1 ------ ------ Total other income $27 $34 ====== ====== - ------ (a) Amounts in 1997 and 1996 primarily reflect gains on the sale of the Marathon Group's interests in certain domestic pipeline companies. Net interest and other financial costs for the first quarter of 1997 and 1996 are set forth in the following table:
First Quarter Ended March 31 (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- Interest and other financial income $3 $5 Interest and other financial costs (85) (120) ------ ------ Net interest and other financial costs (82) (115) Less: Favorable adjustment to carrying value of indexed debt(a) 16 - ------ ------ Net interest and other financial costs adjusted to exclude above item $(98) $(115) ====== ====== (a) In December 1996, USX issued $117 million in aggregate principal amount of 6-3/4% Notes Due February 1, 2000 ("indexed debt"), mandatorily exchangeable at maturity for common stock of RMI Titanium Company ("RMI") (or for the equivalent amount of cash, at USX's option). The carrying value of indexed debt is adjusted quarterly to settlement value based on changes in the value of RMI common stock. Any resulting adjustment is charged or credited to income and included in interest and other financial costs. USX's 27% interest in RMI continues to be accounted for under the equity method.
Excluding the adjustment to the carrying value of indexed debt, net interest and other financial costs decreased by $17 million in the first quarter of 1997 as compared with the first quarter of 1996, due primarily to lower average debt levels. Provision for estimated income taxes of $91 million and $120 million for the first quarter of 1997 and 1996 were based on tax rates and amounts that recognize management's best estimate of current and deferred tax assets and liabilities. Net income was $196 million in the first quarter of 1997, a decrease of $69 million, or 26%, from the first quarter of 1996, mainly reflecting the items discussed above. 17 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Dividends to Stockholders - ------------------------- On April 29, 1997, the USX Board of Directors (the "Board") declared dividends of 19 cents per share on Marathon Stock, 25 cents per share on Steel Stock and 5 cents per share on Delhi Stock, all payable June 10, 1997, to stockholders of record at the close of business on May 21, 1997. The Board also declared a dividend of $0.8125 per share on USX's 6.5% Cumulative Convertible Preferred Stock, payable June 30, 1997, to stockholders of record at the close of business on June 2, 1997. Cash Flows - ---------- Cash and cash equivalents totaled $78 million at March 31, 1997, compared with $55 million at December 31, 1996. Net cash provided from operating activities totaled $419 million in the first quarter of 1997, compared with $265 million in the first quarter of 1996. The 1996 period included payments of $39 million related to certain state tax issues and $28 million for final settlement of the Pickering v. USX litigation. Excluding the effects of these items, net cash provided from operating activities increased by $87 million in the first quarter of 1997, due primarily to improved operating results (mainly reflecting higher worldwide natural gas and liquid hydrocarbon prices, higher average refined product margins and higher average realized steel prices), partially offset by unfavorable working capital changes. Cash from the disposal of assets was $19 million in the first quarter of 1997, compared with $175 million in the first quarter of 1996. The 1997 proceeds primarily reflected sale of the Marathon Group's interest in a domestic pipeline company and certain other investments. The 1996 proceeds primarily reflected the sale of the U. S. Steel Group's investment in National-Oilwell (an oil field service joint venture); sales of the Marathon Group's interests in oil and gas production properties in Indonesia and the sale of the Marathon Group's interest in a domestic pipeline company. Capital expenditures for property, plant and equipment in the first quarter of 1997 were $185 million, compared with $178 million in the first quarter of 1996. For further details, see USX Corporation - Financial Statistics, following Management's Discussion and Analysis of Financial Condition and Results of Operations. Contract commitments for capital expenditures were $596 million at March 31, 1997, compared with $526 million at December 31, 1996. Investments in equity affiliates of $56 million in the first quarter of 1997 reflect spending on capital projects by equity affiliates, primarily the Nautilus natural gas pipeline system in the Gulf of Mexico and the Sakhalin II project in Russia, and an investment in a power generation project in Ecuador. USX's total long-term debt, preferred stock of subsidiary and notes payable, was $4.4 billion at March 31, 1997, down $134 million from December 31, 1996, mainly reflecting cash provided from operating activities and asset sales during 1997, in excess of cash used for capital expenditures, dividend payments and investments in equity affiliates. Redemptions of long-term debt consisted of $120 million of 8-1/2% Sinking Fund Debentures due 2006. 18 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Liquidity - --------- At March 31, 1997, USX had no borrowings against its $2,350 million long- term revolving credit agreement. At March 31, 1997, USX had no borrowings against its short-term credit agreements totaling $175 million. These agreements are with two banks, with interest based on their prime rate or London Interbank Offered Rate, and carry a facility fee of .15%. Certain other banks provide short-term lines of credit totaling $200 million which generally require maintenance of compensating balances of 3%. At March 31, 1997, USX had $30 million borrowed against these lines of credit, leaving $170 million available in short-term lines of credit. In addition, USX had other outstanding short-term borrowings of $73 million. USX management believes that its short-term and long-term liquidity is adequate to satisfy its obligations as of March 31, 1997, and to complete currently authorized capital spending programs. Future requirements for USX's business needs, including the funding of capital expenditures, debt maturities for the balance of 1997 and years 1998 and 1999, and any amounts that may ultimately be paid in connection with contingencies (which are discussed in Note 10 to the 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. USX's ability to avail itself in the future of the above mentioned financing options is affected by the performance of each of its Groups (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 and actions, the overall U.S. financial climate, and, in particular, with respect to borrowings, by levels of USX's outstanding debt and credit ratings by investor services. Environmental Matters, Contingencies and Commitments - ---------------------------------------------------- USX has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of USX's products and services, operating results will be adversely affected. USX believes that domestic competitors of the U. S. Steel Group and substantially all the competitors of the Marathon Group and the Delhi Group are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and the specific products and services it provides. 19 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- USX has been notified that it is a potentially responsible party ("PRP") at 46 waste sites under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of March 31, 1997. In addition, there are 24 sites where USX has received information requests or other indications that USX may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability. There are also 109 additional sites, excluding retail marketing outlets, where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. At many of these sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. USX accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. Effective January 1, 1997, USX adopted SOP 96-1. First quarter 1997 operating income for USX included charges of $27 million (net of expected recoveries) related to such adoption, primarily accruals of post-closure monitoring costs, study costs and administrative costs. See Note 1 to the Consolidated Financial Statements for additional discussion. First quarter 1997 operating income also included net favorable effects of $15 million related to other environmental accrual adjustments. Accrued liabilities for remediation totaled $171 million at March 31, 1997, an increase of $27 million from December 31, 1996, due primarily to accrual adjustments for the adoption of SOP 96-1 and accruals related to retail marketing outlets, partially offset by other net accrual adjustments related to U. S. Steel Group. Receivables for expected recoveries totaled $42 million at March 31, 1997, an increase of $19 million from December 31, 1996, due primarily to accrual adjustments reflecting an increase in the estimated portion of costs that are ultimately recoverable, and accruals for recoveries associated with adoption of SOP 96-1. See Note 10 to the Consolidated Financial Statements. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment (see Note 10 to the Consolidated Financial Statements for a discussion of certain of these matters). The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Consolidated Financial Statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably. See discussion of Liquidity herein. Outlook - ------- In March 1997, USX called for redemption in April 1997, Zero Coupon Convertible Senior Debentures Due 2005 with a carrying value of $41 million ($24 million in original proceeds and $17 million of amortized discount) and 7% Convertible Subordinated Debentures due 2017 with a carrying value of $227 million. The effects of these redemptions will be reflected in USX's second quarter 1997 financial statements. For additional discussion, see Outlook in Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group, the U. S. Steel Group and the Delhi Group. 20 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Accounting Standard - ------------------- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"), which changes the computation and presentation of earnings per share ("EPS"). USX will adopt SFAS No. 128 in the fourth quarter of 1997, as required. While restatement of prior-period EPS is required by the standard, EPS presented for each class of USX Common Stock for the first quarter of 1997 and for the years 1996 and 1995 will not change upon adoption. 21 USX CORPORATION FINANCIAL STATISTICS (Unaudited) --------------------------------
First Quarter Ended March 31 ---------------- (Dollars in Millions) 1997 1996 - -------------------------------------------------------------------------------- REVENUES Marathon Group $4,082 $3,627 U. S. Steel Group 1,620 1,591 Delhi Group 339 278 Eliminations (44) (23) ------- ------- Total $5,997 $5,473 OPERATING INCOME Marathon Group $214 $377 U. S. Steel Group 120 81 Delhi Group 8 8 ----- ----- Total $342 $466 CAPITAL EXPENDITURES Marathon Group $118 $100 U. S. Steel Group 50 56 Delhi Group 17 22 ----- ----- Total $185 $178
22 Part I - Financial Information (Continued): B. Marathon Group MARATHON GROUP OF USX CORPORATION STATEMENT OF OPERATIONS (Unaudited) -----------------------------------
First Quarter Ended March 31 (Dollars in millions, except per share amounts) 1997 1996 - -------------------------------------------------------------------------------- REVENUES $4,082 $3,627 OPERATING COSTS: Cost of sales (excludes items shown below) 2,758 2,430 Inventory market valuation charges (credits) 114 (155) Selling, general and administrative expenses 84 78 Depreciation, depletion and amortization 171 182 Taxes other than income taxes 708 682 Exploration expenses 33 33 ------ ------ Total operating costs 3,868 3,250 ------ ------ OPERATING INCOME 214 377 Other income 16 25 Interest and other financial income 2 4 Interest and other financial costs (67) (86) ------ ------ INCOME BEFORE INCOME TAXES 165 320 Less provision for estimated income taxes 57 104 ------ ------ NET INCOME $108 $216 ====== ====== MARATHON STOCK DATA: Net income per share - primary $.37 $.75 - fully diluted .37 .74 Dividends paid per share .19 .17 Weighted average shares, in thousands - Primary 287,987 287,460 - Fully diluted 294,661 297,251 Selected notes to financial statements appear on pages 25-28.
23 MARATHON GROUP OF USX CORPORATION BALANCE SHEET (Unaudited) ---------------------------------
March 31 December 31 (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $62 $32 Receivables, less allowance for doubtful accounts of $2 and $2 494 613 Inventories 1,182 1,282 Other current assets 124 119 ------ ------ Total current assets 1,862 2,046 Investments and long-term receivables 384 311 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $9,182 and $9,031 7,232 7,298 Prepaid pensions 285 280 Other noncurrent assets 212 216 ------ ------ Total assets $9,975 $10,151 ====== ====== LIABILITIES Current liabilities: Notes payable $77 $59 Accounts payable 1,087 1,385 Payroll and benefits payable 113 106 Accrued taxes 95 98 Deferred income taxes 146 155 Accrued interest 47 75 Long-term debt due within one year 399 264 ------ ------ Total current liabilities 1,964 2,142 Long-term debt, less unamortized discount 2,522 2,642 Long-term deferred income taxes 1,203 1,178 Employee benefits 361 356 Deferred credits and other liabilities 346 311 Preferred stock of subsidiary 182 182 ------ ------ Total liabilities 6,578 6,811 STOCKHOLDERS' EQUITY 3,397 3,340 ------ ------ Total liabilities and stockholders' equity $9,975 $10,151 ====== ====== Selected notes to financial statements appear on pages 25-28.
24 MARATHON GROUP OF USX CORPORATION STATEMENT OF CASH FLOWS (Unaudited) -----------------------------------
First Quarter Ended March 31 (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income $108 $216 Adjustments to reconcile to net cash provided from operating activities: Depreciation, depletion and amortization 171 182 Exploratory dry well costs 14 14 Inventory market valuation charges (credits) 114 (155) Pensions (5) (5) Postretirement benefits other than pensions 3 4 Deferred income taxes 16 57 Gain on disposal of assets (12) (21) Changes in: Current receivables 119 (24) Inventories (14) 41 Current accounts payable and accrued expenses (323) (57) All other - net 13 10 ------ ------ Net cash provided from operating activities 204 262 ------ ------ INVESTING ACTIVITIES: Capital expenditures (118) (100) Disposal of assets 13 85 Investments in equity affiliates - net (57) 2 All other - net 1 - ------ ------ Net cash used in investing activities (161) (13) ------ ------ FINANCING ACTIVITIES: Increase (decrease) in Marathon Group's share of USX consolidated debt 39 (188) Marathon Stock issued 3 - Dividends paid (55) (49) ------ ------ Net cash used in financing activities (13) (237) ------ ------ NET INCREASE IN CASH AND CASH EQUIVALENTS 30 12 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 32 77 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $62 $89 ====== ====== Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $(92) $(133) Income taxes paid, including settlements with other groups (71) (5) Selected notes to financial statements appear on pages 25-28.
25 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS -------------------------------------- (Unaudited) 1. The information furnished in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. Additional information is contained in the USX Annual Report on Form 10-K for the year ended December 31, 1996. Effective January 1, 1997, USX adopted American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" (SOP 96-1), which provides additional interpretation of existing accounting standards related to recognition, measurement and disclosure of environmental remediation liabilities. As a result of adopting SOP 96-1, the Marathon Group recognized additional environmental remediation liabilities of $11 million. Estimated receivables for recoverable costs related to adoption of SOP 96-1 were $4 million. The net unfavorable effect on Marathon Group first quarter 1997 operating income was $7 million. 2. The financial statements of the Marathon Group include the financial position, results of operations and cash flows for the businesses of Marathon Oil Company and certain other subsidiaries of USX, and a portion of the corporate assets and liabilities and related transactions which are not separately identified with ongoing operating units of USX. These financial statements are prepared using the amounts included in the USX consolidated financial statements. Corporate amounts reflected in these financial statements are determined based upon methods which management believes to be reasonable. The accounting policies applicable to the preparation of the financial statements of the Marathon Group may be modified or rescinded in the sole discretion of the Board of Directors of USX (Board), although the Board has no present intention to do so. The Board may also adopt additional policies depending on the circumstances. Although the financial statements of the Marathon Group, the U. S. Steel Group and the Delhi Group separately report the assets, liabilities (including contingent liabilities) and stockholders' equity of USX attributed to each such group, such attribution of assets, liabilities (including contingent liabilities) and stockholders' equity among the Marathon Group, the U. S. Steel Group and the Delhi Group for the purpose of preparing their respective financial statements does not affect legal title to such assets and responsibility for such liabilities. Holders of USX-Marathon Group Common Stock (Marathon Stock), USX-U. S. Steel Group Common Stock (Steel Stock) and USX-Delhi Group Common Stock (Delhi Stock) are holders of common stock of USX and continue to be subject to all the risks associated with an investment in 26 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 2. (Continued) USX and all of its businesses and liabilities. Financial impacts arising from one Group that affect the overall cost of USX's capital could affect the results of operations and financial condition of other groups. In addition, net losses of any Group, as well as dividends or distributions on any class of USX Common Stock or series of Preferred Stock and repurchases of any class of USX Common Stock or series of Preferred Stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on all classes of Common Stock. Accordingly, the USX consolidated financial information should be read in connection with the Marathon Group financial information. 3. The method of calculating net income per share for the Marathon Stock, Steel Stock and Delhi Stock reflects the Board's intent that the separately reported earnings and surplus of the Marathon Group, the U. S. Steel Group and the Delhi Group, as determined consistent with the USX Certificate of Incorporation, are available for payment of dividends on the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. Primary net income per share is based on the weighted average number of common shares outstanding plus common stock equivalents, provided they are not antidilutive. Common stock equivalents result from assumed exercise of stock options, where applicable. Fully diluted net income per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options provided, in each case, the effect is not antidilutive. 4. The items below are included in both revenues and operating costs, resulting in no effect on income.
(In millions) ------------------- First Quarter Ended March 31 1997 1996 ---- ---- Matching crude oil and refined product buy/sell transactions settled in cash $755 $599 Consumer excise taxes on petroleum products and merchandise 655 633
27 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 5. The financial statement provision for estimated income taxes and related tax payments or refunds have been reflected in the Marathon Group, the U. S. Steel Group and the Delhi Group financial statements in accordance with USX's tax allocation policy for such groups. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated among the Marathon Group, the U. S. Steel Group and the Delhi Group for group financial statement purposes, based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to the respective groups. The provision for estimated income taxes for the Marathon Group is based on tax rates and amounts which recognize management's best estimate of current and deferred tax assets and liabilities. Differences between the combined interim tax provisions of the Marathon, U. S. Steel and Delhi Groups and USX consolidated are allocated to each group based on the relationship of the individual group provisions to the combined interim provisions. 6. Inventories are carried at the lower of cost or market. Cost of inventories of crude oil and refined products is determined under the last- in, first-out (LIFO) method.
(In millions) ---------------------- March 31 December 31 1997 1996 -------- ----------- Crude oil and natural gas liquids $414 $463 Refined products and merchandise 811 746 Supplies and sundry items 71 73 ------ ------ Total (at cost) 1,296 1,282 Less inventory market valuation reserve 114 - ------ ------ Net inventory carrying value $1,182 $1,282 ====== ======
The inventory market valuation reserve reflects the extent that the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. The reserve is decreased to reflect increases in market prices and inventory turnover and increased to reflect decreases in market prices. Changes in the inventory market valuation reserve result in noncash charges or credits to operating income. For additional information, see Outlook in the Marathon Group's Management's Discussion and Analysis of Financial Condition and Results of Operations. 7. The Marathon Group participates in an agreement (the program) to sell an undivided interest in certain accounts receivable subject to limited recourse. Payments are collected from the sold accounts receivable; the collections are reinvested in new accounts receivable for the buyers; and a yield, based on defined short-term market rates, is transferred to the buyers. At March 31, 1997, the amount sold under the program that had not been collected was $340 million, which will be forwarded to the buyers at the end of the agreement, or in the event of earlier contract termination. If the Marathon Group does not have a sufficient quantity of eligible accounts receivable to reinvest in for the buyers, the size of the program will be reduced accordingly. The buyers have rights to a pool of receivables that must be maintained at a level of 110% of the program size. 28 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 8. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Marathon Group involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Marathon Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Marathon Group. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. The Marathon Group is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At March 31, 1997, and December 31, 1996, accrued liabilities for remediation totaled $58 million and $37 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in cleanup efforts related to underground storage tanks at retail marketing outlets, were $42 million at March 31, 1997, and $23 million at December 31, 1996. For a number of years, the Marathon Group has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the first quarter of 1997 and for the years 1996 and 1995, such capital expenditures totaled $12 million, $66 million and $50 million, respectively. The Marathon Group anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. At March 31, 1997, and December 31, 1996, accrued liabilities for platform abandonment and dismantlement totaled $122 million and $118 million, respectively. Guarantees by USX of the liabilities of affiliated entities of the Marathon Group totaled $34 million at March 31, 1997. As of March 31, 1997, the largest guarantee for a single affiliate was $28 million. At March 31, 1997, the Marathon Group's pro rata share of obligations of LOOP LLC and various pipeline affiliates secured by throughput and deficiency agreements totaled $176 million. Under the agreements, the Marathon Group is required to advance funds if the affiliates are unable to service debt. Any such advances are prepayments of future transportation charges. At March 31, 1997, contract commitments for the Marathon Group's capital expenditures for property, plant and equipment totaled $473 million compared with $388 million at December 31, 1996. 29 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The Marathon Group includes Marathon Oil Company ("Marathon") and certain other subsidiaries of USX which are engaged in worldwide exploration, production, transportation and marketing of crude oil and natural gas; and domestic refining, marketing and transportation of petroleum products. Management's Discussion and Analysis should be read in conjunction with the first quarter 1997 USX consolidated financial information and the Marathon Group Financial Statements and selected notes. The discussion of Results of Operations should be read in conjunction with the Supplemental Statistics provided on page 35. Certain sections of Management's Discussion and Analysis include forward- looking statements concerning trends or events potentially affecting the businesses of the Marathon Group. These statements typically contain words such as "believes", "estimates", "expects" or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in forward-looking statements. For additional cautionary language related to the Marathon Group, see Item 5. herein. Results of Operations - --------------------- Revenues for the first quarter of 1997 and 1996 are summarized in the following table:
First Quarter Ended March 31 ------------------- (Dollars in millions) 1997 1996 ----- ----- Refined products $1,686 $1,529 Merchandise 238 227 Liquid hydrocarbons 266 270 Natural gas 438 319 Transportation and other 44 50 ------ ------ Subtotal 2,672 2,395 Matching crude oil and refined product buy/sell transactions settled in cash (a) 755 599 Consumer excise taxes on petroleum products and merchandise (a) 655 633 ------ ------ Total revenues $4,082 $3,627 ====== ====== - -------- (a)Included in both revenues and operating costs.
Revenues (excluding matching buy/sell transactions and excise taxes) increased by $277 million, or 12%, in the first quarter of 1997 from the comparable prior-year period. The increase primarily reflected higher average refined product prices and worldwide natural gas and liquid hydrocarbon prices, partly offset by reduced volumes of worldwide liquid hydrocarbons. 30 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Operating income and certain items included in operating income for the first quarter of 1997 and 1996 are summarized in the following table:
First Quarter Ended March 31 ------------------- (Dollars in millions) 1997 1996 ----- ----- Operating income $214 $377 Less: Certain favorable (unfavorable) items Inventory market valuation reserve adjustment (a) (114) 155 Charges for withdrawal from MPA (b) - (10) ------ ------ Subtotal (114) 145 ------ ------ Operating income adjusted to exclude above items $328 $232 ====== ====== - -------- (a)The inventory market valuation reserve reflects the extent to which the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. For additional discussion of this noncash adjustment, see Outlook herein. (b)Marine Preservation Association ("MPA") is a non-profit oil spill response group.
Adjusted operating income in the first quarter of 1997 improved by $96 million from last year's first quarter, due primarily to increased worldwide natural gas and liquid hydrocarbon prices and higher average refined product margins, partially offset by reduced volumes of worldwide liquid hydrocarbons. First quarter operating income for domestic exploration and production ("upstream") increased by $63 million in 1997 from 1996. The improvement was mainly due to higher average natural gas and liquid hydrocarbon prices and increased natural gas production, partially offset by lower liquid hydrocarbon volumes. The increase in gas volumes was mainly attributable to the Cotton Valley Pinnacle Reef play in east Texas, while the lower liquid hydrocarbon volumes were mostly due to the fourth quarter 1996 disposal of oil producing properties in Alaska. International upstream operations recorded a $4 million improvement in first quarter operating income in 1997 from 1996 as favorable effects of higher average natural gas and liquid hydrocarbon prices were predominantly offset by lower liquid hydrocarbon liftings, primarily in the U.K. North Sea, and lower natural gas volumes, primarily in Ireland. First quarter operating income for refining, marketing and transportation ("downstream") operations increased by $48 million in 1997 from 1996. First quarter 1996 results included a $10 million charge for Marathon's withdrawal from the MPA. Excluding this item, downstream results improved by over 85% from the prior-year quarter, primarily reflecting higher wholesale margins on refined products, despite higher crude oil and other feedstock acquisition costs. Administrative expense for the first quarter increased by $9 million in 1997 from 1996, mainly reflecting an increase in accruals for stock appreciation rights and Marathon's performance-based variable pay plan. 31 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Other income in the first quarter of 1997 and 1996 included gains of $11 million and $20 million, respectively, on the sales of interests in certain domestic pipeline companies and other investments. Net interest and other financial costs in the first quarter of 1997 decreased by $17 million from the first quarter of 1996, mainly due to lower average debt levels. Net income for the first quarter decreased by $108 million in 1997 from 1996. Excluding the after-tax effects of the inventory market valuation adjustment and other special items, first quarter financial results increased by 61% to $180 million in 1997 from $112 million in 1996, primarily reflecting the factors discussed above. Cash Flows - ---------- Net cash provided from operating activities was $204 million in the first quarter of 1997, compared with $262 million in the first quarter of 1996. Excluding first quarter 1996 payments of $39 million related to certain state tax issues, net cash from operating activities decreased by $97 million, mainly reflecting unfavorable working capital changes, including increased income tax payments, partially offset by the favorable effects of improved profitability. Cash from the disposal of assets was $13 million in the first quarter of 1997, compared with $85 million in the first quarter of 1996. Proceeds in 1996 were mainly from the sales of interests in certain international production properties and a domestic pipeline company. Capital expenditures in the first quarter of 1997 totaled $118 million, compared with $100 million in the first quarter of 1996. Expenditures in both periods were primarily for upstream projects. Contract commitments for capital expenditures were $473 million at March 31, 1997, compared with $388 million at year-end 1996. Investments in equity affiliates of $57 million in the first quarter of 1997 reflect spending on capital projects by equity affiliates, primarily the Nautilus natural gas pipeline system in the Gulf of Mexico and the Sakhalin II project in Russia. In addition, in March 1997, Marathon purchased a 50% interest in an Ecuadorian power generation company, Power Services Ecuador Ecuapower Compania Limitada ("Ecuapower"). Ecuapower's major assets include a 96 megawatt power plant at Santa Domingo and a 34 megawatt power plant at Santa Elena. Financial obligations increased by $39 million in the first quarter of 1997 as cash used for capital expenditures, investments in equity affiliates and dividend payments exceeded net cash provided from operating activities and asset disposals. Financial obligations consist of the Marathon Group's portion of USX debt and preferred stock of a subsidiary attributed to all three groups, as well as debt specifically attributed to the Marathon Group. Dividends paid in the first quarter of 1997 increased by $6 million from the first quarter of 1996 reflecting the two-cents-per-share increase in the quarterly USX-Marathon Group Common Stock dividend rate, initially declared in October 1996. 32 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Liquidity - --------- For discussion of USX's liquidity and capital resources, see USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. Environmental Matters, Contingencies and Commitments - ---------------------------------------------------- The Marathon Group has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the Marathon Group's products and services, operating results will be adversely affected. The Marathon Group believes that substantially all of its competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and whether or not it is engaged in the petrochemical business or the marine transportation of crude oil and refined products. USX has been notified that it is a potentially responsible party ("PRP") at 20 waste sites related to the Marathon Group under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of March 31, 1997. In addition, there are 9 sites related to the Marathon Group where USX has received information requests or other indications that USX may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability. There are also 68 additional sites, excluding retail marketing outlets, related to the Marathon Group where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. At many of these sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. The Marathon Group accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. Effective January 1, 1997, USX adopted the American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" ("SOP 96-1"). First quarter 1997 operating income for the Marathon Group included charges of $7 million (net of expected recoveries) related to such adoption, primarily for accruals of post-closure monitoring costs, study costs and administrative costs. See Note 1 to the Marathon Group Financial Statements for additional discussion. First quarter 1997 operating income also included net favorable effects of $4 million related to other environmental accrual adjustments. Accrued liabilities for remediation totaled $58 million at March 31, 1997, an increase of $21 million from December 31, 1996, due primarily to accrual adjustments for adoption of SOP 96-1 and accruals related to retail marketing outlets. Receivables for expected recoveries totaled $42 million at March 31, 1997, an increase of $19 million from December 31, 1996, due primarily to accrual adjustments reflecting an increase in the estimated portion of costs that are ultimately recoverable, and accruals for recoveries associated with the adoption of SOP 96-1. See Note 8 to the Marathon Group Financial Statements. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Marathon Group involving a variety of matters, including laws and regulations relating to the environment (see Note 8 to the Marathon Group Financial Statements for a discussion of certain of these matters). The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Marathon Group Financial Statements. 33 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- 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. Outlook - ------- In April 1997, Marathon acquired an additional 7.5% interest in Sakhalin Energy Investment Company Ltd. ("Sakhalin Energy"), increasing its ownership to 37.5%. Sakhalin Energy, an incorporated joint venture company, holds the licenses to the Piltun-Astokhskoye and Lunskoye fields, located offshore Sakhalin Island in the Russian Far East Region. The outlook regarding the Marathon Group's revenues, margins and income is largely dependent upon future prices and volumes of crude oil, natural gas and refined products. Prices have historically been volatile and have frequently been driven by unpredictable changes in supply and demand resulting from fluctuations in economic activity and political developments in the world's major oil and gas producing areas, including OPEC member countries. Any substantial decline in such prices could have a material adverse effect on the Marathon Group's results of operations. A prolonged decline in such prices could also adversely affect the quantity of crude oil and natural gas reserves that can be economically produced and the amount of capital available for exploration and development. Relative to the changing levels of commodity prices, when U.S. Steel Corporation acquired Marathon Oil Company in March 1982, crude oil and refined product prices were at historically high levels. In applying the purchase method of accounting, Marathon's crude oil and refined product inventories were revalued by reference to current prices at the time of acquisition. This became the new LIFO cost basis of the inventories, which has been maintained since the 1982 acquisition. Generally accepted accounting principles require that inventories be valued at lower of cost or market. Accordingly, Marathon has established an inventory market valuation ("IMV") reserve to reduce the LIFO cost basis, to the extent necessary, to current market value. Adjustments to the IMV reserve result in noncash charges or credits to operating income. These adjustments affect the comparability of financial results from period to period as well as comparisons with other energy companies, which may not have such adjustments. The IMV reserve adjustments have been separately reported, on a consistent basis, as a component of operating results and separately identified in management's discussion of operations. Commodity prices have fluctuated widely and, since 1986, have generally remained below prices that existed at the time of the 1982 acquisition, resulting in periodic adjustments to the LIFO cost basis of the inventories. At December 31, 1996, market prices exceeded LIFO cost, and no IMV reserve was required. At March 31, 1997, LIFO cost exceeded market prices by $114 million, resulting in a corresponding charge to operating income. During the first quarter of 1996, favorable market price movements resulted in a $155 million credit to operating income. This $269 million variance in operating income affects the comparability of reported financial results. In management's opinion, the Marathon Group's operating performance should be evaluated exclusive of the IMV reserve adjustments, which management believes provides a more indicative view of the profit and cash flow performance of the Group. 34 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- As commodity prices continue to fluctuate, future quarterly IMV reserve adjustments can be reasonably expected. In addition to reported financial results, management believes that the Marathon Group's future operating performance should be evaluated exclusive of the impact of these adjustments, whether favorable or unfavorable. Accounting Standard - ------------------- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"), which changes the computation and presentation of earnings per share ("EPS"). USX will adopt SFAS No. 128 in the fourth quarter of 1997, as required. While restatement of prior-period EPS is required by the standard, EPS presented for USX-Marathon Group Common Stock for the first quarter of 1997 and for the years 1996 and 1995 will not change upon adoption. 35 MARATHON GROUP OF USX CORPORATION SUPPLEMENTAL STATISTICS (Unaudited) ----------------------------------- ($ in Millions)
First Quarter Ended March 31 -------------- 1997 1996 ---- ---- OPERATING INCOME (LOSS) Exploration & Production Domestic $183 $120 International 101 97 Refining, Marketing & Transportation 82 34 Gas Gathering and Processing 3 3 Administrative (41) (32) ------ ------ $328 $222 Inventory Market Val. Res. Adjustment (114) 155 ------ ------ Total Marathon Group $214 $377 CAPITAL EXPENDITURES $118 $100 OPERATING STATISTICS Net Liquid Hydrocarbon Production (a): Domestic 114.8 125.9 International 53.6 65.3 ------ ------ Worldwide 168.4 191.2 Net Natural Gas Production (b): Domestic 758.5 689.8 International - Equity 537.1 596.7 International - Other (c) 37.9 35.2 ------- ------- Total Consolidated 1,333.5 1,321.7 Equity Affiliate 54.9 62.2 ------- ------- Worldwide 1,388.4 1,383.9 Average Equity Sales Prices (d): Liquid Hydrocarbons (per Bbl) Domestic $19.26 $16.17 International 21.30 18.57 Natural Gas (per Mcf) Domestic $2.53 $2.02 International 2.18 1.87 Natural Gas Sales (b) (e): Domestic 1,245.5 1,090.8 International 575.0 631.9 ------- ------- Total Consolidated 1,820.5 1,722.7 Equity Affiliate 54.9 62.2 ------- ------- Worldwide 1,875.4 1,784.9 Crude Oil Refined (a) 476.1 489.8 Refined Products Sold (a) 724.0 725.3 - ------------ (a) Thousands of barrels per day (b) Millions of cubic feet per day (c) Represents gas acquired for injection and subsequent resale (d) Prices exclude gains and losses from hedging activities (e) Represents equity, royalty and resale volumes
36 Part I - Financial Information (Continued): C. U. S. Steel Group U. S. STEEL GROUP OF USX CORPORATION STATEMENT OF OPERATIONS (Unaudited) ------------------------------------
First Quarter Ended March 31 (Dollars in millions, except per share amounts) 1997 1996 - -------------------------------------------------------------------------------- REVENUES $1,620 $1,591 OPERATING COSTS: Cost of sales (excludes items shown below) 1,404 1,415 Selling, general and administrative expenses (credits) (37) (41) Depreciation, depletion and amortization 74 78 Taxes other than income taxes 59 58 ------ ------ Total operating costs 1,500 1,510 ------ ------ OPERATING INCOME 120 81 Other income 11 8 Interest and other financial income 1 1 Interest and other financial costs (12) (29) ------ ------ INCOME BEFORE INCOME TAXES 120 61 Less provision for estimated income taxes 33 15 ------ ------ NET INCOME 87 46 Dividends on preferred stock (6) (6) ------ ------ NET INCOME APPLICABLE TO STEEL STOCK $81 $40 ====== ====== STEEL STOCK DATA: Net income per share - primary $.96 $.49 - fully diluted .93 .48 Dividends paid per share .25 .25 Weighted average shares, in thousands - Primary 85,006 83,197 - Fully diluted 94,581 85,030 Selected notes to financial statements appear on pages 39-42.
37 U. S. STEEL GROUP OF USX CORPORATION BALANCE SHEET (Unaudited) ------------------------------------
March 31 December 31 (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $16 $23 Receivables, less allowance for doubtful accounts of $5 and $23 472 580 Inventories 667 648 Deferred income tax benefits 179 177 ------ ------ Total current assets 1,334 1,428 Investments and long-term receivables, less reserves of $17 and $17 625 621 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $5,792 and $5,796 2,527 2,551 Long-term deferred income tax benefits 199 217 Prepaid pensions 1,779 1,734 Other noncurrent assets 40 29 ------ ------ Total assets $6,504 $6,580 ====== ====== LIABILITIES Current liabilities: Notes payable $20 $18 Accounts payable 661 667 Payroll and benefits payable 397 365 Accrued taxes 171 154 Accrued interest 13 22 Long-term debt due within one year 94 73 ------ ------ Total current liabilities 1,356 1,299 Long-term debt, less unamortized discount 810 1,014 Employee benefits 2,423 2,430 Deferred credits and other liabilities 213 207 Preferred stock of subsidiary 64 64 ------ ------ Total liabilities 4,866 5,014 ------ ------ STOCKHOLDERS' EQUITY Preferred stock 7 7 Common stockholders' equity 1,631 1,559 ------ ------ Total stockholders' equity 1,638 1,566 ------ ------ Total liabilities and stockholders' equity $6,504 $6,580 ====== ====== Selected notes to financial statements appear on pages 39-42.
38 U. S. STEEL GROUP OF USX CORPORATION STATEMENT OF CASH FLOWS (Unaudited) ------------------------------------
First Quarter Ended March 31 (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income $87 $46 Adjustments to reconcile to net cash provided from (used in) operating activities: Depreciation, depletion and amortization 74 78 Pensions (42) (42) Postretirement benefits other than pensions 6 2 Deferred income taxes 21 16 Gain on disposal of assets (1) (3) Changes in: Current receivables 96 (1) Inventories (19) (24) Current accounts payable and accrued expenses 31 (66) All other - net (40) (19) ------ ------ Net cash provided from (used in) operating activities 213 (13) ------ ------ INVESTING ACTIVITIES: Capital expenditures (50) (56) Disposal of assets 5 89 Investments in equity affiliates - net 1 3 All other - net 4 (6) ------ ------ Net cash provided from (used in) investing activities (40) 30 ------ ------ FINANCING ACTIVITIES: Decrease in U. S. Steel Group's share of USX consolidated debt (163) (20) Specifically attributed debt repayments (2) (1) Steel Stock issued 11 7 Dividends paid (26) (26) ------ ------ Net cash used in financing activities (180) (40) ------ ------ NET DECREASE IN CASH AND CASH EQUIVALENTS (7) (23) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 23 52 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $16 $29 ====== ====== Cash provided from (used in) operating activities included: Interest and other financial costs paid (net of amount capitalized) $(33) $(31) Income taxes refunded (paid), including settlements with other groups 27 (18) Selected notes to financial statements appear on pages 39-42.
39 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS -------------------------------------- (Unaudited) 1. The information furnished in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. Additional information is contained in the USX Annual Report on Form 10-K for the year ended December 31, 1996. Effective January 1, 1997, USX adopted American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" (SOP 96-1), which provides additional interpretation of existing accounting standards related to recognition, measurement and disclosure of environmental remediation liabilities. As a result of adopting SOP 96-1, the U. S. Steel Group identified additional environmental remediation liabilities of $35 million, of which $28 million was discounted to a present value of $13 million and $7 million was not discounted. Assumptions used in the calculation of the present value amount included an inflation factor of 2% and an interest rate of 7% over a range of 22 to 30 years. The unfavorable effect on first quarter 1997 operating income was $20 million. 2. The financial statements of the U. S. Steel Group include the financial position, results of operations and cash flows for all businesses of USX other than the businesses, assets and liabilities included in the Marathon Group or the Delhi Group, and a portion of the corporate assets and liabilities and related transactions which are not separately identified with ongoing operating units of USX. These financial statements are prepared using the amounts included in the USX consolidated financial statements. Corporate amounts reflected in these financial statements are determined based upon methods which management believes to be reasonable. The accounting policies applicable to the preparation of the financial statements of the U. S. Steel Group may be modified or rescinded in the sole discretion of the Board of Directors of USX (Board), although the Board has no present intention to do so. The Board may also adopt additional policies depending on the circumstances. Although the financial statements of the U. S. Steel Group, the Marathon Group and the Delhi Group separately report the assets, liabilities (including contingent liabilities) and stockholders' equity of USX attributed to each such group, such attribution of assets, liabilities (including contingent liabilities) and stockholders' equity among the U. S. Steel Group, the Marathon Group and the Delhi Group for purposes of preparing their respective 40 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 2. (Continued) financial statements does not affect legal title to such assets and responsibility for such liabilities. Holders of USX-U. S. Steel Group Common Stock (Steel Stock), USX-Marathon Group Common Stock (Marathon Stock) and USX-Delhi Group Common Stock (Delhi Stock) are holders of common stock of USX and continue to be subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts arising from one Group that affect the overall cost of USX's capital could affect the results of operations and financial condition of other groups. In addition, net losses of any Group, as well as dividends or distributions on any class of USX Common Stock or series of Preferred Stock and repurchases of any class of USX Common Stock or series of Preferred Stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on all classes of Common Stock. Accordingly, the USX consolidated financial information should be read in connection with the U. S. Steel Group financial information. 3. The method of calculating net income per share for the Steel Stock, Marathon Stock and Delhi Stock reflects the Board's intent that the separately reported earnings and surplus of the U. S. Steel Group, the Marathon Group and the Delhi Group, as determined consistent with the USX Certificate of Incorporation, are available for payment of dividends on the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. Primary net income per share is calculated by adjusting net income for dividend requirements of preferred stock and is based on the weighted average number of common shares outstanding plus common stock equivalents, provided they are not antidilutive. Common stock equivalents result from assumed exercise of stock options, where applicable. Fully diluted net income per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options, provided in each case, the effect is not antidilutive. 4. Operating income includes net periodic pension credits of $38 million and $40 million in the first quarter of 1997 and 1996, respectively. These pension credits are primarily noncash and for the most part are included in selling, general and administrative expenses. 5. The financial statement provision for estimated income taxes and related tax payments or refunds have been reflected in the U. S. Steel Group, the Marathon Group and the Delhi Group financial statements in accordance with USX's tax allocation policy for such groups. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated among the U. S. Steel Group, the Marathon Group and the Delhi Group for group financial statement purposes, based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to the respective groups. 41 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 5. (Continued) The provision for estimated income taxes for the U. S. Steel Group is based on tax rates and amounts which recognize management's best estimate of current and deferred tax assets and liabilities. Differences between the combined interim tax provisions of the U. S. Steel, Marathon and Delhi Groups and USX consolidated are allocated to each group based on the relationship of the individual group provisions to the combined interim provisions. 6. Inventories are carried at the lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method.
(In millions) ----------------------- March 31 December 31 1997 1996 -------- ----------- Raw materials $114 $124 Semi-finished products 317 309 Finished products 182 162 Supplies and sundry items 54 53 ---- ---- Total $667 $648 ==== ====
7. The U. S. Steel Group participates in an agreement (the program) to sell an undivided interest in certain accounts receivable subject to limited recourse. Payments are collected from the sold accounts receivable; the collections are reinvested in new accounts receivable for the buyers; and a yield, based on defined short-term market rates, is transferred to the buyers. At March 31, 1997, the amount sold under the program that had not been collected was $350 million, which will be forwarded to the buyers at the end of the agreement, or in the event of earlier contract termination. If the U. S. Steel Group does not have a sufficient quantity of eligible accounts receivable to reinvest in for the buyers, the size of the program will be reduced accordingly. The buyers have rights to a pool of receivables that must be maintained at a level of 115% of the program size. In the event of a change in control of USX, as defined in the agreement, the U. S. Steel Group may be required to forward payments collected on sold accounts receivable to the buyers. Prior to 1993, USX Credit, a division of USX, sold certain of its loans receivable subject to limited recourse under an agreement that expires in 1997. USX Credit continues to collect payments from the loans and transfer to the buyers principal collected plus yield based on defined short-term market rates. At March 31, 1997, the balance of sold loans receivable subject to recourse was $35 million. USX Credit is not actively seeking new loans at this time. In the event of a change in control of USX, as defined in the agreement, the U. S. Steel Group may be required to provide cash collateral in the amount of the uncollected loans receivable to assure compliance with the limited recourse provisions. 42 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 8. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the U. S. Steel Group involving a variety of matters including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the U. S. Steel Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the U. S. Steel Group. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. The U. S. Steel Group is subject to federal, state and local laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At March 31, 1997, and December 31, 1996, accrued liabilities for remediation totaled $113 million and $107 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. For a number of years, the U. S. Steel Group has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the first quarter of 1997 and for the years 1996 and 1995, such capital expenditures totaled $16 million, $90 million and $55 million, respectively. The U. S. Steel Group anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. Guarantees by USX of the liabilities of affiliated entities of the U. S. Steel Group totaled $36 million at March 31, 1997. In the event that any defaults of guaranteed liabilities occur, USX has access to its interest in the assets of the affiliates to reduce U. S. Steel Group losses resulting from these guarantees. As of March 31, 1997, the largest guarantee for a single affiliate was $14 million. At March 31, 1997, contract commitments for the U. S. Steel Group's capital expenditures for property, plant and equipment totaled $117 million compared with $134 million at December 31, 1996. 43 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The U. S. Steel Group includes U. S. Steel, which is primarily engaged in the production and sale of steel mill products, coke and taconite pellets. The U. S. Steel Group also includes the management of mineral resources, domestic coal mining, engineering and consulting services and technology licensing (together with U. S. Steel, the "Steel and Related Businesses"). Other businesses that are part of the U. S. Steel Group include real estate development and management, and leasing and financing activities. Management's Discussion and Analysis should be read in conjunction with the first quarter 1997 USX consolidated financial information and the U. S. Steel Group Financial Statements and selected notes. The discussion of Results of Operations should be read in conjunction with the Supplemental Statistics provided on page 47. Certain sections of Management's Discussion and Analysis include forward- looking statements concerning trends or events potentially affecting the businesses of the U. S. Steel Group. These statements typically contain words such as "anticipates," "believes," "estimates," "expects" or similar words indicating that future outcomes are not known with certainty and subject to risk factors that could cause these outcomes to differ significantly from those projected. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in forward-looking statements. For additional cautionary language related to the U. S. Steel Group, see Item 5. herein. Results of Operations - --------------------- Revenues for the U. S. Steel Group increased $29 million in the first quarter of 1997 compared with the first quarter of 1996. The increase primarily reflected higher average realized prices. Operating income for the U. S. Steel Group increased $39 million in the first quarter of 1997, compared with the same quarter of 1996. First quarter 1997 included charges of $20 million related to the adoption of the American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" ("SOP 96-1"). These charges were partially offset by a net reduction of $11 million in other unrelated environmental accruals. For additional discussion on SOP 96-1, see Note 1 to the U. S. Steel Group Financial Statements. Operating income for Steel and Related Businesses increased $54 million in the first quarter of 1997, compared with the same quarter of 1996. The increase was primarily due to higher average realized prices, a partial recovery of insurance proceeds related to the April, 1996 breakout of the Gary Works' No. 13 blast furnace and an improved product mix. This improvement was partially offset by higher natural gas costs. U. S. Steel entered into a five and one-half year contract with the United Steelworkers of America ("USWA"), effective February 1, 1994, covering approximately 15,000 employees. The contract provided for reopener negotiations of specific payroll items. These negotiations have now been resolved by following the settlements reached by other major integrated producers (including the timing of a final lump-sum bonus payment in July, 1999). All revised contract terms became effective as of February 1, 1997. 44 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Operating income for Administrative and Other Businesses in the first quarter of 1997 included charges of $9 million related to environmental accruals and the adoption of SOP 96-1. Excluding these charges, first quarter 1997 operating income decreased $6 million from the first quarter 1996 primarily due to lower pension credits. Administrative and Other Businesses includes the portion of pension credits, postretirement benefit costs and certain other expenses principally attributable to the former businesses of the U. S. Steel Group as well as USX corporate general and administrative costs allocated to the U. S. Steel Group. The pension credits referred to in Administrative and Other Businesses, combined with pension costs for ongoing operating units of the U. S. Steel Group, resulted in net pension credits (which are primarily noncash) of $38 million and $40 million in the first quarters of 1997 and 1996, respectively. The amounts of these credits fluctuate over time primarily reflecting changes in the expected long-term rate of return on plan assets and assumed discount rate on the outstanding pension obligation. To the extent that these credits decline in the future, operating income would be adversely affected. Other income in the first quarter of 1997 increased $3 million compared with first quarter 1996 due to higher income from affiliates. Interest and other financial costs decreased $17 million, compared with first quarter 1996. Interest and other financial costs in first quarter 1997 was reduced $16 million as a result of the quarterly adjustment to the carrying value of USX's indexed debt (as set forth in the following paragraph). In December 1996, USX issued $117 million in aggregate principal amount of 6-3/4% Notes Due February 1, 2000 ("indexed debt"), mandatorily exchangeable at maturity for common stock of RMI Titanium Company ("RMI") (or for the equivalent amount of cash, at USX's option). The carrying value of indexed debt is adjusted quarterly to settlement value based on changes in the value of RMI common stock. Any resulting adjustment is charged or credited to income and included in interest and other financial costs. USX's 27% interest in RMI continues to be accounted for under the equity method. Net income increased $41 million, or 89%, in the first quarter of 1997 as compared with first quarter of 1996. The increase mainly reflects the factors discussed above. First quarter 1997 steel shipments of 2.9 million tons remained approximately at first quarter 1996 levels. Raw steel production in the first quarter of 1997 totaled 3.1 million tons, a decrease of 3% over first quarter 1996. Raw steel production in the first quarter of 1997 averaged 97% of capability versus 99% in the first quarter of 1996. Cash Flows - ------------ Net cash provided from operating activities was $213 million in the first quarter of 1997, compared with net cash used in operating activities of $13 million in the same period of 1996. The first quarter of 1996 included a payment of $28 million related to the Pickering litigation. Excluding this item, net cash from operating activities increased by $198 million due to favorable working capital changes and increased profitability. 45 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Cash from the disposal of assets decreased $84 million in the first quarter of 1997 compared with the same quarter of 1996. The 1996 proceeds mainly reflected the sale of U. S. Steel Group's investment in National-Oilwell. Capital expenditures for property, plant and equipment in first quarter 1997 totaled $50 million, compared with $56 million in the same period in 1996. Capital expenditures for the year 1997 are expected to total approximately $290 million, compared with $337 million in 1996. Capital expenditures for 1997 include a blast furnace reline at the Mon Valley Works, a new heat treat line for plates at the Gary Works and additional environmental expenditures primarily at the Gary Works. Contract commitments for capital expenditures at March 31, 1997 were $117 million, compared with $134 million at year-end 1996. Financial obligations decreased $165 million in the first quarter of 1997 primarily reflecting the net effects of cash from operating, investing and other financing activities. Financial obligations consist of the U. S. Steel Group's portion of USX debt and preferred stock of a subsidiary attributed to all three groups, as well as debt and financing agreements specifically attributed to the U. S. Steel Group. Liquidity - --------- For discussion of USX's liquidity and capital resources, see USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. Environmental Matters, Contingencies and Commitments - ---------------------------------------------------- The U. S. Steel Group has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. In recent years, these expenditures have been mainly for process changes in order to meet Clean Air Act obligations, although ongoing compliance costs have also been significant. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the U. S. Steel Group's products and services, operating results will be adversely affected. The U. S. Steel Group believes that all of its domestic competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities and its production methods. To the extent that competitors are not required to undertake equivalent costs in their operations, the competitive position of the U. S. Steel Group could be adversely affected. USX has been notified that it is a potentially responsible party ("PRP") at 26 waste sites related to the U. S. Steel Group under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of March 31, 1997. In addition, there are 15 sites related to the U. S. Steel Group where USX has received information requests or other indications that USX may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability or make any judgment as to the amount thereof. There are also 41 additional sites related to the U. S. Steel Group where remediation is being sought under other environmental statutes, both federal and state, or where private parties 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 46 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- investigations and remedial studies. The U. S. Steel Group accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the U. S. Steel Group involving a variety of matters, including laws and regulations relating to the environment, certain of which are discussed in Note 8 to the U. S. Steel Group Financial Statements. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the U. S. Steel Group Financial Statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the U. S. Steel Group. See discussion of Cash Flows and Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. Outlook - ------- The U. S. Steel Group anticipates that steel demand will remain relatively strong in the second quarter as long as the domestic economy continues its pattern of modest growth and the favorable pattern of demand for capital goods and consumer durables continues. During the second and third quarter of 1997, raw steel production will be reduced by a planned reline of the Mon Valley Works' No. 1 blast furnace, which provides approximately 10 percent of U. S. Steel's total iron capacity. The reline, which is scheduled to begin in mid- June, is expected to last 86 days. The world steel industry is characterized by excess production capacity which has restricted price increases during periods of economic growth and led to price decreases during economic contractions. Within the next year, the anticipated increased availability of flat-rolled steel could have an adverse effect on U. S. Steel's product prices and shipment levels as companies attempt to gain or retain market share. Steel imports to the United States accounted for an estimated 26% of the domestic steel market in the first two months of 1997, and 23%, 21% and 25% for the years 1996, 1995 and 1994, respectively. The domestic steel industry has, in the past, been adversely affected by unfairly traded imports, and higher levels of imported steel may ultimately have an adverse effect on product prices and shipment levels. Accounting Standard - ------------------- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"), which changes the computation and presentation of earnings per share ("EPS"). USX will adopt SFAS No. 128 in the fourth quarter of 1997, as required. While restatement of prior-period EPS is required by the standard, EPS presented for the USX-U. S. Steel Group Common Stock for the first quarter of 1997 and for the years 1996 and 1995 will not change upon adoption. 47
U. S. STEEL GROUP OF USX CORPORATION SUPPLEMENTAL STATISTICS (Unaudited) ------------------------------------ First Quarter Ended March 31 -------------- (Dollars in Millions) 1997 1996 - -------------------------------------------------------------------------------- REVENUES Steel and Related Businesses (a) $1,608 $1,584 Other 12 7 ------ ------ Total U. S. Steel Group $1,620 $1,591 OPERATING INCOME Steel and Related Businesses (a) $87 $33 Administrative and Other Businesses (b) 33 48 ---- ----- Total U. S. Steel Group $120 $81 CAPITAL EXPENDITURES $50 $56 OPERATING STATISTICS Public & Affiliated Steel Shipments (c) 2,866 2,898 Raw Steel-Production (c) 3,071 3,154 Raw Steel-Capability Utilization (d) 97.3% 99.1% - ------------ (a) Includes the production and sale of steel products, coke and taconite pellets; domestic coal mining; the management of mineral resources; and engineering and consulting services and technology licensing. (b) Includes pension credits, other postretirement benefit costs and certain other expenses principally attributable to former business units of the U. S. Steel Group. Also includes results of real estate development and management, and leasing and financing activities. (c) Thousands of net tons (d) Based on annual raw steel production capability of 12.8 million tons.
48 Part I - Financial Information (Continued): D. Delhi Group DELHI GROUP OF USX CORPORATION STATEMENT OF OPERATIONS (Unaudited) -----------------------------------
First Quarter Ended March 31 (Dollars in millions, except per share amounts) 1997 1996 - -------------------------------------------------------------------------------- REVENUES $338.7 $277.6 OPERATING COSTS: Cost of sales (excludes items shown below) 313.8 253.5 Selling, general and administrative expenses 7.4 6.7 Depreciation, depletion and amortization 7.8 6.9 Taxes other than income taxes 2.1 2.0 ------ ------ Total operating costs 331.1 269.1 ------ ------ OPERATING INCOME 7.6 8.5 Other income .1 .2 Interest and other financial costs (5.5) (5.0) ------ ------ INCOME BEFORE INCOME TAXES 2.2 3.7 Less provision for estimated income taxes .8 1.3 ------ ------ NET INCOME $1.4 $2.4 ====== ====== DELHI STOCK DATA: Net income per share - primary and fully diluted $.15 $.25 Dividends paid per share .05 .05 Weighted average shares, in thousands - Primary 9,466 9,447 - Fully diluted 9,467 9,447 Selected notes to financial statements appear on pages 51-54.
49 DELHI GROUP OF USX CORPORATION BALANCE SHEET (Unaudited) ------------------------------
March 31 December 31 (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $.4 $.4 Receivables, less allowance for doubtful accounts of $.8 and $.8 72.7 131.3 Inventories 5.8 8.6 Other current assets 3.9 5.4 ------ ------ Total current assets 82.8 145.7 Long-term receivables and investments 5.7 5.8 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $451.2 and $452.6 564.4 555.3 Other noncurrent assets 6.1 7.8 ------ ------ Total assets $659.0 $714.6 ====== ====== LIABILITIES Current liabilities: Notes payable $6.0 $4.3 Accounts payable 130.1 196.3 Payroll and benefits payable 3.9 4.2 Accrued taxes 3.8 5.4 Accrued interest 3.3 5.3 Long-term debt due within one year 27.8 16.5 ------ ------ Total current liabilities 174.9 232.0 Long-term debt, less unamortized discount 203.5 202.7 Long-term deferred income taxes 141.7 139.7 Deferred credits and other liabilities 17.9 20.2 Preferred stock of subsidiary 3.8 3.8 ------ ------ Total liabilities 541.8 598.4 STOCKHOLDERS' EQUITY 117.2 116.2 ------ ------ Total liabilities and stockholders' equity $659.0 $714.6 ====== ====== Selected notes to financial statements appear on pages 51-54.
50 DELHI GROUP OF USX CORPORATION STATEMENT OF CASH FLOWS (Unaudited) -----------------------------------
First Quarter Ended March 31 (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income $1.4 $2.4 Adjustments to reconcile to net cash provided from operating activities: Depreciation, depletion and amortization 7.8 6.9 Pensions .5 .7 Deferred income taxes 1.9 .5 Gain on disposal of assets (.6) (.4) Changes in: Current receivables 58.6 (2.7) Inventories 2.8 4.4 Current accounts payable and accrued expenses (70.0) 1.6 All other - net .2 2.1 ------ ------ Net cash provided from operating activities 2.6 15.5 ------ ------ INVESTING ACTIVITIES: Capital expenditures (17.1) (22.6) Disposal of assets .9 .6 ------ ------ Net cash used in investing activities (16.2) (22.0) ------ ------ FINANCING ACTIVITIES: Increase in Delhi Group's share of USX consolidated debt 14.1 7.4 Dividends paid (.5) (.5) ------ ------ Net cash provided from financing activities 13.6 6.9 ------ ------ NET INCREASE IN CASH AND CASH EQUIVALENTS - .4 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .4 1.9 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $.4 $2.3 ====== ====== Cash provided from (used in) operating activities included: Interest and other financial costs paid $(7.3) $(6.3) Income taxes (paid) refunded, including settlements with other groups (.5) .2 Selected notes to financial statements appear on pages 51-54.
51 DELHI GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS -------------------------------------- (Unaudited) 1. The information furnished in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. Additional information is contained in the USX Annual Report on Form 10-K for the year ended December 31, 1996. Effective January 1, 1997, USX adopted American Institute of Certified Public Accountants Statement of Position No. 96-1, "Environmental Remediation Liabilities" (SOP 96-1), which provides additional interpretation of existing accounting standards related to recognition, measurement and disclosure of environmental remediation liabilities. Adoption of SOP 96-1 had no effect on Delhi Group results of operations or financial condition. 2. The financial statements of the Delhi Group include the financial position, results of operations and cash flows for the businesses of Delhi Gas Pipeline Corporation and certain other subsidiaries of USX, and a portion of the corporate assets and liabilities and related transactions which are not separately identified with ongoing operating units of USX. These financial statements are prepared using amounts included in the USX consolidated financial statements. Corporate amounts reflected in these financial statements are determined based upon methods which management believes to be reasonable. The accounting policies applicable to the preparation of the financial statements of the Delhi Group may be modified or rescinded in the sole discretion of the Board of Directors of USX (Board), although the Board has no present intention to do so. The Board may also adopt additional policies depending on the circumstances. Although the financial statements of the Delhi Group, the Marathon Group and the U. S. Steel Group separately report the assets, liabilities (including contingent liabilities) and stockholders' equity of USX attributed to each such group, such attribution of assets, liabilities (including contingent liabilities) and stockholders' equity among the Delhi Group, the Marathon Group and the U. S. Steel Group for the purpose of preparing their respective financial statements does not affect legal title to such assets and responsibility for such liabilities. Holders of USX- Delhi Group Common Stock (Delhi Stock), USX-Marathon Group Common Stock (Marathon Stock) and USX-U. S. Steel Group Common Stock (Steel Stock) are holders of common stock of USX, and continue to be subject to all the risks associated with an investment in USX 52 DELHI GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 2. (Continued) and all of its businesses and liabilities. Financial impacts arising from one Group that affect the overall cost of USX's capital could affect the results of operations and financial condition of other groups. In addition, net losses of any Group, as well as dividends and distributions on any class of USX Common Stock or series of Preferred Stock and repurchases of any class of USX Common Stock or series of Preferred Stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on all classes of Common Stock. Accordingly, the USX consolidated financial information should be read in connection with the Delhi Group financial information. 3. The method of calculating net income per share for the Delhi Stock, Marathon Stock and Steel Stock reflects the Board's intent that the separately reported earnings and surplus of the Delhi Group, the Marathon Group and the U. S. Steel Group, as determined consistent with the USX Certificate of Incorporation, are available for payment of dividends on the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. Primary net income per share is calculated based on the weighted average number of common shares outstanding plus common stock equivalents, provided they are not antidilutive. Common stock equivalents result from assumed exercise of stock options, where applicable. Fully diluted net income per share assumes exercise of stock options, provided the effect is not antidilutive. 4. The financial statement provision for estimated income taxes and related tax payments or refunds have been reflected in the Delhi Group, the Marathon Group and the U. S. Steel Group financial statements in accordance with USX's tax allocation policy for such groups. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated among the Delhi Group, the Marathon Group and the U. S. Steel Group for group financial statement purposes, based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to the respective groups. The provision for estimated U.S. income taxes for the Delhi Group is based on tax rates and amounts which recognize management's best estimate of current and deferred tax assets and liabilities. Differences between the combined interim tax provisions of the Delhi, the Marathon and the U. S. Steel Groups and USX consolidated are allocated to each group based on the relationship of the individual group provisions to the combined interim provisions. 53 DELHI GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 5. Inventories are carried at lower of average cost or market.
(In millions) ---------------------- March 31 December 31 1997 1996 -------- ----------- Natural gas in storage $4.0 $6.4 Natural gas liquids in storage .3 .1 Materials and supplies 1.5 2.1 ---- ---- Total $5.8 $8.6 ==== ====
6. The Delhi Group participates in an agreement (the program) to sell an undivided interest in certain accounts receivable subject to limited recourse. Payments are collected from the sold accounts receivable; the collections are reinvested in new accounts receivable for the buyers; and a yield, based on defined short-term market rates, is transferred to the buyers. At March 31, 1997, the amount sold under the program that had not been collected was $50.0 million, which will be forwarded to the buyers at the end of the agreement, or in the event of earlier contract termination. If the Delhi Group does not have a sufficient quantity of eligible accounts receivable to reinvest in for the buyers, the size of the program will be reduced accordingly. The buyers have rights to a pool of receivables that must be maintained at a level of 110% of the program size. 7. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Delhi Group involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Delhi Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Delhi Group. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. The Delhi Group is subject to federal, state and local laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. Expenditures for remediation and penalties have not been material. 54 DELHI GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 7. (Continued) For a number of years, the Delhi Group has made capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the first quarter of 1997 and for the years 1996 and 1995, such capital expenditures totaled $2.8 million, $9.0 million and $5.5 million, respectively. The Delhi Group anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. At March 31, 1997, contract commitments for the Delhi Group's capital expenditures for property, plant and equipment totaled $5.9 million compared with $4.4 million at December 31, 1996. 55 DELHI GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The Delhi Group ("Delhi") includes Delhi Gas Pipeline Corporation ("DGP") and certain other subsidiaries of USX which are engaged in the purchasing, gathering, processing, treating, transporting and marketing of natural gas. The following discussion should be read in conjunction with the first quarter 1997 USX consolidated financial information and the Delhi Group Financial Statements and selected notes. In addition, the discussion of Results of Operations should be read in conjunction with the Supplemental Statistics provided on page 59. Certain sections of the discussion include forward-looking statements concerning trends or events potentially affecting the Delhi Group. These statements typically contain words such as "anticipates", "believes", "estimates", or "expects", or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in forward-looking statements. For additional cautionary language related to the Delhi Group, see Item 5. herein. Results of Operations - --------------------- Revenues for the first quarter of 1997 and 1996 are summarized in the following table:
First Quarter Ended March 31 ------------------- (Dollars in millions) 1997 1996 ----- ----- Gas sales and trading $295.2 $247.6 Transportation 4.2 3.9 Gas processing 28.3 19.1 Gathering service fees 8.5 5.1 Other 2.5 1.9 ------ ------ Total revenues $338.7 $277.6 ====== ======
The increase was primarily due to higher sales prices for natural gas and natural gas liquids ("NGLs"), partially offset by lower natural gas sales volumes. Operating income in the first quarter of 1997 decreased by $0.9 million as compared with the first quarter of 1996. This decrease was due primarily to lower gas sales and trading unit margins, lower gas sales volumes and increased operating costs, partially offset by increased gas processing unit margins and volumes, gathering service fees and transportation volumes. Gas sales and trading gross margins decreased $5.8 million as compared to the first quarter 1996. Gas sales and trading unit margins decreased 20% from first quarter 1996 levels due to unfavorable intra-month price fluctuations in January and February, as relatively warm winter weather in Delhi's prime service areas resulted in reduced demand and falling prices. Reduced demand by Delhi's major customers resulted in a shift in the sales mix to lower margin spot market sales. Overall, average daily gas sales volumes decreased 12% as compared to the first quarter 1996. 56 DELHI GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Transportation gross margin in the first quarter of 1997 increased by $0.3 million from the comparable prior-year period, primarily due to a 24% increase in average daily transportation volumes in Texas, and a 17% increase in Oklahoma. These additional volumes are primarily the result of the expansion programs in the Cotton Valley Pinnacle Reef play in east Texas and the Carter Knox field in Oklahoma. Overall, average daily transportation volumes increased 21% as compared to the first quarter of 1996. The benefits from the increased volumes were partially offset by an 11% decrease in average transportation rates as compared to the first quarter of 1996. Natural gas processing involves extraction of NGLs such as ethane, propane, isobutane, normal butane and natural gasoline from the natural gas stream. Gas processing gross margin in the first quarter of 1997 increased by $3.8 million, or 78%, as compared with the first quarter of 1996, primarily as the result of higher NGLs sales prices and increased average daily sales volumes. Gathering service fees from treating, dehydration, compression and other services, for the first quarter of 1997, increased $3.4 million, or 67%, as compared to first quarter 1996. The primary reason for this increase was higher natural gas sales prices, as most fees are determined as a percentage of sales price. Operating costs, excluding gas purchase costs, increased $2.7 million in the first quarter of 1997 as compared with the first quarter of 1996. The increase was primarily due to higher field operating expenses, increased depreciation, depletion and amortization resulting from the acquisitions and expansions completed since the first quarter of 1996, increased USX corporate general and administrative costs associated with the Delhi Group, and compensation charges. Interest and other financial costs increased $0.5 million in the first quarter of 1997 as compared with the first quarter of 1996, primarily due to increased debt levels reflecting Delhi's increased capital spending program. Net income of $1.4 million in the first quarter of 1997, compares with net income of $2.4 million in the first quarter of 1996. The changes in net income primarily reflect the decrease in operating income, and the increase in interest and other financial costs, discussed above. Cash Flows - ---------- Net cash provided from operating activities decreased $12.9 million in the first quarter of 1997, compared with the first quarter of 1996. The decrease is primarily the result of negative working capital changes caused by a decrease in payables, that was only partially offset by a decrease in receivables, due to the decline in natural gas and NGLs prices during the first quarter of 1997. Capital expenditures for property, plant and equipment in the first quarter of 1997 were $17.1 million, compared with $22.6 million in the first quarter of 1996. Expenditures in the first quarter of 1997 were primarily for completion of the second phase of the Pinnacle Reef expansion project in east Texas and the expansion of pipeline and processing assets in west Texas. Capital expenditures for the year 1997 are expected to approximate $75 million. Contract commitments for capital expenditures were $5.9 million at March 31, 1997, compared with $4.4 million at year-end 1996. 57 DELHI GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Financial obligations increased by $14.1 million in the first quarter of 1997 as capital expenditures exceeded net cash provided from operating activities. Financial obligations consist of the Delhi Group's portion of USX debt and preferred stock of a subsidiary attributed to all three groups. Liquidity - --------- For discussion of USX's liquidity and capital resources, see USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. Environmental Matters, Contingencies and Commitments - ---------------------------------------------------- The Delhi Group has incurred and will continue to incur capital and operating and maintenance expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the Delhi Group's products and services, operating results will be adversely affected. The Delhi Group believes that substantially all of its competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities and its production processes. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Delhi Group involving a variety of matters, including laws and regulations relating to the environment. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Delhi Group Financial Statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Delhi Group. See discussion of Cash Flows and Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. Outlook - ------- The Delhi Group continues to expand its natural gas pipeline systems and treating and processing facilities through acquisitions and expansions of existing facilities. The Delhi Group is currently involved in significant projects in east and west Texas, the largest being the expansion in the Cotton Valley Pinnacle Reef ("Pinnacle Reef") gas play area of east Texas. Phase Two of the Pinnacle Reef expansion program has been completed, increasing Delhi's capacity in this area to more than 300 million cubic feet per day ("mmcfd"). Pinnacle Reef volumes purchased or transported by Delhi averaged 186 mmcfd in March 1997, up from a December 1996 average of 133 mmcfd. Management anticipates that Delhi's average monthly volumes could approach 300 mmcfd by year-end, and is considering a possible Phase Three expansion as new production warrants. The realization of these additional volumes could be affected by many factors, including but not limited to, the success of drilling by the producers in the Pinnacle Reef gas play area, the level of drilling in this area, and other areas of the United States, levels of imported gas, storage levels, and changes in the price and demand for natural gas. In west Texas, first quarter 1997 volumes averaged 236 mmcfd, up from an average of 190 mmcfd in 1996, as the result of expansions and upgrades of the facilities. 58 DELHI GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Accounting Standard - ------------------- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"), which changes the computation and presentation of earnings per share ("EPS"). USX will adopt SFAS No. 128 in the fourth quarter of 1997, as required. While restatement of prior-period EPS data is required by the standard, EPS presented for USX-Delhi Group Common Stock for the first quarter of 1997 and for the years 1996 and 1995 will not change upon adoption. 59 DELHI GROUP OF USX CORPORATION SUPPLEMENTAL STATISTICS (Unaudited) -----------------------------------
First Quarter Ended March 31 -------------- (Dollars in Millions) 1997 1996 - -------------------------------------------------------------------------------- GROSS MARGIN Gas Sales and Trading Margin $13.6 $19.4 Transportation Margin 4.2 3.9 ------ ------ Systems and Trading Margin 17.8 23.3 Gas Processing Margin 8.7 4.9 Gathering Service Fees Margin (a) 8.5 5.1 ------ ------ Total Gross Margin $35.0 $33.3 OPERATING INCOME $7.6 $8.5 CAPITAL EXPENDITURES $17.1 $22.6 OPERATING STATISTICS Natural Gas Volumes (b) Natural Gas Sales 549.5 624.8 Transportation 511.6 422.4 ------- ------ Systems Throughput 1,061.1 1,047.2 Trading Sales 624.2 624.6 ------- ------ Total Sales Volumes 1,685.3 1,671.8 Natural Gas Liquids Sales (c) 810.8 727.8 - ------------ (a) Prior to the fourth quarter of 1996, Delhi reported natural gas treating, dehydration, compression and other service fees as a reduction to cost of sales. Beginning with the fourth quarter of 1996, these fees are reported as revenue; accordingly, amounts for prior quarters have been reclassified. (b) Millions of cubic feet per day (c) Thousands of gallons per day
60 Part II - Other Information - ---------------------------- Item 1. - LEGAL PROCEEDINGS U. S. Steel Group In August 1996, the Jefferson County, Alabama, Board of Health informed U. S. Steel Mining Company, L.L.C. (USM) of its intent to initiate enforcement action because of alleged violations of air pollution control requirements at USM's Concord Coal Preparation Plant in Hueytown, Ala. On January 31, 1997, USM and the County reached an agreement requiring USM to pay a cash penalty of $100,000 and to implement plant improvements estimated to cost $800,000. This agreement was submitted to the Circuit Court of Jefferson County for approval on February 13, 1997 and was approved by the court on February 18, 1997. USM paid the $100,000 penalty on April 8, 1997. Item 5. - OTHER INFORMATION (a) Forward-looking statements concerning trends, market forces, commitments, material events and other contingencies potentially affecting the USX Corporation ("USX"), or the businesses of its Marathon Group, U. S. Steel Group or Delhi Group, may be provided in reports filed with the Securities and Exchange Commission, external documents and oral presentations. In order to take advantage of "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, USX is filing the following cautionary language identifying important factors (though not necessarily all such factors) that could cause actual outcomes to differ materially from information set forth in forward-looking statements made by, or on behalf of, USX, its representatives and its individual Groups. Cautionary Language Concerning Forward-Looking Statements --------------------------------------------------------- I. USX --- Forward-looking statements with respect to USX may include, but are not limited to, comments about general business strategies, financing decisions or corporate structure. The following discussion is intended to identify important factors (though not necessarily all such factors) that could cause future outcomes to differ materially from those set forth in forward-looking statements. Liquidity Factors ----------------- USX's ability to finance its future business requirements through internally generated funds, proceeds from the sale of stock, borrowings and other external financing sources is affected by the performance of each of its Groups (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 and actions, the overall U.S. financial climate, and, in particular, with respect to borrowings, by USX's outstanding debt and credit ratings by investor services. 61 Part II - OTHER INFORMATION (continued) - --------------------------------------- Other Factors ------------- Holders of USX-Marathon Group Common Stock, USX-U. S. Steel Group Common Stock and USX-Delhi Group Common Stock are holders of common stock of USX and are subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts, arising from any of the groups, which affect the overall cost of USX's capital could affect the results of operations and financial condition of all groups. For further discussion of certain of the factors described herein, see Item 1. Business, Item 5. Market For Registrant's Common Equity and Related Stockholder Matters, and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in the USX Corporation Form 10-K for the fiscal year ended December 31, 1996, and Management's Discussion and Analysis of Financial Condition and Results of Operations herein. II. USX-Marathon Group ------------------ Forward-looking statements with respect to the Marathon Group may include, but are not limited to, levels of revenues, gross margins, operating income, net income or earnings per share; levels of capital, exploration, environmental or maintenance expenditures; the success or timing of completion of ongoing or anticipated capital, exploration or maintenance projects; volumes of production, sales, throughput or shipments of liquid hydrocarbons, natural gas and refined products; levels of reserves, proved or otherwise, of liquid hydrocarbons or natural gas; the acquisition or divestiture of assets; the effect of restructuring or reorganization of business components; the potential effect of judicial proceedings on the business and financial condition; and the anticipated effects of actions of third parties such as competitors, or federal, state or local regulatory authorities. Forward-looking statements typically contain words such as "anticipates", "believes", "estimates", "expects", "forecasts", "predicts" or "projects" or variations of these words, suggesting that future outcomes are uncertain. The following discussion is intended to identify important factors (though not necessarily all such factors) that could cause future outcomes to differ materially from those set forth in forward-looking statements with respect to the Marathon Group. The oil and gas industry is characterized by a large number of companies, none of which is dominant within the industry, but a number of which have greater resources than Marathon. Marathon must compete with these companies for the rights to explore for oil and gas. Marathon's expectations as to revenues, margins and income are based upon assumptions as to future prices and volumes of liquid hydrocarbons, natural gas and refined products. Prices have historically been volatile and have frequently been driven by unpredictable changes in supply and demand resulting from fluctuations in economic activity and political developments in the world's major oil and gas producing areas, including OPEC member countries. Any substantial decline in such prices could have a material adverse effect on Marathon's results of operations. A decline in such prices could also adversely affect the quantity of liquid hydrocarbons and natural gas that can be economically produced and the amount of capital available for exploration and development. 62 Part II - OTHER INFORMATION (continued) - --------------------------------------- The Marathon Group uses commodity-based derivative instruments such as exchange-traded futures contracts and options and over-the-counter commodity swaps and options to manage exposure to market price risk. The Marathon Group's strategic approach is to limit the use of these instruments principally to hedging activities. Accordingly, gains and losses on futures contracts and swaps generally offset the effects of price changes in the underlying commodity. While commodity-based derivative instruments are generally used to reduce risks from unfavorable commodity price movements, they also may limit the opportunity to benefit from favorable movements. Levels of hedging activity vary among oil industry competitors and could affect the Marathon Group's competitive position with respect to those competitors. Factors Affecting Exploration and Production Operations ------------------------------------------------------- Projected production levels for liquid hydrocarbons and natural gas are based on a number of assumptions, including (among others) prices, supply and demand, regulatory constraints, reserve estimates, production decline rates for mature fields, reserve replacement rates, and geological and operating considerations. These assumptions may prove to be inaccurate. Exploration and production operations are subject to various hazards, including explosions, fires and uncontrollable flows of oil and gas. Offshore production and marine operations in areas such as the Gulf of Mexico and the North Sea are also subject to severe weather conditions such as hurricanes or violent storms or other hazards. Development of new production properties in countries outside the United States may require protracted negotiations with host governments and are frequently subject to political considerations, such as tax regulations, which could adversely affect the economics of projects. With respect to the Sakhalin II project in Russia, development plans need to be finalized prior to final commitment by the shareholders of Sakhalin Energy. In addition, Sakhalin Energy continues to seek to have certain Russian laws and normative acts at the Russian Federation and local levels brought into compliance with the existing Production Sharing Agreement Law. Factors Affecting Refining, Marketing and Transportation Operations ------------------------------------------------------------------- Marathon conducts refining, marketing and transportation operations primarily in the Midwest and Southeast. The profitability of these operations depends largely on the margin between the cost of crude oil and other feedstocks refined and the selling prices of refined products. Marathon is a net purchaser of crude oil in order to satisfy a substantial portion of its refinery throughput requirements. As a result, its overall profitability could be adversely affected by rising crude oil and other feedstock prices which are not recovered in the marketplace. Refined product margins have been historically volatile and vary with the level of economic activity in the various marketing areas, the regulatory climate and the available supply of refined products. Gross margins on merchandise sold at retail outlets tend to moderate the volatility experienced in the retail sale of refined products. Environmental regulations, particularly the 1990 Amendments to the Clean Air Act, have imposed (and are expected to continue to impose) increasingly stringent and costly requirements on refining and marketing operations which may have an adverse effect on margins. Refining, marketing and transportation operations are subject to business interruptions due to unforeseen events such as explosions, fires, crude oil or refined product spills, inclement weather, or labor disputes. 63 Part II - Other Information (continued) - --------------------------------------- Technology Factors ------------------ Longer-term projections of corporate strategy, including the viability, timing or expenditures required for capital projects, can be affected by changes in technology, especially innovations in processes used in the exploration, production or refining of hydrocarbons. While specific future changes are difficult to project, recent innovations affecting the oil industry include the development of three- dimensional seismic imaging and deep-water and horizontal drilling capabilities. Other Factors ------------- Holders of USX-Marathon Group Common Stock are holders of common stock of USX and are subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts, arising from any of the groups, which affect the overall cost of USX's capital could affect the results of operations and financial condition of all groups. For further discussion of certain of the factors described herein, and their potential effects on the businesses of the Marathon Group, see Item 1. Business, and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in the USX Corporation Form 10-K for the fiscal year ended December 31, 1996, and Management's Discussion and Analysis of Financial Condition and Results of Operations herein. III. USX-U. S. Steel Group --------------------- Forward-looking statements with respect to the U. S. Steel Group may include, but are not limited to, projections of levels of revenues, operating income or operating income per ton, net income or earnings per share; levels of capital, environmental or maintenance expenditures; the success or timing of completion of ongoing or anticipated capital or maintenance projects; levels of raw steel production capability, prices, production, shipments, or labor and raw material costs; the acquisition, idling, shutdown or divestiture of assets or businesses; the effect of restructuring or reorganization of business components; the effect of potential judicial proceedings on the business and financial condition; and the effects of actions of third parties such as competitors, or federal, state or local regulatory authorities. Forward-looking statements typically contain words such as "anticipates", "believes", "estimates", "expects", "forecasts", "predicts" or "projects", or variations of these words, suggesting that future outcomes are uncertain. The following discussion is intended to identify important factors (though not necessarily all such factors) that could cause future outcomes to differ materially from those set forth in forward-looking statements with respect to the U. S. Steel Group. Market Factors -------------- The U.S. Steel Group's expectations as to levels of production and revenues, gross margins, operating income and operating income per ton are based upon assumptions as to future product prices and mix, and levels of raw steel production capability, production and shipments. These assumptions may prove to be inaccurate. 64 Part II - Other Information (continued) - --------------------------------------- The steel industry is characterized by excess world supply which has restricted the ability of U. S. Steel and the industry to raise prices during periods of economic growth and resist price decreases during economic contraction. Over the next several years, construction of additional flat-rolled steel production facilities could result in increased domestic capacity of up to 14 million tons over 1996 levels. Several of the additional facilities are minimills which are less expensive to build than integrated facilities, and are typically staffed by non- unionized work forces with lower base labor costs and more flexible work rules. Through the use of thin slab casting technology, minimill competitors are increasingly able to compete directly with integrated producers of higher value-added products. Such competition could adversely affect the U.S. Steel Group's future product prices and shipment levels. The domestic steel industry has, in the past, been adversely affected by unfairly traded imports. Steel imports to the United States accounted for an estimated 23%, 21% and 25% of the domestic steel market in 1996, 1995 and 1994, respectively, and for an estimated 26% in the first two months of 1997. Foreign competitors typically have lower labor costs, and are often owned, controlled or subsidized by their governments, allowing their production and pricing decisions to be influenced by political and economic policy considerations as well as prevailing market conditions. Increases in levels of imported steel could adversely affect future market prices and demand levels for domestic steel. The U. S. Steel Group also competes in many markets with producers of substitutes for steel products, including aluminum, cement, composites, glass, plastics and wood. The emergence of additional substitutes for steel products could adversely affect future prices and demand for steel products. The businesses of the U. S. Steel Group are aligned with cyclical industries such as the automotive, appliance, containers, construction and energy industries. As a result, future downturns in the U.S. economy could adversely affect the profitability of the U. S. Steel Group. Operating and Cost Factors -------------------------- The operations of the U. S. Steel Group are subject to planned and unplanned outages due to maintenance, equipment malfunctions or work stoppages; and various hazards, including explosions, fires and severe weather conditions, which could disrupt operations or the availability of raw materials, resulting in reduced production volumes and increased production costs. Labor costs for the U. S. Steel Group are affected by collective bargaining agreements. U. S. Steel entered into a five and one-half year contract with the United Steel Workers of America, effective February 1, 1994, covering approximately 15,000 employees. The contract provided for reopener negotiations of specific payroll items. These negotiations have now been resolved by following the settlements reached by other major integrated producers (including the timing of a final lump-sum bonus payment in July, 1999). All revised contract terms became effective as of February 1, 1997. To the extent that increased costs associated with any renegotiated issues are not recoverable through the sales prices of products, future operating income would be adversely affected. 65 Part II - Other Information (continued) - --------------------------------------- Operating income for the U. S. Steel Group includes net periodic pension credits (which are primarily noncash) mainly reflecting the excess of expected return on plan assets over the cost of benefits earned and interest on the projected benefit obligation. These credits totaled $159 million, $132 million and $120 million in 1996, 1995 and 1994, respectively, and $38 million in the first quarter of 1997. The amounts of these credits fluctuate over time primarily reflecting changes in the expected long-term rate of return on plan assets and the assumed discount rate on the outstanding pension obligation. To the extent that these credits decline in the future, operating income would be adversely affected. The U. S. Steel Group provides health care and life insurance benefits to most employees upon retirement. Most of these benefits have not been prefunded. The accrued liability for such benefits as of December 31, 1996, was $2,249 million. To the extent that competitors do not provide similar benefits, or have been relieved of obligations to provide such benefits following bankruptcy reorganization, the competitive position of the U. S. Steel Group may be adversely affected, depending on future costs of health care. Legal and Environmental Factors ------------------------------- The profitability of the U. S. Steel Group's operations could be affected by a number of contingencies, including legal actions. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the U. S. Steel Group financial statements. The businesses of the U. S. Steel Group are subject to numerous environmental laws. Certain current and former U. S. Steel Group operating facilities, including Gary Works, have been in operation for many years, and could require significant future accruals and expenditures to meet existing and future requirements under these laws. 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. Other Factors ------------- Holders of USX-U. S. Steel Group Common Stock are holders of common stock of USX and are subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts, arising from any of the groups, which affect the overall cost of USX's capital could affect the results of operations and financial condition of all groups. For further discussion of certain of the factors described herein, and their potential effects on the businesses of the U.S. Steel Group, see Item 1. Business, and Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations in the USX Corporation Form 10-K for the fiscal year ended December 31, 1996, and Management's Discussion and Analysis of Financial Condition and Results of Operations herein. 66 Part II - Other Information (continued) - --------------------------------------- IV. USX-Delhi Group --------------- Forward-looking statements with respect to the Delhi Group may include, but are not limited to, projections of levels of revenues, gross margins, operating income, net income or earnings per share; levels of capital, environmental or maintenance expenditures; the success or timing of completion of ongoing or anticipated capital or maintenance projects; volumes of sales, throughput or shipments of natural gas or natural gas liquids ("NGLs"); levels of, or changes in, dedicated reserves of natural gas; the acquisition or divestiture of assets; the effect of restructuring or reorganization of business components or entry into new lines of business; the effect of potential judicial proceedings on the business and financial condition; and the effects of actions of third parties such as competitors, or federal, state or local regulatory authorities. Forward-looking statements typically contain words such as "anticipates", "believes", "estimates", "expects", "forecasts", "predicts" or "projects", or variations of these words, suggesting that future outcomes are uncertain. The following discussion is intended to identify important factors (though not necessarily all such factors) that could cause future outcomes to differ materially from those set forth in forward-looking statements with respect to the Delhi Group. Market Factors -------------- The adoption in 1992 of Federal Energy Regulatory Commission ("FERC") Order No. 636, has resulted in a fundamental "unbundling" of the services provided in the natural gas industry, affording natural gas producers easier access to end-user sales markets, and reducing market demand for the premium services traditionally provided by the Delhi Group. To the extent that producers convert their natural gas sales contracts with the Delhi Group to lower margin, fixed-fee transportation agreements, or that customers reduce their demand for gas under premium service agreements, the Delhi Group's future operating income will be adversely affected. The Delhi Group faces intense competition in all of its businesses, including obtaining additional dedicated natural gas reserves, and in the purchasing, gathering, processing, transporting and marketing of natural gas. The Delhi Group competes with major integrated oil and gas companies; more than 100 major intrastate and interstate pipeline companies; and national and local gas gatherers, brokers, marketers, processors and distributors of varying size, financial resources and experience. Certain of these competitors, including major integrated oil and gas companies and some intrastate and interstate pipeline companies, have greater financial resources and control larger natural gas supplies or storage capacity than the Delhi Group. 67 Part II - Other Information (continued) - --------------------------------------- The Delhi Group's expectations as to levels of revenues, gross margins and operating income, and its return on investment in capital projects are based upon assumptions as to future market prices and market supply and demand for natural gas, NGLs, and competing fuels and feedstocks, and as to levels of third-party drilling success in Delhi's current or anticipated core operating areas of Oklahoma and Texas. These assumptions may prove to be inaccurate. The Delhi Group generally buys natural gas at prices based on a market index, and sells natural gas under sales contracts (typically for periods of one year or less) and in the spot market. Pricing mechanisms under natural gas sales contracts result in gas sales primarily at market sensitive prices with the unit gross margin fluctuating based on the sales price and the cost of natural gas. Accordingly, Delhi's gross margin (and operating results) are affected by fluctuations in natural gas prices and demand levels, and by basis differentials (differences between natural gas prices in various locations). The Delhi Group uses commodity-based derivative instruments such as exchange-traded futures contracts and options and over-the-counter commodity swaps and options to manage its exposure to market risk. The Delhi Group uses these instruments as a hedging mechanism to protect margins. As a result, changes in the fair value of derivative instruments are generally offset by price changes in the underlying natural gas transaction. While commodity-based derivative instruments are generally used to reduce risks from unfavorable commodity price movements, they also may limit the opportunity to benefit from favorable movements. Levels of hedging activity vary among competitors and could affect the Delhi Group's competitive position with respect to those competitors. The Delhi Group obtains natural gas supplies from various sources, including major oil and gas companies, other pipeline companies and independent producers, marketers and brokers. Certain of these supplies are subject to natural declines in production from wells connected to the Delhi Group's systems. The Delhi Group's ability to contract for additional dedicated natural gas reserves to offset such declines depends, in part, on the level and success of drilling by producers in areas in which the Delhi Group operates. Levels of hydrocarbon drilling in these areas, and other areas of the United States, typically fluctuate based on the market price of natural gas and constraints of environmental regulation, among other factors. Market demand for natural gas is influenced by the seasonal requirements of purchasers using gas for space heating and generation of electricity for air conditioning, levels of imported natural gas, particularly from Canada, and the prices of competing fuels. The Delhi Group processes natural gas (extracts NGLs from the gas stream) in plants connected to its pipeline systems, and, in some cases, has its natural gas processed by third parties. Gross margins on gas processing vary with fluctuations in the market price of NGLs (which tend to parallel fluctuations in market prices for crude oil), the demand for NGLs and the price volatility, availability and quality of natural gas. Gross margins on gas processing accounted for 23%, 23% and 14% of total Delhi Group gross margins for the years 1996, 1995 and 1994, respectively, and 25% for the first quarter of 1997. 68 Part II - Other Information (continued) - --------------------------------------- Operational Factors ------------------- The Delhi Group's natural gas purchasing, gathering, processing, treating, transportation and marketing operations are subject to business interruption, liability and other risks of unforeseen events such as explosions, fires, natural disasters, leaks and uncontrollable flows of natural gas or NGLs. The viability and timing of growth strategies through capital development projects, acquisition, or joint ventures can be affected by external factors such as legal or regulatory delays, competing bids or competitor development activity. Contingency Factors ------------------- Future operating results could be affected by litigation settlements, judgments, or other contingencies, and by changes in federal, state and local laws and regulations, including environmental regulations and FERC regulations. Other Factors ------------- Holders of USX-Delhi Group Common Stock are holders of common stock of USX and are subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts, arising from any of the groups, which affect the overall cost of USX's capital could affect the results of operations and financial condition of all groups. For further discussion of certain of the factors described herein, and their potential effects on the businesses of the Delhi Group, see Item 1. Business, and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in the USX Corporation Form 10-K for the fiscal year ended December 31, 1996, and Management's Discussion and Analysis of Financial Condition and Results of Operations herein. 69 Part II - Other Information (continued) - -------------------------------------- Item 5. OTHER INFORMATION (b) 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) ------------------- First Quarter Ended March 31 1997 1996 ---- ---- INCOME DATA: Revenues $4,076 $3,612 Operating income 222 382 Net income 98 208
(In millions) ---------------------- March 31 December 31 1997 1996 -------- ----------- BALANCE SHEET DATA: Assets: Current assets $3,366 $3,271 Noncurrent assets 7,978 7,977 ------ ------ Total assets $11,344 $11,248 ====== ====== Liabilities and Stockholder's Equity: Current liabilities $1,825 $2,197 Noncurrent liabilities 7,569 7,199 Stockholder's equity 1,950 1,852 ------ ------ Total liabilities and stockholder's equity $11,344 $11,248 ====== ======
70 Part II - Other Information (continued): - ---------------------------------------- Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 3. Articles of Incorporation and By-Laws (a)USX Restated Certificate of Incorporation dated September 1, 1996 12.1 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 12.2 Computation of Ratio of Earnings to Fixed Charges 27. Financial Data Schedule (b) REPORTS ON FORM 8-K None Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned chief accounting officer thereunto duly authorized. USX CORPORATION By /s/ Kenneth L. Matheny Kenneth L. Matheny Vice President & Comptroller May 12, 1997 EX-12.1 2 Exhibit 12.1
USX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS TOTAL ENTERPRISE BASIS - (Unaudited) ---------------------------------------------------------- (Dollars in Millions) Three Months Ended Year Ended December 31 March 31 -------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- ---- Portion of rentals representing interest $20 $20 $80 $78 $85 $84 $87 Capitalized interest 4 3 11 13 58 105 78 Other interest and fixed charges 89 107 399 464 464 372 408 Pretax earnings which would be required to cover preferred stock dividend requirements of parent 9 9 36 46 49 44 14 ---- ---- ---- ---- ---- ---- ---- Combined fixed charges and preferred stock dividends (A) $122 $139 $526 $601 $656 $605 $587 ==== ==== ==== ==== ==== ==== ==== Earnings-pretax income with applicable adjustments (B) $403 $526 $1,867 $902 $1,263 $280 $376 ==== ==== ==== ==== ==== ==== ==== Ratio of (B) to (A) 3.31 3.78 3.55 1.50 1.92 (a) (a) ==== ==== ==== ==== ==== ==== ==== (a) Earnings did not cover combined fixed charges and preferred stock dividends by $325 million for 1993 and by $211 million for 1992.
EX-12.2 3 Exhibit 12.2
USX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES TOTAL ENTERPRISE BASIS - (Unaudited) ------------------------------------------------- (Dollars in Millions) Three Months Ended Year Ended December 31 March 31 -------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---- ---- ---- ----- ---- ---- ---- Portion of rentals representing interest $20 $20 $80 $78 $85 $84 $87 Capitalized interest 4 3 11 13 58 105 78 Other interest and fixed charges 89 107 399 464 464 372 408 ---- ---- ---- ---- ----- ---- ---- Total fixed charges (A) $113 $130 $490 $555 $607 $561 $573 ==== ==== ==== ==== ==== ==== ==== Earnings-pretax income with applicable adjustments (B) $403 $526 $1,867 $902 $1,263 $280 $376 ==== ==== ==== ==== ==== ==== ==== Ratio of (B) to (A) 3.57 4.04 3.81 1.63 2.08 (a) (a) ==== ==== ==== ==== ==== ==== ==== (a) Earnings did not cover fixed charges by $281 million for 1993 and by $197 million for 1992.
EX-27 4
5 1,000,000 3-MOS DEC-31-1997 MAR-31-1997 78 0 1027 8 1855 3093 25749 15426 16719 3369 3535 0 7 382 4763 16719 5997 5997 5655 5655 0 0 85 287 91 196 0 0 0 196 0 0 CONSISTS OF MARATHON STOCK ISSUED, $288; STEEL STOCK ISSUED, $85; DELHI STOCK ISSUED, $9. PRIMARY EARNINGS (LOSS) PER SHARE APPLICABLE TO MARATHON STOCK, $.37; STEEL STOCK, $.96; DELHI STOCK $.15. FULLY DILUTED EARNINGS (LOSS) PER SHARE APPLICABLE TO MARATHON STOCK, $.37; STEEL STOCK, $.93; DELHI STOCK, $.15.
EX-4 5 EXHIBIT 4.1 USX CORPORATION ------------ RESTATED CERTIFICATE OF INCORPORATION ------------ FILED IN OFFICE OF SECRETARY OF STATE, STATE OF DELAWARE SEPTEMBER 1, 1996 =============================================================================== TABLE OF CONTENTS Article First--Corporate Name 1 Article Second--Registered Office 1 Article Third--Corporate Purpose 1 Fourth--Capital Stock 1 Division I--Common Stock 1 1. Dividend Rights 1 2. Exchange and Redemption 2 3. Voting Rights 7 4. Liquidation Rights 9 5. Definitions 9 6. Determinations of the Board of Directors 12 Division II--Preferred Stock 12 Series A Junior Preferred Stock 13 6.50% Cumulative Convertible Preferred Stock 19 Article Fifth--Perpetual Existence 35 Article Sixth--Stockholder Liability 35 Article Seventh--Board of Directors 35 Article Eighth--By-laws 36 Article Ninth--Inspection of Accounts 36 Article Tenth--Dividends and Debt Obligations 36 Article Eleventh--Director Liability 36 Article Twelfth--Power and Authority 36 Article Thirteenth--Amendment of Certificate of Incorporation 37 RESTATED CERTIFICATE OF INCORPORATION OF USX CORPORATION (Originally incorporated under the name of U.S. Steel Company on September 10, 1965) --------------- First: The name of the Corporation (which is hereinafter referred to as the "Corporation") is USX CORPORATION Second: Its registered office and place of business in the State of Delaware is located at 1013 Centre Rd., City of Wilmington, County of New Castle. The registered agent in charge thereof upon whom process against the Corporation may be served, is The Prentice-Hall Corporation System, Inc. Third: The purposes of the Corporation are to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware, and without limiting the foregoing to engage in integrated steel operations and to develop, mine, produce, manufacture, construct, transport, buy, hold, sell and generally deal in products, materials, property, both tangible and intangible, and services of all kinds. Fourth: The total number of shares of capital stock which the Corporation shall have authority to issue is Eight Hundred Forty Million (840,000,000), of which Forty Million (40,000,000) shares shall be shares of Preferred Stock, without par value (hereinafter called "Preferred Stock"), Five Hundred Fifty Million (550,000,000) shares shall be shares of a class of common stock designated as USX-Marathon Group Common Stock, par value $1.00 per share ("Marathon Stock"), Two Hundred Million (200,000,000) shares shall be shares of a class of common stock designated as USX-U.S. Steel Group Common Stock, par value $1.00 per share ("Steel Stock"), and Fifty Million (50,000,000) shares shall be shares of a class of common stock designated as USX-Delhi Group Common Stock, par value $1.00 per share ("Delhi Stock"). The Marathon Stock, the Steel Stock and the Delhi Stock shall hereinafter collectively be called the "Common Stock". DIVISION I The powers and rights of the shares of each class of Common Stock, and the qualifications, limitations or restrictions thereof, are as follows: 1. Dividend Rights. Subject to the express terms of any outstanding series of Preferred Stock, dividends may be declared and paid upon each class of the Common Stock upon the terms provided for below with respect to each such class solely in the discretion of the Board of Directors: (a) Dividends on Marathon Stock. Dividends on the Marathon Stock may be declared and paid out of funds of the Corporation legally available therefor. (b) Dividends on Steel Stock. Dividends on the Steel Stock may be declared and paid only out of the lesser of (i) funds of the Corporation legally available therefor and (ii) the Available Steel Dividend Amount. (c) Dividends on Delhi Stock. Dividends on the Delhi Stock may be declared and paid only out of the lesser of (i) funds of the Corporation legally available therefor and (ii) the Available Delhi Dividend Amount. (d) Discrimination Between Classes of Common Stock. The Board of Directors, subject to the provisions of Sections 1(a), 1(b) and 1(c), may, in its sole discretion, declare and pay dividends exclusively on any class or classes of Common Stock in equal or unequal amounts, notwithstanding the amounts of funds available for dividends on each class, the respective voting and liquidation rights of each class, the amount of prior dividends declared on each class or any other factor. 1 2. Exchange and Redemption. Shares of each class of Common Stock are subject to exchange or redemption, as the case may be, upon the terms provided below with respect to each such class; provided that no such class may be exchanged or redeemed in its entirety if all of the other classes have been, or are at the time being, exchanged or redeemed in their entirety: (a) Exchange and Redemption of Marathon Stock. (i) At any time on or after the date on which the Corporation has transferred all of the assets and liabilities of the Marathon Group to a wholly owned subsidiary of the Corporation (the "Marathon Group Subsidiary"), the Board of Directors may, in its sole discretion and by a majority vote of the directors then in office, provided that there are funds of the Corporation legally available therefor, declare that all of the outstanding shares of Marathon Stock shall be exchanged on an Exchange Date set forth in a notice to holders of Marathon Stock pursuant to Section 2(d)(i), for all of the outstanding shares of common stock of the Marathon Group Subsidiary, on a pro rata basis, each of which shall, upon such issuance, be fully paid and nonassessable. (ii) After any Exchange Date for Marathon Stock, any share of Marathon Stock that is issued on conversion or exercise of any Convertible Securities shall, to the extent of funds of the Corporation legally available therefor, immediately upon issuance pursuant to such conversion or exercise and without any notice or any other action on the part of the Corporation or its Board of Directors or the holder of such share of Marathon Stock, be redeemed for $.01 in cash. (b) Exchange and Redemption of Steel Stock. (i) In the event of the Disposition, in one transaction or a series of related transactions, by the Corporation of all or substantially all of the properties and assets of the U.S. Steel Group (other than in connection with the Disposition by the Corporation of all of its properties and assets in one transaction) to any person, entity or group (other than (A) the holders of all outstanding shares of Steel Stock on a pro rata basis or (B) any person, entity or group in which the Corporation, directly or indirectly, owns a majority equity interest), the Corporation shall, on or prior to the first Business Day following the 60th day following the consummation of such Disposition, either: (A) subject to paragraph 1(b) above, declare and pay a dividend in cash and/or in securities or other property received as proceeds of such Disposition to the holders of Steel Stock in an amount equal to the Net Proceeds of such Disposition; or (B) to the extent that there are funds of the Corporation legally available therefor, redeem the number of whole shares of outstanding Steel Stock that has an aggregate average Market Value, during the ten-Business Day period beginning on the first Business Day following such consummation, closest to the value of the Net Proceeds of such Disposition, for cash and/or securities or other property received as proceeds of such Disposition in an amount equal to such Net Proceeds; or (C) exchange each outstanding share of Steel Stock for a number of fully paid and nonassessable shares of Marathon Stock or, if there are no shares of Marathon Stock outstanding on the Exchange Date and shares of Delhi Stock are then outstanding, of Delhi Stock equal to 110% of the average daily ratio (calculated to the nearest five decimal places) of the Market Value of one share of Steel Stock to the Market Value of one share of Marathon Stock or one share of Delhi Stock, as the case may be, during such ten-Business Day period. For purposes of this Section 2(b)(i): (x) as of any date, "substantially all of the properties and assets of the U.S. Steel Group" shall mean a portion of such properties and assets that represents at least 80% of either of the then-current market value of, or the aggregate revenues for the immediately preceding twelve fiscal quarterly periods of the Corporation derived from, the properties and assets of the U.S. Steel Group as of such date (excluding the properties and assets of any person, entity or group in which the Corporation, directly or indirectly, owns less than a majority equity interest); 2 (y) if immediately after any event, the Corporation, directly or indirectly, owns less than a majority equity interest in any person, entity or group in which the Corporation, directly or indirectly, owned a majority equity interest immediately prior to the occurrence of such event, a Disposition of all of the properties and assets of the U.S. Steel Group owned by such person, entity or group shall be deemed to have occurred; and (z) in the case of a Disposition of properties and assets in a series of related transactions, such Disposition shall not be deemed to have been consummated until the consummation of the last of such transactions. (ii) The Board of Directors may, by a majority vote of the directors then in office, at any time after a dividend or redemption pursuant to clause (A) or (B), respectively, of Section 2(b)(i), declare that each of the remaining outstanding shares of Steel Stock shall be exchanged, on an Exchange Date set forth in a notice to holders of Steel Stock pursuant to Section 2(d)(i), for a number of fully paid and nonassessable shares of Marathon Stock or, if there are no shares of Marathon Stock outstanding on such Exchange Date and shares of Delhi Stock are then outstanding, of Delhi Stock, equal to 110% of the Market Value Ratio as of the fifth Business Day prior to the date such notice is mailed to such holders. For purposes of the preceding sentence, "Market Value Ratio", as of any date, shall mean the highest of the following (calculated to the nearest five decimal places): (A) the average ratio of S/X for the five-Business Day period ending on such date, (B) the quotient of (1) the sum of (w) four times the average ratio of S/X for the five-Business Day period ending on such date, (x) three times the average ratio of S/X for the next preceding five- Business Day period, (y) two times the average ratio of S/X for the next preceding five-Business Day period and (z) the average ratio of S/X for the next preceding five-Business Day period, divided by (2) ten and (C) if the dividend pursuant to clause (A) of Section 2(b)(i) was declared and paid or the redemption pursuant to (B) of Section 2(b)(i) was made prior to the commencement of the most recently completed fiscal quarter of the Corporation, the average ratio of S/X for such fiscal quarter, where S is the Market Value of one share of Steel Stock and X is the Market Value of one share of Marathon Stock or one share of Delhi Stock, as the case may be. (iii) At any time on or after the date on which the Corporation has transferred all of the assets and liabilities of the U.S. Steel Group (and no other assets or liabilities) to a wholly owned subsidiary of the Corporation (the "U.S. Steel Group Subsidiary"), the Board of Directors may, in its sole discretion and by a majority vote of the directors then in office, provided that there are funds of the Corporation legally available therefor, declare that all of the outstanding shares of Steel Stock shall be exchanged on an Exchange Date set forth in a notice to holders of Steel Stock pursuant to Section (d)(i), for all of the outstanding shares of common stock of the U.S. Steel Group Subsidiary, on a pro rata basis, each of which shall, upon such issuance, be fully paid and nonassessable. (iv) After any Exchange Date or Redemption Date on which all outstanding Steel Stock was exchanged or redeemed, any share of Steel Stock that is issued on conversion or exercise of any Convertible Securities shall, immediately upon issuance pursuant to such conversion or exercise and without any notice or any other action on the part of the Corporation or its Board of Directors or the holder of such share of Steel Stock: (A) in the event the then-outstanding Steel Stock was exchanged or Marathon Stock or Delhi Stock on such Exchange Date pursuant to Section 2(b)(i) or 2(b)(ii), be exchanged for the kind and amount of shares of capital stock and other securities and property that a holder of such Convertible Security would have been entitled to receive pursuant to the terms of such Convertible Security had such terms provided that the conversion privilege in effect immediately prior to any exchange by the Corporation of any of its capital stock for shares of any other capital stock of the Corporation would be adjusted so that the holder of any such Convertible Security thereafter surrendered for conversion would be entitled to receive the number of shares of capital stock of the Corporation and other securities and property he would have owned immediately following such action had such Convertible Security been converted immediately prior thereto; or (B) in the event the then-outstanding Steel Stock was redeemed in whole pursuant to clause (B) of Section 2(b)(i) or exchanged for common stock of the U.S. Steel Group Subsidiary pursuant to Section 2(b)(iii), be redeemed, to the extent of funds of the Corporation legally available therefor, for $.01 in cash. 3 The provisions of clause (A) of this Section 2(b)(iv) shall not apply to the extent that equivalent adjustments are otherwise made pursuant to the provisions of such Convertible Securities. (c) Exchange and Redemption of Delhi Stock. (i) In the event of the Disposition, in one transaction or a series of related transactions, by the Corporation of all or substantially all of the properties and assets of the Delhi Group (other than in connection with the Disposition by the Corporation of all of its properties and assets in one transaction) to any person, entity or group (other than (A) the holders of all outstanding shares of Delhi Stock on a pro rata basis or (B) any person, entity or group in which the Corporation, directly or indirectly, owns a majority equity interest), the Corporation shall, on or prior to the first Business Day following the 60th day following the consummation of such Disposition, either: (A) subject to paragraph 1(c) above, declare and pay a dividend in cash and/or in securities or other property received as proceeds of such Disposition to the holders of Delhi Stock in an amount equal to the product of the Delhi Fraction and the Net Proceeds of such Disposition; or (B) to the extent that there are funds of the Corporation legally available therefor, redeem the number of whole shares of outstanding Delhi Stock that has an aggregate average Market Value, during the ten-Business Day period beginning on the first Business Day following such consummation, closest to the value of the product of the Delhi Fraction and the Net Proceeds of such Disposition, for cash and/or securities or other property re-ceived as proceeds of such Disposition in an amount equal to such product; or (C) exchange each outstanding share of Delhi Stock for a number of fully paid and nonassessable shares of Marathon Stock or, if there are no shares of Marathon Stock outstanding on such Exchange Date and shares of Steel Stock are then outstanding, of Steel Stock, equal to 110% of the average daily ratio (calculated to the nearest five decimal places) of the Market Value of one share of Delhi Stock to the Market Value of one share of Marathon Stock or one share of Steel Stock, as the case may be, during such ten-Business Day period. For purposes of this Section 2(c)(i): (x) as of any date, "substantially all of the properties and assets of the Delhi Group" shall mean a portion of such properties and assets that represents at least 80% of either of the then-current market value of, or the aggregate revenues for the immediately preceding twelve fiscal quarterly periods of the Corporation derived from, the properties and assets of the Delhi Group as of such date (excluding the properties and assets of any person, entity or group in which the Corporation, directly or indirectly, owns less than a majority equity interest); (y) if immediately after any event, the Corporation, directly or indirectly, owns less than a majority equity interest in any person, entity or group in which the Corporation, directly or indirectly, owned a majority equity interest immediately prior to the occurrence of such event, a Disposition of all of the properties and assets of the Delhi Group owned by such person, entity or group shall be deemed to have occurred; and (z) in the case of a Disposition of properties and assets in a series of related transactions, such Disposition shall not be deemed to have been consummated until the consummation of the last of such transactions. (ii) The Board of Directors may, by a majority vote of the directors then in office, at any time after a dividend or redemption pursuant to clause (A) or (B), respectively, of Section 2(c)(i), declare that each of the remaining outstanding shares of Delhi Stock shall be exchanged, on an Exchange Date set forth in a notice to holders of Delhi Stock pursuant to Section 2(d)(i), for a number of fully paid and nonassessable shares of Marathon Stock or, if there are no shares of Marathon Stock outstanding on such Exchange Date and shares of Steel Stock are then outstanding, of Steel Stock equal to 110% of the Market Value Ratio as of the fifth Business Day prior to the date such notice is mailed to such holders. 4 (iii) The Board of Directors may, by a majority vote of the directors then in office, at any time declare that each of the outstanding shares of Delhi Stock shall be exchanged, on an Exchange Date set forth in a notice to holders of Delhi Stock pursuant to Section 2(d)(i), for a number of fully paid and nonassessable shares of Marathon Stock or, if there are no shares of Marathon Stock outstanding on such Exchange Date, of Steel Stock equal to 115% of the Market Value Ratio as of the fifth Business Day prior to the date such notice is mailed to such holders. (iv) For purposes of Section 2(c)(ii) and (iii), the "Market Value Ratio", as of any date, shall mean the highest of the following (calculated to the nearest five decimal places): (A) the average ratio of D/X for the five-Business Day period ending on such date, (B) the quotient of (1) the sum of (w) four times the average ratio of D/X for the five-Business Day period ending on such date, (x) three times the average ratio of D/X for the next preceding five-Business Day period, (y) two times the average ratio of D/X for the next preceding five- Business Day period and (z) the average ratio of D/X for the next preceding five-Business Day period, divided by (2) ten and (C) if the dividend pursuant to clause (A) of Section 2(c)(i) was declared and paid or the redemption pursuant to clause (B) of Section 2(c)(i) was made prior to the commencement of the most recently completed fiscal quarter of the Corporation, the average ratio of D/X for such fiscal quarter, where D is the Market Value of one share of Delhi Stock and X is the Market Value of one share of Marathon Stock or one share of Steel Stock, as the case may be. (v) At any time on or after the date on which the Corporation has transferred all of the assets and liabilities of the Delhi Group (and no other assets or liabilities) to a wholly owned subsidiary of the Corporation (the "Delhi Group Subsidiary"), the Board of Directors may, in its sole discretion and by a majority vote of the directors then in office, provided that there are funds of the Corporation legally available therefor, declare that all of the outstanding shares of Delhi Stock shall be exchanged on an Exchange Date set forth in a notice to holders of Delhi Stock pursuant to Section 2(d)(i), for a number of outstanding shares of common stock of the Delhi Group Subsidiary equal to the product of the Delhi Fraction and the number of all outstanding shares of common stock of the Delhi Group Subsidiary, on a pro rata basis, each of which shall, upon such issuance, be fully paid and nonassessable. (vi) After any Exchange Date or Redemption Date on which all outstanding Delhi Stock was exchanged or redeemed, any share of Delhi Stock that is issued on conversion or exercise of any Convertible Securities shall, immediately upon issuance pursuant to such conversion or exercise and without any notice or any other action on the part of the Corporation or its Board of Directors or the holder of such share of Delhi Stock: (A) in the event the then-outstanding Delhi Stock was exchanged for Marathon Stock or Steel Stock on such Exchange Date pursuant to Section 2(c)(i), 2(c)(ii) or 2(c)(iii), be exchanged for the kind and amount of shares of capital stock and other securities and property that a holder of such Convertible Security would have been entitled to receive pursuant to the terms of such Convertible Security had such terms provided that the conversion privilege in effect immediately prior to any exchange by the Corporation of any of its capital stock for shares of any other capital stock of the Corporation would be adjusted so that the holder of any such Convertible Security thereafter surrendered for conversion would be entitled to receive the number of shares of capital stock of the Corporation and other securities and property he would have owned immediately following such action had such Convertible Security been converted immediately prior thereto; or (B) in the event the then-outstanding Delhi Stock was redeemed in whole pursuant to clause (B) of Section 2(c)(i) or exchanged for common stock of the Delhi Group Subsidiary pursuant to Section 2(c)(v), be redeemed, to the extent of funds of the Corporation legally available therefor, for $.01 in cash. The provisions of clause (A) of this Section 2(c)(vi) shall not apply to the extent that equivalent adjustments are otherwise made pursuant to the provisions of such Convertible Securities. (d) General Exchange and Redemption Provisions. (i) In the event of any exchange or redemption pursuant to this Section 2 (other than Section 2(a)(ii), 2(b)(iv), or 2(c)(vi)), the Corporation shall cause to be given to each holder of the class of Common Stock to be so exchanged or redeemed a notice stating (A) that shares of such class 5 of Common Stock shall be exchanged or redeemed, as the case may be, (B) the Exchange Date or the Redemption Date, (C) in the event of a partial redemption of Steel Stock or Delhi Stock, as the case may be, pursuant to clause (B) of Section 2(b)(i) or clause (B) of Section 2(c)(i), respectively, the number of shares of Steel Stock or Delhi Stock, as the case may be, to be redeemed, (D) the kind and amount of shares of capital stock or cash and/or securities or other property to be received by such holder with respect to each share of such class of Common Stock held by such holder, including details as to the calculation thereof, (E) the place or places where certificates for shares of such class of Common Stock, properly endorsed or assigned for transfer (unless the Corporation shall waive such requirement), are to be surrendered for delivery of certificates for shares of such capital stock or cash and/or securities or other property and (F) that, subject to Section 2(d)(iv) hereof, dividends on such shares of Common Stock will cease to be paid as of such Exchange Date or Redemption Date. Such notice shall be sent by first-class mail, postage prepaid, not less than 30 nor more than 60 days prior to the Exchange Date or Redemption Date, as the case may be, and in any case to each holder of the class of Common Stock to be exchanged or redeemed, at such holder's address as the same appears on the stock transfer books of the Corporation. Neither the failure to mail such notice to any particular holder of such class of Common Stock nor any defect therein shall affect the sufficiency thereof with respect to any other holder of such class of Common Stock. (ii) If less than all of the outstanding shares of Steel Stock or Delhi Stock, as the case may be, are to be redeemed pursuant to clause (B) of Section 2(b)(i) or clause (B) of Section 2(c)(i), respectively, such shares shall be redeemed by the Corporation pro rata among the holders of such class of Common Stock or by such other method as may be determined by the Board of Directors to be equitable. (iii) The Corporation shall not be required to issue or deliver fractional shares of any class of capital stock or any fractional securities to any holder of any class of Common Stock upon any exchange, redemption, dividend or other distribution pursuant to this Section 2. If more than one share of any class of Common Stock shall be held at the same time by the same holder, the Corporation may aggregate the number of shares of any class of capital stock that shall be issuable or the amount of securities that shall be deliverable to such holder upon any exchange, redemption, dividend or other distribution (including any fractions of shares or securities). If the number of shares of any class of capital stock or the amount of securities remaining to be issued or delivered to any holder of any class of Common Stock is a fraction, the Corporation shall, if such fraction is not issued or delivered to such holder, pay a cash adjustment in respect of such fraction in an amount equal to the fair market value of such fraction on the fifth Business Day prior to the date such payment is to be made. For purposes of the preceding sentence, "fair market value" of any fraction shall be (i) in the case of any fraction of a share of capital stock of the Corporation, the product of such fraction and the Market Value of one share of such capital stock and (ii) in the case of any other fractional security, such value as is determined by the Board of Directors. (iv) No adjustments in respect of dividends shall be made upon the exchange or redemption of any shares of any class of Common Stock; provided, however, that if the Exchange Date or Redemption Date with respect to any class of Common Stock shall be subsequent to the record date for the payment of a dividend or other distribution thereon or with respect thereto, the holders of shares of such class of Common Stock at the close of business on such record date shall be entitled to receive the dividend or other distribution payable on or with respect to such shares on the date set for payment of such dividend or other distribution, notwithstanding the exchange or redemption of such shares or the Corporation's default in payment of the dividend or distribution due on such date. (v) Before any holder of shares of any class of Common Stock shall be entitled to receive certificates representing shares of any capital stock or cash and/or securities or other property to be received by such holder with respect to such shares of such class of Common Stock pursuant to this Section 2, such holder shall surrender at such office as the Corporation shall specify certificates for such shares of such class of Common Stock, properly endorsed or assigned for transfer (unless the Corporation shall waive such requirement). The Corporation will as soon as practicable after such surrender of certificates representing such shares of such class of Common Stock deliver to the person for whose account such shares of such class of Common Stock 6 were so surrendered, or to his nominee or nominees, certificates representing the number of whole shares of the kind of capital stock or cash and/or securities or other property to which he shall be entitled as aforesaid, together with any fractional payment contemplated by Section 2(d)(iii). If less than all of the shares of any class of Common Stock, represented by any one certificate are to be redeemed, the Corporation shall issue and deliver a new certificate for the shares of such class of Common Stock not redeemed. (vi) From and after any applicable Exchange Date or Redemption Date, all rights of a holder of shares of any class of Common Stock that were exchanged or redeemed shall cease except for the right, upon surrender of the certificates representing such shares of Common Stock, to receive certificates representing shares of the kind and amount of capital stock or cash and/or securities or other property for which such shares were exchanged or redeemed, together with any fractional payment contemplated by Section 2(d)(iii) and rights to dividends as provided in Section 2(d)(iv). No holder of a certificate, that immediately prior to the applicable Exchange Date for any class of Common Stock represented shares of such class of Common Stock, shall be entitled to receive any dividend or other distribution with respect to shares of any kind of capital stock into which such class of Common Stock was exchanged until surrender of such holder's certificate for a certificate or certificates representing shares of such kind of capital stock. Upon such surrender, there shall be paid to the holder the amount of any dividends or other distributions (without interest) which theretofore became payable with respect to a record date after the Exchange Date, but that were not paid by reason of the foregoing, with respect to the number of whole shares of the kind of capital stock represented by the certificate or certificates issued upon such surrender. From and after an Exchange Date for any class of Common Stock, the Corporation shall, however, be entitled to treat the certificates for such class of Common Stock that have not yet been surrendered for exchange as evidencing the ownership of the number of whole shares of the kind or kinds of capital stock for which the shares of such class of Common Stock represented by such certificates shall have been exchanged, notwithstanding the failure to surrender such certificates. (vii) The Corporation will pay any and all documentary, stamp or similar issue or transfer taxes that may be payable in respect of the issue or delivery of any shares of capital stock on exchange of shares of any class of Common Stock pursuant hereto. The Corporation shall not, however, be required to pay any tax that may be payable in respect of any transfer involved in the issue and delivery of any shares of capital stock in a name other than that in which the shares of the class of Common Stock so exchanged were registered, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Corporation the amount of any such tax, or has established to the satisfaction of the Corporation that such tax has been paid. 3. Voting Rights. (a) Except as provided in clauses (c), (d) or (e) below, the holders of all classes of Common Stock shall vote together as a single class on all matters as to which holders of Common Stock are entitled to vote. On all matters to be voted on by the holders of all classes of Common Stock together as a single class, (i) each outstanding share of Marathon Stock shall have one vote, (ii) each outstanding share of any other class of Common Stock shall have a number of votes equal to the quotient (calculated to the nearest three decimal places), as of the fifth Business Day prior to the applicable record date or as of any other applicable date,of (A) the sum of (1) four times the average ratio of X/Y for the five-Business Day period ending on such fifth Business Day, (2) three times the average ratio of X/Y for the next preceding five-Business Day period, (3) two times the average ratio of X/Y for the next preceding five-Business Day period and (4) the average ratio of X/Y for the next preceding five-Business Day period, divided by (B) ten, where X is the Market Value of such class of Common Stock and Y is the Market Value of the Marathon Stock or if there are no shares of Marathon Stock outstanding on such record or other applicable date or on any of the twenty-five Business Days prior thereto, the sum of the Market Values of the Steel Stock and of the Delhi Stock; provided that until the Delhi Stock has een traded regular way on the New York Stock Exchange for at least twenty-five Business Days, each outstanding share of the Delhi Stock shall have a number of votes equal to the ratio of A/B (calculated to the nearest three decimal places), where A is the average of the high and low reported sales prices of a share of the Delhi Stock on the New York Stock Exchange, and B is the average of the high and low reported sales prices of a share of Marathon Stock or, if there are no shares of Marathon Stock outstanding, the sum of the average of the high and low 7 reported sales prices of a share of the Steel Stock and a share of the Delhi Stock on such Exchange, in each case on the Effective Date, or on the first Business Day thereafter on which shares of the Delhi Stock are traded on such Exchange. If shares of only one class of Common Stock are outstanding, each share of that class shall have one vote. (b) Unless the vote or consent of a greater number of shares shall then be required by law, the vote or consent of the holders of a majority of all of the shares of any class of Common Stock then outstanding, voting as a separate class, shall be necessary for authorizing, effecting or validating the merger or consolidation of the Corporation into or with any other corporation if such merger or consolidation would adversely affect the powers or special rights of such class of Common Stock either directly by amendment of this Restated Certificate of Incorporation or indirectly by requiring the holders of such class to accept or retain, in such merger or consolidation, anything other than (i) shares of such class or (ii) shares of the surviving or resulting corporation having, in either case, powers and special rights identical to those of such class prior to such merger or consolidation. (c) Unless the vote or consent of a greater number of shares shall then be required by law, the vote or consent of the holders of at least 66 2/3% of all of the shares of Steel Stock then outstanding, voting as a separate class, shall be necessary for: (i) the declaration or payment of any dividend on, or the making of any other payment or distribution with respect to any shares of any other class of Common Stock, if such dividend, payment or distribution is to be made with (A) proceeds from the Disposition of any of the properties and assets of the U.S. Steel Group or (B) any portion of an equity interest in a person, entity or group that owns any of the properties or assets of the U.S. Steel Group; or (ii) the use, or reservation for use, of any proceeds from the Disposition of any of the properties and assets of the U.S. Steel Group, or any of the properties and assets acquired with such proceeds, in any business of the Corporation other than a business of the U.S. Steel Group; provided such vote shall not be required if such proceeds are loaned at a rate or rates representative of actual borrowings and short-term investments by the Corporation. (d) Unless the vote or consent of a greater number of shares shall then be required by law, the vote or consent of the holders of at least 66 2/3% of all the shares of Marathon Stock then outstanding, voting as a separate class, shall be necessary for: (i) the declaration or payment of any dividend on, or the making of any other payment or distribution with respect to, any shares of any other class of Common Stock, if such dividend, payment or distribution is to be made with (A) proceeds from the Disposition of any of the properties and assets of the Marathon Group or (B) any portion of an equity interest in a person, entity or group that owns any of the properties and assets of the Marathon Group; or (ii) the use, or reservation for use, of any proceeds from the Disposition of any of the properties and assets of the Marathon Group, or any of the properties and assets acquired with such proceeds, in any business of the Corporation other than a business of the Marathon Group; provided such vote shall not be required to the extent such proceeds are loaned at a rate or rates representative of actual borrowings and short-term investments by the Corporation. (e) Unless the vote or consent of a greater number of shares shall then be required by law, the vote or consent of the holders of at least 66 2/3% of all of the shares of Delhi Stock then outstanding, voting as a separate class, shall be necessary for: (i) the declaration or payment of any dividend on, or the making of any other payment or distribution with respect to any shares of any other class of Common Stock, if such dividend, payment or distribution is to be made with (A) proceeds from the Disposition of any of the properties and assets of the Delhi Group or (B) any portion of an equity interest in a person, entity or group that owns any of the properties or assets of the Delhi Group; or (ii) the use, or reservation for use, of any proceeds from the Disposition of any of the properties and assets of the Delhi Group, or any of the properties and assets acquired with such proceeds, in any business of the Corporation other than a business of the Delhi Group; 8 provided such vote shall not be required if such proceeds are loaned at a rate or rates representative of actual borrowings and short-term investments by the Corporation. (f) The number of authorized shares of any class of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of shares of Common Stock having a majority of the votes entitled to be cast by the holders of all classes of Common Stock, voting together as provided for in Section 3(a) and without a separate vote of the holders of any class. 4. Liquidation Rights. In the event of the dissolution, liquidation or winding- up of the Corporation, whether voluntary or involuntary, after there shall have been paid or set apart for the holders of Preferred Stock the full preferential amounts to which they are entitled, the holders of the outstanding shares of each class of Common Stock shall be entitled to receive a fraction of the funds of the Corporation remaining for distribution to its stockholders, where such fraction is equal to the quotient of (A) the sum of (1) four times the average ratio of x/y for the five-Business Day period ending on the Business Day prior to the date of the public announcement of (I) a voluntary dissolution, liquidation or winding-up by the Corporation or (II) the institution of the proceeding for the involuntary dissolution, liquidation or winding-up of the Corporation, (2) three times the average ratio of x/y for the next preceding five-Business Day period, (3) two times the average ratio of x/y for the next preceding five-Business Day period and (4) the average ratio of x/y for the next preceding five-Business Day period, divided by (B) ten, where x is the Market Capitalization of such class of Common Stock, and y is the aggregate Market Capitalization of all classes of Common Stock. For purposes of the preceding sentence, "Market Capitalization" of any class of Common Stock on any day shall mean the product of (i) the Market Value of such class of Common Stock on such day and (ii) the number of shares of such class of Common Stock outstanding on such day. 5. Definitions. As used in this Division I, the following terms shall have the following meanings (with terms defined in the singular having comparable meaning when used in the plural and vice versa), unless another definition is provided or the context otherwise requires: "Available Delhi Dividend Amount", on any date, shall mean the product of the Delhi Fraction and either (a) the greater of (i) an amount equal to (x) $172.9 million, increased or decreased, as appropriate, to reflect, from June 30, 1992, (A) Delhi Net Income, (B) any dividends or other distributions declared or paid with respect to, or repurchases or issuances of, any shares of Marathon Stock prior to the close of business on the date Delhi Stock is first issued attributed to the Delhi Group, (C) any dividends or other distributions declared or paid with respect to, or repurchases or issuances of, any shares of Delhi Stock or any shares of Preferred Stock attributed to the Delhi Group, (D) assets or properties of the Delhi Group that are no longer included as part of the Delhi Group as a result of any such dividend, distribution or repurchase pursuant to the provison to the definition of "Delhi Group" and (E) any other adjustments to stockholders' equity of the Delhi Group made in accordance with generally accepted accounting principles, less (y) the sum of the aggregate stated capital of all outstanding Preferred Stock attributed to the Delhi Group and the quotient of the aggregate par value of all outstanding Delhi Stock divided by the Delhi Fraction and (ii) the excess of the fair market value of the net assets of the Delhi Group over the sum of the aggregate stated capital of all outstanding Preferred Stock attributed to the Delhi Group, and the quotient of the aggregate par value of all outstanding Delhi Stock divided by the Delhi Fraction, or (b) in case there shall be no such amount, an amount equal to Delhi Net Income (if positive) for the fiscal year in which the dividend is declared and/or the preceding fiscal year. "Available Steel Dividend Amount", on any date, shall mean either (a) the greater of (i) an amount equal to (x) $2.244 billion, increased or decreased, as appropriate, to reflect (A) Steel Net Income from the close of business on December 31, 1990, (B) any dividends or other distributions declared or paid with respect to, or repurchases or issuances of, any shares of common stock of the Corporation after December 31, 1990 and prior to the close of business on May 6, 1991 attributed to the U.S. Steel Group, (C) any dividends or other distributions declared or paid with respect to, or repurchases or issuances of, any shares of Steel Stock or any shares of Preferred Stock attributed to the U.S. Steel Group and (D) any other adjustments to stockholders' equity of the U.S. Steel Group made in accordance with generally accepted accounting principles, less (y) the sum of the aggregate par value of all outstanding Steel Stock and the aggregate stated capital of all outstanding Preferred Stock attributed to the U.S. Steel Group and (ii) the excess of the fair market value of the net assets of the U.S. Steel Group over the sum of the aggregate par value of all outstanding Steel Stock and the aggregate stated capital of all outstanding Preferred Stock attributed to the U.S. Steel Group, in 9 the case of each of clause (i) and clause (ii) increased by an amount equal to any effects of the recognition of the transition obligation upon the adoption of Statement of Financial Accounting Standards (SFAS) No. 106, "Employer's Accounting for Postretirement Benefits Other than Pensions" (including any amendments thereto) and any cumulative effects of the adoption of SFAS No. 109, "Accounting for Income Taxes" (including any amendments thereto) in the year of adoption or (b) in case there shall be no such amount, an amount equal to Steel Net Income (if positive) for the fiscal year in which the dividend is declared and/or the preceding fiscal year. "Business Day" shall mean each weekday other than any day on which any relevant class of Common Stock is not traded on any national securities exchange or the National Association of Securities Dealers Automated Quotations National Market System or in the over-the-counter market. "Convertible Securities" shall mean any securities of the Corporation that are convertible into or evidence the right to purchase any shares of any class of Common Stock, pursuant to antidilution provisions of such securities or otherwise. The "Delhi Fraction" as of any date is a fraction the numerator of which shall be the number of shares of Delhi Stock outstanding on such date and the denominator of which shall be initially 14,000,000 provided that such fraction shall in no event be greater than one. The denominator of the Delhi Fraction shall be adjusted from time to time as appropriate to reflect (i) subdivisions (by stock split or otherwise) and combinations (by reverse stock split or otherwise) of the Delhi Stock and stock dividends payable in shares of Delhi Stock to holders of Delhi Stock and other reclassifications of Delhi Stock, (ii) the issuance of Delhi Stock, the proceeds of which are attributed to the Delhi Group and (iii) repurchases by the Corporation of outstanding shares of Delhi Stock. "Delhi Group" shall mean, (i) all of the businesses in which any of Delhi Gas Pipeline Corporation, The Nueces Company, Delhi Gasmark, Inc. (previously Texas Gasmark, Inc.), Tonkawa Gas Processing Company, Delhi Gas Marketing Corp. (previously TXO Gas Marketing Corp.), Delhi Gas Ventures Corp. (previously TXO Gas Ventures Corp.), Red River Gas Pipeline Corporation, Ozark Gas Pipeline Corporation, Sweetwater Pipeline Corporation, Western Gas Transmission, Inc., and Western Gas Corporation (or any of their predecessors or successors) is or has been engaged, directly or indirectly, (ii) all assets and liabilities of the Corporation to the extent attributed to any of such businesses, whether or not such assets or liabilities are or were assets and liabilities of such companies, and (iii) such businesses, assets and liabilities acquired by the Corporation for the Delhi Group as determined by the Board of Directors to be included in the Delhi Group; provided that, from and after any dividend or distribution with respect to any shares of Delhi Stock, or any repurchase of shares of Delhi Stock from holders of Delhi Stock generally, the Delhi Group shall no longer include an amount of assets on properties of the Delhi Group equal to the aggregate amount of such kind of assets or properties so paid in respect of shares of Delhi Stock multiplied by a fraction, the numerator of which is equal to one less the Delhi Fraction and the denominator of which is equal to the Delhi Fraction. From and after the date on which all of the outstanding shares of Steel Stock are exchanged for shares of Delhi Stock pursuant to any provision of Section 2, all of the businesses, assets and liabilities of the U.S. Steel Group shall be included in the Delhi Group. "Delhi Group Subsidiary" shall have the meaning set forth in Section 2(c)(v). "Delhi Net Income" shall mean the net income or loss of the Delhi Group determined in accordance with generally accepted accounting principles, including income and expenses of the Corporation attributed to the operations of the Delhi Group on a substantially consistent basis, including, without limitation, corporate administrative costs, net interest and other financial costs and income taxes. "Disposition" shall mean the sale, transfer, assignment or other disposition (whether by merger, consolidation, sale or contribution of assets or stock or otherwise) of properties or assets. "Exchange Date" shall mean any date fixed for an exchange of shares of any class of Common Stock, as set forth in a notice to holders of such class of Common Stock pursuant to Section 2(d)(i). "Marathon Group" shall mean, at any time, (i) all of the businesses in which any of Marathon Oil Company, Texas Oil & Gas Corp., Carnegie Natural Gas Company and Apollo Gas Company (or any of their predecessors or successors) is or has been engaged, directly or indirectly, other than the businesses of the Delhi Group after the date of the first issuance of Delhi Stock, (ii) all assets and liabilities of the Corporation to the extent attributed to any of such businesses, whether or not such 10 assets or liabilities are or were assets and liabilities of such companies, (iii) a proportionate interest in the business, assets and liabilities of the Delhi Group equal to one less the Delhi Fraction, and (iv) such businesses, assets, and liabilities acquired by the Corporation for the Marathon Group after May 6, 1991 and as determined by the Board of Directors to be included in the Marathon Group; provided that, from and after any dividend or distribution with respect to any shares of Delhi Stock, or any repurchase of shares of Delhi Stock from holders of Delhi Stock generally, the Marathon Group shall include an amount of assets or properties of the Delhi Group equal to the aggregate amount of such kind of assets or properties so paid in respect of shares of Delhi Stock multiplied by a fraction, the numerator of which is equal to one less the Delhi Fraction and the denominator of which is equal to the Delhi Fraction. From and after the date on which there are no shares of Steel Stock outstanding (other than as a result of an exchange for shares of Delhi Stock pursuant to any provision of Section 2), all of the businesses, assets and liabilities of the U.S. Steel Group shall be included in the Marathon Group. "Marathon Group Subsidiary" shall have the meaning set forth in Section 2(a)(i). "Market Value" of any class of capital stock of the Corporation on any business Day shall mean the average of the high and low reported sales prices regular way of a share of such class on such Business Day or in case no such reported sale takes place on such Business Day the average of the reported closing bid and asked prices regular way of a share of such class on such Business Day, in either case on the New York Stock Exchange Composite Tape, or if the shares of such class are not listed or admitted to trading on such Exchange on such Business Day, on the principal national securities exchange in the United States on which the shares of such class are listed or admitted to trading, or if not listed or admitted to trading on any national securities exchange on such Business Day, on the National Association of Securities Dealers Automated Quotations National Market System, or if the shares of such class are not listed or admitted to trading on any national securities exchange or quoted on such National Market System on such Business Day, the average of the closing bid and asked prices of a share of such class in the over-the-counter market on such Business Day as furnished by any New York Stock Exchange member firm selected from time to time by the Corporation, or if such closing bid and asked prices are not made available by any such New York Stock Exchange member firm on such Business Day, the market value of a share of such class as determined by the Board of Directors; provided that (i) for purposes of determining the ratios set forth in Sections 2(b)(i), 2(b)(ii), 2(c)(i), 2(c)(ii), 2(c)(iii), 3(a) and 4, the "Market Value" of any share of any class of Common Stock on any day prior to the "ex" date or any similar date for any dividend or distribution paid or to be paid with respect to such class of Common Stock (other than a regular quarterly cash dividend or a dividend or distribution in shares of such class of Common Stock) shall be reduced by the fair market value of the per share amount of such dividend or distribution and (ii) for purposes of determining the ratios set forth in Sections 2(b)(i), 2(b)(ii), 2(c)(i), 2(c)(ii), 2(c)(iii) and 3(a), the "Market Value" of any share of any class of Common Stock on any day prior to (A) the effective date of any subdivision (by stock split or otherwise) or combination (by reverse stock split or otherwise) of outstanding shares of such class of Common Stock or (B) the "ex" date or any similar date for any dividend or distribution with respect to either such class of Common Stock in shares of such class of Common Stock shall be appropriately adjusted to reflect such subdivision, combination, dividend or distribution. For the purposes of the foregoing clause (i) the Board of Directors shall determine the fair market value of any dividend or distribution. "Net Proceeds", as of any date, from any Disposition of any of the properties and assets of the U.S. Steel Group or the Delhi Group, as the case may be, shall mean an amount, if any, equal to the gross proceeds of such Disposition after any payment of, or reasonable provision for, (i) any taxes payable by the Corporation in respect of such Disposition, (ii) any taxes payable by the Corporation in respect of any dividend or redemption pursuant to clause (A) or (B), respectively, of Sections 2(b)(i) or 2(c)(i), respectively, (iii) any transaction costs, including, without limitation, any legal, investment banking and accounting fees and expenses and (iv) any liabilities (contingent or otherwise) of, or allocated to, the U.S. Steel Group or the Delhi Group, as the case may be, including, without limitation, any indemnity obligations incurred in connection with the Disposition. For purposes of this definition, any properties and assets of the Steel Group or the Delhi Group, as the case may be, remaining after such Disposition shall constitute "reasonable provision" for such amount of taxes, costs and liabilities (contingent or otherwise) as can be supported by such properties and assets. To the extent the proceeds of any Disposition include any securities or other property other than cash, the Board of Directors shall determine the value of such securities or property. 11 "Redemption Date" shall mean any date fixed for a redemption of shares of any class of Common Stock, as set forth in a notice to holders of such class of Common Stock pursuant to Section 2(d)(i). "Steel Net Income" shall mean the net income or loss of the U.S. Steel Group determined in accordance with generally accepted accounting principles, including income and expenses of the Corporation attributed to the operations of the Steel Group on a substantially consistent basis, including, without limitation, corporate administrative costs, net interest and other financial costs and income taxes. "U.S. Steel Group" shall mean, at any time, all of the businesses in which the Corporation is or has been engaged, directly or indirectly, and all assets and liabilities of the Corporation, other than any businesses, assets or liabilities of the Marathon Group or the Delhi Group if any shares of Marathon Stock or Delhi Stock are outstanding. "U.S. Steel Group Subsidiary" shall have the meaning set forth in Section 2(b)(iii). 6. Determinations by the Board of Directors. Any determinations made by the Board of Directors of the Corporation under any provision in this Division I of Article Fourth shall be final and binding on all stockholders of the Corporation. DIVISION II A statement of the designations of the Preferred Stock or of any series thereof, and the powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, or of the authority of the Board of Directors to fix by resolution or resolutions such designations and other terms not fixed by the Certificate of Incorporation, is as follows: 1. The Preferred Stock may be issued in one or more series, from time to time, with each such series to have such designation, powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors of the Corporation, subject to the limitations prescribed by law and in accordance with the provisions hereof, the Board of Directors being hereby expressly vested with authority to adopt any such resolution or resolutions. The authority of the Board of Directors with respect to each such series shall include, but not limited to, the determination or fixing of the following: (i) The distinctive designation and number of shares comprising such series, which number may (except where otherwise provided by the Board of Directors in creating such series) be increased or decreased (but not below the number of shares then oustanding) from time to time by like action of the Board of Directors; (ii) The dividend rate of such series, the conditions and times upon which such dividends shall be payable, the relation which such dividends shall bear to the dividends payable on any other class or classes of stock or series thereof, or any other series of the same class, and whether dividends shall be cumulative or non-cumulative; (iii) The conditions upon which the shares of such series shall be subject to redemption by the Corporation and the times, prices and other terms and provisions upon which the shares of the series may be redeemed; (iv) Whether or not the shares of the series shall be subject to the operation of a retirement or sinking fund to be applied to the purchase or redemption of such shares and, if such retirement or sinking fund be established, the annual amount thereof and the terms and provisions relative to the operation thereof; (v) Whether or not the shares of the series shall be convertible into or exchangeable for shares of any other class or classes, with or without par value, or of any other series of the same class, and, if provision is made for conversion or exchange, the times, prices, rates, adjustments, and other terms and conditions of such conversion or exchange; 12 (vi) Whether or not the shares of the series shall have voting rights, in addition to the voting rights provided by law, and, if so, subject to the limitation hereinafter set forth, the terms of such voting rights; (vii) The rights of the shares of the series in the event of voluntary or involuntary liquidation, dissolution, or upon the distribution of assets of the Corporation; (viii) Any other powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, of the shares of such series, as the Board of Directors may deem advisable and as shall not be inconsistent with the provisions of this Certificate of Incorporation. 2. The holders of shares of the Preferred Stock of each series shall be entitled to receive, when and as declared by the Board of Directors, out of funds legally available for the payment of dividends, dividends at the rates fixed by the Board of Directors for such series, and no more, before any dividends, other than dividends payable in Common Stock, shall be declared and paid, or set apart for payment, on the Common Stock with respect to the same dividend period. 3. Whenever, at any time, dividends on the then outstanding Preferred Stock as may be required with respect to any series outstanding shall have been paid or declared and set apart for payment on the then outstanding Preferred Stock, and after complying with respect to any retirement or sinking fund or funds for any series of Preferred Stock, the Board of Directors may, subject to the provisions of the resolution or resolutions creating any series of Preferred Stock, declare and pay dividends on the Common Stock, and the holders of shares of the Preferred Stock shall not be entitled to share therein. 4. The holders of shares of the Preferred Stock of each series shall be entitled upon liquidation or dissolution or upon the distribution of the assets of the Corporation to such preferences as provided in the resolution or resolutions creating such series of Preferred Stock, and no more, before any distribution of the assets of the Corporation shall be made to the holders of shares of the Common Stock. 5. Except as otherwise provided by a resolution or resolutions of the Board of Directors creating any series of Preferred Stock or by the General Corporation Law of Delaware, the holders of shares of the Common Stock issued and outstanding shall have and possess the exclusive right to notice of stockholders' meetings and the exclusive power to vote. The holders of shares of the Preferred Stock issued and outstanding shall, in no event, be entitled to more than one vote for each share of Preferred Stock held by them unless otherwise required by law. Terms of the Preferred Stocks are as follows: SERIES A JUNIOR PREFERRED STOCK Section 1. Designation and Amount. This resolution shall provide for a single series of preferred stock, the designation of which shall be "Series A Junior Preferred Stock", without par value, and the number of shares constituting such series shall be Eight Million (8,000,000). Section 2. Dividends and Distributions. (A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Junior Preferred Stock with respect to dividends, the holders of shares of Series A Junior Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $5.00 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by 13 reclassification or otherwise), to be or being declared on the Common Stock, par value $1.00 per share, of the Corporation (the "Common Stock") with respect to the same dividend period. If the Quarterly Dividend Payment Date is a Saturday, Sunday or legal holiday then such Quarterly Dividend Payment Date shall be the first immediately preceding calendar day which is not a Saturday, Sunday or legal holiday. In the event the Corporation shall at any time after October 10, 1989 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Junior Preferred Stock as provided in paragraph (A) above immediately prior to the time it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall be declared on the Common Stock with respect to a particular dividend period, a dividend of $5.00 per share on the Series A Junior Preferred Stock shall nevertheless be payable on such Quarterly Dividend Payment Date with respect to such quarterly period. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. Dividends in arrears may be declared and paid at any time, without reference to any Quarterly Dividend Payment Date, to holders of record on such date, not exceeding 45 days preceding the payment date thereof, as may be fixed by the Board of Directors. (D) Except as hereinafter provided, no dividends shall be declared or paid or set apart for payment on the shares of Series A Junior Preferred Stock for any period if the Corporation shall be in default in the payment of any dividends (including cumulative dividends, if applicable) on any shares of Preferred Stock ranking, as to dividends, prior to the Series A Junior Preferred Stock, unless the same shall be contemporaneously declared and paid. (E) Dividends payable on the Series A Junior Preferred Stock for the initial dividend period and for any period less than a full quarterly period, shall be computed on the basis of a 360-day year of 30-day months. Section 3. Voting Rights. The holders of shares of Series A Junior Preferred Stock shall have the following voting rights: (A) Each share of Series A Junior Preferred Stock shall entitle the holder thereof to one vote on all matters submitted to a vote of the stockholders of the Corporation. The holders of Series A Junior Preferred Stock shall be entitled to notice of all meetings of the stockholders of the Corporation. (B) Except as otherwise provided herein or by law, the holders of shares of Series A Junior Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. 14 (C) If, on the date used to determine stockholders of record for any meeting of stockholders for the election of directors, a default in preference dividends on the Preferred Stock shall exist, the number of directors constituting the Board of Directors of the Corporation shall be increased by two, and the holders of the Preferred Stock of all series (whether or not the holders of such series of Preferred Stock would be entitled to vote for the election of directors if such default in preference dividends did not exist), shall have the right at such meeting, voting together as a single class without regard to series, to the exclusion of the holders of Common Stock, to elect two directors of the Corporation to fill such newly created directorships. Each director elected by the holders of shares of Preferred Stock (herein called a "Preferred Director"), shall continue to serve as such director for the full term for which he shall have been elected, notwithstanding that prior to the end of such term a default in preference dividends shall cease to exist. Any Preferred Director may be removed by, and shall not be removed except by, the vote of the holders of record of the outstanding shares of Preferred Stock, voting together as a single class without regard to series, at a meeting of the stockholders, or of the holders of shares of Preferred Stock, called for the purpose. So long as a default in any preference dividends on the Preferred Stock shall exist (i) any vacancy in the office of a Preferred Director may be filled (except as provided in the following clause (ii)) by an instrument in writing signed by the remaining Preferred Director and filed with the Corporation and (ii) in the case of the removal of any Preferred Director, the vacancy may be filled by the vote of the holders of the outstanding shares of Preferred Stock, voting together as a single class without regard to series, at the same meeting at which such removal shall be voted. Each director appointed as aforesaid by the remaining Preferred Director shall be deemed, for all purposes hereof, to be a Preferred Director. Whenever the term of office of the Preferred Directors shall end and no default in preference dividends shall exist, the number of directors constituting the Board of Directors of the Corporation shall be reduced by two. For the purposes of this paragraph (C), a "default in preference dividends" on the Preferred Stock shall be deemed to have occurred whenever the amount of accrued and unpaid dividends upon any series of the Preferred Stock shall be equivalent to six full quarterly dividends or more, and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all accrued dividends on all shares of Preferred Stock of each and every series then outstanding shall have been paid through the last Quarterly Dividend Payment Date. Section 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends on, make any other distributions on (other than a dividend in Common Stock or in any other stock of the Corporation ranking junior to the Series A Junior Preferred Stock as to dividends and upon liquidation, dissolution or winding up and other than as provided in subparagraph (ii) of this section), or redeem or purchase or otherwise acquire for consideration (except by conversion into or exchange for stock of the Corporation ranking junior to the Series A Junior Preferred Stock as to dividends and upon dissolution, liquidation or winding up), any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Preferred Stock, except dividends paid ratably on the Series A Junior Preferred Stock and all stock ranking on a parity with the Series A Junior Preferred Stock as to dividends on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (as to dividends and upon dissolution, liquidation or winding up) to the Series A Junior Preferred Stock; 15 (iv) purchase or otherwise acquire for consideration any shares of Series A Junior Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Junior Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. Section 6. Liquidation, Dissolution or Winding Up. (A) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of the Series A Junior Preferred Stock shall be entitled to receive the greater of (a) $100 per share, plus accrued dividends to the date of distribution, whether or not earned or declared, or (b) an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock (the "Series A Liquidation Preference"). In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Preferred Stock were entitled immediately prior to such event pursuant to clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series A Junior Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Junior Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Junior Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. Optional Redemption. (A) The Corporation shall have the option to redeem the whole or any part of the Series A Junior Preferred Stock at any time on at least 30 days notice in accordance with the provisions of paragraph 16 (B) of this Section 8 at a redemption price equal to, subject to the provision for adjustment hereinafter set forth, 100 times the "current per share market price" of the Common Stock on the date of the mailing of the notice of redemption, together with unpaid accumulated dividends to the date of such redemption. In the event the Corporation shall at any time after October 10, 1989 (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Preferred Stock were otherwise entitled immediately prior to such event under the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. The "current per share market price" on any date shall be deemed to be the average of the closing price per share of such Common Stock for the 10 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either cases as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Common Stock is not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if the Common Stock is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or such other system then in use or, if on any such date the Common Stock is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Common Stock selected by the Corporation. If on such date no such market maker is making a market in the Common Stock, the fair value of the Common Stock on such date as determined in good faith by the Board of Directors of the Corporation shall be used. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Common Stock is listed or admitted to trading is open for the transaction of business or, if the Common Stock is not listed or admitted to trading on any national securities exchange, a Monday, Tuesday, Wednesday, Thursday or Friday on which banking institutions in the State of New York are not authorized or obligated by law or executive order to close. (B) Whenever shares of Series A Junior Preferred Stock are to be redeemed, the Corporation shall mail a notice ("Notice of Redemption") by first-class mail, postage prepaid, to each holder of record of shares of Series A Junior Preferred Stock to be redeemed and to the transfer agent for the Series A Junior Preferred Stock. The Notice of Redemption shall be addressed to the holder at the address of the holder appearing on the stock transfer books of the Corporation maintained by the transfer agent for the Series A Junior Preferred Stock. The Notice of Redemption shall include a statement of (i) the redemption date, (ii) the redemption price, (iii) the number of shares of Series A Junior Preferred Stock to be redeemed, (iv) the place or places where shares of the Series A Junior Preferred Stock are to be surrendered for payment of the redemption price, (v) that the dividends on the shares to be redeemed will cease to accrue on such redemption date, and (vi) the provision under which redemption is made. No defect in the Notice of Redemption or in the mailing thereof shall affect the validity of the redemption proceedings, except as required by law. From the date on which a Notice of Redemption shall have been given as aforesaid and the Corporation shall have deposited with the transfer agent for the Series A Junior Preferred Stock a sum sufficient to redeem the shares of Series A Junior Preferred Stock as to which Notice of Redemption has been given, with irrevocable instructions and authority to pay the redemption price to the holders thereof, or if no such deposit is made, then upon such date fixed for redemption (unless the Corporation shall default in making payment of the redemption price), all rights of the holders thereof as stockholders of the Corporation by reason of the ownership of such shares (except their right to receive the redemption price thereof, but without interest), shall terminate including, but not limited to, their right to receive dividends, and such shares shall no longer be deemed outstanding. The Corporation shall be entitled to receive, from time to time, from the transfer agent for Series A Junior Preferred Stock the interest, if any, on such monies deposited with it and the holders of any shares so redeemed shall have no claim to any such interest. In case the holder of any shares so called for redemption shall not claim the redemption price 17 for his shares within one year after the date of redemption, the transfer agent for the Series A Junior Preferred Stock shall, upon demand, pay over to the Corporation such amount remaining on deposit and the transfer agent for the Series A Junior Preferred Stock shall thereupon be relieved of all responsibility to the holders of such shares and such holder of the shares of the Series A Junior Preferred Stock so called for redemption shall look only to the Corporation for the payment thereof. (C) In the event that fewer than all the outstanding shares of the Series A Junior Preferred Stock are to be redeemed, the number of shares to be redeemed shall be determined by the Board of Directors and the shares to be redeemed shall be determined by lot or pro rata as may be determined by the Board of Directors or by any other method as may be determined by the Board of Directors in its sole discretion to be equitable. (D) If the Corporation shall be in default in the payment of any dividends (including cumulative dividends, if applicable) on any shares of Preferred Stock ranking, as to dividends, prior to the Series A Junior Preferred Stock, then no shares of the Series A Junior Preferred Stock shall be redeemed and the Corporation shall not purchase or otherwise acquire any shares of the Series A Junior Preferred Stock. Section 9. Ranking. (A) The Series A Junior Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, unless the terms of any such series shall provide otherwise. (B) For purposes of this resolution, any stock of any class or classes of the Corporation shall be deemed to rank: (i) prior to the shares of the Series A Junior Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, if the holders of such class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, as the case may be, in preference or priority to the holders of shares of the Series A Junior Preferred Stock. Each holder of any share of the Series A Junior Preferred Stock, by his acceptance thereof, expressly covenants and agrees that the rights of the holders of any shares of any other series of Preferred Stock of the Corporation to receive dividends or amounts distributable upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, shall be and hereby are expressly prior to his rights unless in the case of any particular series of Preferred Stock the certificate or other instrument creating or evidencing the same expressly provides that the rights of the holders of such series shall not be prior to the shares of the Series A Junior Preferred Stock; and (ii) on a parity with shares of the Series A Junior Preferred Stock, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share or sinking fund provisions, if any, be different from those of the Series A Junior Preferred Stock, if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of shares of the Series A Junior Preferred Stock; and (iii) junior to shares of the Series A Junior Preferred Stock, either as to dividends or upon liquidation, if such class or classes shall be Common Stock or if the holders of shares of the Series A Junior Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, as the case may be, in preference or priority to the holders of shares of such class or classes. Section 10. Amendment. Except as otherwise set forth in this Certificate of Designation, Preferences and Rights with respect to the Series A Junior Preferred Stock, holders of Series A Junior Preferred Stock shall not have any special powers and their consent shall not be required for taking any corporate action, provided, however, that: 18 (A) Unless the vote or consent of the holders of a greater number of shares shall then be required by law, the consent of the holders of at least 66 2/3% of all of the shares of the Series A Junior Preferred Stock at the time outstanding, given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of shares of the Series A Junior Preferred Stock shall vote together as a separate class, shall be necessary for authorizing, effecting or validating the amendment, alteration or repeal of any of the provisions of the Restated Certificate of Incorporation or of any certificate amendatory thereof or supplemental thereto (including any Certificate of Designation, Preferences and Rights or any similar document relating to any series of Preferred Stock) so as to affect adversely the powers, preferences, or rights, of this Series A Junior Preferred Stock. The increase of the authorized amount of the Preferred Stock, or the creation, authorization or issuance of any shares of any other class of stock of the Corporation ranking prior to or on a parity with the shares of the Series A Junior Preferred Stock as to dividends or upon liquidation, or the reclassification of any authorized or outstanding stock of the Corporation into any such prior or parity shares, or the creation, authorization or issuance of any obligation or security convertible into or evidencing the right to purchase any such prior or parity shares shall not be deemed to affect adversely the powers, preferences or rights of the Series A Junior Preferred Stock. Section 11. Fractional Shares. Series A Junior Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Preferred Stock. 6.50% CUMULATIVE CONVERTIBLE PREFERRED STOCK (WITHOUT PAR VALUE) 1. Designation. This resolution shall provide for a single series of Preferred Stock, the designation of which shall be "6.50% Cumulative Convertible Preferred Stock", without par value (hereinafter called this "Series"), and the number of authorized shares constituting this Series is 6,900,000. Shares of this Series shall have a stated value of $1.00 per share (which shall also be the stated capital of each share). The number of authorized shares of this Series may be reduced by further resolution adopted by the Board of Directors and by the filing of a certificate pursuant to the provisions of the General Corporation Law of the State of Delaware stating that such reduction has been so authorized, but the number of authorized shares of this Series shall not be so increased. 2. Dividends. (a) The holders of shares of this Series shall be entitled to receive dividends payable in cash at a rate of 6.50% per annum per share on the initial liquidation preference of $50.00 per share. Such dividends shall be cumulative from the date of original issue of such shares, and shall be payable, when, as and if declared by the Board of Directors, out of funds legally available for such purpose, on the last calendar day of March, June, September and December of each year, commencing June 30, 1993, except that if such date is a Saturday, Sunday or legal holiday, then such dividend shall be payable on the first immediately preceding calendar day which is not a Saturday, Sunday or legal holiday. (b) Each dividend on shares of this Series shall be paid to the holders of record of such shares as they appear on the stock transfer books of the Corporation on such record date, not exceeding 30 days preceding the payment date thereof, as shall be fixed by the Board of Directors. Dividends in arrears for any past dividend period or any part thereof may be declared and paid at any time, without reference to any regular dividend payment date, to holders of record on such date, not exceeding 45 days preceding the payment date thereof, as may be fixed by the Board of Directors. (c) Except as hereinafter provided, no dividends shall be declared or paid or set apart for payment on the Preferred Stock of any series ranking, as to dividends, on a parity with or junior to this Series for any period unless full cumulative dividends have been or contemporaneously are declared and paid on this Series for all past dividend periods. When dividends are not paid in full, as aforesaid, upon the shares of this Series and any other Preferred Stock ranking on a parity as to dividends with this Series, all dividends declared upon shares of this Series and any other Preferred Stock ranking on a parity as to dividends with this Series shall be declared pro rata so that the amount of dividends declared per share on this Series and such other Preferred Stock shall in all cases bear to each other the same ratio that accrued dividends per share on the shares of this Series and such 19 other Preferred Stock bear to each other. Holders of shares of this Series shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends, as herein provided, on this Series. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on this Series which may be in arrears. (d) So long as any shares of this Series are outstanding, no dividend (other than a dividend in Common Stock or in any other stock of the Corporation ranking junior to this Series as to dividends and upon liquidation and other than as provided in Section 2(c)) shall be declared or paid or set aside for payment or other distribution declared or made upon the Common Stock or any other stock of the Corporation ranking junior to or on a parity with this Series as to dividends or upon liquidation, nor shall any Common Stock nor any other stock of the Corporation ranking junior to or on a parity with this Series as to dividends or upon liquidation be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Corporation (except by conversion into or exchange for stock of the Corporation ranking junior to this Series as to dividends and upon liquidation) unless, in each case, the full cumulative dividends on all outstanding shares of this Series shall have been paid or contemporaneously are declared and paid for all past dividend periods. (e) Dividends payable on this Series for each full quarterly dividend period shall be computed by dividing the annual dividend rate by four and multiplying by the initial liquidation preference of $50.00 per share. Dividends payable on this Series for any period shorter or longer than a full quarterly dividend period, including for the initial dividend period, shall be computed on the basis of a 360-day year of twelve 30-day months. 3. Optional Redemption; Provision for U.S. Steel Group Special Events; Related Provisions. (a) Except as provided in Section 3(b), the shares of this Series shall not be redeemable by the Corporation prior to April 1, 1996. On and after April 1, 1996, shares of this Series may, subject to the satisfaction of the condition set forth in the last sentence of this Section 3(a), be redeemed, in whole at any time or in part from time to time, at the option of the Corporation, out of funds legally available for such purpose, for cash in an amount equal to the following redemption prices per share if redeemed during the twelve-month period beginning April 1 of the year indicated below, upon giving notice as provided below:
Redemption Price (As a percentage of Dollar initial liquidation Equivalent Year preference) Per Share ---- ------------------- ---------- 1996 104.55% $52.275 1997 103.90 51.950 1998 103.25 51.625 1999 102.60 51.300 2000 101.95 50.975 2001 101.30 50.650 2002 100.65 50.325 2003 and thereafter 100.00 50.000 and thereafter at the initial liquidation preference of $50.00 per share, plus, in each case, an amount equal to all accrued and unpaid dividends thereon to the date fixed for redemption. No shares of this Series may be redeemed in accordance with this Section 3(a) if the Corporation shall be advised on or prior to the related Redemption Date by either Moody's Investors Service, Inc. ("Moody's") (provided that Moody's is then rating the senior unsecured debt of the Corporation) or Standard & Poor's Corporation ("S&P") (provided that S&P is then rating the senior unsecured debt of the Corporation) that such redemption would result in an immediate lowering by Moody's or S&P, as the case may be, of the credit rating on the Corporation's senior unsecured debt from its then existing level, unless the Corporation shall have received from the issuance of common stock of the Corporation, since the date which is two years prior to the related Redemption Date, net proceeds in an aggregate amount at least equal to the product of the initial liquidation preference of $50.00 per share times the number of shares of this Series to be redeemed. 20 (b) (i) The shares of this Series shall be redeemed by the Corporation, in whole, out of funds legally available for such purpose, for cash in an amount equal to the Redemption Price if any of the following events with respect to the U.S. Steel Group occur (such events, collectively, the "U.S. Steel Group Special Events"): (A) (1) The Corporation exchanges all of the outstanding shares of Steel Stock for all of the outstanding shares of common stock of the U.S. Steel Group Subsidiary (as provided in Section 2(b)(iii) of Division I of the Certificate of Incorporation) (the "Steel Group Subsidiary Exchange") or (2) in the event of a Disposition of all or substantially all of the properties and assets of the U.S. Steel Group, the Corporation either pays a dividend on the Steel Stock in, or redeems a number of shares of Steel Stock for, an amount equal to the Net Proceeds of such Disposition (as provided in Section 2(b)(i)(A) or Section 2(b)(i)(B), respectively, of Division I of the Certificate of Incorporation) (the "Steel Group Disposition Dividend" or the "Steel Group Disposition Redemption", respectively); or (B) The Corporation pays a dividend on, or the Corporation or any of its Subsidiaries consummates a tender offer or exchange offer for, shares of Steel Stock and the aggregate amount of such dividend or the consideration paid in such tender offer or exchange offer is an amount equal to all or substantially all of the properties and assets of the U.S. Steel Group (the "Steel Group Special Dividend" or the "Steel Group Tender or Exchange Offer", respectively); provided that the calculation of all or substantially all of the properties and assets of the U.S. Steel Group shall be made without giving effect to any money borrowed by the Corporation or any of its Subsidiaries in connection with such dividend or tender offer or exchange offer, as the case may be. The Redemption Date of shares of this Series pursuant to this Section 3(b)(i) shall be, if the applicable U.S. Steel Group Special Event is (I) the Steel Group Subsidiary Exchange, the date of such exchange, (II) the Steel Group Disposition Dividend or the Steel Group Special Dividend, the date such dividend is paid, (III) the Steel Group Disposition Redemption, the date of such redemption or (IV) the Steel Group Tender or Exchange Offer, the date such tender offer or exchange offer is consummated. Notwithstanding anything to the contrary contained in this Section 3(b)(i), any redemption pursuant to this Section 3(b)(i) shall be conditioned upon the actual exchange of Steel Stock for shares of common stock of the U.S. Steel Group Subsidiary, payment of the Steel Group Disposition Dividend or the amount due as a result of the Steel Group Disposition Redemption (in each case in the required kind of capital stock, cash, securities and/or other property), payment of the Steel Group Special Dividend or the consummation of the Steel Group Tender or Exchange Offer, as the case may be. (ii) The shares of this Series shall be redeemed by the Corporation, in whole, out of funds legally available for such purpose, for cash in an amount equal to the Redemption Price if following the Disposition of all or substantially all of the properties and assets of the U.S. Steel Group, the Corporation exchanges all of the outstanding shares of Steel Stock for Marathon Stock (as provided in Section 2(b)(i)(C) of Division I of the Certificate of Incorporation) and, at any time subsequent to such exchange, any of the following events with respect to the Marathon Group occur (such events, collectively, the "Marathon Group Special Events"): (A) The Corporation exchanges all of the outstanding shares of Marathon Stock for all of the outstanding shares of common stock of the Marathon Group Subsidiary (as provided in Section 2(a)(i) of Division I of the Certificate of Incorporation) (the "Marathon Group Subsidiary Exchange"); or (B) The Corporation pays a dividend on, or the Corporation or any of its Subsidiaries consummates a tender offer or exchange offer for, shares of Marathon Stock and the aggregate amount of such dividend or the consideration paid in such tender offer or exchange offer is an amount equal to all or substantially all of the properties and assets of the Marathon Group (the "Marathon Group Special Dividend" or the "Marathon Group Tender or Exchange Offer", respectively); provided that the calculation of all or substantially all of the properties and assets of the Marathon Group shall be made without giving effect to any money borrowed by the Corporation or any of its Subsidiaries in connection with such dividend or tender offer or 21 exchange offer, as the case may be; provided, further, that, at the time of the payment of such dividend on, or the consummation of such tender or exchange offer for, Marathon Stock, there is another class of common stock, other than Marathon Stock, of the Corporation then outstanding. The Redemption Date of shares of this Series pursuant to this Section 3(b)(ii) shall be, if the applicable Marathon Group Special Event is (I) the Marathon Group Subsidiary Exchange, the date of such exchange, (II) the Marathon Group Special Dividend, the date such dividend is paid or (III) the Marathon Group Tender or Exchange Offer, the date such tender offer or exchange offer is consummated. Notwithstanding anything to the contrary contained in this Section 3(b)(ii), any redemption pursuant to this Section 3(b)(ii) shall be conditioned upon the actual exchange of Marathon Stock for shares of common stock of the Marathon Group Subsidiary, payment of the Marathon Group Special Dividend or the consummation of the Marathon Group Tender or Exchange Offer, as the case may be. (c) The following general redemption provisions shall apply, as the context requires, to any redemption of any shares of this Series pursuant to this Section 3: (i) In the event that fewer than all the outstanding shares of this Series are to be redeemed, the number of shares to be redeemed shall be determined by the Board of Directors and the shares to be redeemed shall be determined by lot or pro rata as may be determined by the Board of Directors or by any other method as may be determined by the Board of Directors in its sole discretion to be equitable, provided that the Corporation may redeem any number of shares of this Series owned by holders whose aggregate holdings of such shares do not exceed 100 as may be specified by the Corporation. (ii) In the event the Corporation shall redeem shares of this Series pursuant to this Section 3, notice of such redemption shall be given, (x) if such redemption is a result of the Steel Group Tender or Exchange Offer or the Marathon Group Tender or Exchange Offer, on the date of the public announcement of such tender offer or exchange offer by the Corporation or any of its Subsidiaries, but in any event not less than 30 days prior to such redemption, and on the date of the public announcement of any extension thereof, (y) if such redemption is a result of the Steel Group Disposition Dividend or the Steel Group Disposition Redemption, on a date not less than 45 days prior to the date selected by the Board of Directors for the payment of such dividend or such redemption and (z) otherwise, on a date at least 30 days but not more than 60 days prior to the date fixed for such redemption by the Board of Directors, in each case to each holder of record of the shares of this Series to be redeemed. Such notice shall be given by first class mail, postage prepaid, at such holder's address as the same appears on the stock transfer books of the Corporation. Neither the failure to mail, to any particular holder, any notice required by this Section 3(c)(ii) nor any defect therein or in the mailing thereof, shall affect the sufficiency of the notice or the validity of the proceedings for redemption with respect to any other holder. Any notice which was mailed in the manner herein provided shall be conclusively presumed to have been duly given on the date mailed whether or not the holder receives the notice. Each such notice shall state, as appropriate: (A) the Redemption Date; (B) the number of shares of this Series to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (C) the Redemption Price to be paid in respect of the redemption; (D) the place or places where certificates for such shares are to be surrendered for the payment of the Redemption Price; (E) the then current Conversion Price and, if any event then known to the Corporation will result in an adjustment to the Conversion Price on or prior to the Redemption Date, such adjusted Conversion Price and the date of such adjustment; (F) if such redemption of shares of this Series is the result of a U.S. Steel Group Special Event or a Marathon Group Special Event, that such redemption is conditioned upon the occurrence of the applicable U.S. Steel Group Special Event or Marathon Group Special Event and if that U.S. Steel Group Special Event is the Steel Group Disposition Dividend or the Steel Group Disposition Redemption, the last date on which the shares of this Series may be converted into shares of Steel Stock, determined as set forth in Section 4(a); and (G) that dividends on the shares of this Series to be redeemed shall cease to accrue on the Redemption Date, provided that if such redemption of shares of this Series is the result of a U.S. Steel Group Special Event or a Marathon Group Special Event, the conditions to such redemption shall have been satisfied. (iii) Notice having been given as provided in Section 3(c)(ii), from and after the Redemption Date (unless default shall be made by the Corporation in providing an adequate amount of money 22 for the payment of the Redemption Price necessary to effect such redemption in accordance with the terms hereof) (A) except if the redemption is the result of a U.S. Steel Group Special Event or a Marathon Group Special Event and the conditions to such redemption shall not have been satisfied, dividends on the shares of this Series so called for redemption shall cease to accrue, (B) such shares shall no longer be deemed to be outstanding and (C) all rights of the holders thereof as holders of shares of this Series shall cease (except the right to receive from the Corporation the Redemption Price, without interest thereon, upon surrender and endorsement of their certificates). Upon surrender in accordance with said notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, unless the Corporation shall waive such requirement), such shares shall be so redeemed by the Corporation. (iv) The Corporation's obligation to provide an adequate amount of money for the payment of the Redemption Price necessary to effect any redemption in accordance with this Section 3 shall be deemed fulfilled if, on or before the applicable Redemption Date, the Corporation shall deposit with a bank or trust company that has an office in the Borough of Manhattan, City of New York, and that has, or is an affiliate of a bank or trust company that has, a capital and surplus of at least $50,000,000, an amount of money adequate for the payment of the aggregate Redemption Price necessary for such redemption in accordance with the terms hereof, in trust, with irrevocable instructions that such money be applied to the redemption of the shares of this Series so called for redemption. If such redemption is conditioned upon the payment of the Steel Group Disposition Dividend or payment of the amount due as a result of the Steel Group Disposition Redemption, the Corporation shall deposit such moneys and give such irrevocable instructions in respect of such redemption, subject to the payment of such Steel Group Disposition Dividend or payment of the amount due as a result of such Steel Group Disposition Redemption, not later than the 30th day prior to the date selected by the Board for the payment of such dividend on, or the redemption of, Steel Stock, but in any event prior to the date the Corporation declares such dividend or gives notice of such redemption, each in accordance with Section 2 of Division I of the Certificate of Incorporation. No interest shall accrue for the benefit of the holders of shares of this Series to be redeemed on any money so payable by the Corporation in respect of any redemption. Subject to applicable escheat laws, any money unclaimed at the end of two years from the related Redemption Date shall revert to the general funds of the Corporation, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Corporation for the payment of such money. In case fewer than all the shares of this Series represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder thereof. (v) Any shares of this Series which shall at any time have been redeemed shall, upon the taking of any action required by law, have the status of authorized but unissued shares of Preferred Stock, without designation as to series until such shares are once more designated as part of a particular series by the Board of Directors. (vi) Notwithstanding the foregoing provisions of this Section 3, unless the full cumulative dividends on all outstanding shares of this Series shall have been paid or contemporaneously are declared and paid for all past dividend periods, no shares of this Series shall be redeemed unless all outstanding shares of this Series are simultaneously redeemed, and the Corporation shall not purchase or otherwise acquire any shares of this Series; provided, however, that the foregoing shall not prevent the purchase or acquisition of shares of this Series pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of this Series. 4. Conversion or Exchange. Holders of shares of this Series shall have the right to convert all or a portion of such shares into shares of Steel Stock, as follows: (a) Subject to and upon compliance with the provisions of this Section 4, a holder of shares of this Series shall have the right, at such holder's option, at any time, to convert such shares into the number of fully paid and nonassessable shares of Steel Stock equal to the quotient of (i) the product of the initial liquidation preference for shares of this Series of $50.00 per share for such shares times the number of shares of this Series to be converted, divided by (ii) the Conversion Price (as in effect on the date provided for in the last paragraph of Section 4(b)) by surrendering the certificates representing such shares to be converted, such surrender to be made in the manner provided in accordance with this Section 4; provided that the right to convert shares of this Series called for 23 redemption pursuant to Section 3 shall terminate at the close of business on the related Redemption Date, unless the Corporation shall default in making payment of any moneys payable upon such redemption under Section 3 or, if the redemption of shares of this Series is the result of a Steel Group Special Event or a Marathon Group Special Event, the conditions to such redemption shall not have been satisfied; and, provided, further, that if the Corporation has given notice of a redemption pursuant to Section 3(c) which is conditioned on the occurrence of the Steel Group Disposition Dividend or the Steel Group Disposition Redemption, the right to convert shares of this Series shall terminate on the 31st day prior to the date selected by the Board of Directors for such redemption. Any holder of any share or shares of this Series may only convert whole shares of this Series and the Corporation shall not be obligated to issue any fractional shares of this Series. (b) In order to exercise the conversion right, the holder of any shares of this Series to be converted shall surrender the certificate representing such shares, duly endorsed or assigned to the Corporation or in blank, at the office of the Transfer Agent, accompanied by written notice to the Corporation that the holder thereof elects to convert such shares or a specified portion thereof. Unless the shares issuable on conversion are to be issued in the same name as the name in which such shares of this Series are registered, any shares surrendered for conversion shall be accompanied by instruments of transfer, in form satisfactory to the Corporation, duly executed by the holder or such holder's duly authorized attorney and an amount sufficient to pay any transfer or similar tax (or evidence reasonably satisfactory to the Corporation demonstrating that such taxes have been paid). Holders of shares of this Series at the close of business on a record date for determining stockholders entitled to receive a dividend shall be entitled to receive the dividend payable on such shares on the corresponding dividend payment date (except that holders of shares called for redemption on a Redemption Date between such record date and the dividend payment date shall not be entitled to receive such dividend on such dividend payment date) notwithstanding the conversion thereof following such dividend record date and prior to such dividend payment date. However, shares of this Series surrendered for conversion during the period between the close of business on any dividend record date and the opening of business on the corresponding dividend payment date (except shares called for redemption on a Redemption Date during such period) must be accompanied by payment of an amount equal to the dividend payable on such shares on such dividend payment date. A holder of shares of this Series on a dividend record date who (or whose transferee) tenders any such shares for conversion into shares of Steel Stock on a dividend payment date will receive the dividend payable by the Corporation on such shares of this Series on such date, and the converting holder need not include payment of the amount of such dividend upon surrender of such shares for conversion. Except as provided above, the Corporation shall make no payment or allowance for unpaid dividends, whether or not in arrears, on converted shares or for dividends on the shares of Steel Stock issued upon such conversion. As promptly as practicable after the surrender of certificates for shares of this Series as aforesaid, the Corporation shall issue and shall deliver at such office to such holder, or on such holder's written order, a certificate or certificates for the number of full shares of Steel Stock issuable upon the conversion of such shares in accordance with the provisions of this Section 4, and any fractional interest in respect of a share of Steel Stock arising upon such conversion shall be settled as provided in Section 4(c). Each conversion shall be deemed to have been effected immediately prior to the close of business on the date on which the certificates for shares of this Series shall have been surrendered and the notice referred to in the third preceding paragraph (and, if applicable, payment of an amount equal to the dividend payable on such shares as described in the second preceding paragraph) received by the Corporation as aforesaid, and the person or persons in whose name or names any certificate or certificates for shares of Steel Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby at such time on such date and such conversion shall be at the Conversion Price in effect at such time on such date. (c) No fractional shares or scrip representing fractions of shares of Steel Stock or any other common stock of the Corporation shall be issued upon conversion of any share of this Series. Instead of any fractional interest in a share of Steel Stock or such other common stock that would otherwise be deliverable upon the conversion of a share of this Series, the Corporation shall pay to the holder 24 of such share an amount in cash based upon the Closing Price of Steel Stock or such other common stock on the Trading Day immediately preceding the date of conversion. If more than one share shall be surrendered for conversion at one time by the same holder, the number of full shares of Steel Stock or such other common stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of this Series so surrendered. (d) The Conversion Price per share of Steel Stock shall be adjusted from time to time as follows: (i) If the Corporation shall after the date on which shares of this Series are initially issued (A) pay a dividend or make a distribution on any class of its capital stock in shares of Steel Stock, (B) subdivide the outstanding Steel Stock into a greater number of shares or (C) combine the outstanding Steel Stock into a smaller number of shares, then the Conversion Price in effect at the opening of business on the day next following the date fixed for the determination of stockholders entitled to receive such dividend or distribution or at the opening of business on the day next following the day on which such subdivision or combination becomes effective, as the case may be, shall be adjusted so that the holder of any share of this Series thereafter surrendered for conversion shall be entitled to receive the number of shares of Steel Stock that such holder would have owned or have been entitled to receive after the happening of any of the events described above had such share been converted immediately prior to the record date in the case of a dividend or distribution or the effective date in the case of a subdivision or combination. An adjustment made pursuant to this Section 4(d)(i) shall become effective immediately after the opening of business on the day next following the record date (except as provided in Section 4(m)) in the case of a dividend or distribution and shall become effective immediately after the opening of business on the day next following the effective date in the case of a subdivision or combination. (ii) If the Corporation shall issue after the date on which shares of this Series are initially issued rights or warrants (other than any rights or warrants (including the Rights) referred to in Section 4(d)(iii) below) to all holders of Steel Stock entitling them (for a period expiring within 45 days after the record date mentioned below) to subscribe for or purchase Steel Stock at a price per share less than the Current Market Price per share of Steel Stock on the record date for the determination of stockholders entitled to receive such rights or warrants, then the Conversion Price in effect at the opening of business on the day next following such record date shall be adjusted to equal the price determined by multiplying (I) the Conversion Price in effect immediately prior to the opening of business on the day next following the date fixed for such determination by (II) a fraction, the numerator of which shall be the sum of (A) the number of shares of Steel Stock outstanding on the close of business on the date fixed for such determination and (B) the number of shares that the aggregate proceeds to the Corporation from the exercise of such rights or warrants for Steel Stock would purchase at such Current Market Price, and the denominator of which shall be the sum of (A) the number of shares of Steel Stock outstanding on the close of business on the date fixed for such determination and (B) the number of additional shares of Steel Stock offered for subscription or purchase pursuant to such rights or warrants. Such adjustment shall become effective immediately after the opening of business on the day next following such record date (except as provided in Section 4(m)). In determining whether any rights or warrants entitle the holders of Steel Stock to subscribe for or purchase shares of Steel Stock at less than the Current Market Price thereof, there shall be taken into account any consideration received by the Corporation upon issuance and upon exercise of such rights or warrants, the value of such consideration, if other than cash, to be determined by the Board of Directors. (iii) If the Corporation shall distribute to all holders of the Steel Stock any shares of capital stock (other than common stock of the Corporation), evidences of indebtedness, cash or other assets of the Corporation (including securities, but excluding (w) any dividend or distribution referred to in Section 4(d)(i), (x) any rights or warrants referred to in Section 4(d)(ii) or in the second or third paragraph of this Section 4(d)(iii), (y) any dividend or distribution paid exclusively in cash or (z) any stocks, securities or other property received as a result of a transaction referred to in Section 4(f)) (any of the foregoing being hereinafter referred to in this Section 4(d)(iii) as the "Securities"), then in each such case the Conversion Price shall be adjusted so that it shall equal the price determined by multiplying (I) the Conversion Price in effect immediately prior to the close of business on the date fixed for the determination of stockholders entitled to receive such 25 distribution by (II) a fraction, the numerator of which shall be the Current Market Price per share of the Steel Stock on the record date mentioned below less the then fair market value (as determined by the Board of Directors) of the portion of the Securities so distributed to one share of Steel Stock, and the denominator of which shall be the Current Market Price per share of the Steel Stock on the record date mentioned below. Such adjustment shall become effective immediately at the opening of business on the day next following the record date for the determination of stockholders entitled to receive such distribution (except as provided in Section 4(m)). With respect to the Amended and Restated Rights Agreement, dated as of October 1, 1992 (as amended or otherwise modified from time to time, the "Restated Rights Agreement"), between the Corporation and Mellon Bank, N.A. (terms used in this paragraph and not otherwise defined herein having the meanings set forth in the Restated Rights Agreement), the Conversion Price will be adjusted only when the Rights issuable pursuant thereto become exercisable after the Corporation's right of redemption thereunder has expired. Subject to the foregoing, upon the later to occur of the Distribution Date and a Section 11(a)(ii) Event (the "Adjustment Date"), the Conversion Price in effect at the opening of business on the Adjustment Date shall be adjusted to equal the price determined by multiplying such Conversion Price by a fraction the numerator of which shall be equal to the Current Market Price per share of the Steel Stock on the Trading Day immediately prior to the Adjustment Date less an amount equal to the quotient of (x) the aggregate fair market value on the Adjustment Date (as determined by the Board of Directors) of the Rights distributed under the Restated Rights Agreement divided by (y) the number of shares of Steel Stock outstanding on such day prior to the Adjustment Date and the denominator of which shall be equal to such Current Market Price per share of the Steel Stock. Such adjustment shall become effective immediately after the opening of business on the day next following such Adjustment Date. In case the Corporation shall (other than pursuant to the Restated Rights Agreement) distribute rights or warrants to purchase Steel Stock pro rata to all holders of Steel Stock which rights or warrants are not at such time immediately exercisable but, upon the occurrence of a specified event or events ("Exercise Trigger Date") will become exercisable and once they become exercisable will entitle, or upon the occurrence of an additional specified event or events ("Price Trigger Date") will entitle, the holder thereof to purchase Steel Stock at a price per share of Steel Stock less than the Current Market Price of the Steel Stock on the Trading Day next succeeding the later of the Exercise Trigger Date or the Price Trigger Date ("Adjustment Trigger Date") and there shall have occurred such Adjustment Trigger Date, thus permitting the holders of such rights or warrants irrevocably to exercise any exchange, subscription or purchase rights conferred by such rights or warrants at a price per share of Steel Stock less than such Current Market Price, then the Conversion Price in effect at the opening of business on the Adjustment Trigger Date shall be adjusted by multiplying (I) such Conversion Price by (II) a fraction, the numerator of which shall be equal to the Current Market Price per share of the Steel Stock on the Trading Day immediately prior to the Adjustment Trigger Date less an amount equal to the quotient of (x) the aggregate fair market value on the Adjustment Trigger Date of the rights or warrants so distributed (as determined by the Board of Directors) divided by (y) the number of shares of Steel Stock outstanding on such day prior to the Adjustment Trigger Date and the denominator of which shall be equal to such Current Market Price per share of the Steel Stock. Such adjustment shall become effective immediately after the opening of business on the day next following such Adjustment Trigger Date. (iv) If the Corporation shall, by dividend or otherwise, at any time distribute to all holders of the Steel Stock cash (excluding any regular quarterly dividend payable solely in cash, any cash that is distributed as part of a distribution requiring a Conversion Price adjustment pursuant to Section 4(d)(iii) and cash that is distributed in a merger or consolidation to which Section 4(f) applies) in an aggregate amount that, together with (A) the aggregate amount of any other distributions to all holders of the Steel Stock made exclusively in cash (to which this Section 4(d)(iv) would otherwise apply) within the 12 months preceding the date of payment of such distribution and in respect of which no Conversion Price adjustment has been made and (B) all Excess Purchase Payments in respect of each tender offer or exchange offer or other negotiated purchase for Steel Stock concluded by the Corporation or any of its Subsidiaries within the 12 months preceding the date of payment of such distribution and in respect of which no Conversion Price adjustment has been made, exceeds an amount equal to 12 1/2% of the product of the 26 Current Market Price per share of Steel Stock on the date fixed for determination of holders of Steel Stock entitled to receive such distribution times the number of shares of Steel Stock outstanding on such date, then the Conversion Price shall be adjusted so that it shall equal the price determined by multiplying (I) such Conversion Price in effect immediately prior to the Conversion Price adjustment contemplated by this Section 4(d)(iv) by (II) a fraction the numerator of which shall be the Current Market Price per share of the Steel Stock on the date fixed for determination of holders of Steel Stock entitled to receive such distribution less the combined amount of such cash and such Excess Purchase Payments so distributed applicable to one share of Steel Stock and the denominator of which shall be such Current Market Price per share of the Steel Stock on such date of determination. Such adjustment shall become effective immediately prior to the opening of business on the day next following the date fixed for such determination. (v) In case a tender offer or exchange offer or other negotiated purchase made by the Corporation or any of its Subsidiaries for all or any portion of the Steel Stock shall be consummated, if the aggregate amount of any Excess Purchase Payment, together with (A) the aggregate amount of any distributions made to all holders of Steel Stock made exclusively in cash (excluding any regular quarterly dividend payable solely in cash, any cash that is distributed as part of a distribution requiring a Conversion Price adjustment pursuant to Section 4(d)(iii) and cash that is distributed in a merger or consolidation to which Section 4(f) applies) within the 12 months preceding the consummation of such tender or exchange offer or other negotiated purchase and in respect of which no Conversion Price adjustment has been made, and (B) all other Excess Purchase Payments in respect of each tender or exchange offer or other negotiated purchase for Steel Stock concluded by the Corporation or any of its Subsidiaries within the 12 months preceding the consummation of such tender or exchange offer or other negotiated purchase and in respect of which no Conversion Price adjustment has been made, exceeds an amount equal to 12 1/2% of the product of the Current Market Price per share of Steel Stock on the consummation date of such tender or exchange offer or other negotiated purchase (any such date, the "Purchase Date") times the number of shares of Steel Stock outstanding (including any tendered, exchanged or purchased shares) on such Purchase Date, then the Conversion Price shall be adjusted so that it shall equal the price determined by multiplying (I) such Conversion Price in effect immediately prior to such Purchase Date by (II) a fraction, the numerator of which shall be the Current Market Price per share of the Steel Stock on such Purchase Date less the combined amount of Excess Purchase Payments and such cash so distributed applicable to one share of Steel Stock and the denominator of which shall be such Current Market Price per share on such Purchase Date. Such adjustment shall become effective immediately prior to the opening of business on the day next following such Purchase Date. (vi) The Corporation from time to time may reduce the Conversion Price by any amount for any period of at least 20 business days (or such other period as may then be required by applicable law), provided that the Board of Directors shall have determined that such reduction is in the best interests of the Corporation. No reduction in the Conversion Price pursuant to this Section 4(d)(vi) shall become effective unless the Corporation shall have mailed a notice, at least 15 days prior to the date on which such reduction is scheduled to become effective, to each holder of shares of this Series. Such notice shall be given by first class mail, postage prepaid, at such holder's address as the same appears on the stock transfer books of the Corporation. Such notice shall state the amount per share by which the Conversion Price will be reduced and the period for which such reduction will be in effect. (vii) The Corporation may make such reductions in the Conversion Price, in addition to those required by Sections 4(d)(i) through (v), as the Board determines to be necessary in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights will not be taxable to the recipients; provided that any such reduction shall not be effective until written evidence of the action of the Board authorizing such reduction shall be filed with the Secretary of the Corporation and notice thereof shall have been given by first class mail, postage prepaid, to each holder of shares of this Series at such holder's address as the same appears on the stock transfer books of the Corporation. (e) No adjustment in the Conversion Price shall be required unless such adjustment would require a cumulative increase or decrease of at least 1% in such price; provided, however, that any adjustments that by reason of this Section 4(e) are not required to be made shall be carried forward 27 and taken into account in any subsequent adjustment until made; and provided, further, that any adjustment shall be required and made in accordance with the provisions of this Section 4 (other than this Section 4(e)) not later than such time as may be required in order to preserve the tax-free nature of a distribution to the holders of shares of Steel Stock or any other common stock into which shares of this Series are convertible. Notwithstanding any other provisions of this Section 4, the Corporation shall not be required to make any adjustment of any Conversion Price established hereunder for the issuance of any shares of common stock of the Corporation (including Steel Stock) pursuant to any plan providing for the reinvestment of dividends or interest payable on securities of the Corporation and the investment of additional optional amounts in shares of such common stock under such plan. All calculations under this Section 4 shall be made to the nearest 1/100 of a cent (with $.00005 being rounded upward) or to the nearest 1/10,000 of a share (with .00005 of a share being rounded upward), as the case may be. (f) If the Corporation shall be a party to any transaction (including without limitation a merger or consolidation of the Corporation and excluding any transaction as to which Sections 4(d)(i) through (vi) apply), in each case as a result of which shares of Steel Stock shall be converted into the right to receive stock, securities or other property (including cash or any combination thereof), (each of the foregoing being referred to herein as a "Transaction"), each share of this Series which is not converted into the right to receive stock, securities or other property in connection with such Transaction shall thereafter be convertible into the kind and amount of shares of stock, securities and other property (including cash or any combination thereof) receivable upon the consummation of such Transaction by a holder of that number of shares or fraction thereof of Steel Stock into which one share of this Series was convertible immediately prior to such Transaction, assuming such holder of Steel Stock (i) is not a person with which the Corporation consolidated or into which the Corporation merged or which merged into the Corporation or to which such sale or transfer was made, as the case may be (a "Constituent Person"), or an affiliate of a Constituent Person and (ii) failed to exercise his rights of election, if any, as to the kind or amount of stock, securities and other property (including cash) receivable upon such Transaction (provided that if the kind or amount of stock, securities and other property (including cash) receivable upon such Transaction is not the same for each share of Steel Stock of the Corporation held immediately prior to such Transaction by other than a Constituent Person or an affiliate thereof and in respect of which such rights of election shall not have been exercised ("non- electing share"), then for the purpose of this Section 4(f) the kind and amount of stock, securities and other property (including cash) receivable upon such Transaction by each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). The Corporation shall not be a party to any Transaction unless the terms of such Transaction are consistent with the provisions of this Section 4(f) and it shall not consent or agree to the occurrence of any Transaction until the Corporation has entered into an agreement with the other party or parties to such transaction for the benefit of the holders of shares of this Series that will contain provisions enabling the holders of such shares that remain outstanding after such Transaction to convert into the consideration received by holders of Steel Stock at the Conversion Price in effect immediately prior to such Transaction. The provisions of this Section 4(f) shall similarly apply to successive Transactions. (g) The reclassification of common stock into which shares of this Series are then convertible into securities which include securities other than such common stock (other than any reclassification upon a consolidation or merger to which Section 4(f) applies), shall be deemed to involve (i) a distribution of such securities other than such common stock to all holders of such common stock (and the effective date of such reclassification shall be deemed to be "the date fixed for the determination of stockholders entitled to receive such distribution") and (ii) a subdivision or combination, as the case may be, of the number of shares of such common stock outstanding immediately prior to such reclassification into the number of shares of such common stock outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be the effective date of such subdivision or combination). (h) If the Corporation shall, by dividend or otherwise, distribute to all holders of Steel Stock or other class of common stock into which shares of this Series are then convertible shares of common stock other than Steel Stock or any class of common stock into which shares of this Series are then convertible, each share of this Series shall be convertible, in addition to the number of shares of Steel Stock and/or such other common stock into which such share is then convertible, into the number of shares of such other common stock receivable upon payment of such distribution to a holder of that number of shares or fraction thereof of Steel Stock or such other common stock into which one share 28 of this Series was convertible immediately prior to the record date fixed for the determination of stockholders entitled to receive such distribution. Shares of this Series shall become so convertible immediately after the opening of business on the day next following such record date (except as provided in Section 4(m)). In addition, a Conversion Price shall be established with respect to such common stock in an amount equal to the quotient of (i) the initial liquidation preference of $50.00 per share of this Series divided by (ii) the number of shares or fraction thereof of such common stock that a holder of one share of Steel Stock or such other common stock into which shares of this Series are then convertible would be entitled to receive on the payment date for such distribution from and after any such date of determination of stockholders entitled to receive such distribution and, thereafter, Conversion Price adjustments as nearly as equivalent in type as may be practicable to the adjustments pursuant to Sections 4(d) through (f) which are to be made in respect of Steel Stock shall be made in respect of shares of such common stock. Notwithstanding the foregoing and the provisions of Section 4(d)(iii), if the Corporation shall make such a distribution in common stock and, thereafter, all of the shares of such common stock cease to be outstanding, on the date such shares of common stock cease to be outstanding (x) the shares of this Series shall cease to be convertible into shares of such common stock, (y) a distribution of shares of such common stock shall be deemed to have occurred on such date and (z) the Conversion Price for the class of common stock upon which such distribution was made, or if no shares of such class are then outstanding because shares of such class were exchanged for shares of another class of common stock, of such other class of common stock, shall be adjusted in the manner set forth in Section 4(d)(iii) to the same extent as if shares of the common stock in which such distribution was made were within the meaning of the term "Securities" in Section 4(d)(iii). (i) After the date, if any, on which all outstanding shares of Steel Stock or of any other common stock into which shares of this Series are then convertible are exchanged for shares of another class of common stock (as provided in the Certificate of Incorporation), each share of this Series shall thereafter be convertible into the number of shares of such other class of common stock receivable upon such exchange by a holder of that number of shares or fraction thereof of Steel Stock and/or such other common stock into which shares of this Series are then convertible into which one share of this Series was convertible immediately prior to such exchange. From and after any such exchange, Conversion Price adjustments as nearly equivalent as may be practicable to the adjustments pursuant to Sections 4(d) through 4(h) which, prior to such exchange, were made in respect of Steel Stock and/or such other common stock into which shares of this Series are then convertible shall instead be made pursuant to such Sections 4(d) through 4(h) in respect of shares of such other class of common stock. (j) Subject to the provisions of Section 4(k), if: (i) the Corporation takes any action that would require an adjustment of the Conversion Price pursuant to Sections 4(d) through (i); or (ii) there shall be any consolidation or merger to which the Corporation is a party and for which approval of any stockholders of the Corporation is required, or the sale or transfer of all or substantially all of the assets of the Corporation or the U.S. Steel Group; or (iii) there shall occur the voluntary or involuntary liquidation, dissolution or winding up of the Corporation; or (iv) the Corporation or any of its Subsidiaries shall commence a tender offer or exchange offer for all or a portion of the outstanding shares of Steel Stock (or shall amend any such tender or exchange offer), then the Corporation shall cause to be filed with the Transfer Agent and shall cause to be mailed to the holders of shares of this Series at their addresses as shown on the stock transfer books of the Corporation, as promptly as possible, but at least 15 days prior to the earliest applicable date hereinafter specified, a notice stating, as applicable, (A) the proposed record date for a dividend or distribution or the proposed effective date of a consolidation, merger, sale, transfer, liquidation, dissolution or winding up, (B) the date as of which it is expected that holders of Steel Stock of record shall be entitled to exchange their shares of Steel Stock for securities or other property, if any, deliverable upon such consolidation, merger, sale, transfer, liquidation, dissolution or winding up or (C) the date on which such tender or exchange offer commenced, the date on 29 which such tender or exchange offer is scheduled to expire unless extended, the consideration offered and the other material terms thereof (or the material terms of any amendment thereto). Failure to give or receive such notice or any defect therein shall not affect the legality or validity of the related transaction. (k) If the Corporation intends: (i) to effect a U.S. Steel Group Special Event or a Marathon Group Special Event; or (ii) exchange shares of Steel Stock for Marathon Stock or Delhi Stock following a Disposition of all or substantially all of the properties and assets of the U.S. Steel Group, then the Corporation shall cause to be filed with the Transfer Agent and shall cause to be mailed to the holders of shares of this Series at their addresses as shown on the stock transfer books of the Corporation, not less than 45 days prior to the Steel Group Disposition Dividend or the Steel Group Disposition Redemption and not less than 30 days prior to any other U.S. Steel Group Special Event, any Marathon Group Special Event or any such exchange of Steel Stock for shares of Marathon Stock or Delhi Stock, a notice stating, as applicable, (A) the record date for any dividend that is a U.S. Steel Group Special Event or a Marathon Group Special Event, (B) the date on which any redemption or exchange that is a U.S. Steel Group Special Event, a Marathon Group Special Event or an exchange of Steel Stock for shares of Marathon Stock or Delhi Stock is expected to become effective, and the date as of which it is expected that holders of record of Steel Stock or Marathon Stock shall be entitled to exchange their shares of Steel Stock or Marathon Stock, respectively, for securities or other property deliverable upon such redemption or exchange or (C) the date on which the Steel Group Tender or Exchange Offer or the Marathon Group Tender or Exchange Offer commenced, the consideration offered and the other material terms thereof (or the material terms of any amendment thereto). In addition, from and after any exchange of Steel Stock for Delhi Stock, effected in accordance with Section 2(b)(i) of Division I of the Certificate of Incorporation, the Corporation shall give similar notice of its intention to exchange Delhi Stock for shares of the Delhi Group Subsidiary, if Steel Stock has been exchanged therefor, or to pay a dividend on, or redeem shares of, Delhi Stock following the Disposition of all or substantially all of the properties and assets of the Delhi Group. Failure to give or receive any such notice or any defect therein shall not affect the legality or validity of the related transaction. In the event of any conflict between the notice provisions of this paragraph (k) and paragraph (j) above, the notice provisions of this paragraph (k) shall govern. (l) Whenever the Conversion Price is adjusted as herein provided, the Corporation shall promptly file with the Transfer Agent an officer's certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment, which certificate shall be prima facie evidence of the correctness of such adjustment. Promptly after delivery of such certificate, the Corporation shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the effective date of such adjustment and shall send such notice of such adjustment of the Conversion Price by first class mail, postage prepaid, to the holder of each share of this Series at such holder's address as the same appears on the stock transfer books of the Corporation. (m) In any case in which Section 4(d) or 4(h) provides that an adjustment shall become effective on the day next following a record date for an event, the Corporation may defer until the occurrence of such event (A) issuing to the holder of any share of this Series converted after such record date and before the occurrence of such event the additional shares of Steel Stock or any other common stock of the Corporation issuable upon such conversion by reason of the adjustment required by such event over and above the number of shares of Steel Stock or such other common stock issuable upon such conversion before giving effect to such adjustment and (B) paying to such holder any amount in cash in lieu of any fraction thereof pursuant to Section 4(c). (n) For purposes of this Section 4, the number of shares of Steel Stock or any other common stock of the Corporation at any time outstanding shall not include any shares of Steel Stock or such other common stock then owned or held by or for the account of Corporation. The Corporation shall not pay a dividend or make any distribution on shares of Steel Stock or such other common stock held in the treasury of the Corporation. 30 (o) There shall be no adjustment of the Conversion Price in case of the issuance of any stock of the Corporation in a reorganization, acquisition or other similar transaction except as specifically set forth in this Section 4. If any action or transaction would require adjustment of any Conversion Price established hereunder pursuant to more than one paragraph of this Section 4, only the adjustment which would result in the largest reduction of such Conversion Price shall be made. (p) The Corporation covenants that it will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued shares of Steel Stock and/or, if the shares of this Series are then convertible into other common stock of the Corporation, such other common stock, or its issued shares of Steel Stock or such other common stock, as the case may be, held in its treasury, or both, for the purpose of effecting conversion of shares of this series, the full number of shares of Steel Stock or such other common stock deliverable upon the conversion of all outstanding shares of this Series not theretofore converted. For purposes of this Section 4(p), the number of shares of Steel Stock or such other common stock that shall be deliverable upon the conversion of all outstanding shares of this Series shall be computed as if at the time of computation all such outstanding shares were held by a single holder. The Corporation covenants that any shares of Steel Stock or other common stock of the Corporation issued upon conversion of shares of this Series shall be validly issued, fully paid and nonassessable. The Corporation shall endeavor to list the shares of Steel Stock or other common stock of the Corporation required to be delivered upon conversion of shares of this Series, prior to such delivery, upon each national securities exchange, if any, upon which the outstanding Steel Stock or such other common stock is listed at the time of such delivery. Prior to the delivery of any securities that the Corporation shall be obligated to deliver upon conversion of shares of this Series, the Corporation shall endeavor to comply with all federal and state laws and regulations thereunder requiring the registration of such securities with, or any approval of or consent to the delivery thereof by, any governmental authority. (q) The Corporation will pay any and all documentary, stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Steel Stock or other securities or property on conversion of shares of this Series pursuant hereto; provided, however, that the Corporation shall not be required to pay any tax that may be payable in respect of any transfer involved in the issue or delivery of shares of Steel Stock or other securities or property in a name other than that of the holder of such shares to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Corporation the amount of any such tax or established, to the reasonable satisfaction of the Corporation, that such tax has been paid. 5. Voting. The shares of this Series shall not have any voting powers, either general or special, except that: (a) Unless the vote or consent of the holders of a greater number of shares shall then be required by law, the consent of the holders of at least 66 2/3% of all of the shares of this Series at the time outstanding, given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of shares of this Series shall vote together as a separate class, shall be necessary for authorizing, effecting or validating the amendment, alteration or repeal of any of the provisions of the Certificate of Incorporation or of any certificate amendatory thereof or supplemental thereto (including any Certificate of Designation and Terms or any similar document relating to any series of Preferred Stock) so as to affect adversely the powers, preferences, or rights, of this Series. The increase of the authorized amount of the Preferred Stock, or the creation or authorization of any shares of any other class of stock of the Corporation ranking prior to or on a parity with the shares of this Series as to dividends or upon liquidation, or the reclassification of any authorized stock of the Corporation into any such parity shares, or the creation or authorization of any obligation or security convertible into or evidencing the right to purchase any such prior or parity shares shall not be deemed to affect adversely the powers, preferences or rights of this Series. (b) Unless the vote or consent of the holders of a greater number of shares shall then be required by law, the consent of the holders of at least 66 2/3% of all of the shares of this Series and all other series of Preferred Stock ranking on a parity with shares of this Series, either as to dividends or upon 31 liquidation, at the time outstanding, given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of shares of this Series and such other series of Preferred Stock shall vote together as a single class without regard to series, shall be necessary for authorizing, effecting or validating the issuance of any shares of any class of stock of the Corporation ranking prior to the shares of this Series as to dividends or upon liquidation, or the reclassification of any outstanding stock of the Corporation into any such prior shares, or the issuance of any obligation or security convertible into or evidencing the right to purchase any such prior shares. (c) Unless the vote or consent of the holders of a greater number of shares shall then be required by law, the consent of the holders of at least a majority of all of the shares of this Series and all other series of Preferred Stock ranking on a parity with this Series, either as to dividends or upon liquidation, at the time outstanding, given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of shares of this Series and such other series of Preferred Stock shall vote together as a single class without regard to series, shall be necessary for authorizing, effecting or validating the merger or consolidation of the Corporation into or with any other corporation if such merger or consolidation would adversely affect the powers, preferences or rights of this Series or such other series of Preferred Stock or if, after such merger or consolidation, there shall be outstanding any shares of any class of stock ranking prior to the shares of this Series as to dividends or upon liquidation or any obligation or security convertible into or evidencing the right to purchase any such prior shares (except such stock, securities or obligations of the Corporation as may have been outstanding immediately preceding such merger or consolidation). (d) If, on the date used to determine stockholders of record for any meeting of stockholders for the election of directors, a default in preference dividends on the Preferred Stock shall exist, the number of directors constituting the Board of Directors shall be increased by two, and the holders of the Preferred Stock of all series (whether or not the holders of such series of Preferred Stock would be entitled to vote for the election of directors if such default in preference dividends did not exist), shall have the right at such meeting, voting together as a single class without regard to series, to the exclusion of the holders of Common Stock of the Corporation, to elect two directors of the Corporation to fill such newly created directorships. Each director elected by the holders of shares of Preferred Stock (herein called a "Preferred Director"), shall continue to serve as such director for the full term for which such director shall have been elected, notwithstanding that prior to the end of such term a default in preference dividends shall cease to exist. Any Preferred Director may be removed without cause by, and shall not be removed without cause except by, the vote of the holders of record of the outstanding shares of Preferred Stock, voting together as a single class without regard to series, at a meeting of the stockholders, or of the holders of shares of Preferred Stock, called for the purpose. So long as a default in any preference dividends on the Preferred Stock shall exist (A) any vacancy in the office of a Preferred Director may be filled (except as provided in the following clause (B)) by an instrument in writing signed by the remaining Preferred Director and filed with the Corporation and (B) in the case of the removal of any Preferred Director, the vacancy may be filled by the vote of the holders of the outstanding shares of Preferred Stock, voting together as a single class without regard to series, at the same meeting at which such removal shall be voted. Each director appointed as aforesaid by the remaining Preferred Director shall be deemed, for all purposes hereof, to be a Preferred Director. Whenever the term of office of the Preferred Directors shall end and no default in preference dividends shall exist, the number of directors constituting the Board of Directors shall be reduced by two. For the purposes hereof, a "default in preference dividends" on the Preferred Stock shall be deemed to have occurred whenever the amount of accrued and unpaid dividends upon any series of the Preferred Stock shall be equivalent to six full quarterly dividends or more (whether or not consecutive), and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all accrued dividends on all shares of Preferred Stock of each and every series then outstanding shall have been paid for all past dividend periods. 6. Liquidation Rights. (a) Upon the dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, the holders of the shares of this Series shall be entitled to receive out of the assets of the Corporation available for distribution to stockholders, before any payment or distribution shall be made on any class of the common stock of the Corporation or on any other class of stock ranking 32 junior to the Preferred Stock upon liquidation, the amount of $50 per share, plus a sum equal to all dividends (whether or not earned or declared) on such shares accrued and unpaid thereon to the date of final distribution. (b) Neither the sale, lease or exchange (for cash, shares of stock, securities or other consideration) of all or substantially all the property and assets of the Corporation nor the merger or consolidation of the Corporation into or with any other corporation or the merger or consolidation of any other corporation into or with the Corporation, shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this Section 6. (c) After the payment to the holders of the shares of this Series of the full preferential amounts provided for in this Section 6, the holders of shares of this Series as such shall have no right or claim to any of the remaining assets of the Corporation. (d) In the event the assets of the Corporation available for distribution to the holders of shares of this Series upon any dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to Section 6(a), no such distribution shall be made on account of any shares of any other class or series of Preferred Stock ranking on a parity with the shares of this Series upon such dissolution, liquidation or winding up unless proportionate distributive amounts shall be paid on account of the shares of this Series, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation or winding up. 7. Ranking. For purposes of this resolution, any stock of any class or classes of the Corporation shall be deemed to rank: (a) prior to the shares of this Series, either as to dividends or upon liquidation, if the holders of such class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, as the case may be, in preference or priority to the holders of shares of this Series; (b) on a parity with the shares of this Series, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share or sinking fund provisions, if any, be different from those of this Series, if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of shares of this Series; and (c) junior to shares of this Series, either as to dividends or upon liquidation, if such class or classes shall be the Series A Junior Preferred Stock issued by the Corporation pursuant to the Restated Rights Agreement or if such class or classes shall be any class of common stock of the Corporation or if the holders of shares of this Series shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, as the case may be, in preference or priority to the holders of shares of such class or classes. 8. Determinations by the Board of Directors. Any determinations made by the Board of Directors of the Corporation under any provision of this Resolution shall be final and binding on all stockholders (including holders of shares of this Series) of the Corporation. 9. Definitions. Unless otherwise defined herein, terms used herein shall have the meanings assigned to them in Division I of the Certificate of Incorporation and the following terms shall have the following meanings: "Board of Directors" or "Board" means, at any time, the duly elected or acting board of directors (or duly authorized committee thereof) of the Corporation at such time. "Certificate of Incorporation" means the Corporation's Restated Certificate of Incorporation, as amended, supplemented or otherwise modified from time to time. 33 "Closing Price" of shares of any class of common stock of the Corporation for any day shall mean the last reported sales price, regular way on such day, or, if no reported sale takes place on such day, the average of the reported closing bid and asked prices on such day, regular way, in either case as reported on the New York Stock Exchange Composite Tape or, if such common stock is not listed or admitted to trading on the NYSE, on the principal national securities exchange on which such common stock is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the National Market System of NASDAQ or, if such common stock is not quoted on such National Market System, the average of the closing bid and asked prices on such day in the over-the- counter market as reported by NASDAQ or, if closing bid and asked prices for such common stock on such day shall not have been reported through NASDAQ, the average of the closing bid and asked prices on such day as furnished by any NYSE member firm regularly making a market in such common stock selected for such purpose by the Board of Directors. "Conversion Price" means the conversion price per share of Steel Stock and/or other shares of common stock of the Corporation into which shares of this Series are convertible, as such Conversion Price may be adjusted pursuant to Section 4. The initial conversion price per share of Steel Stock will be $46.125 (equivalent to a conversion rate of 1.084 shares of Steel Stock for each share of this Series). "Current Market Price" shall mean, with respect to any class of common stock of the Corporation, the average of the daily Closing Prices of a share of such common stock during the five consecutive Trading Days selected by the Corporation commencing not more than 20 Trading Days before, and ending not later than, the date in question; provided, however, that (i) if the "ex" date for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Sections 4(d)(ii) through (v) occurs on or after the 20th Trading Day prior to the day in question and prior to the "ex" date for the issuance or distribution requiring such computation, the Closing Price for each Trading Day prior to the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such other event, (ii) if the "ex" date for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the Conversion Price pursuant to Sections 4(d) (ii) through (v) occurs on or after the "ex" date for the issuance or distribution requiring such computation and on or prior to the day in question, the Closing Price for each Trading Day on and after the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event, and (iii) if the "ex" date for the issuance or distribution requiring such computation is on or prior to the day in question, after taking into account any adjustment required pursuant to clause (ii) of this proviso, the Closing Price for each Trading Day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value on the day in question (as determined by the Board of Directors in a manner consistent with any determination of such value for purposes of Section 4(d) (iii) or (iv)) of the evidences of indebtedness, shares of capital stock or assets being distributed applicable to one share of the applicable class of common stock of the Corporation as of the close of business on the day before such "ex" date. For purposes of this definition, the term "ex" date, with respect to any class of common stock of the Corporation, (i) when used with respect to any issuance or distribution, means the first date on which such common stock trades regular way on such exchange or in the relevant market from which the Closing Price was obtained without the right to receive such issuance or distribution, (ii) when used with respect to any subdivision or combination of shares of such common stock, means the first date on which such common stock trades regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective, and (iii) when used with respect to any tender or exchange offer means the first date on which such common stock trades regular way on such exchange or in such market after the expiration time of such tender or exchange offer. "Excess Purchase Payment" means the excess, if any, of (A) the aggregate of the cash and the value (as determined by the Board of Directors) of all other consideration paid by the Corporation or any of its Subsidiaries with respect to the shares of the applicable class of common stock of the Corporation acquired in a tender or exchange offer or other negotiated purchase respectively, over (B) the product of the Current Market Price per share of such common stock times the number of shares of such common stock acquired in such tender or exchange offer or purchase. "NASDAQ" means the National Association of Securities Dealers, Inc. Automated Quotations System or any successor thereto. 34 "NYSE" means the New York Stock Exchange, Inc. or any successor thereto. "Redemption Date" means any date on which the Corporation redeems any shares of this Series. "Redemption Price" means (i) with respect to any redemption pursuant to Section 3(a), the applicable amount set forth in such Section and (ii) with respect to any redemption pursuant to Section 3(b), an amount per share equal to the sum of the initial liquidation preference of $50.00 per share of this Series, plus an amount equal to all accrued and unpaid dividends thereon to the date fixed for redemption. "Restated Rights Agreement" shall have the meaning given to it in the second paragraph of Section 4 (d)(iii). "Rights" shall mean the rights of the Corporation which are issuable under the Corporation's stockholder rights plan adopted by the Board of Directors, the terms and conditions of which are set forth in the Restated Rights Agreement, or rights to purchase any capital stock of the Corporation under any successor shareholder rights plan or plan adopted in replacement of the Corporation's stockholder rights plan. "Subsidiary" means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by the Corporation or by one or more other Subsidiaries. For the purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "substantially all of the properties and assets of the U.S. Steel Group" and "substantially all of the properties and assets of the Marathon Group" shall mean a portion of such properties and assets that represents at least 80% of either of the then-current market value of, or the aggregate revenues for the immediately preceding twelve fiscal quarterly periods of the Corporation derived from, the properties and assets of the U.S. Steel Group or the Marathon Group, respectively, as of such date (excluding the properties and assets of any person, entity or group in which the Corporation, directly or indirectly, owns less than a majority interest). "Trading Day" shall mean, with respect to any class of common stock of the Corporation, any day on which such common stock is traded on the NYSE, or if such common stock is not listed or admitted to trading on the NYSE, on the principal national securities exchange on which such common stock is listed or admitted, or if not listed or admitted to trading on any national securities exchange, on the National Market System of the NASDAQ, or if such common stock is not quoted on such National Market System, in the applicable securities market in which such common stock is traded. "Transfer Agent" means the Corporation, through its Shareholder Services Department, or such other agent or agents of the Corporation as may be designated by the Board of Directors as the Transfer Agent for shares of this Series. Fifth: The existence of the Corporation is to be perpetual. Sixth: The private property of the stockholders shall not be subject to the payment of corporate debts to any extent whatever. Seventh: The number of directors of the Corporation shall be fixed from time to time by, or in the manner provided in, its by-laws and may be increased or decreased as therein provided; but the number thereof shall not be less than three. The directors of the Corporation shall be divided into three classes: Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the whole number of the Board of Directors. In the election of directors at the 1984 annual meeting of the stockholders, the Class I directors shall be elected to hold office for a term to expire at the first annual meeting of the stockholders thereafter; the Class II directors shall be elected to hold office for a term to expire at the second annual meeting of the stockholders thereafter; and the Class III directors shall be elected to hold office for a term to expire at the third annual meeting of the stockholders thereafter, and in the case of each class, until their respective successors are duly elected and qualified. At each annual election held after the 1984 annual meeting of the stockholders the directors elected to succeed those whose terms expire shall be identified as being of the same class as the directors they 35 succeed and shall be elected to hold office for a term to expire at the third annual meeting of the stockholders after their election, and until their respective successors are duly elected and qualified. If the number of directors is changed, any increase or decrease in directors shall be apportioned among the classes so as to maintain all classes as equal in number as possible, and any additional director elected to any class shall hold office for a term which shall coincide with the terms of the other directors in such class and until his successor is duly elected and qualified. In the case of any increase in the number of directors of the Corporation, the additional director or directors shall be elected by the Board of Directors. In the case of any vacancy in the Board of Directors from death, resignation, disqualification or other cause, a successor to hold office for the unexpired portion of the term of the director whose place shall be vacant, and until the election of his successor, shall be elected by a majority of the Board of Directors then in office, though less than a quorum. Directors of the Corporation may be removed only for cause. Eighth: The Board of Directors shall have power to adopt, amend and repeal the by-laws at any regular or special meeting of the Board of Directors, provided that notice of intention to adopt, amend or repeal the by-laws in whole or in part shall have been included in the notice of meeting; or, without any such notice, by a vote of two-thirds of the directors then in office. Stockholders may adopt, amend and repeal the by-laws at any regular or special meeting of the stockholders by an affirmative vote of two-thirds of the shares outstanding and entitled to vote thereon, provided that notice of intention to adopt, amend or repeal the by-laws in whole or in part shall have been included in the notice of the meeting. Any action required to be taken at any annual or special meeting of the stockholders of the Corporation, or any action which may be taken at any annual or special meeting of the stockholders or otherwise, may not be taken without a meeting, prior notice and a vote, and stockholders may not act by written consent. Ninth: The Board of Directors from time to time shall determine whether and to what extent, and at what times and places, and under what conditions and regulations, the accounts and books of the Corporation, or any of them, shall be open to the inspection of the stockholders, and no stockholder shall have any right to inspect any account or book or document of the Corporation, except as conferred by law or authorized by the Board of Directors, or by the stockholders. Tenth: The directors may from time to time declare such dividends as they shall deem advisable and proper, subject to the provisions of Article Fourth and to such restrictions as may be imposed by law, and pay the same to the stockholders at such times as they shall fix. The Board of Directors shall have power to issue bonds, debentures, or other obligations, either non-convertible or convertible into the Corporation's stock, subject to the provisions of Article Fourth and upon such terms, in such manner and under such conditions in conformity with law, as may be fixed by the Board of Directors prior to the issue of such bonds, debentures or other obligations. Eleventh: No director shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty by such director as a director, except (i) for breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Article Eleventh shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. Twelfth: The powers and authorities hereinbefore conferred upon the Board of Directors are in furtherance and not in limitation of those conferred by the laws of the State of Delaware. 36 Thirteenth: The Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by law; and all rights preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to the rights reserved in this Article. In Witness Whereof, this Restated Certificate of Incorporation, which restates and integrates and does not further amend the provisions of the Corporation's Certificate of Incorporation, as heretofore amended and supplemented, there being no discrepancies between those provisions and the provisions of this Restated Certificate of Incorporation, and having been duly adopted by the Board of Directors of the Corporation in accordance with the provisions of Section 245 of the General Corporation Law of the State of Delaware, has been executed on the 1st day of September, 1996. USX CORPORATION By: /s/ T. J. Usher - ------------------- T. J. Usher Chairman of the Board of Directors 37
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