-----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, D4XDSPFeEKDkfBwcdbDJDnUTLMk/hTVSbuxyGHke+mNbEYeulROE6zdjgCEnkwKt CxlrKmyDqz68ZzFFwUFeXg== 0000101778-99-000008.txt : 19990816 0000101778-99-000008.hdr.sgml : 19990816 ACCESSION NUMBER: 0000101778-99-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: SEC FILE NUMBER: 001-05153 FILM NUMBER: 99686865 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 June 30, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ------------ to ------------ USX CORPORATION - -------------------------------------------------------------------------------- ---- (Exact name of registrant as specified in its charter) Delaware 1-5153 25-0996816 --------------- ------------ ------------------- (State or other (Commission (IRS Employer jurisdiction of File Number) Identification No.) incorporation) 600 Grant Street, Pittsburgh, PA 15219-4776 - --------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (412) 433-1121 ------------------------------ (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes..X..No..... Common stock outstanding at July 31, 1999 follows: USX-Marathon Group - 308,744,772 shares USX-U. S. Steel Group - 88,369,055 shares 2 USX CORPORATION SEC FORM 10-Q QUARTER ENDED June 30, 1999 --------------------------- 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 21 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Item 3. Quantitative and Qualitative Disclosures About Market Risk 30 Financial Statistics 32 B. Marathon Group Item 1. Financial Statements: Marathon Group Statement of Operations 33 Marathon Group Balance Sheet 34 Marathon Group Statement of Cash Flows 35 Selected Notes to Financial Statements 36 Item 2. Marathon Group Management's Discussion and Analysis of Financial Condition and Results of Operations 45 Item 3. Quantitative and Qualitative Disclosures About Market Risk 59 Supplemental Statistics 61 3 USX CORPORATION SEC FORM 10-Q QUARTER ENDED June 30, 1999 --------------------------- INDEX Page ----- ---- PART I - FINANCIAL INFORMATION (Continued) C. U. S. Steel Group Item 1. Financial Statements: U. S. Steel Group Statement of Operations 62 U. S. Steel Group Balance Sheet 63 U. S. Steel Group Statement of Cash Flows 64 Selected Notes to Financial Statements 65 Item 2. U. S. Steel Group Management's Discussion and Analysis of Financial Condition and Results of Operations 72 Item 3. Quantitative and Qualitative Disclosures About Market Risk 83 Supplemental Statistics 85 PART II - OTHER INFORMATION Item 1. Legal Proceedings 86 Item 4. Submission of Matters to a Vote of Security Holders 87 Item 5. Other Information 88 Item 6. Exhibits and Reports on Form 8-K 89 4 Part I - Financial Information A. Consolidated Corporation
USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) ------------------------------------------------ Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 1999 1998 1999 1998 - -------------------------------------------------------------------------------- REVENUES: Sales $6,731 $7,182 $12,809 $14,082 Dividend and affiliate income 18 46 11 71 Gain (loss) on disposal of assets 9 30 (13) 44 Gain on ownership change in Marathon Ashland Petroleum LLC - (2) - 246 Other income 8 4 13 17 ------ ------ ------ ------ Total revenues 6,766 7,260 12,820 14,460 ------ ------ ------ ------ COSTS AND EXPENSES: Cost of sales (excludes items shown below) 4,810 5,095 9,364 10,266 Selling, general and administrative expenses 37 67 89 152 Depreciation, depletion and amortization 301 281 609 628 Taxes other than income taxes 1,123 1,075 2,148 2,051 Exploration expenses 59 75 122 157 Inventory market valuation credits (66) (3) (415) (28) ------ ------ ------ ------ Total costs and expenses 6,264 6,590 11,917 13,226 ------ ------ ------ ------ INCOME FROM OPERATIONS 502 670 903 1,234 Net interest and other financial costs 91 71 174 153 Minority interest in income of Marathon Ashland Petroleum LLC 112 158 257 212 ------ ------ ------ ------ INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 299 441 472 869 Provision for estimated income taxes 110 143 173 301 ------ ------ ------ ------ INCOME BEFORE EXTRAORDINARY LOSS 189 298 299 568 Extraordinary loss on extinguishment of debt, net of income tax - - 5 - ------ ------ ------ ------ NET INCOME 189 298 294 568 Dividends on preferred stock 3 3 5 5 ------ ------ ------ ------ NET INCOME APPLICABLE TO COMMON STOCKS $186 $295 $289 $563 ====== ====== ====== ====== Selected notes to financial statements appear on pages 9-20.
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USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF OPERATIONS (Continued) (Unaudited) INCOME PER COMMON SHARE ------------------------------------------------------------ Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions, except per share amounts) 1999 1998 1999 1998 - -------------------------------------------------------------------------------- APPLICABLE TO MARATHON STOCK: Net income $134 $162 $253 $345 - Per share - basic and diluted .43 .56 .82 1.19 Dividends paid per share .21 .21 .42 .42 Weighted average shares, in thousands - Basic 309,054 289,591 309,041 289,220 - Diluted 309,462 290,263 309,332 289,879 APPLICABLE TO STEEL STOCK: Income before extraordinary loss $52 $133 $41 $218 - Per share - basic .60 1.53 .47 2.51 - diluted .59 1.46 .47 2.41 Extraordinary loss, net of income tax - - 5 - - Per share - basic and diluted - - .06 - Net income $52 $133 $36 $218 - Per share - basic .60 1.53 .41 2.51 - diluted .59 1.46 .41 2.41 Dividends paid per share .25 .25 .50 .50 Weighted average shares, in thousands - Basic 88,387 86,953 88,378 86,777 - Diluted 92,647 94,507 88,379 94,314 Selected notes to financial statements appear on pages 9-20.
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USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET (Unaudited) ---------------------------------------- ASSETS June 30 December 31 (Dollars in millions) 1999 1998 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $99 $146 Receivables, less allowance for doubtful accounts of $8 and $12 1,689 1,663 Inventories 2,607 2,008 Deferred income tax benefits 218 217 Other current assets 230 172 ------ ------ Total current assets 4,843 4,206 Investments and long-term receivables, less reserves of $3 and $10 1,175 1,249 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $16,632 and $16,238 12,723 12,929 Prepaid pensions 2,530 2,413 Other noncurrent assets 329 336 ------ ------ Total assets $21,600 $21,133 ====== ====== Selected notes to financial statements appear on pages 9-20.
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USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET (Continued) (Unaudited) -------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY June 30 December 31 (Dollars in millions) 1999 1998 - -------------------------------------------------------------------------------- LIABILITIES Current liabilities: Notes payable $149 $145 Accounts payable 2,526 2,478 Distribution payable to minority shareholder of Marathon Ashland Petroleum LLC - 103 Payroll and benefits payable 445 480 Accrued taxes 301 245 Accrued interest 103 97 Long-term debt due within one year 82 71 ------ ------ Total current liabilities 3,606 3,619 Long-term debt, less unamortized discount 4,059 3,920 Long-term deferred income taxes 1,656 1,579 Employee benefits 2,858 2,868 Deferred credits and other liabilities 726 720 Preferred stock of subsidiary 250 250 USX obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely junior subordinated convertible debentures of USX 182 182 Minority interest in Marathon Ashland Petroleum LLC 1,744 1,590 STOCKHOLDERS' EQUITY Preferred stock - 6.50% Cumulative Convertible issued - 2,767,787 shares ($138 liquidation preference) 3 3 Common stocks: Marathon Stock issued - 308,722,152 shares and 308,458,835 shares 309 308 Steel Stock issued - 88,368,566 shares and 88,336,439 shares 88 88 Securities exchangeable solely into Marathon Stock issued - 309,138 shares and 507,324 shares - 1 Additional paid-in capital 4,592 4,587 Deferred compensation (1) (1) Retained earnings 1,582 1,467 Accumulated other comprehensive income (loss) (54) (48) ------ ------ Total stockholders' equity 6,519 6,405 ------ ------ Total liabilities and stockholders' equity $21,600 $21,133 ====== ====== Selected notes to financial statements appear on pages 9-20.
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USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) ------------------------------------------------ Six Months Ended June 30 (Dollars in millions) 1999 1998 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income $294 $568 Adjustments to reconcile to net cash provided from operating activities: Extraordinary loss 5 - Minority interest in income of Marathon Ashland Petroleum LLC - net of distributions 51 82 Depreciation, depletion and amortization 609 628 Exploratory dry well costs 62 97 Inventory market valuation credits (415) (28) Pensions and other postretirement benefits (116) (101) Deferred income taxes 98 180 Gain on ownership change in Marathon Ashland Petroleum LLC - (246) (Gain) loss on disposal of assets 13 (44) Changes in: Current receivables - sold 30 - - operating turnover (301) 236 Inventories (221) (193) Current accounts payable and accrued expenses 385 6 All other - net (33) (96) ------ ------ Net cash provided from operating activities 461 1,089 ------ ------ INVESTING ACTIVITIES: Capital expenditures (685) (686) Disposal of assets 182 45 Restricted cash-withdrawals 39 202 - deposits (26) (390) Affiliates -investments - net - (71) - loans and advances (56) (58) - repayments of loans and advances - 63 All other - net (3) 26 ------ ------ Net cash used in investing activities (549) (869) ------ ------ FINANCING ACTIVITIES: Commercial paper and revolving credit arrangements - net (51) (121) Other debt - borrowings 459 842 - repayments (195) (100) Common stock - issued 8 75 - repurchased - (195) Dividends paid (179) (170) ------ ------ Net cash provided from financing activities 42 331 ------ ------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (1) - ------ ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (47) 551 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 146 54 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $99 $605 ====== ====== Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $(178) $(144) Income taxes paid (12) (150) Selected notes to financial statements appear on pages 9-20.
9 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (Unaudited) 1. The information furnished in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. Certain reclassifications of prior year data have been made to conform to 1999 classifications. Additional information is contained in the USX Annual Report on Form 10-K for the year ended December 31, 1998. 2. On March 31, 1999, USX irrevocably deposited with a trustee the entire 5.5 million common shares it owned in RTI International Metals, Inc. (RTI). The deposit of the shares resulted in the satisfaction of USX's obligation under its 6-3/4% Exchangeable Notes (indexed debt) due February 1, 2000. Under the terms of the indenture, the trustee will exchange the RTI shares for the notes at maturity. The notes are exchangeable for shares of RTI common stock on a variable basis up to one share per note depending on the market price of RTI common stock at maturity. Ownership of any shares not required for satisfaction of the indexed debt will revert to USX. As a result of the above transaction, USX recorded in the first quarter of 1999 an extraordinary loss of $5 million, net of a $3 million income tax benefit, representing prepaid interest expense and the write-off of unamortized debt issue costs, and a pretax charge of $22 million, representing the difference between the carrying value of the investment in RTI and the carrying value of the indexed debt, which is included in gain (loss) on disposal of assets. This transaction represents a noncash investing and financing activity of $56 million, which was the carrying value of the indexed debt at March 31, 1999. Additionally, a $13 million credit to adjust the indexed debt to settlement value at March 31, 1999, is included in net interest and other financial costs. In December 1996, USX had issued $117 million of notes indexed to the common share price of RTI. At maturity, USX would have been required to exchange the notes for shares of RTI common stock, or redeem the notes for the equivalent amount of cash. Since USX's investment in RTI was attributed to the U. S. Steel Group, the indexed debt was also attributed to the U. S. Steel Group. USX had a 26% investment in RTI and accounted for its investment using the equity method of accounting. 3. Total comprehensive income for the second quarter of 1999 and 1998 was $185 million and $294 million, respectively, and $288 million and $565 million for the six months of 1999 and 1998, respectively. 10 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 4. The Marathon Group's operations consists of three reportable operating segments: 1) Exploration and Production (E&P) - explores for and produces crude oil and natural gas on a worldwide basis; 2) Refining, Marketing and Transportation (RM&T) - refines, markets and transports crude oil and petroleum products, primarily in the Midwest and southeastern United States through Marathon Ashland Petroleum LLC (MAP); and 3) Other Energy Related Businesses (OERB). OERB is an aggregation of two segments which fall below the quantitative reporting thresholds: 1) Natural Gas and Crude Oil Marketing and Transportation - markets and transports its own and third- party natural gas and crude oil in the United States; and 2) Power Generation - develops, constructs and operates independent electric power projects worldwide. The U. S. Steel Group consists of one operating segment, U. S. Steel (USS). USS is engaged in the production and sale of steel mill products, coke and taconite pellets. USS also engages in the following related business activities: the management of mineral resources, domestic coal mining, engineering and consulting services, and real estate development and management. The results of segment operations are as follows:
Total Marathon (In millions) E&P RM&T OERB Segments USS Total - -------------------------------------------------------------------------------- SECOND QUARTER 1999 Revenues: Customer $689 $4,637 $113 $5,439 $1,292 $6,731 Intersegment (a) 34 4 6 44 - 44 Intergroup (a) 4 - 4 8 11 19 Equity in earnings (losses) of unconsolidated affiliates 3 4 5 12 (10) 2 Other 13 10 6 29 11 40 ----- ----- ----- ----- ----- ----- Total revenues $743 $4,655 $134 $5,532 $1,304 $6,836 ===== ===== ===== ===== ===== ===== Segment income (loss) $124 $228 $19 $371 $(9) $362 ===== ===== ===== ===== ===== ===== SECOND QUARTER 1998 Revenues: Customer $499 $4,928 $66 $5,493$1,689 $7,182 Intersegment (a) 41 1 2 44 - 44 Intergroup (a) 2 - 1 3 - 3 Equity in earnings of unconsolidated affiliates 2 3 1 6 28 34 Other 20 11 3 34 16 50 ----- ----- ----- ----- ----- ----- Total revenues $564 $4,943 $73 $5,580 $1,733 $7,313 ===== ===== ===== ===== ==== ===== Segment income $73 $397 $3 $473 $154 $627 ===== ===== ===== ===== ===== ===== (a)Intersegment and intergroup sales and transfers were conducted on an arm's- length basis.
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USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 4. (Continued) Total Marathon (In millions) E&P RM&T OERB Segments USS Total - -------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, 1999 Revenues: Customer $1,261 $8,816 $195 $10,272 $2,537 $12,809 Intersegment (a) 68 9 15 92 - 92 Intergroup (a) 7 - 8 15 12 27 Equity in earnings (losses) of unconsolidated affiliates 4 7 13 24 (33) (9) Other 19 16 9 44 21 65 ----- ----- ----- ----- ----- ----- Total revenues $1,359 $8,848 $240 $10,447 $2,537 $12,984 ===== ===== ===== ===== ===== ===== Segment income (loss) $160 $273 $34 $467 $(68) $399 ===== ===== ===== ===== ===== =====
SIX MONTHS ENDED JUNE 30, 1998 Revenues: Customer $1,017 $9,520 $162 $10,699 $3,358 $14,057 Intersegment (a) 84 2 4 90 - 90 Intergroup (a) 6 - 4 10 - 10 Equity in earnings of unconsolidated affiliates 1 6 6 13 43 56 Other 21 24 5 50 28 78 ----- ----- ----- ----- ----- ----- Total revenues $1,129 $9,552 $181 $10,862 $3,429 $14,291 ===== ===== ===== ===== ==== ===== Segment income $197 $525 $17 $739 $260 $999 ===== ===== ===== ===== ===== ===== (a)Intersegment and intergroup sales and transfers were conducted on an arm's- length basis.
12 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 4. (Continued) The following schedules reconcile segment revenues and income (loss) to amounts reported in the Marathon and U. S. Steel Groups' financial statements:
Marathon GroupU. S. Steel Group Second Quarter Second Quarter Ended Ended June 30 June 30 (In millions) 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Revenues: Revenues of reportable segments $5,532 $5,580 $1,304 $1,733 Items not allocated to segments: Loss on ownership change in MAP - (2) - - Other (7) - - - Elimination of intersegment revenues (44) (44) - - Administrative revenues - (4) - - ------ ------ ----- ----- Total Group revenues $5,481 $5,530 $1,304 $1,733 ====== ====== ====== ====== Income: Income (loss) for reportable segments $371 $473 $(9) $154 Items not allocated to segments: Loss on ownership change in MAP - (2) - - Administrative expenses (31) (21) (8) (5) Pension credits - - 140 93 Costs related to former business activities - - (20) (25) Inventory market valuation adjustments 66 3 - - Other (a) (7) - - - ------ ------ ------ ------ Total Group income from operations $399 $453 $103 $217 ====== ====== ====== ====== (a)Represents for the Marathon Group in 1999, estimated loss on sale of Carnegie Natural Gas Company and affiliated subsidiaries (Carnegie).
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USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 4. (Continued) Marathon GroupU. S. Steel Group Six Months Six Months Ended Ended June 30 June 30 (In millions) 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Revenues: Revenues of reportable segments $10,447 $10,862 $2,537 $3,429 Items not allocated to segments: Gain on ownership change in MAP - 246 - - Other (23) 24 (22) - Elimination of intersegment revenues (92) (90) - - Administrative revenues - (1) - - ------ ------ ----- ----- Total Group revenues $10,332 $11,041 $2,515 $3,429 ====== ====== ====== ====== Income: Income (loss) for reportable segments $467 $739 $(68) $260 Items not allocated to segments: Gain on ownership change in MAP - 246 - - Administrative expenses (57) (59) (13) (14) Pension credits - - 248 186 Costs related to former business activities - - (44) (53) Inventory market valuation adjustments 415 28 - - Other (a) (23) (99) (22) - ------ ------ ------ ------ Total Group income from operations $802 $855 $101 $379 ====== ====== ====== ====== (a) Represents for the Marathon Group in 1999, loss on sale of Scurlock and Carnegie, and in 1998, international exploration and production property impairments, MAP transition charges and gas contract settlement. For the U. S. Steel Group in 1999, represents loss on investment in RTI stock used to satisfy indexed debt obligations.
5. In the second quarter of 1999, MAP sold Scurlock Permian LLC (Scurlock), its crude oil gathering business, to Plains Marketing, L.P for $136 million. During the first six months of 1999, MAP recorded a pretax loss of $16 million related to the sale. Scurlock had been reported as part of the Marathon Group's refining, marketing and transportation operating segment. On June 1, 1999, the Marathon Group announced that it had signed a definitive agreement to sell Carnegie to Equitable Resources, Inc. The transaction is expected to close later this year. Carnegie is engaged in natural gas production, transmission, distribution, sales and storage activities in Pennsylvania and West Virginia. At June 30, 1999, the net assets held for sale have been included in other current assets in the consolidated balance sheet. During the second quarter of 1999, USX recorded an estimated pretax loss of $7 million related to the sale. Carnegie has been reported as part of the Marathon Group's other energy related businesses operating segment. 14 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 6. The items below are included in both revenues and costs and expenses, resulting in no effect on income.
(In millions) ------------------------------- Second Quarter Six Months Ended Ended June 30 June 30 1999 1998 1999 1998 ---- ---- ---- ---- Consumer excise taxes on petroleum products and merchandise $1,003 $958 $1,916 $1,834 Matching crude oil and refined product buy/sell transactions settled in cash 698 994 1,570 1,982
7. Income from operations includes net periodic pension credits of $83 million and $48 million in the second quarter of 1999 and 1998, respectively, ($128 million and $98 million in the first six months of 1999 and 1998, respectively.) These pension credits are primarily noncash and for the most part are included in selling, general and administrative expenses. In the second quarter of 1999, USX recognized a one-time pretax settlement gain of $35 million, related mainly to pension costs of employees who retired under the U. S. Steel Group 1998 voluntary early retirement program. This noncash settlement gain is included in selling, general and administrative expenses. 8. 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. 9. The method of calculating net income per share for the Marathon Stock and Steel Stock reflects the USX Board of Directors' intent that the separately reported earnings and surplus of the Marathon Group and the U. S. Steel Group, as determined consistent with the USX Restated Certificate of Incorporation, are available for payment of dividends on the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. The financial statements of the Marathon Group and the U. S. Steel Group, taken together, include all accounts which comprise the corresponding consolidated financial statements of USX. Basic net income per share is calculated by adjusting net income for dividend requirements of preferred stock and is based on the weighted average number of common shares outstanding. Diluted net income 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. 15 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 9. (Continued)
COMPUTATION OF INCOME PER SHARE Second Quarter Ended June 30 1999 1998 Basic Diluted Basic Diluted - -------------------------------------------------------------------------------- Marathon Group Net income (millions) $134 $134 $162 $162 ====== ====== ====== ====== Shares of common stock outstanding (thousands): Average number of common shares outstanding 309,054 309,054 289,591 289,591 Effect of dilutive stock options - 408 - 672 ------ ------ ------ ------ Average common shares and dilutive effect 309,054 309,462 289,591 290,263 ====== ====== ====== ====== Net income per share $.43 $.43 $.56 $.56 ====== ====== ====== ====== U. S. Steel Group Net income (millions): Net income $55 $55 $136 $136 Dividends on preferred stock 3 3 3 - ------ ------ ------ ------ Net income applicable to Steel Stock 52 52 133 136 Effect of dilutive convertible securities - 2 - 2 ------ ------ ------ ------ Net income assuming conversions $52 $54 $133 $138 ====== ====== ====== ====== Shares of common stock outstanding (thousands): Average number of common shares outstanding 88,387 88,387 86,953 86,953 Effect of dilutive securities: Trust preferred securities - 4,256 - 4,256 Preferred stock - - - 3,211 Stock options - 4 - 87 ------ ------ ------ ------ Average common shares and dilutive effect 88,387 92,647 86,953 94,507 ====== ====== ====== ====== Net income per share $.60 $.59 $1.53 $1.46 ====== ====== ====== ======
16 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 9. (Continued)
COMPUTATION OF INCOME PER SHARE Six Months Ended June 30 1999 1998 Basic Diluted Basic Diluted - -------------------------------------------------------------------------------- Marathon Group Net income (millions) $253 $253 $345 $345 ====== ====== ====== ====== Shares of common stock outstanding (thousands): Average number of common shares outstanding 309,041 309,041 289,220 289,220 Effect of dilutive stock options - 291 - 659 ------ ------ ------ ------ Average common shares and dilutive effect 309,041 309,332 289,220 289,879 ====== ====== ====== ====== Net income per share $.82 $.82 $1.19 $1.19 ====== ====== ====== ====== U. S. Steel Group Net income (millions): Income before extraordinary loss $46 $46 $223 $223 Dividends on preferred stock 5 5 5 - Extraordinary loss 5 5 - - ------ ------ ------ ------ Net income applicable to Steel Stock 36 36 218 223 Effect of dilutive convertible securities - - - 4 ------ ------ ------ ------ Net income assuming conversions $36 $36 $218 $227 ====== ====== ====== ====== Shares of common stock outstanding (thousands): Average number of common shares outstanding 88,378 88,378 86,777 86,777 Effect of dilutive securities: Trust preferred securities - - - 4,256 Preferred stock - - - 3,211 Stock options - 1 - 70 ------ ------ ------ ------ Average common shares and dilutive effect 88,378 88,379 86,777 94,314 ====== ====== ====== ====== Per share: Income before extraordinary loss $.47 $.47 $2.51 $2.41 Extraordinary loss .06 .06 - - ------ ------ ------ ------ Net income $.41 $.41 $2.51 $2.41 ====== ====== ====== ======
17 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 10. During 1997, Marathon Oil Company (Marathon) and Ashland Inc. (Ashland) agreed to combine the major elements of their refining, marketing and transportation (RM&T) operations. On January 1, 1998, Marathon transferred certain RM&T net assets to MAP, a new consolidated subsidiary. Also on January 1, 1998, Marathon acquired certain RM&T net assets from Ashland in exchange for a 38% interest in MAP. The acquisition was accounted for under the purchase method of accounting. The purchase price was determined to be $1.9 billion, based upon an external valuation. The change in Marathon's ownership interest in MAP resulted in a gain of $246 million, which is included in the first six months 1998 revenues. Effective August 11, 1998, Marathon acquired Tarragon Oil and Gas Limited (Tarragon), a Canadian oil and gas exploration and production company. Results for 1999 include the operations of Marathon Canada Limited, formerly known as Tarragon. 11. Inventories are carried at lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method.
(In millions) ------------------------ June 30 December 31 1999 1998 ------- ----------- Raw materials $840 $916 Semi-finished products 368 282 Finished products 1,370 1,205 Supplies and sundry items 165 156 ------ ------ Total (at cost) 2,743 2,559 Less inventory market valuation reserve 136 551 ------ ------ Net inventory carrying value $2,607 $2,008 ====== ======
The inventory market valuation reserve reflects the extent that the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. The reserve is decreased to reflect increases in market prices and inventory turnover and increased to reflect decreases in market prices. Changes in the inventory market valuation reserve result in noncash charges or credits to costs and expenses. For additional information, see discussion of results of operations in the Marathon Group's Management's Discussion and Analysis of Financial Condition and Results of Operations. 12. In 1997, USX sold its stock in Delhi Gas Pipeline Corporation and other subsidiaries of USX that comprised all of the Delhi Group. The net proceeds of the sale of $195 million were used to redeem all shares of USX- Delhi Group Common Stock (Delhi Stock) and were distributed to the holders thereof on January 26, 1998. After the redemption, 50,000,000 shares of Delhi Stock remain authorized but unissued. 18 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 13. At June 30, 1999, USX had $400 million in borrowings against its $2,350 million long-term revolving credit agreement. At June 30, 1999, MAP had no borrowings against its $500 million revolving credit agreements with banks or its $190 million revolving credit agreement with Ashland. USX has a short-term credit agreement totaling $125 million at June 30, 1999. Interest is based on the bank's prime rate or London Interbank Offered Rate (LIBOR), and carries a facility fee of .15%. Certain other banks provide short-term lines of credit totaling $150 million which require a .125% fee or maintenance of compensating balances of 3%. At June 30, 1999, there were no borrowings against these facilities. USX had other outstanding short-term borrowings of $149 million. In the event of a change in control of USX, debt obligations totaling $3,571 million at June 30, 1999, may be declared immediately due and payable. 14. In the first quarter of 1999, USX issued $300 million in aggregate principal amount of 6.65% Notes due 2006. On March 31, 1999, USX extinguished $117 million of indexed debt, representing 6-3/4% Exchangeable Notes due February 1, 2000. See Note 2 for further discussion. 15. USX has an agreement (the program) to sell an undivided interest in certain accounts receivable of the U. S. Steel Group. 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 June 30, 1999, 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 USX does not have a sufficient quantity of eligible accounts receivable to reinvest in for the buyers, the size of the program will be reduced accordingly. The buyers have rights to a pool of receivables that must be maintained at a level of at least 115% of the program's size. In the event of a change in control of USX, as defined in the agreement, USX may be required to forward payments collected on sold accounts receivable to the buyers. 16. 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. 19 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 16. (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 June 30, 1999, and December 31, 1998, accrued liabilities for remediation totaled $160 million and $145 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 $47 million at June 30, 1999, and $41 million at December 31, 1998. For a number of years, USX has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the six months of 1999 and for the years 1998 and 1997, such capital expenditures totaled $42 million, $173 million and $134 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 June 30, 1999, and December 31, 1998, accrued liabilities for platform abandonment and dismantlement totaled $142 million and $141 million, respectively. Guarantees by USX of the liabilities of affiliated entities totaled $218 million at June 30, 1999. In the event that any defaults of guaranteed liabilities occur, USX has access to its interest in the assets of most of the affiliates to reduce losses resulting from these guarantees. As of June 30, 1999, the largest guarantee for a single affiliate was $131 million. At June 30, 1999, USX's pro rata share of obligations of LOOP LLC and various pipeline affiliates secured by throughput and deficiency agreements totaled $163 million. Under the agreements, USX is required to advance funds if the affiliates are unable to service debt. Any such advances are prepayments of future transportation charges. Contract commitments to acquire property, plant and equipment and long-term investments at June 30, 1999, totaled $983 million compared with $812 million at December 31, 1998. 20 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 17. On April 12, 1999, USX and Kobe Steel, Ltd. (Kobe Steel) announced that they had entered into a letter of intent with Blackstone Capital Partners II (Blackstone) to combine the steelmaking and bar producing assets of USS/Kobe Steel Company (USS/Kobe) with companies controlled by Blackstone, Republic Technologies International, Inc., Republic Engineered Steels, Inc. and Bar Technologies, Inc. (collectively Republic). In addition, on August 6, 1999, USX agreed to a $15 million equity investment in Republic when the combination is consummated. USX currently owns 50% of USS/Kobe and will own approximately 15% of Republic. The seamless pipe business of USS/Kobe is excluded from this transaction and will continue to operate as a joint venture between USX and Kobe Steel. The transaction was subject to numerous conditions, including financing. As of the date of issuance of the accompanying financial statements, it was uncertain whether several of these conditions would be resolved and the transaction would be completed. Due to these uncertainties, neither USX nor USS/Kobe recognized any financial effects of the transaction in the second quarter 1999. On August 6, 1999, Republic received financing commitments sufficient to complete the transaction, which is scheduled to be closed on August 13, 1999. The estimated fair value of USX's investment in Republic, based upon preliminary information supplied by Republic, is approximately $80 million less than USX's carrying value of its investment in the steelmaking and bar producing assets of USS/Kobe. Based on the resolution of the uncertainties and the anticipated closing of the transaction, USX expects to recognize an estimated impairment of $80 million in the third quarter of 1999. 21
USX CORPORATION RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS TOTAL ENTERPRISE BASIS - (Unaudited) ---------------------------------------------------------- Six Months Ended June 30 Year Ended December 31 - --------------------- ------------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- ---- 3.89 5.48 3.36 3.92 3.62 1.49 2.01 ==== ==== ==== ==== ==== ==== ====
USX CORPORATION RATIO OF EARNINGS TO FIXED CHARGES TOTAL ENTERPRISE BASIS - (Unaudited) ------------------------------------------------- Six Months Ended June 30 Year Ended December 31 - --------------------- ------------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- ---- 4.00 5.67 3.47 4.11 3.90 1.62 2.18 ==== ==== ==== ==== ==== ==== ====
22 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- USX Corporation ("USX") is a diversified company that is principally engaged in the energy business through its Marathon Group and in the steel business through its U. S. Steel Group. The following discussion should be read in conjunction with the second quarter and first six months of 1999 USX Consolidated Financial Statements and selected notes. For income per common share amounts applicable to USX's two classes of common stock, USX-Marathon Group Common Stock ("Marathon Stock") and USX-U. S. Steel Group Common Stock ("Steel Stock"), see Consolidated Statement of Operations - Income per Common Share. For Group results, see Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group and the U. S. Steel Group. For operating statistics, see Supplemental Statistics following Management's Discussion and Analysis of Financial Condition and Results of Operations for the respective Groups. Certain sections of Management's Discussion and Analysis include forward- looking statements concerning trends or events potentially affecting USX. These statements typically contain words such as "anticipates", "believes", "estimates", "expects" or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in the forward-looking statements. For additional risk factors affecting the businesses of USX, see Supplementary Data - Disclosures About Forward-Looking Statements in the USX 1998 Form 10-K. 23 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Results of Operations - --------------------- Revenues for the second quarter and the first six months of 1999 and 1998 are set forth in the following table:
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 1999 1998 1999 1998 ------ ------ ------ ------ Revenues Marathon Group $5,481 $5,530 $10,332 $11,041 U. S. Steel Group 1,304 1,733 2,515 3,429 Eliminations (19) (3) (27) (10) ------ ------ ------- ------- Total USX Corporation revenues $6,766 $7,260 $12,820 $14,460 Less: Excise taxes (a)(b) 1,003 958 1,916 1,834 Matching buy/sell transactions (a)(c) 698 994 1,570 1,982 ------ ------ ------ ------ Revenues excluding above items $5,065 $5,308 $9,334 $10,644 ====== ====== ====== ====== - ------ (a) Included in both revenues and costs and expenses for the Marathon Group and USX consolidated. (b) Consumer excise taxes on petroleum products and merchandise. (c) Matching crude oil and refined products buy/sell transactions settled in cash.
Revenues (excluding excise taxes and matching buy/sell transactions) decreased by $243 million in the second quarter of 1999 as compared with the second quarter of 1998, reflecting a decrease of $429 million for the U. S. Steel Group offset by an increase of $202 million for the Marathon Group. For the first six months of 1999 revenues decreased $1,310 million as compared with the same period of 1998, reflecting decreases of $379 million for the Marathon Group and $914 million for the U. S. Steel Group. For discussion of revenues by Group, see Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group and the U. S. Steel Group. 24 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Income from operations for the second quarter and the first six months of 1999 and 1998 are set forth in the following table:
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 1999 1998 1999 1998 ------ ------ ------ ------ Reportable segments Marathon Group Exploration & production $124 $73 $160 $197 Refining, marketing & transportation 228 397 273 525 Other energy related businesses 19 3 34 17 ---- ---- ---- ---- Income for reportable segments - Marathon Group $371 $473 $467 $739 U. S. Steel Group Income for reportable segment (9) 154 (68) 260 --- ---- ---- ---- Income for reportable segments - USX Corporation 362 627 399 999 Items not allocated to segments: Marathon Group 28 (20) 335 116 U. S. Steel Group 112 63 169 119 ---- ---- ---- ---- Total income from operations - USX Corporation $502 $670 $903 $1,234
Income for reportable segments decreased by $265 million in the second quarter of 1999 as compared with the second quarter of 1998, reflecting decreases of $102 million for the Marathon Group reportable segments and $163 million for U. S. Steel Group reportable segment. Income for reportable segments in the first six months of 1999 decreased by $600 million compared with the first six months of 1998, reflecting decreases of $272 million for the Marathon Group reportable segments and $328 million for U. S. Steel Group reportable segment. For discussion of income from operations see Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group and the U. S. Steel Group. 25 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Net interest and other financial costs for the second quarter and first six months of 1999 and 1998 are set forth in the following table:
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 1999 1998 1999 1998 ------ ------ ------ ------ Net interest and other financial costs $91 $71 $174 $153 Less: Favorable (unfavorable) adjustment to carrying value of indexed debt (a) - - 13 (4) ----- ------ ------ ------ Net interest and other financial costs adjusted to exclude above item $91 $71 $187 $149 ===== ====== ====== ====== - ------ (a) For discussion, see Note 2 to the USX Consolidated Financial Statements.
Adjusted net interest and other financial costs increased by $20 million in the second quarter of 1999 and $38 million in the first six months of 1999 as compared with the same periods of 1998, due primarily to increased costs resulting from higher average debt levels and lower interest income. Provisions for estimated income taxes of $110 million and $173 million for the second quarter and the first six months of 1999 were based on tax rates and amounts that recognize management's best estimate of current and deferred tax assets and liabilities. The U. S. Steel Group's provision for estimated income taxes for the second quarter and first six months of 1998 included a $9 million favorable foreign tax adjustment as a result of a favorable resolution of foreign tax litigation. Extraordinary loss on extinguishment of debt of $5 million, net of a $3 million income tax benefit, in the first six months of 1999 represents prepaid interest expense and the write-off of unamortized debt issue costs resulting from the satisfaction of USX's obligation of its indexed debt in the first quarter of 1999. For further discussion, see Note 2 to the USX Consolidated Financial Statements. Net income was $189 million for the second quarter of 1999, a decrease of $109 million from the second quarter of 1998 reflecting decreases of $28 million for the Marathon Group and $81 million for the U. S. Steel Group. Net income was $294 million for the first six months of 1999, a decrease of $274 million as compared with the first six months of 1998, reflecting decreases of $92 million for the Marathon Group and $182 million for the U. S. Steel Group. 26 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Dividends to Stockholders - ------------------------- On July 27, 1999, the USX Board of Directors (the "Board") declared dividends of 21 cents per share on Marathon Stock and 25 cents per share on Steel Stock, payable September 10, 1999, to stockholders of record at the close of business on August 18, 1999. The Board also declared a dividend of $0.8125 per share on USX's 6.50% Cumulative Convertible Preferred Stock, payable September 30, 1999, to stockholders of record at the close of business on August 31, 1999. On July 27, 1999, Marathon Oil Canada Limited, an indirect subsidiary of Marathon Oil Company, declared a dividend of CDN $0.3178 per share on its non- voting Exchangeable Shares, payable September 10, 1999, to stockholders of record at the close of business on August 18, 1999. Cash Flows - ---------- Cash and cash equivalents totaled $99 million at June 30, 1999, compared with $605 million at June 30, 1998, a decrease of $506 million reflecting a $510 million decrease for the Marathon Group offset by a $4 million increase for the U. S. Steel Group. The decrease for the Marathon Group was primarily the result of a temporary change in excise tax payment patterns in 1998 that reversed later in the year. Net cash provided from operating activities totaled $461 million in the first six months of 1999, a $628 million decrease from the first six months of 1998, reflecting a $510 million decrease for the Marathon Group and a $118 million decrease for the U. S. Steel Group. The decrease for the Marathon Group mainly reflected lower profitability, unfavorable working capital changes and an increase from the previous period in the amount distributed by MAP to Ashland. Capital expenditures for property, plant and equipment in the first six months of 1999 were $685 million compared with $686 million for the first six months of 1998. For further details, see USX Corporation - Financial Statistics, following Management's Discussion and Analysis of Financial Condition and Results of Operations. Loans and advances to affiliates were $56 million in the first six months of 1999 compared with $58 million in the first six months of 1998. Cash outflows in both periods mainly reflected funding by the Marathon Group to equity affiliates for capital projects, primarily the Sakhalin II project in Russia. Repayments of loans and advances from affiliates were $63 million in the first six months of 1998 as a result of repayments by Sakhalin Energy Investment Company, Ltd. of advances made by the Marathon Group in conjunction with the Sakhalin II project in Russia. Contract commitments to acquire property, plant and equipment and long-term investments at June 30, 1999, totaled $983 million compared with $812 million at December 31, 1998. The increase was primarily due to the pending acquisition of certain Ultramar Diamond Shamrock refining, marketing and transportation. USX's total long-term debt, preferred stock of subsidiary, USX obligated preferred securities of a subsidary trust and notes payable, totaled $4,722 million at June 30, 1999, up $154 million from December 31, 1998 primarily due to the issuance of the 6.65% Notes due 2006 and an increase in commercial paper issuances partially offset by repayments on revolving credit agreements and the settlement of the indexed debt. 27 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Liquidity - --------- At June 30, 1999, USX had $400 million of borrowings against its $2,350 million long-term revolving credit agreement and $149 million of borrowings against other short-term lines. There were no borrowings against the MAP revolving credit agreements at June 30, 1999. USX management believes that its short-term and long-term liquidity is adequate to satisfy its obligations as of June 30, 1999, 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 1999 and years 2000 and 2001, and any amounts that may ultimately be paid in connection with contingencies (which are discussed in Note 16 to the USX Consolidated Financial Statements), are expected to be financed by a combination of internally generated funds, proceeds from the sale of stock, borrowings and other external financing sources. USX management's opinion concerning liquidity and USX's ability to avail itself in the future of the financing options mentioned in the above forward- looking statements are based on currently available information. To the extent that this information proves to be inaccurate, future availability of financing may be adversely affected. Factors that could affect the availability of financing include the performance of each Group (as measured by various factors including cash provided from operating activities), the state of worldwide debt and equity markets, investor perceptions and expectations of past and future performance, the overall U.S. financial climate, and, in particular, with respect to borrowings, by levels of USX's outstanding debt and credit ratings by rating agencies. Environmental Matters, Contingencies and Commitments - ---------------------------------------------------- USX has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of USX's products and services, operating results will be adversely affected. USX believes that domestic competitors of the U. S. Steel Group and substantially all the competitors of the Marathon Group are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and the specific products and services it provides. USX has been notified that it is a potentially responsible party ("PRP") at 41 waste sites under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of June 30, 1999. In addition, there are 19 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 140 additional sites, excluding retail gasoline stations, where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. Of these sites, 17 were associated with properties conveyed to MAP by Ashland for which Ashland has retained liability for all costs associated with remediation. At many of these sites, 28 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- 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. In October 1998, the National Enforcement Investigations Center and Region V of the United States Environmental Protection Agency ("EPA")conducted a multi- media inspection of MAP's Detroit refinery. Subsequently, in November 1998, Region V conducted a multi-media inspection of MAP's Robinson refinery. These inspections covered compliance with the Clean Air Act (New Source Performance Standards, Prevention of Significant Deterioration, and the National Emission Standards for Hazardous Air Pollutants for Benzene), the Clean Water Act (Permit exceedances for the Waste Water Treatment Plant), reporting obligations under the Emergency Planning and Community Right to Know Act and the handling of process waste. Thus far, MAP has been served with two Notices of Violation ("NOV") and two Findings of Violation in connection with the multi-media inspection at its Detroit refinery, and a NOV as a result of the inspection at its Robinson refinery. MAP can contest the factual and the legal basis for the allegations prior to the EPA taking enforcement action. At this time, it is not known when complete findings on the results of these multi-media inspections will be issued. 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 16 to the USX Consolidated Financial Statements for a discussion of certain of these matters). The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the USX Consolidated Financial Statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably. See discussion of Liquidity herein. Outlook - ------- See Outlook in Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group and the U. S. Steel Group. Year 2000 Readiness Disclosure - ------------------------------ See Year 2000 Readiness Disclosure in Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group and the U. S. Steel Group. 29 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Accounting Standard - ------------------- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". This new standard requires recognition of all derivatives as either assets or liabilities at fair value. This new standard may result in additional volatility in both current period earnings and other comprehensive income as a result of recording recognized and unrecognized gains and losses resulting from changes in the fair value of derivative instruments. At adoption this new standard requires a comprehensive review of all outstanding derivative instruments to determine whether or not their use meets the hedge accounting criteria. Upon adoption, there may be derivative instruments employed by USX that do not meet all of the designated hedge criteria and they will be reflected in income on a mark-to-market basis. Based upon the strategies currently used by USX and the level of activity related to forward exchange contracts and commodity-based derivative instruments in recent periods, USX does not anticipate the effect of adoption to have a material impact on either financial position or results of operations. The effective date of SFAS No. 133 was amended by SFAS No. 137. USX plans to adopt the standard effective January 1, 2001, as required. 30 USX CORPORATION AND SUBSIDIARY COMPANIES QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------- Management Opinion Concerning Derivative Instruments - -------------------------------------- USX utilizes derivative instruments principally in hedging activities, whereby gains and losses are generally offset by price changes in the underlying commodity. Recently, the Marathon Group's risk management policy was expanded to include the use of derivative instruments for certain nonhedging and trading activities. These instruments will be marked-to-market each period and the related income or loss will be included in income from operations. Management believes that use of derivative instruments along with risk assessment procedures and internal controls does not expose USX to material risk. The use of derivative instruments could materially affect USX's results of operations in particular quarterly or annual periods. However, management believes that use of derivative instruments will not have a material adverse effect on financial position or liquidity. Commodity Price Risk and Related Risks - -------------------------------------- Sensitivity analysis of the incremental effects on pretax income of hypothetical 10% and 25% changes in commodity prices for open derivative commodity instruments as of June 30, 1999 are provided in the following table(a):
Incremental Decrease in Pretax Income Assuming a Hypothetical Price Change of(a) (Dollars in millions) 10% 25% - -------------------------------------------------------------------------------- Derivative Commodity Instruments Marathon Group (b) (c) Crude oil (price increase) (d) $21.8 $56.9 Natural gas (price decrease) (d) 9.6 24.8 Refined products (price increase) (d) .1 .2 U. S. Steel Group Natural gas (price decrease) (d) $2.5 $6.3 Zinc (price decrease) (d) 3.0 7.6 Tin (price decrease) (d) .4 .7 Nickel (price decrease) (d) .1 .2 (a) Gains and losses on derivative commodity instruments are generally offset by price changes in the underlying commodity. Effects of these offsets are not reflected in the sensitivity analyses. Amounts reflect the estimated incremental effect on pretax income of hypothetical 10% and 25% changes in closing commodity prices for each open contract position at June 30, 1999. Marathon Group and U. S. Steel Group management evaluate their portfolios of derivative commodity instruments on an ongoing basis and add or revise strategies to reflect anticipated market conditions and changes in risk profiles. Changes to the portfolios subsequent to June 30, 1999, would cause future pretax income effects to differ from those presented in the table.
31 USX CORPORATION AND SUBSIDIARY COMPANIES QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------- (b) The number of net open contracts varied throughout second quarter 1999, from a low of 2,476 contracts at June 30, 1999, to a high of 34,199 contracts at April 16, 1999, and averaged 25,914 for the quarter. The derivative commodity instruments used and hedging positions taken also varied throughout second quarter 1999, and will continue to vary in the future. Because of these variations in the composition of the portfolio over time, the number of open contracts, by itself, cannot be used to predict future income effects. (c) The calculation of sensitivity amounts for basis swaps assumes that the physical and paper indices are perfectly correlated. Gains and losses on options are based on changes in intrinsic value only. (d) The direction of the price change used in calculating the sensitivity amount for each commodity reflects that which would result in the largest incremental decrease in pretax income when applied to the derivative commodity instruments used to hedge that commodity. Interest Rate Risk - ------------------ As of June 30, 1999, the discussion of USX's interest rate risk has not changed materially from that presented in Quantitative and Qualitative Disclosures About Market Risk included in USX's 1998 Form 10-K. Foreign Currency Exchange Rate Risk - ----------------------------------- As of June 30, 1999, the discussion of USX's foreign currency exchange rate risk has not changed materially from that presented in Quantitative and Qualitative Disclosures About Market Risk included in USX's 1998 Form 10-K. Equity Price Risk - ----------------- USX was subject to equity price risk resulting from its issuance in December 1996 of $117 million of 6 3/4% Exchangeable Notes due February 1, 2000 ("indexed debt"). However, on March 31, 1999, USX irrevocably deposited with a trustee the entire 5.5 million shares it owned in RTI. The deposit of shares resulted in the satisfaction of USX's obligation under the indexed debt. Under the terms of the indenture, the trustee will exchange the RTI shares for the notes at maturity. USX is no longer exposed to any negative risks associated with changes in the value of RTI common stock. For further discussion, see Note 2 to the USX Consolidated Financial Statements. Safe Harbor - ----------- USX's Quantitative and Qualitative Disclosures About Market Risk include forward-looking statements with respect to management's opinion about risks associated with USX's use of derivative instruments. These statements are based on certain assumptions with respect to market prices and industry supply and demand for crude oil, natural gas, refined products, steel products and certain raw materials. To the extent that these assumptions prove to be inaccurate, future outcomes with respect to USX's derivative usage may differ materially from those discussed in the forward-looking statements. 32
USX CORPORATION FINANCIAL STATISTICS (Unaudited) -------------------------------- Second Quarter Six Months Ended Ended June 30 June 30 -------------- -------------- (Dollars in millions) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------ REVENUES Marathon Group $5,481 $5,530 $10,332 $11,041 U. S. Steel Group 1,304 1,733 2,515 3,429 Eliminations (19) (3) (27) (10) ------- ------- ------- ------- Total $6,766 $7,260 $12,820 $14,460 INCOME FROM OPERATIONS Marathon Group $399 $453 $802 $855 U. S. Steel Group 103 217 101 379 ------ ------ ------ ------ Total $502 $670 $903 $1,234 CASH FLOW DATA - -------------- CAPITAL EXPENDITURES Marathon Group $336 $331 $532 $550 U. S. Steel Group 74 79 153 136 ------ ------ ------ ------ Total $410 $410 $685 $686 INVESTMENTS (RETURNS) & OTHER AFFILIATE ACTIVITY - NET Marathon Group $37 $(22) $56 $3 U. S. Steel Group - - - 63 ------ ------ ------ ------ Total $37 $(22) $56 $66
33 Part I - Financial Information (Continued): B. Marathon Group
MARATHON GROUP OF USX CORPORATION STATEMENT OF OPERATIONS (Unaudited) ----------------------------------- Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions, except per share amounts) 1999 1998 1999 1998 - -------------------------------------------------------------------------------- REVENUES: Sales $5,447 $5,496 $10,287 $10,733 Dividend and affiliate income 28 18 44 28 Gain (loss) on disposal of assets (1) 13 (11) 16 Gain on ownership change in Marathon Ashland Petroleum LLC - (2) - 246 Other income 7 5 12 18 ------ ------ ------ ------ Total revenues 5,481 5,530 10,332 11,041 ------ ------ ------ ------ COSTS AND EXPENSES: Cost of sales (excludes items shown below) 3,669 3,662 7,074 7,385 Selling, general and administrative expenses 132 120 254 251 Depreciation, depletion and amortization 222 209 459 479 Taxes other than income taxes 1,066 1,014 2,036 1,942 Exploration expenses 59 75 122 157 Inventory market valuation credits (66) (3) (415) (28) ------ ------ ------ ------ Total costs and expenses 5,082 5,077 9,530 10,186 ------ ------ ------ ------ INCOME FROM OPERATIONS 399 453 802 855 Net interest and other financial costs 71 49 146 103 Minority interest in income of Marathon Ashland Petroleum LLC 112 158 257 212 ------ ------ ------ ------ INCOME BEFORE INCOME TAXES 216 246 399 540 Provision for estimated income taxes 82 84 146 195 ------ ------ ------ ------ NET INCOME $134 $162 $253 $345 ====== ====== ====== ====== MARATHON STOCK DATA: Net income per share - Basic and diluted $.43 $.56 $.82 $1.19 Dividends paid per share .21 .21 .42 .42 Weighted average shares, in thousands - Basic 309,054 289,591 309,041 289,220 - Diluted 309,462 290,263 309,332 289,879 Selected notes to financial statements appear on pages 36-44.
34
MARATHON GROUP OF USX CORPORATION BALANCE SHEET (Unaudited) --------------------------------- June 30 December 31 (Dollars in millions) 1999 1998 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $79 $137 Receivables, less allowance for doubtful accounts of $3 and $3 1,296 1,277 Inventories 1,839 1,310 Deferred income tax benefits 81 80 Other current assets 230 172 ------ ------ Total current assets 3,525 2,976 Investments and long-term receivables 652 603 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $10,557 and $10,299 10,224 10,429 Prepaid pensions 203 241 Other noncurrent assets 301 295 ------ ------ Total assets $14,905 $14,544 ====== ====== LIABILITIES Current liabilities: Notes payable $132 $132 Accounts payable 1,940 1,980 Payroll and benefits payable 130 150 Distribution payable to minority shareholder of Marathon Ashland Petroleum LLC - 103 Accrued taxes 173 99 Accrued interest 92 87 Long-term debt due within one year 67 59 ------ ------ Total current liabilities 2,534 2,610 Long-term debt, less unamortized discount 3,568 3,456 Long-term deferred income taxes 1,482 1,450 Employee benefits 542 553 Deferred credits and other liabilities 411 389 Preferred stock of subsidiary 184 184 Minority interest in Marathon Ashland Petroleum LLC 1,744 1,590 COMMON STOCKHOLDERS' EQUITY 4,440 4,312 ------ ------ Total liabilities and common stockholders' equity $14,905 $14,544 ====== ====== Selected notes to financial statements appear on pages 36-44.
35
MARATHON GROUP OF USX CORPORATION STATEMENT OF CASH FLOWS (Unaudited) ----------------------------------- Six Months Ended June 30 (Dollars in millions) 1999 1998 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income $253 $345 Adjustments to reconcile to net cash provided from operating activities: Minority interest in income of Marathon Ashland Petroleum LLC - net of distributions 51 82 Depreciation, depletion and amortization 459 479 Exploratory dry well costs 62 97 Inventory market valuation credits (415) (28) Pensions and other postretirement benefits 27 6 Deferred income taxes 49 91 Gain on ownership change in Marathon Ashland Petroleum LLC - (246) (Gain) loss on disposal of assets 11 (16) Changes in: Current receivables (265) 161 Inventories (151) (160) Current accounts payable and accrued expenses 333 105 All other - net (77) (69) ------ ------ Net cash provided from operating activities 337 847 ------ ------ INVESTING ACTIVITIES: Capital expenditures (532) (550) Disposal of assets 178 30 Restricted cash -withdrawals 39 4 - deposits (20) (387) Affiliates - investments - net - (8) - loans and advances (56) (58) - repayments of loans and advances - 63 All other - net - 13 ------ ------ Net cash used in investing activities (391) (893) ------ ------ FINANCING ACTIVITIES: Increase in Marathon Group's portion of USX consolidated debt 119 292 Specifically attributed debt- borrowings 140 379 - repayments (140) - Marathon Stock issued 8 50 Dividends paid (130) (122) ------ ------ Net cash provided from (used in) financing activities (3) 599 ------ ------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (1) - ------ ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (58) 553 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 137 36 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $79 $589 ====== ====== Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $(136) $(105) Income taxes paid, including settlements with the U. S. Steel Group (7) (136) Selected notes to financial statements appear on pages 36-44.
36 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS -------------------------------------- (Unaudited) 1. The information furnished in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. Certain reclassifications of prior year data have been made to conform to 1999 classifications. Additional information is contained in the USX Annual Report on Form 10-K for the year ended December 31, 1998. 2. The financial statements of the Marathon Group include the financial position, results of operations and cash flows for the businesses of Marathon Oil Company (Marathon) and certain other subsidiaries of USX, and a portion of the corporate assets and liabilities and related transactions which are not separately identified with ongoing operating units of USX. These financial statements are prepared using the amounts included in the USX consolidated financial statements. Corporate amounts reflected in these financial statements are determined based upon methods which management believes to be reasonable. The accounting policies applicable to the preparation of the financial statements of the Marathon Group may be modified or rescinded in the sole discretion of the Board of Directors of USX (Board), although the Board has no present intention to do so. The Board may also adopt additional policies depending on the circumstances. Although the financial statements of the Marathon Group and the U. S. Steel Group separately report the assets, liabilities (including contingent liabilities) and stockholders' equity of USX attributed to each such Group, such attribution of assets, liabilities (including contingent liabilities) and stockholders' equity between the Marathon Group and the U. S. Steel Group for the purpose of preparing their respective financial statements does not affect legal title to such assets and responsibility for such liabilities. Holders of USX-Marathon Group Common Stock (Marathon Stock) and USX-U. S. Steel Group Common Stock (Steel Stock) are holders of common stock of USX and continue to be subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts arising from one Group that affect the overall cost of USX's capital could affect the results of operations and financial condition of the other Group. In addition, net losses of either Group, as well as dividends or distributions on any class of USX Common Stock or series of Preferred Stock and repurchases of any class of USX Common Stock or series of Preferred Stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on both classes of Common Stock. Accordingly, the USX consolidated financial information should be read in connection with the Marathon Group financial information. 37 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 2. (Continued) The financial statement provision for estimated income taxes and related tax payments or refunds have been reflected in the Marathon Group and the U. S. Steel Group financial statements in accordance with USX's tax allocation policy for such groups. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated between the Marathon Group and the U. S. Steel Group for group financial statement purposes, based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to the respective groups. The provision for 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 and U. S. Steel Groups and USX consolidated are allocated to each group based on the relationship of the individual group provisions to the combined interim provisions. 3. The Marathon Group's total comprehensive income for the second quarter of 1999 and 1998 was $134 million and $160 million, respectively, and $255 million and $344 million for the six months of 1999 and 1998, respectively. 4. In the second quarter of 1999, Marathon Ashland Petroleum LLC (MAP) sold Scurlock Permian LLC (Scurlock), its crude oil gathering business, to Plains Marketing, L.P for $136 million. During the first six months of 1999, MAP recorded a pretax loss of $16 million related to the sale. Scurlock had been reported as part of the Marathon Group's refining, marketing and transportation operating segment. On June 1, 1999, the Marathon Group announced that it had signed a definitive agreement to sell Carnegie Natural Gas Company and affiliated subsidiaries (Carnegie) to Equitable Resources, Inc. The transaction is expected to close later this year. Carnegie is engaged in natural gas production, transmission, distribution, sales and storage activities in Pennsylvania and West Virginia. At June 30, 1999, the net assets held for sale have been included in other current assets in the balance sheet. During the second quarter of 1999, the Marathon Group recorded an estimated pretax loss of $7 million related to the sale. Carnegie has been reported as part of the Marathon Group's other energy related businesses operating segment. 5. The Marathon Group's operations consists of three reportable operating segments: 1) Exploration and Production (E&P) - explores for and produces crude oil and natural gas on a worldwide basis; 2) Refining, Marketing and Transportation (RM&T) - refines, markets and transports crude oil and petroleum products, primarily in the Midwest and southeastern United States through MAP; and 3) Other Energy Related Businesses (OERB). OERB is an aggregation of two segments which fall below the quantitative reporting thresholds: 1) Natural Gas and Crude Oil Marketing and Transportation - markets and transports its own and third-party natural gas and crude oil in the United States; and 2) Power Generation - develops, constructs and operates independent electric power projects worldwide. The results of segment operations are as follows: 38 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 5. (Continued)
Total (In millions) E&P RM&T OERB Segments - -------------------------------------------------------------------------------- SECOND QUARTER 1999 Revenues: Customer $689 $4,637 $113 $5,439 Intersegment (a) 34 4 6 44 Intergroup (a) 4 - 4 8 Equity in earnings of unconsolidated affiliates 3 4 5 12 Other 13 10 6 29 ------ ------ ------ ------ Total revenues $743 $4,655 $134 $5,532 ====== ====== ====== ====== Segment income $124 $228 $19 $371 ====== ====== ====== ====== SECOND QUARTER 1998 Revenues: Customer $499 $4,928 $66 $5,493 Intersegment (a) 41 1 2 44 Intergroup (a) 2 - 1 3 Equity in earnings of unconsolidated affiliates 2 3 1 6 Other 20 11 3 34 ------ ------ ------ ------ Total revenues $564 $4,943 $73 $5,580 ====== ====== ====== ====== Segment income $73 $397 $3 $473 ====== ====== ====== ====== (a) Intersegment and intergroup sales and transfers were conducted on an arm's- length basis.
39 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 5. (Continued)
Total (In millions) E&P RM&T OERB Segments - -------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, 1999 Revenues: Customer $1,261 $8,816 $195 $10,272 Intersegment (a) 68 9 15 92 Intergroup (a) 7 - 8 15 Equity in earnings of unconsolidated affiliates 4 7 13 24 Other 19 16 9 44 ------ ------ ------ ------ Total revenues $1,359 $8,848 $240 $10,447 ====== ====== ====== ====== Segment income $160 $273 $34 $467 ====== ====== ====== ====== SIX MONTHS ENDED JUNE 30, 1998 Revenues: Customer $1,017 $9,520 $162 $10,699 Intersegment (a) 84 2 4 90 Intergroup (a) 6 - 4 10 Equity in earnings of unconsolidated affiliates 1 6 6 13 Other 21 24 5 50 ------ ------ ------ ------ Total revenues $1,129 $9,552 $181 $10,862 ====== ====== ====== ====== Segment income $197 $525 $17 $739 ====== ====== ====== ====== (a) Intersegment and intergroup sales and transfers were conducted on an arm's- length basis.
40 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 5. (Continued) The following schedules reconcile segment revenues and income to amounts reported in the Marathon Group financial statements:
Second Quarter Ended June 30 (In millions) 1999 1998 - -------------------------------------------------------------------------------- Revenues: Revenues of reportable segments $5,532 $5,580 Items not allocated to segments: Loss on ownership change in MAP - (2) Other (7) - Elimination of intersegment revenues (44) (44) Administrative revenues - (4) ------ ------ Total Group revenues $5,481 $5,530 ====== ====== Income: Income for reportable segments $371 $473 Items not allocated to segments: Loss on ownership change in MAP - (2) Administrative expenses (31) (21) Inventory market valuation adjustments 66 3 Other (a) (7) - ------ ------ Total Group income from operations $399 $453 ====== ====== (a)Represents estimated loss on sale of Carnegie.
41 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 5. (Continued)
Six Months Ended June 30 (In millions) 1999 1998 - -------------------------------------------------------------------------------- Revenues: Revenues of reportable segments $10,447 $10,862 Items not allocated to segments: Gain on ownership in MAP - 246 Other (23) 24 Elimination of intersegment revenues (92) (90) Administrative revenues - (1) ------ ------ Total Group revenues $10,332 $11,041 ====== ====== Income: Income for reportable segments $467 $739 Items not allocated to segments: Gain on ownership in MAP - 246 Administrative expenses (57) (59) Inventory market valuation adjustments 415 28 Other (a) (23) (99) ------ ------ Total Group income from operations $802 $855 ====== ====== (a)Represents in 1999, loss on sale of Scurlock and Carnegie, and in 1998, international exploration and production property impairments, MAP transition charges and gas contract settlement.
6. The items below are included in both revenues and costs and expenses, resulting in no effect on income.
(In millions) ------------------------------- Second Quarter Six Months Ended Ended June 30 June 30 1999 1998 1999 1998 ---- ---- ---- ---- Consumer excise taxes on petroleum products and merchandise $1,003 $958 $1,916 $1,834 Matching crude oil and refined product buy/sell transactions settled in cash 698 994 1,570 1,982
PAGE> 42 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 7. The method of calculating net income per common share for the Marathon Stock and Steel Stock reflects the Board's intent that the separately reported earnings and surplus of the Marathon Group and the U. S. Steel Group, as determined consistent with the USX Restated Certificate of Incorporation, are available for payment of dividends on the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. Basic net income per share is based on the weighted average number of common shares outstanding. Diluted net income per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options, provided in each case, the effect is not antidilutive. See Note 9 of the Notes to USX Consolidated Financial Statements for the computation of income per share. 8. Inventories are carried at the lower of cost or market. Cost of inventories of crude oil and refined products is determined under the last- in, first-out (LIFO) method.
(In millions) ------------------------ June 30 December 31 1999 1998 ----------- ----------- Crude oil and natural gas liquids $712 $731 Refined products and merchandise 1,153 1,023 Supplies and sundry items 110 107 ------ ------ Total (at cost) 1,975 1,861 Less inventory market valuation reserve 136 551 ------ ------ Net inventory carrying value $1,839 $1,310 ====== ======
The inventory market valuation reserve reflects the extent that the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. The reserve is decreased to reflect increases in market prices and inventory turnover and increased to reflect decreases in market prices. Changes in the inventory market valuation reserve result in noncash charges or credits to costs and expenses. For additional information, see discussion of results of operations in the Marathon Group's Management's Discussion and Analysis of Financial Condition and Results of Operations. 9. At June 30, 1999, accounts payable includes an estimated income tax payable to the U. S. Steel Group of $24 million, determined in accordance with the tax allocation policy discussed in Note 2. PAGE> 43 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 10. During 1997, Marathon and Ashland Inc. (Ashland) agreed to combine the major elements of their refining, marketing and transportation (RM&T) operations. On January 1, 1998, Marathon transferred certain RM&T net assets to MAP, a new consolidated subsidiary. Also on January 1, 1998, Marathon acquired certain RM&T net assets from Ashland in exchange for a 38% interest in MAP. The acquisition was accounted for under the purchase method of accounting. The purchase price was determined to be $1.9 billion, based upon an external valuation. The change in Marathon's ownership interest in MAP resulted in a gain of $246 million, which is included in the first six months 1998 revenues. Effective August 11, 1998, Marathon acquired Tarragon Oil and Gas Limited (Tarragon), a Canadian oil and gas exploration and production company. Results for 1999 include the operations of Marathon Canada Limited, formerly known as Tarragon. 11. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Marathon Group involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Marathon Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Marathon Group. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. The Marathon Group is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At June 30, 1999, and December 31, 1998, accrued liabilities for remediation totaled $59 million and $48 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 $47 million at June 30, 1999, and $41 million at December 31, 1998. 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 six months of 1999 and for the years 1998 and 1997, such capital expenditures totaled $29 million, $124 million and $81 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. 44 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 11. (Continued) At June 30, 1999, and December 31, 1998, accrued liabilities for platform abandonment and dismantlement totaled $142 million and $141 million, respectively. Guarantees by USX and its consolidated subsidiaries of the liabilities of an affiliated entity of the Marathon Group totaled $131 million at June 30, 1999, and December 31, 1998. At June 30, 1999, the Marathon Group's pro rata share of obligations of LOOP LLC and various pipeline affiliates secured by throughput and deficiency agreements totaled $163 million. Under the agreements, the Marathon Group is required to advance funds if the affiliates are unable to service debt. Any such advances are prepayments of future transportation charges. The Marathon Group's contract commitments to acquire property, plant and equipment and long-term investments at June 30, 1999, totaled $861 million compared with $624 million at December 31, 1998. 45 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The Marathon Group includes Marathon Oil Company ("Marathon") and certain other subsidiaries of USX Corporation ("USX"), which are engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of petroleum products primarily through Marathon Ashland Petroleum ("MAP"), owned 62% by Marathon; and other energy related businesses. Net income and related per share amounts are net of Ashland Inc.'s 38% minority interest in MAP's income. The Management's Discussion and Analysis should be read in conjunction with the Marathon Group's Financial Statements and Notes to Financial Statements. The discussion of Results of Operations should be read in conjunction with the Supplemental Statistics provided on page 61. Certain sections of Management's Discussion and Analysis include forward- looking statements concerning trends or events potentially affecting the businesses of the Marathon Group. These statements typically contain words such as "anticipates", "believes", "estimates", "expects", "targets", "scheduled" or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in forward-looking statements. For additional risk factors affecting the businesses of the Marathon Group, see Supplementary Data - Disclosures About Forward-Looking Statements in the USX Annual Report on Form 10-K for the year ended December 31, 1998. 46 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Results of Operations - --------------------- Revenues for the second quarter and first six months of 1999 and 1998 are summarized in the following table:
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 1999 1998 1999 1998 ----- ----- ----- ----- Exploration & production ("E&P") $743 $564 $1,359 $1,129 Refining, marketing & transportation 4,655 4,943 8,848 9,552 Other energy related businesses 134 73 240 181 ------ ------ ------ ------ Revenues of reportable segments $5,532 $5,580 $10,447 $10,862 Items not allocated to segments: Gain on ownership change in MAP - (2) - 246 Other (a) (7) - (23) 24 Elimination of intersegment revenues (44) (44) (92) (90) Administrative revenues - (4) - (1) ------ ------ ------ ------ Total Group revenues $5,481 $5,530 $10,332 $11,041 ====== ====== ====== ======
Items included in both revenues and costs and expenses, resulting in no effect on income:
Consumer excise taxes on petroleum products and merchandise $1,003 $958 $1,916 $1,834 Matching crude oil and refined product buy/sell transactions settled in cash 698 994 1,570 1,982 - --------- (a)Represents in 1999, loss on sale of Scurlock and Carnegie, and in 1998, a gas contract settlement.
E&P revenues increased by $179 million in the second quarter of 1999 from the comparable prior-year period. The increase primarily reflected increased domestic liquid hydrocarbon prices and volumes. For the first six months of 1999, E&P revenues increased by $230 million from the prior-year period due to higher domestic liquid hydrocarbon volumes and prices and international gas volumes, partially offset by lower worldwide natural gas prices. Refining, marketing and transportation revenues decreased by $288 million in the second quarter of 1999 from the comparable prior-year period. The decrease primarily reflected the loss of revenues from Scurlock Permian LLC, partially offset by higher volumes of refined product sales, increased refined product prices and higher merchandise sales. For the first six months of 1999, refining, marketing and transportation revenues decreased by $704 million from the prior-year period primarily due to the factors discussed previously, except for refined product prices, which decreased. Merchandise sales increased by $52 million and $108 million from last year's second quarter and first six months, respectively. 47 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Other energy related businesses revenues increased by $61 million in the second quarter of 1999 from the comparable prior-year period. For the first six months of 1999, revenues increased by $59 million from the prior-year period. The increase in both periods primarily reflected increased oil and gas resale activity and higher equity earnings from increased pipeline throughput. Income from operations for the second quarter and first six months of 1999 and 1998 are set forth in the following table:
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 1999 1998 1999 1998 ----- ----- ----- ----- E&P Domestic $93 $41 $131 $115 International (a) 31 32 29 82 ------ ------ ------ ------ Income for E&P reportable segment 124 73 160 197 Refining, marketing & transportation 228 397 273 525 Other energy related businesses (b) 19 3 34 17 ------ ------ ------ ------ Income for reportable segments $371 $473 $467 $739 Items not allocated to segments: Administrative expenses (c) $(31) $(21) $(57) $(59) IMV reserve adjustment (d) 66 3 415 28 Estimated loss on sale of assets (e) (7) - (23) - Gain on ownership change & trans. charges-MAP (f) - (2) - 223 E&P int'l impairment & dom. contract settlement (g)- - - (76) ------ ------ ------ ------ Total Group income from operations $399 $453 $802 $855 ====== ====== ====== ====== - -------- (a)Where applicable, second quarter and six months 1999 results include Marathon Canada Limited, formerly Tarragon Oil and Gas Limited, which was acquired by Marathon on August 11, 1998. (b)Includes domestic natural gas and crude oil marketing and transportation, and power generation. (c)Includes the portion of the Marathon Group's administrative costs not charged to the operating segments and the portion of USX corporate general and administrative costs allocated to the Marathon Group. (d)The inventory market valuation ("IMV") reserve reflects the extent to which the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. See Note 8 to the Marathon Group Financial Statements. (e)For additional information regarding the loss on the sale of Scurlock Permian LLC and the estimated loss on the sale of Carnegie Natural Gas Company and affiliated subsidiaries, see Note 4 to the Marathon Group Financial Statements. (f)The gain on ownership change and one-time transition charges relate to the formation of MAP. For additional discussion of the gain on ownership change in MAP, see Note 10 to the Marathon Group Financial Statements. (g)This represents a write-off of certain non-revenue producing international investments and the gain from the resolution of contract disputes with a purchaser of the Marathon Group's natural gas production from certain domestic properties.
48 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Income for reportable segments in the second quarter of 1999 declined by $102 million from last year's second quarter, due primarily to lower refined product margins, partially offset by higher domestic liquid hydrocarbon prices and production and increased refined product sales volumes. Income for reportable segments in the first six months of 1999 decreased by $272 million from the first six months of 1998, due primarily to lower refined product margins and lower natural gas prices, partially offset by increased domestic liquid hydrocarbon production and higher domestic liquid hydrocarbon prices. Worldwide E&P ("upstream") segment income in the second quarter of 1999 increased by $51 million from last year's second quarter. Results in the first six months of 1999 decreased by $37 million from the same period in 1998. Domestic E&P income in the second quarter of 1999 increased by $52 million from last year's second quarter. This increase was mainly due to higher liquid hydrocarbon prices. Results in the first six months of 1999 increased by $16 million from the same period in 1998. The increase was primarily due to lower exploration expense, increased liquid hydrocarbon and natural gas production and increased liquid hydrocarbon prices, partially offset by lower natural gas prices. International E&P income in the second quarter of 1999 decreased by $1 million from last year's second quarter. Results in the first six months of 1999 decreased by $53 million from the same period in 1998. This decrease was mainly due to lower liquid hydrocarbon and natural gas production in Europe, higher exploration expense and lower natural gas prices. Refining, marketing and transportation ("downstream") segment income in the second quarter of 1999 decreased by $169 million from last year's second quarter. Results in the first six months 1999 decreased by $252 million from the same period in 1998. The decreases in both periods were mainly due to lower refined product margins, partially offset by recognized mark-to-market derivative gains from nonhedging activities, increased refined product sales volumes and increased merchandise sales at Speedway SuperAmerica LLC. Other energy related businesses segment income in the second quarter of 1999 increased by $16 million from last year's second quarter. Results in the first six months of 1999 increased by $17 million from the same period in 1998. The 1999 results included a reversal of abandonment accruals ($10 million) resulting from revised cost estimates and higher equity earnings as a result of increased pipeline throughput. Items not allocated to segments Administrative expenses in the second quarter of 1999 increased by $10 million from last year's second quarter. The increase was primarily due to higher accruals for employee benefit plans. IMV reserve adjustment - When U. S. Steel Corporation acquired Marathon Oil Company in March 1982, crude oil and refined product prices were at historically high levels. In applying the purchase method of accounting, the Marathon Group's crude oil and refined product inventories were revalued by reference to current prices at the time of acquisition, and this became the new LIFO cost basis of the inventories. Generally accepted accounting principles require that inventories be carried at lower of cost or market. Accordingly, the Marathon Group has established an IMV reserve to reduce the cost basis of its inventories to net realizable value. Quarterly adjustments to the IMV reserve result in noncash charges or credits to income from operations. 49 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- When Marathon acquired the crude oil and refined product inventories associated with Ashland's RM&T operations on January 1, 1998, the Marathon Group established a new LIFO cost basis for those inventories. The acquisition cost of these inventories lowered the overall average cost of the Marathon Group's combined RM&T inventories. As a result, the price threshold at which an IMV reserve will be recorded has also been lowered. This acquisition resulted in a one-time reduction in the IMV reserve, yielding a net favorable IMV reserve adjustment of $25 million in the first quarter of 1998. These adjustments affect the comparability of financial results from period to period as well as comparisons with other energy companies, many of which do not have such adjustments. Therefore, the Marathon Group reports separately the effects of the IMV reserve adjustments on financial results. In management's opinion, the effects of such adjustments should be considered separately when evaluating operating performance. Net interest and other financial costs in the first six months of 1999 increased by $43 million from the comparable 1998 period, mainly due to increased costs resulting from higher average debt levels and lower interest income. The provision for estimated income taxes in the first six months of 1999 decreased by $49 million from the comparable 1998 period due to a decline in income before taxes. Net income for the second quarter and first six months decreased by $28 million and $92 million, respectively, in 1999 from 1998, primarily reflecting the factors discussed above. Cash Flows - ---------- Net cash provided from operating activities was $337 million in the first six months of 1999, compared with $847 million in the first six months of 1998. The $510 million decrease mainly reflected lower profitability, unfavorable working capital changes and distributions by MAP to Ashland of $206 million in the first six months of 1999 as compared to $130 million in the comparable 1998 period. The favorable working capital change reported in the first six months of 1998 was due to a temporary change in excise tax payment patterns, which reversed later in the year. Capital expenditures in the first six months of 1999 totaled $532 million, compared with $550 million in the comparable 1998 period. For additional information regarding capital expenditures, refer to the Supplemental Statistics on page 61. Cash from disposal of assets was $178 million in the first six months 1999, compared with $30 million in the comparable 1998 period. Proceeds in 1999 were mainly from the sale of Scurlock Permian LLC and domestic production properties. 50 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The net change in restricted cash was a net withdrawal of $19 million in the first six months of 1999, compared to a net deposit of $383 million in the comparable 1998 period. The 1999 amount primarily represents net cash withdrawn for the purchase of domestic production properties. The 1998 amount primarily represents the proceeds from a Cdn$550 million loan agreement Marathon entered into to finance a portion of the Tarragon Oil and Gas Limited acquisition, which were restricted to collateralize a loan and invested in short-term investments. Loans and advances to affiliates were $56 million in the first six months of 1999, compared with $58 million in the comparable 1998 period. Cash outflows in both periods mainly reflected funding provided to equity affiliates for capital projects, primarily the Sakhalin II project in Russia. Repayments of loans and advances to affiliates were $63 million in the first six months of 1998 as a result of repayments by Sakhalin Energy Investment Company, Ltd. of advances made by Marathon in conjunction with the Sakhalin II project in Russia. Contract commitments for property, plant and equipment acquisitions and long-term investments at June 30, 1999 totaled $861 million compared with $624 million at December 31, 1998. The increase was primarily due to the pending acquisition of certain Ultramar Diamond Shamrock refining, marketing and transportation assets. Financial obligations, which consist of the Marathon Group's portion of USX debt and preferred stock of a subsidiary attributed to both groups, as well as debt specifically attributed to the Marathon Group, increased by $119 million in the first six months of 1999. Financial obligations increased primarily because capital expenditures and dividend payments exceeded cash from operating activities and proceeds from asset sales. These obligations were partially funded by a reduction in cash of $58 million. Derivative Instruments - ---------------------- See Quantitative and Qualitative Disclosure About Market Risk for discussion of derivative instruments and associated market risk for the Marathon Group. Liquidity - --------- For discussion of USX's liquidity and capital resources, see Management's Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and Liquidity. 51 MARATHON GROUP OF USX CORPORATION 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, power business or the marine transportation of crude oil and refined products. USX has been notified that it is a potentially responsible party ("PRP") at 16 waste sites related to the Marathon Group under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of June 30, 1999. In addition, there are 7 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 108 additional sites, excluding retail marketing outlets, related to the Marathon Group where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. Of these sites, 17 were associated with properties conveyed to MAP by Ashland for which Ashland has retained liability for all costs associated with remediation. At many 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. 52 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- In October 1998, the National Enforcement Investigations Center and Region V of the United States Environmental Protection Agency ("EPA") conducted a multi-media inspection of MAP's Detroit refinery. Subsequently, in November 1998, Region V conducted a multi-media inspection of MAP's Robinson refinery. These inspections covered compliance with the Clean Air Act (New Source Performance Standards, Prevention of Significant Deterioration, and the National Emission Standards for Hazardous Air Pollutants for Benzene), the Clean Water Act (Permit exceedances for the Waste Water Treatment Plant), reporting obligations under the Emergency Planning and Community Right to Know Act and the handling of process waste. Although MAP has been advised as to certain compliance issues regarding MAP's Detroit refinery, it is not known when complete findings on the results of the inspections will be issued. Thus far, MAP has been served with two Notices of Violation ("NOV") and two Findings of Violation in connection with the multi- media inspection at its Detroit refinery, and a NOV as a result of the inspection at its Robinson refinery. MAP can contest the factual and the legal basis for the allegations prior to the EPA taking enforcement action. At this time, it is not known when complete findings on the results of these multi-media inspections will be issued. 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 11 to the Marathon Group Financial Statements for a discussion of certain of these matters. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Marathon Group Financial Statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Marathon Group. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. Outlook - ------- The outlook regarding the Marathon Group's upstream revenues and income is largely dependent upon future prices and volumes of liquid hydrocarbons and natural gas. Prices have historically been volatile and have frequently been affected by unpredictable changes in supply and demand resulting from fluctuations in worldwide economic activity and political developments in the world's major oil and gas producing and consuming areas. Any significant decline in prices could have a material adverse effect on the Marathon Group's results of operations. A prolonged decline in such prices could also adversely affect the quantity of crude oil and natural gas reserves that can be economically produced and the amount of capital available for exploration and development. 53 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Marathon's 1999 worldwide liquid hydrocarbon production is currently estimated to average in the range of 215,000 to 220,000 barrels per day ("bpd"). Worldwide natural gas volumes for 1999 are expected to be approximately 1.35 billion cubic feet per day ("bcfpd"). These estimates reflect the anticipated sale of Marathon fields in Egypt, as well as timing delays in both domestic and international offshore developments. Marathon expects liquid hydrocarbon production to increase approximately seven percent annually in 2000 and 2001. Natural gas volumes in 2000 are expected to be flat with 1999 and up approximately four percent in 2001. These projections are based on known discoveries and do not include the impact of potential or future major acquisitions, dispositions, or wildcat drilling. On July 16, 1999, Marathon agreed to sell its interests in two fields in Egypt. The transaction included a 50 percent interest in the Ashrafi oilfield offshore in the southwest Gulf of Suez and a 25 percent interest in the El Qar'a natural gas and condensate field in the Nile Delta. Marathon's second quarter production was about 6,000 bpd from the two fields. The transaction is expected to close in the third quarter of 1999 with an effective date of June 1, 1999. The sale is subject to final approval by the Egyptian authorities, consents of third parties and satisfaction of customary closing conditions. On July 5, 1999, oil production commenced from the Piltun-Astokhskoye field offshore Sakahlin Island in the Russian Far East Region. Marathon holds a 37.5% interest in Sakhalin Energy Investment Company Ltd. ("Sakhalin Energy"), which is the first enterprise to develop and produce oil and gas resources in Russia under a production sharing agreement. Production, limited to the ice-free season of the year, is expected to reach 90,000 gross barrels of oil per day by the start of the second producing season in 2000. On May 27, 1999, Marathon was awarded a 10 percent equity interest in Blocks 31 and 32 offshore Angola. The blocks, which are located approximately 90 miles northwest of Luanda in water depths between 5,400 and 9,200 feet, are adjacent to Blocks 15 and 17 where major discoveries by others have been made. Marathon, bidding with others, was recently awarded three parcels offshore Nova Scotia. Marathon and its partners submitted high gross bids of $118 million with Marathon's share being approximately $39 million. The high bids represent exploration expenditures which will be made during the initial five years of a nine-year license. Marathon has a 30, 33.75 and 37.5 percent interest in Parcels 11, 18 and 10, respectively and will be operator of Parcel 11. 54 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The above discussion includes forward-looking statements with respect to projected liquid hydrocarbon production levels and natural gas volumes for 1999, 2000 and 2001 and timing/levels of gross production for Sakhalin Energy. These statements are based on a number of assumptions, including (among others) prices, amount of capital available for exploration and development, worldwide supply and demand for petroleum products, regulatory constraints, reserve estimates, production decline rates of mature fields, timing of commencing production from new wells, timing and results of future development drilling, reserve replacement rates, and other geological, operating and economic considerations. In addition, development of new production properties in countries outside the United States may require protracted negotiations with host governments and is frequently subject to political considerations, such as tax regulations, which could adversely affect the economics of projects. To the extent these assumptions prove inaccurate and/or negotiations and other considerations are not satisfactorily resolved, actual results could be materially different than present expectations. Downstream income of the Marathon Group is largely dependent upon refining crack spreads (the difference between light product prices and crude costs). 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 crude oil and refined products. On May 24, 1999, MAP signed an agreement with Ultramar Diamond Shamrock ("UDS") to purchase 179 UDS owned-and-operated convenience stores, 5 product terminals and an assignment of supply contracts for about 240 branded UDS jobber stations in Michigan. Additionally, MAP will lease a sixth product terminal from UDS. The transaction is expected to close later this year. This is a forward-looking statement. Some factors that could potentially affect the timing of the UDS closing include (among others) receipt of government approvals, consents of third parties and satisfaction of customary closing conditions. On May 20, 1999, MAP reached an agreement with P.M.I. Comercio Internacional, S.A. de C.V., (PMI), an affiliate of Petroleos Mexicanos, (PEMEX), to purchase approximately 90,000 bpd of heavy Maya crude oil. The multi-year contract will begin upon completion of a 34,500 bpd delayed-coking project planned for MAP's refinery in Garyville, Louisiana. This work is anticipated to be completed in fourth quarter 2001. This is a forward-looking statement. Some factors that could potentially affect the completion of the delayed-coking project include (among others) levels of cash flow from operations, obtaining the necessary construction and environmental permits, unforeseen hazards such as weather conditions and regulatory constraints. On August 3, 1999, Marathon announced a voluntary early retirement incentive program. Eligibility is extended to approximately 500 employees in specific organizations and groups, which does not include MAP and Information Technology employees. Retirement effective dates under this program will be November 1, 1999. 55 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Year 2000 Readiness Disclosure - ------------------------------ The Marathon Group is executing Year 2000 action plans which include: * prioritizing and focusing on those computerized and automated systems and processes ("systems") critical to the Marathon Group's operations in terms of material operational, safety, environmental and financial risk to the company. * allocating and committing appropriate resources to fix the problem. * developing detailed contingency plans for those systems critical to the operations in terms of material operational, safety, environmental and financial risk to the company. * communicating with, and aggressively pursuing, critical third parties to help ensure the Year 2000 readiness of their products and services through use of mailings, telephone contacts, and the inclusion of Year 2000 readiness language in purchase orders and contracts. * performing rigorous Year 2000 tests of critical systems. * participating in, and exchanging Year 2000 information with industry trade associations, such as the American Petroleum Institute ("API"). * engaging qualified outside engineering and information technology consulting firms to assist in the Year 2000 inventory, assessment and readiness. State of Readiness Information Technology (IT) systems are 96% ready as of June 30, 1999. IT systems are expected to be 100% ready by September 30, 1999 with minor exceptions. The exceptions identified currently are third party software vendors whose upgrade schedules have been delayed until fourth quarter 1999. In these cases, contingency plans are scheduled to be in place by September 30, 1999 for the affected software to ensure there will be no significant business impact. Inventorying of Non-Information Technology (Non-IT) systems and assessment of these inventoried systems was 99% complete as of June 30, 1999. Of the inventory assessed, few systems require remediation. Non-IT systems are scheduled to be Year 2000 ready by the end of third quarter 1999. The following chart provides the percent of completion for the (i) inventory of systems and processes that may be affected by the Year 2000 ("Y2K Inventory"), (ii) analysis performed to determine the Year 2000 date impact of inventoried systems and processes ("Y2K Impact Assessment") and (iii) overall Year 2000 readiness of the Marathon Group's Year 2000 inventory ("Y2K Readiness of Overall Inventory"). The percent of completion for Y2K Readiness of Overall Inventory includes all inventory systems not date impacted, those systems already Year 2000 ready and those corrected and made Year 2000 ready through the renovation/replacement, testing and implementation activities; however, the implementation of certain Year 2000 ready IT systems has been deferred until the fourth quarter of 1999 due to third party software vendor upgrade schedules. 56
MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Percent Completed Y2K Y2K Readiness As of June 30, 1999 Impact of Y2K Assess- Overall Inventory ment Inventory ------ ------ ------ Information Technology 100% 100% 96% Non-Information Technology 99% 99% 97%
Third Parties Third parties include suppliers, customers and vendors. Contacts have been made with critical third parties to determine if they will be able to provide their services to the Marathon Group after the Year 2000. Third party vendors' responses have been graded in order to rate their Y2K readiness. Those with an average or below average grade have been contacted directly by the appropriate business units to discuss their Y2K readiness. Using a Year 2000 ready test environment, testing is underway on third party software to validate that it is Year 2000 ready. In addition, third party software that poses a risk to a business unit is being included within the business unit's contingency plans. The Costs to Address Year 2000 Issues Total costs incurred as of June 30, 1999, were $25 million, including $11 million of incremental costs. The total estimated costs associated with Year 2000 readiness are expected to be $39 million, of which $20 million are incremental costs. This reflects a decrease of $3 million from the previously reported estimate. The Risks of the Company's Year 2000 Issues The most reasonably likely worst case Year 2000 scenario would be the inability of critical third party suppliers, such as utility providers, telecommunication companies, drilling equipment suppliers, platform suppliers, crude oil suppliers and pipeline carriers, to continue providing their products and services. This could pose the greatest material operational, safety, environmental and/or financial risk to the company. These critical third party suppliers have generally indicated that they are or expect to be Year 2000 ready in a timely manner. The lack of accurate and timely Year 2000 date impact information from suppliers of automation and process control systems and processes is also a concern. Without quality information from suppliers, specifically on embedded chip technology, some Year 2000 problems could go undetected until after January 1, 2000. According to information received from suppliers of these systems, oil and gas industry surveys and Marathon Group's own test results, These embedded systems do not appear to pose significant problems or involve the possibility of major failures that could affect vital operations. An additional risk is the ability of some third party software vendors to provide timely software upgrades to make their product Year 2000 ready. Communication continues with these vendors to expedite the completion of upgrades as much as possible. Contingency plans are being developed in case timely upgrades are not available. 57 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- In a report issued February 24, 1999 by the United States Senate Special Committee on the Year 2000 Technology Problem, the committee expressed concern that many of the countries from which the United States imports oil are significantly behind the United States in their Year 2000 remediation efforts and oil production and transportation could be at some risk. In 1998, 64% or 577,000 bpd of the crude oil processed by MAP's refineries was from foreign sources and acquired primarily from various foreign national oil companies, producing companies and traders. Of this total, approximately 330,000 bpd was acquired from the Middle East. According to a report by the American Petroleum Institute and a February 1999 report by the United States Department of Energy, the four largest exporters of petroleum to the United States expect all critical systems to be Year 2000 ready by the end of 1999. If any country is unable to export oil, other countries may be able to increase production and exports. According to the API report, in any event, import deliveries of oil would not stop immediately as there is always crude oil en route to the United States. In addition, the United States government has a Strategic Petroleum Reserve to act as a buffer to protect against temporary interruptions in foreign oil supplies. The Marathon Group could be adversely affected by a disruption in supply if alternate sources of supply are not available. In the initial review of assets to be acquired from UDS, Marathon determined that certain facilities and systems may not be completely Y2K ready. Once the transaction is closed, Marathon will undertake thorough Y2K inventory, assessment and remediation (where necessary) of acquired facilities. Marathon expects this work can be completed by December 31, 1999. If the closing is delayed or if the required remediation is greater than expected, there is a risk some of the acquired facilities may not be Y2K ready. The completion percentages in the chart on page 56 do not include UDS IT or Non-IT systems. Contingency Planning Marathon Group business units are reviewing their written contingency plans within their business units and with other business units with which they interact. Overall, contingency planning is 66% completed, which is slightly ahead of schedule. These plans are to be completed and tested, when practical, by the end of third quarter 1999. A multiple occurrence emergency response drill for Year 2000 was conducted during the last week of July 1999. Planning is progressing with the year-end Marathon Group Year 2000 monitoring center. Marathon will also be participating in the API Year 2000 monitoring center currently in development. These centers will be used to track and report the Y2K impact as each time zone rolls over to January 1, 2000. As Marathon Group business units and API member companies report problems and related solutions, the information will be shared with other business units so they can proactively prepare to deal with a similar situation. This discussion includes forward-looking statements of the Marathon Group's efforts and management's expectations and costs relating to Year 2000 readiness. The Marathon Group's ability to achieve Year 2000 readiness and the level of incremental costs associated therewith, could be adversely impacted by, among other things, the availability and cost of programming and testing resources, vendors' ability to install or modify proprietary hardware and software and unanticipated problems identified in the ongoing Year 2000 readiness review. Also, the Marathon Group's ability to mitigate Year 2000 risks could be adversely impacted by the effectiveness of contingency plans. 58 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Accounting Standard - -------------------- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". This new standard requires recognition of all derivatives as either assets or liabilities at fair value. This new standard may result in additional volatility in both current period earnings and other comprehensive income as a result of recording recognized and unrecognized gains and losses resulting from changes in the fair value of derivative instruments. At adoption this new standard requires a comprehensive review of all outstanding derivative instruments to determine whether or not their use meets the hedge accounting criteria. Upon adoption, there may be derivative instruments employed by USX that do not meet all of the designated hedge criteria and they will be reflected in income on a mark-to-market basis. Based upon the strategies currently used by USX and the level of activity related to forward exchange contracts and commodity-based derivative instruments in recent periods, USX does not anticipate the effect of adoption to have a material impact on either financial position or results of operations of the Marathon Group. The effective date of SFAS No. 133 was amended by SFAS No. 137. USX plans to adopt the standard effective January 1, 2001, as required. 59 MARATHON GROUP OF USX CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------- Management Opinion Concerning Derivative Instruments - -------------------------------------- USX utilizes derivative instruments principally in hedging activities, whereby gains and losses are generally offset by price changes in the underlying commodity. Recently, the Marathon Group's risk management policy was expanded to include the use of derivative instruments for certain nonhedging and trading activities. These instruments will be marked-to-market each period and the related income or loss will be included in income from operations. Management believes that use of derivative instruments along with risk assessment procedures and internal controls does not expose the Marathon Group to material risk. The use of derivative instruments could materially affect the Marathon Group's results of operations in particular quarterly or annual periods. However, management believes that use of derivative instruments will not have a material adverse effect on financial position or liquidity. Commodity Price Risk and Related Risks - -------------------------------------- Sensitivity analysis of the incremental effects on pretax income of hypothetical 10% and 25% changes in commodity prices for open derivative commodity instruments as of June 30, 1999 are provided in the following table(a):
Incremental Decrease in Pretax Income Assuming a Hypothetical Price Change of(a) (Dollars in millions) 10% 25% - -------------------------------------------------------------------------------- Derivative Commodity Instruments Marathon Group (b) (c) Crude oil (price increase) (d) $21.8 $56.9 Natural gas (price decrease) (d) 9.6 24.8 Refined products (price increase) (d) .1 .2 (a) Gains and losses on derivative commodity instruments are generally offset by price changes in the underlying commodity. Effects of these offsets are not reflected in the sensitivity analyses. Amounts reflect the estimated incremental effect on pretax income of hypothetical 10% and 25% changes in closing commodity prices for each open contract position at June 30, 1999. Marathon Group management evaluates its portfolio of derivative commodity instruments on an ongoing basis and adds or revises strategies to reflect anticipated market conditions and changes in risk profiles. Changes to the portfolio subsequent to June 30, 1999 would cause future pretax income effects to differ from those presented in the table. (b) The number of net open contracts varied throughout second quarter 1999 from a low of 2,476 contracts at June 30, 1999, to a high of 34,199 contracts at April 16, 1999, and averaged 25,914 for the quarter. The derivative commodity instruments used and hedging positions taken also varied throughout second quarter 1999, and will continue to vary in the future. Because of these variations in the composition of the portfolio over time, the number of open contracts, by itself, cannot be used to predict future income effects. (c) The calculation of sensitivity amounts for basis swaps assumes that the physical and paper indices are perfectly correlated. Gains and losses on options are based on changes in intrinsic value only. 60 MARATHON GROUP OF USX CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------- (d) The direction of the price change used in calculating the sensitivity amount for each commodity reflects that which would result in the largest incremental decrease in pretax income when applied to the derivative commodity instruments used to hedge that commodity.
Interest Rate Risk - ------------------ As of June 30, 1999, the discussion of the Marathon Group's interest rate risk has not changed materially from that presented in Quantitative and Qualitative Disclosures About Market Risk included in USX's 1998 Form 10-K. Foreign Currency Exchange Rate Risk - ----------------------------------- As of June 30, 1999, the discussion of the Marathon Group's foreign currency exchange rate risk has not changed materially from that presented in Quantitative and Qualitative Disclosures About Market Risk included in USX's 1998 Form 10-K. Equity Price Risk - ----------------- As of June 30, 1999, the Marathon Group had no material exposure to equity price risk. Safe Harbor - ----------- The Marathon Group's Quantitative and Qualitative Disclosures About Market Risk include forward-looking statements with respect to management's opinion about risks associated with the Marathon Group's use of derivative instruments. These statements are based on certain assumptions with respect to market prices and industry supply and demand for crude oil, natural gas and refined products. To the extent that these assumptions prove to be inaccurate, future outcomes with respect to the Marathon Group's derivative usage may differ materially from those discussed in the forward-looking statements. 61
MARATHON GROUP OF USX CORPORATION SUPPLEMENTAL STATISTICS (Unaudited) ------------------------------------------------ Second Quarter Six Months Ended June 30 Ended June 30 (Dollars in millions) 1999(a) 1998 1999(a) 1998 - -------------------------------------------------------------------------------- INCOME (LOSS) FROM OPERATIONS Exploration & Production ("E&P") Domestic $93 $41 $131 $115 International 31 32 29 82 ----- ----- ----- ----- Income For E&P Reportable Segment 124 73 160 197 Refining, Marketing & Transportation 228 397 273 525 Other Energy Related Businesses(b) 19 3 34 17 ----- ----- ----- ----- Income For Reportable Segments $371 $473 $467 739 Items Not Allocated To Segments: Administrative Expenses $(31) $(21) $(57) $(59) Inventory Market Val. Res. Adjustment 66 3 415 28 Estimated Loss on Sale of Assets (7) - (23) - Gain on Ownership Change & Trans. Charges - MAP - (2) - 223 E&P Int'l Impairment & Dom. Contract Settlement - - - (76) ------ ------ ------ ------ Marathon Group Income From Operations $399 $453 $802 $855 CAPITAL EXPENDITURES Exploration & Production $261 $256 $410 $423 Refining, Marketing & Transportation 73 69 119 119 Other (c) 2 6 3 8 ----- ----- ----- ----- Total $336 $331 $532 $550 EXPLORATION EXPENSE Domestic $44 $54 $66 $92 International (d) 15 21 56 65 ----- ----- ----- ----- Total $59 $75 $122 $157 INVESTMENTS(RETURNS) & OTHER AFFILIATE ACTIVITY-NET $37 $(22) $56 $3 OPERATING STATISTICS Net Liquid Hydrocarbon Production (e): United States 148.7 137.9 145.9 131.9 Europe 34.6 45.6 34.3 43.0 Other International 29.8 13.8 30.4 9.8 ------ ------ ------ ------ Worldwide 213.1 197.3 210.6 184.7 Net Natural Gas Production (f): United States 741.8 723.2 755.5 735.6 Europe (g) 346.9 402.8 373.1 428.0 Other International 171.0 12.7 180.2 12.9 ------ ------ ------- ------- Total Consolidated 1259.7 1138.7 1308.8 1176.5 Equity Affiliate 35.6 36.6 35.6 39.6 ------- ------- ------- ------- Worldwide 1295.3 1175.3 1344.4 1216.1 Average Equity Sales Prices (h): Liquid Hydrocarbons (per Bbl) Domestic $13.56 $9.97 $11.41 $10.98 International 14.87 12.85 12.80 13.24 Natural Gas (per Mcf) Domestic $1.81 $1.87 $1.64 $1.89 International 1.77 2.05 1.82 2.11 Crude Oil Refined (e) 939.0 923.2 893.8 914.3 Refined Products Sold (e) 1259.3 1178.9 1190.5 1160.8 Matching buy/sell volumes included in refined products sold (e).................... 56.0 32.1 47.1 39.8 - -------------- (a) Where applicable, second quarter and six months 1999 results include Marathon Canada Limited, formerly Tarragon Oil and Gas Limited, which was acquired by Marathon on August 11, 1998. (b) Includes domestic natural gas and crude oil marketing and transportation, and power generation. (c) Includes other energy related businesses and corporate capital expenditures. (d) Six months ended June 30, 1998 includes $30 million for impairment in first quarter 1998. (e) Thousands of barrels per day (f) Millions of cubic feet per day (g) Includes gas acquired for injection and subsequent resale of 16.1, 17.8, 24.5 and 25.2 mmcfd in the second quarters and six months year-to- date 1999 and 1998, respectively. (h) Prices exclude gains and losses from hedging activities.
62 Part I - Financial Information (Continued): C. U. S. Steel Group
U. S. STEEL GROUP OF USX CORPORATION STATEMENT OF OPERATIONS (Unaudited) ------------------------------------ Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions, except per share amounts) 1999 1998 1999 1998 - -------------------------------------------------------------------------------- REVENUES: Sales $1,303 $1,689 $2,549 $3,359 Income (loss) from affiliates (10) 28 (33) 43 Gain (loss) on disposal of assets 10 17 (2) 28 Other income (loss) 1 (1) 1 (1) ------ ------ ------ ------ Total revenues 1,304 1,733 2,515 3,429 ------ ------ ------ ------ COSTS AND EXPENSES: Cost of sales (excludes items shown below) 1,160 1,436 2,317 2,891 Selling, general and administrative expenses (credits) (95) (53) (165) (99) Depreciation, depletion and amortization 79 72 150 149 Taxes other than income taxes 57 61 112 109 ------ ------ ------ ------ Total costs and expenses 1,201 1,516 2,414 3,050 ------ ------ ------ ------ INCOME FROM OPERATIONS 103 217 101 379 Net interest and other financial costs 20 22 28 50 ------ ------ ------ ------ INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 83 195 73 329 Provision for estimated income taxes 28 59 27 106 ------ ------ ------ ------ INCOME BEFORE EXTRAORDINARY LOSS 55 136 46 223 Extraordinary loss on extinguishment of debt, net of income tax - - 5 - ------ ------ ------ ------ NET INCOME 55 136 41 223 Dividends on preferred stock 3 3 5 5 ------ ------ ------ ------ NET INCOME APPLICABLE TO STEEL STOCK $52 $133 $36 $218 ====== ====== ====== ====== STEEL STOCK DATA: Income before extraordinary loss $52 $133 $41 $218 - Per share - basic .60 1.53 .47 2.51 - diluted .59 1.46 .47 2.41 Extraordinary loss, net of income tax - - 5 - - Per share - basic and diluted - - .06 - Net income $52 $133 $36 $218 - Per share - basic .60 1.53 .41 2.51 - diluted .59 1.46 .41 2.41 Dividends paid per share .25 .25 .50 .50 Weighted average shares, in thousands - Basic 88,387 86,953 88,378 86,777 - Diluted 92,647 94,507 88,379 94,314 Selected notes to financial statements appear on pages 65-71.
63
U. S. STEEL GROUP OF USX CORPORATION BALANCE SHEET (Unaudited) ------------------------------------ June 30 December 31 (Dollars in millions) 1999 1998 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $20 $9 Receivables, less allowance for doubtful accounts of $5 and $9 423 392 Inventories 768 698 Deferred income tax benefits 176 176 ------ ------ Total current assets 1,387 1,275 Investments and long-term receivables, less reserves of $3 and $10 620 743 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $6,075 and $5,939 2,499 2,500 Prepaid pensions 2,327 2,172 Other noncurrent assets 51 59 ----- ------ Total assets $6,884 $6,749 ====== ====== LIABILITIES Current liabilities: Notes payable $17 $13 Accounts payable 612 501 Payroll and benefits payable 315 330 Accrued taxes 132 150 Accrued interest 11 10 Long-term debt due within one year 15 12 ------ ------ Total current liabilities 1,102 1,016 Long-term debt, less unamortized discount 491 464 Long-term deferred income taxes 174 129 Employee benefits 2,316 2,315 Deferred credits and other liabilities 474 484 Preferred stock of subsidiary 66 66 USX obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely junior subordinated convertible debentures of USX 182 182 STOCKHOLDERS' EQUITY Preferred stock 3 3 Common stockholders' equity 2,076 2,090 ------ ------ Total stockholders' equity 2,079 2,093 ------ ------ Total liabilities and stockholders' equity $6,884 $6,749 ====== ====== Selected notes to financial statements appear on pages 65-71.
64
U. S. STEEL GROUP OF USX CORPORATION STATEMENT OF CASH FLOWS (Unaudited) ------------------------------------ Six Months Ended June 30 (Dollars in millions) 1999 1998 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income $41 $223 Adjustments to reconcile to net cash provided from operating activities: Extraordinary loss 5 - Depreciation, depletion and amortization 150 149 Pensions and other postretirement benefits (143) (107) Deferred income taxes 49 89 (Gain) loss on disposal of assets 2 (28) Changes in: Current receivables - sold 30 - - operating turnover (60) 94 Inventories (70) (33) Current accounts payable and accrued expenses 76 (116) All other - net 44 (29) ------ ------ Net cash provided from operating activities 124 242 ------ ------ INVESTING ACTIVITIES: Capital expenditures (153) (136) Disposal of assets 4 15 Restricted cash -withdrawals - 3 - deposits (6) (3) Affiliates - investments - net - (63) All other - net (3) 13 ------ ------ Net cash used in investing activities (158) (171) ------ ------ FINANCING ACTIVITIES: Increase (decrease) in U. S. Steel Group's portion of USX consolidated debt 105 (47) Specifically attributed debt repayments (11) (3) Steel Stock issued - 25 Dividends paid (49) (48) ------ ------ Net cash provided from (used in) financing activities 45 (73) ------ ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11 (2) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9 18 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $20 $16 ====== ====== Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $(42) $(39) Income taxes paid, including settlements with the Marathon Group (5) (14) Selected notes to financial statements appear on pages 65-71.
65 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS -------------------------------------- (Unaudited) 1. The information furnished in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. Certain reclassifications of prior year data have been made to conform to 1999 classifications. Additional information is contained in the USX Annual Report on Form 10-K for the year ended December 31, 1998. 2. The financial statements of the U. S. Steel Group include the financial position, results of operations and cash flows for all businesses of USX other than the businesses, assets and liabilities included in the Marathon Group and a portion of the corporate assets and liabilities and related transactions which are not separately identified with ongoing operating units of USX. These financial statements are prepared using the amounts included in the USX consolidated financial statements. Corporate amounts reflected in these financial statements are determined based upon methods which management believes to be reasonable. The accounting policies applicable to the preparation of the financial statements of the U. S. Steel Group may be modified or rescinded in the sole discretion of the Board of Directors of USX (Board), although the Board has no present intention to do so. The Board may also adopt additional policies depending on the circumstances. Although the financial statements of the U. S. Steel Group and the Marathon Group separately report the assets, liabilities (including contingent liabilities) and stockholders' equity of USX attributed to each such Group, such attribution of assets, liabilities (including contingent liabilities) and stockholders' equity between the U. S. Steel Group and the Marathon Group for purposes of preparing their respective financial statements does not affect legal title to such assets and responsibility for such liabilities. Holders of USX-U. S. Steel Group Common Stock (Steel Stock) and USX-Marathon Group Common Stock (Marathon Stock) are holders of common stock of USX and continue to be subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts arising from one Group that affect the overall cost of USX's capital could affect the results of operations and financial condition of the other Group. In addition, net losses of either Group, as well as dividends or distributions on any class of USX Common Stock or series of Preferred Stock and repurchases of any class of USX Common Stock or series of Preferred Stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on both classes of Common Stock. Accordingly, the USX consolidated financial information should be read in connection with the U. S. Steel Group financial information. The financial statement provision for estimated income taxes and related tax payments or refunds have been reflected in the U. S. Steel Group and the Marathon Group financial statements in accordance with USX's tax allocation policy for such groups. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated 66 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 2. (Continued) between the U. S. Steel Group and the Marathon Group for group financial statement purposes, based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to the respective groups. The provision for 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 and Marathon Groups and USX consolidated are allocated to each group based on the relationship of the individual group provisions to the combined interim provisions. 3. The U. S. Steel Group's total comprehensive income for the second quarter of 1999 and 1998 was $51 million and $134 million, respectively, and $33 million and $221 million for the six months of 1999 and 1998, respectively. 4. The U. S. Steel Group consists of one operating segment, U. S. Steel. U. S. Steel is engaged in the production and sale of steel mill products, coke and taconite pellets. U. S. Steel also engages in the following related business activities: the management of mineral resources, domestic coal mining, engineering and consulting services, and real estate development and management. The results of segment operations are as follows:
Second Quarter Ended June 30 (In millions) 1999 1998 - -------------------------------------------------------------------------------- Revenues: Customer $1,292 $1,689 Intergroup (a) 11 - Equity in earnings (losses) of unconsolidated affiliates (10) 28 Other 11 16 ------ ------ Total revenues $1,304 $1,733 ====== ====== Segment income (loss) $(9) $154 ====== ====== (a) Intergroup sales and transfers were conducted on an arm's-length basis.
67 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 4. (Continued)
Six Months Ended June 30 (In millions) 1999 1998 - -------------------------------------------------------------------------------- Revenues: Customer $2,537 $3,358 Intergroup (a) 12 - Equity in earnings (losses) of unconsolidated affiliates (33) 43 Other 21 28 ------ ------ Total revenues $2,537 $3,429 ====== ====== Segment income (loss) $(68) $260 ====== ====== (a) Intergroup sales and transfers were conducted on an arm's-length basis.
The following schedules reconcile segment revenue and income (loss) to amounts reported in the U. S. Steel Group's financial statements:
Second Quarter Ended June 30 (In millions) 1999 1998 - -------------------------------------------------------------------------------- Revenues of reportable segment and Group revenues $1,304 $1,733 ====== ====== Income (loss) for reportable segment $(9) $154 Items not allocated to segment: Administrative expenses (8) (5) Pension credits 140 93 Costs related to former business activities (20) (25) ------ ------ Total Group income from operations $103 $217 ====== ======
68 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited)
4. (Continued) Six Months Ended June 30 (In millions) 1999 1998 - -------------------------------------------------------------------------------- Revenues of reportable segment $2,537 $3,429 Loss on investment in RTI stock used to satisfy indexed debt obligations (22) - ------ ------ Total Group revenues $2,515 $3,429 ====== ====== Income (loss) for reportable segment $(68) $260 Items not allocated to segment: Administrative expenses (13) (14) Pension credits 248 186 Costs related to former business activities (44) (53) Loss on investment in RTI stock used to satisfy indexed debt obligations (22) - ------ ------ Total Group income from operations $101 $379 ====== ======
5. The method of calculating net income per common share for the Steel Stock and Marathon Stock reflects the Board's intent that the separately reported earnings and surplus of the U. S. Steel Group and the Marathon Group, as determined consistent with the USX Restated Certificate of Incorporation, are available for payment of dividends on the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. Basic net income per share is calculated by adjusting net income for dividend requirements of preferred stock and is based on the weighted average number of common shares outstanding. Diluted net income per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options, provided in each case, the effect is not antidilutive. See Note 9, of the Notes to USX Consolidated Financial Statements for the computation of income per share. 6. On March 31, 1999, USX irrevocably deposited with a trustee the entire 5.5 million common shares it owned in RTI International Metals, Inc. (RTI). The deposit of the shares resulted in the satisfaction of USX's obligation under its 6-3/4% Exchangeable Notes (indexed debt) due February 1, 2000. Under the terms of the indenture, the trustee will exchange the RTI shares for the notes at maturity. The notes are exchangeable for shares of RTI common stock on a variable basis up to one share per note depending on the market price of RTI common stock at maturity. Ownership of any shares not required for satisfaction of the indexed debt will revert to USX. As a result of the above transaction, USX recorded in the first quarter of 1999 an extraordinary loss of $5 million, net of a $3 million income tax benefit, representing prepaid interest expense and the write-off of unamortized debt issue costs, and a pretax charge of $22 million, representing 69 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 6. (Continued) the difference between the carrying value of the investment in RTI and the carrying value of the indexed debt, which is included in gain (loss) on disposal of assets. This transaction represents a noncash investing and financing activity of $56 million, which was the carrying value of the indexed debt at March 31, 1999. Additionally, a $13 million credit to adjust the indexed debt to settlement value at March 31, 1999, is included in net interest and other financial costs. In December 1996, USX had issued $117 million of notes indexed to the common share price of RTI. At maturity, USX would have been required to exchange the notes for shares of RTI common stock, or redeem the notes for the equivalent amount of cash. Since USX's investment in RTI was attributed to the U. S. Steel Group, the indexed debt was also attributed to the U. S. Steel Group. USX had a 26% investment in RTI and accounted for its investment using the equity method of accounting. 7. Income from operations includes net periodic pension credits of $88 million and $51 million in the second quarter of 1999 and 1998, respectively, ($141 million and $102 million in the first six months of 1999 and 1998, respectively.) These pension credits are primarily noncash and for the most part are included in selling, general and administrative expenses. In the second quarter of 1999, the U. S. Steel Group recognized a one- time pretax settlement gain of $35 million, related mainly to pension costs of employees who retired under the U. S. Steel Group 1998 voluntary early retirement program. This noncash settlement gain is included in selling, general and administrative expenses. 8. Inventories are carried at the lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method.
(In millions) ------------------------- June 30 December 31 1999 1998 ----------- ----------- Raw materials $128 $185 Semi-finished products 368 282 Finished products 217 182 Supplies and sundry items 55 49 ---- ---- Total $768 $698 ==== ====
70 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 9. The U. S. Steel Group participates in an agreement (the program) to sell an undivided interest in certain accounts receivable. Payments are collected from the sold accounts receivable; the collections are reinvested in new accounts receivable for the buyers; and a yield, based on defined short-term market rates, is transferred to the buyers. At June 30, 1999, the amount sold under the program that had not been collected was $350 million, which will be forwarded to the buyers at the end of the agreement, or in the event of earlier contract termination. If the U. S. Steel Group does not have a sufficient quantity of eligible accounts receivable to reinvest in for the buyers, the size of the program will be reduced accordingly. The buyers have rights to a pool of receivables that must be maintained at a level of at least 115% of the program size. In the event of a change in control of USX, as defined in the agreement, the U. S. Steel Group may be required to forward payments collected on sold accounts receivable to the buyers. 10. At June 30, 1999, accounts receivable includes an estimated income tax receivable from the Marathon Group of $24 million, determined in accordance with the tax allocation policy discussed in Note 2. 11. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the U. S. Steel Group involving a variety of matters including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the U. S. Steel Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the U. S. Steel Group. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. 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 June 30, 1999, and December 31, 1998, accrued liabilities for remediation totaled $101 million and $97 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. For a number of years, the U. S. Steel Group has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the first six months of 1999 and for the years 1998 and 1997, such capital expenditures totaled $13 million, $49 million and $43 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. 71 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 11. (Continued) Guarantees by USX of the liabilities of affiliated entities of the U. S. Steel Group totaled $87 million at June 30, 1999. In the event that any defaults of guaranteed liabilities occur, USX has access to its interest in the assets of the affiliates to reduce U. S. Steel Group losses resulting from these guarantees. As of June 30, 1999, the largest guarantee for a single affiliate was $59 million. The U. S. Steel Group's contract commitments to acquire property, plant and equipment at June 30, 1999, totaled $122 million compared with $188 million at December 31, 1998. 12. On April 12, 1999, USX and Kobe Steel, Ltd. (Kobe Steel) announced that they had entered into a letter of intent with Blackstone Capital Partners II (Blackstone) to combine the steelmaking and bar producing assets of USS/Kobe Steel Company (USS/Kobe) with companies controlled by Blackstone, Republic Technologies International, Inc., Republic Engineered Steels, Inc. and Bar Technologies, Inc. (collectively Republic). In addition, on August 6, 1999, USX agreed to a $15 million equity investment in Republic when the combination is consummated. USX currently owns 50% of USS/Kobe and will own approximately 15% of Republic. The seamless pipe business of USS/Kobe is excluded from this transaction and will continue to operate as a joint venture between USX and Kobe Steel. The transaction was subject to numerous conditions, including financing. As of the date of issuance of the accompanying financial statements, it was uncertain whether several of these conditions would be resolved and the transaction would be completed. Due to these uncertainties, neither USX nor USS/Kobe recognized any financial effects of the transaction in the second quarter 1999. On August 6, 1999, Republic received financing commitments sufficient to complete the transaction, which is scheduled to be closed on August 13, 1999. The estimated fair value of USX's investment in Republic, based upon preliminary information supplied by Republic, is approximately $80 million less than USX's carrying value of its investment in the steelmaking and bar producing assets of USS/Kobe. Based on the resolution of the uncertainties and the anticipated closing of the transaction, USX expects to recognize an estimated impairment of $80 million in the third quarter of 1999. 72 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 engaged in the production, transportation and sale of steel mill products, coke, and taconite pellets; the management of mineral resources; domestic coal mining; real estate development; and engineering and consulting services. Certain business activities are conducted through joint ventures and partially owned companies, such as USS/Kobe Steel Company ("USS/Kobe"), USS-POSCO Industries ("USS-POSCO"), PRO-TEC Coating Company ("PRO-TEC"), Transtar, Inc. ("Transtar"), Clairton 1314B Partnership, and VSZ U. S. Steel, s. r.o. Management's Discussion and Analysis should be read in conjunction with the U. S. Steel Group's Financial Statements and Notes to Financial Statements. The discussion of Results of Operations should be read in conjunction with the Supplemental Statistics provided on page 85. Certain sections of Management's Discussion and Analysis include forward- looking statements concerning trends or events potentially affecting the businesses of the U. S. Steel Group. These statements typically contain words such as "anticipates," "believes," "estimates," "expects" or similar words indicating that future outcomes are not known with certainty and subject to risk factors that could cause these outcomes to differ significantly from those projected. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in forward-looking statements. For additional risk factors affecting the businesses of the U. S. Steel Group, see Supplementary Data -- Disclosures About Forward- Looking Statements in USX 1998 Form 10-K. Results of Operations - --------------------- Revenues for the second quarter and first six months of 1999 and 1998 are set forth in the following table:
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 1999 1998 1999 1998 ------ ------ ------ ------ Sales $1,303 $1,689 $2,549 $3,359 Income (loss) from affiliates (10) 28 (33) 43 Gain (loss) on disposal of assets 10 17 (2) 28 Other income (loss) 1 (1) 1 (1) ----- ----- ----- ----- Total Revenues $1,304 $1,733 $2,515 $3,429
Total revenues decreased by $429 million and $914 million in the second quarter and first six months of 1999, respectively, compared with the same periods in 1998. The decreases primarily reflected lower average steel product prices (prices decreased $53/ton and $46/ton in the second quarter and first six months of 1999, respectively), lower shipment volumes (shipments decreased 309,000 tons and 861,000 tons in the second quarter and first six months of 1999, respectively), and lower income from affiliates. 73 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- Income from operations for the U. S. Steel Group for the second quarter and first six months of 1999 and 1998 is set forth in the following table:
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 1999 1998 1999 1998 ------ ------ ------ ------ Segment income (loss) for U. S. Steel Operations (a) $(9) $154 $(68) $260 Items not allocated to segment: Pension credits 140 93 248 186 Administrative expenses (8) (5) (13) (14) Costs related to former business activities (b) (20) (25) (44) (53) Loss on investment in RTI stock used to satisfy indexed debt obligations (c) - - (22) - ----- ----- ----- ----- Total Group income from operations $103 $217 $101 $379 ===== ===== ===== ===== - ----- (a) Includes income (loss) from the production and sale of steel mill products, coke and taconite pellets; the management of mineral resources; domestic coal mining; real estate development; and engineering and consulting services. (b) Includes the portion of postretirement benefit costs and certain other expenses principally attributable to former business units of the U. S. Steel Group. (c) For further details, see Note 6 to the U. S. Steel Group Financial Statements.
Segment income for U. S. Steel operations Segment income for U. S. Steel operations decreased $163 million and $328 million in the second quarter and first six months of 1999, respectively, compared with the same periods in 1998. The decreases in segment income were primarily due to lower average steel prices, lower shipments and lower income from affiliates. Segment income for the first six months included a $10 million charge for environmental accruals. Results in second quarter 1998 included a favorable $30 million (net of charges and reserves) insurance litigation settlement pertaining to the Gary (Ind.) Works No. 8 blast furnace explosion. Steel product prices and shipment volumes continue to be negatively affected by the ongoing effects of steel imports, and the continued weakness in tubular and plate markets. Items not allocated to segment Pension credits associated with pension plan assets and liabilities allocated to pre-1987 retirees, former businesses, and certain corporate activities are not included in segment income for U. S. Steel operations. These pension credits, which are primarily noncash, totaled $140 million and $248 million in the second quarter and first six months of 1999, respectively, compared to $93 million and $186 million in the same period in 1998. Pension credits in the second quarter and first six months of 1999 included $35 million for a one-time favorable settlement primarily related to the 1998 voluntary early retirement program for salaried employees completed during the second quarter 1999. Pension credits, combined with pension costs included in segment income for U. S. Steel operations, resulted in net pension credits of $88 million and $140 74 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- million in the second quarter and first six months of 1999, respectively, compared to $48 million and $97 million in the same periods in 1998. Future net pension credits can be volatile depending upon the future marketplace performance of plan assets, changes in actuarial assumptions regarding such factors as a selection of a discount rate and rate of return on assets, changes in the amortization levels of transition amounts or prior period service costs, plan amendments affecting benefit payout levels and profile changes in the beneficiary populations being valued. Changes in any of these factors could cause net pension credits to change. To the extent net pension credits decline in the future, income from operations would be adversely affected. For additional information on pensions, see the discussion of "Outlook" below. Net interest and other financial costs for the second quarter and first six months of 1999 and 1998 are set forth in the following table:
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 1999 1998 1999 1998 ------ ------ ------ ------ Net interest and other financial costs $20 $22 $28 $50 Less: Favorable (unfavorable) adjustments to carrying value of indexed debt (a) - - 13 (4) ----- ----- ----- ----- Net interest and other financial costs adjusted to exclude above item $20 $22 $41 $46 ===== ===== ===== ===== - ----- (a) For discussion, see Note 6 to the U. S. Steel Group Financial Statements.
Adjusted net interest and other financial costs decreased by $2 million and $5 million in the second quarter and first six months of 1999, respectively, as compared with the same periods in 1998. The provision for estimated income taxes in the second quarter and first six months of 1999 decreased compared to the same periods in 1998 due to a decline in income from operations. The provision for estimated income taxes for the second quarter and first six months of 1998 included a $9 million favorable foreign tax adjustment as a result of a favorable resolution of foreign tax litigation. The extraordinary loss on extinguishment of debt of $5 million (net of $3 million income tax benefit) in the first six months of 1999 represents prepaid interest expense and the write-off of unamortized debt issue costs resulting from the satisfaction of USX's obligation of its indexed debt. For further discussion, see Note 6 to the U. S. Steel Group Financial Statements. Net income decreased $81 million and $182 million in the second quarter and first six months of 1999, respectively, compared to the same periods in 1998, primarily reflecting the factors discussed above. Operating Statistics - -------------------- Second quarter and first six months of 1999 steel shipments of 2.5 million tons and 4.9 million tons, decreased 11% and 15%, respectively, from the same 75 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- periods in 1998. Raw steel production in the second quarter of 1999 of 3.1 million tons, increased 7% from the same period in 1998. Raw steel production in the first six months of 1999 of 5.8 million tons, decreased 3% from the same period in 1998. Raw steel capability utilization in the second quarter of 1999 averaged 96.9%, compared to 90.9% in the same period in 1998. Raw steel capability utilization in the first six months of 1999 averaged 92.0%, compared to 95.3% in the same period in 1998. Steel shipments, production and raw steel capability utilization in the first six months of 1999 continued to be negatively impacted by the ongoing effects of steel imports and weak plate and tubular markets. Cash Flows - ---------- Net cash provided from operating activities in the first six months of 1999 was $124 million, compared with $242 million in the same period in 1998. The first six months of 1998 included proceeds of $38 million for the insurance litigation settlement pertaining to the 1995 Gary Works No. 8 blast furnace explosion. Excluding this item, net cash provided from operating activities decreased $80 million due mainly to decreased profitability. Capital expenditures in the first six months of 1999 were $153 million, compared with $136 million in the same period in 1998. Contract commitments for capital expenditures at June 30, 1999, totaled $122 million, compared with $188 million at year-end 1998. Net cash used in investments in equity affiliates in the first six months of 1998 of $63 million primarily reflects funding for entry into a joint venture in Slovakia with VSZ a.s. Financial obligations (excluding the noncash satisfaction of the indexed debt) increased by $94 million in the first six months of 1999. Financial obligations consist of the U. S. Steel Group's portion of USX debt and preferred stock of a subsidiary attributed to both groups, as well as debt and financing agreements specifically attributed to the U. S. Steel Group. The increase in financial obligations resulted from capital expenditures and dividend payments exceeding cash from operating activities. Derivative Instruments See Quantitative and Qualitative Disclosures About Market Risk for discussion of derivative instruments and associated market risk for U. S. Steel Group. Liquidity For discussion of USX's liquidity and capital resources, see Management's Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and Liquidity. Environmental Matters, Litigation and Contingencies - --------------------------------------------------- The U. S. Steel Group has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. In recent years, these expenditures have been mainly for process changes in order to meet Clean Air Act obligations, although ongoing compliance costs have also been significant. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the U. S. Steel Group's products and services, operating results will be adversely affected. The U. S. Steel Group believes that all of its domestic competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and the specific products and services it provides. To the extent that competitors are not 76 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- 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 potential responsible party (``PRP'') at 25 waste sites related to the U. S. Steel Group under the Comprehensive Environmental Response, Compensation and Liability Act (``CERCLA'') as of June 30, 1999. In addition, there are 12 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 32 additional sites related to the U. S. Steel Group where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. At many of these sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. The U. S. Steel Group accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the U. S. Steel Group involving a variety of matters, including laws and regulations relating to the environment, certain of which are discussed in Note 11 to the U. S. Steel Group Financial Statements. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the U. S. Steel Group Financial Statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the U. S. Steel Group. Outlook - ------- Shipment volumes in the third quarter for U. S. Steel Group are expected to be higher than second quarter 1999. However, the favorable effects of increased shipments are expected to be more than offset by lower price realizations due to continued unfavorable product mix, including a substantial amount of semi- finished sales, and continued weakness in plate and tubular markets. The third quarter will also be impacted by higher benefit costs associated with the recently ratified labor contract and unfavorable manufacturing costs related to planned outages. In recent years, demand for steel in the United States has been at high levels. Any weakness in the United States economy for capital goods or consumer durables could further adversely impact U. S. Steel Group's product prices and shipment levels. On June 25, 1999, U. S. Steel reached an agreement with the United Steel Workers of America ("USWA") on a new five-year labor contract covering approximately 14,500 employees effective August 1, 1999. The union membership ratified the contract on August 6, 1999. The new labor contract, which includes $2.00 in hourly wage increases phased in over the term of the agreement beginning in 2000 as well as pension and other benefit improvements for active and retired employees and spouses, will result in higher labor and benefit costs for the U. S. Steel Group each year throughout the term of the contract. Net pension credits for the U. S. Steel Group are estimated to be reduced by approximately $5 million per month beginning August 1, 1999 for the balance of the year. As a result of the pension changes in the new labor contract, net pension credits for 1999 are now expected to total approximately $225 million, which includes the $35 million for the one-time favorable settlement recorded in the second quarter of 1999. Management believes that this agreement is competitive with labor agreements reached by U. S. Steel's major domestic integrated competitors and thus does not believe that U. S. Steel's competitive position with regard to such other competitors will be materially affected. 77 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- During the third quarter of 1999, a number of minor outages are planned at various U. S. Steel Group facilities that in aggregate are expected to result in higher manufacturing costs. Steel imports to the United States accounted for an estimated 25%, 30% and 24% of the domestic steel market in the first four months of 1999, and for the years 1998 and 1997, respectively. Steel imports of cut-to-length plate and cold-rolled increased 28% and 22%, respectively, in the first four months of 1999, compared to the same period in 1998. On September 30, 1998, USX joined with 11 other producers, the USWA and the Independent Steelworkers Union ("ISU") to file trade cases against Japan, Russia, and Brazil. Those filings contended that millions of tons of unfairly traded hot-rolled carbon sheet products have caused serious injury to the domestic steel industry through rapidly falling prices and lost business. In the case against Japan, on April 28, 1999, the U.S. Department of Commerce ("Commerce"), announced final antidumping ("AD") duty determinations and, on June 11, 1999, the U.S. International Trade Commission ("ITC") announced its final determination that the imports from Japan were injuring the domestic industry. The final AD order against Japan was issued on June 23, 1999. In the cases against Brazil, on July 7, 1999, Commerce announced final countervailing ("CVD") and AD duty determinations and, contemporaneously, announced that it had entered into agreements with Brazil to suspend the investigations. In the case against Russia, on July 13, 1999, Commerce announced final AD duty determinations and, contemporaneously, announced that it had entered into an agreement with Russia to suspend the investigation. In addition, Commerce announced that it had also entered into a comprehensive agreement concerning all steel product imports from Russia except for plate products and hot-rolled products. Plate products from Russia are subject to a suspension agreement signed in 1997. USX is evaluating whether to appeal the recently announced suspension agreements with Brazil and Russia. On February 16, 1999, USX joined with four other producers and the USWA to file trade cases against eight countries (Japan, South Korea, India, Indonesia, Macedonia, the Czech Republic, France, and Italy) concerning imports of cut-to- length plate products. AD cases were filed against all the countries and CVD duty cases were filed against six of the countries. On April 2, 1999, the ITC issued its preliminary determination that the domestic industry was being injured or threatened with injury as the result of imports from six of the countries. The ITC determined that the volume of imports from Macedonia and the Czech Republic were negligible and had declined in importance in the United States market relative to the other countries. On July 20, 1999, Commerce announced preliminary AD and CVD duty determinations. The preliminary injury determination and the preliminary duty determinations are subject to further investigation by the ITC and Commerce. On June 2, 1999, USX joined with eight other producers and the USWA and the ISU to file trade cases against twelve countries (Argentina, Brazil, China, Indonesia, Japan, Russia, South Africa, Slovakia, Taiwan, Thailand, Turkey, and Venezuela) concerning imports of cold-rolled products. AD cases were filed against all the countries and CVD duty cases were filed against Brazil, Indonesia, Thailand, and Venezuela. On July 19, 1999, the ITC issued its preliminary determination that the domestic industry was being injured or threatened with injury as the result of imports from all of the countries. The ITC, by a divided vote, decided to discontinue the CVD investigations of subsidized imports from Indonesia, Thailand, and Venezuela. Commerce is expected to announce preliminary duty determinations later in the year. These cases are subject to further investigation by both the ITC and Commerce. On June 30, 1999, USX joined with four other producers and the USWA to file trade cases against five countries (the Czech Republic, Japan, Mexico, Romania, and 78 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- South Africa) concerning imports of large and small diameter carbon and alloy standard, line, and pressure pipe. On July 20, 1999, Commerce announced its decision to initiate an investigation and the ITC's preliminary staff hearing was conducted on July 21, 1999. The ITC's preliminary injury determination is expected to be announced in mid-August and, assuming a preliminary determination of injury, Commerce is expected to announce preliminary duty determinations later in the year. Any preliminary injury determination and preliminary duty determinations are subject to further investigation by the ITC and Commerce. USX intends to file additional antidumping and countervailing duty petitions if unfairly traded imports adversely impact, or threaten to adversely impact, the results of the U. S. Steel Group. The forgoing discussion includes statements concerning anticipated steel pricing, product mix, and shipment levels are forward-looking and are based upon assumptions as to future product demand, prices and mix, and levels of steel production capability, production and shipments. These forward-looking statements can be affected by imports, domestic and international economies, domestic production capacity, and customer demand. In the event these assumptions prove to be inaccurate, actual results may differ significantly from those presently anticipated. On April 12, 1999, USX and Kobe Steel, Ltd. (Kobe Steel) announced that they had entered into a letter of intent with Blackstone Capital Partners II (Blackstone) to combine the steelmaking and bar producing assets of USS/Kobe Steel Company (USS/Kobe) with companies controlled by Blackstone, Republic Technologies International, Inc., Republic Engineered Steels, Inc. and Bar Technologies, Inc. (collectively Republic). In addition, on August 6, 1999, USX agreed to a $15 million equity investment in Repubic when the combination is consummated. USX currently owns 50% of USS/Kobe and will own approximately 15% of Republic. The seamless pipe business of USS/Kobe is excluded from this transaction and will continue to operate as a joint venture between USX and Kobe Steel. The transaction was subject to numerous conditions, including financing. As of the date of the issuance of the accompanying financial statements, it was uncertain whether several of these conditions would be resolved and the transaction would be completed. Due to these uncertainties, neither USX nor USS/Kobe recognized any financial effects of the transaction in the second quarter 1999. On August 6, 1999, Republic received financing commitments sufficient to complete the transaction, which is scheduled to be closed on August 13, 1999. The estimated fair value of USX's investment in Republic, based upon preliminary information supplied by Republic, is approximately $80 million less than USX's carrying value of its investment in the steelmaking and bar producing assets of USS/Kobe. Based on the resolution of the uncertainties and the anticipated closing of the transaction, USX expects to recognize an estimated impairment of $80 million in the third quarter of 1999. The statement with respect to the amount of the estimated impairment is forward-looking and is based on a number of assumptions including but not limited to fair value determination of Republic, equity investment and asset allocation. In the event these assumptions prove to be inaccurate, the actual impairment may differ significantly from the amount presently anticipated. If the transaction closes as anticipated, Republic has stated that it expects to incur operating losses through 2000, which will include restructuring charges associated with the consolidation of the combined operations. USX will recognize its share of any such losses under the equity method of accounting. 79 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- Year 2000 Readiness Disclosure - ------------------------------ A multi-functional Year 2000 task force continues to execute a preparedness plan which addresses readiness requirements for business computer systems, technical infrastructure, end-user computing, third parties, manufacturing, environmental operations, systems products produced and sold, and dedicated R&D test facilities. The U. S. Steel Group is executing a Year 2000 readiness plan which includes: . prioritizing and focusing on those computerized and automated systems and processes critical to the operations in terms of material safety, operational, environmental, quality and financial risk to the company. . allocating and committing appropriate resources to fix the problem. . communicating with, and aggressively pursuing, critical third parties to help ensure the Year 2000 readiness of their products and services through use of mailings, telephone contacts, on-site assessments and the inclusion of Year 2000 readiness language in purchase orders and contracts. . performing rigorous Year 2000 tests of critical systems. . participating in, and exchanging Year 2000 information with industry trade associations, such as the American Iron & Steel Institute, Association of Iron & Steel Engineers and the Steel Industry Systems Association. . engaging qualified outside engineering and information technology consulting firms to assist in the Year 2000 impact assessment and readiness effort. State of Readiness The Year 2000 inventory and date impact assessment activities for both information technology (IT) and non-IT systems/processes within the U. S. Steel Group are complete. IT systems/processes are 98% Year 2000 ready as of June 30, 1999, and the non-IT area is 99% ready. Progress on achieving Year 2000 readiness for both critical and non-critical systems/processes is ahead of the stated U. S. Steel Group objectives. All systems/processes for IT and non-IT are targeted to be Year 2000 ready, including testing on the exchange of information among systems/processes (integration testing), by the end of September, 1999. There are several systems/processes which will be replaced and/or upgraded with third-party Year 2000 ready products and services during the third quarter, 1999; however, implementation schedules have been established for such systems/processes. The remaining Year 2000 efforts in 1999 will primarily focus on (1) tracking and verifying the readiness of third parties critical to the business operations, (2) reviewing the effectiveness of the contingency plans that have been developed, (3) establishing Year 2000 crisis management command centers, (4) preparing and communicating final plans to the workforce and affected entities for the transition to the new century and (5) conducting the final round of Year 2000 assessments by the internal audit team. 80 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- The following table provides the percent of completion for the inventory of systems and processes that may be affected by the year 2000 ("Y2K Inventory"), the analysis performed to determine the Year 2000 date impact on inventoried systems and processes ("Y2K Impact Assessment") and the year 2000 readiness of the U. S. Steel Group`s year 2000 inventory ("Y2K Readiness of Overall Inventory"). The percent of completion for Y2K Readiness of Overall Inventory includes all inventory items not date impacted, those items already Year 2000 ready and those corrected and made Year 2000 ready through the renovation/replacement, testing and implementation activities.
Percent Completed Y2K Y2K Readiness Impact of Y2K Assess- Overall As of June 30, 1999 Inventory ment Inventory ------ ------ ------ Information Technology 100% 100% 98% Non-Information Technology 100% 100% 99%
Third Parties The U. S. Steel Group continues to review and track the Year 2000 readiness of its third party relationships (including, but not limited to outside processors, process control systems and hardware suppliers, telecommunication providers, and transportation carriers) who are critical to its operations. The majority of contacts have been made with critical third parties to determine if they will be able to provide their products and services to the U. S. Steel Group after the Year 2000. An aggressive follow-up process with those third parties not responding or returning an unacceptable response is underway. Communications with U. S. Steel Group's third parties is an on-going process which includes mailings, telephone contacts and on-site visits. If it is determined that there is a significant risk with a third party, an effort will be made to work with those third parties to resolve the issue, or a new provider of the same products or services will be investigated and secured. As of June 30, 1999, the U. S. Steel Group has sent out approximately 900 inquiries and over 92% have responded. Approximately 490 of these third parties are considered critical vendors/suppliers or outside steel processors. The response rate for the critical third parties is at 100%. Follow-up phone assessments have been made on 74% (362) of the critical third parties. For over 95% of those assessed to date, there is a medium to high level of assurance that the critical third parties will be Year 2000 ready. In addition, on-site Year 2000 assessments have also been made on several critical third parties to verify the effectiveness and accuracy of their responses. Other on-site assessments are planned, as conditions warrant. Additional phone and/or on-site assessments of critical third parties, as deemed necessary, are scheduled for completion by the end of third quarter, 1999; however, plans are to continue to monitor the readiness of critical third parties for the remainder of 1999. 81 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- The Costs to Address Year 2000 Issues The current estimated cost associated with Year 2000 readiness, is approximately $29 million, which includes $16 million in incremental cost. Total costs incurred as of June 30, 1999, were $19 million, including $8 million of incremental costs. In the third quarter, the estimated costs will be re- evaluated in consideration of the remaining project activities including the present state of readiness, implementation of contingency plans, continued monitoring of critical third parties, preparations and transition to the new century, and internal assessments of Year 2000 readiness. Year 2000 Risks to the Company The most reasonably likely worst case Year 2000 scenario would be the inability of third party suppliers, such as utility providers, telecommunication companies, outside processors, and other critical suppliers, to continue providing their products and services. This could pose the greatest material safety, operational, environmental, quality and/or financial risk to the company. In addition, the lack of accurate and timely Year 2000 date impact information from suppliers of automation and process control systems and processes is a concern to the U. S. Steel Group. Without timely and reliable information from suppliers, specifically on embedded chip technology, schedules for attaining readiness can be impacted and some Year 2000 problems could go undetected during the transition to the year 2000. Contingency Planning Since no one can predict with certainty the outcome of this unprecedented Year 2000 event, the U. S. Steel Group's primary strategy and defense against Year 2000 related problems is to diligently continue to mitigate risks through review and extensive testing of its critical systems/processes. From a Year 2000 contingency planning perspective, contingency plans have been developed and documented to provide continuity in the key business operations and corollary customer service. These plans were developed by contingency planning work groups representing each business/producing location with an executive steering committee overseeing the development process. The contingency planning strategies generally being employed include; (1) idle or shut down facilities for a short duration (minutes/hours in most cases as opposed to days) over the critical period during the change of the century to protect personnel and safeguard equipment and facilities, (2) curtail the processing of hot metal during the highest period of risk, (3) schedule extra key personnel over the critical turn of the century period to prepare the processing environment, to monitor conditions and to evaluate when it is safe to resume normal operations, (4) procure auxiliary power generation for critical functions with consideration to both the potential impact of Year 2000 and extreme inclement weather conditions, (5) establish strategically located command centers with appropriate communication facilities to collect and disseminate important information and to activate emergency escalation procedures, (6) review and adjust inventory levels as business conditions dictate to provide continuity in customer service, and (7) continue to evaluate the readiness of regular and alternate third party suppliers and service providers to help assure the availability and continuity of critical products and services. During the remainder of 1999, the contingency plans will be adjusted and tested, as applicable, as business conditions warrant. This discussion includes forward-looking statements of the U. S. Steel Group's efforts and management's expectations relating to Year 2000 readiness. The Steel 82 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- Group's ability to achieve Year 2000 readiness and the level of incremental costs associated therewith, could be adversely impacted by, among other things, the availability and cost of programming and testing resources, vendors' ability to install or modify proprietary hardware and software and unanticipated problems identified in the ongoing Year 2000 readiness review. Also, the U. S. Steel Group's ability to mitigate Year 2000 risks could be adversely impacted by the effectiveness of contingency plans. Accounting Standard - -------------------- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". This new standard requires recognition of all derivatives as either assets or liabilities at fair value. This new standard may result in additional volatility in both current period earnings and other comprehensive income as a result of recording recognized and unrecognized gains and losses resulting from changes in the fair value of derivative instruments. At adoption this new standard requires a comprehensive review of all outstanding derivative instruments to determine whether or not their use meets the hedge accounting criteria. Upon adoption, there may be derivative instruments employed by USX that do not meet all of the designated hedge criteria and they will be reflected in income on a mark-to-market basis. Based upon the strategies currently used by USX and the level of activity related to forward exchange contracts and commodity-based derivative instruments in recent periods, USX does not anticipate the effect of adoption to have a material impact on either financial position or results of operations for the U. S. Steel Group. The effective date of SFAS No. 133 was amended by SFAS No. 137. USX plans to adopt the standard effective January 1, 2001, as required. 83 U. S. STEEL GROUP OF USX CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------- Commodity Price Risk and Related Risks - -------------------------------------- Sensitivity analysis of the incremental effects on pretax income of hypothetical 10% and 25% decreases in commodity prices for open derivative commodity instruments as of June 30, 1999 are provided in the following table(a):
Incremental Decrease in Pretax Income Assuming a Hypothetical Price Change of(a) (Dollars in millions) 10% 25% - -------------------------------------------------------------------------------- Derivative Commodity Instruments U. S. Steel Group Natural gas (price decrease) $2.5 $6.3 Zinc (price decrease) 3.0 7.6 Tin (price decrease) .4 .7 Nickel (price decrease) .1 .2 (a) Gains and losses on derivative commodity instruments are generally offset by price changes in the underlying commodity. Effects of these offsets are not reflected in the sensitivity analyses. Amounts reflect the estimated incremental effect on pretax income of hypothetical 10% and 25% changes in closing commodity prices for each open contract position at June 30, 1999. U. S. Steel Group management evaluates its portfolio of derivative commodity instruments on an ongoing basis and adds or revises strategies to reflect anticipated market conditions and changes in risk profiles. Changes to the portfolio subsequent to June 30, 1999, would cause future pretax income effects to differ from those presented in the table.
84 U. S. STEEL GROUP OF USX CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------- Interest Rate Risk - ------------------ As of June 30, 1999, the discussion of the U. S. Steel Group's interest rate risk has not changed materially from that presented in Quantitative and Qualitative Disclosures About Market Risk included in USX's 1998 Form 10-K. Foreign Currency Exchange Rate Risk - ----------------------------------- As of June 30, 1999, the U. S. Steel Group had no material exposure to foreign currency exchange rate risk. Equity Price Risk - ----------------- USX was subject to equity price risk resulting from its issuance in December 1996 of $117 million of 6 3/4% Exchangeable Notes due February 1, 2000 ("indexed debt"). However, on March 31, 1999, USX irrevocably deposited with a trustee the entire 5.5 million shares it owned in RTI. The deposit of shares resulted in the satisfaction of USX's obligation under the indexed debt. Under the terms of the indenture, the trustee will exchange the RTI shares for the notes at maturity. USX is no longer exposed to any negative risks associated with changes in the value of RTI common stock. For further discussion, see Note 6 to the U.S. Steel Group Financial Statements. Safe Harbor - ----------- The U. S. Steel Group's Quantitative and Qualitative Disclosures About Market Risk include forward-looking statements with respect to management's opinion about risks associated with the U. S. Steel Group's use of derivative instruments. These statements are based on certain assumptions with respect to market prices and industry supply and demand for steel products and certain raw materials. To the extent that these assumptions prove to be inaccurate, future outcomes with respect to the U. S. Steel Group's hedging programs may differ materially from those discussed in the forward-looking statements. 85
U.S. STEEL GROUP OF USX CORPORATION SUPPLEMENTAL STATISTICS (Unaudited) ----------------------------------- Second Quarter Six Months Ended June 30 Ended June 30 (Dollars in millions) 1999 1998 1999 1998 - -------------------------------------------------------------------------------- REVENUES $1,304 $1,733 $2,515 $3,429 INCOME (LOSS) FROM OPERATIONS U. S. Steel Operations (a) (b) $(9) $154 $(68) $260 Items not allocated to segment: Pension Credits (c) 140 93 248 186 Administrative Expenses (8) (5) (13) (14) Cost related to former business activities (d) (20) (25) (44) (53) Loss on settlement of indexed debt with RTI International Metals, Inc. Stock - - (22) - ---- ---- ---- ---- Total U. S. Steel Group 103 217 101 379 PENSION COSTS INCLUDED IN U. S. STEEL OPERATIONS $52 $45 $108 $89 CAPITAL EXPENDITURES $74 $79 $153 $136 OPERATING STATISTICS Average steel price per ton $424 $477 $430 $476 Steel Shipments (e) 2,548 2,857 4,929 5,790 Raw Steel-Production (e) 3,091 2,902 5,840 6,045 Raw Steel-Capability Utilization (f) 96.9% 90.9% 92.0% 95.3% Total iron ore shipments (e) 4,823 4,989 6,186 6,772 - ---------- (a) Results in the first six months of 1999 included a $10 million charge for environmental accruals. Results in second quarter and the first six months of 1998 included approximately $30 million (net of related charges and reserves) for the settlement of litigation against company's property insurers to recover losses related to a 1995 explosion at the Gary Works No. 8 blast furnace. (b) Includes the production and sale of steel products, coke and taconite pellets; domestic coal mining; the management of mineral resources; engineering and consulting services; and equity income from joint ventures and partially owned companies, such as USS/Kobe Steel Company, USS-POSCO Industries, PRO-TEC Coating Company, Transtar Inc., and until March 31, 1999 RTI International Metals, Inc. (formerly RMI Titanium Company). Also includes results of real estate development and management, and leasing and financing activities. (c) Includes $35 million for a pension settlement gain primarily related to the early retirement program completed during the second quarter 1999. (d) Includes other postretirement benefit costs and certain other expenses principally attributable to former business units of the U. S. Steel Group. (e) Thousands of net tons (f) Based on annual raw steel production capability of 12.8 million tons.
86 Part II - Other Information - ---------------------------- Item 1. LEGAL PROCEEDINGS Marathon Group Posted Price Litigation The Marathon Group, alone or with other energy companies, has been named in a number of lawsuits in State and Federal courts alleging various causes of action related to crude oil royalty payments based on posted prices, including underpayment of royalty interests, underpayment of severance taxes, antitrust violations, and violation of the Texas common purchaser statue. Plaintiffs in these actions include governmental entities and private entities or individuals, and some seek class action status. All of these cases are in various states of preliminary activities. No class certification has been determined as to Marathon in any case to date. During November 1997, Marathon and over twenty other defendants entered into a proposed class settlement agreement covering antitrust and contract claims from January 1, 1986, through September 30, 1997, excluding federal and Indian royalty claims, common purchaser claims and severance tax claims. A new settlement agreement was filed with the U.S. District Court in Texas on June, 26, 1998, which replaces the November 1997 Settlement Agreement. The new settlement agreement omits from the settlement class all State entities which receive royalty payments and only covers private claimants. It will settle all private claims, subject to opt-outs, for a period from January 1, 1986 to September 30, 1998. The agreement was approved by the Court in April 1999. The approval of the settlement has been appealed to the 5th Circuit Court of Appeals. Marathon and approximately 20 other oil companies have settled a claim by the state of Texas that the oil companies allegedly had violated Texas's common purchaser statute and underpaid royalties on oil produced from state lands. Under the settlement, the companies will pay a total of $12.6 million. Multi-media In July, the U.S. Environmental Protection Agency ("EPA") served MAP with one Notice of Violation and two Findings of Violation in connection with its multimedia inspection of the Detroit Refinery. These informal action notices allege violations of the Michigan State Implementation Plan and the EPA New Source Performance Standards and National Emission Standards for Hazardous Air Pollutants for benzene. MAP has an opportunity to contest the factual and legal basis for the allegations prior to the EPA taking enforcement action. Other Environmental Cases In July 1999, Speedway SuperAmerica LLC was assessed a $112,000 penalty by the West Virginia Division of Environmental Protection for the Resource Conservation and Recovery Act violations including, among other things, the storing of ignitable and hazardous waste and failing to correctly label hazardous waste containers and properly characterize all waste. 87 At the Robinson refinery the Department of Justice filed a civil complaint in February 1999, alleging violation of the Clean Air Act with respect to benzene releases at the Robinson refinery. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of stockholders was held April 27, 1999. In connection with the meeting, proxies were solicited pursuant to the Securities Exchange Act. The following are the voting results on proposals considered and voted upon at the meeting, all of which were described in the proxy statement. 1. All nominees for director listed in the proxy statement were elected. 2. PricewaterhouseCoopers LLP was elected as the independent accountants for 1999. (For, 356,025,355; against, 683,304; abstained, 1,415,852). 88 Part II - Other Information (Continued): - --------------------------- Item 5. OTHER INFORMATION (Continued) Marathon Group SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION OF MARATHON OIL COMPANY Supplementary Data --------------------------------------------------------------------- (Unaudited) The following summarized consolidated financial information of Marathon Oil Company, a wholly owned subsidiary of USX, is included in this Form 10-Q in satisfaction of the reporting obligation of Marathon which has debt securities registered under the Securities Exchange Act. All such securities are guaranteed by USX.
(In millions) ------------------------------- Second Quarter Six Months Ended Ended June 30 June 30 1999 1998 1999 1998 ---- ---- ---- ---- INCOME DATA: Revenues $5,480 $5,524 $10,322 $11,026 Income from operations 415 460 823 868 Net income 143 148 254 321
(In millions) ----------------------- June 30 December 31 1999 1998 -------- ----------- BALANCE SHEET DATA: Assets: Current assets $5,093 $4,742 Noncurrent assets 11,286 11,420 ------ ------ Total assets $16,379 $16,162 ====== ====== Liabilities and Stockholder's Equity: Current liabilities $2,430 $2,543 Noncurrent liabilities 9,353 9,428 Preferred stock of subsidiary 10 17 Minority interest in consolidated subsidiary 1,744 1,590 Stockholder's equity 2,842 2,584 ------- ------- Total liabilities and stockholder's equity $16,379 $16,162 ======= =======
89 Part II - Other Information (Continued): - ---------------------------------------- Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 3.1 USX Restated Certificate of Incorporation dated May 1, 1999................. 3.2 USX By-Laws, effective as of May 1, 1999................ 4.1 Amended and Restated Rights Agreement.................. Incorporated by reference to USX's Form 8 Amendment to Form 8-A filed on October 9, 1992 (File No. 1-5153). 10(h) Amended and Restated Limited Liability Agreement of Marathon Ashland Petroleum LLC, dated as of December 31, 1998. 10(i) Amendment No. 1 dated as of December 31, 1998, to the Put/Call Registration Rights and Standstill Agreement dated as of January 1, 1998 of Marathon Ashland Petroleum LLC. 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 August 13, 1999 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) Six Months Ended Year Ended December 31 June 30 -------------------------------- 1999 1998 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- ---- Portion of rentals representing interest $49 $50 $105 $82 $78 $76 $83 Capitalized interest 20 23 46 31 11 13 58 Other interest and fixed charges 168 150 328 312 382 452 456 Pretax earnings which would be required to cover preferred stock dividend requirements of parent 7 8 15 20 36 46 49 ---- ---- ---- ---- ---- ---- ---- Combined fixed charges and preferred stock dividends (A) $244 $231 $494 $445 $507 $587 $646 ==== ==== ==== ==== ==== ==== ==== Earnings-pretax income with applicable adjustments (B) $949 $1265 $1662 $1745 $1837 $877 $1300 ==== ==== ==== ==== ==== ==== ==== Ratio of (B) to (A) 3.89 5.48 3.36 3.92 3.62 1.49 2.01 ==== ==== ==== ==== ==== ==== ====
EX-12.2 3 Exhibit 12.2
USX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES TOTAL ENTERPRISE BASIS - (Unaudited) ------------------------------------------------- (Dollars in Millions) Six Months Ended Year Ended December 31 June 30 -------------------------------- 1999 1998 1998 1997 1996 1995 1994 ---- ---- ---- ----- ---- ---- ---- Portion of rentals representing interest $49 $50 $105 $82 $78 $76 $83 Capitalized interest 20 23 46 31 11 13 58 Other interest and fixed charges 168 150 328 312 382 452 456 ---- ---- ---- ---- ---- ----- ---- Total fixed charges (A) $237 $223 $479 $425 $471 $541 $597 ==== ==== ==== ==== ==== ==== ==== Earnings-pretax income with applicable adjustments (B) $949 $1265 $1662 $1745 $1837 $877 $1300 ==== ==== ==== ==== ==== ==== ==== Ratio of (B) to (A) 4.00 5.67 3.47 4.11 3.90 1.62 2.18 ==== ==== ==== ==== ==== ==== ====
EX-27 4
5 1,000,000 6-MOS DEC-31-1999 JUN-30-1999 99 0 1697 8 2607 4843 29355 16632 21600 3606 4059 182 3 397 6119 21600 12809 12820 11917 11917 0 0 174 472 173 299 0 5 0 294 0 0 Consists of Marathon Stock issued, $309; Steel Stock issued, $88. Basic earnings per share applicable to Marathon Stock, $.82; Steel Stock, $.41. Diluted earnings per share applicable to Marathon Stock, $.82; Steel Stock, $.41.
EX-3.1 5 Exhibit 3.1 USX Corporation Restated Certificate of Incorporation FILED IN OFFICE OF SECRETARY OF STATE, STATE OF DELAWARE MAY 1, 1999 Table of Contents Article First-Corporate Name 1 Article Second-Registered Office 1 Article Third-Corporate Purpose 1 Article 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 Road, 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 of $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 therof, 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 therfor. (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 therfor 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 therfor 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), 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. 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); (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 2(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 for 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. 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 received 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. (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 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 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 been 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 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 662/3% 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 662/3% 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 662/3% 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; 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 proviso 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 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 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 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 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. ''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; (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 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. (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; (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 (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 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: (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 662/3% 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 3,000,000. 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 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:
Year Redemption Dollar Price Equivalent (As a percentage of Per Share initial liquidation preference) 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. (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 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 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 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 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 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 121/2% of the product of the 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 121/2% 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 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 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 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. (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 662/3% 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 662/3% 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 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 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. ''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 . ''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 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. 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 May, 1999. USX CORPORATION /s/ T. J. Usher By: T. J. Usher Chairman of the Board of Directors EX-3.2 6 USX CORPORATION BY-LAWS MAY 1, 1999 BY-LAWS of USX CORPORATION May 1, 1999 ARTICLE I. Stockholders. Section 1. Time and Place of Meetings of Stockholders. Unless the time and place of the annual meeting of stockholders for the purpose of electing directors and transacting such other business as may be brought before the meeting are changed by the Board of Directors, as may be done from time to time, provided that all legal requirements for such change and notice to stockholders are observed, such annual meeting of stockholders of the Corporation shall be held at 1013 Centre Road, City of Wilmington, County of New Castle, and State of Delaware at 2 o'clock, p.m., on the last Tuesday in April in each year, if not a legal holiday, and if a legal holiday, then on the next succeeding Tuesday which is not a legal holiday. Special meetings of the stockholders may be called by the Board of Directors to be held at such time and place and for such purpose or purposes as are specified in such call. Neither the annual meeting nor any special meeting of stockholders need be held within the State of Delaware. 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. Section 2. Notice of Meetings of Stockholders. It shall be the duty of the Secretary to cause notice of each annual or special meeting to be mailed to all stockholders of record as of the record date as fixed by the Board of Directors for the determination of stockholders entitled to vote at such meeting. Such notice shall indicate briefly the action to be taken at such meeting and shall be mailed to the stockholders at the addresses of such stockholders as shown on the books of the Corporation at least 10 days but not more than 60 days preceding the meeting. Section 3. Nomination of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nomination for election to the Board of Directors of the Corporation at a meeting of stockholders may be made by the Board of Directors or by any stockholder of record of the Corporation entitled to vote generally for the election of directors at such meeting who complies with the notice procedures set forth in this Section 3. Such nominations, other than those made by or on behalf of the Board of Directors, shall be made by notice in writing delivered or mailed by first class United States mail, postage prepaid, to the Secretary, and received not less than 45 days nor more than 75 days prior to the first anniversary of the date on which the Corporation first mailed its proxy materials for the preceding year's annual meeting of stockholders; provided, however, that if the date of the annual meeting is advanced more than 30 days prior to or delayed by more than 30 days after the anniversary of the preceding year's annual meeting, notice by the stockholder to be timely must be so delivered not later than the close of business on the later of (i) the 90th day prior to such annual meeting or (ii) the 10th day following the day on which public announcement of the date of such meeting is first made. Such notice shall set forth (a) as to each proposed nominee (i) the name, age, business address and, if known, residence address of each such nominee, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of each class of the capital stock of the Corporation which are beneficially owned by each such nominee, and (iv) any other information concerning the nominee that must be disclosed as to nominees in proxy solicitations pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to be named as a nominee and to serve as a director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such stockholder and (ii) the number of shares of each class of the capital stock of the Corporation which are beneficially owned by such stockholder. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation. The chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Section 4. Notice of Business at Annual Meetings. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a stockholder of record. For business to be properly brought before an annual meeting by a stockholder, if such business relates to the election of directors of the Corporation, the procedures in Article I, Section 3 must be complied with. If such business relates to any other matter, the stockholder must have given timely notice thereof in writing to the Secretary. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 45 days nor more than 75 days prior to the first anniversary of the date on which the Corporation first mailed its proxy materials for the preceding year's annual meeting of stockholders; provided, however, that if the date of the annual meeting is advanced more than 30 days prior to or delayed by more than 30 days after the anniversary of the preceding year's annual meeting, notice by the stockholder to be timely must be so delivered not later than the close of business on the later of (i) the 90th day prior to such annual meeting or (ii) the 10th day following the day on which public announcement of the date of such meeting is first made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the number of shares of each class of the capital stock of the Corporation which are beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 4 and in Section 3 of this Article I and except that any stockholder proposal which complies with Rule 14a-8 of the proxy rules (or any successor provision) promulgated under the Securities Exchange Act of 1934, as amended, and is to be included in the Corporation's proxy statement for an annual meeting of stockholders shall be deemed to comply with the requirements of this Section 4. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 4, and if he should so determine, the chairman shall so declare to the meeting that any such business not properly brought before the meeting shall not be transacted. Section 5. Quorum. At each meeting of the stockholders the holders of one- third of the voting power of the outstanding shares of stock entitled to vote generally at the meeting, present in person or represented by proxy, shall constitute a quorum, unless the representation of a larger number shall be required by law, and, in that case, the representation of the number so required shall constitute a quorum. Except as otherwise required by law, a majority of the voting power of the shares of stock entitled to vote generally at a meeting and present in person or by proxy, whether or not constituting a quorum, may adjourn, from time to time, without notice other than by announcement at the meeting. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. Section 6. Organization. The Chairman of the Board, or in his absence the Vice Chairman of the Board designated by the Chairman of the Board, or the President in the order named, shall call meetings of the stockholders to order, and shall act as chairman of such meeting; provided, however, that the Board of Directors may appoint any person to act as chairman of any meeting in the absence of the Chairman of the Board. The Secretary of the Corporation shall act as secretary at all meetings of the stockholders; but in the absence of the Secretary at any meeting of the stockholders the presiding officer may appoint any person to act as secretary of the meeting. Section 7. Voting. At each meeting of the stockholders, every stockholder shall be entitled to vote in person, or by proxy appointed by instrument in writing, subscribed by such stockholder or by his duly authorized attorney, or, to the extent permitted by law, appointed by an electronic transmission, and delivered to the inspectors at the meeting; and he shall have the number of votes for each share of capital stock standing registered in his name at the date fixed by the Board of Directors pursuant to Section 4 of Article IV of these By-Laws as may be determined in accordance with the Corporation's Certificate of Incorporation, or as may be provided by law. The votes for directors, and, upon demand of any stockholder, or where required by law, the votes upon any question before the meeting, shall be by ballot. At least ten days before each meeting of the stockholders, a full, true and complete list, in alphabetical order, of all of the stockholders entitled to vote at such meeting, showing the address of each stockholder, and indicating the class and number of shares held by each, shall be furnished and held open for inspection in such manner, as is required by law. Only the persons in whose names shares of stock stand on the books of the Corporation at the date fixed by the Board of Directors pursuant to Section 4 of Article IV of these By-Laws, as evidenced in the manner provided by law, shall be entitled to vote in person or by proxy on the shares so standing in their names. Prior to any meeting, but subsequent to the date fixed by the Board of Directors pursuant to Section 4 of Article IV of these By-Laws, any proxy may submit his powers of attorney to the Secretary, or to the Treasurer, for examination. The certificate of the Secretary, or of the Treasurer, as to the regularity of such powers of attorney, and as to the class and number of shares held by the persons who severally and respectively executed such powers of attorney, shall be received as prima facie evidence of the class and number of shares represented by the holder of such powers of attorney for the purpose of establishing the presence of a quorum at such meeting and of organizing the same, and for all other purposes. Section 8. Inspectors. At each meeting of the stockholders, the polls shall be opened and closed, the proxies and ballots shall be received and be taken in charge, and all questions touching the qualification of voters and the validity of proxies and the acceptance or rejection of votes, shall be decided by one or more inspectors. Such inspector or inspectors shall be appointed by the Board of Directors before the meeting. If for any reason any of the inspectors previously appointed shall fail to attend or refuse or be unable to serve, inspectors in place of any so failing to attend or refusing or unable to serve, shall be appointed in like manner. ARTICLE II. Board of Directors. Section 1. Number, Classes and Terms of Office. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. The number of directors shall be fixed from time to time by resolution of the Board of Directors, 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 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 only by the Board of Directors. Section 2. Vacancies. Except as otherwise provided by law, in the case of any vacancy in the Board of Directors through 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 only by a majority of the Board of Directors then in office, though less than a quorum. Section 3. Removal. Directors of the Corporation may be removed only for cause. Section 4. Place of Meetings, etc. The Board of Directors may hold its meetings, and may have an office and keep the books of the Corporation (except as otherwise may be provided for by law) in such place or places in the State of Delaware or outside of the State of Delaware, as the Board from time to time may determine. Section 5. Regular Meetings. Regular meetings of the Board of Directors shall be held at such times as may be fixed by resolution of the Board of Directors. The Secretary shall give notice, as provided for special meetings, for each regular meeting. Section 6. Special Meetings. Special meetings of the Board of Directors shall be held whenever called by direction of the Chairman or a Vice Chairman of the Board, or the President, or a majority of the directors then in office. The Secretary shall give notice of each special meeting by mailing the same at least two days before the meeting, or by telegraphing or telexing or by facsimile transmission of the same at least one day before the meeting, to each director; but such notice may be waived by any director. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. At any meeting at which every director shall be present, even though without any notice, any business may be transacted. Section 7. Quorum. A majority of the total number of directors shall constitute a quorum for the transaction of business; but if at any meeting of the Board there be less than a quorum present, a majority of those present may adjourn the meeting from time to time. At any meeting of the Board of Directors all matters shall be decided by the affirmative vote of a majority of directors then present, provided, that the affirmative vote of at least one-third of all the directors then in office shall be necessary for the passage of any resolution. Section 8. Order of Business. At meetings of the Board of Directors business shall be transacted in such order as, from time to time, the Board may determine by resolution. At all meetings of the Board of Directors, the Chairman of the Board or in his absence the Vice Chairman of the Board designated by the Chairman of the Board, or the President, in the order named, shall preside. Section 9. Compensation of Directors. Each director of the Corporation who is not a salaried officer or employee of the Corporation, or of a subsidiary of the Corporation, shall receive such allowances for serving as a director and such fees for attendance at meetings of the Board of Directors or any committee appointed by the Board as the Board may from time to time determine. Section 10. Election of Officers. At the first regular meeting of the Board of Directors in each year (at which a quorum shall be present) held next after the annual meeting, the Board of Directors shall proceed to the election of the principal officers of the Corporation to be elected by the Board of Directors under the provisions of Article III of these By-Laws. ARTICLE III. Officers. Section 1. Officers. The principal officers of the Corporation shall be a Chairman of the Board of Directors, one or more Vice Chairmen of the Board of Directors, a President, one or more Executive-Directors, one or more Executive Vice Presidents, one or more Group Presidents, a Senior Vice President-Finance, a General Counsel, a Treasurer, a Secretary and a Comptroller, none of whom need be directors. All such principal officers shall be elected by the Board of Directors. Each principal officer who shall be a member of the Board of Directors shall be considered an Officer-Director. The Board of Directors or any committee or officer designated by it may appoint such other officers as it or he shall deem necessary, who shall have such authority and shall perform such duties as from time to time may be assigned to them by or with the authority of the Board of Directors. One person may hold two or more offices. In its discretion, the Board of Directors may leave unfilled any office. All officers, agents and employees shall be subject to removal at any time by the Board of Directors. All officers, agents and employees, other than officers elected by the Board of Directors, shall hold office at the discretion of the committee or of the officer appointing them. Each of the salaried officers of the Corporation shall devote his entire time, skill and energy to the business of the Corporation, unless the contrary is expressly consented to by the Board of Directors. Section 2. Powers and Duties of the Chairman of the Board. The Chairman of the Board of Directors shall be the chief executive officer of the Corporation and, subject to the Board of Directors, shall be in general charge of the affairs of the Corporation. He shall preside at all meetings of the stockholders and of the Board of Directors. Section 3. Powers and Duties of the Vice Chairmen of the Vice Chairmen Board, the President and the Executive-Directors. Subject to the Chairman of the Board of Directors and the Board itself, the Vice Chairmen of the Board, the President and the Executive-Directors shall have such duties as may be assigned to them by the Chairman of the Board of Directors or the Board itself. Section 4. Executive Vice Presidents, Group Presidents and Senior Vice President-Finance. Each Executive Vice President, each Group President and the Senior Vice President-Finance shall have such authority, and shall perform such duties, as may be assigned to him. Section 5. The General Counsel. The General Counsel shall be the chief consulting officer of the Corporation in all legal matters, and, subject to the Chairman of the Board of Directors and the Board itself, shall have general control of all matters of legal import concerning the Corporation. Section 6. Powers and Duties of Treasurer. Subject to the officer designated by the Board of Directors, the Treasurer shall have custody of all the funds and securities of the Corporation which may have come into his hands; when necessary or proper he shall endorse, or cause to be endorsed, on behalf of the Corporation, for collection, checks, notes and other obligations, and shall cause the deposit of same to the credit of the Corporation in such bank or banks or depositary as the Board of Directors may designate or as the Board of Directors by resolution may authorize; he shall sign all receipts and vouchers for payments made to the Corporation other than routine receipts and vouchers, the signing of which he may delegate; he shall sign all checks made by the Corporation; provided, however, that the Board of Directors may authorize and prescribe by resolution the manner in which checks drawn on banks or depositaries shall be signed, including the use of facsimile signatures, and the manner in which officers, agents or employees shall be authorized to sign; he may sign with the President or a vice president all certificates of shares in the capital stock; whenever required by the Board of Directors, he shall render a statement of his cash account; he shall enter regularly, in books of the Corporation to be kept by him for the purpose, full and accurate account of all moneys received and paid by him on account of the Corporation; he shall, at all reasonable times, exhibit his books and accounts to any director of the Corporation upon application at his office during business hours; and he shall perform all acts incident to the position of treasurer. He shall give a bond for the faithful discharge of his duties in such sum as the Board of Directors may require. Section 7. Powers and Duties of Secretary. The Secretary shall keep the minutes of all meetings of the Board and the minutes of all meetings of the stockholders, and also (unless otherwise directed by the Board of Directors) the minutes of all committees, in books provided for that purpose; he shall attend to the giving and serving of all notices of the Corporation; he may sign with an Officer-Director or any other duly authorized person, in the name of the Corporation, all contracts authorized by the Board of Directors, and affix the seal of the Corporation thereto; he shall have charge of the certificate books, transfer books and stock ledgers, and such other books and papers as the Board of Directors may direct, all of which shall, at all reasonable times, be open to the examination of any director, upon application at the Secretary's office during business hours; and he shall in general perform all the duties incident to the office of secretary, subject to the control of the Chairman of the Board of Directors and the Board itself. Section 8. Comptroller. Subject to the officer designated by the Board of Directors, the Comptroller shall be in charge of the accounts of the Corporation, and shall perform such duties as from time to time may be assigned to him. Section 9. Voting upon Stocks. Unless otherwise ordered by the Board of Directors, any Officer-Director or any person or persons appointed in writing by any of them, shall have full power and authority in behalf of the Corporation to attend and to act and to vote at any meetings of stockholders of any corporation in which the Corporation may hold stock, and at any such meeting shall possess and may exercise any and all the rights and powers incident to the ownership of such stock, and which, as the owner thereof, the Corporation might have possessed and exercised if present. The Board of Directors, by resolution, from time to time, may confer like powers upon any other person or persons. ARTICLE IV. Capital Stock - Seal. Section 1. Certificates of Shares. The certificates for shares of each class of the capital stock of the Corporation shall be in such form, not inconsistent with the Certificate of Incorporation, as shall be prepared or be approved by the Board of Directors. No certificate shall be valid unless it is signed by the Chairman or a Vice Chairman of the Board of Directors or the President or a vice president, and either the Treasurer or an assistant treasurer, or the Secretary or an assistant secretary, but where such certificate is signed by a registrar other than the Corporation or its employee the signatures of any such officer and, where authorized by resolution of the Board of Directors, any transfer agent may be facsimiles. In case any officer or transfer agent of the Corporation who has signed, or whose facsimile signature has been placed upon, any such certificate shall have ceased to be such officer or transfer agent of the Corporation before such certificate is issued, such certificate may be issued by the Corporation with the same effect as though the person or persons were such officer or transfer agent of the Corporation at the date of issue. All certificates for each class of capital stock of the Corporation shall be consecutively numbered. The name of the person owning the shares represented thereby, with the class and number of such shares and the date of issue, shall be entered on the Corporation's books. All certificates surrendered to the Corporation shall be cancelled, and no new certificate shall be issued until the former certificate for the same class and number of shares of the same class shall have been surrendered and cancelled, except in accordance with procedures established by the Board of Directors or where required by law. Section 2. Transfer of Shares. Shares in the capital stock of the Corporation shall be transferred only on the books of the Corporation by the holder thereof in person, or by his attorney, upon surrender and cancellation of certificates for a like class and number of shares. Section 3. Regulations. The Board of Directors shall have power and authority to make all such rules and regulations as respectively they may deem expedient, concerning the issue, transfer and registration of certificates for shares of the capital stock of the Corporation. The Board of Directors may appoint one or more transfer agents or assistant transfer agents and one or more registrars of transfers, and may require all stock certificates to bear the signature of a transfer agent or assistant transfer agent and a registrar of transfers. The Board of Directors may at any time terminate the appointment of any transfer agent or any assistant transfer agent or any registrar of transfers. Section 4. Fixing Date for determination of Stockholders' Rights. The Board of Directors is authorized from time to time to fix in advance a date, not exceeding 60 days preceding the date of any meeting of stockholders, or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, as a record date for the determination of the stockholders entitled to notice of, and to vote at, any such meeting and any adjournment thereof, or entitled to receive payment of any such dividend, or to any such allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of capital stock, and in such case such stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to such notice of, and to vote at, such meeting and any adjournment thereof, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after any such record date fixed as aforesaid. Section 5. Dividends. The Board of Directors may from time to time declare such dividends as they shall deem advisable and proper, subject to such restrictions as may be imposed by law and the Corporation's Certificate of Incorporation. Section 6. Facsimile Signatures. In addition to the provisions for the use of facsimile signatures elsewhere specifically authorized in these By-Laws, facsimile signatures of any officer or officers of this Corporation may be used whenever and as authorized by the Board of Directors. Section 7. Corporate Seal. The Board of Directors shall provide a suitable seal, containing the name of the Corporation, which seal shall be in charge of the Secretary. If and when so directed by the Board of Directors, duplicates of the seal may be kept and be used by the Treasurer or by any assistant secretary or assistant treasurer. ARTICLE V. Indemnification. Section 1. Right to Indemnification. The Corporation shall indemnify and hold harmless to the fullest extent permitted by law any person who was or is made or is threatened to be made a party or is involved in any action, suit, or proceeding whether civil, criminal, administrative or investigative ("proceeding") by reason of the fact that he, or a person for whom he is the legal representative, is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or non-profit entity, including service with respect to employee benefit plans, against all expenses, liability, and loss reasonably incurred or suffered by such person. The Corporation shall indemnify any person seeking indemnity in connection with a proceeding initiated by such person only if the proceeding was authorized by the Board of Directors of the Corporation. Section 2. Prepayment of Expenses. The Corporation shall pay the expenses reasonably incurred in defending any such proceeding in advance of its final disposition provided however the payment of expenses incurred by a director or officer in his capacity as a director or officer (except with regard to service to an employee benefit plan or nonprofit entity) in advance of the final disposition of the proceeding shall be made only upon the agreement by the director or officer to repay all amounts advanced if it should be determined that the director or officer is not entitled to be indemnified under this Article or otherwise, and provided, further, that the Corporation shall have no obligation to pay any expenses in advance pursuant to this Section 2 to any person who is or was an employee or agent of the Corporation (other than a director or an officer) or is or was serving at the request of the Corporation as an employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, with respect to any proceeding by or in the right of the Corporation to procure a judgment in its favor. Section 3. Claims. If a claim under this Article is not paid in full within ninety days after a written claim has been received by the Corporation, the claimant may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid in addition the expense of prosecuting such claim. In any such action the Corporation shall have the burden of proving that the claimant was not eligible for indemnification under applicable law. Section 4. Non-Exclusivity of Rights. The rights conferred on any person by this Article shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, By-Law, agreement, vote of stockholders or disinterested directors or otherwise. ARTICLE VI. Amendments. Section 1. The Board of Directors shall have power to adopt, amend and repeal the By-Laws at any regular or special meeting of the Board, 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 holders of outstanding shares of the capital stock of the Corporation having two-thirds of the votes entitled to be cast 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. EX-10.H 7 Exhibit 10(h) 1EXECUTION COPY AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT of MARATHON ASHLAND PETROLEUM LLC Dated as of December 31, 1998 AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT dated as of December 31, 1998, of MARATHON ASHLAND PETROLEUM LLC (the "Company"), by and between Marathon Oil Company, an Ohio corporation ("Marathon"), and Ashland Inc., a Kentucky corporation ("Ashland"), as Members. Preliminary Statement WHEREAS, on June 11, 1997, Marathon and Emro Marketing Company ("Emro Marketing") formed the Company (formerly known as "Emro Supply, LLC") by filing a Certificate of Formation of the Company with the Secretary of State of the State of Delaware and executed the Limited Liability Company Agreement of the Company pursuant to which Marathon received a 60% interest in the Company and Emro Marketing received a 40% interest in the Company; WHEREAS, on July 18, 1997, Emro Marketing assigned its interest in the Company to Marathon and Fuelgas Company, Inc., a wholly owned subsidiary of Marathon ("Fuelgas"), with Marathon receiving an additional 39% interest in the Company and Fuelgas receiving a 1% interest in the Company, which interest will be transferred to Marathon immediately following the Closing (for purposes of this Agreement and the other Transaction Documents, all references to Marathon's interest in the Company shall be deemed to include the 1% interest owned by Fuelgas); WHEREAS, on July 18, 1997, Marathon and Fuelgas executed the First Amended and Restated Limited Liability Company Agreement of the Company and filed an Amended and Restated Certificate of Formation of the Company with the Secretary of State of the State of Delaware; WHEREAS, on October 29, 1997, Marathon and Fuelgas filed a Second Amended and Restated Certificate of Formation of the Company with the Secretary of State of the State of Delaware to change the name of the Company to Marathon Ashland Petroleum LLC; WHEREAS, on December 8, 1997, Marathon and Fuelgas executed the Second Amended and Restated Limited Liability Company Agreement of the Company which became effective on December 10, 1997; WHEREAS the parties hereto desire that the Company (a) be a premier petroleum supply, refining, marketing and transportation business, (b) create a highly efficient, cost-effective and competitive petroleum supply, refining, marketing and transportation system, (c) deliver to the Members the highest possible economic value added, (d) be customer-focused and market-driven in its business strategy, (e) be a respected and responsible member of the communities in which the Company will operate, with a high regard for environmental responsibility and employee safety, and (f) seek to maximize Distributable Cash to the Members consistent with the foregoing, including capital spending levels which over time are expected to be generally equivalent to the level of non-cash charges; and WHEREAS the Members entered into this Agreement on January 1, 1998 to set forth the rights and responsibilities of each of them with respect to the governance, financing and operation of the Company; WHEREAS, the Members have executed Amendment No. 1 to this Agreement as of August 21, 1998, and have executed Amendment No. 2 to this Agreement as of September 1, 1998; and WHEREAS, the Members wish to make certain additional amendments to this Agreement, and to restate this Agreement incorporating such additional amendments as well as the amendments contained in Amendment No. 1 and Amendment No. 2. NOW, THEREFORE, the parties hereto hereby agree as follows: ARTICLE I Certain Definitions; Applicable GAAP SECTION 1.01. Definitions. Defined terms used in this Agreement shall have the meanings ascribed to them by definition in this Agreement or in Appendix A. In addition, when used herein the following terms have the following meanings: "Accounting Determination" has the meaning set forth in Section 1.02. "Acquisition Expenditures" means, in connection with any acquisition by the Company and its subsidiaries, without duplication (i) the purchase price paid or to be paid for the net assets or capital stock or other equity interests in connection with such acquisition, (ii) any Indebtedness assumed by the Company and its subsidiaries in connection with any such acquisition, (iii) any contingent liabilities assumed or incurred by the Company and its subsidiaries in connection with any such acquisition to the extent that such contingent liabilities are required to be reflected on the balance sheet of the Company and its subsidiaries in accordance with Financial Accounting Standard Number 5 (or any successor or superseding provision of Applicable GAAP), and (iv) all other costs and expenses incurred or to be incurred by the Company or any of its subsidiaries in connection with any such acquisition to the extent that such costs and expenses would be capitalized if such acquisition were consummated. "Adjustable Amount" has the meaning set forth in Section 8.13. "Additional Monetary Amount" has the meaning set forth in Section 14.03(c). "Additional Required Cash Amount" has the meaning set forth in Section 14.01(a). "Adjusted DD&A" means: (i) for the twelve-month periods ended December 31, 1995 and 1996, $348 million and $346 million, respectively; (ii) for the twelve-month period ended December 31, 1997, the total combined depreciation, depletion and amortization expense of the Marathon Business and the Ashland Business during such twelve-month period, including, without duplication, (a) any gains (deductions from depreciation, depletion and amortization) or losses (additions to depreciation, depletion and amortization) on asset retirements during such period and (b) pro forma depreciation, depletion and amortization expense related to the Financed Properties during such period (calculated in the same manner such pro forma depreciation, depletion and amortization expense was calculated in Schedule A, which considers the placed-in-service dates of the Financed Properties); (iii) for the twelve-month period ended September 30, 1998, the sum of: (a) the total combined depreciation, depletion and amortization expense of the Marathon Business and the Ashland Business during the period commencing on October 1, 1997, and ended on the date immediately preceding the Closing Date, including, without duplication, (1) any gains (deductions from depreciation, depletion and amortization) or losses (additions to depreciation, depletion and amortization) on asset retirements during such period and (2) pro forma depreciation, depletion and amortization expense related to the Financed Properties during such period (calculated in the same manner such pro forma depreciation, depletion and amortization expense was calculated in Schedule A, which considers the placed-in-service dates of the Financed Properties); and (b) the total depreciation, depletion and amortization expense of the Company and its subsidiaries for the period commencing on the Closing Date and ended on September 30, 1998, including (1) any gains (deductions from depreciation, depletion and amortization) or losses (additions to depreciation, depletion and amortization) on asset retirements during such period, (2) depreciation, depletion and amortization expense related to the Garyville Propylene Upgrade Project during such period and (3) depreciation, depletion and amortization expense related to all Company-funded Capital Expenditures, but excluding (4) depreciation, depletion and amortization expense related to Member-Funded Capital Expenditures and (5) the increase or decrease in such depreciation, depletion and amortization expense related to the Ashland Transferred Assets (including pro forma depreciation, depletion and amortization expense related to the Financed Properties) resulting from the application of purchase accounting treatment to the transactions contemplated by the Transaction Documents (such purchase accounting treatment causing an increase or decrease in the estimated useful lives and the net book value of the Ashland Transferred Assets); and (iv) for the twelve-month period ended September 30, 1999, and each twelve-month period ended September 30 thereafter, the total depreciation, depletion and amortization expense of the Company and its subsidiaries for such twelve-month period, including, without duplication, (a) any gains (deductions from depreciation, depletion and amortization) or losses (additions to depreciation, depletion and amortization) on asset retirements during such period, (b) depreciation, depletion and amortization expense related to the Garyville Propylene Upgrade Project during such period and (c) depreciation, depletion and amortization expense related to Company-funded Capital Expenditures but excluding (d) depreciation, depletion and amortization expense related to Member-Funded Capital Expenditures and (e) the increase or decrease in such depreciation, depletion and amortization expense related to the Ashland Transferred Assets (including pro forma depreciation, depletion and amortization expense related to the Financed Properties) resulting from the application of purchase accounting treatment to the transactions contemplated by the Transaction Documents (such purchase accounting treatment causing an increase or decrease in the estimated useful lives and the net book value of the Ashland Transferred Assets); all as determined on a consolidated basis with respect to (x) in the case of any period ending prior to the Closing Date, Marathon and its subsidiaries or Ashland and its subsidiaries, as applicable, or (y) in the case of any period ending on or after the Closing Date, the Company and its subsidiaries, in each case in accordance with Applicable GAAP. "Adjusted EBITDA" means: (i) for the twelve-month periods ended December 31, 1995 and 1996, $657 million and $600 million, respectively; (ii) for the twelve-month period ended December 31, 1997, the sum of: (a) Historical EBITDA for such twelve-month period, plus (b) $80 million, minus (c) 38% of an amount equal to (1) the sum of the amounts calculated pursuant to clauses (a) and (b) above for such twelve-month period less (2) the Adjusted DD&A for such twelve-month period. (iii) for the twelve-month period ended September 30, 1998, the sum of: (a) for the period commencing on October 1, 1997, and ended on the date immediately preceding the Closing Date, the sum of: (1) Historical EBITDA for such period, plus (2) $20 million, minus (3) 38% of an amount equal to (A) the sum of the amounts calculated pursuant to clauses (1) and (2) above with respect to such period less (B) the Adjusted DD&A for such period; and (b) for the period commencing on the Closing Date and ended on September 30, 1998, the sum of: (1) EBITDA of the Company and its subsidiaries for such period, plus (2) $12.4 million, minus (3) the Tax Distribution Amounts paid or to be paid in respect of each of the three Fiscal Quarters (or portion thereof) included in such period; and (iv) for the twelve-month period ended September 30, 1999 and each twelve-month period ended September 30 thereafter, the sum of: (a) EBITDA of the Company and its subsidiaries for such twelve-month period, minus (b) the Tax Distribution Amounts paid or to be paid in respect of each of the four Fiscal Quarters included in such twelve-month period; all as determined on a consolidated basis with respect to (x) in the case of any period ending prior to the Closing Date, Marathon and its subsidiaries or Ashland and its subsidiaries, as applicable, or (y) in the case of any period ending on or after the Closing Date, the Company and its subsidiaries, in each case in accordance with then Current GAAP (other than Ordinary Course Lease Expenses which shall be calculated in accordance with Applicable GAAP). "Advanced Amount" has the meaning set forth in Section 14.01(b). "Affiliate Transaction" means any agreement or transaction between the Company or any of its subsidiaries and any Member or any Affiliate of any Member that: (a) for purposes of Section 7.03(a)(i), will result or is reasonably anticipated will result in expenditures, contingent or actual liabilities or benefits to the Company and its subsidiaries in excess of $2 million; (b) for purposes of Section 7.03(b), is either (i) outside the ordinary course of the Company and its subsidiaries' business and results or will result in contingent or actual liabilities or benefits to the Company and its subsidiaries in excess of $100,000 in the applicable Fiscal Year or (ii) within the ordinary course of the Company and its subsidiaries' business and results or will result in expenditures, contingent or actual liabilities or benefits to the Company and its subsidiaries (A) in excess of $2 million individually in the applicable Fiscal Year or (B) when taken together with all other agreements or transactions entered into the same Fiscal Year as such agreement or transaction which are either related to such agreement or transaction or are substantially the same type of agreement or transaction as such agreement or transaction, in excess of $2 million in the aggregate in the applicable Fiscal Year; and (c) for purposes of Section 8.08(k)(i), is either (i) outside the ordinary course of the Company and its subsidiaries' business and will result or is reasonably anticipated will result in expenditures, contingent or actual liabilities or benefits to the Company and its subsidiaries in excess of $2 million or (ii) within the ordinary course of the Company and its subsidiaries' business and will result or is reasonably anticipated will result in expenditures, contingent or actual liabilities or benefits to the Company and its subsidiaries in excess of $25 million. For purposes of this definition of Affiliate Transaction, any guarantee by a Member or any Affiliate of any Member of any obligations of the Company or any of its subsidiaries that is provided by such Member or such Affiliate without cost to the Company and its subsidiaries shall not be deemed to be an Affiliate Transaction. Notwithstanding the foregoing, the term "Affiliate Transaction" shall not include any distributions of cash or other property to the Members pursuant to Article V. "Affiliate Transaction Dispute Notice" has the meaning set forth in Section 8.11(b). "Aggregate Tax Rate" has the meaning set forth in Section 5.01(a)(i). "Agreed Additional Capital Contributions" has the meaning set forth in Section 4.02(c). "Agreement" means this Limited Liability Company Agreement of the Company, as the same may be amended, restated, supplemented or otherwise modified from time to time. "Annual Capital Budget" has the meaning set forth in Section 8.09(a). "Applicable GAAP" has the meaning set forth in Section 1.02. "Approved Marathon Crude Oil Purchase Program" has the meaning set forth in Section 8.12. "Arbitratable Dispute" has the meaning set forth in Section 13.04(a). "Arbitration Payment Due Date" has the meaning set forth in Section 14.03(a). "Arbitration Proceeding" has the meaning set forth in Section 14.01(a). "Arbitration Tribunal" has the meaning set forth in Appendix B. "Arm's-Length Transaction" has the meaning set forth in Section 8.11(a). "Ashland Designated Sublease Agreements" shall mean the Ashland Sublease Agreements attached as Exhibits L- 1, L-2, L-3 and L-4 to the Asset Transfer and Contribution Agreement. "Ashland-Funded Capital Expenditures" has the meaning set forth in Section 4.02(a). "Audited Financial Statements" has the meaning set forth in Section 7.02(c). "Average Annual DD&A" means: (a) for Fiscal Year 1998, the average of the Adjusted DD&A for the three twelve-month periods ended December 31, 1995, 1996 and 1997; (b) for Fiscal Year 1999, the average of the Adjusted DD&A (i) for the two twelve-month periods ended December 31, 1996 and 1997 and (ii) for the one twelve-month period ended September 30, 1998; (c) for Fiscal Year 2000, the average of the Adjusted DD&A (i) for the twelve-month period ended December 31, 1997 and (ii) for the two twelve-month periods ending on September 30, 1998 and 1999; and (d) for Fiscal Year 2001 and each Fiscal Year thereafter, the average of the Adjusted DD&A for the three twelve-month periods ending on September 30 in each of the three Fiscal Years immediately preceding such Fiscal Year. "Average Adjusted EBITDA" means: (a) for Fiscal Year 1998, the average of the Adjusted EBITDA for the three twelve-month periods ended December 31, 1995, 1996 and 1997; (b) for Fiscal Year 1999, the average of the Adjusted EBITDA (i) for the two twelve-month periods ended December 31, 1996 and 1997 and (ii) for the one twelve-month period ended September 30, 1998; (c) for Fiscal Year 2000, the average of the Adjusted EBITDA (i) for the twelve-month period ended December 31, 1997 and (ii) for the two twelve-month periods ending on September 30, 1998 and 1999; and (d) for Fiscal Year 2001 and each Fiscal Year thereafter, the average of the Adjusted EBITDA for the three twelve-month periods ending on September 30 in each of the three Fiscal Years immediately preceding such Fiscal Year. "Average Annual Level" means for any twelve-month period ending on September 30 of any calendar year, the average of the level of the Price Index ascertained by adding the twelve monthly levels of the Price Index during such twelve-month period and dividing the total by twelve. "Bareboat Charters" has the meaning set forth in Section 9.3(k) of the Asset Transfer and Contribution Agreement. "Base Level" means 161.2. "Base Rate" has the meaning set forth in Section 1.01 of the Put/Call, Registration Rights and Standstill Agreement. "Board of Managers" has the meaning set forth in Section 8.02(a). "Bulk Motor Oil Business" has the meaning set forth in Section 14.03(h) of the Put/Call, Registration Rights and Standstill Agreement. "Business Plan" has the meaning set forth in Section 8.10. "Capital Account" has the meaning set forth in Section 6.01. "Capital Expenditures" means, for any period, the aggregate of all expenditures incurred by the Company and its subsidiaries during such period that, in accordance with Applicable GAAP, are or should be included in additions to property, plant or equipment or similar items reflected in the consolidated statement of cash flows of the Company and its subsidiaries; provided, however, that Capital Expenditures shall not include (a) exchanges of such items for other items, (b) expenditures of proceeds of insurance settlements by the Company or any of its subsidiaries in respect of lost, destroyed or damaged assets, equipment or other property to the extent such expenditures are made to replace or repair such lost, destroyed or damaged assets, equipment or other property within 18 months of such loss, destruction or damage, (c) funds expended by a Member or an Affiliate of a Member to purchase any Subleased Property that is contributed to the Company or a subsidiary of the Company pursuant to Section 4.01(c)(i)(A) or (d) Member-Funded Capital Expenditures; all as determined on a consolidated basis with respect to the Company and its subsidiaries in accordance with Applicable GAAP. "Capital Lease" means any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a consolidated balance sheet of the Company and its subsidiaries in accordance with Applicable GAAP. "Closing Date Affiliate Transactions" has the meaning set forth in Section 8.08(k)(i)(A). "Company Independent Auditors" has the meaning set forth in Section 7.01. "Company Investment Guidelines" has the meaning set forth in Section 8.15. "Company Leverage Policy" has the meaning set forth in Section 8.14. "Competitive Business" has the meaning set forth in Section 14.01(a) of the Put/Call, Registration Rights and Standstill Agreement. "Competitive Third Party" has the meaning set forth in Section 14.01(d) of the Put/Call, Registration Rights and Standstill Agreement. "Contracting Member" has the meaning set forth in Section 8.11(b). "Covered Person" means any Member, any Affiliate of a Member or any officers, directors, shareholders, partners, employees, representatives or agents of a Member or their respective Affiliates, or any Representative, or any employee, officer or agent of the Company or its Affiliates. "Critical Decision" means each Primary Critical Decision and each Other Critical Decision. "Critical Decision Termination Date" means (a) in the case of any Other Critical Decision, the first anniversary of the Closing Date or (b) in the case of any Primary Critical Decision, the first anniversary of the Closing Date or, if the Critical Decision Termination Date shall be extended with respect to such Primary Critical Decision as provided in Section 8.19(c), the fifteen-month anniversary of the Closing Date. "Crude Oil Purchases" means any purchase of crude oil by the Company or any of its subsidiaries from Marathon or any Affiliate of Marathon. "Current GAAP" means, at any time, GAAP as in effect at such time. "Delinquent Member" has the meaning set forth in Section 14.01(a). "Designated Sublease Agreements" means the Ashland Designated Sublease Agreements and the Marathon Designated Sublease Agreements. "Designated Sublease Amount" means any obligation of a Member to the Company or a subsidiary of the Company under Section 4.01(c) with respect to a Subleased Property or a Designated Sublease Agreement. "Dispute" has the meaning set forth in Section 13.01. "Dispute Notice" has the meaning set forth in Section 13.02. "Disputed Capital Contribution Amount" has the meaning set forth in Section 13.04(a). "Disputed Indemnification Amount" has the meaning set forth in Section 14.01(a). "Disputed Monetary Amount" has the meaning set forth in Section 14.01(a). "Distributable Cash" means, for each Fiscal Quarter, without duplication: (a) the Short-Term Investments of the Company and its subsidiaries on the last day of such Fiscal Quarter, minus (b) the Ordinary Course Debt of the Company and its subsidiaries on the last day of such Fiscal Quarter, minus (c) the Tax Distribution Amount to be paid in respect of such Fiscal Quarter, minus (d) funds held on the last day of such Fiscal Quarter for financing Special Projects or Permitted Capital Projects/Acquisitions, minus (e) if the notional repayment of principal for Special Project Indebtedness or Permitted Capital Project/Acquisition Indebtedness during such Fiscal Quarter calculated using a notional repayment schedule established and approved by the Board of Managers in accordance with the Company Leverage Policy was more than the amount of actual principal repayments for such Special Project Indebtedness or Permitted Capital Project/Acquisition Indebtedness during such Fiscal Quarter, the amount of such excess, plus (f) if the amount of the actual principal repayments for Special Project Indebtedness or Permitted Capital Project/Acquisition Indebtedness during such Fiscal Quarter was more than the notional repayment of principal for such Special Project Indebtedness or Permitted Capital Project/Acquisition Indebtedness during such Fiscal Quarter (calculated in the manner described in clause (e) above), the amount of such excess, plus or minus (g) any adjustments or reserves (including any adjustments for minimum cash balance requirements, including cash reserves for accrued or withheld Taxes not yet due) in the amounts and for the time periods established and approved by the Board of Managers pursuant to a vote in accordance with Section 8.07(b). "Distribution Date" has the meaning set forth in Section 5.01(a). "Distributions Calculation Statement" has the meaning set forth in Section 5.01(c). "EBITDA" means for any period: (a) net income, plus (b) to the extent deducted in computing such net income, the sum of (i) estimated or actual Federal, state, local and foreign income tax expense, (ii) interest expense, (iii) depreciation, depletion and amortization expense, (iv) non-cash charges resulting from the cumulative effect of changes in accounting principles, and (v) non-cash lower of cost or market inventory or fixed asset writedowns; minus (c) to the extent added in computing such net income, (i) any interest income (excluding interest income on accounts receivable related to marketing programs), (ii) non-cash gains resulting from the cumulative effect of changes in accounting principles and (iii) non-cash lower of cost or market inventory or fixed asset gains; all as determined on a consolidated basis (x) in the case of any period ended prior to the Closing Date, Marathon and its subsidiaries or Ashland and its subsidiaries, as applicable, or (y) in the case of any period ending on or after the Closing Date, with respect to the Company and its subsidiaries, in each case in accordance with then Current GAAP. For purposes of this definition, depreciation, depletion and amortization expense will include any gains (deductions from depreciation, depletion and amortization) or losses (additions to depreciation, depletion and amortization) on asset retirements and excess purchase price amortization adjustments. For the avoidance of doubt, EBITDA shall not include any revenues or expenses constituting Member-Funded Capital Expenditures or Member-Indemnified Expenditures. "Executive Officers" has the meaning set forth in Section 9.01(a). "Final Monetary Amount" has the meaning set forth in Section 14.03(a). "Financed Properties" means each of the properties listed in Schedule 1.01. "Fiscal Quarter" means the three-month period ended March 31, June 30, September 30 and December 31 of each Fiscal Year. "Fiscal Year" has the meaning set forth in Section 6.05. "Fuelgas Interest" means the 1% interest in the Company which is owned by Fuelgas. "GAAP" means United States generally accepted accounting principles applied on a consistent basis. "Garyville Propylene Upgrade Project" means the propylene splitter with a capacity of approximately 800 million pounds per year that is being constructed at the Garyville refinery for the production of propylene. "Historical EBITDA" means for any period ending prior to the Closing Date the sum of: (a) EBITDA of the Marathon Business for such period as adjusted for each of the "EBIT Adjustment" items set forth in lines 10-55 of Schedule B-1 and each of the "Depreciation Adjustment" items set forth in lines 133 through 150 of Schedule B-1, in each case calculated for such period in the same manner that such adjustments were calculated in Schedule B-1, plus (b) EBITDA of the Ashland Business for such period as adjusted for each of the "EBIT Adjustment" items set forth in lines 11-56 of Schedule B-2 and each of the "Depreciation Adjustment" items set forth in lines 111-120 of Schedule B-2, in each case calculated for such period in the same manner that such adjustments were calculated in Schedule B-2; all determined on a consolidated basis with respect to Marathon and its subsidiaries or Ashland and its subsidiaries, as applicable, in accordance with then Current GAAP. "Initial GAAP" has the meaning set forth in Section 1.02. "Initial Term" has the meaning set forth in Section 2.03. "Make-Up Expense" has the meaning set forth in Section 6.02(d). "Maralube Express Business" has the meaning set forth in Section 14.03(d)(i) of the Put/Call, Registration Rights and Standstill Agreement. "Marathon Crude Oil Purchase Program" has the meaning set forth in Section 8.12. "Marathon Designated Sublease Agreements" shall mean the Marathon Sublease Agreements attached as Exhibits E-1, E-2 and E-3 to the Asset Transfer and Contribution Agreement. "Marathon-Funded Capital Expenditures" has the meaning set forth in Section 4.02(a). "Material Adverse Effect" has the meaning set forth in the Asset Transfer and Contribution Agreement. "Member-Funded Capital Expenditures" has the meaning set forth in Section 4.02(a). "Member-Indemnified Expenditures" has the meaning set forth in Section 4.02(b). "Monetary Dispute" has the meaning set forth in Section 14.01(a). "Non-Contracting Member" has the meaning set forth in Section 8.11(b). "Non-Delinquent Member" has the meaning set forth in Section 14.01. "Non-Terminating Member" has the meaning set forth in the Put/Call, Registration Rights and Standstill Agreement. "Normal Annual Capital Budget Amount" means, for each Fiscal Year, an amount equal to the sum of: (i) an amount equal to 130% of the Average Annual DD&A for such Fiscal Year, plus (ii) if, with respect to any Fiscal Year, (a) the Average Adjusted EBITDA for such Fiscal Year less the amount calculated pursuant to clause (i) above for such Fiscal Year exceeds (b) $240 million (such excess, the "Excess EBITDA" for such Fiscal Year), the sum of (1) the lesser of: (x) 10% of the Average Annual DD&A for such Fiscal Year and (y) the Excess EBITDA for such Fiscal Year and (2) 50% of the amount by which the Excess EBITDA for such Fiscal Year exceeds an amount equal to 10% of the Average Annual DD&A for such Fiscal Year. An example of the calculation of Adjusted DD&A, Adjusted EBITDA, Average Annual DD&A, Average Adjusted EBITDA and the Normal Annual Capital Budget Amount is shown in Schedule A. In the event of any inconsistency between such Schedule A and the language of this definition of Normal Annual Capital Budget Amount, neither shall control over the other. "Offer Notice" has the meaning set forth in Section 10.04(a). "Ordinary Course Debt" means, without duplication, the aggregate outstanding principal amount of all loans and advances under any committed or uncommitted credit facilities (including any commercial paper borrowings or borrowings under the Revolving Credit Agreement, but excluding trade payables), provided that Ordinary Course Debt shall not include any Permitted Intercompany Debt, any Special Project Indebtedness or any Permitted Capital Project Indebtedness. "Ordinary Course Lease Expense" means, with respect to any Fiscal Year, the rental or lease expense for such Fiscal Year of assets rented or financed by operating leases (as determined in accordance with Applicable GAAP). "Original Lease" means the lease or charter underlying a Marathon Designated Sublease Agreement or an Ashland Designated Sublease Agreement in which Marathon or Ashland, as applicable, is the lessee or charterer. "Other Critical Decision" means each of the Level III decisions set forth in paragraphs 2(c)(iii), (v), (vii), (viii) and (ix) of the Retail Integration Protocol. "Packaged Motor Oil Business" has the meaning set forth in Section 14.03(h) of the Put/Call, Registration Rights and Standstill Agreement. "Percentage Interest" has the meaning set forth in Section 3.01. "Permitted Capital Project/Acquisition Indebtedness" has the meaning set forth in the Company Leverage Policy. "Permitted Intercompany Debt" has the meaning set forth in the Company Leverage Policy. "Price Index" means the Consumer Price Index for All Urban Consumers of the United States Department of Labor Bureau of Labor Statistics for all Urban Areas (on the 1982- 84 equals 100 standard). "Primary Critical Decision" means each of the Level III decisions set forth in paragraphs 2(c)(i), (ii), (iv) and (vi) of the Retail Integration Protocol. "Prime Rate" means the rate of interest per annum publicly announced from time to time by Citibank, NA, as its prime rate in effect at its principal office in New York; each change in the Prime Rate shall be effective on the date such change is publicly announced as being effective. "Private Label Packaged Motor Oil Business" has the meaning set forth in Section 14.03(h) of the Put/Call Registration Rights and Standstill Agreement. "Profit and Loss", as appropriate, means, for any period, the taxable income or tax loss of the Company and its subsidiaries under Code Section 703(a) and Treasury Regulation Section 1.703-1 for the Fiscal Year, adjusted as follows: (a) All items of income, gain, loss or deduction required to be separately stated pursuant to Code Section 703(a)(1) shall be included; (b) Tax exempt income as described in Code Section 705(a)(1)(B) realized by the Company during such Fiscal Year shall be taken into account as if it were taxable income; (c) Expenditures of the Company described in Code Section 705(a)(2)(B) for such Fiscal Year, including items treated under Treasury Regulation Section 1.704-1(b)(2)(iv)(i) as items described in Code Section 705(a)(2)(B), shall be taken into account as if they were deductible items; (d) With respect to any property (other than money) which has been contributed to the capital of the Company, "Profit" and "Loss" shall be computed in accordance with the provisions of Treasury Regulation Section 1.704-1(b)(2)(iv)(g) by computing depreciation, amortization, income, gain, loss or deduction based upon the fair market value of such property at the date of contribution. Book depreciation (as that term is used in Treasury Regulation Section 1.704-(b)(2)(iv)(g)(3)) for any asset contributed to the Company that was fully depreciated for federal income tax purposes as of the date of its contribution shall be based on the applicable recovery period (as determined in Code Section 168(c)) for new assets of the same type; (e) With respect to any property of the Company which has been revalued as required or permitted by Treasury Regulations under Code Section 704(b), "Profit" or "Loss" shall be determined based upon the fair market value of such property as determined in such revaluation; and (f) With respect to any property of the Company which (i) is distributed in kind to a Member, or (ii) has been revalued under Section 6.03 upon the occurrence of any event specified in Treasury Regulation Section 1.704- 1(b)(2)(iv)(f), the difference between the adjusted basis for federal income tax purposes and the fair market value shall be treated as gain or loss upon the disposition of such property. "Qualified Candidate" has the meaning set forth in Section 9.02(c). "Quick Lube Business" has the meaning set forth in Section 14.03(h) of the Put/Call, Registration Rights and Standstill Agreement. "Refundable Amount" has the meaning set forth in Section 14.03(d). "Representatives" has the meaning set forth in Section 8.01 "Response" has the meaning set forth in Section 13.02. "Retail Integration Protocol" means the Speedway SuperAmerica LLC Retail Integration Protocol attached hereto as Exhibit A. "Revolving Credit Agreement" has the meaning set forth in Section 2.2(a) of the Master Formation Agreement. "Section 8.11(b) Affiliate Transaction" has the meaning set forth in Section 8.11(b). "Security Interest" has the meaning set forth in Section 14.05(a). "Selling Member" has the meaning set forth in Section 10.04(a). "Senior Manager" has the meaning set forth in Section 13.02. "Shared Service" means an administrative service that is provided to the Company or its subsidiaries by Marathon, Ashland or any of their respective Affiliates pursuant to the Shared Services Agreement or provided to Marathon, Ashland or any of their respective Affiliates by the Company or its subsidiaries pursuant to the Shared Services Agreement. "Shared Services Agreement" means the Shared Services Agreement by and among Marathon, Ashland and the Company, including the Schedules thereto, attached as Exhibit U to the Asset Transfer and Contribution Agreement. "Short-Term Investments" means, without duplication, collected or available bank cash balances, the fair market value of any investment made by the Company or any of its subsidiaries pursuant to the Company's Investment Guidelines and the fair market value of any investment made by the Company or any of its subsidiaries that should have been made pursuant to the Company's Investment Guidelines, but excluding Incidental Cash and any cash balances that represent uncollected funds. "Significant Shared Service" means (a) any Shared Service related to the Treasury and Cash Management function and (b) any Shared Service (or group of related Shared Services) that results or is reasonably anticipated to result in the payment by or to the Company or any of its subsidiaries of more than $2 million in any contract year in the period during which such Shared Service will be provided. For purposes of determining whether the $2 million threshold of this definition has been satisfied, payments for all Shared Services in each of the following general administrative areas shall be aggregated within each area specified below and considered related Shared Services: Human Resources; Health, Environment and Safety; Law; Public Affairs; Governmental Affairs; Finance and Accounting (including Internal Audit); Administrative Services; Information Technology Services; Procurement; Business Development; Aviation; Engineering and Technology; Economics; and Security. "Sole Arbitrator" has the meaning set forth in Appendix B. "Special Project" has the meaning set forth in the Company Leverage Policy. "Special Project Indebtedness" has the meaning set forth in the Company Leverage Policy. "Special Termination Right" has the meaning set forth in Section 2.01(a) of the Put/Call, Registration Rights and Standstill Agreement. "Subleased Property" has the meaning set forth in Section 4.01(c). "Super Majority Decision" has the meaning set forth in Section 8.08. "Surplus Cash" has the meaning assigned to such term in the Company Leverage Policy. "Tax Distribution Amount" has the meaning set forth in Section 5.01(a). "Tax Liability" means, with respect to a Fiscal Year, a Member's liability for Federal, state, local and foreign taxes attributable to taxable income allocated to such Member pursuant to Section 6.03 and Section 10.03, taking into account any Tax deduction or loss specifically allocated to a Member pursuant to this Agreement or any other Transaction Document. "Term of the Company" has the meaning set forth in Section 2.03. "Terminating Member" has the meaning set forth in Section 2.01(a) of the Put/Call, Registration Rights and Standstill Agreement. "Unaudited Financial Statements" has the meaning set forth in Section 7.02(a). "Valvoline Business" has the meaning set forth in Section 14.03(h) of the Put/Call, Registration Rights and Standstill Agreement. SECTION 1.02. Applicable GAAP. In connection with the calculation pursuant to this Agreement of Adjusted DD&A, Capital Expenditures or Ordinary Course Lease Expenses, the determination of whether a lease is a Capital Lease or the determination of whether the Company has entered into an operating lease for purposes of Section 8.16 (each such calculation or determination, an "Accounting Determination"), the Company shall apply then Current GAAP; provided, however, that if at any time after January 1, 1998, a change shall occur in GAAP which would result in any Accounting Determination being different under Current GAAP than such Accounting Determination would have been under GAAP as in effect on January 1, 1998 ("Initial GAAP"), then (a) the Members shall negotiate in good faith to make such amendments to the relevant provisions of this Agreement as shall be required to preserve the economic and other results intended by the Members as of January 1, 1998 with respect to such Accounting Determination and (b) unless and until such time as the Members shall in good faith mutually agree to such amendments, Initial GAAP shall be applied to make such Accounting Determination or, if the Members shall have previously amended the relevant provisions of this Agreement pursuant to this Section 1.02 in response to a prior change in GAAP, then GAAP as in effect at the time the most recent such previous amendment was made shall be used to make such Accounting Determination (the GAAP that is actually applied by the Company in making any such Accounting Determination pursuant to this Agreement being the "Applicable GAAP"). ARTICLE II General Provisions SECTION 2.01. Formation; Effectiveness. The Company has been formed as a limited liability company pursuant to the provisions of the Delaware Act by the filing of the Certificate of Formation with the Secretary of State of the State of Delaware. Pursuant to Section 18-201(d) of the Delaware Act, the provisions of this Agreement shall be effective as of the Closing Date. Each Member hereby adopts, confirms and ratifies the Certificate of Formation and all acts taken in connection therewith. Ashland shall be admitted as a member of the Company upon its execution and delivery of this Agreement. Except as provided in this Agreement, the rights, duties, liabilities and powers of the Members shall be as provided in the Delaware Act. SECTION 2.02. Name. The name of the Company shall be Marathon Ashland Petroleum LLC. The Board of Managers may adopt such trade or fictitious names as it may determine. SECTION 2.03. Term. Subject to the provisions of Article XV providing for early termination in certain circumstances and the provisions of Article IX of the Put/Call, Registration Rights and Standstill Agreement, the initial term of the Company (the "Initial Term") began on the date the Certificate of Formation was filed with the Secretary of State of the State of Delaware, and shall continue until the close of business on December 31, 2022 and, thereafter, the term of the Company shall be automatically extended for successive 10-year periods unless at least two years prior to the end of the Initial Term or any succeeding 10-year period, as applicable, a Member notifies the Board of Managers and the other Member in writing that it wants to terminate the term of the Company at the end of the Initial Term or such 10-year period, in which event, the term of the Company shall not thereafter be extended for a successive ten-year term. The President of the Company shall notify each Member in writing at least six months prior to each such two-year notification date that the Term of the Company will be automatically extended unless a Member provides a notice to the contrary pursuant to this Section 2.03. The failure of the President of the Company to give such notice, or any defect in any notice so given, shall not affect the Members' rights to terminate the Term of the Company pursuant to this Section 2.03, and shall not result in a termination of the Term of the Company unless a Member provides a notice to the contrary pursuant to this Section 2.03. The Initial Term, together with any such extensions, is hereinafter referred to as the "Term of the Company". The existence of the Company as a separate legal entity shall continue until the cancelation of the Certificate of Formation in the manner provided in the Delaware Act. SECTION 2.04. Registered Agent and Office. The name of the registered agent of the Company for service of process on the Company in the State of Delaware is The Corporation Trust Company, and the address of the registered agent and the address of the office of the Company in the State of Delaware is c/o The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801. The Board of Managers may change such office and such agent from time to time in its sole discretion. SECTION 2.05. Purpose. (a) The purpose of the Company is to engage in any lawful act or activity for which a limited liability company may be formed under the Delaware Act (either directly or indirectly through one or more subsidiaries). It is the Members' understanding and intent that (i) the Company will be an independent, self-funding entity, (ii) no additional capital contributions are expected to be required by the Members and (iii) the administrative requirements of the Company will generally be provided by the Company's own employees. In furtherance of this understanding and intent, and without limiting the generality of the foregoing, unless the Members shall mutually agree otherwise, the following administrative functions and services shall be provided substantially by the Company and its subsidiaries' employees (or by its unaffiliated third party contractors) under the supervision and control of the Company's officers: Human Resources; Health, Environment and Safety; Law; Finance and Accounting; Internal Audit; Treasury and Cash Management; and Information Technology. For the avoidance of doubt, the Members acknowledge and agree that the provision at any time of the specific Shared Services identified and described in Schedule 10.2(e) to the Marathon Asset Transfer and Contribution Agreement Disclosure Letter and Schedule 10.2(e) to the Ashland Asset Transfer and Contribution Agreement Disclosure Letter to the Company and its subsidiaries by the Members shall not be deemed to violate the requirements of the immediately preceding sentence. (b) The Company, and the President on behalf of the Company, may enter into and perform the Transaction Documents and the Commercial Documents to which the Company is a party without any further act, vote or approval of the Board of Managers or the Members notwithstanding any other provision of this Agreement, the Delaware Act or other Applicable Law. The President of the Company is hereby authorized to enter into such Transaction Documents and such Commercial Documents on behalf of the Company, but such authorization shall not be deemed a restriction on the power of the Board of Managers to enter into other agreements on behalf of the Company. SECTION 2.06. Powers. In furtherance of its purposes, but subject to all the provisions of this Agreement, the Company shall have the power and is hereby authorized to: (a) acquire by purchase, lease, contribution of property or otherwise, own, operate, hold, sell, convey, transfer or dispose of any real or personal property which may be necessary, convenient or incidental to the accomplishment of the purpose of the Company; (b) act as a trustee, executor, nominee, bailee, director, officer, agent or in some other fiduciary capacity for any person or entity and to exercise all the powers, duties, rights and responsibilities associated therewith; (c) take any and all actions necessary, convenient or appropriate as trustee, executor, nominee, bailee, director, officer, agent or other fiduciary, including the granting or approval of waivers, consents or amend ments of rights or powers relating thereto and the execution of appropriate documents to evidence such waivers, consents or amendments; (d) borrow money and issue evidences of indebtedness in furtherance of any or all of the purposes of the Company, and secure the same by mortgage, pledge or other lien on the assets of the Company; (e) invest any funds of the Company pending distribution or payment of the same pursuant to the provisions of this Agreement; (f) prepay in whole or in part, refinance, recast, increase, modify or extend any Indebtedness of the Company and, in connection therewith, execute any extensions, renewals or modifications of any mortgage or security agreement securing such Indebtedness; (g) enter into, perform and carry out contracts of any kind, including, without limitation, contracts with any person or entity affiliated with any of the Members, necessary to, in connection with, convenient to, or incidental to the accomplishment of the purposes of the Company; (h) employ or otherwise engage employees, managers, contractors, advisors, attorneys and consultants and pay reasonable compensation for such services; (i) enter into partnerships, limited liability companies, trusts, associations, corporations or other ventures with other persons or entities in furtherance of the purposes of the Company; and (j) do such other things and engage in such other activities related to the foregoing as may be necessary, convenient or incidental to the conduct of the business of the Company, and have and exercise all of the powers and rights conferred upon limited liability companies formed pursuant to the Delaware Act. ARTICLE III Members SECTION 3.01. Members; Percentage Interests. The names and addresses of the Members and their respective percentage interests in the Company ("Percentage Interests") are as follows:
Percentage Members Interests Marathon Oil Company 62% 5555 San Felipe P.O. Box 3128 Houston, TX 77056-2723 Ashland Inc. 38% 50 East RiverCenter Boulevard P.O. Box 391 Covington, KY 41012-0391
Marathon's Percentage Interest shall be deemed to include the Fuelgas Interest. Promptly after the Closing, Marathon will cause Fuelgas to merge with and into Marathon. SECTION 3.02. Adjustments in Percentage Interests. Marathon's and Ashland's Percentage Interests, and the Percentage Interests of each other Member, if any, shall be adjusted (a) at the time of any Transfer of such Member's Membership Interests pursuant to Section 10.02 and (b) at the time of the admission of each new Member pursuant to such terms and conditions as the Board of Managers from time to time shall determine pursuant to a vote in accordance with Section 8.07(b), in each case to take into account such Transfer or admission of a new Member. ARTICLE IV Capital Contributions; Assumption of Assumed Liabilities SECTION 4.01. Contributions. (a) On or before the Closing Date, Marathon shall contribute, convey, transfer, assign and deliver to the Company or shall have contributed, conveyed, transferred, assigned and delivered to the Company, the Marathon Transferred Assets, and Ashland shall contribute, convey, transfer, assign and deliver to the Company or shall have contributed, conveyed, transferred, assigned and delivered to the Company, the Ashland Transferred Assets, in each case pursuant to terms and conditions of the Asset Transfer and Contribution Agreement. In addition, any additional assets that Marathon or Ashland are required to contribute, convey, transfer, assign and deliver to the Company at a later date pursuant to the terms and conditions of the Asset Transfer and Contribution Agreement shall be so contributed at such later date. (b) The Company shall assume, as of the Closing Date, the Assumed Liabilities pursuant to the terms of the Asset Transfer and Contribution Agreement. (c) Payments or Damages under Designated Sublease Agreements as Contributions. (i) Each Member has agreed, pursuant to the Designated Sublease Agreements to which it is a party, to sublease to the Company or one of its subsidiaries the assets or property listed on Schedule 4.01(c) ("Subleased Property") for a nominal consideration in lieu of transferring such property to the Company or such subsidiary, free of any Liens, other than Permitted Encumbrances, as a capital contribution. (A) If at any time after January 1, 1998 a Member in its capacity as a sublessor shall become the owner of any Subleased Property, such Member shall promptly contribute, convey, transfer, assign and deliver to the Company (or, if the Company so directs, to one of its subsidiaries) at no cost to the Company or such subsidiary, and the Company hereby agrees to accept, or to cause such subsidiary to accept, such Subleased Property and the related Designated Sublease Agreement shall be terminated with respect to such Subleased Property, all as more specifically set forth in such Designated Sublease Agreement. In addition, if at any time after January 1, 1998 a Member assigns to the Company (or a subsidiary of the Company) a purchase option with respect to a Subleased Property pursuant to a Designated Sublease Agreement and the Company or such subsidiary exercises such purchase option and pays all or a portion of the purchase price therefor, such Member shall promptly reimburse the Company or such subsidiary such amount so paid and, if not so reimbursed, such amount shall be subject to set-off pursuant to Section 14.04. Any such payment by the Company shall be treated as a distribution to the appropriate Member for capital account purposes, and any such amount paid to the Company or such subsidiary by a Member in connection with such reimbursement obligation, or to the extent of a set-off applied pursuant to Section 14.04 as a result of such failure to so reimburse, shall be treated as a capital contribution to the Company. (B) Any amount paid by the Company or any of its subsidiaries under a Designated Sublease Agreement to cure or prevent a payment default by the sublessor Member under the underlying Original Lease shall be reimbursed to the Company or such subsidiary by such Member, and if not so reimbursed, shall be subject to set-off pursuant to Section 14.04. Any such payment by the Company shall be treated as a distribution to the appropriate Member for capital account purposes, and any such amount paid to the Company or such subsidiary by a Member in connection with a default of its payment obligations under its respective Designated Sublease Agreements, or to the extent of a set-off applied pursuant to Section 14.04 as a result of such default, shall be treated as a capital contribution to the Company. (C) None of the capital contributions pursuant to (A) and (B) above shall result in any adjustment to the Members' respective Percentage Interests in the Company. (ii) If (A) a Member commences a voluntary case under any applicable bankruptcy, insolvency, liquidation, receivership, reorganization or other similar law now in effect, or an order for relief is entered against such Member in an involuntary case under any such law and (B) a trustee of such Member rejects a Designated Sublease Agreement of such Member, then (1) the Member shall be obligated to reimburse the Company for the Loss to the Company as a result of such rejected Designated Sublease Agreement, which Loss, if not so reimbursed, shall be subject to set-off pursuant to Section 14.04 prior to the interest of such Member in any distributions hereunder and (2) the amount of such Loss shall be deemed to be the loss of use of such Subleased Property for the economic life thereof rather than any other period. SECTION 4.02. Additional Contributions. (a) Member-Funded Capital Expenditures. For each Capital Expenditure project identified on Schedule 4.02(a)-1, Marathon shall contribute to the Company the amount of funds necessary to comply with its obligations under Section 7.1(j) of the Asset Transfer and Contribution Agreement with respect to such Capital Expenditure project as, when and if the Company actually incurs Capital Expenditures related to such Capital Expenditure project (such Capital Expenditures, as, when and if they are funded by Marathon, are referred to herein as the "Marathon-Funded Capital Expenditures"). For each Capital Expenditure project identified on Schedule 4.02(a)-2, Ashland shall contribute to the Company the amount of funds necessary to comply with its obligations under Section 7.2(k) of the Asset Transfer and Contribution Agreement with respect to such Capital Expenditure project as, when and if the Company actually incurs Capital Expenditures related to such Capital Expenditure project (such Capital Expenditures, as, when and if they are funded by Ashland, are referred to herein as the "Ashland-Funded Capital Expenditures", and together with the Marathon-Funded Capital Expenditures, the "Member-Funded Capital Expenditures"). Each Member-Funded Capital Expenditure shall be treated as a capital contribution to the Company, but shall not result in any adjustment to the Members' respective Percentage Interests in the Company. To the extent permitted by applicable Tax law, any Tax deduction by the Company of a Member-Funded Capital Expenditure shall be specially allocated so that each Member will have the Tax benefit of its Member-Funded Capital Expenditures. (b) Indemnification Payments as Contributions. Any indemnity amount paid by Marathon or Ashland to the Company under Article IX of the Asset Transfer and Contribution Agreement (each a "Member-Indemnified Expenditure") shall be treated as a capital contribution to the Company, but shall not result in any adjustment to the Members' respective Percentage Interests in the Company. A determination of whether the associated Loss will be deducted or capitalized by the Company for Tax purposes shall be made by the Company at the direction of the Indemnifying Party. Any Tax deduction or loss claimed by the Company with respect to the indemnified amount shall be specially allocated to the Indemnifying Party. (c) Other Additional Capital Contributions. The Members shall make other additional capital contributions ("Agreed Additional Capital Contributions") pro rata based on their respective Percentage Interests if and to the extent such capital contributions are approved by the Board of Managers pursuant to a vote in accordance with Section 8.07(b). (d) No Third-Party Beneficiaries. The provisions of this Agreement, including without limitation, this Section 4.02, are intended solely to benefit the Members and, to the fullest extent permitted by Applicable Law, shall not be construed as conferring any benefit upon any creditor of the Company other than the Members, and no such creditor of the Company other than the Members shall be a third-party beneficiary of this Agreement, and no Member or member of the Board of Managers shall have any duty or obligation to any creditor of the Company to issue any call for capital pursuant to this Agreement. SECTION 4.03. Negative Balances; Withdrawal of Capital; Interest. Neither of the Members shall have any obligation to the Company or to the other Member to restore any negative balance in its Capital Account. Neither Member may withdraw capital or receive any distributions from the Company except as specifically provided herein. No interest shall be paid by the Company on any capital contributions. ARTICLE V Distributions SECTION 5.01. Distributions. (a) Within 45 days after the end of each Fiscal Quarter during each Fiscal Year, the Company shall distribute to the Members (the date of such distribution being a "Distribution Date") an amount in cash (the "Tax Distribution Amount") determined as follows: (i) The maximum Tax Liability of each Member with respect to its allocable portion (as provided in Section 6.03) of the Company's estimated taxable income for the portion of such Fiscal Year ending on the last day of such Fiscal Quarter shall be determined, based upon the highest aggregate marginal statutory Federal, state and local income tax rate (determined taking into account the deductibility, to the extent allowed, of income-based taxes paid to governmental entities) to which any Member may be subject for the related Fiscal Year (and excluding any deferred taxes) (the "Aggregate Tax Rate"). (ii) If the Tax Liability determined in clause (i) is positive with respect to either Member, there shall be a cash distribution to each of the Members, in accordance with their Percentage Interests, of an aggregate amount such that neither Member shall have received distributions under this clause and subsection (b) below for such portion of such Fiscal Year in an amount less than its Tax Liability for such portion of such Fiscal Year. (iii) Following a determination by the Company of the Company's actual net taxable income with respect to a Fiscal Year, the maximum Tax Liability of each Member with respect to its allocable portion (as provided in Section 6.03) of the Company's net taxable income for such Fiscal Year shall be determined, based upon the Aggregate Tax Rate. If the maximum Tax Liability of any Member for the Fiscal Year is in excess of the cash distributions previously made to the Member for such Fiscal Year under clause (ii) above and subsection (b) below, the Company shall make a cash distribution to all the Members, in accordance with their Percentage Interests, of an aggregate amount such that the excess is eliminated for all the Members. Such distribution shall be made within 45 days of the date the Company's actual net taxable income is determined. (iv) In the event that the Company Independent Auditors determine pursuant to Section 7.02(d) that the Company's actual net taxable income with respect to a Fiscal Year is greater than the amount determined by the Company pursuant to clause (iii) above, the Company shall make a determination of the amount of cash, if any, required to be distributed to the Members, in accordance with their Percentage Interests, such that, after taking into account cash distributions previously made to a Member under clauses (ii) and (iii) above and subsection (b) below, no Member shall receive less than its Tax Liability for such Fiscal Year based on such higher net taxable income amount. The Company shall, within 15 days after the determination is made, distribute such additional amount of cash to the Members, in accordance with their Percentage Interests. (v) In the event that the Company Independent Auditors determine pursuant to Section 7.02(d) that the Company's actual net taxable income with respect to a Fiscal Year is less than the amount determined by the Company pursuant to clause (iii) above, a determination shall be made of the excess Tax Distribution Amount that was distributed to the Members in respect of such Fiscal Year based on the Company's determination of its actual net taxable income and the Company shall deduct from the next Tax Distribution Amount payable to the Members pursuant to this Section 5.01, the amount of such excess distribution. (b) In addition to the distributions pursuant to Section 5.01(a), on each Distribution Date, the Company shall distribute to the Members all Distributable Cash for the Fiscal Quarter to which such Distribution Date relates provided, however, that the distribution of (i) Distributable Cash pursuant to this paragraph 5.01(b) or (ii) cash pursuant to Section 5.01(a) above, in each case with respect to any Fiscal Quarter may be made in such other manner and in such other amount as the Members shall agree with respect to such Fiscal Quarter; provided, further, however, that any agreement by any Member with respect to the distribution of either Distributable Cash pursuant to this paragraph 5.01(b) or cash pursuant to Section 5.01(a) for any Fiscal Quarter pursuant to the preceding proviso shall not alter or waive any of the rights of either Member under this Agreement with respect to distributions of Distributable Cash pursuant to this paragraph 5.01(b) or cash pursuant to Section 5.01(a) with respect to any subsequent Fiscal Quarter. Subject to Section 5.02(b), each such distribution shall be allocated between the Members pro rata based upon their respective Percentage Interests. (c) The Company shall prepare and distribute to each Member within 45 days after the end of each Fiscal Quarter a statement (a "Distributions Calculation Statement") setting forth the calculations (in reasonable detail) used by the Company for purposes of distributions pursuant to this Section 5.01 of (i) the Tax Distribution Amount for each Member for such Fiscal Quarter, (ii) the amount of Distributable Cash for such Fiscal Quarter and (iii) the allocation of such Distributable Cash between the Members. (d) Notwithstanding anything to the contrary in this Agreement, any agreement reached between the Members to distribute any amount of cash different from the amounts which would be calculated in accordance with the methodology set forth in Section 5.01(a) and Section 5.01(b) above shall not alter or waive in any manner the obligations of the Company to prepare and deliver the Distributions Calculation Statement as set forth in Section 5.01(c) above, and after any such agreement has been reached the Company shall continue to prepare and deliver such Distribution Calculation Statement with respect to each Fiscal Quarter as if no such agreement had been reached. SECTION 5.02. Certain General Limitations. (a) Notwithstanding any provision to the contrary contained in this Agreement, the Company, and the Board of Managers on behalf of the Company, shall not be required to make a distribution to either Member with respect to such Member's Membership Interests if such distribution would violate Section 18-607 of the Delaware Act or other applicable law. (b) Notwithstanding any other provision of this Article V, all amounts distributed to the Members in connection with a dissolution of the Company or the sale or other disposition of all or substantially all the assets of the Company that results in a dissolution of the Company shall be distributed to the Members in accordance with their respective Capital Account balances, as adjusted pursuant to Article VI for all Company operations up to and including the date of such distribution. SECTION 5.03. Distributions in Kind. The Company shall not distribute to the Members any assets in kind unless approved by the Board of Managers pursuant to a vote in accordance with Section 8.07(b). If cash and property in kind are to be distributed simultaneously, the Company shall distribute such cash and property in kind in the same proportion to each Member, unless otherwise approved by the Board of Managers pursuant to a vote in accordance with Section 8.07(b). For purposes of determining amounts distributable to Members under Section 5.01, for purposes of determining Profit and Loss under Section 1.01, for purposes of making adjustments to Capital Accounts under Article VI and for purposes of allocations under Article VI, any property to be distributed in kind shall have the value assigned to such property by the Board of Managers pursuant to a vote in accordance with Section 8.07(b) and such value shall be deemed to be part of and included in Distributable Cash for purposes of determining distributions to the Members under this Agreement. SECTION 5.04. Distributions in the Event of an Exercise of the Marathon Call Right, Ashland Put Right or the Special Termination Rights. In the event of an exercise by Marathon of its Marathon Call Right or its Special Termination Right or the exercise by Ashland of its Ashland Put Right or its Special Termination Right pursuant to the Put/Call, Registration Rights and Standstill Agreement, certain distributions to Ashland or Marathon, as applicable, will be suspended in accordance with the provisions of Section 5.01 thereof. ARTICLE VI Allocations and Other Tax Matters SECTION 6.01. Maintenance of Capital Accounts. An account (a "Capital Account") shall be established and maintained in the Company's books for each Member in accordance with Treasury Regulation Section 1.704- 1(b)(2)(iv) and to which the following provisions apply to the extent not inconsistent with such Regulation: (a) There shall be credited to each Member's Capital Account (i) the amount of money contributed by such Member to the Company (including liabilities of the Company assumed by such Member as provided in Treasury Regulation Section 1.704-1(b)(2)(iv)(c)), (ii) the fair market value of any property contributed by the Member to the Company (net of liabilities secured by such contributed property that the Company is considered to assume or take subject to under Code Section 752), and (iii) such Member's share of the Company's Profit; (b) There shall be debited from each Member's Capital Account (i) the amount of money distributed to such Member by the Company (including liabilities of such Member assumed by the Company as provided in Treasury Regulation Section 1.704-1(b)(2)(iv)(c)) other than amounts which are in repayment of debt obligations of the Company to such Member, (ii) the fair market value of property distributed to such Member (net of liabilities secured by such property that such Member is considered to assume or take subject to under Code Section 752), and (iii) such Member's share of the Company's Loss; (c) To each Member's Capital Account there shall be credited, in the case of an increase, or debited, in the case of a decrease, such Member's share of any adjustment to the adjusted basis of Company assets pursuant to Code Section 734(b) or Code Section 743(b) to the extent provided by Treasury Regulation Section 1.704-(b)(2)(iv)(m); and (d) Upon the transfer of all or any part of the Membership Interests of a Member, the Capital Account of the transferee Member shall include the portion of the Capital Account of the transferor Member attributable to such transferred Membership Interest (or portion thereof). SECTION 6.02. Allocations. (a) Except as provided in Section 6.02(b), 6.02(c), 6.02(d) and 6.02(e), Profit or Loss for any Fiscal Year shall be allocated between the Members in proportion to their respective Percentage Interests. (b) To the extent any Tax deduction or loss is specifically allocated to a Member pursuant to this Agreement (other than pursuant to Section 6.03) or any other Transaction Document, including any deduction or loss indemnified by a Member, any Member-Funded Capital Expenditure, any Member-Indemnified Expenditure and any special allocations pursuant to Sections 6.12, 6.13, 6.14, 6.15 and 6.16 the associated Profit and Loss shall be allocated to the same Member. (c) Depreciation and amortization with respect to any asset contributed by a Member to the Company shall be allocated solely to such Member. (d) If any asset contributed by a Member is sold or otherwise disposed of prior to the time such asset has been completely depreciated or amortized for Federal income tax purposes, the Member contributing such property shall be allocated an expense ("Make-Up Expense") equal to (i) the remaining tax basis of the asset at the time of the sale or other disposition, multiplied by (ii) the other Member's Percentage Interest at the time of such sale or other disposition. The contributing Member shall be allocated Make-Up Expense over the remaining tax life of the asset at the time of sale or other disposition at the same rate as depreciation or amortization would have been allocated to such Member if the sale or other disposition had not occurred. Make-Up Expense allocated to a Member shall be taken from and reduce the amount of expenses allocated to the other Member. The purpose for this provision is to allocate to a Member, with respect to depreciable or amortizable assets contributed by such Member, a total amount of deductions and cost recovery allowances equal to 100% of the basis of such assets at the time of contribution. (e) In the event that the Company sells or otherwise disposes of all or substantially all its assets or engages in any other transaction that will lead to a liquidation of the Company, then, notwithstanding the foregoing provisions of this Section 6.02, (i) any Profit or Loss realized by the Company in such transaction and (ii), to the extent necessary, any other Profit or Loss in the Fiscal Year such transaction occurs or thereafter (and, in each case, to the extent necessary, constituent items of income, gain, loss, deduction and credit) shall be specially allocated as between the Members as required so as to cause in so far as possible each Member's Capital Account balance to be proportionate to its Percentage Interest. SECTION 6.03. Tax Allocations. (a) For income tax purposes only, each item of income, gain, loss, deduction and credit of the Company as determined for income tax purposes shall be allocated between the Members in accordance with the corresponding allocation in Section 6.02, subject to the requirements of Section 704(c) of the Code. (b) The Members acknowledge and agree that Section 704(c) shall be applied using the so-called "traditional method with curative allocations" set forth in Treasury Regulation Section 1.704-3(c). Curative allocations of income, gain, loss or deduction shall, to the extent possible, have substantially the same effect on each Member's Federal income tax liability as the item of income, gain, loss or deduction for which allocation is limited. (c) By reason of the special allocation of book depreciation and amortization with respect to the assets contributed by the Members pursuant to Section 6.02(c), tax depreciation and amortization with respect to each such asset shall be allocated solely to the contributing Member. (d) Items described in this Section 6.03 shall neither be credited nor charged to the Members' Capital Accounts. SECTION 6.04. Tax Elections. (a) The Members intend that the Company be treated as a partnership for Federal income tax purposes. Accordingly, neither the Tax Matters Partner nor either Member shall file any election or return on its own behalf or on behalf of the Company that is inconsistent with that intent. (b) Any elections or other decisions relating to tax matters that are not expressly provided for herein, including the determination of the fair market value of contributed property and the decision to adjust the Capital Accounts to reflect the fair market value of the Company's assets upon the occurrence of any event specified in Treasury Regulation Section 1.704-1(b)(2)(iv)(f), shall be made jointly by the Members in any manner that reasonably reflects the purpose and intention of this Agreement. SECTION 6.05. Fiscal Year. The fiscal year (the "Fiscal Year") of the Company for tax and accounting purposes shall be the 12-month (or shorter) period ending on the last day of December of each year. SECTION 6.06. Tax Returns. (a) The Company shall cause to be prepared and timely filed all Federal, state, local and foreign income tax returns and reports required to be filed by the Company and its subsidiaries. The Company shall provide copies of all the Company's Federal, state, local and foreign tax returns (and any schedules or other required filings related to such returns) that reflect items of income, gain, deduction, loss or credit that flow to separate Member returns, to the Members for their review and comment prior to filing, except as otherwise agreed by the Members. The Members agree in good faith to resolve any difference in the tax treatment of any item affecting such returns and schedules. However, if the Members are unable to resolve the dispute, the position of the Tax Matters Partner shall be followed if nationally recognized tax counsel acceptable to both Members provides an opinion that substantial authority exists for such position. Substantial authority shall be given the meaning ascribed to it in Code Section 6662. If the Members are unable to resolve the dispute prior to the due date for filing the return, including approved extensions, the position of the Tax Matters Partner shall be followed, and amended returns shall be filed if necessary at such time the dispute is resolved. The costs of the dispute shall be borne by the Company. The Members agree to file their separate Federal income tax returns in a manner consistent with the Company's return, the provisions of this Agreement and in accordance with applicable Federal income tax law. (b) The Company shall elect the most rapid method of depreciation and amortization allowed under Applicable Law, unless the Members agree otherwise. The failure of either Member to agree that the Company should elect a less rapid method of depreciation or amortization is not subject to any dispute resolution provisions. (c) The Members shall provide each other with copies of all correspondence or summaries of other communications with the Internal Revenue Service or any state, local or foreign taxing authority (other than routine correspondence and communications) regarding the tax treatment of the Company's operations. No Member shall enter into settlement negotiations with the Internal Revenue Service or any state, local or foreign taxing authority with respect to any issue concerning the Company's income, gains, losses, deductions or credits if the tax adjustment attributable to such issue (assuming the then current Aggregate Tax Rate) would be $2 million or greater, without first giving reasonable advance notice of such intended action to the other Member. SECTION 6.07. Tax Matters Partner. (a) Initially, Marathon shall be the "Tax Matters Partner" of the Company within the meaning of Section 6231(a)(7) of the Code, and shall act in any similar capacity under state, local or foreign law, but only with respect to returns for which items of income, gain, loss, deduction or credit flow to the separate returns of the Members. In the event of a transfer of any Member's interest in the Company, the Tax Matters Partner shall be the Member with the largest Percentage Interest following such transfer. (b) The Tax Matters Partner shall incur no liability (except as a result of the gross negligence or willful misconduct of the Tax Matters Partner) to the other Member including, but not limited to, liability for any additional taxes, interest or penalties owed by the other Member due to adjustments of Company items of income, gain, loss, deduction or credit at the Company level. SECTION 6.08. Duties of Tax Matters Partner. (a) Except as provided in Section 6.08(b), the Tax Matters Partner shall cooperate with the other Member and shall promptly provide the other Member with copies of notices or other materials from, and inform the other Member of discussions engaged in with, the Internal Revenue Service or any state, local or foreign taxing authority and shall provide the other Member with notice of all scheduled administrative proceedings, including meetings with agents of the Internal Revenue Service or any state, local or foreign taxing authority, technical advice conferences, appellate hearings, and similar conferences and hearings, as soon as possible after receiving notice of the scheduling of such proceedings, but in any case prior to the date of such scheduled proceedings. (b) The duties of the Tax Matters Partner under Section 6.08(a) shall not apply with respect to notices, materials, discussions, proceedings, meetings, conferences, or hearings involving any issue concerning the Company's income, gains, losses, deductions or credits if the tax adjustment attributable to such issue (assuming the then current Aggregate Tax Rate) would be less than $2 million except as otherwise required under Applicable Law. (c) The Tax Matters Partner shall not extend the period of limitations or assessments without the consent of the other Member, which consent shall not be unreasonably withheld. (d) The Tax Matters Partner shall not file a petition or complaint in any court, or file any claim, amended return or request for an administrative adjustment with respect to partnership items, after any return has been filed, with respect to any issue concerning the Company's income, gains, losses, deductions or credits if the tax adjustment attributable to such issue (assuming the then current Aggregate Tax Rate) would be $2 million or greater, unless agreed by the other Member. If the other Member does not agree, the position of the Tax Matters Partner shall be followed if nationally recognized tax counsel acceptable to both Members issues an opinion that a reasonable basis exists for such position. Reasonable basis shall be given the meaning ascribed to it for purposes of applying Code Section 6662. The costs of the dispute shall be borne by the Company. (e) The Tax Matters Partner shall not enter into any settlement agreement with the Internal Revenue Service or any state, local or foreign taxing authority, either before or after any audit of the applicable return is completed, with respect to any issue concerning the Company's income, gains, losses, deductions or credits, unless any of the following apply: (i) both Members agree to the settlement; (ii) the tax effect of the issue if resolved adversely would be, and the tax effect of settling the issue is, proportionately the same for both Members (assuming each otherwise has substantial taxable income); (iii) the Tax Matters Partner determines that the settlement of the issue is fair to both Members and the amount of the tax adjustment attributable to such issue (assuming the then current Aggregate Tax Rate) would be less than $2 million; or (iv) nationally recognized tax counsel acceptable to both Members determines that the settlement is fair to both Members and is one it would recommend to the Company if both Members were owned by the same person and each had substantial taxable income. In all events, the costs incurred by the Tax Matters Partner in performing its duties hereunder shall be borne by the Company in accordance with the Shared Services Agreement. (f) The Tax Matters Partner may request extensions to file any tax return or statement without the written consent of, but shall so inform, the other Member. SECTION 6.09. Survival of Provisions. The provisions of this Agreement regarding the Company's tax returns and Tax Matters Partner shall survive the termination of the Company and the transfer of any Member's interest in the Company and shall remain in effect for the period of time necessary to resolve any and all matters regarding the federal, state, local and foreign taxation of the Company and items of Company income, gain, loss, deduction and credit. SECTION 6.10. Section 754 Election. In the event that a Member purchases the Membership Interests of a Selling Member pursuant to Section 10.04, the purchasing Member shall have the right to direct the Tax Matters Partner to make an election under Section 754 of the Code. The purchasing Member shall pay all costs incurred by the Company in connection with such election, including any costs borne by the Company to maintain records required as a result of such election. The purchasing Member, at its option and expense, may maintain on behalf of the Company any records required as a result of such election. SECTION 6.11. Qualified Income Offset, Minimum Gain Chargeback. Notwithstanding anything to the contrary in this Agreement, there is hereby incorporated a qualified income offset provision which complies with Treasury Regulation Section 1.704-1(b)(2)(ii)(d) and minimum gain chargeback and partner minimum gain chargeback provisions which comply with the requirements of Treasury Regulation Section 1.704-2 and such provisions shall apply to the allocation of Profits and Losses. SECTION 6.12. Tax Treatment of Designated Sublease Agreements. (a) For purposes of Article VI, Ashland or Marathon, as the case may be, shall be treated as transferring to the Company all of its interest in Subleased Property pursuant to an Ashland Designated Sublease Agreement or a Marathon Designated Sublease Agreement, as if the leasehold interest in such Subleased Property was an Ashland Transferred Asset or a Marathon Transferred Asset. (b) Payments under the Original Lease made by Ashland or Marathon, as the case may be, after the effective date of the Ashland Designated Sublease Agreement or Marathon Designated Sublease Agreement, as the case may be, shall be treated as made by the Company or its subsidiaries, and then immediately reimbursed by Ashland or Marathon, as the case may be. (c) All items of loss, deduction and credit attributable to payments under the Original Lease made by Ashland or Marathon, as the case may be, including payments by the Company or any of its subsidiaries that are charged to Ashland or Marathon by set-off or other means, shall be allocated entirely to the Member incurring such payments. (d) Depreciation and amortization deductions, if any, as well as any deductions or offsets to taxable income or gain, attributable to property described in the Ashland Designated Sublease Agreements or the Marathon Designated Sublease Agreements, as the case may be, shall be allocated entirely to Ashland or Marathon, as the case may be, except to the extent such deductions or offsets are attributable to amounts paid by the Company or any of its subsidiaries and not reimbursed by Ashland or Marathon, as the case may be, either directly or indirectly. SECTION 6.13. Tax Treatment of Reimbursed Liability Payments. Any tax deduction or loss attributable to payments by the Company or any of its subsidiaries of Assumed Liabilities, as described in Schedules 2.3(d) and 3.3(d) to the Asset Transfer and Contribution Agreement, that are reimbursed by a Member either directly or indirectly, shall be allocated entirely to such Member. SECTION 6.14. Tax Treatment of Disproportionate Payments. Except as otherwise provided in this Agreement or in any other Transaction Document, any Tax deduction or loss reflected on a Tax return, report or other Tax filing by the Company, attributable to (i) payments made or costs incurred by a Member, (ii) payments made or costs incurred by the Company and reimbursed or to be reimbursed by a Member and (iii) payments made or costs incurred by the Company and not shared among the Members based on their Percentage Interests, shall be allocated among the Members to take into account the amounts paid, incurred, reimbursed or shared by each. SECTION 6.15. Allocation of Income, Gains, Losses and Other Items from LOOP LLC and LOCAP, Inc. (a) Income, gains, losses, deductions, credits, adjustments, tax preferences and other distributive share items with respect to the Company's interest in LOOP LLC, a tax partnership, for periods beginning on or after the Closing, shall be allocated between the Members in such a manner so that, when such items are included with the same items allocated to Ashland with respect to the Ashland LOOP/LOCAP Interest, each Member is allocated all such items in proportion to its respective Percentage Interest in the Company. (b) In determining the Capital Account for each Member, (i) Ashland shall be treated as contributing the Ashland LOOP/LOCAP Interest to the Company, (ii) Profit and Loss shall be treated as including taxable income, gain, loss and distributions arising from Ashland's 4% interest in LOOP LLC and (iii) dividends and distributions that Ashland receives from LOOP LLC or LOCAP, Inc. in respect of the Ashland LOOP/LOCAP Interest and paid to the Company pursuant to Section 7.2(i) of the Asset Transfer and Contribution Agreement shall be treated as being received directly by the Company. SECTION 6.16. Allocation of Income, Gain, Loss, Deduction and Credits Attributable to Stock-Based Compensation. Each item of income, gain, loss, deduction (excluding deductions for administrative costs incurred by the Company) and credit attributable to the grant to, or the exercise by or on behalf of, an employee or retired employee of the Company of a stock option, stock appreciation right, or other stock-based incentive compensation involving the stock of a Member or an Affiliate of a Member shall be allocated to the Member whose stock or whose Affiliate's stock is involved. Any exercise price paid by or on behalf of the employee or retired employee to the Company shall be paid over to the Member whose stock (or whose Affiliate's stock) is involved. A Member's Capital Account shall be (i) increased by the fair market value of its (or its Affiliate's) stock delivered to or on behalf of an employee or retired employee as aforesaid (without duplication to the extent such stock is first contributed to the Company), (ii) decreased (pursuant to Section 6.01(a)(iii) or (b)(iii)) by the deduction allocated to such Member as aforesaid and (iii) decreased by the amount of the exercise price so paid over by the Company or deemed to be paid over by the Company under principles analogous to those in Treasury Regulation Section 1.83-6(d)(1). ARTICLE VII Books and Records SECTION 7.01. Books and Records; Examination. The Board of Managers shall keep or cause to be kept such books of account and records with respect to the Company's business as they may deem appropriate. Each Member and its duly authorized representatives shall have the right at any time to examine, or to appoint independent certified public accountants (the fees of which shall be paid by such Member) to examine, the books, records and accounts of the Company and its subsidiaries, their operations and all other matters that such Member may wish to examine, including, without limitation, all documentation relating to actual or proposed transactions with either Member or any Affiliate of either Member. The Company, and the Board of Managers, shall not have the right to keep confidential from the Members any information that the Board of Managers would otherwise be permitted to keep confidential from the Members pursuant to Section 18-305(c) of the Delaware Act. The Company's books of account shall be kept using the method of accounting determined by the Board of Managers. The Company Independent Auditors (the "Company Independent Auditors") shall be an independent public accounting firm selected by the Board of Managers pursuant to a vote in accordance with Section 8.07(b) or Section 8.07(c), as applicable, and shall initially be Price Waterhouse LLP. SECTION 7.02. Financial Statements and Reports. (a) Unaudited Monthly Financial Statements. (i) The Company shall prepare and send to each Member (at the same time) promptly, but in no event later than noon on the 15th Business Day after the last day of each month, the following unaudited financial statements with respect to the Company and its subsidiaries: a balance sheet, a statement of operations, a statement of cash flows and a statement of changes in capital (collectively, "Unaudited Financial Statements") as at the end of and for such month. (ii) The Company shall prepare and send to each Member promptly, but in no event later than noon on the 20th Business Day after the last day of each month, an unaudited financial summary booklet containing a breakdown of such operating and financial information by major department or division of the Company and its subsidiaries as at the end of and for such month as either Member shall reasonably request; provided that each Member shall be provided with the same information at the same time as the other Member. (b) Unaudited Quarterly Financial Statements. The Company shall prepare and send to each Member (at the same time) promptly, but in no event later than the 30th day after the last day of each Fiscal Quarter, (i) Unaudited Financial Statements as at the end of and for such Fiscal Quarter; (ii) a management's discussion and analysis of financial condition and results of operations section prepared in accordance with Rule 303 of Regulation S-K of the Securities Act with respect to such Fiscal Quarter; and (iii) an unaudited statement of changes in the Members' capital accounts as at the end of and for such Fiscal Quarter. (c) Audited Annual Financial Statements. Within 75 days after the end of each Fiscal Year, the Board of Managers shall cause (i) an examination to be made, at the expense of the Company, by the Company Independent Auditors, covering (A) the assets, liabilities and capital of the Company and its subsidiaries, and the Company's and its subsidiaries' operations during such Fiscal Year, (B) an examination of the Distributions Calculation Statement for such Fiscal Year, and (C) all other matters customarily included in such examinations and (ii) to be delivered to each Member (at the same time) a copy of the report of such examination, stating that such examination has been performed in accordance with generally accepted auditing standards, together with (1) the following financial statements with respect to the Company and its subsidiaries certified by such accountants as having been prepared in accordance with GAAP: a balance sheet, a statement of operations, a statement of cash flows and a statement of changes in capital as at the end of and for such Fiscal Year (collectively, the "Audited Financial Statements") and (2) a management's discussion and analysis of financial condition and results of operations section prepared in accordance with Rule 303 of Regulation S-K of the Securities Act with respect to such Fiscal Year. The Company shall prepare the Audited Financial Statements in such manner and form as is necessary to enable Ashland to file such Audited Financial Statements with the Commission in accordance with Item 3-09 of Regulation S-X under the Exchange Act. (d) Schedule of Members' Capital Accounts. (i) Preliminary Annual Capital Account Schedule. The Company shall prepare and send to each Member (at the same time) promptly, but in no event later than the 75th day after the last day of each Fiscal Year, a schedule showing the respective Capital Accounts of the Members based on the Company's estimated taxable income for such Fiscal Year. (ii) Examination. Unless otherwise agreed by the Members, within 15 days after the date the Company determines its net taxable income with respect to any Fiscal Year, but in no event later than 7 months after the end of such Fiscal Year, the Board of Managers shall cause (i) an examination to be made, at the expense of the Company, by the Company Independent Auditors, covering (A) the determination of the Company's taxable income with respect to such Fiscal Year and (B) the respective Capital Accounts of the Members based on the Company's taxable income for such Fiscal Year and (ii) to be delivered to each Member (at the same time) a copy of the report of such examination, stating that such examination has been performed in accordance with generally accepted auditing standards. (iii) Final Annual Capital Account Schedule. The Company shall prepare and send to each Member (at the same time) promptly, but in no event later than the 15th day after the date the Company files its federal income tax return with respect to each Fiscal Year, a schedule showing the respective Capital Accounts of the Members based on the Company's actual taxable income for such Fiscal Year. (e) Other Financial Information. The Company shall prepare and send to each Member (at the same time) promptly such other financial information as a Member shall from time to time reasonably request. SECTION 7.03. Notice of Affiliate Transactions; Annual List. (a) (i) The Company shall notify each Member of any Affiliate Transaction (other than an Affiliate Transaction that is a Significant Shared Service) that the Company or any of its subsidiaries is considering entering into or renewing or extending the term thereof (whether pursuant to contractual provisions thereof or otherwise), which notice shall be given, to the extent reasonably possible, sufficiently in advance of the time that the Company intends to enter into, renew or extend the term of such Affiliate Transaction so as to provide the Members with a reasonable opportunity to examine the documentation related to such Affiliate Transaction. (ii) The Company shall notify each Member of any Affiliate Transaction that is a Significant Shared Service that the Company or any of its subsidiaries is considering entering into or renewing or extending the term thereof (whether pursuant to contractual provisions thereof or otherwise), which notice shall be given, to the extent reasonably possible, sufficiently in advance of the time that the Company intends to enter into, renew or extend the term of such Affiliate Transaction so as to provide the Members with a reasonable opportunity to examine the documentation related to such Affiliate Transaction. (b) Within 60 days after the end of each Fiscal Year, the Company shall prepare and distribute to each Member a list setting forth a description of each Affiliate Transaction entered into by the Company or any of its subsidiaries during such Fiscal Year and identifying all of the parties to such Affiliate Transactions; provided that if two or more Affiliate Transactions either (i) constitute a series of related transactions or agreements or (ii) are substantially the same type of transaction or agreement, the Company need not separately describe each such Affiliate Transaction but instead can describe such related or similar Affiliated Transactions as a group. ARTICLE VIII Management of the Company SECTION 8.01. Managing Members. The business and affairs of the Company shall be managed by the Members acting through their respective representatives on the Board of Managers ("Representatives"). The President and the Representatives shall be deemed "managers" of the Company within the meaning of the Delaware Act. Except for such matters as may be delegated to a Member from time to time by the Board of Managers pursuant to a vote in accordance with Section 8.07(b), and subject to the provisions of Sections 6.07 and 6.08, no Member shall act unilaterally on behalf of the Company or any of its subsidiaries without the approval of the other Member and no Member shall have the power unilaterally to bind the Company or any of its subsidiaries. SECTION 8.02. Board of Managers. (a) The Members shall exercise their management authority through a board of managers (the "Board of Managers") consisting of (i) the President of the Company, who shall not be deemed a Representative hereunder and who shall not be entitled to vote on any matter coming before the Board of Managers, and (ii) eight Representatives, each of whom shall be entitled to vote, five of whom shall be designated by Marathon and three of whom shall be designated by Ashland. In the event of a Transfer by a Member of its Membership Interests pursuant to Article X, effective at the time of such Transfer, (i) such Member's Representatives shall automatically be removed from the Board of Managers and (ii) the transferee of such Membership Interests shall be permitted to designate the number of Representatives to the Board of Managers as is equal to the number previously designated by the transferor of such Membership Interests. Such transferee shall promptly notify the other Member as to the names of the persons who such transferee has designated as its Representatives on the Board of Managers. (b) Each Representative may be removed and replaced, with or without cause, at any time by the Member designating him or her, but, except as provided in Section 8.02(a), may not be removed or replaced by any other means. A Member who removes one or more of its Representatives from the Board of Managers shall promptly notify the other Member as to the names of its replacement Representatives. SECTION 8.03. Responsibility of the Board of Managers. The Board of Managers shall be responsible for overseeing the operations of the Company and shall, in particular, have sole jurisdiction to approve each of the following matters: (i) hiring senior executives of the Company, evaluating their performance and planning for their succession; (ii) reviewing and approving Company strategies, Business Plans and Annual Capital Budgets; (iii) reviewing and approving significant external business opportunities for the Company, including acquisitions, mergers and divestitures; (iv) reviewing and approving policies of the Company that maintain high standards in areas of environmental responsibility, employee safety and health, community, government, employee and customer relations; (v) reviewing external and internal audits and management responses thereto; and (vi) establishing compensation and benefits policies for employees of the Company. SECTION 8.04. Meetings. (a) Except as set forth in Section 8.04(h), all actions of the Board of Managers shall be taken at meetings of the Board of Managers in accordance with this Section 8.04. (b) As soon as practicable after the appointment of the Representatives, the Board of Managers shall meet for the purpose of organization and the transaction of other business. (c) Regular meetings of the Board of Managers shall be held at such times as the Board of Managers shall from time to time determine, but no less frequently than once each Fiscal Quarter; provided that an annual meeting of the Board of Managers (which annual meeting shall count as one of the regular quarterly meetings) shall be held no later than June 30 of each Fiscal Year. (d) Special meetings of the Board of Managers shall be held whenever called by any Member. Any and all business may be transacted at a special meeting that may be transacted at a regular meeting of the Board of Managers. (e) The Board of Managers may hold its meetings at such place or places as the Board of Managers may from time to time by resolution determine or as shall be designated in the respective notices or waivers of notice thereof; however, the Board of Managers shall consider holding meetings from time to time at each of the Member's corporate headquarters and at the operational sites of the Company. (f) Notices of regular meetings of the Board of Managers or of any adjourned meeting shall be given at least two weeks prior to such meeting, unless otherwise agreed by each Member. Notices of special meetings of the Board of Managers shall be mailed by the Secretary or an Assistant Secretary to each member of the Board of Managers addressed to him or her at his or her residence or usual place of business, so as to be received at least two Business Days before the day on which such meeting is to be held, or shall be sent to him or her by telegraph, cable, facsimile or other form of recorded communication or be delivered personally, by overnight courier or by telephone so as to be received not later than two Business Days before the day on which such meeting is to be held. Such notice shall include the purpose, time and place of such meeting and shall set forth in reasonable detail the matters to be considered at such meeting. However, notice of any such meeting need not be given to any member of the Board of Managers if such notice is waived by him or her in writing or by telegraph, cable, facsimile or other form of recorded communication, whether before or after such meeting shall be held, or if he or she shall be present at such meeting. (g) Action by Communication Equipment. The members of the Board of Managers may participate in a meeting of the Board of Managers by means of video or telephonic conferencing or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at such meeting. (h) Unanimous Action by Written Consent. Any action required or permitted to be taken at any meeting of the Board of Managers may be taken without a meeting if all the Representatives consent thereto in writing and such writing is filed with the minutes of the proceedings of the Board of Managers. (i) Organization. Meetings of the Board of Managers shall be presided over by a chair, who will be a member of the Board of Managers selected by a majority of the Board of Managers. The Secretary of the Company or, in the case of his or her absence, any person whom the person presiding over the meeting shall appoint, shall act as secretary of such meeting and keep the minutes thereof. SECTION 8.05. Compensation. Unless the Members otherwise agree, no person shall be entitled to any compensation from the Company in connection with his or her services as a Representative. SECTION 8.06. Quorum. (a) Quorum for Super Majority Decisions. Subject to Section 14.01(e) of the Put/Call, Registration Rights and Standstill Agreement and Sections 14.01 and 14.05 and Section 5 of Schedule 8.14, at all meetings of the Board of Managers, the quorum required for the transaction of any business that constitutes a Super Majority Decision shall be the presence, either in person or by proxy, of (i) at least one Representative of each Member and (ii) a majority of all the Representatives on the Board of Managers (which may include the Representatives referred to in the preceding clause (i)). (b) Quorum for Other Decisions. Subject to Sections 14.01 and 14.05 and Section 5 of Schedule 8.14, at all meetings of the Board of Managers, the quorum required for the transaction of any business that does not constitute a Super Majority Decision shall be (i) in the case of all matters that were described in the notice in reasonable detail for such meeting delivered to the members of the Board of Managers pursuant to Section 8.04(f), the presence, either in person or by proxy, of a majority of all the Representatives on the Board of Managers and (ii) in the case of all matters that were not described in the notice in reasonable detail for such meeting delivered to the members of the Board of Managers pursuant to Section 8.04(f), the presence, either in person or by proxy, of (A) at least one Representative of each Member and (B) a majority of all the Representatives on the Board of Managers (which may include the Representatives referred to in the preceding clause (A)). (c) Rescheduled Meetings. The Company shall use its reasonable best efforts to schedule the time and place of each meeting of the Board of Managers so as to ensure that a quorum will be present at each such meeting and that at least one Representative of each Member will be present at each such meeting. In the absence of a quorum at any such meeting or any adjournment or adjournments thereof, a majority in voting interest of those present in person or by proxy and entitled to vote thereat may reschedule such meeting from time to time until the Representatives requisite for a quorum, as aforesaid, be present in person or by proxy. At any such rescheduled meeting at which a quorum is present, any business may be transacted that might have been transacted at the meeting as originally called. SECTION 8.07. Voting. (a) General. Each Representative shall be entitled to cast one vote on all matters coming before the Board of Managers. In exercising their voting rights under this Agreement, the Representatives may act by proxy. (b) Super Majority Decisions. Subject to Section 14.01(e) of the Put/Call, Registration Rights and Standstill Agreement and Sections 14.01 and 14.05 and Section 5 of Schedule 8.14, all Super Majority Decisions to be decided by the Board of Managers shall be approved by the unanimous affirmative vote of the votes cast by the Representatives who are present, either in person or by proxy, at a duly called meeting of the Board of Managers at which a quorum is present. The parties acknowledge and agree that all references in this Agreement, any other Transaction Document and any appendices, exhibits or schedules hereto or thereto to any determination, decision, approval or other form of authorization by the Board of Managers pursuant to a vote in accordance with Section 8.07(b) shall be deemed to mean that such determination, decision, approval or other form of authorization shall constitute a Super Majority Decision which requires the approval of the Board of Managers in accordance with this Section 8.07(b). (c) Other Decisions. Subject to Sections 14.01 and 14.05 and Section 5 of Schedule 8.14, all matters other than Super Majority Decisions to be decided by the Board of Managers shall be approved by the affirmative vote of a majority of the votes cast by the Representatives who are present, either in person or by proxy, at a duly called meeting of the Board of Managers at which a quorum is present, unless the vote of a greater number of Representatives is required by Applicable Law or this Agreement. SECTION 8.08. Matters Constituting Super Majority Decisions. Subject to the provisions of Section 8.07(b), each of the following matters, and only the following matters, shall constitute a "Super Majority Decision" which requires the approval of the Board of Managers pursuant to Section 8.07(b): (a) (i) the purchase or investment by the Company or any of its subsidiaries of or in any assets or securities, or any group of assets or securities, that have an aggregate purchase price or cost of more than $20 million, if the purpose or effect of such purchase or investment is to enable the Company to enter into a line of business other than (A) the Company's Business as such Business is conducted on the Closing Date or (B) any other line of business that is approved after the Closing Date by the Board of Managers as a Super Majority Decision under this Section 8.08(a)(i) pursuant to a vote in accordance with Section 8.07(b), provided that any such purchase or investment by the Company or any of its subsidiaries shall not require a Super Majority Decision under this Section 8.08(a) if and to the extent such purchase or investment is being made to enable the Company to enter into the Bulk Motor Oil Business, the Packaged Motor Oil Business, the Private Label Packaged Motor Oil Business and/or the Quick Lube Business and, at the time of such purchase or investment, (1) the Company and its subsidiaries are permitted to engage in such business under Section 14.03(b) of the Put/Call, Registration Rights and Standstill Agreement and (2) Ashland and its Affiliates shall own (beneficially or otherwise) 20% or more of the Valvoline Business (it being understood and agreed that this proviso shall not limit or constitute an exception to any other provision of Section 8.08); and (ii) the determination of whether any new line of business approved by the Board of Managers as a Super Majority Decision under Section 8.08(a)(i) should constitute a "Competitive Business" for purposes of Section 14.01 of the Put/Call, Registration Rights and Standstill Agreement; (b) (i) any reorganization, merger, consolidation or similar transaction between the Company and any person (other than a direct or indirect Wholly Owned Subsidiary of the Company) or any sale or lease of all or substantially all of the Company's assets to any person (other than a direct or indirect Wholly Owned Subsidiary of the Company); (ii) any (A) reorganization, merger, consolidation or similar transaction or series of transactions between any of the Company's subsidiaries and any person (other than the Company or a direct or indirect Wholly Owned Subsidiary of the Company) or (B) sale or lease of all or substantially all of any of the Company's subsidiaries' assets to any person (other than the Company or a direct or indirect Wholly Owned Subsidiary of the Company) which in either case involves an aggregate consideration of over $50,000,000; c) the admission of a new Member (other than as a result of a Transfer of an existing Member's Membership Interests pursuant to Article X) or the issuance of any additional Membership Interests or other equity interests to any person, including any existing Member; (d) except as expressly provided in Sections 4.01(c), 4.02(a) and 4.02(b), the acceptance or requirement of any additional capital contributions to the Company by either Member; (e) the initial hiring of the following officers of the Company: the President; the Executive Vice President; the officers principally in charge of (i) refining, (ii) wholesale and branded marketing, (iii) retail marketing (two initially), (iv) supply and transportation and (v) environmental health and safety and human resources; the Senior Vice President-Finance and Commercial Services of the Company; and the general counsel of the Company; (f) (i) the approval of Acquisition Expenditures, Capital Expenditures and such other expenditures of the type to be included in the Annual Capital Budget for any Fiscal Year (other than (A) Ordinary Course Lease Expenses, (B) up to $100 million in the aggregate for all periods in Capital Expenditures of the Company and its subsidiaries directly associated with the Garyville Propylene Upgrade Project, (C) Member-Funded Capital Expenditures, (D) Member-Indemnified Expenditures and (E) Acquisition Expenditures or Capital Expenditures of the Company and its subsidiaries directly associated with Permitted Capital Projects/Acquisitions that are funded with Permitted Capital Project/Acquisition Indebtedness) that when taken together with (x) the other expenditures already approved as part of the Annual Capital Budget for such Fiscal Year and (y) all other expenditures already made in such Fiscal Year, would reasonably be expected to exceed the Normal Annual Capital Budget Amount for such Fiscal Year; and (ii) the incurrence of rentals or operating leases which result in aggregate Ordinary Course Lease Expenses (other than Ordinary Course Lease Expenses incurred under the Bareboat Charters) for any Fiscal Year that exceed $80 million; provided, however, in the event the Company or one of its subsidiaries shall make any acquisition or divestiture, the Members shall negotiate in good faith to adjust the dollar amount set forth in this Section 8.08(f)(ii) to take into account the effect of such acquisition or divestiture; (g) (i) except for any acquisition or capital project related to the Bulk Motor Oil Business, the Packaged Motor Oil Business, the Private Label Motor Oil Business and/or the Quick Lube Business, any acquisition, divestiture or individual capital project (other than (i) Ordinary Course Lease Expenses, (ii) up to $100 million in the aggregate for all periods in Capital Expenditures of the Company and its subsidiaries directly associated with the Garyville Propylene Upgrade Project, (iii) Member-Funded Capital Expenditures, (iv) Member-Funded Indemnified Expenditures and (v) Acquisition Expenditures or Capital Expenditures of the Company and its subsidiaries directly associated with Permitted Capital Projects/Acquisitions that are funded with Permitted Capital Project/Acquisition Indebtedness) where the liability or consideration involved is more than $50 million in the aggregate (including contingent liabilities only to the extent required to be reflected on the balance sheet of the Company in accordance with Financial Accounting Standard Number 5 (or any successor or superseding provision of Current GAAP)); (ii) any acquisitions or individual capital projects related to the Bulk Motor Oil Business, the Packaged Motor Oil Business, the Private Label Motor Oil Business and/or the Quick Lube Business during any Fiscal Year where the liability or consideration involved is more than $50 million in the aggregate in such Fiscal Year (including contingent liabilities only to the extent required to be reflected on the balance sheet of the Company in accordance with Financial Accounting Standard Number 5 (or any successor or superseding provision of Current GAAP)); provided that nothing in this Section 8.08(g)(ii) shall be deemed or interpreted to permit the Company or any of its subsidiaries to engage in any of such businesses except as and to the extent expressly permitted under Section 14.03 of the Put/Call, Registration Rights and Standstill Agreement; (iii) for the avoidance of doubt, acquisitions or individual capital projects related to the Maralube Express Business shall be subject to clause (i) of this Section 8.08(g) and not clause (ii) of this Section 8.08(g); (h) the initiation or settlement of any action, suit, claim or proceeding involving (i) an amount in excess of $50 million (with respect to initiation) or $25 million (with respect to settlement), (ii) material non-monetary relief (including, without limitation, entering into any consent decree that has or could reasonably be expected to (A) impose any material obligation on Ashland or any of its Affiliates or the Company or any of its subsidiaries or (B) have a material adverse effect on the business, operations, assets, liabilities, results of operations, cash flows, condition (financial or otherwise) or prospects of Ashland or any of its Affiliates or the Company or any of its subsidiaries) or (iii) the initiation or settlement of any criminal action, suit, claim or proceeding (other than a misdemeanor) if such criminal action, suit or proceeding has or could reasonably be expected to (A) impose any material obligation on Ashland or any of its Affiliates or (B) have a material adverse effect on the business, operations, assets, liabilities, results of operations, cash flows, condition (financial or otherwise) or prospects of Ashland or any of its Affiliates; (i) any change in the Company Independent Auditors unless the new firm is one of the "Big Six" accounting firms (or any successor thereto) or a firm of comparable stature in Ashland's opinion; (j) any modification, alteration, amendment or termination of any Transaction Document to which the Company or any of its subsidiaries is a party and all Members are not a party; (k) (i) in the case of any Affiliate Transaction that is not a Crude Oil Purchase, a Significant Shared Service or a Designated Sublease Agreement, (A) any Affiliate Transaction (other than the Affiliate Transactions listed on Schedule 8.08(k)(i)(A) (the "Closing Date Affiliate Transactions")), (B) any material amendment to or change in the terms or provisions of any Affiliate Transaction that was either a Closing Date Affiliate Transaction or previously approved by the Board of Managers pursuant to Section 8.08(k)(i)(A) (it being understood that a renewal or extension of the term of an Affiliate Transaction pursuant to contractual provisions that were previously approved by the Board of Managers pursuant to this Section 8.08(k)(i) or that were included in a Closing Date Affiliate Transaction on the Closing Date shall be deemed for purposes of this Agreement not to constitute a new Affiliate Transaction or a material amendment to or change in an Affiliate Transaction) or (C) any amendment or change in the terms or provisions of any agreement or transaction between the Company or any of its subsidiaries and any Member or any Affiliate of any Member which causes such agreement or transaction to become an Affiliate Transaction; (ii) in the case of Crude Oil Purchases, the approval of such Crude Oil Purchases in accordance with Section 8.12(a); (iii) in the case of any Significant Shared Service, (A) any agreement or transaction constituting a Significant Shared Service (other than the specific Significant Shared Services identified and described in Schedule 10.2(e) to the Asset Transfer and Contribution Agreement), (B) any material amendment to or change in the terms and provisions of any Significant Shared Service identified and described in Schedule 10.2(e) to the Asset Transfer and Contribution Agreement or thereafter approved by the Board of Managers in accordance with this Section 8.08(k)(iii), (C) subject to the provisions of Section 8.11(b) and except as expressly provided in Section 8.12(b), any cancelation or failure by the Company or any of its subsidiaries to renew any Significant Shared Service provided by Ashland or any Affiliate of Ashland to the Company or any of its subsidiaries or provided by the Company or any of its subsidiaries to Ashland or any Affiliate of Ashland and (D) the periodic review and approval of Significant Shared Services in accordance with Section 8.12(b); and (iv) any material amendment to or change in the terms or provisions of, cancelation, termination or failure to renew, any Designated Sublease Agreement or any election by the Company to refuse or reject the contribution of any Subleased Property to the Company or any of its subsidiaries; (l) the commencement of a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or the consent to the entry of an order for relief in an involuntary case under any such law, or the consent to the appointment of or the taking possession by a receiver, liquidator, assignee, custodian, trustee or sequestrator (or similar official) of the Company or any of its subsidiaries or for any substantial part of the Company's or any of its subsidiaries' property, or the making of any general assignment for the benefit of creditors; (m) (i) the modification, alteration or amendment of the amount, timing, frequency or method of calculation of distributions to the Members from that provided in Article V or (ii) an adjustment to the amount of Distributable Cash pursuant to clause (g) of the definition of "Distributable Cash" in Section 1.01; (n) (i) the modification, alteration or amendment of the Company Leverage Policy, or (ii) the approval of any matter which the Company Leverage Policy provides is to be approved by the Board of Managers as a Super Majority Decision; (o) (i) the approval of any distribution by the Company to the Members of any assets in kind, (ii) the approval of any distribution by the Company to the Members of cash and property in kind on a non-pro rata basis, and (iii) the determination of the value assigned to such assets in kind; (p) each Critical Decision or material amendment thereto made on or prior to the Critical Decision Termination Date for such Critical Decision; and (q) the delegation to a Member of the power to unilaterally bind the Company or any of its subsidiaries with respect to any matter. SECTION 8.09. Annual Capital Budget. (a) In Fiscal Year 1999 and in each Fiscal Year thereafter, the Executive Officers of the Company shall timely prepare or cause to be prepared a draft capital budget (the "Draft Annual Capital Budget") for such Fiscal Year, which shall set forth in reasonable line item detail the proposed Acquisition Expenditures, Capital Expenditures and the Ordinary Course Lease Expenditures of the Company and its subsidiaries for such Fiscal Year, including all Ordinary Course Lease Expenditures and all Capital Expenditures of the Company and its subsidiaries directly associated with the Garyville Propylene Upgrade Project. In addition, to the extent that information can reasonably be obtained on the nature of assets rented or financed by operating leases, such information shall be presented along with the Annual Capital Budget. Copies of the Draft Annual Capital Budget shall be provided to each Member (at the same time) and to the Board of Managers. No later than the last regular meeting of the Board of Managers for a Fiscal Year, the Executive Officers shall present to the Board of Managers the Draft Annual Capital Budget for the following Fiscal Year for the Board of Managers' review, consideration and approval, with such additions, deletions and changes thereto as the Board of Managers shall deem necessary. Upon its approval by the Board of Managers (and taking into account any additions, deletions or other changes deemed necessary by the Board of Managers) the Draft Annual Capital Budget for a Fiscal Year shall become the "Annual Capital Budget" for such Fiscal Year. (b) If the Board of Managers shall fail to approve an Annual Capital Budget for any Fiscal Year, the total expenditures provided for in the Annual Capital Budget for such Fiscal Year shall be in an amount equal to the Normal Annual Capital Budget Amount for such Fiscal Year. (c) No later than August 30 of each Fiscal Year, the Board of Managers shall review the Annual Capital Budget for such Fiscal Year and shall make such additions, deletions and changes thereto as the Board of Managers shall deem necessary. SECTION 8.10. Business Plan. In Fiscal Year 1999 and in each Fiscal Year thereafter, the Executive Officers of the Company shall timely prepare or cause to be prepared a draft business plan (the "Draft Business Plan") for the next three Fiscal Years. Copies of the Draft Business Plan shall be provided to each Member (at the same time) and to the Board of Managers. No later than the last regular meeting of the Board of Managers for a Fiscal Year, the Executive Officers shall present to the Board of Managers the Business Plan for their review, consideration and approval, with such additions, deletions and changes thereto as the Board of Managers shall deem necessary. Upon its approval by the Board of Managers (and taking into account any such additions, deletions or other changes deemed necessary by the Board of Managers), the Draft Business Plan for a Fiscal Year shall become the "Business Plan" for such Fiscal Year. SECTION 8.11. Requirements as to Affiliate Transactions. (a) The Company and its subsidiaries shall only be permitted to enter into or renew or extend the term thereof (whether pursuant to contractual provisions thereof or otherwise) an agreement or a transaction with a Member or an Affiliate of a Member (which, solely for purposes of this Section 8.11, shall be deemed to include any entity more than 10% of the voting stock or other ownership interests of, or economic interest in, which is owned by a Member (other than the Company or any of its subsidiaries)) on the same terms or on terms no less favorable to the Company or such subsidiary than could be obtained from a third party on an arm's-length basis (an "Arm's-Length Transaction"). (b) (i) If (A) the Company or any subsidiary of the Company enters into, renews or extends the term of (pursuant to contractual provisions thereof that were previously approved by the Board of Managers or otherwise) or materially amends or changes the terms or provisions of, any agreement or transaction between the Company or any of its subsidiaries and any Member or any Affiliate of any Member (a "Section 8.11(b) Affiliate Transaction") or proposes to do any of the foregoing and (ii) not later than 90 days after receiving written notice thereof from the Company pursuant to Section 7.03 or otherwise (which notice describes the material terms and conditions of such transaction in reasonable detail), the Member that is not (or whose Affiliate is not) a party to such Section 8.11(b) Affiliate Transaction (the "Non-Contracting Member") notifies the Company and the Member that is (or whose Affiliate is) a party to such Section 8.11(b) Affiliate Transaction (the "Contracting Member") in writing that the Non-Contracting Member believes in good faith that either such Affiliate Transaction is not an Arm's-Length Transaction or that the quality of the service being provided or to be provided by the Contracting Member is inferior to that which the Company and its subsidiaries could otherwise obtain on comparable terms and conditions, then the Company shall promptly (and, in any event within 30 days) provide the Non-Contracting Member with a reasonably detailed explanation of the basis for the Company's determination that such new, renewed or extended Affiliate Transaction is an Arm's-Length Transaction or the quality of the service being provided or to be provided to the Company and its subsidiaries is not inferior. (ii) If following receipt of such evidence, the Non-Contracting Member is not reasonably satisfied that such Affiliate Transaction is an Arm's-Length Transaction or the quality of the service being provided or to be provided to the Company and its subsidiaries is not inferior, then, at the written request of the Non-Contracting Member (such written request being an "Affiliate Transaction Dispute Notice"), the Company shall (A) modify the terms of such Affiliate Transaction so that it becomes an Arm's- Length Transaction, (B) if the Company had given the Members written notice pursuant to Section 7.03(a) prior to entering into, renewing or extending such Affiliate Transaction, not enter into, renew or extend such Affiliate Transaction or (C) if the Company had given the Members written notice pursuant to Section 7.03(a) prior to entering into, renewing or extending such Affiliate Transaction, enter into, renew or extend such Affiliate Transaction in which event the determination of whether such Affiliate Transaction is an Arm's Length Transaction and/or whether the quality of the service being provided is inferior shall be in accordance with the Dispute Resolution Procedures set forth in Article XIII or (D) if the Company shall not have given the Members written notice pursuant to Section 7.03(a) prior to entering into, renewing or extending such Affiliate Transaction, commence the dispute resolution procedures set forth in Article XIII. (iii) For purposes of Article XIII, a Non- Contracting Member's delivery of an Affiliate Transaction Dispute Notice to the Company shall constitute delivery of a Dispute Notice thereunder, and the Company shall be required to deliver a Response to the Non-Contracting Member within 30 days thereafter. If it is finally determined pursuant to such Dispute Resolution Procedures that such Affiliate Transaction is an Arm's-Length Transaction and, if disputed, that the quality of service being so provided is not inferior, then the Company shall be permitted to enter into, renew or extend such Affiliate Transaction. If it is finally determined pursuant to such Dispute Resolution Procedures that such Affiliate Transaction is not an Arm's-Length Transaction or that the quality of service being so provided is inferior, then the Company shall either modify the terms of such Affiliate Transaction so that it becomes an Arm's-Length Transaction and, if disputed, with an adequate level of quality of service or not enter into, renew or extend such Affiliate Transaction. In the event that such Affiliate Transaction has already been entered into, renewed or extended, then (A) the Company and the Contracting Member shall make such modifications to the terms of such Affiliate Transaction as are necessary so that such Affiliate Transaction becomes an Arm's-Length Transaction and, if disputed, with an adequate level of quality of service and (B) the Contracting Member shall pay the Company an amount equal to the difference between (I) the costs incurred by the Company under such Affiliate Transaction since the time of such entering into, renewal or extension and (II) the costs that the Company would have incurred under such Affiliate Transaction during such time period had such Affiliate Transaction been an Arm's-Length Transaction and, if disputed, with an adequate level of quality of service at the time of such initial agreement, renewal or extension. SECTION 8.12. Review of Certain Affiliate Transactions Related to Crude Oil Purchases and Shared Services. (a) (i) Not less than 30 days prior to the regular meeting of the Board of Managers during the fourth Fiscal Quarter of each Fiscal Year (or, if no regular meeting of the Board of Managers is scheduled during such Fiscal Quarter, at a special meeting of the Board of Managers during such Fiscal Quarter), the Company shall submit to the Board of Managers a reasonably detailed description of any proposed transactions or agreements related to crude oil purchases by the Company and its subsidiaries from Marathon or any Affiliate of Marathon that are intended to remain in effect or to be put into effect during such next Fiscal Year (collectively, the "Marathon Crude Oil Purchase Program"). Following such submission, the Company shall provide the Board of Managers promptly with such information with respect to such Marathon Crude Oil Purchase Program and the Company's other proposed crude oil purchases and policies for such next Fiscal Year as any Representative shall reasonably request. At each such regular or special meeting during the fourth Fiscal Quarter of each Fiscal Year, the Board of Managers shall review such Marathon Crude Oil Purchase Program. During such next Fiscal Year, the Company and its subsidiaries shall be permitted to purchase crude oil from Marathon or any Affiliate of Marathon only on the terms and conditions of the proposed transactions and agreements submitted to and approved by the Board of Managers at such regular or special meeting pursuant to a vote in accordance with Section 8.07(b) (the "Approved Marathon Crude Oil Purchase Program"). Any purchase (or group of related purchases) of crude oil by the Company or any of its subsidiaries from Marathon or any Affiliate of Marathon during such Fiscal Year that is an Affiliate Transaction for purposes of Section 8.08(k) and is not made under or in accordance with the Approved Marathon Crude Oil Purchase Program and any material amendment to or change in the Approved Marathon Crude Oil Purchase Program during such Fiscal Year shall be made only with the prior approval of the Board of Managers pursuant to a vote in accordance with Section 8.07(b). (ii) The Company shall prepare and send to each Member (at the same time) promptly, but in no event later than the 30th day after the last day of each Fiscal Quarter, (A) a summary of all Crude Oil Purchases during such Fiscal Quarter, (B) a description of any amendments to, changes in or deviations from the Approved Marathon Crude Oil Purchase Program in effect during such Fiscal Quarter, (C) a description of any then known proposed amendments to, changes in or deviations from the Approved Marathon Crude Oil Purchase Program in effect during the remaining balance of the Fiscal Year and (D) such other information with respect to purchases of crude oil by the Company and its subsidiaries as either Member shall reasonably request. (b)(i) All administrative services that Marathon, Ashland and each of their respective Affiliates provide to the Company or any of its subsidiaries, and that the Company and its subsidiaries provide to Marathon, Ashland or any of their respective Affiliates, shall be pursuant to the Shared Services Agreement. To the extent that there is a conflict between the Shared Services Agreement, Schedule 10.2(e) to the Marathon Asset Transfer and Contribution Agreement Disclosure Letter or Schedule 10.2(e) to the Ashland Asset Transfer and Contribution Agreement Disclosure Letter, on the one hand, and this Agreement, on the other hand, this Agreement shall control. (ii) Not less than 90 days prior to each of the annual meetings of the Board of Managers held in 2000, 2003 and every three years thereafter, the Company shall submit to the Board of Managers the provisions of the Shared Services Agreement that relate to each Significant Shared Service then in effect or that is proposed to be put into effect. Following such submission, the Company shall provide the Board of Managers promptly with such information with respect to such Significant Shared Services and with respect to any other Shared Services then being provided or proposed to be provided as any Representative shall reasonably request. At each such annual meeting, unless all the Representatives otherwise agree, the Board of Managers shall review each such Significant Shared Service and shall determine pursuant to a vote in accordance with Section 8.07(b) whether such Significant Shared Service should be continued (or, in the case of any proposed Significant Shared Service, put into effect). Unless the Board of Managers approves pursuant to a vote in accordance with Section 8.07(b) the continuation or effectiveness of a Significant Shared Service, the Shared Service Agreement to the extent it relates to such Significant Shared Service shall be terminated effective 90 days after such annual meeting or at such later date as the Board of Managers shall specify pursuant to a vote in accordance with Section 8.07(b) and the Company shall be deemed at the time of such annual meeting to have given notice to the Member providing or receiving (or whose Affiliate is providing or receiving) such Significant Shared Service that the Company is terminating the Shared Service Agreement with respect to such Significant Shared Service. SECTION 8.13. Adjustable Amounts. Within 30 days following the date on which the United States Department of Labor Bureau of Labor Statistics for all Urban Areas publishes the Price Index for the month of September of each Fiscal Year commencing September, 1998, the Company shall determine whether the Average Annual Level for the immediately preceding twelve-month period exceeds the Base Level. If the Company determines that the Average Annual Level for such twelve-month period exceeds the Base Level, then the Company shall increase or decrease each of the dollar amounts set forth in this Agreement (other than the $348 million and $346 million amounts set forth in the definition of Adjusted DD&A, the $657 million, $600 million, $80 million, $20 million and $12.4 million amounts set forth in the definition of Adjusted EBITDA, the $240 million amount set forth in the definition of "Normal Annual Capital Budget Amount" in Section 1.01, the $100 million amount set forth in Section 8.08(f)(i) and any dollar amount set forth in any Appendix, Exhibit or Schedule to this Agreement, including Schedule 8.14) (each dollar amount that is adjusted pursuant to this Section 8.13 being an "Adjustable Amount"), including, without limitation, the following amounts, to an amount calculated by multiplying the relevant Adjustable Amount by a fraction whose numerator is the Average Annual Level for such twelve-month period and whose denominator is the Base Level: (i) the $100,000, $2 million and $25 million amounts set forth in the definition of "Affiliate Transaction" and the $2 million amount set forth in the definition of "Significant Shared Service" in each case in Section 1.01; (ii) the $2 million amount set forth in Section 6.06(c); (iii) the $2 million amounts set forth in Sections 6.08(b), (d) and (e); (iv) the $20 million amount set forth in Section 8.08(a)(i); (v) the $80 million amount set forth on Section 8.08(f)(ii) (or such other dollar amount as shall be agreed pursuant to the proviso to Section 8.08(f)(ii)); (vi) the $50 million amount set forth in Section 8.08(g); (vii) the $50 million and $25 million amounts set forth in Section 8.08(h)(i); and (viii) each $7.5 million amount set forth in Section 14.01(a); provided that in no event shall any Adjustable Amount be decreased below the initial amount thereof set forth herein. Within five Business Days after making such determinations, the Company shall distribute to each Member a notice setting forth: (A) the amount by which the Average Annual Level for such Fiscal Year exceeded the Base Level and (B) the calculations of any adjustments made to the Adjustable Amounts pursuant to this Section 8.13. Any adjustment made to the Adjustable Amounts pursuant to this Section 8.13 shall be effective as of January 1st of the next Fiscal Year. SECTION 8.14. Company Leverage Policy. The leverage policy for the Company shall be the leverage policy set forth on Schedule 8.14, with such modifications, alterations or amendments thereto as the Board of Managers shall from time to time approve pursuant to a vote in accordance with Section 8.07(b) (such leverage policy, as so modified, altered or amended, is referred to herein as the "Company Leverage Policy"). SECTION 8.15. Company's Investment Guidelines. The Company's Senior Vice President-Finance and Commercial Services, Vice President-Finance and Controller and Treasurer (or Treasury Manager) shall constitute an Investment Policy Committee of the Company and shall establish investment guidelines for the Company and its subsidiaries (such investment guidelines, as they may be modified, altered or amended by such Investment Policy Committee from time to time, are referred to herein as the "Company Investment Guidelines"). The initial Company Investment Guidelines is set forth on Schedule 8.15. The Company and its subsidiaries shall only make investments that are permitted under the Company Investment Guidelines at the time of such investments. In addition, the Company and its subsidiaries shall invest all Surplus Cash (after meeting daily cash requirements) in accordance with the Company Investment Guidelines. SECTION 8.16. Requirements as to Operating Leases. The Company and its subsidiaries shall not enter into any operating lease (as determined in accordance with Applicable GAAP) if the purpose or intent of entering into such operating lease is to circumvent the Company Leverage Policy or the super majority voting requirement for Capital Expenditures of the Company set forth in Section 8.08(f). The lease by the Company and its subsidiaries of vehicles, railcars and computers in accordance with the historical practices of the Ashland Business and the Marathon Business shall not be deemed to violate this Section 8.16, provided, for the avoidance of doubt, that all Ordinary Course Lease Expenses related to any such leases shall be considered Ordinary Course Lease Expenses for the purposes of Section 8.08(f)(ii). SECTION 8.17. Limitations on Actions Relating to the Calculation of Distributable Cash. Notwithstanding anything to the contrary contained in this Agreement, the Company shall not, and shall cause its subsidiaries not to (a) modify, alter or amend the Company Investment Guidelines, (b) accelerate the payment of the Company's and its subsidiaries' accounts payable, (c) delay the collection of the Company's and its subsidiaries' accounts receivable or (d) take any other action, if the purpose or intent of such action is to reduce the amount of Distributable Cash in a manner that is inconsistent with the intent of the Members to maximize the amount of Distributable Cash distributions to the Members. SECTION 8.18. Reliance by Third Parties. Persons dealing with the Company are entitled to rely conclusively upon the power and authority of the Board of Managers herein set forth. Except as provided in this Agreement, neither the President, nor a Representative, nor any Member shall have any authority to bind the Company or any of its subsidiaries. SECTION 8.19. Integration of Retail Operations. (a) Until the Critical Decision is made regarding the location of the Company's retail operations' headquarters, the Company's retail operations' business shall have headquarters in both Enon, Ohio and Lexington, Kentucky. (b) (i) The Company shall make a formal recommendation to the Board of Managers with respect to each Critical Decision not later than the ten-month anniversary of the Closing Date. Following receipt of a formal recommendation with respect to any Critical Decision, Marathon and Ashland shall negotiate in good faith to reach an agreement with respect to such Critical Decision not later than the first anniversary of the Closing Date. (ii) Each formal recommendation with respect to any Critical Decision shall be accompanied by a report on the business and economic analyses used by the Company to arrive at such recommendation, including but not limited to, a reasonably detailed description of the risks and benefits of the recommended decision and the anticipated impact of the recommended decision on the Speedway and SuperAmerica brand images and business models. (iii) Following receipt of any formal recommendation with respect to any Critical Decision, each Member may request, and the Company shall promptly provide to both Members, such additional information and analyses (including studies by outside consultants) as such Member may reasonably request; provided, however, any additional information request shall not extend the Critical Decision Termination Date. (c) If any Primary Critical Decision shall not have been agreed by the Board of Managers pursuant to a vote in accordance with Section 8.07(b) prior to the first anniversary of the Closing Date, the Critical Decision Termination Date with respect to such Primary Critical Decision shall be automatically, and without any further action required by either Member, the Company or the Board of Managers, extended until the fifteen-month anniversary of the Closing Date. During the period of such extension, the Company shall provide promptly to each Member such additional information or analyses (including studies by outside consultants) as either Member shall reasonably request. Not later than 30 days prior to the fifteen-month anniversary of the Closing Date, the Company shall, if requested by either Member, again make a formal recommendation to the Board of Managers with respect to such Primary Critical Decision. Such formal recommendation shall include a report on the supporting business and economic analyses described in Section 8.19(b)(ii). Any request for additional information shall not extend the Critical Decision Termination Date. (d) Until such time as the implementation of any Critical Decision shall have been completed in all material respects, the President of the Company shall report to the Board of Managers at each regular meeting of the Board of Managers on the implementation of such Critical Decision and on any material modifications or changes to such Critical Decision. (e) To the extent there is any conflict between the terms and provisions of this Agreement and the terms and provisions of the Retail Integration Protocol, the terms and provisions of this Agreement shall control. ARTICLE IX Officers SECTION 9.01. (a) Election, Appointment and Term of Office. The executive officers of the Company (the "Executive Officers") shall consist solely of: a President; an Executive Vice President; an officer principally in charge of refining; an officer principally in charge of wholesale and branded marketing; the officer or officers (two initially) principally in charge of retail marketing; an officer principally in charge of supply and transportation; an officer who shall be the Senior Vice President-Finance and Commercial Services of the Company; and an officer who shall be the general counsel of the Company; provided, however, that Marathon and Ashland may make additions or deletions to the positions which shall be considered executive officers of the Company by mutual agreement. Schedule C sets forth a list of (i) the persons who Marathon and Ashland have chosen to serve initially as the Executive Officers of the Company, (ii) the executive office for which each such person is to serve and (iii) whether each such person was designated by Marathon or Ashland. Marathon and Ashland agree that the composition of the initial Executive Officers is intended to reflect their respective Percentage Interests in the Company. Accordingly, if any person identified on Schedule C is for any reason unable or unwilling to serve as an Executive Officer at the Closing Date, the Member who designated such person shall have the right to designate a substitute person, subject to the right of the other Member to consent to such substitute nominee (which consent shall not be unreasonably withheld). Marathon and Ashland shall cause their respective Representatives to promptly approve the appointment of each person listed on Schedule C to the related executive office position listed on Schedule C. (b) Except as otherwise determined by the Board of Managers, each Executive Officer shall hold office until his or her death or until his or her earlier resignation or removal in the manner hereinafter provided. Except as otherwise expressly provided herein, the Executive Officers shall have such powers and duties in the management of the Company as generally pertain to their respective offices as if the Company were a corporation governed by the General Corporation Law of the State of Delaware. (c) The Board of Managers may elect or appoint such other officers to assist and report to the Executive Officers as it deems necessary. Subject to the preceding sentence, each such officer shall have such authority and shall perform such duties as may be provided herein or as the Board of Managers may prescribe. The Board of Managers may delegate to any Executive Officer the power to choose such other officers and to prescribe their respective duties and powers. (d) Except as otherwise determined by the Board of Managers, if additional officers are elected or appointed during the year pursuant to Section 9.01(c), each such officer shall hold office until his or her death or until his or her earlier resignation or removal in the manner hereinafter provided. SECTION 9.02. Resignation, Removal and Vacancies. (a) Any officer may resign at any time by giving written notice to the President or the Secretary of the Company, and such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, when accepted by action of the Board of Managers. Except as aforesaid, the acceptance of such resignation shall not be necessary to make it effective. (b) All officers and agents elected or appointed by the Board of Managers shall be subject to removal at any time by the Board of Managers with or without cause. (c) Vacancies in all Executive Officer positions may only be filled by the majority vote of the Representa tives on the Board of Managers. In each instance where a vacant Executive Officer position is to be filled, Marathon, after consultation with the Company, shall first send Ashland a notice which discloses the name and details of the candidate for the vacant Executive Officer position that the Representatives of Marathon will nominate and vote in favor of for such position. Ashland shall thereafter have the right, by notice to the Company and Marathon within ten days after receipt of such notice from Marathon, to veto such candidate. Each candidate that Marathon proposes for a vacant Executive Officer position shall be a bona fide candidate who is willing and able to serve and who Marathon in good faith believes is qualified to fill such vacant Executive Officer position (a "Qualified Candidate"). In the event Ashland exercises its veto with respect to a Qualified Candidate, the vacancy will be filled by the majority vote of the Representatives on the Board of Managers. SECTION 9.03. Duties and Functions of Executive Officers. (a) President. The President of the Company, who shall be a non-voting member of the Board of Managers, shall be in charge of the day-to-day operations of the Company and shall preside at all meetings of the Board of Managers and shall perform such other duties and exercise such powers, as may from time to time be prescribed by the Board of Managers. (b) Executive Vice President. The Executive Vice President of the Company initially shall report to the President and be the officer principally in charge of all supply, refining, marketing and transportation operations of the Company other than the Company's retail operations. (c) Other Executive Officers. The Executive Officers of the Company other than the President and the Executive Vice President shall perform such duties and exercise such powers, as may from time to time be prescribed by the President or the Board of Managers. ARTICLE X Transfers of Membership Interests SECTION 10.01. Restrictions on Transfers. (a) General. Except as expressly provided by this Article X, neither Member shall Transfer all or any part of its Membership Interests to any person without first obtaining the written approval of the other Member, which approval may be granted or withheld in its sole discretion. Notwithstanding anything to the contrary contained in this Agreement, no Transfer by a Member of its Membership Interests to any person shall be made except to a permitted assignee under Article XV of the Put/Call, Registration Rights and Standstill Agreement. (b) Transfer by Operation of Law. In the event a Member shall be party to a merger, consolidation or similar business combination transaction with a third party or sell all or substantially all its assets to a third party, such Member may Transfer all (but not part) of its Membership Interests to such third party; provided, however, that such Member shall not be permitted to Transfer its Membership Interests to such third party as aforesaid if the purpose or intent of such merger, consolidation, similar business combination transaction or sale is to circumvent or avoid the application of Sections 10.01(c) and 10.04 to the Transfer of such Member's Membership Interests to such third party. (c) Transfer by Sale to Third Party. At any time after December 31, 2002, a Member may sell all (but not part) of its Membership Interests (and, in the case of Ashland, the Ashland LOOP/LOCAP Interest) to any person (other than a Transfer by operation of law pursuant to Section 10.01(b), a Transfer to a Wholly Owned Subsidiary pursuant to Section 10.01(d) or a Transfer by Ashland to Marathon pursuant to Section 10.01(e)) if (i) it shall first have offered the other Member the opportunity to purchase such Membership Interests (and, in the case of Ashland, the Ashland LOOP/LOCAP Interest) pursuant to the right of first refusal procedures set forth in Section 10.04, (ii) such sale is completed within the time periods specified in Section 10.04, (iii) the other Member shall have approved the purchaser of such Membership Interests (and, in the case of Ashland, the Ashland LOOP/LOCAP Interest), which approval shall not be unreasonably withheld or delayed and (iv) it shall use its commercially reasonable best efforts to (A) terminate the outstanding Original Lease underlying each of its Designated Sublease Agreements on or prior to the date of such Transfer and (B) contribute the related Subleased Property to the Company or one of its subsidiaries at no cost to the Company or such subsidiary on or prior to the date of such Transfer; provided, however, that (i) such Member shall not be obligated to pay more than a reasonable amount as consideration therefor to, or make more than a reasonable financial accommodation in favor of, or commence litigation against, a third party lessor with respect to any such underlying Original Lease in order to obtain any consent required from such lessor and (ii) any additional cost associated with exercising an option under the Original Lease to purchase Subleased Property or to terminate the Original Lease shall be deemed not to constitute an obligation to pay more than a reasonable amount. In the event that such Member is unable to terminate an outstanding Original Lease in accordance with this Section 10.02(b), then (i) the Company shall be entitled to continue to sublease the Subleased Property pursuant to the related Designated Sublease Agreement until the term of the Original Lease expires, (ii) the Member shall continue to use its commercially reasonable best efforts to terminate the Original Lease and contribute the Subleased Property to the Company as provided above; provided, however that (A) such Member shall not be obligated to pay more than a reasonable amount as consideration therefor to, or make more than a reasonable financial accommodation in favor of, or commence litigation against, a third party lessor with respect to any such Original Lease in order to obtain any consent required from such lessor and (b) any additional cost associated with exercising an option under the Original Lease to purchase Subleased Property or to terminate the Original Lease shall be deemed not to constitute an obligation to pay more than a reasonable amount and (iii) if such Member subsequently acquires fee title to the Subleased Property, such Member shall contribute such Subleased Property to the Company or one of its subsidiaries at no cost to the Company or such subsidiary at such time. It is expressly understood and agreed that, in determining whether to reasonably withhold its approval of a proposed purchaser of Marathon's Membership Interests pursuant to this Section 10.01(c), Ashland shall be entitled to consider the creditworthiness of such proposed purchaser, including whether such proposed purchaser is likely to be able to perform all of Marathon's and USX's respective obligations under the Put/Call, Registration Rights and Standstill Agreement. (d) Transfer to Wholly Owned Subsidiary. A Member may Transfer all (but not part) of its Membership Interests at any time to a Wholly Owned Subsidiary of such Member if (i) such Member shall have received an opinion from nationally recognized tax counsel acceptable to both Members that such Transfer will not result in a termination of the status of the Company as a partnership for Federal income tax purposes and (ii) the transferring Member enters into an agreement with the other Member providing that so long as such Wholly Owned Subsidiary holds such transferring Member's Membership Interests, such Wholly Owned Subsidiary shall remain a Wholly Owned Subsidiary of such transferring Member. (e) Transfer Pursuant to Put/Call, Registration Rights and Standstill Agreement. Ashland may Transfer all of its Membership Interests to Marathon in connection with the exercise by Marathon of its Marathon Call Right or its Special Termination Right or the exercise by Ashland of its Ashland Put Right. In addition, Marathon may Transfer all of its Membership Interests to Ashland in connection with the exercise by Ashland of its Special Termination Right. (f) Consequences of Permitted Transfers. (i) In connection with any Transfer by a Member to a third party transferee pursuant to Section 10.01(b), (A) such third party transferee shall at the time of such Transfer become subject to all of such transferring Member's obligations hereunder and shall succeed to all of such transferring Member's rights hereunder and (B) such transferring Member shall be relieved of all of its obligations hereunder other than with respect to any default hereunder by such transferring Member or any of its Affiliates hereunder that occurred prior to the time of such Transfer. (ii) In connection with any Transfer by a Member to a third party transferee or to the other Member pursuant to Section 10.01(c), (A) such third party transferee or such other Member shall at the time of such Transfer become subject to all of such transferring Member's obligations hereunder and shall succeed to all of such transferring Member's rights hereunder and (B) such transferring Member shall at the time of such Transfer be relieved of all of its obligations hereunder other than with respect to any default hereunder by such transferring Member or any of its Affiliates that occurred prior to the time of such Transfer. (iii) In connection with any Transfer by a Member to a Wholly Owned Subsidiary of such Member pursuant to Section 10.01(d), (A) such Wholly Owned Subsidiary shall at the time of such Transfer become subject to all of such Member's obligations hereunder and shall succeed to all of such Member's rights hereunder and (B) such Member shall not be relieved of its obligations hereunder without the prior written consent of the other Member, which consent shall not be unreasonably withheld or delayed. (iv) In connection with any Transfer by Ashland to Marathon pursuant to Section 10.01(e), (A) Marathon shall at the time of such Transfer become subject to all of Ashland's obligations hereunder and shall succeed to all of Ashland's rights hereunder and (B) Ashland shall at the time of such Transfer be relieved of all of its obligations hereunder other than with respect to any default hereunder by Ashland or any of its Affiliates that occurred prior to the Exercise Date (as such term is defined in the Put/Call, Registration Rights and Standstill Agreement). (v) In connection with any Transfer by Marathon to Ashland pursuant to Section 10.01(e), (A) Ashland shall at the time of such Transfer become subject to all of Marathon's obligations hereunder and shall succeed to all of Marathon's rights hereunder and (B) Marathon shall at the time of such Transfer be relieved of all of its obligations hereunder other than with respect to any default hereunder by Marathon or any of its Affiliates that occurred prior to the Special Termination Exercise Date (as such term is defined in the Put/Call, Registration Rights and Standstill Agreement). (vi) In connection with any Transfer by Ashland to a third party transferee pursuant to Section 10.01(b), 10.01(c) or 10.01(d), such third party transferee shall at the time of such Transfer succeed to all of Ashland's veto rights under Section 9.02(c); provided, that if Ashland Transfers its Membership Interests to a third party transferee pursuant to Section 10.01(c), such third party transferee shall not thereafter be permitted to transfer its veto rights under Section 9.02(c) to another third party transferee pursuant to Section 10.01(c). (vii) In connection with any Transfer by a Member to a third party transferee pursuant to this Article X, such transferring Member shall retain all of the rights granted to a Member under Article VII to examine the books and records of the Company and to receive financial statements and reports prepared by the Company until such time following such Transfer as such transferring Member ceases to have any liability under Article IX of the Asset Transfer and Contribution Agreement. (g) Consequences of an Unpermitted Transfer. Any Transfer of a Member's Membership Interests made in violation of the applicable provisions of this Agreement shall be void and without legal effect. SECTION 10.02. Conditions for Admission. No transferee of all of the Membership Interests of any Member shall be admitted as a Member hereunder unless (a) such Membership Interests are Transferred to a person in compliance with the applicable provisions of this Agreement, (b) such transferee shall have executed and delivered to the Company such instruments as the Board of Managers deems necessary or desirable in its reasonable discretion to effectuate the admission of such transferee as a Member and to confirm the agreement of such transferee or recipient to be bound by all the terms and provisions of this Agreement with respect to the Membership Interests acquired by such transferee and (c) such transferee shall have executed and delivered an assignment and assumption agreement pursuant to Section 15.04 of the Put/Call, Registration Rights and Standstill Agreement. SECTION 10.03. Allocations and Distributions. Subject to applicable Treasury Regulations, upon the Transfer of all the Membership Interests of a Member as herein provided, the Profit or Loss of the Company attributable to the Membership Interests so transferred for the Fiscal Year during which such Transfer occurs shall be allocated between the transferor and transferee as of the date set forth on the written assignment, and such allocation shall be based upon any permissible method agreed to by the Members that is provided for in Code Section 706 and the Treasury Regulations issued thereunder. Except as otherwise expressly provided in Section 5.01 of the Put/Call, Registration Rights and Standstill Agreement, distributions shall be made to the holder of record of the Membership Interests on the date of distribution. SECTION 10.04. Right of First Refusal. (a) If a Member (the "Selling Member") shall desire to sell all (but not part) of its Membership Interests (which, for purposes of this Section 10.04, shall be deemed to include, in the case of Ashland, the Ashland LOOP/LOCAP Interest) pursuant to Section 10.01(c), then the Selling Member shall give notice (the "Offer Notice") to the other Member, identifying the proposed purchaser from whom it has received a bona fide offer and setting forth the proposed sale price (which shall be payable only in cash or purchase money obligations secured solely by the Membership Interests being sold) and the other material terms and conditions upon which the Selling Member is proposing to sell such Membership Interests to such proposed purchaser. No such sale shall encompass or be conditioned upon the sale or purchase of any property other than such Membership Interests (other than, in the case of Ashland, the Ashland LOOP/LOCAP Interest). The other Member shall have 30 days from receipt of the Offer Notice to elect, by notice to the Selling Member, to purchase the Membership Interests offered for sale on the terms and conditions set forth in the Offer Notice. (b) If a Member makes such election, the notice of election shall state a closing date not later than 60 days after the date of the Offer Notice. If such Member breaches its obligation to purchase the Membership Interests of the Selling Member on the same terms and conditions as those contained in the Offer Notice after giving notice of its election to make such purchase (other than where such breach is due to circumstances beyond such Member's reasonable control), then, in addition to all other remedies available, the Selling Member may, at any time for a period of 270 days after such default, sell such Membership Interests to any person at any price and upon any other terms without further compliance with the procedures set forth in Section 10.04. (c) If the other Member gives notice within the 30-day period following the Offer Notice from the Selling Member that it elects not to purchase the Membership Interests, the Selling Member may, within 120 days after the end of such 30-day period (or 270 days in the case where such parties have received a second request under HSR), sell such Membership Interests to the identified purchaser (subject to clause (iii) of Section 10.01(c)) on terms and conditions no less favorable to the Selling Member than the terms and conditions set forth in such Offer Notice. In the event the Selling Member shall desire to offer the Membership Interests for sale on terms and conditions less favorable to it than those previously set forth in an Offer Notice, the procedures set forth in this Section 10.04 must again be initiated and applied with respect to the terms and conditions as modified. SECTION 10.05. Restriction on Resignation or Withdrawal. Except in connection with a Transfer permitted pursuant to Section 10.01, neither Member shall resign or withdraw from the Company without the consent of the other Member. Any purported resignation or withdrawal from the Company in violation of this Section 10.05 shall be null and void and of no force or effect. ARTICLE XI Liability, Exculpation and Indemnification SECTION 11.01. Liability. Except as otherwise provided by the Delaware Act, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and no Covered Person shall be obligated personally for any such debt, obligation or liability of the Company solely by reason of being a Covered Person. SECTION 11.02. Exculpation. (a) No Covered Person shall be liable to the Company or any other Covered Person for any cost, expense, loss, damage, claim or liability incurred by reason of any act or omission performed or omitted by such Covered Person in such capacity, whether or not such person continues to be a Covered Person at the time of such cost, expense, loss, damage, claim or liability is incurred or imposed, if the Covered Person acted in good faith and in a manner the Covered Person reasonably believed to be in or not opposed to the best interests of the Company, and if, with respect to any criminal action or proceeding, such Covered Person had no reasonable cause to believe its conduct was unlawful, except that a Covered Person shall be liable for any such cost, expense, loss, damage, claim or liability incurred by reason of such Covered Person's breach of Section 12.02. (b) A Covered Person shall be fully protected in relying in good faith upon the records of the Company and upon such information, opinions, reports or statements presented to the Company by any person as to any matters the Covered Person reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Company, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which distributions to Members might properly be paid. SECTION 11.03. Indemnification. (a) To the fullest extent permitted by Applicable Law, a Covered Person shall be entitled to indemnification from the Company for any reasonable cost and expense, loss, damage, claim or liability incurred by such Covered Person in connection with any pending, threatened or completed claim, action, suit or proceeding by reason of being a Covered Person or by reason of any act or omission performed or omitted by such Covered Person in such capacity, whether or not such person continues to be a Covered Person at the time such cost, expense, loss, damage, claim or liability is incurred or imposed, if the Covered Person (i) has been successful on the merits or otherwise with respect to such claim, action, suit or proceeding, or (ii) acted in good faith and in a manner the Covered Person reasonably believed to be in or not opposed to the best interests of the Company, and if, with respect to any criminal action or proceeding, such Covered Person had no reasonable cause to believe its conduct was unlawful, except that no Covered Person shall be entitled to be indemnified in respect of any such cost, expense, loss, damage, claim or liability incurred by such Covered Person by reason of such Covered Person's breach of Section 12.02 with respect to such acts or omissions; provided, however, that any indemnity under this Section 11.03 shall be provided out of and to the extent of Company assets only, and no Covered Person shall have any personal liability on account of such indemnification of any other Covered Person, and provided further that, in the case of officers, employees and agents of the Company, such right to indemnification shall be subject to any further limitations or requirements that may be adopted by the Board of Managers, provided such limitations or requirements were adopted prior to the events that gave rise to the claim for indemnification. (b) Expenses incurred with respect to any claim, action, suit or proceeding of the character described in Section 11.03(a) shall be advanced to a Covered Person by the Company prior to the final disposition thereof, but the Covered Person shall be obligated to repay such advances if it is ultimately determined that the Covered Person is not entitled to indemnification under Section 11.03(a). As a condition to advancing expenses hereunder, the Company may require the Covered Person to sign a written instrument acknowledging his obligation to repay any advances hereunder if it is ultimately determined he is not entitled to such indemnity. (c) Notwithstanding anything in this Section 11.03 to the contrary, no Covered Person shall be indemnified in respect of any claim, action, suit or proceeding initiated by such Covered Person or his personal or legal representative, or which involved the voluntary solicitation or intervention of such person or his personal or legal representative (other than an action to enforce indemnification rights hereunder or any action initiated with the approval of a majority of the Board of Managers). (d) The rights of indemnification provided in this Section 11.03 shall be in addition to any other rights to which any Covered Person may otherwise be entitled to by contract or otherwise; and in the event of any Covered Person's death, such rights shall extend to such Covered Person's heirs and personal representatives. ARTICLE XII Fiduciary Duties SECTION 12.01. Duties and Liabilities of Covered Persons. To the extent that, at law or in equity, a Covered Person has duties (including fiduciary duties) and liabilities relating thereto to the Company or to any other Covered Person, a Covered Person acting under this Agreement shall not be liable to the Company or to any other Covered Person for its good faith reliance on the provisions of this Agreement. The provisions of this Agreement, to the extent that they expand or restrict the duties and liabilities of a Covered Person otherwise existing at law or in equity, are agreed by the parties hereto to replace such other duties and liabilities of such Covered Person. SECTION 12.02. Fiduciary Duties of Members of the Company and Members of the Board of Managers. Each Member and each member of the Board of Managers shall have the fiduciary duties of loyalty and care (similar to the fiduciary duties of loyalty and care of directors of a business corporation governed by the General Corporation Law of the State of Delaware) to the Company and all of the Members. Notwithstanding any provision of this Agreement to the contrary, each Member and each member of the Board of Managers agrees to and shall exercise good faith, fairness and loyalty to the Company and to all of the Members, and shall make all decisions in a manner that such Member or such member of the Board of Managers reasonably believes to be in the best interest of the Company and all of the Members. Notwithstanding the foregoing, this Section 12.02 is not intended to limit a Member's ability to exercise or enforce any of its rights and remedies under this Agreement and the other Transaction Documents in good faith, including, without limitation, Article IX of the Asset Transfer and Contribution Agreement. ARTICLE XIII Dispute Resolution Procedures SECTION 13.01. General. All controversies, claims or disputes between the Members or between the Company and either Member that arise out of or relate to this Agreement or the construction, interpretation, performance, breach, termination, enforceability or validity of this Agreement, or the commercial, economic or other relationship of the parties hereto, whether such claim is based on rights, privileges or interests recognized by or based upon statute, contract, tort, common law or otherwise and whether such claim existed prior to or arises on or after January 1, 1998 (a "Dispute") shall be resolved in accordance with the provisions of this Article XIII (except as otherwise expressly provided in Sections 6.06 and 6.08). Notwithstanding anything to the contrary contained in this Article XIII, nothing in this Article XIII shall limit the ability of the directors and officers of either Member from communicating directly with the directors and officers of the other Member. SECTION 13.02. Dispute Notice and Response. Either Member may give the other Member written notice (a "Dispute Notice") of any Dispute which has not been resolved in the normal course of business. Within fifteen Business Days after delivery of the Dispute Notice, the receiving Member shall submit to the other Member a written response (the "Response"). The Dispute Notice and the Response shall each include (i) a statement setting forth the position of the Member giving such notice, a summary of the arguments supporting such position and, if applicable, the relief sought and (ii) the name and title of a senior manager of such Member who has authority to settle the Dispute and will be responsible for the negotiations related to the settlement of the Dispute (the "Senior Manager"). SECTION 13.03. Negotiation Between Senior Managers. (a) Within 10 days after delivery of the Response provided for in Section 13.02, the Senior Managers of both Members shall meet or communicate by telephone at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, and shall negotiate in good faith to attempt to resolve the Dispute that is the subject of such Dispute Notice. If such Dispute has not been resolved within 45 days after delivery of the Dispute Notice, then the Members shall attempt to settle the Dispute pursuant to Section 13.04. (b) All negotiations between the Senior Managers pursuant to this Section 13.03 shall be treated as compromise and settlement negotiations. Nothing said or disclosed, nor any document produced, in the course of such negotiations which is not otherwise independently discoverable shall be offered or received as evidence or used for impeachment or for any other purpose in any current or future arbitration or litigation. SECTION 13.04. Negotiation Between Chief Executive Officer and President. (a) If the Dispute has not been resolved by negotiation between the Senior Managers pursuant to Section 13.03, then within 10 Business Days after the expiration of the 45 day period provided in Section 13.03, the Chief Executive Officer of Ashland and the President of Marathon shall meet or communicate by telephone at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, and shall negotiate in good faith to attempt to resolve the Dispute that is the subject of such Dispute Notice. If such Dispute has not been resolved within 20 Business Days after the expiration of the 45 day period provided in Section 13.03, then (i) if the Dispute relates solely to (A) a claim by a Member or the Board of Managers that the other Member has failed to pay the Company a Designated Sublease Amount or an amount in respect of a Member-Funded Capital Expenditure, a Member-Funded Indemnity Expenditure or an Agreed Additional Capital Contribution required to be made by it pursuant to Section 4.02 (a "Disputed Capital Contribution Amount"), (B) the determination of any of the following amounts with respect to any period: distributions pursuant to Article V; the Aggregate Tax Rate; Adjusted DD&A; Adjusted EBITDA; EBITDA; Distributable Cash; the Average Annual Level and adjustments to Adjustable Amounts; the Normal Annual Capital Budget Amount; Ordinary Course Lease Expenses; Profit and Loss; the Tax Distribution Amount; the Tax Liability of any Member; and the determination of fair market value of property distributed in kind under Section 15.03, (C) the resolution of any dispute arising under Section 8.11(b) with respect to Affiliate Transactions or (D) the resolution of any dispute arising under Section 8.12 with respect to certain Affiliate Transactions related to Crude Oil Purchases and Shared Services (any Dispute relating to any of the matters set forth in clause (A), (B), (C) or (D) above being referred to herein as an "Arbitratable Dispute"), such Dispute shall be settled pursuant to the arbitration procedures set forth in Appendix B and (ii) if the Dispute does not relate primarily to an Arbitratable Dispute, each party hereto shall be permitted to take such actions at law or in equity as it is otherwise permitted to take or as may be available under Applicable Law. (b) All negotiations between the Chief Executive Officer of Ashland and the President of Marathon pursuant to this Section 13.04 shall be treated as compromise and settlement negotiations. Nothing said or disclosed, nor any document produced, in the course of such negotiations which is not otherwise independently discoverable shall be offered or received as evidence or used for impeachment or for any other purpose in any current or future arbitration or litigation. SECTION 13.05. Right to Equitable Relief Preserved. Notwithstanding anything in this Agreement or Appendix B to the contrary, either Member or the Company may at any time seek from any court of the United States located in the State of Delaware or from any Delaware state court, any interim, provisional or injunctive relief that may be necessary to protect the rights or property of such party or maintain the status quo before, during or after the pendency of the negotiation process or the arbitration proceeding or any other proceeding contemplated by Section 13.03 or 13.04. ARTICLE XIV Rights and Remedies with Respect to Monetary Disputes SECTION 14.01. Ability of Company to Borrow to Fund Disputed Monetary Amounts. (a) If the Company or a Member on behalf of the Company (a "Non-Delinquent Member") claims that the other Member (a "Delinquent Member") owes the Company a monetary amount in respect of either (i) a Disputed Capital Contribution Amount or (ii) an indemnification obligation under Article IX of the Asset Transfer and Contribution Agreement that the Company or the Non-Delinquent Member claims the Delinquent Member owes the Company and is either (A) past due or (B) in dispute (a "Disputed Indemnification Amount") (each such claim described in clauses (i) and (ii) above being a "Monetary Dispute", and each such claimed amount being a "Disputed Monetary Amount"), and if (1) the Disputed Monetary Amount itself, or when added together all other Disputed Monetary Amounts, exceeds $7.5 million; (2) the Board of Managers (by vote of a majority of the Representatives of the Non-Delinquent Member at a special or regular meeting of the Board of Managers (which majority shall constitute a quorum for purposes of the transaction of such business)) has determined that an out-of-pocket disbursement of such Disputed Monetary Amount or any portion thereof by the Company or one of its subsidiaries within the next twelve months is reasonably necessary for the operation and conduct of the Company's Business and, accordingly, that such amount should be paid within the next twelve months; (3) the aggregate amount of all Disputed Monetary Amounts (or portions thereof) that the Board of Managers shall have determined pursuant to clause (2) above should be paid within the next twelve months (such aggregate amount being the "Additional Required Cash Amount") exceeds $7.5 million; (4) postponement by the Company or such subsidiary of such disbursement until such time as the Monetary Dispute is reasonably likely to be finally resolved pursuant to an arbitration proceeding in accordance with Appendix B to this Agreement or Appendix B to the Asset Transfer and Contribution Agreement, as applicable (an "Arbitration Proceeding"), would have, or would reasonably be expected to have, a Material Adverse Effect on the Company's Business; and (5) the Delinquent Member has not paid the Company the Disputed Monetary Amount pursuant to Section 14.02 or otherwise, then the Board of Managers (by vote of a majority of the Representatives of the Non-Delinquent Member at a special or regular meeting of the Board of Managers (which majority shall constitute a quorum for purposes of the transaction of such business)) shall be permitted to cause the Company to incur an amount of Indebtedness equal to such Additional Required Cash Amount, which Indebtedness may be borrowed from a third party or the Non-Delinquent Member. (b) If the Non-Delinquent Member lends the Company the Additional Required Cash Amount pursuant to Section 14.01(a), then (i) the amount actually lent by the Non-Delinquent Member (the "Advanced Amount") and all accrued interest thereon shall be due and payable on the Arbitration Payment Due Date (provided that the Company shall be permitted to prepay the Advanced Amount in whole or in part at any time prior to such date); and (ii) the Advanced Amount shall bear interest at the Base Rate from the date on which such advance is made until the date that the Advanced Amount, together with all interest accrued thereon, is repaid to the Non-Delinquent Member. SECTION 14.02. Interim Payment of Disputed Monetary Amount. In order to reduce the amount of liquidated damages that a Delinquent Member would be required to pay to the Company pursuant to Section 14.03 in the event that such Delinquent Member loses in an Arbitration Proceeding with respect to a Monetary Dispute, the Delinquent Member shall be permitted to pay the Company the related Disputed Monetary Amount prior to the commencement of such Arbitration Proceeding. The Arbitration Tribunal or Sole Arbitrator, as applicable, shall not take into consideration in determining the liability of the Delinquent Member, a decision by such Delinquent Member to pay the Disputed Monetary Amount prior to the commencement of the Arbitration Proceeding. SECTION 14.03. Liquidated Damages. (a) No Interim Payment of Disputed Monetary Amount--Delinquent Member is Found Liable for Final Monetary Amount. If (i) it is finally determined in an Arbitration Proceeding that a Delinquent Member owes the Company a monetary amount in respect of (A) a Disputed Capital Contribution Amount or (B) a Disputed Indemnification Amount (each such finally determined amount being a "Final Monetary Amount") and (ii) the Delinquent Member had not paid the Company the Disputed Monetary Amount prior to the commencement of such Arbitration Proceeding pursuant to Section 14.02, then the Delinquent Member shall promptly, and in any event on or before the tenth Business Day following the date on which the Arbitration Tribunal or Sole Arbitrator makes its final determination (such tenth Business Day being the "Arbitration Payment Due Date"), pay to the Company (A) the Final Monetary Amount, together with interest, accrued from the commencement of the Arbitration Proceeding to the date that the Delinquent Member pays the Final Monetary Amount to the Company, on the Final Monetary Amount, at a rate per annum equal to (1) during the period from the commencement of the Arbitration Proceeding to the Arbitration Payment Due Date, the Prime Rate and (2) at any time thereafter, 150% of the Prime Rate, in each case, with daily accrual of interest, plus (B) an amount equal to 25% of the Final Monetary Amount. (b) Interim Payment of Disputed Monetary Amount-- Delinquent Member is Found Liable for the Same Amount. If (i) it is finally determined in an Arbitration Proceeding that a Delinquent Member owes the Company a Final Monetary Amount, (ii) the Final Monetary Amount is equal to the Disputed Monetary Amount and (iii) the Delinquent Member had paid the Company the Disputed Monetary Amount prior to the commencement of such Arbitration Proceeding pursuant to Section 14.02, then if the Final Monetary Amount is equal to the Disputed Monetary Amount, the Delinquent Member shall not owe the Company any other amount in respect of the Monetary Dispute. (c) Interim Payment of Disputed Monetary Amount-- Delinquent Member is Found Liable for a Greater Amount. If (i) it is finally determined in an Arbitration Proceeding that a Delinquent Member owes the Company a Final Monetary Amount, (ii) the Final Monetary Amount is greater than the Disputed Monetary Amount and (iii) the Delinquent Member had paid the Company the Disputed Monetary Amount prior to the commencement of such Arbitration Proceeding pursuant to Section 14.02, then the Delinquent Member shall promptly, and in any event on or before the Arbitration Payment Due Date, pay to the Company an amount (an "Additional Monetary Amount") equal to (A) the Final Monetary Amount less (B) the Disputed Monetary Amount, together with interest, accrued from the commencement of the Arbitration Proceeding to the date that the Delinquent Member pays the Additional Monetary Amount to the Company, on the Additional Monetary Amount, at a rate per annum equal to (1) during for the period from the commencement of the Arbitration Proceeding to the Arbitration Payment Due Date, the Prime Rate and (2) at any time thereafter, 150% of the Prime Rate, in each case, with daily accrual of interest. (d) Interim Payment of Disputed Monetary Amount-- Delinquent Member is Found Liable for a Lesser Amount. If (i) it is finally determined in an Arbitration Proceeding that a Delinquent Member owes the Company a Final Monetary Amount, (ii) the Final Monetary Amount is less than the Disputed Monetary Amount and (iii) the Delinquent Member had paid the Company the Disputed Monetary Amount prior to the commencement of such Arbitration Proceeding, then the Company shall promptly, and in any event on or before the Arbitration Payment Due Date, repay to the Delinquent Member an amount (a "Refundable Amount") equal to (A) the Disputed Monetary Amount less (B) the Final Monetary Amount, together with interest, accrued from the commencement of the Arbitration Proceeding to the date that the Company repays the Refundable Amount to the Delinquent Member, on the Refundable Amount, at a rate per annum equal to (1) during the period from the commencement of the Arbitration Proceeding to the Arbitration Payment Due Date, the Prime Rate and (2) at any time thereafter, 150% of the Prime Rate, in each case, with daily accrual of interest. (e) Interim Payment of Disputed Monetary Amount-- Delinquent Member is Found Not Liable for Disputed Monetary Amount. If (i) it is finally determined in an Arbitration Proceeding that a Delinquent Member does not owe the Company the related Disputed Monetary Amount and (ii) the Delinquent Member had paid the Company the Disputed Monetary Amount prior to the commencement of such Arbitration Proceeding, then the Company shall promptly, and in any event on or before the Arbitration Payment Due Date, repay to the Delinquent Member an amount equal to the Disputed Monetary Amount, together with interest, accrued from the commencement of the Arbitration Proceeding to the date that the Company repays the Disputed Monetary Amount to the Delinquent Member, on the Disputed Monetary Amount, at a rate per annum equal to (A) during the period from the commencement of the Arbitration Proceeding to the Arbitration Payment Due Date, the Prime Rate and (B) at any time thereafter, 150% of the Prime Rate, in each case, with daily accrual of interest. SECTION 14.04. Right of Set-Off. Notwithstanding any provision to the contrary contained in this Agreement, if at the time of a Distribution Date a Delinquent Member has failed to pay the Company an amount that it was required pursuant to Section 14.03 to pay to the Company on or before such Distribution Date, then on such Distribution Date, the Company shall be permitted to set off from the distribution that it would otherwise be required to make to such Delinquent Member pursuant to Section 5.01 on such Distribution Date, an amount equal to such unpaid amount. If the amount of the distribution that such Delinquent Member was otherwise entitled to receive pursuant to Section 5.01 on such Distribution Date is less than the aggregate amount that such Delinquent Member owes to the Company pursuant to Section 14.03, then the Company shall be permitted to set off from subsequent distributions that it would otherwise make to such Delinquent Member pursuant to Section 5.01 the remaining unpaid amount until such time as such remaining unpaid amount shall have been paid in full. A Delinquent Member's interest in distributions to be made to such Delinquent Member pursuant to Section 5.01 shall be reduced by any amount set off by the Company against such distributions pursuant to this Section 14.04(a). SECTION 14.05. Security Interest. (a) Each Member hereby agrees that if (i) it has failed to pay the Company an amount that it was required to pay to the Company pursuant to Section 14.03 on or prior to the related Arbitration Payment Due Date, and (ii) the Board of Managers (by vote of a majority of the Representatives of the other Member at a special or regular meeting of the Board of Managers (which majority shall constitute a quorum for purposes of the transaction of such business) so requests, such Member shall (A) on the Business Day next following such Arbitration Payment Due Date, grant to the Company, as security for the performance of its obligation to pay the Company such amount owed (but for no other amount), a first priority security interest in its Membership Interests and the proceeds thereof (a "Security Interest"), all under the Uniform Commercial Code of the State of Delaware and (ii) promptly thereafter, execute and deliver to the Company all financing statements and other instruments that the Board of Managers (by vote of a majority of the Representatives of the other Member at a special or regular meeting of the Board of Managers (which majority shall constitute a quorum for purposes of the transaction of such business)) may request to effectuate and carry out the preceding provisions of this Section 14.05(a). The Company shall be entitled to all the rights and remedies of a secured party under the Uniform Commercial Code of the State of Delaware with respect to any Security Interest granted by such Member. At the option of the Company, this Agreement or a carbon, photographic, or other copy hereof may serve as a financing statement with respect to any such Security Interest. For purposes of perfecting a Security Interest, a Member's Membership Interests shall be deemed to be a "security" governed by Chapter 8 of the Delaware Uniform Commercial Code and as such term is therein defined in Section 8-102(c) thereunder. (b) If the Company incurs Indebtedness pursuant to Section 14.01 by borrowing from a Non-Delinquent Member, the Company shall be permitted to assign all its rights with respect to a Security Interest granted to it pursuant to Section 14.05(a) to such Non-Delinquent Member as security for such Indebtedness; provided that such Non-Delinquent Member shall not be permitted to assign such Security Interest to a third party. ARTICLE XV Dissolution and Termination SECTION 15.01. Dissolution. The Company shall be dissolved and its business and affairs wound up upon the earliest to occur of any one of the following events: (a) the expiration of the Term of the Company; (b) the sale or other disposition of all or substantially all the property of the Company; (c) the written consent of both Members; (d) the unanimous agreement of all Representatives on the Board of Managers; (e) the bankruptcy, involuntary liquidation or dissolution of either Member; or (f) the entry of a decree of judicial dissolution pursuant to Section 18-802 of the Delaware Act. The bankruptcy, involuntary liquidation of dissolution of a Member shall cause a Member to cease to be a member of the Company. Notwithstanding the foregoing, the Company shall not be dissolved and its business and affairs shall not be wound up upon the occurrence of any event specified in (i) clause (e) above if within 90 days after the date on which such event occurs, the remaining Member elects in writing to continue the business of the Company or (ii) clause (a) above if a Non-Terminating Member purchases the Membership Interests of the Terminating Member pursuant to its Special Termination Right. Except as provided in this paragraph and Section 15.01(e), and to the fullest extent permitted by the Delaware Act, the occurrence of an event that causes a Member to cease to be a member of the Company shall not cause the Company to be dissolved or its business or affairs to be wound up, and upon the occurrence of such an event, the business of the Company shall continue without dissolution. SECTION 15.02. Winding Up of Company. Upon dissolution, the Company's business shall be liquidated in an orderly manner. The Board of Managers shall act as the liquidating trustee (unless the Board of Managers elects to appoint a liquidating trustee) to wind up the affairs of the Company pursuant to this Agreement. In performing its duties, the liquidating trustee is authorized to sell, distribute, exchange or otherwise dispose of the assets of the Company in accordance with the Delaware Act and in any reasonable manner that the liquidating trustee shall determine to be in the best interest of the Members or their successors-in-interest. SECTION 15.03. Distribution of Property. In the event the Board of Managers determines that it is necessary in connection with the liquidation of the Company to make a distribution of property in kind, such property shall be transferred and conveyed to the Members so as to vest in each of them as a tenant in common an undivided interest in the whole of such property equal to their interests in the property based upon the amount of cash that would be distributed to each of the Members in accordance with Article V if such property were sold for an amount of cash equal to the fair market value of such property, as determined and approved by the Board of Managers pursuant to a vote in accordance with Section 8.07(b). SECTION 15.04. Time Limitation. Any liquidating distribution pursuant to this Article XV shall be made no later than the later of (a) the end of the taxable year during which such liquidation occurs and (b) 90 days after the date of such liquidation. SECTION 15.05. Termination of Company. The Company shall terminate when all assets of the Company, after payment of or due provision for all debts, liabilities and obligations of the Company, shall have been distributed to the Members in the manner provided for in this Agreement, and the Certificate of Formation shall have been canceled in the manner provided by the Delaware Act. ARTICLE XVI Miscellaneous SECTION 16.01. Notices. Any notice, consent or approval to be given under this Agreement shall be in writing and shall be deemed to have been given if delivered: (i) personally by a reputable courier service that requires a signature upon delivery; (ii) by mailing the same via registered or certified first-class mail, postage prepaid, return receipt requested; or (iii) by telecopying the same with receipt confirmation (followed by a first-class mailing of the same) to the intended recipient. Any such writing will be deemed to have been given: (a) as of the date of personal delivery via courier as described above; (b) as of the third calendar day after depositing the same into the custody of the postal service as evidenced by the date-stamped receipt issued upon deposit of the same into the mails as described above; and (c) as of the date and time electronically transmitted in the case of telecopy delivery as described above, in each case addressed to the intended party at the address set forth below: To the Board of Managers: Marathon Ashland Petroleum LLC 539 South Main Street Findlay, Ohio 45840 Attn: General Counsel Phone: (419) 422-2121 Fax: (419) 421-4115 To Marathon: Marathon Oil Company 5555 San Felipe P.O. Box 3128 Houston, TX 77056-2723 Attn: General Counsel Phone: (713) 296-4137 Fax: (713) 296-4171 To Ashland: Ashland Inc. 50 E. RiverCenter Boulevard P.O. Box 391 Covington, KY 41012-0391 Attn: General Counsel Phone: (606) 815-4711 Fax: (606) 815-3823 Any party may designate different addresses or telecopy numbers by notice to the other parties. SECTION 16.02. Merger and Entire Agreement. This Agreement (including the Exhibits, Schedules and Appendices attached hereto), together with the other Transaction Documents (including the exhibits, schedules and appendices thereto) and certain other agreements executed contemporaneously with the Master Formation Agreement constitutes the entire Agreement of the parties hereto and supersedes any prior understandings, agreements, or representations by or among the parties hereto, written or oral, to the extent they relate in any way to the subject matter hereof. SECTION 16.03. Assignment. A party hereto shall not assign all or any of its rights, obligations or benefits under this Agreement to any third party otherwise than (i) in connection with a Transfer of its Membership Interests pursuant to Article X, (ii) with the prior written consent of the other party hereto, which consent may be withheld in such party's sole discretion, (iii) the granting by a Member of a Security Interest to the Company pursuant to Section 14.05 or (iv) pursuant to Article V of the Put/Call, Registration Rights and Standstill Agreement, and any attempted assignment not in compliance with this Section 16.03 shall be void ab initio. SECTION 16.04. Parties in Interest. This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective successors, legal representatives and permitted assigns. SECTION 16.05. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. SECTION 16.06. Amendment; Waiver. This Agreement may not be amended except in a written instrument signed by each of the parties hereto and expressly stating it is an amendment to this Agreement. Any failure or delay on the part of any party hereto in exercising any power or right hereunder shall not operate as a waiver thereof, nor shall any single or partial exercise of any such right or power preclude any other or further exercise thereof or the exercise of any other right or power hereunder or otherwise available at law or in equity. SECTION 16.07. Severability. If any term, provision, covenant, or restriction of this Agreement or the application thereof to any person or circumstance, at any time or to any extent, is held by a court of competent jurisdiction or other Governmental Authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement (or the application of such provision in other jurisdictions or to persons or circumstances other than those to which it was held invalid or unenforceable) shall in no way be affected, impaired or invalidated, and to the extent permitted by Applicable Law, any such term, provision, covenant or restriction shall be restricted in applicability or reformed to the minimum extent required for such to be enforceable. This provision shall be interpreted and enforced to give effect to the original written intent of the parties hereto prior to the determination of such invalidity or unenforceability. SECTION 16.08. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH SECTION 18-1101 OF THE DELAWARE ACT. ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM OR PROCEEDING RELATED TO OR ARISING OUT OF THIS AGREEMENT, OR ANY TRANSACTION OR CONDUCT IN CONNECTION HEREWITH, IS WAIVED. SECTION 16.09. Enforcement. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties hereto shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in the Delaware Chancery Court; provided that if the Delaware Chancery Court does not have jurisdiction with respect to such matter, the parties hereto shall be entitled to enforce specifically the terms and provisions of this Agreement in any court of the United States located in the State of Delaware or in Delaware state court, this being in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties hereto (i) consents to submit itself to the personal jurisdiction of the Delaware Chancery Court in the event that any dispute arises out of this Agreement or any of the transactions contemplated by this Agreement; provided that if the Delaware Chancery Court does not have jurisdiction with respect to any such dispute, such party consents to submit itself to the personal jurisdiction of any Federal court located in the State of Delaware or any Delaware state court, (ii) agrees to appoint and maintain an agent in the State of Delaware for service of legal process, (iii) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court, (iv) agrees that it will not plead or claim in any such court that any action relating to this Agreement or any of the transactions contemplated by this Agreement in any such court has been brought in an inconvenient forum and (v) agrees that it will not initiate any action relating to this Agreement or any of the transactions contemplated by this Agreement in any court other than (1) the Delaware Chancery Court, or (2) if the Delaware Chancery Court does not have jurisdiction with respect to such action, a Federal court sitting in the State of Delaware or a Delaware state court. SECTION 16.10. Creditors. None of the provisions of this Agreement shall be for the benefit of or enforceable by any creditor of the Company or of any Member. SECTION 16.11. No Bill for Accounting. In no event shall either Member have any right to file a bill for an accounting or any similar proceeding. SECTION 16.12. Waiver of Partition. Each Member hereby waives any right to partition of the Company property. SECTION 16.13. Table of Contents, Headings and Titles. The table of contents and section headings of this Agreement and titles given to Exhibits and Schedules to this Agreement are for reference purposes only and are to be given no effect in the construction or interpretation of this Agreement. SECTION 16.14. Use of Certain Terms; Rules of Construction. As used in this Agreement, the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular paragraph, subparagraph, section, subsection or other subdivision. Whenever the context may require, any pronoun used in this Agreement shall include the corres ponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. Each party hereto agrees that any rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation or construction of this Agreement or any Transaction Document. SECTION 16.15. Holidays. Notwithstanding any deadline for payment, performance, notice or election under this Agreement, if such deadline falls on a date that is not a Business Day, then the deadline for such payment, perform ance, notice or election will be extended to the next succeeding Business Day. SECTION 16.16. Third Parties. Nothing herein expressed or implied is intended or shall be construed to confer upon or give any person and their respective successors, legal representatives and permitted assigns any rights, remedies or basis for reliance upon, under or by reason of this Agreement. SECTION 16.17. Liability for Affiliates. Except where and to the extent that a contrary intention otherwise appears, where a Member undertakes to cause its Affiliates to take or abstain from taking any action, such undertaking shall mean (i) in the case of any Affiliate that is controlled by such Member, that such Member shall cause such Affiliate to take or abstain from taking such action and (ii) in the case of an Affiliate that controls or is under common control with such Member, that such Member shall use its commercially reasonable best efforts to cause such Affiliates to take or abstain from taking such action; provided, however, that such Member shall not be required to violate, or cause any director of such Affiliate to violate, any fiduciary duty to minority shareholders of such Affiliate. IN WITNESS WHEREOF, this Agreement has been duly executed by the Members as of the day and year first above written. MARATHON OIL COMPANY by /s/ Victor G. Beghini Name: Victor G. Beghini Title: President ASHLAND INC. by /s/Paul W. Chellgren Name: Paul W. Chellgren Title: Chairman of the Board and Chief Executive Officer TABLE OF CONTENTS Page ARTICLE I Certain Definitions; Applicable GAAP SECTION 1.01. Definitions 2 SECTION 1.02. Applicable GAAP 21 ARTICLE II General Provisions SECTION 2.01. Formation; Effectiveness 22 SECTION 2.02. Name 22 SECTION 2.03. Term 22 SECTION 2.04. Registered Agent and Office 23 SECTION 2.05. Purpose 23 SECTION 2.06. Powers 24 ARTICLE III Members SECTION 3.01. Members; Percentage Interests 25 SECTION 3.02. Adjustments in Percentage Interests 26 ARTICLE IV Capital Contributions; Assumption of Assumed Liabilities SECTION 4.01. Contributions 26 SECTION 4.02. Additional Contributions 28 SECTION 4.03. Negative Balances; Withdrawal of Capital; Interest 29 ARTICLE V Distributions SECTION 5.01. Distributions 29 SECTION 5.02. Certain General Limitations 32 SECTION 5.03. Distributions in Kind 32 SECTION 5.04. Distributions in the Event of an Exercise of the Marathon Call Right, Ashland Put Right or the Special Termination Rights 33 ARTICLE VI Allocations and Other Tax Matters SECTION 6.01. Maintenance of Capital Accounts 33 SECTION 6.02. Allocations 34 SECTION 6.03. Tax Allocations 35 SECTION 6.04. Tax Elections 35 SECTION 6.05. Fiscal Year 36 SECTION 6.06. Tax Returns 36 SECTION 6.07. Tax Matters Partner 37 SECTION 6.08. Duties of Tax Matters Partner 37 SECTION 6.09. Survival of Provisions 39 SECTION 6.10. Section 754 Election 39 SECTION 6.11. Qualified Income Offset, Minimum Gain Chargeback 39 SECTION 6.12. Tax Treatment of Designated Sublease Agreements 39 SECTION 6.13. Tax Treatment of Reimbursed Liability Payments 40 SECTION 6.14. Tax Treatment of Disproportionate Payments 40 SECTION 6.15. Allocation of Income, Gains, Losses and Other Items from LOOP LLC and LOCAP, Inc 41 SECTION 6.16. Allocation of Income, Gain, Loss, Deduction and Credits Attributable to Stock-Based Compensation 41 ARTICLE VII Books and Records SECTION 7.01. Books and Records; Examination 42 SECTION 7.02. Financial Statements and Reports 42 SECTION 7.03. Notice of Affiliate Transactions; Annual List 44 ARTICLE VIII Management of the Company SECTION 8.01. Managing Members 45 SECTION 8.02. Board of Managers 45 SECTION 8.03. Responsibility of the Board of Managers 46 SECTION 8.04. Meetings 46 SECTION 8.05. Compensation 48 SECTION 8.06. Quorum 48 SECTION 8.07. Voting 49 SECTION 8.08. Matters Constituting Super Majority Decisions 50 SECTION 8.09. Annual Capital Budget 56 SECTION 8.10. Business Plan 56 SECTION 8.11. Requirements as to Affiliate Transactions 57 SECTION 8.12. Review of Certain Affiliate Transactions Related to Crude Oil Purchases and Shared Services 59 SECTION 8.13. Adjustable Amounts 61 SECTION 8.14. Company Leverage Policy 62 SECTION 8.15. Company's Investment Guidelines 62 SECTION 8.16. Requirements as to Operating Leases 63 SECTION 8.17. Limitations on Actions Relating to the Calculation of Distributable Cash 63 SECTION 8.18. Reliance by Third Parties 63 SECTION 8.19. Integration of Retail Operations 63 ARTICLE IX Officers SECTION 9.01. Election, Appointment and Term of Office 65 SECTION 9.02. Resignation, Removal and Vacancies 66 SECTION 9.03. Duties and Functions of Executive Officers 67 ARTICLE X Transfers of Membership Interests SECTION 10.01. Restrictions on Transfers 67 SECTION 10.02. Conditions for Admission 71 SECTION 10.03. Allocations and Distributions 72 SECTION 10.04. Right of First Refusal 72 SECTION 10.05. Restriction on Resignation or Withdrawal 73 ARTICLE XI Liability, Exculpation and Indemnification SECTION 11.01. Liability 73 SECTION 11.02. Exculpation 73 SECTION 11.03. Indemnification 74 ARTICLE XII Fiduciary Duties SECTION 12.01. Duties and Liabilities of Covered Persons 75 SECTION 12.02. Fiduciary Duties of Members of the Company and Members of the Board of Managers 76 ARTICLE XIII Dispute Resolution Procedures SECTION 13.01. General 76 SECTION 13.02. Dispute Notice and Response 76 SECTION 13.03. Negotiation Between Senior Managers 77 SECTION 13.04. Negotiation Between Chief Executive Officer and President 77 SECTION 13.05. Right to Equitable Relief Preserved 78 ARTICLE XIV Rights and Remedies with Respect to Monetary Disputes SECTION 14.01. Ability of Company to Borrow to Fund Disputed Monetary Amounts 79 SECTION 14.02. Interim Payment of Disputed Monetary Amount 80 SECTION 14.03. Liquidated Damages 80 SECTION 14.04. Right of Set-Off 82 SECTION 14.05. Security Interest 83 ARTICLE XV Dissolution and Termination SECTION 15.01. Dissolution 84 SECTION 15.02. Winding Up of Company 84 SECTION 15.03. Distribution of Property 85 SECTION 15.04. Time Limitation 85 SECTION 15.05. Termination of Company 85 ARTICLE XVI Miscellaneous SECTION 16.01. Notices 85 SECTION 16.02. Merger and Entire Agreement 86 SECTION 16.03. Assignment 87 SECTION 16.04. Parties in Interest 87 SECTION 16.05. Counterparts 87 SECTION 16.06. Amendment; Waiver 87 SECTION 16.07. Severability 87 SECTION 16.08. GOVERNING LAW 88 SECTION 16.09. Enforcement 88 SECTION 16.10. Creditors 89 SECTION 16.11. No Bill for Accounting 89 SECTION 16.12. Waiver of Partition 89 SECTION 16.13. Table of Contents, Headings and Titles 89 SECTION 16.14. Use of Certain Terms; Rules of Construction 89 SECTION 16.15. Holidays 89 SECTION 16.16. Third Parties 89 SECTION 16.17. Liability for Affiliates 89 Appendix A Certain Definitions Appendix B Procedures for Dispute Resolution Exhibit A Speedway SuperAmerica LLC Retail Integration Protocol Schedule 1.01 Financed Properties Schedule 4.01(c) Subleased Property Schedule 4.02(a)-1 Marathon Capital Expenditures Schedule 4.02(a)-2 Ashland Capital Expenditures Schedule 8.01(k)(i)(A) Closing Date Affiliate Transactions Schedule 8.14 Company Leverage Policy Schedule 8.15 Company Investment Guidelines Schedule A Calculations re: Normal Annual Capital Budget Amount Schedule B-1 Adjustments to Historical EBITDA (Marathon) Schedule B-2 Adjustments to Historical EBITDA (Ashland) Schedule C Initial Executive Officers _______________________________ 1NOTE: THIS DOCUMENT (VERSION 5) HAS BEEN MARKED FOR AUTOMATIC TABLE OF CONTENTS GENERATION EX-10.I 8 Exhibit 10(i) EXECUTION COPY AMENDMENT NO. 1, dated as of December 31, 1998 (this "Amendment") to the PUT/CALL, REGISTRATION RIGHTS AND STANDSTILL AGREEMENT dated as of January 1, 1998 (the "Agreement") among MARATHON OIL COMPANY, an Ohio corporation, USX CORPORATION, a Delaware corporation, ASHLAND INC., a Kentucky corporation and MARATHON ASHLAND PETROLEUM LLC, a Delaware limited liability company (collectively, the "Parties"). WHEREAS, the Parties have heretofore entered into the Agreement (capitalized terms used in this Amendment and not defined herein shall have the meanings given such terms in the Agreement); and WHEREAS, the Parties wish to amend the Agreement to reflect certain changes to the prices set forth therein. NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the Parties agree as follows: Section 1. Amendments: (a) Section 1.01 of the Agreement is amended to insert the following definition after the definition of "Price Index" and prior to the definition of "Private Label Packaged Motor Oil Business": "'Price Reduction' shall have the meaning set forth in Section 2.02(b) of the Put/Call, Registration Rights and Standstill Agreement." (b) Section 2.02(a) of the Agreement is amended to read in its entirety as follows: "(a) Amount. The Special Termination Price shall be an amount equal to (i) the product of (x) 100% of the Appraised Value of the Company multiplied by (y) the Terminating Member's Percentage Interest, less (ii) if the Terminating Member is Ashland, the Price Reduction." (c) Sections 2.02(b) and 2.02(c) as numbered in the Agreement are numbered Sections 2.02(c) and 2.02(d) respectively and a new Section 2.02(b) of the Agreement is added to read in its entirety as follows: "(b) Price Reduction. Price Reduction means an amount equal to the excess of (i) $14,139,519, which is the agreed present value at January 1, 1998, of the tax cost to Ashland ("Present Value Tax Cost") of allocating to it depreciation deductions as shown in Chart A in Schedule 2.02(b)(1) ("Chart A Depreciation"), as compared to allocating to Ashland depreciation deductions as shown in Chart B in Schedule 2.02(b)(1) ("Chart B Depreciation"), over (ii) the present value at January 1, 1998, of the tax cost to Ashland of allocating to it Chart A Depreciation as compared to Chart B Depreciation, taking into account Ashland's decreased taxable gain or increased taxable loss on the sale of all of its Membership Interest in the Company when Chart A Depreciation as compared to Chart B Depreciation is allocated to it ("Present Value Tax Cost on Sale"). "Chart A Depreciation represents the agreed depreciation deductions with respect to property contributed by Ashland on the Closing of the Asset Transfer and Contribution Agreement allocated to it through the depreciable life of such property as set forth in Section 6.03 of the LLC Agreement as amended and restated as of December 31, 1998. Chart B Depreciation represents the agreed depreciation deductions with respect to property contributed by Ashland on the Closing of the Asset Transfer and Contribution Agreement allocated to it through the depreciable life of such property as set forth in Sections 6.03, 6.12 and 4.01(c) of such agreement as in effect prior to such restatement as if it were in effect through such depreciable life, but treating the assets comprising the Merrill Lynch Master Lease Program as Subleased Property listed on Schedule 4.01(c) for purposes of Sections 4.01(c) and 6.12. Chart A Depreciation and Chart B Depreciation shall not be revised to reflect the actual amount of depreciation deductions with respect to property contributed by Ashland on the Closing of the Asset Transfer and Contribution Agreement allocated to Ashland, or to take into account the sale or other disposition by the Company of any of the property contributed by Ashland on the Closing of the Asset Transfer and Contribution Agreement. "Solely for purposes of determining the Present Value Tax Cost and the Present Value Tax Cost on Sale, the following factors and assumptions have been and will be used: (i) discount rate of 9% per annum, (ii) combined Federal/State income tax rate of 39%, (iii) the cash flow impact of a reduction in Ashland's income taxes for a year as the result of Chart A or Chart B Depreciation is realized on the last day of that year and (iv) the cash flow impact of Ashland's income tax expense or benefit arising from a sale of all of its membership interest in the Company is incurred or realized on the last day of the year of sale. "Schedule 2.02(b)(2) reflects, for purposes of illustration, the Present Value Tax Cost on Sale if Ashland sells all of its 38% membership interest in the Company on January 1, 2005. The Present Value Tax Cost on Sale with respect to Ashland's sale of all of its interest in the Company at a date different than January 1, 2005, shall be computed in the same manner as the Present Value Tax Cost on Sale illustrated in Schedule 2.02(b)(2). "Consistent with the foregoing principle, if Ashland sells all or part of its Membership Interest to Marathon in a transaction not otherwise described in this Agreement, the price paid by or on behalf of Marathon for such interest shall be appropriately reduced." (d) Attached new Schedules 2.02(b)(1) and 2.02(b)(2) are inserted between Schedule 1.03(d) and Schedule 14.01(a). (e) Section 3.02(a) of the Agreement is amended to read in its entirety as follows: "(a) Amount. The Marathon Call Price shall be an amount equal to (i) the product of (x) 115% of the Appraised Value of the Company multiplied by (y) Ashland's Percentage Interest, less (ii) the Price Reduction." (f) Section 4.02(a) of the Agreement is amended to read in its entirety as follows: "(a) Amount. The Ashland Put Price shall be an amount equal to the sum of (i) for that portion of the Ashland Put Price to be paid to Ashland in Cash or in Marathon Debt Securities, an amount equal to the product of (1) the excess of (x) the product of (A) 85% of the Appraised Value of the Company multiplied by (B) Ashland's Percentage Interest over (y) the Price Reduction, multiplied by (2) the percentage of the Ashland Put Price to be paid to Ashland in Cash and/or in Marathon Debt Securities, plus (ii) for that portion of the Ashland Put Price to be paid to Ashland in Marathon Equity Securities the same as above but substituting 90% for 85% in Clause (A) and substituting Marathon Equity Securities for Cash and/or Marathon Debt Securities in clause (2)." Section 2. Parties in Interest. This Amendment shall inure to the benefit of, and be binding upon, the Parties hereto and their respective successors, legal representatives and permitted assigns. Section 3. Counterparts. This Amendment may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 4. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF. ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM OR PROCEEDING RELATED TO OR ARISING OUT OF THIS AMENDMENT, OR ANY TRANSACTION OR CONDUCT IN CONNECTION HEREWITH, IS WAIVED. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the day and year first above written. MARATHON OIL COMPANY ASHLAND INC. By:/s/ V. G. Beghini By:/s/Paul W. Chellgren Name:V. G. Beghini Name:Paul W. Chellgren Title: President Title: Chairman of the Board and Chief Executive Officer USX CORPORATION MARATHON ASHLAND PETROLEUM, LLC By:/s/ Thomas J. Usher By: /s/ J. L. Frank Name:Thomas J. Usher Name:J. L. Frank Title:Chairman of the Board Title:President and Chief Executive Officer Put/Call, Registration Rights and Standstill Agreement Schedule 2.02(b)(1) Chart A and Chart B Depreciation
Chart A Calendar Depreciation Combined Present Value Year Allocated Fed. & State Tax Effect to Ashland Inc. Tax @ 39% @ 9% 1998 $ 116,601,400 $ 45,474,546 $ 41,719,767 1999 209,882,520 81,854,183 68,895,028 2000 167,906,016 65,483,346 50,565,158 2001 134,324,816 52,386,678 37,112,044 2002 107,506,491 41,927,531 27,250,019 2003 85,935,232 33,514,740 19,983,745 2004 76,373,917 29,785,828 16,293,868 2005 76,373,917 29,785,828 14,948,502 2006 76,373,917 29,785,828 13,714,222 2007 76,373,917 29,785,828 12,581,855 2008 38,361,861 14,961,126 5,797,928 Totals $1,166,014,004 $ 454,745,462 $ 308,862,136
Chart B Calendar Depreciation Combined Present Value Year Allocated Fed. & State Tax Effect to Ashland Inc. Tax @ 39% @ 9% 1998 $ 134,434,575 $ 52,429,484 $ 48,100,444 1999 213,507,942 83,268,097 70,085,092 2000 171,643,459 66,940,949 51,690,695 2001 138,302,064 53,937,805 38,210,901 2002 111,275,746 43,397,541 28,205,424 2003 89,884,379 35,054,908 20,902,096 2004 77,757,082 30,325,262 16,588,957 2005 77,057,057 30,052,252 15,082,212 2006 77,057,057 30,052,252 13,836,892 2007 77,057,057 30,052,252 12,694,396 2008 50,315,315 19,622,973 7,604,547 Totals $1,218,291,733 $ 475,133,776 $ 323,001,655 Present Value tax cost $ 14,139,519
Put/Call, Registration Rights and Standstill Agreement Schedule 2.02(b)(2) Present Value Tax Cost on Sale Illustration
Sale of 100% Interest 1/1/2005 Calendar Decr. Gain/ Year Depreciation Allocated Incr. Loss to Ashland Chart A Chart B Difference Chart A vs. B 1998 $116,601,400 $134,434,575 $17,833,175 1999 209,882,520 213,507,942 3,625,422 2000 167,906,016 171,643,459 3,737,443 2001 134,324,816 138,302,064 3,977,248 2002 107,506,491 111,275,746 3,769,255 2003 85,935,232 89,884,379 3,949,147 2004 76,373,917 77,757,082 1,383,165 2005 - - - (38,274,855)(1) 2006 - - - 2007 - - - 2008 - - - Totals $ 898,530,392 $936,805,247 $38,274,855 $(38,274,855)
Increase (Decrease) Combined Taxable Federal/State Present Calendar Income Income Tax Value Year Chart A @ 39% Tax Cost on vs. B Sale 1998 $17,833,175 $6,954,938 $6,380,677 1999 3,625,422 1,413,915 1,190,064 2000 3,737,443 1,457,603 1,125,537 2001 3,977,248 1,551,127 1,098,857 2002 3,769,255 1,470,009 955,405 2003 3,949,147 1,540,167 918,351 2004 1,383,165 539,434 295,089 2005 (38,274,855) (14,927,193) (7,491,455) 2006 - - - 2007 - - - 2008 - - - Totals $ - $ - $4,472,526 Present Value Tax Cost (Schedule 2.02 (b)(1)) $14,139,519 Price Reduction $ 9,666,993 (1) 100% of cumulative difference between Chart A and Chart B depreciation through 2004.
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