The following is a summary of restricted stock award activity.
Awards Weighted-Average Grant Date Fair Value Unvested at December 31, 2009 1,441,499 $ 44.89 Granted 628,163 31.62 Vested (626,527) 49.33 Forfeited (136,897) 40.66 Unvested at December 31, 2010 1,306,238 36.81
The vesting date fair value of restricted stock awards which vested during 2010, 2009 and 2008 was $21 million, $24 million and $38 million. The weighted average grant date fair value of restricted stock awards was $36.81, $44.89, and $47.72 for awards unvested at December 31, 2010, 2009 and 2008.
As of December 31, 2010, there was $29 million of unrecognized compensation cost related to restricted stock awards which is expected to be recognized over a weighted average period of 1.8 years.
22. Stockholders’ Equity
Securities exchangeable into Marathon common stock – In conjunction with our acquisition of Western Oil
Sands Inc. (“Western”) on October 18, 2007, Canadian residents were able to receive, at their election, cash, Marathon common stock or securities exchangeable into Marathon common stock (the “Exchangeable Shares”). The Exchangeable Shares are shares of an indirect Canadian subsidiary of Marathon and were exchanged into Marathon stock based upon an exchange ratio that began at one-for-one and adjusted quarterly to reflect cash dividends. The Exchangeable Shares were exchangeable at the option of the holder at any time and were automatically redeemable on October 18, 2011. They could also be redeemed prior to their automatic redemption if certain conditions were met. Those conditions were met and we filed notice of the proposed redemption in Canada on March 3, 2010. On April 7, 2010, the remaining exchangeable shares were redeemed.
Preferred shares – Also in connection with our acquisition of Western, the Board of Directors authorized a class of
voting preferred stock. Upon completion of the acquisition, we issued shares of this voting preferred stock to a trustee, who holds the shares for the benefit of the holders of the Exchangeable Shares discussed above. Each share of voting preferred stock is entitled to one vote on all matters submitted to the holders of Marathon common stock. Each holder of Exchangeable Shares may direct the trustee to vote the number of shares of voting preferred stock equal to the number of shares of Marathon common stock issuable upon the exchange of the Exchangeable Shares held by that holder. In no event will the aggregate number of votes entitled to be cast by the trustee with respect to the outstanding shares of voting preferred stock exceed the number of votes entitled to be cast with respect to the outstanding Exchangeable Shares. Except as otherwise provided in our restated certificate of incorporation or by applicable law, the common stock and the voting preferred stock will vote together as a single class in the election of directors of Marathon and on all other matters submitted to a vote of stockholders of Marathon generally. The voting preferred stock will have no other voting rights except as required by law. Other than dividends payable solely in shares of voting preferred stock, no dividend or other distribution, will be paid or payable to the holder of the voting preferred stock. In the event of any liquidation, dissolution or winding up of Marathon, the holder of shares of the voting preferred stock will not be entitled to receive any assets of Marathon available for distribution to its stockholders. The voting preferred stock is not convertible into any other class or series of the capital stock of Marathon or into cash, property or other rights, and may not be redeemed. In connection with the redemption of the exchangeable shares, these preferred shares were eliminated in June 2010.
Share repurchase plan – The Board of Directors has authorized the repurchase of up to $5 billion of Marathon
common stock. Purchases under the program may be in either open market transactions, including block purchases, or in privately negotiated transactions using cash on hand, cash generated from operations, proceeds from potential asset sales or cash from available borrowings to acquire shares. This program may be changed based upon our financial condition or changes in market conditions and is subject to termination prior to completion. The repurchase program does not include specific price targets or timetables. There have been no stock repurchases since August 2008.
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements
23. Leases
We lease a wide variety of facilities and equipment under operating leases, including land and building space, office equipment, production facilities and transportation equipment. Most long-term leases include renewal options and, in certain leases, purchase options. Future minimum commitments for capital lease obligations (including sale-leasebacks accounted for as financings) and for operating lease obligations having initial or remaining noncancelable lease terms in excess of one year are as follows:
(In millions) Capital Lease Obligations(a) Operating Lease Obligations 2011 $ 47 $ 148 2012 58 154 2013 44 147 2014 44 132 2015 45 122 Later years 422 275 Sublease rentals - (2)
Total minimum lease payments $ 660 $ 976
Less imputed interest costs (240)
Present value of net minimum lease payments $ 420
(a) Capital lease obligations include $164 million related to assets under construction as of December 31, 2010. These leases are
currently reported in long-term debt based on percentage of construction completed at $73 million.
In connection with past sales of various plants and operations, we assigned and the purchasers assumed certain leases of major equipment used in the divested plants and operations of United States Steel. In the event of a default by any of the purchasers, United States Steel has assumed these obligations; however, we remain primarily obligated for payments under these leases.
Of the $420 million present value of net minimum capital lease payments, $37 million was related to obligations assumed by United States Steel under the Financial Matters Agreement.
Operating lease rental expense was:
(In millions) 2010 2009 2008
Minimum rental(a) $ 241 $ 238 $ 245
Contingent rental 22 19 22
Sublease rentals (2) - -
Net rental expense $ 261 $ 257 $ 267
(a)Excludes $16 million, $3 million and $5 million paid by United States Steel in 2010, 2009 and 2008 on assumed leases. 24. Commitments and Contingencies
We are defendant in a number of lawsuits arising in the ordinary course of business, including, but not limited to, royalty claims, contract claims and environmental claims. While the ultimate outcome and impact to us cannot be predicted with certainty, we believe that the resolution of these proceedings will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. Certain of these matters are discussed below.
Environmental matters – We are subject to federal, state, local and foreign laws and regulations relating to the
environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At December 31, 2010 and 2009, accrued liabilities for remediation totaled $119 million and $116 million. 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 clean-up efforts related to underground storage tanks at retail marketing outlets, were $56 million and $59 million at December 31, 2010 and 2009.
Guarantees – We have provided certain guarantees, direct and indirect, of the indebtedness of other companies.
Under the terms of most of these guarantee arrangements, we would be required to perform should the guaranteed party fail to fulfill its obligations under the specified arrangements. In addition to these financial guarantees, we also have various performance guarantees related to specific agreements.
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements
Guarantees related to indebtedness of equity method investees – We hold interests in an offshore oil port, LOOP LLC,
and a crude oil pipeline system, LOCAP LLC. Both LOOP LLC and LOCAP LLC have secured various project financings with throughput and deficiency agreements. Under the agreements, we are required to advance funds if the investees are unable to service their debt. Any such advances are considered prepayments of future transportation charges. The terms of the agreements vary but tend to follow the terms of the underlying debt. Our maximum potential undiscounted payments under these agreements totaled $172 million as of December 31, 2010.
We hold an interest in a refined products pipeline through our investment in Centennial, and have guaranteed the repayment of Centennial’s outstanding balance under a Master Shelf Agreement which expires in 2024. The guarantee arose in order for Centennial to obtain adequate financing. Our maximum potential undiscounted payments under this agreement totaled $55 million as of December 31, 2010.
Other guarantees – We have entered into other guarantees with maximum potential undiscounted payments totaling
$188 million as of December 31, 2010, which consist primarily of leases of corporate assets containing general lease indemnities and guaranteed residual values, a commitment to contribute cash to an equity method investee for certain catastrophic events in lieu of procuring insurance coverage, a legal indemnification, a performance guarantee and a long- term transportation services agreement.
Existing guarantees of our subsidiaries’ performance issued to Irish government entities remain in place after the 2009 sales until the purchasers issue similar guarantees to replace them. The guarantees, related to asset retirement obligations, have been indemnified by the purchasers. Our maximum potential undiscounted payments under these guarantees as of December 31, 2010 are $104 million.
United States Steel was the sole general partner of Clairton 1314B Partnership, L.P., which owned certain cokemaking facilities formerly owned by United States Steel. We have agreed, under certain circumstances, to indemnify the limited partners if the partnership’s product sales fail to qualify for the credit under Section 29 of the Internal Revenue Code. The Clairton 1314B Partnership was terminated on October 31, 2008, but we were not released from our obligations. United States Steel has estimated the maximum potential amount of this indemnity obligation, including interest and tax gross-up, was approximately $110 million as of December 31, 2010.
In October, 2010, upon acquiring a position in four exploration blocks in the Kurdistan Region of Iraq, we indemnified the Kurdistan Regional Government (“KRG”) against any negative tax effects related to certain payments we are obligated to make to the KRG. As of December 31, 2010, some of those payments have been made, no related taxes have been assessed, and neither is there any history of such payments being taxed. Given the lack of history of tax assessment against such payments, and because certain of our future payments to the KRG are not quantifiable, a maximum potential undiscounted payments cannot be calculated.
General guarantees associated with dispositions – Over the years, we have sold various assets in the normal course of
our business. Certain of the related agreements contain performance and general guarantees, including guarantees regarding inaccuracies in representations, warranties, covenants and agreements, and environmental and general indemnifications that require us to perform upon the occurrence of a triggering event or condition. These guarantees and indemnifications are part of the normal course of selling assets. We are typically not able to calculate the maximum potential amount of future payments that could be made under such contractual provisions because of the variability inherent in the guarantees and indemnities. Most often, the nature of the guarantees and indemnities is such that there is no appropriate method for quantifying the exposure because the underlying triggering event has little or no past experience upon which a reasonable prediction of the outcome can be based.
Contract commitments – At December 31, 2010 and 2009, our contract commitments to acquire property, plant and
equipment totaled $2,650 million and $2,938 million.
25. Subsequent Event
On January 13, 2011, the Board of Directors of Marathon Oil Corporation (“Marathon”) announced that it has approved moving forward with plans to spin off Marathon’s downstream (Refining, Marketing and Transportation) business, resulting in two independent, energy companies: Marathon Petroleum Corporation (“MPC”) and Marathon Oil Corporation (“MRO”). To effect the spin-off, Marathon intends to distribute one share of MPC for every two shares of Marathon held at a record date to be determined. The transaction is expected to be effective June 30, 2011, with distribution of MPC shares shortly thereafter. A tax ruling request was submitted to the IRS regarding the tax-free nature of the spin-off and Marathon anticipates a response during the second quarter of 2011.
MARATHON OIL CORPORATION
Notes to Consolidated Financial Statements
On February 1, 2011, MPC, currently a wholly owned subsidiary of Marathon, completed a private placement of three series of Senior Notes aggregating $3 billion (the “Notes”). The following table details information about each of the three series of Senior Notes:
(In millions)
3.500% notes due March 1, 2016 $ 750
5.125% notes due March 1, 2021 1,000
6.500% notes due March 1, 2041 1,250
$ 3,000
The Notes are intended to establish a minimum $750 million initial cash balance for MPC upon completion of the spin-off. All cash above that level will be used to repay existing intercompany debt with Marathon, and any remaining proceeds will be distributed to Marathon on or before June 30, 2011. The Notes are unsecured and unsubordinated obligations of MPC which are guaranteed by Marathon on a senior unsecured basis. Marathon’s guarantees will terminate upon completion of the spin-off.
The holders of the Notes are entitled to the benefits of a registration rights agreement. Within 360 days, MPC and MRO will be obligated to use commercially reasonable efforts to file a registration statement with respect to a registered exchange offer to exchange the Notes for new notes that are guaranteed by MRO, if applicable, with terms substantially identical in all material respects to the Notes. Alternatively, if the exchange offer cannot be completed, we will be required to file a shelf registration statement to cover resale of the Notes under the Securities Act. If we do not comply with these obligations, we will be required to pay additional interest on the Notes. The additional interest shall accrue on the principal amount of the Notes at a rate of 0.25 per annum, which rate will be increased by an additional 0.25 percent per annum for each subsequent 90-day period that such additional interest continues to accrue, provided that the rate at which such additional interest accrues may not exceed 1.00 percent per annum. Marathon’s obligations under the registration rights agreement will terminate upon termination of the Marathon guarantees in connection with the completion of the spin-off.
On January 27, 2011, Marathon commenced cash tender offers for certain specified series of outstanding debt, including that of its wholly owned subsidiary, Marathon Oil Canada Corporation (formerly known as Western Oil Sands Inc.). The tender offers are for any and all of four series of outstanding notes and a maximum of $500 million in aggregate principal amount of three additional series of Marathon’s outstanding notes. In the any and all offer, $1.2 billion in aggregate principal amount of notes was tendered and accepted with a settlement date of February 10, 2011. In the maximum tender offer, $1.2 billion in aggregate principal amount of notes was tendered, of which $500 million was accepted, and settled on February 25, 2011.
In February 2011, Marathon gave notice in accordance with the make whole call provisions of the respective indentures that we will redeem $798 million in addition to the $1.2 billion any and all offer and the $500 million maximum tender offer, for a total principal amount of $2.5 billion to be redeemed by the end of the first quarter of 2011.