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Published: Thursday, 1/27/2011

Marathon: Spinoff deal hinges on tax-free rank

Marathon Petroleum Corp., the Findlay oil-refining business proposed for a spinoff from Marathon Oil Corp. in Houston, says there is a risk the proposed deal may not receive tax-free status from the Internal Revenue Service.

The company has asked the IRS to consider its planned stock distribution to be tax-free, which would allow the split to happen without Marathon and its shareholders incurring additional tax liability. A ruling is expected by spring.

In a filing this week to the U.S. Securities and Exchange Commission, the company said a tax-free ruling from the IRS "is a condition to the completion of the spinoff." But Marathon Petroleum spokesman Angelia Graves said that there would be an "evaluation" of the Marathon spinoff proposal if the tax-free status is denied.

"I'm sure if there were some problem with that, there would be a review of the current plan," she said. "We don't anticipate that will be the case."

Details of the split between locally based Marathon Petroleum and Marathon Oil were provided in the SEC filing. Marathon Petroleum, which is expected to be traded on the New York Stock Exchange under the ticker symbol MPC, anticipates the move to be completed by June 30.

Other risks identified in the filing include that the company has no history of operating as an independent public company, and that the company plans to take on $3 billion to $3.5 billion in debt following the spinoff. Ms. Graves said Marathon Petroleum's debt will come from bonds that will be used, in part, to repay money owed to its current parent company.

Marathon Oil, which will retain its oil exploration, oil sands mining, and natural gas operations, announced this month it planned the spinoff, about two years after it proposed a similar move but later abandoned it. Marathon Petroleum now operates as a unit of Marathon Oil.

Marathon Petroleum was incorporated in Delaware in November, 2009, during an internal restructuring of Marathon Oil's business. The split-off of the northwest Ohio business is being done to try to enhance the stock of both firms, Marathon Oil has said.

Gianna Bern, an analyst with Brookshire Advisory and Research Inc. in Chicago, said the split could allow each firm to fill separate investment niches.

"It gives them an opportunity to bring in some different kinds of investors than they might have otherwise," she said.

Marathon Petroleum was on a growth track last year, the SEC filing shows. The company reported $45 billion in revenue and a profit of $393 million for the first nine months of 2010. That's compared to $45 billion in revenue and net income of $449 million for the full 2009 fiscal year.

Still, the filing showed that profit was down significantly from $1.2 billion reported in 2008 and $2.3 billion in 2007.

This year could bring more profits for the Findlay business. Goldman Sachs oil analyst Arjun Murti said in a report this week that he expects "refining margins to cyclically improve in 2011."

However, Ms. Bern said Marathon Oil's exploration and production business is a bigger money-maker than Marathon Petroleum's refinery operations.

Marathon Petroleum is expected to become the fifth-largest independent oil refiner in the United States, with capacity to process 1.1 million barrels of crude daily. It will control six refineries, 1,300 Speedway gas stations, and branding deals with more than 5,000 Marathon gas stations, as well as a pipeline system, and truck and river barge operations. Independent businessmen own the Marathon stations.

The company has 1,600 employees at its three South Main Street office buildings, and had nearly 26,000 employees nationwide at the end of last year. More than 19,000 of those workers are employed at the company's Speedway stores, and 2,800 of them worked for a division that was sold in December.

The president and chief executive of the Findlay company will be Gary Heminger, 57, a Marathon Oil executive who heads the same operations for the Houston firm. His new compensation package was not listed in the recent filing, but in 2009, he received $7 million in total compensation, including a $900,000 salary and a $950,000 bonus.

Marathon Petroleum disclosed that two of Mr. Heminger's siblings work within the company. Grant Heminger, vice president of marketing for the Speedway subsidiary, has worked with the company for 21 years.

Darla Burns, the Hemingers' sister, is a senior accounting analyst for Marathon Petroleum and has been with the company for 24 years.

Contact Sheena Harrison at: sharrison@theblade.com or 419-724-6103.



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