United States Steel and Carnegie Pension Fund (UCF or the
Applicant), Located in Atlanta, GA
[01/05/2004]
Volume 69, Number 2, Page 375-383
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Prohibited Transaction Exemption 2003-40; Exemption Application No. D-
11191]
United States Steel and Carnegie Pension Fund (UCF or the
Applicant), Located in Atlanta, GA
AGENCY: Employee Benefits Security Administration, U.S. Department of
Labor.
ACTION: Grant of individual exemption.
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SUMMARY: This document contains a final exemption issued by the
Department of Labor (the Department) from certain prohibited
transaction restrictions of the Employee Retirement Income Security Act
of 1974 (the Act) and from certain taxes imposed by the Internal
Revenue Code of 1986 (the Code).
The exemption permits the in kind contribution of certain timber
rights (the Timber Rights) under two timber purchase and cutting
agreements (the Timber Rights Agreements) to The United States Steel
Corporation Plan for Employee Pension Benefits (the Plan) by the United
States Steel Corporation (US Steel), the Plan sponsor and a party in
interest with respect to the Plan. The exemption also permits ancillary
transactions between the Plan and US Steel arising from certain rights
retained by US Steel related to the timberland (the Property) on which
the Timber Rights are based. The exemption affects participants and
beneficiaries of, and fiduciaries with respect to the Plan.
EFFECTIVE DATE: This exemption is effective as of December 24, 2003.
FOR FURTHER INFORMATION CONTACT: Ms. Silvia M. Quezada of the Office of
Exemption Determinations, Employee Benefits Security Administration,
U.S. Department of Labor, telephone (202) 693-8553. (This is not a
toll-free number.)
SUPPLEMENTARY INFORMATION: On November 14, 2003, the Department
published a notice of proposed individual exemption (the Notice) in the
Federal Register at 68 FR 64650. The Notice was requested in an
application filed on behalf of the Plan pursuant to section 408(a) of
the Act and section
[[Page 376]]
4975(c)(2) of the Code, and in accordance with the procedures set forth
in 29 CFR part 2570, subpart B (55 FR 32836, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (5 U.S.C. App. 1 1995) transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Accordingly, this final exemption is being
issued solely by the Department.
The Notice set forth a summary of the facts and representations
(the Summary) contained in the Applicant's June 2, 2003 application for
exemptive relief and referred interested persons to the application for
a complete statement of the facts and representations. The application
has been available for public inspection at the Department in
Washington, DC.
The Notice also invited interested persons to submit written or
faxed comments with respect to the Notice and/or requests for a public
hearing on or before December 18, 2003. All comments were made a part
of the record. In response to the solicitation of comments from
interested persons, the Department received 54 written comments,
including 2 comment letters submitted by the Applicant. Among these, a
number of interested persons requested a public hearing. Of the
comments received, 3 commenters supported the merits of the proposed
transactions, while 51 commenters opposed the transactions for a
variety of reasons. The Department also received 39 general telephone
inquiries concerning the proposed transactions.
The Department forwarded copies of all of the comment letters to
the Applicant and requested that the concerns raised by the commenters
be addressed in writing by either the Applicant or The Campbell Group
(TCG) of Portland, Oregon, which will serve on behalf of the Plan as
the independent fiduciary (the Independent Fiduciary) with respect to
the proposed transactions.
Following is a discussion of the comments and responses provided by
the Applicant, the Independent Fiduciary, or the Department.
The Applicant's Comments
The Department received comment letters from the Applicant dated
December 2, and December 23, 2003. In these letters, the Applicant
requested certain changes and clarifications to the conditions of the
exemption as proposed in the Notice. The Applicant's comments on the
conditions of the Notice and the Summary are discussed below in the
order of appearance in the Notice.
1. Section I(B) and Section I(B)(1) of the Notice. The Applicant
notes that Section I(B) of the proposal provides relief for ancillary
transactions arising from certain rights retained by US Steel, but
limits that relief to four specified types of ancillary transactions
(See Section I(B)(1) through (4)). By contrast, the Applicant points
out that on page 64655 of the Summary, in the first full non-bulleted
paragraph appearing in column 1, Representation 14, in describing these
transactions, precedes the same list of the four types of transactions
by stating that the subsequent dealings with US Steel ``include the
following.'' The Applicant explains that while the list in Section I(B)
covers the principal examples of ancillary transactions that may arise
from the Timber Rights contribution, there may be other matters that
arise during the course of the operation of the Timber Rights
Agreements that involve dealings between the Plan and US Steel.
Therefore, the Applicant believes there should be no need to limit
these types of transactions, which may benefit the Plan, so long as all
the protections of the exemption apply to them. In the exemption
request under consideration, all such transactions would be subject to
the oversight of the Independent Fiduciary, who would represent the
interests of the Plan. Accordingly, the Applicant requests that Section
I(B) be amended by adding the phrase ``including the following'' at the
end of the initial paragraph, before the list of the four types of
transactions to conform with the Summary.
The Department does not concur with the Applicant's comment. The
Department does not believe that it would be appropriate to provide
broad exemptive relief for ``other transactions'' that have not been
identified in the Applicant's submission. Therefore, the Department did
not make the revision as requested by the Applicant. Instead, the
Department requested that the Applicant provide a listing of additional
ancillary transactions that could arise between the Plan and US Steel
following the Timber Rights contribution. The Applicant and the
Independent Fiduciary identified additional ancillary transactions
which are referenced in new Sections I(b)(5) and Section III(e) of the
Notice.
Section I(b)(5) refers to: ``(5) Any additional ancillary
transactions defined in Section III(e).'' Section III(e) provides that
the term ``additional ancillary transactions'' means:
(1) The allocation and contesting of property taxes, fees,
licenses, fines and other charges or assessments imposed on the
Plan, the Timber Rights or (as relevant) the Property; (2) the
allocation of payments in connection with the granting of easements
or use permits; (3) the use of timberlands in connection with
government-mandated environmental cleanup or other construction or
maintenance activities occurring on US Steel owned adjacent
properties; (4) the negotiation by the Independent Fiduciary with US
Steel of a premium price to be paid to the Plan to permit US Steel
to buy out the Timber Rights on a parcel in order to sell the parcel
to a third party; (5) the coordination between the Independent
Fiduciary and US Steel of access to the Property on a continuing
basis, such as where to place a gate or to whom to permit access;
(6) the allocation of costs and responsibilities related to
participation in cooperatives for fire protection, research on land
use, or other matters relating to the Property and the Timber
Rights; (7) the representation of the Plan in regulatory matters,
such as changes in laws or regulations affecting the Property, that
also would impact US Steel; (8) the allocation of insurance coverage
for the Property and Timber Rights between the Plan and US Steel;
(9) the joint hiring by, or the allocation of costs between, the
Plan and US Steel of contractors to cut or maintain roads for fire
protection or other joint uses; (10) the joint action by, or
allocation of costs between, the Plan and US Steel to maintain
Property boundaries, monitor for violations, and determine damages
if any from third party trespass or other intrusion onto the
Property; (11) the joint representation of the Plan and US Steel to
an agency or other governmental body in the event of any regulatory
dispute or other regulatory issue involving the Timber Rights and
the Property; (12) working with government agencies on environmental
projects, enhancements, conservation easements, or similar matters
that may affect the value of the Timber Rights and the Property;
(13) the negotiation of a joint sale of the Timber Rights owned by
the Plan and the underlying Property owned by US Steel to a third
party; (14) the enforcement and settlement arising from US Steel's
obligations under the Timber Rights Agreements; and (15) the joint
defense and prosecution of lawsuits involving the Timber Rights and/
or the Property.
The Department notes that the exemption requires that the
Independent Fiduciary represent the Plan's interest with respect to the
ancillary transactions and approve of the terms prior to entering into
any of the transactions.
The Applicant also notes that, with regard to Section I(B)(1) of
the Notice, an early termination may not apply to a Timber Rights
Agreement as a whole, but rather to a portion of the Property covered
by that Agreement, as described in Representation 7 of the Summary.
Therefore, the Applicants suggests that the initial clause of
subparagraph (a) be revised to read as follows:
[[Page 377]]
US Steel exercises its right to early termination of an
Agreement or with respect to a portion of the Property covered by an
Agreement, * * *
The Department concurs with the Applicant and has modified the
initial clause of subparagraph (a) of Section I(B)(1) accordingly.
2. Section II(j) of the Notice. In response to the Department's
concern over the authority of the Independent Fiduciary with respect to
the disposition of Timber Rights to third parties, the Applicant agreed
to amend Section II(j) of the Notice. Section II(j) pertains to the
disposition of the Timber Rights under the Timber Rights Agreements and
related instruments. The Applicant proposes that its oversight role in
approving or directing sales to third parties under the Management
Agreement with TCG be turned over to a Second Independent Fiduciary
appointed for that purpose. Section II(j) of the final exemption reads
as follows:
The Independent Fiduciary, acting on behalf of the Plan, retains
the right to sell or assign, in whole or in part, any of the Plan's
Timber Rights interests to any third party purchaser.
Notwithstanding the above, UCF retains the authority to appoint a
second independent fiduciary (the Second Independent Fiduciary) to
determine whether to approve a proposed disposition, or to determine
whether to direct the Independent Fiduciary to make a disposition.
The Department concurs with the Applicant's amendment to Section
II(j) and has revised the Notice, accordingly.
3. Section III(a) of the Notice. Under Section III(a) of the
Notice, the Applicant states that one of the circumstances under which
a fiduciary will not be deemed independent of and unrelated to US Steel
is where ``the annual gross revenue received by such fiduciary, during
any year of its engagement, from US Steel and its affiliates exceeds 5%
of the Independent Fiduciary's annual gross revenue from all sources
for its prior tax year.''
The Applicant interprets this to mean that if, during the course of
a particular year, the gross revenue received by TCG from US Steel and
its affiliates were to exceed 5% of its total annual gross revenue for
the prior year, TCG would, at that point in time, cease to be
``independent'' for purposes of the exemption. This means that the
relief provided by the exemption for any transaction entered into under
TCG's authority as Independent Fiduciary prior to the date on which its
revenue exceeds the 5% threshold would not be affected. Violation of
the 5% condition would therefore have only a prospective effect,
requiring UCF to hire another Independent Fiduciary in order to
continue using the exemption going forward, and would not retroactively
invalidate all past transactions that have been entered into pursuant
to the exemption. The Applicant requests that the Department confirm
this interpretation.
In response to this comment, the Department concurs with the
Applicant's interpretation of the Independent Fiduciary's 5% earnings
cap and the unavailability of the exemption in the event this
limitation is exceeded.
4. Representation 7 of the Summary. The Applicant wishes to clarify
certain matters relating to a ``temporary'' termination of the Timber
Rights with respect to Property under the Timber Rights Agreements
discussed in Representation 7 of the Summary. First, in the second
sentence of the second full paragraph on page 64653 of the Notice,
pertaining to the terms of the Timber Rights Agreement for the 135,000
acre parcel, the phrase which states ``the fair market rental value of
the affected timberland surface plus'' should be deleted. For purposes
of clarification, the Applicant requests that the following sentence be
added at the end of the paragraph: ``In the event of surface or strip
mining, US Steel must also pay the fair market rental value of the
affected timberland surface.''
Second, in Footnote 8 on the same page, the Applicant requests that
in the 5th line, the phrase stating ``in less than 15 years'' should be
deleted. The Applicant explains that the reason for these changes is
that certain mining activities (namely, those described in clauses (i)
through (xvi) of Section 12.2 of the Timber Rights Agreements, which
also are listed in Footnote 8 of the Notice) are deemed to be
``temporary'' even if the use is for longer than 15 years. In
accordance with prevailing practice in Alabama, the Applicant further
explains that these mining activities give rise to a requirement to
reimburse the timber owner only for the value of the standing timber,
but not for the fair market rental value of the Property, itself. The
only ``temporary'' mining activity for which the Plan will receive fair
market rental value during mining use, in addition to timber value, is
surface or strip mining, because surface or strip mining could involve
a large amount of land being out of use for an indeterminate period.
According to the Applicant, activities other than those enumerated in
Footnote 8 would be characterized as ``temporary'' if (a) they are for
less than 15 years, (b) they do not pose a material risk of
contamination or nuisance, and (c) the surface will be substantially
restored to its prior condition upon cessation of activities.
Third, the Applicant states that the same comments and changes
apply to the 4th full paragraph on page 64653 of the Notice, which
describes the parallel provisions in the Timber Rights Agreement
covering the 35,000 acre parcel of the Property.
In response to the foregoing comments, the Department notes these
clarifications to the Summary and, particularly, the Timber Rights
Agreements.
5. Representation 11 of the Summary. The Applicant notes that
Representation 11 of the Summary describes negotiations that were
taking place at the time the exemption application was filed to sell
the mineral rights held by US Steel and its affiliate, US Steel Mining
Co., with respect to the underlying land. Since that time, the
Applicant states that US Steel has agreed to sell its mineral rights to
a third party (the USS Mineral Sale). The Applicant further states that
the mineral purchaser's interest will be subject to the terms of the
Timber Rights Agreements with regard to compensation due to the Plan
for damaged or destroyed timber.
On June 30, 2003, the Applicant indicates that the Oak Grove Mine,
owned by US Steel Mining Co., was separately sold. The area affected by
the sale involved approximately 12,000 acres and related only to
certain identified coal seams that are expected to be fully mined in
approximately 10 years (which may be extended if options for any of
five different option parcels totaling 22,000 acres are exercised).
Rights to any other minerals on those acres were retained by US Steel
and are included in the USS Mineral Sale.
Because the Oak Grove Mine was sold prior to the date on which the
Timber Rights Agreements were finalized, the Applicant explains that
the documents associated with its conveyance are to be treated as
``Current Leases'' that pre-date the Timber Rights Agreements, so that
their compensation terms will technically supersede the mining use
provisions of the Timber Rights Agreements. The Applicant further
explains that these compensation terms, like those in the Timber Rights
Agreements, provide for compensation at fair market value for any
timber that might be damaged or destroyed for mining purposes.
According to the Applicant, the negotiation of those terms was overseen
by TCG as Independent Fiduciary, and those terms are viewed by TCG as
fair and reasonable to the Plan. Furthermore, the
[[Page 378]]
Applicant indicates that the terms of the Oak Grove Mine sale were
taken into account by the independent appraiser and Independent
Fiduciary in valuing the Timber Rights.
The Department takes note of the Applicant's clarifications
regarding the USS Mineral Sale in Representation 11 of the Summary.
6. Representation 14 of the Summary. The Applicant wishes to
clarify that the last paragraph of Representation 14 of the Summary
reflects the Applicant's original statement that TCG's representations
regarding its independence from U.S. Steel are contained in the
``Management Agreement.'' Because the Management Agreement had not been
finalized by the time TCG was required to begin its work, the Applicant
notes that these representations are contained in a letter agreement
between UCF and TCG dated August 25, 2003.
The Department acknowledges the Applicant's clarification of the
written instrument wherein TCG memorializes its independence from
either the Applicant and US Steel.
7. Representation 17 of the Summary. The Applicant wishes to
clarify that with regard to TCG's incentive fee (the Incentive Fee),
the Management Agreement provision regarding such fee is being amended.
As described in the last sentence of Representation 17 of the Summary,
50% of the Incentive Fee was originally payable every third year for
the duration of the Management Agreement. The Applicant explains that
the amendment will permit UCF and TCG, by mutual agreement, to defer
payment of all or a portion of the Incentive Fee due in a particular
year to any subsequent year. The Applicant further explains that this
action may be taken to spread out the Incentive Fee payments more
evenly from period to period.
In response to this comment, the Department notes the proposed
amendment regarding the payment of TCG's Incentive Fee. The Department
further notes that no exemptive relief is provided herein for the
payment of incentive compensation to TCG.
The Applicant's Response to Issues Raised by the Commenters
In a letter dated, December 10, 2003, the Applicant provided the
Department with a written response to the issues raised by interested
persons who responded in writing to the Department concerning the
Notice. Discussed below are the issues raised by the commenters and the
responses to these comments made by the Applicant and the Independent
Fiduciary.
1. Effect of Contribution on Benefits Provided under the Plan.
Several commenters questioned whether the proposed contribution would
affect benefits under the Plan. In response, the Applicant states that
the proposed transaction would not, in itself, have any effect on the
benefits provided under the Plan. If anything, the Applicant states
that the proposed transaction would offer greater assurance that the
benefits will ultimately be paid, by providing the Plan with a larger
and more diverse asset base.
In addition, the Applicant points out that several comment letters
raised questions about increasing benefit levels. Because the Applicant
considers this matter outside the scope of the proposed transactions
and the exemption request, it has not chosen to comment.
2. Plan Merger Questions. Some of the commenters raised questions
regarding the merger of the US Steel pension plans. Because this merger
is occurring separately from, and unrelated to, the Timber Rights
contribution, the Applicant states that US Steel will respond directly
to the Plan participants on those issues, outside of the exemption
proceeding.
3. Persons to Whom Independent Fiduciary Is Responsible. A
commenter questioned to whom in UCF would TCG be responsible. The
Applicant states that the Independent Fiduciary would report to the
officers of Plan LLC, the limited liability company that is created to
hold the Timber Rights on behalf of the Plan. They would be M. Sharon
Cassidy, the General Counsel of UCF; William Donovan, the Vice
President--Investments of UCF; and Katherine Stults, the Staff
Analyst--Forest Products Industry of UCF.
The Independent Fiduciary's Response to the Commenters
In a letter to the Department dated December 9, 2003, the
Independent Fiduciary responded to the following issues raised by a
number of commenters:
1. Risk of Short-Term Loss on the Investment, No Returns to the
Plan, and Transaction Costs Outweighing Benefits. A commenter thought
the proposed transaction would subject the Plan to a risk of short-term
loss on the investment and generate no investment return at all to the
Plan.
In response to this comment, the Independent Fiduciary states that
based on the cruise (i.e., inspection with reference to possible timber
yield) and inventory work and cash flow projections by Larson &
McGowin, the independent appraiser, it anticipates that there will be
sufficient timber available for harvest in 2004 and subsequent years so
as to provide a positive cash flow from the outset of the proposed
transaction. Consequently, the Independent Fiduciary does not expect a
loss to the Plan, and in fact, believes there will be a positive
return, from the first year of the investment forward over the course
of the first five years. Also, as demonstrated by the appraisal report,
the Independent Fiduciary anticipates positive cash flows and a
positive investment return for the Plan over the long term from this
investment, net of any related costs. Therefore, in its considered
judgment, and as expressed in its report, the Independent Fiduciary
believes the proposed transaction would be a prudent investment for the
Plan.
The Independent Fiduciary notes that another commenter cited the
specific risk of adverse affects to the Plan from lawsuits related to
environmental issues, given the nature of the assets involved. The
Independent Fiduciary states that the parties have taken several
precautions to limit any environmental risk, including an
indemnification obligation in favor of the Plan from US Steel as owner
of the underlying land. Therefore, the Independent Fiduciary believes
this risk to be limited and that it will not outweigh the potential
benefits of the proposed transaction.
2. Preferability of Selling the Property to a Third Party and
Donating the Sale Proceeds to the Plan. A commenter suggested the
preferability of selling the Property outright to an unrelated party
and then donating the proceeds to the Plan.
In response to this comment, the Independent Fiduciary states that
if US Steel were to attempt to sell the Timber Rights, the proceeds
would be relatively low compared to the their long-term expected cash
flow, because of the young age of the timber. The Independent Fiduciary
represents that it would be difficult to invest the proceeds in a
manner that would achieve the same expected investment return with a
commensurate level of risk compared to the Timber Rights. In addition,
the Independent Fiduciary states that the contribution provides an
opportunity for the Plan to receive Timber Rights without incurring
transaction costs. For these reasons, and because of the
diversification benefits of expanding the Plan's investments to include
timber rights, the Independent Fiduciary believes that it is prudent
and in the interests of the Plan to receive the Timber Rights as a
contribution rather than the proceeds of the sale of the Timber Rights.
[[Page 379]]
3. Risk of Loss from Floods, Fires, Vandalism and Other Causes,
Natural and Otherwise. A commenter questioned the risk of loss to the
Plan from the Timber Rights investment caused by floods, fire,
vandalism and other causes.
In response to this comment, the Independent Fiduciary states that
based on its past experience in managing timber property, there would
be only a small risk of loss from fire or other natural disasters. The
Independent Fiduciary explains that it would take steps to minimize
fire and disease risk through active timber management aimed at
maintaining healthy and vigorous stands. Further, the Independent
Fiduciary asserts that the nature of the Property, being interspersed
with other land uses and close to an urban center (Birmingham), would
lead to quick detection of fire and quick response. The Independent
Fiduciary notes that although tornado damage to timberlands is
generally confined to small areas, and hurricane damage tends to occur
closer to near-coastal areas, flooding and drought are generally not
significant risks in the area where the Property is located.
The Independent Fiduciary further explains that consistent with
every other property it manages, it will have a ``fire plan'' to serve
as the basis for how it will manage the risk of fire and how it will
respond to any incidence of fire. It notes that the capacity of the
state of Alabama to support fire fighting efforts is only one
consideration that will be accounted for in the fire plan for the
Property. The Independent Fiduciary states that in its experience one
of the most effective means to manage the risk of fire is through
active management that maintains a healthy and vigorous forest,
including the practice of periodically thinning in overly dense forest
types. Therefore, the Independent Fiduciary represents that it will
increase the intensity of its management practices on the Property,
which will improve the health and vigor of the forest and help mitigate
the inherent risk of fire, insects, and disease.
4. Using the Proposed Transaction to Benefit US Steel. Some
commenters raised the possibility that US Steel would be using the
proposed in kind contribution transaction to benefit itself in various
ways.
In response to the commenters, the Independent Fiduciary states
that the form of the transaction is a ``contribution,'' and not a
``sale.'' The Independent Fiduciary explains that US Steel is receiving
no cash or other consideration from the Plan in exchange for the Timber
Rights, other than the possibility of decreasing future cash
contributions. Therefore, it believes the Plan's current assets and
investments are not being affected or diminished in any way.
The Independent Fiduciary explains that the exemption does not
provide any relief from the requirement that the assets accepted
through the in kind contribution constitute a prudent investment for
the Plan. In this regard, the Independent Fiduciary explains that its
role has been to assure that the terms of the transaction are fair and
reasonable to the Plan. In its view, the Independent Fiduciary believes
that the terms of the transaction are at least as favorable, if not
more favorable, to the Plan than the terms it could obtain in an arm's
length transaction with an unrelated party. The Independent Fiduciary
states that it will continue to perform that role in connection with
any future dealings between the Plan and US Steel relating to the
Timber Rights. Therefore, the Independent Fiduciary concludes that US
Steel is not obtaining any benefit at the Plan's expense.
The Independent Fiduciary further states that the Timber Rights,
once contributed to the Plan, must be used for the exclusive benefit of
the Plan. Any appreciation in value would belong to the Plan and would
increase the security of future pension payments. Any benefit to US
Steel, such as through a tax deduction or decreasing future
contributions, would be incidental to the principal benefit of
increasing the Plan's funding level, according to the Independent
Fiduciary.
The Independent Fiduciary notes that a commenter suggested that US
Steel would be using this opportunity to seek an ``exemption'' from or
otherwise postpone its obligatory annual cash contribution to the Plan.
In response to this commenter's concern, the Independent Fiduciary
states that US Steel would not receive any exemption from its
contribution obligations, which apply regardless of the form of
contribution. The Independent Fiduciary also states that as noted in
the exemption application, US Steel anticipates that it will be making
a cash contribution in 2005.
5. Risks to the Plan from Becoming a ``Business'' as a Result of
Owning the Timber Rights. Two commenters suggested that there are risks
to the Plan from becoming engaged in a ``business,'' with one comment
describing these risks by comparison to the ``unscrupulous executives''
at companies such as Enron.
In response to these comments, the Independent Fiduciary explains
that managing approximately 170,000 acres of timberland in Alabama is
not comparable to those well-publicized problems, where the principal
issue at the root of the problems at those companies was a lack of
independent oversight and control. The Independent Fiduciary asserts
that it will manage the Timber Rights, subject to the oversight of UCF
as Plan Trustee, so that independent oversight and controls will be in
place.
6. Risk to the Plan of Limiting the Make-Whole Contribution Period
and Its Scope. The Independent Fiduciary notes that US Steel's ``make-
whole'' contribution obligation was limited to five years because there
is a risk of loss to any prudent investment, and it did not seem
appropriate to require US Steel to guarantee the long-term prudence of
the Timber Rights investment to any greater extent than any other Plan
investment, other than to cover any initial risk relating to the in-
kind contribution. The Independent Fiduciary further explains that the
make-whole contribution is therefore limited to five years to protect
the Plan from risks related to the initial contribution transaction.
A commenter asked if the make-whole contribution would be designed
to bring the Plan to its ``proper funding level.'' In response to the
commenter's concern, the Independent Fiduciary states that the
contribution would be triggered only by changes in the value of the
Timber Rights, and would not be affected by the Plan's then-current
funding level. The Independent Fiduciary indicates that the make-whole
payment would be required even if the Plan were overfunded, although
the payment would be postponed to the extent that it would not be
deductible for tax purposes or would result in an excise tax. If the
Plan were underfunded, the Independent Fiduciary represents that the
make-whole payment would be limited by the loss in value of the Timber
Rights and would not necessarily restore the Plan to full funding, a
matter addressed by the pension funding rules.
Furthermore, the Independent Fiduciary explains that the make-whole
contribution obligation would take into account any loss from forest
fires or other causes for damage to the timber, to the extent that loss
reduces the appraised value or net cash flow from the Timber Rights
over the first five years.
7. Exclusion of Due Diligence Costs from the Make-Whole Obligation.
Another commenter argued that the make-whole contribution formula
should be changed to allow the Plan to
[[Page 380]]
recover its due diligence costs, ``unless the Plan initiated the Timber
Rights contribution activity.''
In response to this comment, the Independent Fiduciary states that
the due diligence process undertaken here is necessary for it and for
UCF to fulfill the prudence obligations in connection with the
acceptance of the Timber Rights as a Plan investment. If a cash
contribution were received in place of the in kind contribution, and if
it were similarly used to acquire private real estate assets, the
Independent Fiduciary states that the Plan would incur similar costs in
determining a prudent investment for the cash. Even if the Plan did not
invest in real estate, the Independent Fiduciary explains that the Plan
would likely incur costs in determining how to invest the cash through
researching and performing due diligence on other investment
opportunities. Therefore, the Independent Fiduciary concludes that it
is in the interests of the Plan to incur these due diligence fees,
which are reasonable since similar costs would be incurred even if the
contribution were made in cash.
8. Limiting Expenses for Operating the Timber Rights to Earnings
from the Timber Rights. A commenter suggested limiting expenses for
operating the Timber Rights to earnings from the Timber Rights because
the commenter argued that to do otherwise would violate the exclusive
benefit provision of the Plan.
In response to this comment, the Independent Fiduciary states that
the Timber Rights would be considered a Plan asset just like any other
asset owned by the Plan, so that there is no reason to limit related
expenses to related earnings. Using other Plan assets to cover Timber
Rights expenses would be a use of Plan assets for the benefit of the
Plan, consistent with the exclusive benefit requirement, according to
the Independent Fiduciary. In any event, the Independent Fiduciary
states that it anticipates positive cash flow net of expenses
throughout the term of the Timber Rights, so it does not consider this
matter to be an issue.
9. Administrability and Feasibility of the Timber Rights. A
commenter questioned how the administrability and feasibility of the
Timber Rights would be determined.
In response to this comment, the Independent Fiduciary indicated
that it would make such determinations on behalf of the Plan.
10. Disposal of the Timber Rights and Distribution of the Proceeds.
A commenter questioned who would determine whether to dispose of the
Timber Rights and distribute the sale proceeds.
In response to this comment, the Independent Fiduciary states that
it will manage the disposition of the Timber Rights. The Department
notes that the Independent Fiduciary will manage the disposition of the
Timber Rights. However, UCF will retain the authority to appoint a
Second Independent Fiduciary to determine whether to approve a proposed
disposition disclosed to UCF by the Independent Fiduciary, or to
determine whether to direct the Independent Fiduciary to make such
disposition. As for the proceeds of any sale of the Timber Rights, the
Independent Fiduciary states that they would go into the general assets
of the Plan.
11. Alternative Transactions and More ``Stable'' Products.
A commenter asked whether alternative transactions and more stable
investment products had been considered for potential investment by the
Plan.
In response to this comment, the Independent Fiduciary states that
the proposed contribution of Timber Rights represents a prudent
opportunity for the Plan to expand and diversify its investments into
an established asset class in which it does not currently invest. The
Independent Fiduciary explains that these assets are available to the
Plan only as a contribution in the form of Timber Rights, and under
circumstances that permit the Plan to expend less in transaction costs
than it otherwise would do in connection with a timber investment. The
Independent Fiduciary also believes that the Timber Rights are a
prudent and stable investment.
12. Ownership of the Underlying Property. A commenter asked whether
US Steel owns the underlying Property.
In response to this comment, the Independent Fiduciary notes that
US Steel owns the underlying Property in fee simple absolute.
13. Environmental Due Diligence. A commenter queried whether
appropriate environmental due diligence had been performed on the
Property underlying the Timber Rights.
In response to this comment, the Independent Fiduciary wishes to
clarify that under the proposed transaction, the Plan is acquiring
title only to the timber and is acquiring a contractual right to grow
and harvest timber for a 99 year period under two Timber Cutting
Agreements. In addition, the Independent Fiduciary states that the Plan
will never be the owner of the surface or subsurface Property.
Therefore, its practical exposure from the perspective of potential
environmental liability will be for any releases by the Plan or its
agents.
The Independent Fiduciary explains that it engaged an environmental
consultant, GeoSource, Inc., to perform a Phase I Environmental Site
Assessment (ESA) of the Property in accordance with ASTM Standard E
1527-00 (Standard Practice for Environmental Assessments) and E 2247-02
(Standard Practice for Phase I Environmental Assessments for Forestland
and Rural Property). In addition, the Independent Fiduciary indicates
that outside environmental counsel to UCF reviewed the consultant's
work and directed additional work to further expand the amount of
information, as a result of which certain areas of environmental
concern were excluded entirely from the proposed transaction. Based on
the ESA, the Independent Fiduciary states that it advised the Plan to
acquire Timber Rights only rather than to own the underlying Property
or its surface or subsurface. In addition, the Independent Fiduciary
notes that US Steel will indemnify the Plan against any liability
arising out of any existing environmental conditions.
Moreover, the Independent Fiduciary states that it will take steps
to address any potential exposure to the Plan to environmental
liability from its timber operations. Based on the Phase I ESA and
follow up investigation, the Independent Fiduciary indicates that areas
of historical mining activities have been identified where timber
harvesting will also take place. Together with environmental counsel,
the Independent Fiduciary explains that it plans to develop a pollution
prevention protocol for operations within these areas so that
environmental concerns will be built into Plan-sponsored timber
operations. The protocol will also address wetland and endangered
species concerns, which protocols are customary for timber operators.
Finally, the Independent Fiduciary notes that Larson & McGowin, the
independent appraiser, has considered the impact of these requirements
in valuing the Timber Rights.
14. Compensation to the Plan for Loss in Timber Value Due to
Mineral/Mining Activities. A commenter questioned how the Plan would be
compensated for the loss in timber value due to mineral or mining
activities.
In response to this comment, the Independent Fiduciary points out
that the Timber Agreements provide for compensation to the Plan for the
loss of any timber to the extent mining operations require the removal
of the
[[Page 381]]
timber. In certain instances where the use is for a long term, where
there is a risk of environmental contamination or where the Property
will not be restored after the mining use, the Independent Fiduciary
notes that US Steel or the mineral owner will be required to compensate
the Plan for the permanent loss of the use of such Property, with the
exception of surface ponds related to existing mineral operations which
have been excluded.
15. Replanting Costs. A commenter asked who would pay the cost of
replanting the acreage in a pine forest following a harvest anticipated
in the next 10 years.
In response to this comment, the Independent Fiduciary states that
the Plan will pay the cost of replanting, as it will continue to derive
the economic benefit of such plantings under the 99 year term of the
Timber Agreements. The Independent Fiduciary asserts that this cost was
taken into account when Larson & McGowin completed the appraisal of the
Timber Rights.
16. Capacity of the Independent Fiduciary to Manage Timberland in
Alabama. A commenter expressed concern that while the Independent
Fiduciary was qualified to manage timberland in the western United
States and Canada, it had little or no experience with forest and land
types present in Alabama.
In response to this comment, the Independent Fiduciary states that
it has considerable experience relevant to the management of Alabama
timberland. The Independent Fiduciary explains that it has been
involved in the management of diverse timber types for over twenty
years as a professional timber investment management organization, and
that it is very experienced in providing a full range of management and
fiduciary services. During that time, the Independent Fiduciary states
that it was engaged by one of the largest industrial timberland owners
in the Southeast to provide advice and counsel regarding timberland
investment management strategies in the Southeast. Furthermore, one of
the principal officers of the Independent Fiduciary assigned to the
proposed Timber Rights contribution began his career as a forester
trained in the southeastern United States nearly 25 years ago,
receiving training specific to the predominant forest type associated
with the US Steel Property.
The Independent Fiduciary explains that consistent with a proven
strategy applied numerous times in the past, it sought out demonstrated
forestry expertise in the local area for the purposes of assembling a
team of highly qualified foresters to provide UCF with state of the art
forestry investment services on the Property. Furthermore, the
Independent Fiduciary asserts that it has assembled a team of foresters
that it believes are the most qualified individuals available to be
part of its management team in Birmingham. For example, two of the
three foresters on that team have over 20 years of experience managing
timberland in the Birmingham/Tuscaloosa area.
17. Litigation Risk. One commenter expressed concern over the
liability risk of lawsuits stemming from the Timber Rights, in
particular, suits related to hunting activity associated with the
Property.
In response to this comment, the Independent Fiduciary explains
that according to the information provided by US Steel, there have only
been two personal liability suits filed against US Steel involving the
Property over the last ten years. The Independent Fiduciary explains
that this is not unusual for a ten year period. It also notes that only
one of those lawsuits was related to hunting.
The Independent Fiduciary states that the predominant strategy
implemented by numerous industrial timberland managers and timber
investment management organizations across the South to deal with
hunting liability risk has been to lease hunting rights to private
hunting clubs. The hunting clubs have an interest in utilizing the
resource in a responsible manner, including assisting the land manager
in controlling access to the property, responsible utilization of
forest roads, managing the hunting activity of their members, and
reporting any incidence of fire, arson, theft, etc. Furthermore, the
Independent Fiduciary explains that liability insurance is typically
required on the part of the hunting clubs to help manage the risks
associated with these leases. As property manager, the Independent
Fiduciary states that its goal will be to develop a prudent strategy
for managing these liability risks. It states that it intends to
examine the options and select the one that best balances the benefits
to the Plan, such as income from hunting leases with the potential
risks.
Determination of the Department
Accordingly, based upon the entire record, including the written
comments received in response to the Notice, and the responses to the
comments made by the Applicant and the Independent Fiduciary, the
Department has determined to grant the exemption. The Department has
also determined not to hold a public hearing. In the Department's view,
the comments did not raise any factual issues that were not adequately
addressed by the Applicant or the Independent Fiduciary. Accordingly,
the Department believes that no issues were identified by the
commenters that would need to be further explored by a hearing. The
Department notes that, in transactions of this nature, it has placed
emphasis on the need for an Independent Fiduciary and on such
Independent Fiduciary's considered and objective evaluation of the
transactions. In its deliberations, which included its analysis of all
aspects of the transactions, the Independent Fiduciary has consistently
represented for the record that no contribution of Timber Rights will
be accepted on behalf of the Plan unless such transactions are found by
the Independent Fiduciary to be in the interests of the Plan. Finally,
the Department notes that the Independent Fiduciary's satisfaction of
its obligations is a critical factor in the Department's decision to
grant a final exemption.
The exemption application pertaining to the final exemption, the
Notice, the comments submitted to the Department and the responses to
the comments, and all other documents submitted to the Department
concerning this exemption have been included as part of the public
record of the application. The complete application file (Exemption
Application No. D-11191), including all supplemental submissions
received by the Department, is available for public inspection in the
Public Disclosure Room of the Employee Benefits Security
Administration, U.S. Department of Labor, Room N-1513, 200 Constitution
Avenue, NW., Washington, DC 20210.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and Code, including any
prohibited transaction provisions to which the exemption does not apply
and the general fiduciary responsibility provisions of section 404 of
the Act, which require, among other things, a fiduciary to discharge
his or her duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(B) of the Act; nor does it affect the
requirements of section 401(a) of the Code that the plan operate for
the exclusive benefit of the employees of
[[Page 382]]
the employer maintaining the plan and their beneficiaries;
(2) The exemption does not extend to transactions prohibited under
section 406(b)(3) of the Act and section 4975(c)(1)(F) of the Code;
(3) In accordance with section 408(a) of the Act, section
4975(c)(2) of the Code, and the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, August 10, 1990), the Department finds
that the exemption is administratively feasible, in the interest of the
Plan and of its participants and beneficiaries and protective of the
rights of participants and beneficiaries of the Plan;
(4) The exemption is supplemental to, and not in derogation of, any
other provisions of the Act and the Code, including administrative
exemptions. Furthermore, the fact that a transaction is subject to an
administrative exemption is not dispositive of whether the transaction
is in fact a prohibited transaction; and
(5) The availability of this exemption is subject to the express
condition that the facts and representations contained in the
application are true and complete and accurately describe all material
terms of the transactions, which are the subjects of the exemption.
Exemption
In accordance with section 408(a) of the Act and section 4975(c)(2)
of the Code and the procedures set forth in 29 CFR part 2570, subpart B
(55 FR 32836, August 10, 1990), and based upon the entire record, the
Department finds that the exemption is:
(a) Administratively feasible;
(b) In the interests of the Plan and its participants and
beneficiaries; and
(c) Protective of the rights of the participants and beneficiaries
of the Plan.
Section I. Covered Transactions
(A) The restrictions of sections 406(a), 406(b)(1) and (b)(2) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code shall not apply, effective December 24, 2003, to the in kind
contribution of certain timber rights (the Timber Rights), under two
timber purchase and cutting agreements (the Timber Rights Agreements)
to The United States Steel Corporation Plan for Employee Pension
Benefits (the Plan) by the United Steel Corporation (US Steel), the
Plan sponsor and a party in interest with respect to the Plan.
(B) The restrictions of sections 406(a), 406(b)(1) and (b)(2) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code shall not apply, effective December 24, 2003, to the following
ancillary transactions between the Plan and US Steel arising from
certain rights retained by US Steel related to the timberland (the
Property) on which the Timber Rights are based:
(1) The receipt of compensation by the Plan from US Steel under the
Timber Rights Agreements in the event that either (a) US Steel
exercises its right to early termination of an Agreement, or with
respect to a portion of the Property covered by an Agreement, which
requires a termination payment to the Plan at a premium over the fair
market value of the Timber Rights as determined by a qualified,
independent appraiser, which has been selected by the independent
fiduciary (the Independent Fiduciary); or (b) US Steel owes
compensation to the Plan for mineral activities that interfere with the
Plan's use of the land for timber purposes;
(2) The guarantee by US Steel to make the Plan whole in the event
of a decline in value of the Timber Rights after five years;
(3) Any ongoing obligation incurred by US Steel to maintain the
Property in a fashion that does not unreasonably interfere with the
Plan's use thereof;
(4) The indemnity given by US Steel to the Plan for any
environmental claims arising out of activities engaged in prior to the
execution and closing of the proposed Timber Rights contribution; and
(5) Any additional ancillary transactions defined in Section
III(e).
Section II. General Conditions
This exemption is conditioned upon adherence to the material facts
and representations described herein and upon satisfaction of the
following general conditions:
(a) A qualified, Independent Fiduciary acting on behalf of the
Plan, represents the Plan's interests for all purposes with respect to
the Timber Rights contribution, and determines prior to entering into
any of the transactions described herein, that each such transaction,
including the Timber Rights contribution, is in the interest of the
Plan;
(b) The Independent Fiduciary negotiates and approves the terms of
any of the transactions between the Plan and US Steel that relate to
the Timber Rights;
(c) The Independent Fiduciary manages the holding, disposition, and
assignment of the Timber Rights and takes whatever actions it deems
necessary to protect the rights of the Plans with respect to the Timber
Rights;
(d) The terms of any transactions between the Plan and US Steel are
no less favorable to the Plan than terms negotiated at arm's length
under similar circumstances between unrelated third parties;
(e) The Independent Fiduciary determines the fair market value of
the Timber Rights contributed to the Plan on the date of such
contribution. In determining the fair market value of the Timber Rights
contribution, the Independent Fiduciary obtains an updated appraisal
from a qualified, independent appraiser selected by the Independent
Fiduciary, and ensures that the appraisal is consistent with sound
principles of valuation;
(f) The fair market value of the Timber Rights does not exceed 5%
of the Plan's total assets at the time of such contribution.
(g) The Plan pays no fees or commissions in connection with the
Timber Rights contribution. (This condition does not preclude the Plan
from paying the Independent Fiduciary's ongoing management fees once
the contribution has been approved and accepted. It also does not
restrict the Plan from paying the due diligence costs connected with
the acquisition of the Property, such as the expenses for a title
search, appraisal and environmental review.)
(h) Five years from the date of the Timber Rights contribution, US
Steel contributes, to the Plan, an amount in cash calculated as
follows:
(1) The fair market value of the Timber Rights as of the date of
the contribution, less
(2) The sum of (i) the fair market value of the Timber Rights held
by the Plan as of the date five years from the date of the
contribution, as determined by a qualified, independent appraiser,
which is selected by the Independent Fiduciary, plus (ii) the net cash
distributed to the Plan LLC or the Plan relating to all or any part of
the Timber Rights (and/or the related timber) prior to such date;
provided, that if a contribution is due and if, for the taxable year of
US Steel in which the contribution is to be made, such contribution (i)
is not deductible under section 404(a)(1) of the Code or (ii) results
in the imposition of an excise tax under section 4972 of the Code, such
contribution is not made until the next taxable year of US Steel for
which the contribution is deductible under section 404(a)(1) of the
Code and does not result in an excise tax under section 4972 of the
Code.
[[Page 383]]
(i) US Steel indemnifies the Plan with respect to all liability for
hazardous substances released on the Property prior to the execution
and closing of the Timber Rights contribution.
(j) The Independent Fiduciary, acting on behalf of the Plan,
retains the right to sell or assign, in whole or in part, any of the
Plan's Timber Rights interests to any third party purchaser.
Notwithstanding the above, UCF retains the authority to appoint a
second independent fiduciary (the Second Independent Fiduciary) to
determine whether to approve a proposed disposition, or to determine
whether to direct the Independent Fiduciary to make a disposition.
Section III. Definitions
(a) The term ``Independent Fiduciary'' means a fiduciary who is:
(1) Independent of an unrelated to US Steel or its affiliates, and (2)
appointed to act on behalf of the Plan for purposes related to (i) the
in kind contribution of the Timber Rights by US Steel to the Plan and
(ii) other transactions between the Plan and US Steel related to the
Property on which the Timber Rights are based. For purposes of this
exemption, a fiduciary will not be deemed to be independent of and
unrelated to US Steel if: (1) Such fiduciary directly or indirectly
controls, is controlled by or is under common control with US Steel,
(2) such fiduciary directly or indirectly receives any compensation or
other consideration in connection with any transaction described in
this exemption; except that an Independent Fiduciary may receive
compensation for acting as an Independent Fiduciary from US Steel in
connection with the transactions contemplated herein if the amount or
payment of such compensation is not contingent upon or in any way
affected by the Independent Fiduciary's ultimate decision, and (3) the
annual gross revenue received by such fiduciary, during any year of its
engagement, from US Steel and its affiliates exceeds 5% of the
Independent Fiduciary's annual gross revenue from all sources for its
prior tax year.
(b) The term ``affiliate'' means:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner of any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) The term ``Second Independent Fiduciary'' means a fiduciary who
meets the definition of an ``Independent Fiduciary'' in Section III(a)
above, except that such fiduciary is appointed solely to oversee a
disposition transaction as described in Section II(j) hereof.
(e) The term ``additional ancillary transactions'' refers to other
transactions which may be entered into by the Plan and US Steel arising
from rights retained by US Steel related to the Property on which the
Timber Rights are based. These transactions include the following: (1)
The allocation and contesting of property taxes, fees, licenses, fines
and other charges or assessments imposed on the Plan, the Timber Rights
or (as relevant) the Property; (2) the allocation of payments in
connection with the granting of easements or use permits; (3) the use
of timberlands in connection with government-mandated environmental
cleanup or other construction or maintenance activities occurring on US
Steel owned adjacent properties; (4) the negotiation by the Independent
Fiduciary with US Steel of a premium price to be paid to the Plan to
permit US Steel to buy out the Timber Rights on a parcel in order to
sell the parcel to a third party; (5) the coordination between the
Independent Fiduciary and US Steel of access to the Property on a
continuing basis, such as where to place a gate or to whom to permit
access; (6) the allocation of costs and responsibilities related to
participation in cooperatives for fire protection, research on land
use, or other matters relating to the Property and the Timber Rights;
(7) the representation of the Plan in regulatory matters, such as
changes in laws or regulations affecting the Property, that also would
impact US Steel; (8) the allocation of insurance coverage for the
Property and Timber Rights between the Plan and US Steel; (9) the joint
hiring by, or the allocation of costs between, the Plan and US Steel of
contractors to cut or maintain roads for fire protection or other joint
uses; (10) the joint action by, or allocation of costs between, the
Plan and US Steel to maintain Property boundaries, monitor for
violations, and determine damages if any from third party trespass or
other intrusion onto the Property; (11) the joint representation of the
Plan and US Steel to an agency or other governmental body in the event
of any regulatory dispute or other regulatory issue involving the
Timber Rights and the Property; (12) working with government agencies
on environmental projects, enhancements, conservation easements, or
similar matters that may affect the value of the Timber Rights and the
Property; (13) the negotiation of a joint sale of the Timber Rights
owned by the Plan and the underlying Property owned by US Steel to a
third party; (14) the enforcement and settlement arising from US
Steel's obligations under the Timber Rights Agreements; and (15) the
joint defense and prosecution of lawsuits involving the Timber Rights
and/or the Property.
Effective Date: This exemption is effective as of December 24,
2003.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this final exemption,
refer to the proposed exemption which is cited above.
Signed at Washington, DC, this 30th day of September, 2003.
Ivan L. Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, Department of Labor.
[FR Doc. 04-52 Filed 1-2-04; 8:45 am]
BILLING CODE 4510-29-P
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