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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
Commission file number 1-2918
ASHLAND INC.
(a Kentucky corporation)
I.R.S. No. 61-0122250
1000 Ashland Drive
Russell, Kentucky 41169
Telephone Number: (606) 329-3333
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
At April 30, 1997, there were 74,249,655 shares of
Registrant's Common Stock outstanding. One Right to purchase
one-thousandth of a share of Series A Participating
Cumulative Preferred Stock accompanies each outstanding share
of Registrant's Common Stock.
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PART I - FINANCIAL INFORMATION
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ASHLAND INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
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Three months ended Six months ended
March 31 March 31
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(In millions except per share data) 1997 1996 1997 1996
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REVENUES
Sales and operating revenues (including excise taxes) $ 3,226 $ 3,072 $ 6,653 $ 6,151
Other 17 25 37 119 (1)
---------- ---------- --------- ----------
3,243 3,097 6,690 6,270
COSTS AND EXPENSES
Cost of sales and operating expenses 2,497 2,396 5,168 4,746
Excise taxes on products and merchandise 244 251 495 489
Selling, general and administrative expenses 337 318 669 627
Depreciation, depletion and amortization 113 99 217 200
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3,191 3,064 6,549 6,062
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OPERATING INCOME 52 33 141 208
OTHER INCOME (EXPENSE)
Interest expense (net of interest income) (42) (42) (82) (86)
Equity income 9 6 16 11
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INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST 19 (3) 75 133
Income taxes (7) 1 (23) (42)
Minority interest in earnings of subsidiaries (5) - (9) (6)
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NET INCOME (LOSS) 7 (2) 43 85 (1)
Dividends on convertible preferred stock (5) (5) (10) (9)
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INCOME (LOSS) AVAILABLE TO COMMON SHARES $ 2 $ (7) $ 33 $ 76
========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE - Note E
Primary $ .03 $ (.11) $ .50 $ 1.18 (1)
Assuming full dilution $ .09 $ (.11) $ .56 $ 1.15
DIVIDENDS PAID PER COMMON SHARE $ .275 $ .275 $ .55 $ .55
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(1) Includes a gain of $73 million ($48 million or 74 cents a share after
income taxes) resulting from the settlement of Ashland Exploration's
claims in the bankruptcy reorganization of Columbia Gas Transmission
and Columbia Gas Systems.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
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ASHLAND INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31 September 30 March 31
(In millions) 1997 1996 1996
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ASSETS
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CURRENT ASSETS
Cash and cash equivalents $ 81 $ 77 $ 70
Accounts receivable 1,777 1,693 1,662
Allowance for doubtful accounts (26) (27) (25)
Construction completed and in progress 17 50 19
Inventories - Note B 804 736 810
Deferred income taxes 99 112 89
Other current assets 147 99 112
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2,899 2,740 2,737
INVESTMENTS AND OTHER ASSETS
Investments in and advances to unconsolidated affiliates 162 157 153
Investments of captive insurance companies 154 178 194
Cost in excess of net assets of companies acquired 138 120 104
Other noncurrent assets 395 359 410
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849 814 861
PROPERTY, PLANT AND EQUIPMENT
Cost 7,476 7,374 7,159
Accumulated depreciation, depletion and amortization (3,783) (3,659) (3,601)
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3,693 3,715 3,558
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$ 7,441 $ 7,269 $ 7,156
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LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES
Debt due within one year $ 297 $ 203 $ 321
Trade and other payables 2,020 2,044 1,910
Income taxes 37 32 40
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2,354 2,279 2,271
NONCURRENT LIABILITIES
Long-term debt (less current portion) 1,852 1,784 1,749
Employee benefit obligations 632 613 630
Reserves of captive insurance companies 171 166 183
Deferred income taxes 85 64 33
Other long-term liabilities and deferred credits 356 375 404
Commitments and contingencies - Note C
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3,096 3,002 2,999
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES 179 174 176
STOCKHOLDERS' EQUITY
Convertible preferred stock - 293 293
Common stockholders' equity 1,812 1,521 1,417
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1,812 1,814 1,710
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$ 7,441 $ 7,269 $ 7,156
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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ASHLAND INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
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Preferred Common Paid-in Retained Loan to
(In millions) Stock stock capital earnings LESOP Other Total
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BALANCE AT OCTOBER 1, 1995 $ 293 $ 64 $ 256 $ 1,063 $ (11) $ (10) $ 1,655
Net income 85 85
Dividends
Preferred stock (9) (9)
Common stock (35) (35)
Issued common stock under stock
incentive plans 4 4
LESOP loan repayment 11 11
Other changes (1) (1)
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BALANCE AT MARCH 31, 1996 $ 293 $ 64 $ 260 $ 1,104 $ - $ (11) $ 1,710
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BALANCE AT OCTOBER 1, 1996 $ 293 $ 64 $ 280 $ 1,185 $ - $ (8) $ 1,814
Net income 43 43
Dividends
Preferred stock (10) (10)
Common stock (35) (35)
Issued common stock under
Preferred stock conversion (290) 9 281 -
Stock incentive plans 1 20 21
Employee savings plan 1 1
Preferred stock redemption (3) (3)
Other changes (19) (19)
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BALANCE AT MARCH 31, 1997 $ - $ 74 $ 582 $ 1,183 $ - $ (27) $ 1,812
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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ASHLAND INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
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Six months ended
March 31
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(In millions) 1997 1996
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CASH FLOWS FROM OPERATIONS
Net income $ 43 $ 85
Expense (income) not affecting cash
Depreciation, depletion and amortization 217 200
Deferred income taxes 32 (14)
Other noncash items 4 15
Change in operating assets and liabilities (1) (226) (10)
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70 276
CASH FLOWS FROM FINANCING
Proceeds from issuance of long-term debt 87 1
Proceeds from issuance of capital stock 14 4
Loan repayment from leveraged employee stock ownership plan - 11
Repayment of long-term debt (59) (51)
Increase in short-term debt 135 21
Redemption of preferred stock (3) -
Dividends paid (47) (46)
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127 (60)
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment (185) (178)
Purchase of operations - net of cash acquired (44) (24)
Proceeds from sale of operations 1 1
Investment purchases (2) (58) (225)
Investment sales and maturities (2) 80 223
Other-net 13 5
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(193) (198)
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INCREASE IN CASH AND CASH EQUIVALENTS 4 18
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 77 52
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CASH AND CASH EQUIVALENTS - END OF PERIOD $ 81 $ 70
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(1) Excludes changes resulting from operations acquired or sold.
(2) Represents primarily investment transactions of captive insurance companies.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE A - GENERAL
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial reporting and
Securities and Exchange Commission regulations, but are subject to
any year-end audit adjustments which may be necessary. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included. These financial statements should be read in
conjunction with Ashland's Annual Report on Form 10-K for the
fiscal year ended September 30, 1996. Results of operations for
the periods ended March 31, 1997, are not necessarily indicative
of results to be expected for the year ending September 30, 1997.
NOTE B - INVENTORIES
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March 31 September 30 March 31
(In millions) 1997 1996 1996
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Crude oil $ 373 $ 336 $ 342
Petroleum products 329 323 354
Chemicals 357 342 346
Other products 152 146 177
Materials and supplies 63 63 68
Excess of replacement costs over LIFO carrying values (470) (474) (477)
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$ 804 $ 736 $ 810
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NOTE C - LITIGATION, CLAIMS AND CONTINGENCIES
Federal, state and local statutes and regulations relating to the
protection of the environment have a significant impact on the
conduct of Ashland's businesses. For information regarding
environmental expenditures and reserves, see the "Miscellaneous -
Governmental Regulation and Action - Environmental Protection"
section of Ashland's Form 10-K.
Environmental reserves are subject to considerable uncertainties
which affect Ashland's ability to estimate its share of the
ultimate costs of required remediation efforts. Such uncertainties
involve the nature and extent of contamination at each site, the
extent of required cleanup efforts under existing environmental
regulations, widely varying costs of alternate cleanup methods,
changes in environmental regulations, the potential effect of
continuing improvements in remediation technology, and the number
and financial strength of other potentially responsible parties at
multiparty sites. As a result, charges to income for environmental
liabilities could have a material effect on results of operations
in a particular quarter or fiscal year as assessments and
remediation efforts proceed or as new remediation sites are
identified. However, such charges are not expected to have a
material adverse effect on Ashland's consolidated financial
position.
Ashland has numerous insurance policies that provide coverage at
various levels for environmental costs. In addition, various costs
of remediation efforts related to underground storage tanks are
eligible for reimbursement from state administered funds.
During 1996, the U.S. Environmental Protection Agency (EPA)
notified Ashland that its three refineries would be subject to a
comprehensive inspection of compliance with federal environmental
laws and regulations. The third and final inspection was completed
during the quarter ended December 31, 1996. Such inspections could
result in sanctions, monetary penalties and further remedial
expenditures. Also during 1996, Ashland arranged for an
independent review of environmental compliance at its three
refineries by an outside consulting firm, self-reported to the EPA
a number of issues of non-compliance with applicable laws or
regulations, and commenced a program to address these matters.
Ashland is not in a position to determine what actions, if any,
may be instituted and is similarly
6
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ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE C - LITIGATION, CLAIMS AND CONTINGENCIES (continued)
uncertain at this time what additional remedial actions may be
required or costs incurred. However, this matter is not expected
to have a material adverse effect on Ashland's consolidated
financial position.
In addition to environmental matters, Ashland and its subsidiaries
are parties to numerous claims and lawsuits (some of which are for
substantial amounts). While these actions are being contested, the
outcome of individual matters is not predictable with assurance.
Although any actual liability is not determinable as of March 31,
1997, Ashland believes that any liability resulting from these
matters, after taking into consideration Ashland's insurance
coverages and amounts already provided for, should not have a
material adverse effect on Ashland's consolidated financial
position.
NOTE D - ACQUISITIONS
During the six months ended March 31, 1997, Ashland Chemical
acquired various distribution and specialty chemical businesses.
These acquisitions were accounted for as purchases and did not
have a significant effect on Ashland's consolidated financial
statements.
NOTE E - COMPUTATION OF EARNINGS PER SHARE
In March 1997, Ashland called for redemption the 6 million
outstanding shares of its $3.125 Cumulative Convertible Preferred
Stock. Each preferred share was convertible into 1.546 shares of
Ashland Common Stock, plus cash for fractional shares. Almost 99%
of the series was submitted for conversion to common stock by the
March 31 deadline. The remaining preferred shares were redeemed at
a price of $51.88 per share plus 19.1 cents per share of accrued
and unpaid dividends.
The impact of the conversion on the computation of primary
earnings per share was negligible for the periods ended March 31,
1997. For purposes of the fully-diluted computation, the preferred
shares were assumed to be converted to common shares as of the
beginning of the period in accordance with generally accepted
accounting principles, despite the fact that the assumed
conversion is anti-dilutive. If the shares had been assumed
converted as of the beginning of the period for the primary
computation, the resulting primary earnings per share would have
been essentially equivalent to earnings per share assuming full
dilution.
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Three months ended Six months ended
March 31 March 31
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(In millions except per share data) 1997 1996 1997 1996
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PRIMARY EARNINGS (LOSS) PER SHARE
Income (loss) available to common shares
Net income (loss) $ 7 $ (2) $ 43 $ 85
Dividends on convertible preferred stock (5) (5) (10) (9)
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$ 2 $ (7) $ 33 $ 76
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Average common shares and equivalents outstanding
Average common shares outstanding 65 64 65 64
Common shares issuable upon exercise of stock options 1 - 1 -
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66 64 66 64
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Earnings (loss) per share $ .03 $ (.11) $ .50 $ 1.18
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7
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ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE E - COMPUTATION OF EARNINGS PER SHARE (continued)
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Three months ended Six months ended
March 31 March 31
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(In millions except per share data) 1997 1996 1997 1996
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EARNINGS (LOSS) PER SHARE
ASSUMING FULL DILUTION
Income (loss) available to common shares
Net income (loss) $ 7 $ (2) $ 43 $ 85
Dividends on convertible preferred stock - (5) - -
Interest on convertible debentures (net of income taxes) - - - 2
--------- --------- --------- ---------
$ 7 $ (7) $ 43 $ 87
========= ========= ========= =========
Average common shares and equivalents outstanding
Average common shares outstanding 65 64 65 64
Common shares issuable upon
Exercise of stock options 1 - 1 -
Conversion of debentures - - - 3
Conversion of preferred stock 9 - 9 9
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75 64 75 76
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Earnings (loss) per share $ .09 $ (.11) $ .56 $ 1.15
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8
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ASHLAND INC. AND SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
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Three months ended Six months ended
March 31 March 31
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(Dollars in millions except as noted) 1997 1996 1997 1996
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SALES AND OPERATING REVENUES
Refining and Marketing (1) $ 1,609 $ 1,577 $ 3,361 $ 3,021
Valvoline 267 265 530 540
Chemical 982 909 1,939 1,795
APAC 191 181 496 510
Coal 163 139 313 303
Exploration 73 66 152 122
Intersegment sales (59) (65) (138) (140)
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$ 3,226 $ 3,072 $ 6,653 $ 6,151
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OPERATING INCOME
Refining and Marketing (1) $ (12) $ (10) $ 2 $ 19
Valvoline 24 8 37 20
Chemical 33 43 67 81
APAC - - 18 23
Coal 17 6 29 23
Exploration 4 10 16 89
General corporate expenses (14) (24) (28) (47)
----------- ----------- ----------- -----------
$ 52 $ 33 $ 141 $ 208
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EQUITY INCOME
Arch Mineral Corporation $ 5 $ 4 $ 10 $ 5
Other 4 2 6 6
----------- ----------- ----------- -----------
$ 9 $ 6 $ 16 $ 11
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OPERATING INFORMATION
Refining and Marketing (1)
Refining inputs (thousand barrels per day) (2) 335.1 342.6 354.1 360.5
Value of products manufactured per barrel $ 26.57 $ 23.58 $ 27.77 $ 22.78
Input cost per barrel 22.88 19.85 23.88 18.88
----------- ----------- ----------- -----------
Refining margin per barrel $ 3.69 $ 3.73 $ 3.89 $ 3.90
Refined product sales (thousand barrels per day)
Wholesale sales to
Ashland brand retail jobbers 22.8 17.7 23.5 15.2
Other wholesale customers (3) 263.2 281.7 282.8 292.9
SuperAmerica retail system 73.7 71.0 75.1 73.1
----------- ----------- ----------- -----------
Total refined product sales 359.7 370.4 381.4 381.2
SuperAmerica merchandise sales $ 138 $ 134 $ 282 $ 273
Valvoline lubricant sales (thousand barrels per day) (3) 18.1 17.8 18.1 19.1
APAC construction backlog
At end of period $ 654 $ 664 $ 654 $ 664
Increase (decrease) during period $ 90 $ 48 $ 7 $ (8)
Ashland Coal, Inc. (4)
Tons sold (millions) 6.4 5.2 12.2 11.2
Sales price per ton $ 25.50 $ 26.57 $ 25.56 $ 26.97
Arch Mineral Corporation (4)
Tons sold (millions) 7.5 7.3 15.3 14.2
Sales price per ton $ 25.36 $ 24.95 $ 25.17 $ 25.39
Exploration
Net daily production
Natural gas (million cubic feet) (3) 132.9 113.5 119.2 112.3
Nigerian crude oil (thousand barrels) 17.0 17.3 17.3 17.7
Sales price
Natural gas (per thousand cubic feet) $ 2.84 $ 2.88 $ 2.94 $ 2.53
Nigerian crude oil (per barrel) $ 20.89 $ 18.17 $ 22.09 $ 17.16
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(1) Segments formerly identified as Petroleum and SuperAmerica have been
combined effective October 1, 1996. Prior year amounts have been restated.
(2) Includes crude oil and other purchased feedstocks.
(3) Includes intersegment sales.
(4) Ashland's ownership interest is 57% in Ashland Coal and 50% in Arch
Mineral.
9
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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RESULTS OF OPERATIONS
Current Quarter - Ashland recorded net income of $7 million for
the three months ended March 31, 1997, compared to a net loss of
$2 million for the same period last year. Operating income equaled
$52 million in the current quarter compared to $33 million in last
year's second quarter. The increase in earnings was due primarily
to substantial improvements from Valvoline and Ashland Coal, which
were partially offset by declines in the Chemical, Exploration,
and Refining and Marketing segments.
Year-to-Date - Ashland recorded net income of $43 million for the
six months ended March 31, 1997. This compares to net income of
$85 million for last year's first half, which included operating
income of $73 million ($48 million after income taxes) from the
settlement of Ashland Exploration's claims in the bankruptcy
reorganization of Columbia Gas Transmission and Columbia Gas
Systems. Excluding the non-recurring gain in the prior year, net
income improved from prior-year levels, due primarily to increased
operating income for Valvoline and Ashland Coal. These
improvements were partially offset by lower results from Refining
and Marketing, Chemical, and APAC.
Effective October 1, 1996, Ashland changed its methodology for
allocating corporate general and administrative (G&A) expenses.
For purposes of comparison to prior year results, segment
operating income for the current quarter and year-to-date periods
have been adjusted in the following table to exclude the increased
allocations.
Three months ended Six months ended
March 31 March 31
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(In Millions) 1997 1996 1997 1996
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OPERATING INCOME
Refining and Marketing $ (8) $ (10) $ 11 $ 19
Valvoline 25 8 40 20
Chemical 36 43 72 81
APAC 1 - 21 23
Coal 17 6 29 23
Exploration 4 10 17 89
General corporate expenses (23) (24) (49) (47)
----------- ----------- ----------- -----------
$ 52 $ 33 $ 141 $ 208
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REFINING AND MARKETING
Also effective October 1, 1996, Ashland began reporting the
results of Ashland Petroleum, its refining division, and
SuperAmerica retail gasoline marketing operations as a single
industry segment to allow for better peer group comparisons. Prior
year results have been restated.
Current Quarter - Refining and Marketing reported an operating
loss of $12 million for the March 1997 quarter versus a loss of
$10 million for the March 1996 quarter. The decline was primarily
the result of heavy flooding in the Ohio Valley which limited the
ability to ship product on the river at a time when margins were
strengthening. Also negatively impacting current quarter results
were higher average input costs, expenses related to previously
announced staff reductions for Ashland Petroleum and increased
corporate G&A allocations. Partially offsetting these negative
factors were lower refining expenses and higher retail gasoline
and merchandise sales volumes and margins.
Year-to-Date - Refining and Marketing reported operating income of
$2 million for the six months ended March 31, 1997, compared to
$19 million for the first six months of fiscal 1996. In addition
to the flooding, the increased corporate G&A allocations and the
expenses of the staff reductions discussed previously, Scurlock
Permian was adversely affected by lower margins on crude oil
sales, reflecting increased competition in the domestic crude oil
markets. In addition, SuperAmerica experienced a softening in
retail gasoline margins and higher operating costs. These negative
factors
10
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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REFINING AND MARKETING (CONTINUED)
were partially offset by a reduction in refining expenses and
higher retail gasoline and merchandise volumes.
The Ashland brand jobber program continues to expand with the
opening of 63 more units during the first six months of the year,
bringing the total number of units to 548 at March 31, 1997,
compared to 286 at March 31, 1996. SuperAmerica continued its
expansion also, opening 16 new and 7 rebuilt units to bring the
total number of units to 757 at March 31, 1997, including 634
SuperAmerica stores and 123 Rich outlets. At March 31, 1996, there
were 625 SuperAmerica stores and 100 Rich outlets in operation.
Ashland's Refining and Marketing operations will be greatly
affected by the announced transaction between Ashland and USX's
Marathon group. See "Profitability Improvement Plan" on page 14
and Exhibit 99 - Press Release dated May 15, 1997.
VALVOLINE
Current Quarter - Valvoline reported record operating income of
$24 million for the quarter ended March 31, 1997, compared to $8
million for the quarter ended March 31, 1996. The U.S. lubricant
business was the leading contributor to earnings, reflecting
improved motor oil margins and increased market share. The sale of
R-12 automotive refrigerant, no longer produced in the United
States, was another strong profit contributor, reflecting
significantly stronger prices. The Zerex(R) antifreeze business
also showed improvement, reflecting higher margins, while First
Recovery benefited from higher used oil collection revenues.
Year-to-Date - Operating income of $37 million for the first six
months of fiscal 1997 was also a record for Valvoline, and was a
considerable improvement over the $20 million recorded in the same
period last year. The increase generally reflects the same factors
discussed in the quarterly comparison above.
CHEMICAL
Current Quarter - Ashland Chemical was the leading earnings
contributor for the quarter, with $33 million of operating income,
compared to $43 million for the same period a year ago. The
decrease was due to lower results from certain distribution and
specialty chemical product lines and higher corporate G&A
allocations. The General Polymers plastics distribution business
reported record second quarter results and foundry products also
showed improvement. However, these improvements were more than
offset by declines in other product lines, especially industrial
chemicals and solvents, which experienced decreased margins due to
rising material costs. Drew Marine is down due to reduced sales in
a very competitive market.
Year-to-Date - Ashland Chemical's operating income for the six
months ended March 31, 1997, amounted to $67 million, compared to
$81 million for the first six months of fiscal 1996. Record
results for General Polymers, foundry products, specialty polymers
and adhesives, and electronic chemicals were more than offset by
declines in other product lines. Industrial chemicals and solvents
and Drew Marine are down due to the reasons discussed in the
quarterly comparison, while petrochemicals are down due to
decreased margins for solvents and maleic anhydride, resulting
from higher raw material costs.
APAC
Current Quarter - For the second quarter of fiscal 1997, APAC's
construction operations reported slightly better than break-even
results despite the normal winter slowdown in construction
activity. Similar results were reported for the March 1996
quarter.
Year-to-Date - For the six months ended March 31, 1997, APAC
reported operating income of $18 million, compared to $23 million
for the same period last year. The decline was the result of
adverse
11
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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weather conditions in several of APAC's operating areas in the
December 1996 quarter, a gain on an aggregate property sale in the
December 1995 quarter, and increased corporate G&A allocations
during the current year. The construction backlog at March 31,
1997, amounted to $654 million, compared to $664 million at March
31, 1996.
COAL
Current Quarter - Operating income for Ashland Coal nearly tripled
to $17 million for the March 1997 quarter, compared to $6 million
for the March 1996 quarter, despite decreased sales realizations
per ton. The improvement was driven by record volumes and record
low mining costs resulting from the relocation of two major
draglines and more favorable overburden ratios.
Year-to-Date - Operating income for Ashland Coal increased to $29
million for the six months ended March 31, 1997, compared to $23
million for the same period last year. The increase was generally
due to the same factors discussed in the quarterly comparison.
EXPLORATION
Current Quarter - Ashland's exploration segment reported operating
income of $4 million for the second fiscal quarter of 1997,
compared to $10 million for the 1996 quarter. The decline was due
to a charge of $8 million resulting from litigation settlement and
remediation expenses related to certain nonproducing properties.
During the quarter, natural gas production increased 17% to 133
million cubic feet a day, as new wells from the Vermilion 410 and
389 blocks in the Gulf of Mexico began producing.
Year-to-Date - For the first six months of fiscal 1997, the
exploration segment reported operating income of $16 million,
compared to $89 million for the same period last year. Excluding
the previously mentioned $73 million Columbia Gas settlement from
last year's results, and the $8 million in litigation and
remediation expenses discussed above from the current year's
results, operating income was up $8 million for the first six
months. The improvement reflects a 16% increase in natural gas
prices and a 6% increase in natural gas volumes resulting from the
new Gulf of Mexico production discussed above.
GENERAL CORPORATE EXPENSES
General corporate expenses, excluding the impact of the increased
G&A allocations to the operating divisions, were $23 million in
the current quarter, compared to $24 million in the prior year's
quarter. Comparable amounts for the six months periods were $49
million for 1997 versus $47 million for 1996. The year-to-date
increase reflects higher consulting fees.
OTHER INCOME (EXPENSE)
For the six months ended March 31, 1997, interest expense (net of
interest income) totaled $82 million, compared to $86 million for
the 1996 period. The decline reflected a decrease in the average
outstanding debt level during the December quarter and lower
interest rates resulting from certain long-term debt refinancings.
Equity income from Arch Mineral for the quarter ended March 31,
1997, amounted to $5 million, compared to $4 million for the March
1996 quarter. Equity income from Arch for the six months ended
March 31, 1997, amounted to $10 million, compared to $5 million
for the same period last year. The increases in both comparisons
resulted from higher sales and production tonnage and reduced SG&A
and interest costs. The increases in sales and production tonnage
reflect increased sales commitments at Arch of Illinois and
excellent mining conditions at Arch of Kentucky.
12
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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FINANCIAL POSITION
LIQUIDITY
Ashland's financial position has enabled it to obtain capital for
its financing needs and to maintain investment grade ratings on
its senior debt. On February 3, 1997, Moody's Investors Service
lowered the rating on Ashland's senior debt from Baa1 to Baa2, a
level equivalent to the company's BBB senior debt rating from
Standard & Poor's. Ashland has a revolving credit agreement
providing for up to $320 million in borrowings, under which no
borrowings were outstanding at March 31, 1997. At that date,
Ashland Coal also had revolving credit agreements providing for up
to $500 million in borrowings, of which $15 million was in use.
Under a shelf registration, Ashland can issue an additional $220
million in medium-term notes should future opportunities or needs
arise. Ashland and Ashland Coal also have access to various
uncommitted lines of credit and commercial paper markets, under
which short-term notes and commercial paper of $237 million were
outstanding at March 31, 1997.
Cash flows from operations, a major source of Ashland's liquidity,
amounted to $70 million for the six months ended March 31, 1997,
compared to $276 million for the six months ended March 31, 1996.
This decrease was attributed primarily to the decreased level of
earnings, including the effect of the Columbia settlement, and
increased working capital requirements.
Working capital at March 31 1997, was $545 million, compared to
$461 million at September 30, 1996, and $466 million at March 31,
1996. Liquid assets (cash, cash equivalents and accounts
receivable) amounted to 78% of current liabilities at March 31,
1997, and 76% at September 30, 1996. Ashland's working capital is
significantly affected by its use of the LIFO method of inventory
valuation, which valued inventories $470 million below their
replacement costs at March 31, 1997.
CAPITAL RESOURCES
For the six months ended March 31, 1997, property additions
amounted to $185 million, compared to $178 million for the same
period last year. Property additions (including exploration costs
and geophysical expenses) and cash dividends for the remainder of
fiscal 1997 are estimated at $334 million and $43 million,
respectively. Ashland anticipates meeting its remaining 1997
capital requirements for property additions, dividends and $26
million in contractual maturities of long-term debt from
internally generated funds.
Ashland's capital employed at March 31, 1997, consisted of debt
(51%), deferred income taxes (2%), minority interest (4%), and
common stockholders' equity (43%). Debt as a percent of capital
employed was 51% at March 31, 1997, compared to 49% at September
30, 1996. At March 31, 1997, long-term debt included $48 million
of floating-rate debt, and the interest rates on an additional
$485 million of fixed-rate debt had been converted to floating
rates through interest rate swap agreements.
ENVIRONMENTAL MATTERS
Federal, state and local laws and regulations relating to the
protection of the environment have resulted in higher operating
costs and capital investments by the industries in which Ashland
operates. Because of the continuing trends toward greater
environmental awareness and ever increasing regulations, Ashland
believes that expenditures for environmental compliance will
continue to have a significant effect on the conduct of its
businesses. Although it cannot accurately predict how such trends
will affect future operations and earnings, Ashland believes the
nature and significance of its ongoing compliance costs will be
comparable to those of its competitors in the petroleum, chemical
and extractive industries. For information on certain specific
environmental proceedings and investigations, see the "Legal
Proceedings" section of this Form 10-Q. For information regarding
environmental expenditures and reserves, see the "Miscellaneous
Governmental Regulation and Action - Environmental Protection"
section of Ashland's Form 10-K.
13
- ------------------------------------------------------------------------------
ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------
ENVIRONMENTAL MATTERS (continued)
Environmental reserves are subject to considerable uncertainties
which affect Ashland's ability to estimate its share of the
ultimate costs of required remediation efforts. Such uncertainties
involve the nature and extent of contamination at each site, the
extent of required cleanup efforts under existing environmental
regulations, widely varying costs of alternate cleanup methods,
changes in environmental regulations, the potential effect of
continuing improvements in remediation technology, and the number
and financial strength of other potentially responsible parties at
multiparty sites. As a result, charges to income for environmental
liabilities could have a material effect on results of operations
in a particular quarter or fiscal year as assessments and
remediation efforts proceed or as new remediation sites are
identified. However, such charges are not expected to have a
material adverse effect on Ashland's consolidated financial
position, cash flow or liquidity.
During 1996, the U.S. Environmental Protection Agency (EPA)
notified Ashland that its three refineries would be subject to a
comprehensive inspection of compliance with federal environmental
laws and regulations. The third and final inspection was completed
during the quarter ended December 31, 1996. Such inspections could
result in sanctions, monetary penalties and further remedial
expenditures.
Also during 1996, Ashland arranged for an independent review of
environmental compliance at its three refineries by an outside
consulting firm, self-reported to the EPA a number of issues of
non-compliance with applicable laws or regulations, and commenced
a program to address these matters. Ashland is not in a position
to determine what actions, if any, may be instituted and is
similarly uncertain at this time what additional remedial actions
may be required or costs incurred. However, this matter is not
expected to have a material adverse effect on Ashland's
consolidated financial position.
PROFITABILITY IMPROVEMENT PLAN
Following is an update of the progress under certain steps in
Ashland's profitability improvement plan announced on December 9, 1996.
o REDUCING CAPITAL EXPENDITURES FOR REFINING. These are being
limited to $100 million for fiscal 1997, below projected
depreciation, and totaled $43 million for the first six
months.
o AGGRESSIVELY REVIEWING OPTIONS FOR STRATEGIC ALLIANCES FOR
ASHLAND'S REFINING AND MARKETING OPERATIONS. On May 15, 1997,
Ashland and USX Corporation announced the signing of a Letter
of Intent between Ashland and USX's Marathon group to pursue
a combination of the major elements of Marathon and Ashland's
refining, marketing and transportation operations. Under the
terms of the Letter of Intent, Marathon will have a 62
percent ownership interest, and Ashland will have a 38
percent ownership interest, in the new limited liability
joint venture company, which has not yet been named.
Exploration, production and chemical businesses are not to be
a part of the new company's assets. Also excluded from the
transaction are Ashland's Valvoline and APAC road
construction divisions. Certain equity investments of both
companies are also excluded. Ashland's refinery-produced
petrochemicals will be a part of the new company. It is
anticipated that the new company will not assume debt of
either Marathon or Ashland. The transaction is subject to the
negotiation and execution of definitive documents and a
closing of the transaction is targeted for calendar year-end.
The anticipated combination requires the approval of the
Boards of Directors of Ashland, Marathon and USX and of
certain governmental agencies, as well as the satisfactory
conclusion of due diligence by the parties. See Exhibit 99 -
Press Release dated May 15, 1997.
o EVALUATING STRATEGIC ALTERNATIVES FOR ASHLAND'S EXPLORATION
DIVISION. As previously announced, Ashland has filed a
registration statement for a proposed initial public offering
(IPO) of these operations, now known as Blazer Energy Corp.
The IPO is a viable option, but Ashland is also evaluating
other alternatives, including an outright sale, in an effort
to produce the best value for its shareholders.
14
- ------------------------------------------------------------------------------
ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------
PROFITABILITY IMPROVEMENT PLAN (continued)
o INCREASING CAPITAL EMPLOYED IN ASHLAND CHEMICAL, THE APAC
HIGHWAY CONSTRUCTION GROUP AND VALVOLINE. Ashland has
invested $43 million in seven acquisitions in Ashland
Chemical during the first six months of the year. These
acquisitions help expand Ashland's distribution and specialty
chemical businesses in the United States and also broaden
their growing global presence.
o IMPLEMENTING A COMMON STOCK REPURCHASE PROGRAM. In December,
Ashland's board approved a plan to repurchase up to one
million shares of Ashland common stock annually to offset
dilution due to company benefit programs. No purchases have
occurred to date under this program.
In another major development, on April 4, 1997, Ashland Coal, Inc.
and Arch Mineral Corporation jointly announced the execution of a
definitive agreement to merge their companies into a publicly
traded company to be known as Arch Coal, Inc. The merger will
create the sixth largest coal company in the United States by
sales tons. Ashland currently owns 57% of Ashland Coal and 50% of
Arch Mineral and will own about 54% of Arch Coal. Following the
completion of the transaction, which is expected to occur on or
about June 30, 1997, Arch Coal will be consolidated in Ashland's
financial statements.
In March 1997, Ashland called the outstanding shares of its $3.125
Cumulative Convertible Preferred Stock. There were 6 million
shares in the series, each convertible into 1.546 shares of
Ashland Common Stock, plus cash for fractional shares. Almost 99%
of the series was submitted for conversion to common stock by the
March 31 deadline. The remaining shares were redeemed at a price
of $51.88 per share plus 19.1 cents per share of accrued and
unpaid dividends. The conversions further strengthen Ashland's
balance sheet and, based on current common dividend payments,
should provide annual cash savings of about $8.5 million.
FORWARD LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. Although Ashland
believes that its expectations are based on reasonable
assumptions, it cannot assure that the expectations contained in
such statements will be achieved. Important factors which could
cause actual results to differ materially from those contained in
such statements are discussed in Note A to the Consolidated
Financial Statements under risks and uncertainties in Ashland's
Annual Report for the fiscal year ended September 30, 1996. Other
factors and risks affecting Ashland's revenues and operations are
contained in Ashland's Form 10-K for the fiscal year ended
September 30, 1996, which is on file with the Securities and
Exchange Commission.
15
PART II - OTHER INFORMATION
- ---------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
Environmental Proceedings - (1) As of March 31, 1997, Ashland was subject
to 78 notices received from the USEPA and similar state agencies
identifying Ashland as a "potentially responsible party" ("PRP") under
Superfund or similar state laws for potential joint and several liability
for cleanup costs in connection with alleged releases of hazardous
substances from various waste treatment or disposal sites. These sites are
currently subject to ongoing investigation and remedial activities,
overseen by the USEPA or a state agency in accordance with procedures
established under regulations, in which Ashland may be participating as a
member of various PRP groups. Generally, the type of relief sought includes
remediation of contaminated soil and/or groundwater, reimbursement for the
costs of site cleanup or oversight expended, and/or long-term monitoring of
environmental conditions at the sites. Ashland carefully monitors the
investigatory and remedial activity at many of these sites. Based on its
experience with site remediation, its familiarity with current
environmental laws and regulations, its analysis of the specific hazardous
substances at issue, the existence of other financially viable PRPs and its
current estimates of investigatory, clean-up and monitoring costs at each
site, Ashland believes that its liability at these sites, either
individually or in the aggregate, after taking into account established
reserves, will not have a material adverse effect on Ashland's consolidated
financial position, cash flow or liquidity, but could have a material
adverse effect on results of operations in a particular quarter or fiscal
year. Estimated costs for these matters are recognized in accordance with
generally accepted accounting principles governing probability and the
ability to reasonably estimate future costs. For additional information
regarding Superfund, see "Miscellaneous - Governmental Regulation and
Action-Environmental Protection."
(2) On March 19, 1996, after consultation with the USEPA, the Kentucky
Division for Air Quality issued a finding that Ashland had not demonstrated
compliance with certain air regulations regarding volatile organic
compounds at its Catlettsburg, Kentucky refinery, and referred the matter
to USEPA - Region IV for formal enforcement action. Ashland filed a
petition requesting a hearing before a Kentucky administrative hearing
officer on the merits of the matter. The hearing is scheduled for July
1997. Separately, the USEPA issued a Notice of Violation to Ashland
regarding this matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
99 Press Release dated May 15, 1997
(b) Reports on Form 8-K
None
16
SIGNATURES
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 thereunto duly authorized.
Ashland Inc.
(Registrant)
Date May 15, 1997 /s/ Kenneth L. Aulen
-------------------------------------------
Administrative Vice President and Controller
(Chief Accounting Officer)
Date May 15, 1997 /s/ Thomas L. Feazell
-------------------------------------------
Senior Vice President,
General Counsel and Secretary
5
NEWS FROM ASHLAND
FOR FURTHER INFORMATION:
USX Ashland Inc.
William E. Kesler Dan Lacy
(412) 433-6870 (606) 329-3148
FOR IMMEDIATE RELEASE
May 15, 1997
USX-Marathon Group
and Ashland Inc.
Pursue New Venture
Pittsburgh, Pa. -- USX Corporation and Ashland Inc. today announced the
signing of a letter of intent to pursue a combination of the major elements
of USX's Marathon Group and Ashland's refining, marketing and
transportation operations. Under its terms, USX-Marathon will have a 62
percent ownership, and Ashland will have a 38 percent ownership in a joint
venture which is expected to be formed following regulatory reviews and
execution of definitive agreements and approval by the boards of USX and
Ashland.
In making this announcement, USX Chairman Thomas J. Usher said,
"The goal of this joint venture is to create a competitive enterprise which
capitalizes on the strengths and complementary assets of both companies.
Market conditions have dictated that new approaches be explored to improve
performance and growth opportunities. Our collective focus will be to build
upon the strengths of each company to further improve our competitiveness
and return to our shareholders."
Ashland Chairman and CEO Paul W. Chellgren added, "The petroleum
refining and marketing industry in the United States is undergoing a rapid
transformation based on the need to improve profitability, create new
efficiencies and better serve customers and shareholders. The combination
of Ashland's and Marathon's refining and marketing business will create a
stronger, more efficient company with greater prospects for long-term job
creation and better ability to provide enhanced shareholder and customer
value."
Marathon and Ashland have agreed that exploration, production and
chemical businesses are not to be a part of the new venture. Other
exclusions include Ashland's Valvoline division, along with equity
investments in certain pipelines for both companies. Ashland's
refinery-produced petrochemicals will become part of the joint venture.
The joint venture's headquarters will be located in Findlay, Ohio,
and J. L. "Corky" Frank, currently Marathon's executive vice president,
refining, marketing and transportation, will be named president of the yet
unnamed entity. Ashland's Duane Gilliam, currently Ashland Petroleum
executive vice president, will be appointed as executive vice president for
the joint venture. Current plans are to maintain the existing brand
identification for each company. Marathon markets under the Marathon brand
name and through its Emro marketing company brands: Speedway, Bonded,
Starvin' Marvin, United, Gastown, Wake Up and Kwik Sak. Ashland brands
include Ashland, SuperAmerica and Rich Oil. Future decisions on brand
identification or consolidation may be undertaken by the new company.
Usher and Chellgren emphasized that prospective synergies will be
defined over the next several months. It is expected that the joint venture
will be able to achieve substantial benefits largely by pursuing
operational efficiencies and integrating the strengths of their business
processes, management systems and administrative support functions. These
efficiencies are not premised on the closure of major operating facilities;
however, future decisions in this regard will be governed by business
conditions and the needs of the joint venture consistent with the
achievement of its business plan. The principal aim of the joint venture is
to develop the most efficient and competitive organization for the new
company with consideration for the communities in which it operates. As the
new company structure is formed, there will likely be workforce reductions
and job reassignments, but the long term growth potential of this combined
entity could provide future employment opportunities. Chellgren and Usher
added, "Combining the strengths of our supply, distribution and marketing
systems and capitalizing on our mutual experience will serve our
stockholders well in the long run."
Marathon Oil Company is part of the USX-Marathon Group (NYSE:MRO),
a unit of USX Corporation. Ashland Inc. (NYSE:ASH) is a large energy and
chemical company engaged in petroleum refining and marketing; coal; highway
construction; and oil and gas exploration and production.
This press release contains forward-looking statements concerning
the future benefits which may be realized from a combination of the
Marathon and Ashland refining, marketing and transportation operations. The
realization of these benefits is dependent upon the execution of a
definitive agreement; receipt of government approvals; the success with
which the integration of the operations, management systems and business
processes is accomplished; and the business conditions prevailing in the
markets to be served by the combined operations. In accordance with the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, USX has included in Form 10-Q for the period ended March 31, 1997,
and Ashland Inc. has included in its Annual Report and Form 10-K for the
fiscal year ended September 30, 1996, meaningful cautionary statements
identifying important factors, but not necessarily all factors, that could
cause actual results to differ materially from those set forth in the
forward-looking statements.
For more information on Marathon, see its website at www.marathon.com or
www.usx.com For more information on Ashland, see its website at
www.ashland.com
Marathon/Ashland Fact Sheet
May 15, 1997
TOTAL ASSETS OF PROPOSED COMPANY
FACT SHEET
MARATHON FACTS ASHLAND FACTS FACTS ON
PROPOSED COMPANY
- ---------------------------------------- -------------------------------------- -----------------------------------------
HEADQUARTERS HEADQUARTERS HEADQUARTERS
- ---------------------------------------- -------------------------------------- -----------------------------------------
Marathon Oil Company Ashland Petroleum Company JOINT VENTURE
P.O. Box 3128 P.O. Box 391 (To be named)
Houston, TX 77253-3128 Ashland, KY 41114 Findlay, Ohio
(713) 629-6600 Phone (606) 329-3333 Phone
(713) 871-0728 FAX (606) 329-4795 FAX MANAGEMENT:
J. L. Corky Frank, President
Duane Gilliam, Executive Vice President
- ---------------------------------------- -------------------------------------- -----------------------------------------
MARATHON REFINERIES (4) ASHLAND REFINERIES (3) PROPOSED COMPANY REFINERIES (7)
- ---------------------------------------- -------------------------------------- -----------------------------------------
Garyville, La. Garyville, La.
Capacity: 255,000 bpd Capacity: 255,000 bpd
Catlettsburg, Ky. Catlettsburg, Kentucky
Capacity: 220,000 bpd Capacity: 220,000 bpd
Robinson, Ill. Robinson, Ill.
Capacity: 180,000 bpd Capacity: 180,000 bpd
St. Paul Park, Minn. St. Paul Park, Minn.
Capacity: 70,000 bpd Capacity: 70,000 bpd
Texas City, Texas Texas City, Texas
Capacity: 70,000 bpd Capacity: 70,000 bpd
Canton, Ohio Canton, Ohio
Capacity: 65,000 bpd Capacity: 65,000 bpd
Detroit, Mich. Detroit, Mich.
Capacity: 70,000 bpd Capacity: 70,000 bpd
TOTAL MARATHON CAPACITY: TOTAL ASHLAND CAPACITY: TOTAL COMBINED CAPACITY:
575,000 bpd 355,000 bpd 930,000 bpd
MARATHON ASHLAND PERCENT OF U.S. CAPACITY:
Percent of U.S. Capacity: 3.7% Percent of U.S. Capacity: 2.3% 6%
Marathon/Ashland Fact Sheet
May 15, 1997
MARATHON FACTS ASHLAND FACTS FACTS ON
PROPOSED COMPANY
- ---------------------------------------- -------------------------------------- -----------------------------------------
TERMINALS TERMINALS TERMINALS
- ---------------------------------------- -------------------------------------- -----------------------------------------
51 light product and asphalt terminals 34 light product and asphalt 85 light product and asphalt terminals.
in Midwest and Southeast terminals One light product facility in Niles,
Mich., is jointly owned by both
Marathon and Ashland.
- ---------------------------------------- -------------------------------------- -----------------------------------------
RETAIL MARKETING RETAIL MARKETING RETAIL MARKETING
- ---------------------------------------- -------------------------------------- -----------------------------------------
Approximately 3,980 outlets in 17 Approximately 1,420 outlets in 11 Approximately 5,400 outlets in 20
states, including Alabama, Florida, states, including Illinois, Indiana, states, including Alabama, Florida,
Georgia, Illinois, Indiana, Kentucky, Kentucky, Minnesota, North Dakota, Georgia, Illinois, Indiana, Kentucky,
Louisiana, Michigan, Mississippi, Ohio, Pennsylvania, South Dakota, Louisiana, Michigan, Minnesota,
North Carolina, Ohio, Pennsylvania, Virginia, West Virginia and Mississippi, North Carolina, North
South Carolina, Tennessee, Virginia, Wisconsin. Dakota, Ohio, Pennsylvania, South
West Virginia and Wisconsin. Carolina, South Dakota, Tennessee,
Virginia, West Virginia and Wisconsin.
- ---------------------------------------- -------------------------------------- -----------------------------------------
PIPELINE PIPELINE PIPELINE
- ---------------------------------------- -------------------------------------- -----------------------------------------
Owns, leases or has ownership interest Owns, leases or has ownership Most of Marathon's and Ashland's
in 5,142 miles of pipeline that will interest in 5,790 miles of pipeline pipeline holdings will go to the joint
be included in this joint venture. in 13 states. This includes 2,287 venture, with some relatively minor
This includes 1,052 miles of crude oil miles of crude oil gathering lines, exclusions. Marathon's 11.1% interest
gathering lines, 1,761 miles of crude 2,987 miles of crude oil trunk in Capline and certain other equity
oil trunk lines and 2,329 miles of lines, 475 miles of product lines pipeline interests are not included.
product lines. and 41 miles of natural gas liquid Ashland's 21.6% interest in Capline,
lines. the large pipeline that transports
crude oil from St. James, La., to
Patoka, Ill., is included in the joint
venture.
