SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K/A
AMENDMENT TO CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Amendment No. 1
Amendment to Current Report on Form 8-K Dated January 1, 1998
ASHLAND INC.
(Exact name of registrant as specified in its charter)
Kentucky
(State or other jurisdiction of incorporation)
1-2918 61-0122250
(Commission File Number) (I.R.S. Employer
Identification No.)
1000 Ashland Drive, Russell, Kentucky 41169
(Address of principal executive offices) (Zip Code)
P.O. Box 391, Ashland, Kentucky 41114
(Mailing Address) (Zip Code)
Registrant's telephone number, including area code (606) 329-3333
Item 7. Financial Statements and Exhibits
(a) Audited Financial Statements of Marathon Oil Company downstream
businesses.
(b) Pro Forma Financial Information (unaudited) to reflect Ashland
Inc.'s acquisition of a 38% interest in a joint venture (Marathon Ashland
Petroleum LLC) formed to combine the major elements of Ashland Inc.'s and
Marathon Oil Company's respective petroleum supply, refining, marketing and
transportation businesses.
(c) Exhibits
23 Consent of Independent Accountants.
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: March 17, 1998
Name: Thomas L. Feazell
Title: Senior Vice President, General
Counsel and Secretary
Exhibit Index
Exhibit No.
23 Consent of Independent Accountants.
ITEM 7(a)
Report of Independent Accountants
To the Board of Directors of
Marathon Oil Company
In our opinion, the accompanying balance sheets and the related statements
of operations, of cash flows and of changes in Marathon investment present
fairly, in all material respects, the financial position of Marathon Oil
Company Downstream Businesses (a division of Marathon Oil Company) at
December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of Downstream's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Pittsburgh, PA
March 12, 1998
MARATHON OIL COMPANY DOWNSTREAM BUSINESSES
AUDITED FINANCIAL STATEMENTS
December 31, 1997
CONTENTS
FINANCIAL STATEMENTS: Page
STATEMENT OF OPERATIONS---------------------------------------------------------------------------------- 1
BALANCE SHEET-------------------------------------------------------------------------------------------- 2
STATEMENT OF CASH FLOWS---------------------------------------------------------------------------------- 3
STATEMENT OF CHANGES IN MARATHON INVESTMENT-------------------------------------------------------------- 4
NOTES TO FINANCIAL STATEMENTS:
NOTE A - BUSINESS DESCRIPTION AND BASIS OF PRESENTATION--------------------------------------------- 5
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES--------------------------------------------------- 5
NOTE C - MARATHON INVESTMENT, ALLOCATIONS AND RELATED PARTY TRANSACTIONS---------------------------- 7
NOTE D - EMPLOYEE BENEFIT PLANS--------------------------------------------------------------------- 7
NOTE E - REVENUES----------------------------------------------------------------------------------- 8
NOTE F - NET INTEREST AND OTHER FINANCIAL COSTS----------------------------------------------------- 8
NOTE G - INCOME TAXES------------------------------------------------------------------------------- 9
NOTE H - INVENTORIES-------------------------------------------------------------------------------- 10
NOTE I - INVESTMENTS AND LONG-TERM RECEIVABLES------------------------------------------------------ 11
NOTE J - SALES OF RECEIVABLES----------------------------------------------------------------------- 12
NOTE K - PROPERTY, PLANT AND EQUIPMENT-------------------------------------------------------------- 12
NOTE L - LONG-TERM DEBT----------------------------------------------------------------------------- 13
NOTE M - SUPPLEMENTAL CASH FLOW INFORMATION--------------------------------------------------------- 13
NOTE N - LEASES------------------------------------------------------------------------------------- 14
NOTE O - DERIVATIVE INSTRUMENTS--------------------------------------------------------------------- 15
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS-------------------------------------------------------- 16
NOTE Q - CONTINGENCIES AND COMMITMENTS-------------------------------------------------------------- 16
MARATHON OIL COMPANY DOWNSTREAM BUSINESSES
STATEMENT OF OPERATIONS (Dollars in millions)
Year Ended December 31
-----------------------------------------
1997 1996 1995
---- ---- ----
Revenues - Note E $ 13,630 $ 14,151 $ 12,074
---------- --------- ---------
Costs and expenses:
Cost of sales (excludes items shown below) 9,899 10,726 8,642
Selling, general and administrative expenses 247 216 199
Depreciation and amortization 173 173 178
Taxes other than income taxes 2,809 2,838 2,792
Inventory market valuation charges (credits) - Note H 283 (209) (70)
---------- ---------- ----------
Total costs and expenses 13,411 13,744 11,741
---------- --------- ---------
Income from operations 219 407 333
Net interest and other financial costs - Note F 45 41 36
---------- --------- ---------
Income before income taxes 174 366 297
Provision for estimated income taxes - Note G 59 133 107
---------- --------- ---------
Net income $ 115 $ 233 $ 190
========== ========= =========
The accompanying notes are an integral part of these financial statements.
1
MARATHON OIL COMPANY DOWNSTREAM BUSINESSES
BALANCE SHEET (Dollars in millions)
December 31
-------------------------
1997 1996
---- ----
Assets
Current assets:
Cash and cash equivalents $ 23 $ 30
Receivables, less allowance for doubtful accounts of
$2 and $2 - Note J 574 159
Inventories - Note H 939 1,242
Related party investments - Note C - 287
Other current assets 6 10
--------- ----------
Total current assets 1,542 1,728
Investments and long-term receivables - Note I 82 65
Property, plant and equipment - net - Note K 1,744 1,726
Other noncurrent assets 19 14
--------- ----------
Total assets $ 3,387 $ 3,533
========= ==========
Liabilities
Current liabilities:
Accounts payable $ 847 $ 943
Payroll and benefits payable 35 23
Accrued taxes 25 28
Deferred income taxes - Note G 175 285
Long-term debt due within one year - Note L 4 44
--------- ----------
Total current liabilities 1,086 1,323
Long-term debt - Note L 34 29
Long-term notes payable to related party - Note C 69 327
Long-term deferred income taxes - Note G 222 201
Employee benefits - Note D 26 25
Deferred credits and other liabilities 61 45
--------- ----------
Total liabilities 1,498 1,950
Marathon investment 1,889 1,583
--------- ----------
Total liabilities and Marathon investment $ 3,387 $ 3,533
========= ==========
The accompanying notes are an integral part of these financial statements.
2
MARATHON OIL COMPANY DOWNSTREAM BUSINESSES
STATEMENT OF CASH FLOWS (Dollars in millions)
Year Ended December 31
-----------------------------------------
1997 1996 1995
---- ---- ----
Decrease in cash and cash equivalents
Operating activities:
Net income $ 115 $ 233 $ 190
Adjustments to reconcile to net cash provided
from operating activities:
Depreciation and amortization 173 173 178
Inventory market valuation charge (credits) 283 (209) (70)
Deferred income taxes (88) 70 40
Gain on disposal of assets (12) (9) (6)
Changes in:
Current receivables - third party sales agreement terminated - Note J - - (319)
- sold to affiliates - Note J (489) 135 354
- operating turnover 74 (65) (99)
Inventories 20 60 49
Current accounts payable and accrued expenses (87) 86 75
All other - net (2) (20) (39)
----------- ---------- ----------
Net cash (used in) provided from operating activities (13) 454 353
----------- --------- ----------
Investing activities:
Capital expenditures (198) (230) (174)
Disposal of assets 19 15 14
Investments in equity affiliates - (3) -
---------- ---------- ----------
Net cash used in investing activities (179) (218) (160)
----------- ---------- ----------
Financing activities:
Debt - additions 10 - -
- repayments (45) (5) (4)
Investment in related party preferred stock 287 (103) (73)
Net change in Marathon advances 191 (196) (188)
Notes payable to related party (258) 55 72
----------- ---------- ----------
Net cash provided from (used in) financing activities 185 (249) (193)
----------- ---------- ----------
Net decrease in cash and cash equivalents (7) (13) -
Cash and cash equivalents at beginning of year 30 43 43
---------- --------- ----------
Cash and cash equivalents at end of year $ 23 $ 30 $ 43
========== ========= ==========
See Note M for supplemental cash flow information.
The accompanying notes are an integral part of these financial statements.
3
MARATHON OIL COMPANY DOWNSTREAM BUSINESSES
STATEMENT OF CHANGES IN MARATHON INVESTMENT (Dollars in millions)
Marathon investment at December 31, 1994 $ 1,544
Net income for the year ended December 31, 1995 190
Net change in Marathon advances (188)
------------
Marathon investment at December 31, 1995 1,546
Net income for the year ended December 31, 1996 233
Net change in Marathon advances (196)
------------
Marathon investment at December 31, 1996 1,583
Net income for the year ended December 31, 1997 115
Net change in Marathon advances 191
-----------
Marathon investment at December 31, 1997 $ 1,889
============
The accompanying notes are an integral part of these financial statements.
4
MARATHON OIL COMPANY DOWNSTREAM BUSINESSES
NOTES TO FINANCIAL STATEMENTS
NOTE A - BUSINESS DESCRIPTION AND BASIS OF PRESENTATION
On December 12, 1997, Marathon Oil Company (Marathon), a wholly owned
subsidiary of USX Corporation (Parent), entered into an asset transfer and
contribution agreement with Ashland Inc. (Ashland) providing for the
formation of Marathon Ashland Petroleum LLC (MAP). Effective January 1,
1998, Marathon contributed substantially all of its refining, marketing and
transportation operations and certain petroleum supply operations
comprising the downstream business (collectively, "Downstream") to MAP.
Downstream operated as a business division of Marathon. Marathon has a 62%
ownership interest in MAP.
Downstream's contributed assets included four operating refineries, 1,544
service stations operated by Emro Marketing Company, 306 Marathon branded
retail outlets primarily operated by dealers, 51 product terminals and
5,586 miles of owned, leased and partially owned pipelines. Downstream
markets refined products through the Marathon brand and its Emro Marketing
Company brands, which include Speedway, Bonded, Cheker, Starvin' Marvin,
United, Gastown, Wake-Up, and Kwik-Sak. Downstream contributed agreements
to supply petroleum products to 2,159 Marathon branded retail outlets
operated by independent dealers and jobbers.
The accompanying financial statements pertain to the business which was
contributed to MAP, and represent a carve-out financial statement
presentation of Marathon's downstream operations. The financial statements
include allocations and estimates of direct and indirect Marathon corporate
administrative costs attributable to Downstream. The methods by which such
amounts are attributed or allocated are deemed reasonable by management.
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
Principles applied in consolidation - Investments in undivided interest
pipelines are consolidated on a pro rata basis. Investments in other
entities over which Downstream has significant influence are accounted for
using the equity method of accounting and are carried at Downstream's share
of net assets plus advances. The proportionate share of income from these
equity method investments is included in revenues.
Use of estimates - Generally accepted accounting principles require
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at year-end and the reported amounts of revenues and expenses
during the year.
Cash and cash equivalents - Cash and cash equivalents include cash on hand
and on deposit, and highly liquid debt instruments with maturities
generally of three months or less.
Inventories - Inventories are carried at lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
Long-lived assets - Property, plant and equipment are depreciated
principally by the straight-line method. When property or major facility
depreciated on an individual basis is sold or otherwise disposed of, any
gain or loss is reflected in income. Proceeds from disposal of other
facilities depreciated on a group basis are credited to the depreciation
reserve with no immediate effect on income. Expenditures for maintenance
and repairs, including those for refinery turnarounds, are expensed.
Downstream evaluates impairment of its assets individually or by logical
groupings. Assets deemed to be impaired are written down to their fair
value, including any related goodwill, using discounted future cash flows
and if available, comparable market value analyses.
5
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - Continued
Derivative instruments - Downstream engages in commodity risk management
activities within the normal course of its business as an end-user of
derivative instruments (see Note O). Management is authorized to manage
exposure to price fluctuations related to the purchase and sale of crude
oil and refined products through the use of a variety of derivative
financial and nonfinancial instruments. Derivative financial instruments
require settlement in cash and include such instruments as over-the-counter
(OTC) commodity swap agreements and OTC commodity options. Derivative
nonfinancial instruments require or permit settlement by delivery of
commodities and include exchange-traded commodity futures contracts and
options. At times, derivative positions are closed prior to maturity,
simultaneous with the underlying physical transaction, and the effects are
recognized in income accordingly. Downstream's practice does not permit
derivative positions to remain open if the underlying physical market risk
has been removed. Changes in the market value of derivative instruments are
deferred, including both closed and open positions, and are subsequently
recognized in income, as sales or cost of sales, in the same period as the
underlying transaction. The effect of changes in the market indices related
to OTC swaps are recorded and recognized in income with the underlying
transaction. Premiums on all commodity-based option contracts are initially
recorded based on the amount paid or received; the options' market value is
subsequently recorded as a receivable or payable, as appropriate. The
margin receivable accounts required for open commodity contracts reflect
changes in the market prices of the underlying commodity and are settled on
a daily basis.
Recorded deferred gains or losses are reflected within other noncurrent
assets or deferred credits and other liabilities. Cash flows from the use
of derivative instruments are reported in the same category as the hedged
item in the statement of cash flows.
Environmental Remediation - Downstream provides for remediation costs and
penalties when the responsibility to remediate is probable and the amount
of associated costs is reasonably determinable. Prior to January 1, 1997,
the timing of remediation accruals generally coincided with completion of a
feasibility study or commitment to a formal plan of action. Remediation
liabilities are accrued based on estimates of known environmental exposure
and are discounted in certain instances. If recoveries of remediation costs
from third parties are probable, a receivable is recorded.
Effective January 1, 1997, the Parent adopted American Institute of
Certified Public Accountants Statement of Position No. 96-1, "Environmental
Remediation Liabilities" (SOP 96-1), which provides additional
interpretation of existing accounting standards related to recognition,
measurement and disclosure of environmental remediation liabilities. As a
result of adopting SOP 96-1, Downstream identified additional environmental
remediation liabilities of $11 million. Estimated receivables for
recoverable costs related to adoption of SOP 96-1 were $4 million. The net
unfavorable effect on Downstream's 1997 income from operations at January
1, 1997 was $7 million.
Insurance - Downstream is insured for catastrophic casualty and certain
property exposures, as well as those risks required to be insured by law or
contract. Costs resulting from noninsured losses are charged against income
upon occurrence.
Income taxes - Historically, Downstream's results were included in the
consolidated federal income tax return filed by the Parent. The income tax
provision for each period presented represents the current and deferred
income taxes that would have resulted if Downstream's operations were a
stand-alone taxable entity filing its own income tax returns. Accordingly,
the calculation of tax provisions and deferred taxes necessarily require
certain assumptions, allocations and estimates which management believes
are reasonable to reflect the tax reporting for Downstream as a stand-alone
taxpayer.
Stock-based compensation - During 1996, the Parent adopted Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation," for disclosure only, and elected to continue to follow the
accounting provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."
6
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE C - MARATHON INVESTMENT, ALLOCATIONS AND RELATED PARTY TRANSACTIONS
For purposes of these separate financial statements, payables and
receivables related to transactions between Downstream and Marathon, as
well as liabilities and refunds related to income taxes, are included as a
component of the Marathon investment.
Downstream purchased crude oil from Marathon at transfer prices that were
intended to reflect market prices, in the amounts of $578 million, $735
million and $624 million for the years ended December 31, 1997, 1996, and
1995, respectively. Downstream sales to the Parent and its wholly owned
subsidiaries for the years ended December 31, 1997, 1996, and 1995, were
not material. Marathon provided Downstream with certain services including
data processing, legal and financial services, other corporate functions
and office space. Charges for these services were allocated based on usage
or other methods that management believed to be reasonable and amounted to
$113 million, $105 million, and $96 million for the years ended December
31, 1997, 1996, and 1995, respectively. The Parent uses a centralized cash
management system under which cash receipts of Downstream were remitted to
the Parent and cash disbursements of Downstream were funded by the Parent.
USX Portfolio Delaware, Inc. (PFD), a wholly owned subsidiary of the
Parent, has extended borrowing facilities to Downstream at interest rates
based on a market based calculation. Borrowings outstanding at December 31,
1997 and 1996 were $69 million and $327 million, respectively. The average
rate on the PFD variable rate notes during 1997 was 6.5%. Downstream
invests in redeemable preferred stock of PFD. Dividends on the preferred
stock are declared and settled daily in either additional shares of PFD
preferred stock or cash. The preferred stock is redeemable by PFD at $2,000
per share, and any stockholder may require PFD to redeem all or part of its
stock. Downstream investments in redeemable preferred stock of PFD at
December 31, 1997 and 1996 were $0 and $287 million, respectively.
NOTE D - EMPLOYEE BENEFIT PLANS
Marathon has noncontributory defined benefit pension plans covering
substantially all employees of Downstream. Benefits under these plans are
based primarily upon years of service and career earnings. The funding
policy for all plans provides that payments to the pension trusts shall be
equal to the minimum funding requirements of the Employee Retirement and
Income Security Act, plus such additional amounts as may be approved. For
the purposes of these separate financial statements, Downstream, with the
exception of Emro Marketing Company, is considered to be participating in
multiemployer benefit plans. No charges have been allocated to Downstream
for the Marathon defined benefit pension plans for the years ended December
31, 1997, 1996, and 1995, as the plans are in an overfunded position.
Emro Marketing Company has a noncontributory defined benefit pension plan
covering substantially all of the retail marketing employees. Benefits
under this plan are based primarily on years of service and career
earnings. The net pension cost was $6 million, $6 million, and $4 million
for the years ended December 31, 1997, 1996, and 1995, respectively. The
net pension liability included in the balance sheet was $11 million at
December 31, 1997 and 1996.
Marathon also has defined benefit retiree health insurance plan covering
most employees upon their retirement. Health benefits are primarily
provided through comprehensive hospital, surgical and major medical benefit
provisions subject to various cost sharing features. For the purposes of
these separate financial statements, Downstream, with the exception of the
marketing business, is considered to be participating in multiemployer
benefit plans. Downstream's allocated share of employee benefit expenses
was $12 million, $14 million, and $13 million for the years ended December
31, 1997, 1996, and 1995, respectively.
Certain Downstream management employees participate in the Parent's
stock-based compensation program. For 1997, 1996 and 1995, Downstream
recorded allocated compensation expenses of $6 million, $2 million, and $1
million, respectively.
7
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE E - REVENUES
The items below are included in revenues and costs and expenses, with no
effect on income.
1997 1996 1995
---- ---- ----
(Millions)
Consumer excise taxes on petroleum products and merchandise $ 2,736 $ 2,768 $ 2,708
Matching crude oil and refined product buy/sell transactions
settled in cash 2,322 2,746 1,926
NOTE F - NET INTEREST AND OTHER FINANCIAL COSTS
1997 1996 1995
---- ---- ----
(Millions)
Interest and other financial income:
PFD dividend income $ 15 $ 11 $ 7
---------- --------- ---------
Interest and other financial costs:
Interest on PFD notes $ 24 $ 18 $ 13
Expenses on sales of accounts receivable (See Note J) 32 29 23
Other 4 5 7
----------- ---------- ---------
Total 60 52 43
----------- ---------- ---------
Net interest and other financial costs $ 45 $ 41 $ 36
========== ========= =========
8
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE G - INCOME TAXES
Income tax provisions and related assets and liabilities are determined on
a stand-alone basis (see Note B).
Provisions (credits) for estimated income taxes:
1997 1996 1995
-------------------------------- ------------------------------ --------------------------------
Current Deferred Total Current Deferred Total Current Deferred Total
------- -------- ----- ------- -------- ----- ------- -------- -----
(Millions) (Millions) (Millions)
Federal $ 132 $ (77) $ 55 $ 59 $ 61 $ 120 $ 62 $ 37 $ 99
State and local 15 (11) 4 4 9 13 5 3 8
-------- ------- ------ ------- -------- -------- -------- -------- --------
Total $ 147 $ (88) $ 59 $ 63 $ 70 $ 133 $ 67 $ 40 $ 107
======== ======= ====== ======= ======== ======== ======== ======== ========
A reconciliation of federal statutory tax rate (35%) to total provisions
follows:
1997 1996 1995
---- ---- ----
(Millions)
Statutory rate applied to income before income taxes $ 61 $ 128 $ 104
Effects of partially owned companies (5) (4) (3)
State and local income taxes after federal income tax benefit 3 9 5
Other - - 1
---------- --------- ----------
Total provisions $ 59 $ 133 $ 107
========== ========= ==========
Deferred tax assets and liabilities resulted from the following:
December 31
-----------------------
1997 1996
---- ----
(Millions)
Deferred tax assets:
Minimum tax credit carryforwards $ - $ 14
Expected federal benefit for deducting state
deferred income taxes 11 14
Employee benefits 20 19
Other 27 20
--------- ----------
Total deferred tax assets 58 67
--------- ----------
Deferred tax liabilities:
Property, plant and equipment 231 222
Inventory 203 314
Other 21 17
--------- ----------
Total deferred tax liabilities 455 553
--------- ----------
Net deferred tax liabilities $ 397 $ 486
========= ==========
9
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE H - INVENTORIES
Inventories consist of the following:
December 31
------------------------
1997 1996
---- ----
(Millions)
Crude oil and natural gas liquids $ 443 $ 455
Refined products and merchandise 733 743
Supplies and sundry items 46 44
--------- ----------
Total (at cost) 1,222 1,242
Less inventory market valuation reserve 283 -
--------- ----------
Net inventory carrying value $ 939 $ 1,242
========= ==========
Inventories of crude oil and refined products are valued by the LIFO
method. The LIFO method accounted for 94% and 96% of total inventory at
December 31, 1997 and December 31, 1996, respectively.
The inventory market valuation reserve reflects the extent that the
recorded LIFO cost basis of crude oil and refined products inventories
exceeds net realizable value. The reserve is decreased to reflect increases
in market prices and inventory turnover and increased to reflect decreases
in market prices. Changes in the inventory market valuation reserve result
in noncash charges or credits to costs and expenses.
10
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE I - INVESTMENTS AND LONG-TERM RECEIVABLES
December 31
------------------------
1997 1996
---- ----
(Millions)
Equity method investments $ 34 $ 34
Receivables due after one year 48 31
--------- ---------
Total $ 82 $ 65
========= ==========
The following represents summarized financial information of affiliates
accounted for by the equity method of accounting:
1997 1996 1995
---- ---- ----
(Millions)
Income data:
Revenues $ 126 $ 118 $ 115
Operating income 42 39 32
Net income 11 26 2
December 31
------------------------
1997 1996
---- ----
(Millions)
Balance sheet data:
Current assets $ 23 $ 18
Noncurrent assets 583 612
Current liabilities 70 81
Noncurrent liabilities 435 459
Downstream purchases from equity affiliates totaled $30 million, $34
million and $35 million in 1997, 1996 and 1995, respectively. Downstream
sales to equity affiliates were not material.
11
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE J - SALES OF RECEIVABLES
Downstream participated in an agreement (the program) to sell to the Parent
an undivided interest in certain accounts receivable. At December 31, 1997,
the amount sold under the program that had not been collected was zero,
since the program was terminated in December 1997. The amount sold under
the program averaged $412 million in 1997, $424 million in 1996 and $363
million in 1995.
NOTE K - PROPERTY, PLANT AND EQUIPMENT
December 31
------------------------
1997 1996
---- ----
(Millions)
Refining $ 1,455 $ 1,386
Marketing 1,292 1,203
Transportation 550 544
------------ ----------
Total 3,297 3,133
Less accumulated depreciation and amortization 1,553 1,407
------------ ----------
Net $ 1,744 $ 1,726
============ ==========
Property, plant and equipment includes gross assets acquired under capital
leases of $24 million at December 31, 1997 and 1996; the related amounts
for the years 1997 and 1996 in accumulated depreciation and amortization
were $24 million.
12
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE L - LONG-TERM DEBT
December 31
-----------------------
1997 1996
---- ----
(Millions)
7.35% mortgage note for asset acquisition, due 1997 $ - $ 40
7.75% debt issued for asset acquisition, due 1998 4 9
Other due 2000, various rates 10 -
Capitalized lease obligations (guaranteed by Parent) 24 24
--------- ---------
Total 38 73
Less amount due within one year 4 44
--------- ---------
Long-term debt due after one year $ 34 $ 29
========= =========
NOTE M - SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended December 31
----------------------------------------
1997 1996 1995
---- ---- ----
Cash used in operating activities includes:
Interest and other financial costs paid (net of amounts capitalized), $ (50) $ (51) $ (43)
including amounts paid to PFD
Income taxes paid (147) (63) (67)
Noncash investing and financing activities:
Dividend income from PFD received in redeemable
preferred stock of PFD $ 15 $ 11 $ 7
13
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE N - LEASES
Future minimum commitments for capital leases and for operating leases
having remaining noncancelable lease terms in excess of one year are as
follows:
Capital Operating
Leases Leases
-------- ----------
(Millions)
1998 $ 2 $ 29
1999 2 23
2000 2 23
2001 2 17
2002 2 14
Later years 27 61
------- --------
Total minimum lease payments $ 37 $ 167
========
Less imputed interest costs 13
-------
Present value of net minimum lease payments
included in long-term debt $ 24
=======
Operating lease rental expense:
1997 1996 1995
---- ---- ----
(Millions)
Minimum rental $ 42 $ 39 $ 39
Contingent rental 10 10 10
Sublease rentals (1) (1) (1)
----------- --------- ---------
Net rental expense $ 51 $ 48 $ 48
========== ========= =========
Downstream leases a wide variety of facilities and equipment under
operating leases, including land and building space, office equipment, and
transportation equipment. Most long-term leases include renewal options
and, in certain leases, purchase options.
14
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE O - DERIVATIVE INSTRUMENTS
Downstream uses commodity-based derivative instruments to manage exposure
to price fluctuations related to the anticipated purchase and sale of crude
oil and refined products. The derivative instruments used, as part of an
overall risk management program, include exchange-traded futures contracts
and options, and instruments which require settlement in cash such as OTC
commodity swaps and options. While risk management activities generally
reduce market risk exposure due to unfavorable commodity price changes for
raw material purchases and products sold, such activities can also
encompass strategies which assume certain price risk in isolated
transactions.
Downstream remains at risk for possible changes in the market value of the
derivative instrument; however, such risk should be mitigated by price
changes in the underlying hedged items. Downstream is also exposed to
credit risk in the event of nonperformance by counterparties. The credit
worthiness of counterparties is subject to continuing review, including the
use of master netting agreements to the extent practical, and full
performance is anticipated.
The following table sets forth quantitative information by class of
derivative instruments:
Fair Carrying Recorded
Value Amount Deferred Aggregate
Assets Assets Gain or Contract
(In millions) (Liabilities)(a) (Liabilities) (Loss) Values(b)
- --------------------------------------------------------------------------------------------------------------------------------
December 31, 1997:
Exchange-traded commodity futures $ - $ - $ - $ 25
Exchange-traded commodity options 1 (c) 1 2 128
OTC commodity swaps (d) - - - 1
OTC commodity options - - - -
--------- --------- --------- -------
Total commodity derivatives $ 1 $ 1 $ 2 $ 154
========= ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------------
December 31, 1996:
Exchange-traded commodity futures $ - $ - $ (1) $ 35
Exchange-traded commodity options (1) (c) (1) (2) 251
OTC commodity swaps (d) (1) - - 19
OTC commodity options - - (1) 8
----------- ----------- --------- ---------
Total commodity derivatives $ (2) $ (1) $ (4) $ 313
========= ========= ========== ========
- -------------------------------------------------------------------------------------------------------------------------------
(a) The fair value amounts for OTC positions are based on various
indices or dealer quotes. The exchange-traded futures contracts and
certain option contracts do not have a corresponding fair value
since changes in the market prices are settled on a daily basis.
(b) Contract or notional amounts do not quantify risk exposure, but are
used in the calculation of cash settlements under the contracts. The
contract or notional amounts do not reflect the extent to which
positions may offset one another.
(c) Includes fair values as of December 31, 1997 and 1996, for assets of
$3 million and $1 million and liabilities of $(2) million and $(2)
million, respectively.
(d) The OTC swap arrangements vary in duration with certain contracts
extending into mid-1998.
15
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value of financial instruments classified as current assets or
liabilities approximates carrying value due to the short-term maturity of
the instruments. Fair value of investments and long-term receivables is
based on discounted cash flows or other specific instrument analysis and
approximates carrying value. Fair value of long-term debt instruments also
approximates carrying value due to the short-term nature of the debt which
is due in 2000. Downstream's unrecognized financial instruments consist of
accounts receivables sold and financial guarantees. It is not practiable to
estimate fair value of these forms of financial instrument obligations
because there are no quoted market prices for transactions which are
similar in nature. For details relating to sales of receivables, see Note
J. For details relating to financial guarantees, see Note Q.
NOTE Q - CONTINGENCIES AND COMMITMENTS
Downstream is the subject of, or party to, a number of pending or
threatened legal actions, contingencies and commitments relating to
Downstream involving a variety of matters, including laws and regulations
relating to the environment. Certain of these matters are discussed below.
Environmental matters - Downstream is subject to federal, state, local, and
foreign laws and regulations relating to the environment. These laws
generally provide for control of pollutants released into the environment
and require responsible parties to undertake remediation of hazardous waste
disposal sites. Penalties may be imposed for noncompliance. At December 31,
1997, and December 31, 1996, accrued liabilities for remediation totaled
$47 million and $31 million, respectively. It is not presently possible to
estimate the ultimate amount of all remediation costs that might be
incurred or the penalties that might be imposed. Receivables for
recoverable costs from certain states, under programs to assist companies
in clean up efforts related to underground storage tanks at retail
marketing outlets, were $42 million at December 31, 1997 and $23 million at
December 31, 1996.
For a number of years, Downstream has made substantial capital expenditures
to bring existing facilities into compliance with various laws relating to
the environment. In 1997 and 1996, such capital expenditures for
environmental controls totaled $42 million and $36 million, respectively.
Downstream anticipates making additional such expenditures in the future;
however, the exact amounts and timing of such expenditures are uncertain
because of the continuing evolution of specific regulatory requirements.
Guarantees - At December 31, 1997 and December 31, 1996, Downstream's pro
rata share of obligations of LOOP LLC and various pipeline affiliates
secured by throughput and deficiency agreements totaled $142 million and
$152 million, respectively. Under the agreements, Downstream is required to
advance funds if the affiliates are unable to service debt. Any such
advances are prepayments of future transportation charges.
Commitments - At December 31, 1997 and December 31, 1996, contract
commitments for Downstream's capital expenditures for property, plant and
equipment totaled $8 million and $18 million, respectively.
16
ITEM 7(B) PRO FORMA FINANCIAL INFORMATION
Effective January 1, 1998, Ashland Inc. ("Registrant") and Marathon Oil
Company ("Marathon") completed a transaction to form Marathon Ashland
Petroleum LLC (the "Company"). Under the transaction, Registrant and
Marathon contributed the major elements of their respective petroleum
supply, refining, marketing and transportation businesses to the Company in
exchange for, in the case of Registrant, a 38% interest in the Company and
in the case of Marathon, a 62% ownership interest in the Company.
The following tables set forth certain unaudited pro forma financial
information for Registrant giving effect to the formation of the Company.
The pro forma consolidated balance sheet presents the results of the
transaction assuming it occurred on September 30, 1997. The consolidated
statement of income gives effect to the transaction using the audited
financial statements of Registrant for the year ended September 30, 1997
and Marathon Oil Company Downstream Businesses for the year ended December
31, 1997.
The unaudited pro forma financial information may not be indicative of the
financial position or results of operations of Registrant that would have
resulted if the transaction had occurred as of the dates assumed or which
will be obtained in the future. The consolidated statement of income
indicates that Registrant's income from continuing operations would have
been reduced from $279 million to $208 million as a result of the
transaction. However, as indicated in Note (e) to that Statement, such
reduction includes an after tax charge of $96 million to reduce the
carrying value of the Company's LIFO inventories to market.
Ashland Inc.
Pro Forma Consolidated Balance Sheet (unaudited)
September 30, 1997
(In millions)
Historical Deconsolidate Pro Forma
Balance Contributed Pro Forma Balance
ASSETS Sheet Businesses Adjustments Sheet
------------- --------------- -------------- ---------------
Current assets
Cash and cash equivalents $ 268 $ - $ - $ 268
Accounts receivable 1,730 (585) - 1,145
Inventories 729 (256) - 473
Other current assets 268 (27) - 241
------------- --------------- -------------- ---------------
2,995 (868) - 2,127
Investments and other assets
Investments in and advances to
unconsolidated affiliates 86 1,688 294 (a) 2,068
Other noncurrent assets 805 (29) 776
------------- --------------- -------------- ---------------
891 1,659 294 2,844
Property, plant and equipment (net) 3,891 (1,715) - 2,176
------------- --------------- -------------- ---------------
$ 7,777 $ (924) $ 294 $ 7,147
============= =============== ============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Debt due within one year $ 93 $ - $ 252 (a) $ 345
Trade and other payables 2,045 (738) - 1,307
Income taxes 123 - - 123
------------- --------------- -------------- ---------------
2,261 (738) 252 1,775
Noncurrent liabilities
Long-term debt 1,639 - 42 (a) 1,681
Employee benefit obligations 854 (157) - 697
Reserves of captive insurance subsidiaries 161 - - 161
Other long-term liabilities 565 (29) - 536
------------- --------------- -------------- ---------------
3,219 (186) 42 3,075
Minority interest in consolidated subsidiaries 273 - - 273
Common stockholders' equity 2,024 2,024
------------- --------------- -------------- ---------------
$ 7,777 $ (924) $ 294 $ 7,147
============= =============== ============== ===============
Note:
(a)Represents leased assets which were purchased by Registrant and
contributed to the Company, as well as lease obligations which were
retained by Registrant with the related assets subleased to the
Company for a nominal rental.
Ashland Inc.
Pro Forma Statement of Consolidated Income (unaudited)
Year Ended September 30, 1997
(In millions)
Results of
Historical Contributed Pro Forma Pro Forma
Results Businesses Adjustments Results
--------------- ---------------- ---------------- ---------------
Revenues $ 14,319 $ (6,700) $ - $ 7,619
Costs and expenses (13,829) 6,485 (19)(a) (7,363)
--------------- ---------------- ---------------- ---------------
Operating income 490 (215) (19) 256
Other income
Interest expense (net of interest income) (170) (1) (17)(b) (188)
Equity income 15 (5) 143 (c) 153 (e)
--------------- ---------------- ---------------- ---------------
Income from continuing operations before
income taxes and minority interest 335 (221) 107 221
Income taxes (119) 85 (42)(d) (76)
Minority interest in earnings of subsidiaries (24) - - (24)
--------------- ---------------- ---------------- ---------------
Income from continuing operations 192 (136) 65 121
Income from discontinued operations 96 - - 96
--------------- ---------------- ---------------- ---------------
Income before extraordinary loss 288 (136) 65 217
Extraordinary loss on early retirement of debt (9) - - (9)
--------------- ---------------- ---------------- ---------------
Net income $ 279 $ (136) $ 65 $ 208 (e)
=============== ================ ================ ===============
Earnings per share from continuing operations
Primary $ 2.57 $ 1.57 (e)
Assuming full dilution 2.52 1.56
Notes:
(a)Represents administrative costs which Registrant allocated to its
contributed businesses during 1997 that will not be allocated to
the Company. In addition, Registrant allocated $39 million of other
administrative costs to its contributed business during 1997. These
costs were assumed to be allocated to the Company in arriving at
Registrant's pro forma equity income. Such allocations are
currently under review, and it is uncertain how much of this amount
will continue to be charged to the Company, and how much of the
remainder will be eliminated.
(b)Represents estimated interest costs (based on average short-term
borrowing costs during 1997) on leased assets which were purchased
by Registrant and contributed to the Company, as well as interest
costs on lease obligations which were retained by Registrant with
the related assets subleased to the Company for a nominal rental.
(c)Represents Registrant's equity income from its 38% ownership in
the Company, as summarized below:
Pretax income of businesses contributed by
Marathon (includes a reserve of $283 million to reduce the
carrying value of its LIFO inventories to market) $ 174
Registrant 221
Pro forma adjustments
Inventory market valuation reserve (assuming that inventories contributed
by Registrant were valued at January 1, 1997 prices) (132)
Depreciation adjustment on revalued assets 72
Costs retained by Registrant and Marathon
Interest on retained debt 43
Administrative expenses 40
Environmental remediation costs 13
Interest component of lease payments 20
-------------------
451
Registrant's ownership percentage 38%
-------------------
Registrant's share of the Company's earnings 171
Amortization of Registrant's excess investment in the Company (28)
-------------------
Registrant's pro forma equity income from the Company $ 143
===================
(d)Income taxes on the pro forma adjustments.
(e)Includes charges of $158 million ($96 million after income taxes
or $1.36 a share) reflecting Registrant's share of reserves to
reduce the carrying value of the Company's LIFO inventories to
market.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statement on Form S-8 (No. 33-52125) pertaining to the Ashland
Inc. Deferred Compensation and Stock Incentive Plan for Non-Employee
Directors, in the Registration Statement on Form S-8 (No. 2-95022)
pertaining to the Ashland Inc. Amended Stock Incentive Plan for Key
Employees, in the Registration Statement on Form S-8 (No. 33-7501)
pertaining to the Ashland Inc. Employee Savings Plan, in the Registration
Statement on Form S-8 (No. 33-26101) pertaining to the Ashland Inc.
Long-Term Incentive Plan, in the Registration Statement on Form S-8 (No.
33-55922) pertaining to the Ashland Inc. 1993 Stock Incentive Plan, in the
Registration Statement on Form S-8 (No. 33-49907) pertaining to the Ashland
Inc. Leveraged Employee Stock Ownership Plan, in the Registration Statement
on Form S-8 (No. 33-62901) pertaining to the Ashland Inc. Deferred
Compensation Plan, in the Registration Statement on Form S-8 (No.
333-33617) pertaining to the Ashland Inc. 1997 Stock Incentive Plan, in the
Prospectus constituting part of the Registration Statement on Form S-3 (No.
33-57011), as amended by Post-Effective Amendment No. 2, pertaining to the
U.S. $220,000,000 Ashland Inc. Medium-Term Notes, Series H, of our report
dated March 15, 1998, relating to the financial statements of Marathon Oil
Company Downstream Businesses (a division of Marathon Oil Company), which
appears in the Current Report on Form 8-K of Ashland Inc. dated March 17,
1998.
PRICE WATERHOUSE LLP
Pittsburgh, PA
March 17, 1998
