SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-2918
ASHLAND OIL, INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-0122250
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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
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 July 31, 1994, there were 60,641,858 shares of Registrant's Common
Stock outstanding. One-half of one Right to purchase one-tenth of a share
of Cumulative Preferred Stock, Series of 1987 accompanies each outstanding
share of Registrant's Common Stock.
PART I - FINANCIAL INFORMATION
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ASHLAND OIL, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
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Three months ended Nine months ended
June 30 June 30
------------------- ------------------
(In millions except per share data) 1994 1993 1994 1993
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REVENUES
Sales and operating revenues (including
excise taxes) $ 2,703 $ 2,605 $ 7,481 $ 7,546
Other - 14 23 59
-------- -------- -------- --------
2,703 2,619 7,504 7,605
COSTS AND EXPENSES
Cost of sales and operating expenses 2,041 2,013 5,565 5,918
Excise taxes on products and merchandise 227 159 632 479
Selling, general and administrative expenses 264 251 762 740
Depreciation, depletion and amortization 73 73 217 220
General corporate expenses 26 18 68 55
-------- -------- -------- --------
2,631 2,514 7,244 7,412
-------- -------- -------- --------
OPERATING INCOME 72 105 260 193
OTHER INCOME (EXPENSE)
Interest expense - net (29) (29) (86) (93)
Equity income (loss) 14 (1) 11 12
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 57 75 185 112
Income taxes 13 25 49 36
-------- -------- -------- --------
NET INCOME $ 44 $ 50 $ 136 $ 76
======== ======== ======== ========
EARNINGS PER SHARE - Note E
Primary $ .65 $ .81 $ 2.01 $ 1.25
Assuming full dilution $ .63 $ .77 $ 1.93 $ 1.24
DIVIDENDS PAID PER COMMON SHARE $ .25 $ .25 $ .75 $ .75
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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ASHLAND OIL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30 September 30 June 30
(In millions) 1994 1993 1993
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 46 $ 41 $ 51
Accounts receivable 1,298 1,198 1,182
Allowance for doubtful accounts (22) (20) (17)
Construction completed and in progress 51 51 41
Inventories - Note B 696 553 658
Deferred income taxes 60 78 90
Other current assets 72 72 82
-------- -------- --------
2,201 1,973 2,087
INVESTMENTS AND OTHER ASSETS
Investments in and advances to unconsolidated
affiliates 283 280 273
Investments of captive insurance companies 187 185 193
Cost in excess of net assets of companies
acquired 76 65 66
Other noncurrent assets 291 279 267
-------- -------- --------
837 809 799
PROPERTY, PLANT AND EQUIPMENT
Cost 5,792 5,705 5,622
Accumulated depreciation, depletion and
amortization (3,020) (2,935) (2,896)
-------- -------- --------
2,772 2,770 2,726
-------- -------- --------
$ 5,810 $ 5,552 $ 5,612
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Debt due within one year $ 159 $ 159 $ 238
Trade and other payables 1,542 1,418 1,452
Income taxes 23 42 43
-------- -------- --------
1,724 1,619 1,733
NONCURRENT LIABILITIES
Long-term debt (less current portion) 1,381 1,399 1,396
Accrued pension and other postretirement benefits 510 511 504
Reserves of captive insurance companies 186 173 182
Deferred income taxes 33 44 49
Other long-term liabilities and deferred credits 418 351 340
Commitments and contingencies - Note C
-------- -------- --------
2,528 2,478 2,471
STOCKHOLDERS' EQUITY
Convertible preferred stock 293 293 293
Common stockholders' equity 1,265 1,162 1,115
-------- -------- --------
1,558 1,455 1,408
-------- -------- --------
$ 5,810 $ 5,552 $ 5,612
======== ======== ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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ASHLAND OIL, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMMON STOCKHOLDERS' EQUITY
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Deferred Loan to
trans- leveraged
lation employee
adjust- stock Prepaid
ments ownership contri-
Common Paid-in Retained and plan bution
(In millions) stock capital earnings other (LESOP) to LESOP Total
--------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 1, 1992 $ 60 $ 146 $ 931 $ 7 $ (35) $ (23) $ 1,086
Net income 76 76
Dividends on common stock (44) (1) (45)
Dividends on preferred stock (1) (1)
Allocation of LESOP shares
to participants 9 9
Other changes (11) 1 (10)
--------- --------- -------- --------- --------- -------- --------
BALANCE AT JUNE 30, 1993 $ 60 $ 146 $ 962 $ (4) $ (34) $ (15) $ 1,115
========= ========= ======== ========= ========= ======== ========
BALANCE AT OCTOBER 1, 1993 $ 60 $ 143 $ 1,008 $ (10) $ (33) $ (6) $ 1,162
Net income 136 136
Dividends on common stock (45) (45)
Dividends on preferred stock (14) (14)
Issued common stock under
stock incentive plans 1 16 17
Allocation of LESOP shares
to participants 6 6
Other changes 3 3
--------- --------- -------- --------- --------- -------- --------
BALANCE AT JUNE 30, 1994 $ 61 $ 159 $ 1,085 $ (7) $ (33) $ - $ 1,265
========= ========= ======== ========= ========= ======== ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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ASHLAND OIL, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
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Nine months ended
June 30
------------------------
(In millions) 1994 1993
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CASH FLOWS FROM OPERATIONS
Net income $ 136 $ 76
Expense (income) not affecting cash
Depreciation, depletion and amortization 226 229
Deferred income taxes 13 6
Undistributed earnings of unconsolidated affiliates (6) (2)
Gain on sale of operations - net of current income taxes (3) (12)
Other noncash items 37 4
Change in operating assets and liabilities (104) (234)
-------- --------
299 67
CASH FLOWS FROM FINANCING
Proceeds from issuance of long-term debt 27 273
Proceeds from issuance of capital stock 17 293
Repayment of long-term debt (64) (332)
Increase (decrease) in short-term debt 17 (58)
Dividends paid (59) (46)
-------- --------
(62) 130
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment (247) (303)
Purchase of operations - net of cash acquired (57) (2)
Proceeds from sale of operations 58 104
Disposals of property, plant and equipment 15 23
Investment purchases (237) (355)
Investment sales and maturities 236 334
-------- --------
(232) (199)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5 (2)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 41 53
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 46 $ 51
======== ========
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Includes amounts charged to general corporate expenses.
Excludes changes resulting from operations acquired or sold.
Represents primarily investment transactions of captive insurance companies.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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ASHLAND OIL, 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, 1993, as amended
by Form 10-K/A, Amendment No. 1 filed December 2, 1993 (hereinafter
referred to as "Form 10-K"). Results of operations for the periods
ended June 30, 1994, are not necessarily indicative of results to be
expected for the year ending September 30, 1994.
NOTE B - INVENTORIES
----------------------------------------------------------------------
June 30 September 30 June 30
(In millions) 1994 1993 1993
----------------------------------------------------------------------
Crude oil $ 370 $ 273 $ 333
Petroleum products 283 258 297
Chemicals and other products 384 337 369
Materials and supplies 43 45 43
Excess of replacement costs over
LIFO carrying values (384) (360) (384)
-------- -------- --------
$ 696 $ 553 $ 658
======== ======== ========
NOTE C - LITIGATION, CLAIMS AND CONTINGENCIES
Federal, state and local statutes and regulations relating to the
protection of the environment and the health and safety of employees
and other individuals have a significant impact on the conduct of
Ashland's businesses. For information regarding environmental and
health and safety 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 remediation efforts. Such uncertainties involve the nature and
extent of contamination at each site, the extent of required cleanup
efforts, varying costs of alternate cleanup methods, changes in
environmental remediation requirements, the potential effect of
technological improvements, the number and financial strength of other
potentially responsible parties at multiparty sites, and the
identification of new environmental sites. As a result, charges to
income for environmental liabilities could have a material adverse
effect on results of operations in a particular quarter or fiscal year
as assessments and remediation efforts proceed or as new claims arise.
However, such charges are not expected to have a material adverse
effect on Ashland's consolidated financial position.
Ashland has numerous insurance policies from insurers that provide
coverage at various levels for environmental liabilities. Ashland is
currently involved in negotiations concerning the amount of insurance
coverage for environmental costs under certain of these policies. In
addition, certain costs of remediation efforts related to underground
storage tanks are eligible for reimbursement from various state
administered funds. Probable recoveries related to costs incurred in
prior years or expected to be incurred in future years are included in
other noncurrent assets.
Ashland has indemnified the purchaser of an engineering company sold
in 1990 against losses related to certain custom boilers built by the
company and other matters. Ashland is continuing its efforts to
resolve remaining issues related to this indemnity. Future charges
could be incurred under this indemnity, but any amounts are uncertain
at this time.
In addition, Ashland and its subsidiaries are parties to numerous
claims and lawsuits (some of which are for substantial amounts) with
respect to product liability and commercial and other matters. While
these claims and actions are being contested, the outcome of
individual matters is not predictable with assurance. Although any
actual liability is not determinable as of June 30, 1994, Ashland
believes that any liability resulting from these matters involving
Ashland and its subsidiaries, 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 AND DIVESTITURES
During the nine months ended June 30, 1994, Ashland acquired an
asphalt terminal in Lexington, Kentucky, Valvoline distributorships in
six European countries, four specialty chemicals businesses and two
North Carolina paving companies. These acquisitions were accounted
for as purchases and did not have a significant impact on Ashland's
consolidated financial statements.
Also during the nine months ended June 30, 1994, Ashland completed the
sale of Ashland Petroleum's Illinois Basin crude oil gathering and
trucking operations and its carbon fibers business, and APAC's Arizona
operations. Proceeds from the sale of these operations totaled $58
million and resulted in no significant gain or loss.
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ASHLAND OIL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE E - COMPUTATION OF EARNINGS PER SHARE
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Three months ended Nine months ended
June 30 June 30
------------------ ------------------
(In millions except per share data) 1994 1993 1994 1993
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PRIMARY EARNINGS PER SHARE
Income available to common shares
Net income $ 44 $ 50 $ 136 $ 76
Ashland Coal, Inc. (ACI) equity income in
excess of Ashland's share of ACI primary
earnings per share (net of income taxes) - (1) - (1)
Dividends on convertible preferred stock (4) (1) (14) (1)
------- ------- ------- -------
$ 40 $ 48 $ 122 $ 74
======= ======= ======= =======
Average common shares and equivalents
outstanding
Average common shares outstanding 61 60 60 60
Common shares issuable upon exercise
of stock options - - 1 -
Share adjustment for LESOP - (1) (1) (1)
------- ------- ------- -------
61 59 60 59
======= ======= ======= =======
Earnings per share $ .65 $ .81 $ 2.01 $ 1.25
======= ======= ======= =======
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EARNINGS PER SHARE ASSUMING
FULL DILUTION
Income available to common shares
Net income $ 44 $ 50 $ 136 $ 76
ACI equity income in excess of Ashland's
share of ACI earnings per share assuming
full dilution (net of income taxes) - (1) - (1)
Interest on convertible debentures (net
of income taxes) 1 2 3 -
------- ------- ------- -------
$ 45 $ 51 $ 139 $ 75
======= ======= ======= =======
Average common shares and equivalents
outstanding
Average common shares outstanding 61 60 60 60
Common shares issuable upon
Exercise of stock options - - 1 -
Conversion of debentures 3 3 3 -
Conversion of preferred stock 9 4 9 1
Share adjustment for LESOP - (1) (1) (1)
------- ------- ------- -------
73 66 72 60
======= ======= ======= =======
Earnings per share $ .63 $ .77 $ 1.93 $ 1.24
======= ======= ======= =======
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ASHLAND OIL, INC. AND SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
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Three months ended Nine months ended
June 30 June 30
--------------------- --------------------
(Dollars in millions except as noted) 1994 1993 1994 1993
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SALES AND OPERATING REVENUES
Petroleum $ 1,215 $ 1,186 $ 3,351 $ 3,529
SuperAmerica 435 444 1,240 1,356
Valvoline 261 249 745 694
Chemical 757 674 2,084 1,932
Construction 300 315 793 759
Exploration 49 57 148 194
Intersegment sales (314) (320) (880) (918)
--------- --------- --------- ---------
$ 2,703 $ 2,605 $ 7,481 $ 7,546
========= ========= ========= =========
OPERATING INCOME
Petroleum $ 9 $ 34 $ 83 $ 20
SuperAmerica 12 17 43 48
Valvoline 12 15 39 41
--------- --------- --------- ---------
Total Refining and Marketing Group 33 66 165 109
Chemical 33 32 87 80
Construction 24 17 47 28
Exploration 8 8 29 31
General corporate expenses (26) (18) (68) (55)
--------- --------- --------- ---------
$ 72 $ 105 $ 260 $ 193
========= ========= ========= =========
EQUITY INCOME (LOSS)
Arch Mineral Corporation $ 7 $ (4) $ 3 $ (2)
Ashland Coal, Inc. 4 - 2 7
Other 3 3 6 7
--------- --------- --------- ---------
$ 14 $ (1) $ 11 $ 12
========= ========= ========= =========
OPERATING INFORMATION
Petroleum
Product sales (thousand barrels
per day) 355.9 342.7 346.2 338.5
Refining inputs (thousand barrels
per day) 334.6 327.7 330.3 330.9
Value of products manufactured per barrel $ 21.69 $ 23.78 $ 20.86 $ 23.30
Input cost per barrel 17.90 19.14 16.10 19.66
--------- --------- --------- ---------
Refining margin per barrel $ 3.79 $ 4.64 $ 4.76 $ 3.64
SuperAmerica
Product sales (thousand barrels per day) 70.8 72.3 69.6 74.8
Merchandise sales $ 138 $ 136 $ 379 $ 413
Valvoline product sales (thousand barrels
per day) 19.1 17.7 17.4 15.9
Construction backlog
At end of period $ 491 $ 570 $ 491 $ 570
Increase (decrease) during period $ (17) $ 5 $ (4) $ 70
Exploration
Net daily production
Natural gas (million cubic feet) 90.8 103.8 95.9 101.5
Nigerian crude oil (thousand barrels) 17.1 19.8 18.6 21.6
Sales price
Natural gas (per thousand cubic feet) $ 2.39 $ 2.26 $ 2.48 $ 2.53
Nigerian crude oil (per barrel) $ 15.12 $ 18.14 $ 14.60 $ 18.32
Arch Mineral Corporation
Tons sold (millions) 7.5 4.9 17.0 15.3
Sales price per ton $ 26.80 $ 25.39 $ 26.36 $ 25.65
Ashland Coal, Inc.
Tons sold (millions) 5.1 4.5 13.0 14.4
Sales price per ton $ 29.33 $ 28.96 $ 30.15 $ 29.44
-------------------------------------------------------------------------------------------
Includes intersegment sales.
Includes crude oil and other purchased feedstocks.
Amounts have been restated to exclude APAC's Arizona operations which were sold in
February 1994.
Amounts are reported on a 100% basis for these affiliated companies accounted for on
the equity method.
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ASHLAND OIL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------
RESULTS OF OPERATIONS
Current Quarter - Ashland recorded net income of $44 million for the third
quarter of fiscal 1994, compared to $50 million for the same period last
year. Operating income for the current quarter totaled $72 million,
compared to $105 million for last year's third quarter. The decline in
earnings was due primarily to results from the Refining and Marketing
group, reflecting a substantial decrease in operating income from Ashland
Petroleum and lower profits from SuperAmerica and Valvoline. Partially
offsetting these negative comparisons, Chemical reported record quarterly
income and Construction had its best June quarter since 1986. In
addition, equity income from coal operations improved $15 million this
quarter.
Year-to-Date - Net income for the nine months ended June 30, 1994,
amounted to $136 million, compared to $76 million for the nine months
ended June 30, 1993. The improvement reflected significantly higher
earnings from Ashland Petroleum and Construction. In addition, operating
income from Chemical showed improvement, while SuperAmerica, Valvoline and
Exploration are down somewhat from last year. Net income for the year
ending September 30, 1994, is expected to be substantially higher than the
$142 million reported for the year ended September 30, 1993.
PETROLEUM
Current Quarter - Operating income for Ashland Petroleum totaled $9
million for the quarter ended June 30, 1994, compared to $34 million for
the same period last year. The decline in earnings reflected a decrease
in the refining margin (the difference between the value of products
manufactured and input cost) from $4.64 per barrel in 1993 to $3.79 per
barrel in 1994. Though average crude oil costs and product prices were
both down compared to the June 1993 quarter, crude oil costs increased
rapidly during the current quarter and product prices did not keep pace,
resulting in reduced refining margins. Several factors led to the
surprising strength in crude oil costs. Worldwide oil demand has been
better than expected due to unusually strong economic growth, while oil
markets have reflected concern over actual or potential supply disruptions
in producing nations. At the same time, U.S. oil production continues to
decline, U.S. refineries are running at close to full capacity, and
logistical problems created a shortage of West Texas Intermediate crude
oil in the Midwest.
Year-to-Date - For the nine months ended June 30, 1994, Ashland Petroleum
recorded an operating profit of $83 million compared to $20 million for
the same period last year. Prior year results included a $15 million gain
on the sale of TPT, an inland waterways barge operation. The improvement
in earnings was due primarily to an increase in the refining margin from
$3.64 per barrel last year to $4.76 per barrel this year, reflecting the
strong refining margins in the first half of fiscal 1994. The increase in
the refining margin was partially offset by higher refining expenses,
including increases in depreciation charges and costs associated with
turnarounds. Looking ahead to the fourth quarter, factors point toward a
margin improvement. Recent expansions and changes in major crude oil
pipelines serving the Midwest mean Ashland can now move Canadian oil into
the Kentucky and Ohio refineries, allowing for a greater flexibility in
determining the crude oil slate. In addition, crude oil prices seem to
have stabilized, which should give product markets an opportunity to
adjust. Moreover, regional margins should benefit from strong demand as a
result of strained product pipeline capacity in the Midwest.
SUPERAMERICA
Current Quarter - For the three months ended June 30, 1994, SuperAmerica's
operating income totaled $12 million, second only to last year's record
third quarter of $17 million. The decline in earnings reflected lower
sales volumes for gasoline, only partially offset by higher merchandise
sales.
Year-to-Date - Operating income for the nine months ended June 30, 1994,
amounted to $43 million, compared to $48 million for the nine months ended
June 30, 1993. Decreases in sales volumes for gasoline and merchandise,
due to the sale of 80 stores in nonstrategic areas last year, more than
offset margin improvements and lower expenses from operating fewer stores.
The division expects to open 25 stores this year in directly supplied
markets and completed 15 stores in the first nine months. SuperAmerica
was operating 593 stores at June 30, 1994, and June 30, 1993.
VALVOLINE
Current Quarter - For the three months ended June 30, 1994, operating
income for Valvoline totaled $12 million, compared to $15 million for the
same period last year. An increase in revenue from Valvoline
International and Valvoline Instant Oil Change (VIOC) was more than offset
by higher base oil and additive costs and reduced automotive refrigerant
sales. The improvement in revenues from the international operations
reflected the acquisition of distributorships in six European countries
last quarter. Results from VIOC benefited from increases in the number of
company owned stores, average ticket prices and average car counts. In
addition to higher raw material costs, branded motor oil margins were
adversely affected by the continuing shift away from packaged products to
bulk sales. During July, Valvoline signed a letter of intent to purchase
BASF's North American antifreeze and related car care products business,
including the Zerex-R- antifreeze brand. The closure of this transaction is
subject to the execution of a definitive agreement, government approval
and other conditions.
Year-to-Date - For the nine months ended June 30, 1994, Valvoline's
operating income totaled $39 million, compared to $41 million last year.
A decline in margins for branded motor oil, automotive chemicals and
refrigerants more than offset higher revenues from Valvoline International
and VIOC. The fluctuations in these operations were a result of the same
factors described in the quarter comparison.
CHEMICAL
Current Quarter - For the three months ended June 30, 1994, Chemical set a
new quarterly earnings record with operating income of $33 million,
compared to $32 million last year. Boosted by a strong U.S. economy,
sales and operating income for both the distribution and specialty groups
were the highest of any quarter on record. However, income from the
petrochemical group was below the same quarter last year as improved
methanol margins and maleic volumes were offset by declines in the cumene
and solvent businesses. Also, environmental remediation costs were higher
this quarter.
Year-to-Date - For the nine months ended June 30, 1994, operating income
totaled $87 million, compared to $80 million for the same period last
year. Income from the distribution group and the specialty chemicals
group increased this year, reflecting improved sales volumes. However,
these increases were partially offset by higher environmental remediation
expenses and lower Petrochemical results. Petrochemical operating income
was down as cumene profits were lower, reflecting production and weather
related problems early in the year, partially offset by an increase in
earnings from methanol due to better margins.
CONSTRUCTION
Current Quarter - Operating income of $24 million for the three months
ended June 30, 1994, was Construction's best third quarter since 1986, and
well above last year's third quarter of $17 million. Earnings from
continuing operations improved in all geographic regions, reflecting an
increase in revenue from construction jobs and higher profits from the
asphalt, ready-mix concrete, and aggregate plants. In addition, earnings
for the current quarter were not impacted by the normal deferral of winter
costs to the third and fourth quarters of the year, as these costs were
fully absorbed in the second quarter. During the current quarter, APAC
completed the sale of its Arizona operations, the majority of which were
sold in the second quarter.
Year-to-Date - For the nine months ended June 30, operating income totaled
$47 million this year, compared to $28 million last year. The increase in
income was a result of better margins, more favorable operating conditions
and a better quality backlog. Backlog at June 30, 1994 was $491 million,
down from $570 million at June 30, 1993, although the current year backlog
is expected to contain better margins. With no deferred winter costs to
amortize over the fourth quarter, Construction's outlook is very bright
for the rest of the year.
EXPLORATION
Current Quarter - Operating income totaled $8 million for the three months
ended June 30, 1994, essentially even with the same period last year.
Earnings from domestic operations declined as the effects of lower natural
gas production, which was somewhat impacted by several third-party
pipeline maintenance and repair projects late in the quarter, were only
partially offset by higher natural gas prices. Income from foreign
operations increased this quarter despite the ongoing decline in Nigerian
crude oil production. Improved results from crude oil trading activities,
and the fact that last year's operating income included higher expenses
associated with seismic acquisition activity on two offshore blocks in
Nigeria, were responsible for the increased earnings. Late in the
quarter, Ashland began drilling the first exploration well on these
blocks. It is uncertain at this time what impact the recent political
events in Nigeria will have on Ashland's operations in Nigeria.
Year-to-Date - Operating income for the nine months ended June 30, 1994,
totaled $29 million, compared to $31 million for the same period last
year. Domestic operating income decreased $12 million, due principally to
a $5 million decrease in domestic natural gas revenues, reflecting
declines in both natural gas prices and production from last year's strong
levels. Also, prior year results included the favorable impact of a
contract settlement. Foreign operating income increased primarily for the
same reasons noted in the quarter comparison.
GENERAL CORPORATE EXPENSES
For this year's third quarter, general corporate expenses totaled $26
million compared to $18 million last year. Reflected in this year's
results were increases in consulting expenses and accruals for incentive
compensation plans. When comparing year-to-date results, general
corporate expenses increased $13 million this year. In addition to the
variances mentioned in the quarter comparison, the current year included a
gain resulting from the repayment of certain partially reserved notes from
affiliated companies and higher expenses for general environmental and
litigation reserves. Prior year results reflected income from a receipt
related to the previous sale of an engineering company concerning an
earnout arrangement and other matters, partially offset by losses
resulting from debt prepayments.
OTHER INCOME (EXPENSE)
Interest expense for the nine months ended June 30, 1994, declined when
compared to the same period for the prior year, reflecting a decrease in
average debt outstanding. During fiscal 1993, funds provided from long-
term borrowings and the issuance of convertible preferred stock were used
to retire long-term debt, based on scheduled maturities or opportunities
for lower interest rates.
Equity income from Arch Mineral totaled $7 million for the quarter and $3
million for the nine months ended June 30, 1994. This compares to equity
losses of $4 million and $2 million for the corresponding periods of last
year. Ashland recorded equity income from Ashland Coal of $4 million for
the current quarter, compared to slightly better than break-even results
for last year's third quarter, while year-to-date equity income declined
$5 million. Operations for both of the coal companies returned to more
normal levels after being adversely affected by the United Mine Workers'
strike that began in May 1993 and ended in December 1993. Comparisons
with last year's quarter and year-to-date results are not meaningful due
to the effects of the strike.
FINANCIAL POSITION
LIQUIDITY
Ashland's financial position has enabled it to continue investment grade
ratings on its indebtedness and obtain capital for its financing needs.
Ashland's senior debt ratings are Baa1 from Moody's and BBB from Standard
& Poor's. Ashland has revolving credit agreements providing for up to
$350 million in borrowings, none of which were in use at June 30, 1994.
At that date under a shelf registration with the Securities and Exchange
Commission, Ashland could issue an additional $277 million in medium-term
notes as future opportunities or needs arise. Ashland also has access to
commercial paper markets and various uncommitted lines of credit, under
which $94 million in short-term debt was outstanding at June 30, 1994.
Cash and cash equivalents at June 30, 1994, were $46 million, compared to
$41 million at September 30, 1993. Cash flows from operations, a major
source of Ashland's liquidity, amounted to $299 million for the nine
months ended June 30, 1994, compared to $67 million for the nine months
ended June 30, 1993. This increase was attributed primarily to higher
earnings this year and a smaller increase in working capital since the
beginning of the year.
Working capital at June 30, 1994, was $477 million, compared to $354
million at September 30, 1993. Liquid assets (cash, cash equivalents and
accounts receivable) as a percent of current liabilities amounted to 77%
at June 30, 1994, compared to 75% at September 30, 1993. Ashland's
working capital is significantly affected by its use of the LIFO method of
inventory valuation, which valued such inventories at $384 million below
their replacement costs at June 30, 1994.
CAPITAL RESOURCES
For the nine months ended June 30, 1994, property additions amounted to
$247 million, compared to $303 million for the same period last year,
reflecting the reduction of Ashland Petroleum's capital expenditures in
fiscal 1994 as a result of the completion of various refinery units in
1993. Property additions (including exploration costs and geophysical
expenses) and cash dividends for the remainder of 1994 are estimated at
$139 million and $20 million, respectively. Ashland anticipates meeting
its remaining 1994 capital requirements for property additions and
dividends primarily from internally generated funds. However, external
financing may be necessary to provide funds for the remaining contractual
maturities of $45 million for long-term debt, for acquisitions or for
common stock purchases.
During 1994, the sale of APAC's Arizona operations was finalized,
completing the company's previously announced asset divestiture program.
Proceeds from the divestiture were combined with internally generated
funds and used to reduce debt, fund capital requirements for property
additions and pay dividends.
At June 30, 1994, up to 3.5 million additional shares of common stock can
be purchased from time to time in open market transactions under Ashland's
repurchase program. The number of shares ultimately purchased and the
prices Ashland will pay for its stock are subject to periodic review by
management. No shares have been purchased under this program since 1991.
Ashland's capitalization at June 30, 1994, consists of debt due within one
year (5%), long-term debt (44%), deferred income taxes (1%), convertible
preferred stock (9%), and common stockholders' equity (41%). At June 30,
1994, long-term debt included $87 million of floating-rate debt, and the
interest rates on an additional $430 million of fixed-rate debt were
converted to floating rates through interest rate swaps. As a result,
future interest costs will fluctuate with short-term interest rates on 36%
of Ashland's long-term debt.
ENVIRONMENTAL MATTERS
Federal, state and local statutes and regulations relating to the
protection of the environment and the health and safety of employees and
other individuals have resulted in higher operating costs and capital
investments by the industries in which Ashland operates. Because of the
continuing trend toward greater environmental awareness and increasingly
stringent environmental regulations, Ashland believes that expenditures
for compliance with environmental, health and safety regulations will
continue to have a significant impact on the conduct of its businesses.
Although it cannot predict accurately how these developments will affect
future operations and earnings, Ashland does not believe its costs will
vary significantly from those of its competitors in the petroleum and
chemical industries. For information regarding environmental and health
and safety 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
remediation efforts. Such uncertainties involve the nature and extent of
contamination at each site, the extent of required cleanup efforts,
varying costs of alternate cleanup methods, changes in environmental
remediation requirements, the potential effect of technological
improvements, the number and financial strength of other potentially
responsible parties at multiparty sites, and the identification of new
environmental 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 claims arise. However, such charges are not expected to
have a material adverse effect on Ashland's consolidated financial
position, cash flow or liquidity.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Environmental Proceedings - As of June 30, 1994, Ashland was subject
to 71 notices received from the United States Environmental
Protection Agency ("USEPA") identifying Ashland as a "potentially
responsible party" ("PRP") under the Comprehensive Environmental
Response Compensation and Liability Act ("CERCLA") and the Superfund
Amendment and Reauthorization Act ("SARA") 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 in
accordance with procedures established under CERCLA and SARA
regulations, in which Ashland may be participating as a member of
various PRP groups. Generally, the type of relief sought by the
USEPA includes remediation of contaminated soil and/or groundwater,
reimbursement for the costs of site cleanup or oversight expended by
the USEPA, and/or long-term monitoring of environmental conditions
at the sites. Ashland also receives notices from state
environmental agencies pursuant to similar state legislation.
Ashland carefully monitors the investigatory and remedial activity
at each of the 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.
Estimated costs for these matters are recognized in accordance with
generally accepted accounting principles governing probability and
the ability to reasonably estimate future costs.
El Paso Dispute - On March 11, 1993, a complaint was filed by El
Paso Refinery, L.P., against Scurlock Permian Corporation ("SPC"), a
wholly owned subsidiary of Ashland, in the District Court of El Paso
County, Texas. El Paso Refinery, L.P., is currently in Chapter 7
bankruptcy. Plaintiff alleges that SPC wrongfully breached certain
duties under a contract to supply crude oil. Plaintiff further
alleges violations of Texas usury law, common law fraud and duress
and seeks substantial damages. In an apparent companion case filed
the same day by individual plaintiffs (two officers of El Paso
Refining, Inc., the general partner of El Paso Refinery, L.P.),
damages are sought against SPC and others based upon the execution
by plaintiffs of promissory notes in connection with the financing
of the refinery. Ashland and SPC believe these complaints to be
without merit and intend to defend them vigorously. SPC is a
creditor in the El Paso bankruptcy proceeding and had filed a proof
of claim for approximately $39,000,000 against the bankrupt estate.
As of July 28, 1994, SPC had received approximately $18,878,000 from
the liquidation of collateral. Ashland believes its current
reserves are adequate to cover any shortfall that could be sustained
in the bankruptcy proceeding.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
None
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 Oil, Inc.
(Registrant)
Date August 12, 1994 /s/ Kenneth L. Aulen
Kenneth L. Aulen
Administrative Vice President
and Controller (Chief
Accounting Officer)
Date August 12, 1994 /s/ Thomas L. Feazell
Thomas L. Feazell
Senior Vice President,
General Counsel and Secretary
