SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002
Commission file number 1-2918
ASHLAND INC.
(a Kentucky corporation)
I.R.S. No. 61-0122250
50 E. RiverCenter Boulevard
P.O. Box 391
Covington, Kentucky 41012-0391
Telephone Number: (859) 815-3333
Securities Registered Pursuant to Section 12(b):
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, par value $1.00 per share New York Stock Exchange
and Chicago Stock Exchange
Rights to Purchase Series A Participating New York Stock Exchange
Cumulative Preferred Stock and Chicago Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g): NONE
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
At October 31, 2002, based on the New York Stock Exchange closing
price, the aggregate market value of voting stock held by non-affiliates of
the Registrant was approximately $1,780,870,376. In determining this
amount, the Registrant has assumed that its directors and executive
officers are affiliates. Such assumption shall not be deemed conclusive for
any other purpose.
At October 31, 2002, there were 68,242,197 shares of Registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Annual Report to Shareholders for the fiscal
year ended September 30, 2002 are incorporated by reference into Parts I,
II and IV.
Portions of Registrant's definitive Proxy Statement for its January
30, 2003 Annual Meeting of Shareholders are incorporated by reference into
Part III.
EXPLANATORY NOTE
----------------
This amendment to the Annual Report on Form 10-K/A for the fiscal year
ended September 30, 2002 of Ashland Inc. ("Ashland") is being filed to
include the audited financial statements of Marathon Ashland Petroleum LLC
("MAP") for the fiscal year ended December 31, 2002 as required by Rule
3-09 of Regulation S-X. Ashland has a 38% equity interest in MAP. In
accordance with Rule 12b-15 under the Securities and Exchange Act of 1934,
as amended, the text of the amended item is set forth in its entirety in
the pages attached hereto.
A consent of PricewaterhouseCoopers LLP, independent accountants for
MAP, is being filed as an exhibit hereto.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) and (2) Financial Statements and Financial Schedule
The consolidated financial statements and financial schedule of
Ashland presented or incorporated by reference in this report are listed in
the index on page 20.
Audited financial statements of Marathon Ashland Petroleum LLC.
Financial statement schedules are omitted because they are not applicable
as the required information is contained in the applicable financial
statements or notes thereto.
(3) Exhibits
3.1 Third Restated Articles of Incorporation of Ashland (filed as
Exhibit 3 to Ashland's Form 10-Q for the quarter ended June 30,
2002 and incorporated herein by reference).
3.2 By-laws of Ashland, effective as of November 15, 2002.
4.1 Ashland agrees to provide the SEC, upon request, copies of
instruments defining the rights of holders of long-term debt of
Ashland and all of its subsidiaries for which consolidated or
unconsolidated financial statements are required to be filed with
the SEC.
4.2 Indenture, dated as of August 15, 1989, as amended and restated
as of August 15, 1990, between Ashland and Citibank, N.A., as
Trustee (filed as Exhibit 4.2 to Ashland's Form 10-K for the
fiscal year ended September 30, 2001 and incorporated herein by
reference).
4.3 Indenture, dated as of September 7, 2001, between Ashland and
U.S. Bank National Association, as Trustee (filed as Exhibit 4.3
to Ashland's Form 10-K for the fiscal year ended September 30,
2001 and incorporated herein by reference).
4.4 Rights Agreement, dated as of May 16, 1996, between Ashland Inc.
and the Rights Agent, together with Form of Right Certificate
(filed as Exhibit 4.4 to Ashland's Form 10-K for the fiscal year
ended September 30, 2001 and incorporated herein by reference).
The following Exhibits 10.1 through 10.15 are compensatory plans or
arrangements or management contracts required to be filed as exhibits
pursuant to Item 601(b)(10)(ii)(A) of Regulation S-K.
10.1 Amended Stock Incentive Plan for Key Employees of Ashland Inc.
and its Subsidiaries (filed as Exhibit 10.1 to Ashland's Form 10-K
for the fiscal year ended September 30, 1999 and incorporated
herein by reference).
10.2 Ashland Inc. Deferred Compensation Plan for Non-Employee
Directors.
10.3 Ashland Inc. Deferred Compensation Plan.
10.4 Tenth Amended and Restated Ashland Inc. Supplemental Early
Retirement Plan for Certain Employees, as amended.
10.5 Ashland Inc. Salary Continuation Plan.
10.6 Form of Ashland Inc. Executive Employment Contract between Ashland
Inc. and certain executives of Ashland.
10.7 Form of Separation Agreement and General Release between Ashland
Inc. and Paul W. Chellgren, former Chief Executive Officer of
Ashland.
10.8 Form of Indemnification Agreement between Ashland Inc. and each
member of its Board of Directors (filed as Exhibit 10.8 to
Ashland's Form 10-K for the fiscal year ended September 30, 2001
and incorporated herein by reference).
10.9 Ashland Inc. Nonqualified Excess Benefit Pension Plan.
10.10 Ashland Inc. Long-Term Incentive Plan (filed as Exhibit 10.9 to
Ashland's Form 10-K for the fiscal year ended September 30, 2000
and incorporated herein by reference).
10.11 Ashland Inc. Directors' Charitable Award Program.
10.12 Ashland Inc. 1993 Stock Incentive Plan (filed as Exhibit 10.11 to
Ashland's Form 10-K for the fiscal year ended September 30, 2000
and incorporated herein by reference).
10.13 Ashland Inc. 1995 Performance Unit Plan (filed as Exhibit 10.12 to
Ashland's Form 10-K for the fiscal year ended September 30, 2000
and incorporated herein by reference).
10.14 Ashland Inc. 1997 Stock Incentive Plan.
10.15 Amended and Restated Ashland Inc. Incentive Plan.
10.16 Amended and Restated Limited Liability Company Agreement of
Marathon Ashland Petroleum LLC dated as of December 31, 1998
(filed as Exhibit 10.17 to Ashland's Form 10-K for the fiscal year
ended September 30, 1999 and incorporated herein by reference).
10.17 Put/Call, Registration Rights and Standstill Agreement as amended
to December 31, 1998 among Marathon Oil Company, USX Corporation,
Ashland Inc. and Marathon Ashland Petroleum (filed as Exhibit
10.18 to Ashland's Form 10-K for the fiscal year ended September
30, 1999 and incorporated herein by reference).
11 Computation of Earnings Per Share (appearing on page 48 of
Ashland's Annual Report to Shareholders, incorporated by reference
herein, for the fiscal year ended September 30, 2002).
12 Computation of Ratio of Earnings to Fixed Charges.
13 Portions of Ashland's Annual Report to Shareholders, incorporated
by reference herein, for the fiscal year ended September 30, 2002.
21 List of subsidiaries.
23.1 Consent of independent auditors.
23.2* Consent of PricewaterhouseCoopers LLP.
24 Power of Attorney, including resolutions of the Board of
Directors.
99.1* Certificate of Chief Executive Officer of Ashland pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350.
99.2* Certificate of Chief Financial Officer of Ashland pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350.
*Filed herewith
Upon written or oral request, a copy of the above exhibits will be
furnished at cost.
(b) REPORTS ON FORM 8-K
A report on Form 8-K was filed August 2, 2002, to report that Paul W.
Chellgren, Chairman and Chief Executive Officer of Ashland, announced his
plans to retire effective November 15, 2002.
A report on Form 8-K was filed on August 7, 2002 to report that
Ashland had submitted to the SEC the Statements under Oath of the Principal
Executive Officer and the Principal Financial Officer pursuant to the SEC's
June 27, 2002 Order requiring the filing of such statements.
A report on Form 8-K was filed on August 13, 2002 to report that James
J. O'Brien had been named President and Chief Operating Officer and was
elected to Ashland's Board of Directors. O'Brien would become Chairman of
the Board and Chief Executive Officer of Ashland effective November 15,
2002 when Paul W. Chellgren, the then current Chairman and Chief Executive
Officer retired.
A report on Form 8-K was filed on September 19, 2002 to report that
James J. O'Brien would become Chief Executive Officer of Ashland effective
October 1, 2002 and Chairman of the Board effective November 15, 2002.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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)
By:
/s/ J. Marvin Quin
-------------------------------
J. Marvin Quin
Senior Vice President and Chief
Financial Officer
Date: March 20, 2003
CERTIFICATION
-------------
Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief
Executive Officer Regarding Facts and Circumstances Relating to Exchange Act
Filings.
I, James J. O'Brien, Chief Executive Officer of Ashland Inc., certify that:
1. I have reviewed this annual report on Form 10-K/A of Ashland Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 20, 2003
/s/ James J. O'Brien
-------------------------------
Chief Executive Officer
CERTIFICATION
-------------
Statement Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief
Financial Officer Regarding Facts and Circumstances Relating to Exchange Act
Filings.
I, J. Marvin Quin, Chief Financial Officer of Ashland Inc., certify that:
1. I have reviewed this annual report on Form 10-K/A of Ashland Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 20, 2003
/s/ J. Marvin Quin
-------------------------------
Chief Financial Officer
EXHIBIT INDEX
Exhibit
No. Description
------- ---------------------------------------------------------------------
23.2 Consent of PricewaterhouseCoopers LLP.
99.1 Certificate of Chief Executive Officer of Ashland pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350.
99.2 Certificate of Chief Financial Officer of Ashland pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350.
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
CONTENTS
Page
REPORT OF INDEPENDENT ACCOUNTANTS: 1
CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED STATEMENT OF INCOME -----------------------------------------2
CONSOLIDATED BALANCE SHEET -----------------------------------------------3
CONSOLIDATED STATEMENT OF CASH FLOWS -------------------------------------4
CONSOLIDATED STATEMENT OF MEMBERS' CAPITAL -------------------------------5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
NOTE A - BUSINESS DESCRIPTION AND BASIS OF PRESENTATION -------------6
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES -------------------6
NOTE C - NEW ACCOUNTING STANDARDS -----------------------------------8
NOTE D - RELATED PARTY TRANSACTIONS --------------------------------10
NOTE E - OTHER ITEMS -----------------------------------------------12
NOTE F - PENSIONS AND OTHER POSTRETIREMENT BENEFITS ----------------13
NOTE G - INCOME TAXES ----------------------------------------------14
NOTE H - INVENTORIES -----------------------------------------------15
NOTE I - INVESTMENTS AND LONG-TERM RECEIVABLES ---------------------15
NOTE J - PROPERTY, PLANT AND EQUIPMENT -----------------------------16
NOTE K - SHORT-TERM DEBT -------------------------------------------16
NOTE L - LONG-TERM DEBT --------------------------------------------17
NOTE M - SUPPLEMENTAL CASH FLOW INFORMATION ------------------------17
NOTE N - LEASES ----------------------------------------------------17
NOTE O - DERIVATIVE INSTRUMENTS ------------------------------------18
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS -----------------------18
NOTE Q - CONTINGENCIES AND COMMITMENTS -----------------------------18
NOTE R - SUBSEQUENT EVENTS -----------------------------------------20
PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
1201 Louisiana, Suite 2900
Houston, TX 77002-5678
REPORT OF INDEPENDENT ACCOUNTANTS
February 18, 2003
To the Board of Managers of
Marathon Ashland Petroleum LLC:
In our opinion, the accompanying consolidated financial statements
appearing on pages 2 through 20 present fairly, in all material respects,
the financial position of Marathon Ashland Petroleum LLC and its
subsidiaries (MAP) at December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are
the responsibility of MAP's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, 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 our opinion.
As discussed in Note C to the financial statements, MAP changed its method
of accounting for derivatives in 2001.
/s/ PricewaterhouseCoopers LLP
1
CONSOLIDATED STATEMENT OF INCOME (Dollars in Millions)
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
Year Ended December 31
----------------------------------------------------
2002 2001 2000
------------- ------------- ------------
REVENUES AND OTHER INCOME:
Sales and other operating revenues (including consumer
excise taxes) $ 25,389 $ 26,587 $ 28,343
Sales to related parties - Note D 1,010 658 432
Income from equity method investments 48 41 22
Net gains on disposal of assets 40 30 28
Other income 26 32 30
------------- ------------- ------------
Total revenues and other income 26,513 27,348 28,855
------------- ------------- ------------
COSTS AND EXPENSES:
Cost of revenues (excludes items shown below) 20,008 19,372 21,745
Purchases from related parties - Note D 882 710 660
Consumer excise taxes 4,250 4,404 4,344
Depreciation and amortization 365 348 316
Selling, general and administrative expenses 489 435 355
Other taxes 138 141 130
Inventory market valuation charges (credits) - Note H (77) 77 --
------------- ------------- ------------
Total costs and expenses 26,055 25,487 27,550
------------- ------------- ------------
INCOME FROM OPERATIONS: 458 1,861 1,305
Net interest and other financial income (costs) - Note E (5) 4 12
------------- ------------- ------------
INCOME BEFORE INCOME TAXES: 453 1,865 1,317
Provision for income taxes - Note G 3 9 7
------------- ------------- ------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE: 450 1,856 1,310
Cumulative effect of change in derivatives accounting - Note C -- (20) --
------------- ------------- ------------
NET INCOME $ 450 $ 1,836 $ 1,310
============= ============= ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
2
CONSOLIDATED BALANCE SHEET (Dollars in Millions)
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
December 31
---------------------------------
2002 2001
------------- -------------
ASSETS:
Current assets:
Cash and cash equivalents $ 27 $ 33
Receivables, less allowance for doubtful accounts of $5
and $3 1,196 1,087
Related party receivables - Note D 52 59
Inventories - Note H 1,915 1,793
Other current assets 40 41
------------- -------------
Total current assets 3,230 3,013
Investments and long-term receivables - Note I 543 502
Property, plant and equipment - net - Note J 4,204 3,977
Goodwill 21 21
Intangibles 57 23
Other noncurrent assets 26 22
------------- -------------
Total assets $ 8,081 $ 7,558
============= =============
LIABILITIES:
Current liabilities:
Accounts payable $ 2,116 $ 1,736
Accounts payable to related parties - Note D 81 66
Payroll and benefits payable 125 166
Accrued taxes 41 42
Long-term debt due within one year 1 --
------------- -------------
Total current liabilities 2,364 2,010
Long-term debt - Note L 6 7
Deferred income taxes - Note G 5 4
Employee benefits obligations - Note F 465 336
Deferred credits and other liabilities 55 35
------------- -------------
Total liabilities 2,895 2,392
------------- -------------
MEMBERS' CAPITAL (details on page 5)
Members' contributed capital 4,285 4,259
Retained earnings 942 912
Accumulated other comprehensive loss (41) (5)
------------- -------------
Total members' capital 5,186 5,166
------------- -------------
Total liabilities and members' capital $ 8,081 $ 7,558
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
3
CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in Millions)
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
Year Ended December 31
-----------------------------------------------------
2002 2001 2000
------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $ 450 $ 1,836 $ 1,310
Adjustments to reconcile to net cash provided from
operating activities:
Depreciation and amortization 365 348 316
Inventory market valuation charges (credits) (77) 77 --
Pensions and other postretirement benefits 69 44 30
Cumulative effect of change in accounting principle -- 20 --
Deferred income taxes 1 -- --
Net gains on disposal of assets (40) (30) (28)
Equity income from investees (48) (41) (22)
Distributions from investees 39 31 25
Changes in:
Current receivables (105) 300 (278)
Inventories (45) (59) (5)
Accounts payable and other current liabilities 434 (511) 371
Receivables from/payables to related parties 39 (26) 38
All other - net 2 35 (41)
------------- ------------- -------------
Net cash provided from operating activities 1,084 2,024 1,716
------------- ------------- -------------
INVESTING ACTIVITIES:
Capital expenditures (611) (576) (637)
Disposal of assets 89 51 70
Loan transactions - principal loaned (14) (31) (46)
- principal collected 14 35 42
Restricted cash - deposits (79) (62) (54)
- withdrawals 48 54 53
Investments - contributions (100) (16) (1)
- loans and advances -- (5) (5)
- returns and repayments -- 10 --
------------- ------------- -------------
Net cash used in investing activities (653) (540) (578)
------------- ------------- -------------
FINANCING ACTIVITIES:
Revolving credit facilities - borrowings - Note D 701 294 931
- repayments - Note D (701) (294) (931)
Debt repayments -- (1) (14)
Member distributions (437) (1,508) (1,104)
------------- ------------- -------------
Net cash used in financing activities (437) (1,509) (1,118)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6) (25) 20
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 33 58 38
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 27 $ 33 $ 58
============= ============= =============
See Note M for supplemental cash flow information.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
4
CONSOLIDATED STATEMENT OF MEMBERS' CAPITAL (Dollars in Millions)
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
Members' Capital Comprehensive Income
Year Ended Year Ended
December 31 December 31
---------------------------------------- ----------------------------------------
2002 2001 2000 2002 2001 2000
------------ ---------- ----------- ----------- ----------- -----------
MEMBERS' CONTRIBUTED CAPITAL:
Balance at beginning of year $ 4,259 $ 4,244 $ 4,218
Member contributions 26 15 26
------------ ----------- -----------
Balance at end of year 4,285 4,259 4,244
------------ ----------- -----------
RETAINED EARNINGS:
Balance at beginning of year 912 601 395
Net income 450 1,836 1,310 $ 450 $ 1,836 $ 1,310
Distributions to members (420) (1,525) (1,104)
------------ ---------- -----------
Balance at end of year 942 912 601
------------ ---------- -----------
ACCUMULATED OTHER COMPREHENSIVE
LOSS:
Minimum pension liability adjustments:
Balance at beginning of year (5) (4) --
Changes during the year (33) (1) (4) (33) (1) (4)
------------ ---------- -----------
Balance at end of year (38) (5) (4)
------------ ---------- -----------
Deferred gains (losses) on derivative
instruments:
Balance at beginning of year -- -- --
Cumulative effect adjustment -- 6 -- -- 6 --
Reclassification of the cumulative
effect adjustment into
income -- (6) -- -- (6) --
Changes in fair value (3) -- -- (3) -- --
------------ ---------- ----------- ----------- ----------- -----------
Balance at end of year (3) -- --
------------ ---------- -----------
TOTAL (41) (5) (4) $ 414 $ 1,835 $ 1,306
------------ ---------- ----------- =========== =========== ===========
TOTAL MEMBERS' CAPITAL $ 5,186 $ 5,166 $ 4,841
============ ========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
NOTE A - BUSINESS DESCRIPTION AND BASIS OF PRESENTATION
On December 12, 1997, Marathon Oil Company (Marathon), a wholly owned
subsidiary of Marathon Oil Corporation (MOC), formerly USX Corporation,
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 (RM&T) operations to MAP. Also,
on January 1, 1998, Marathon acquired certain RM&T net assets from Ashland
in exchange for a 38 percent interest in MAP. The purchase price was
determined to be $1.9 billion, based upon an external valuation. The
acquisition of Ashland's net assets was accounted for under the purchase
method of accounting.
In connection with the formation of MAP, Marathon and Ashland entered into
a Limited Liability Company Agreement (LLC Agreement) dated January 1,
1998. The LLC Agreement provides for an initial term expiring on December
31, 2022 (25 years from its formation). The term will automatically be
extended for ten-year periods, unless a termination notice is given by
either party.
Also in connection with the formation of MAP, the parties entered into a
Put/Call, Registration Rights and Standstill Agreement (the Put/Call
Agreement). The Put/Call Agreement provides that at any time after December
31, 2004, Ashland will have the right to sell to Marathon all of Ashland's
ownership interest in MAP, for an amount in cash and/or Marathon or MOC
debt or equity securities equal to the product of 85 percent (90 percent if
equity securities are used) of the fair market value of MAP at that time,
multiplied by Ashland's percentage interest in MAP. Payment could be made
at closing, or at Marathon's option, in three equal annual installments,
the first of which would be payable at closing. At any time after December
31, 2004, Marathon will have the right to purchase all of Ashland's
ownership interests in MAP, for an amount in cash equal to the product of
115 percent of the fair market value of MAP at that time, multiplied by
Ashland's percentage interest in MAP.
MAP is engaged in petroleum supply, refining, marketing & transportation
operations and includes Speedway SuperAmerica LLC (SSA), a wholly owned
subsidiary, which operates retail outlets for petroleum products and
merchandise. In addition, MAP, through its wholly owned subsidiary,
Marathon Ashland Pipe Line LLC, is actively engaged in the pipeline
transportation of crude oil and petroleum products.
In 2002, 2001 and 2000, MAP recorded capital contributions from Marathon of
$3 million, $2 million and $2 million, respectively, and from Ashland of
$20 million, $10 million and $24 million, respectively, for environmental
improvements. The LLC Agreement stipulates that ownership interest in MAP
will not be adjusted as a result of such contributions. In 2002 and 2001,
MAP recorded capital contributions of $3 million and $1 million,
respectively, from Marathon, and in 2001, $2 million from Ashland related
to stock-based compensation expense which is allocated 100 percent to
Marathon and Ashland, respectively.
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
PRINCIPLES APPLIED IN CONSOLIDATION - The consolidated financial statements
include the accounts of MAP and the majority-owned subsidiaries which it
controls. Investments in undivided interest pipelines are consolidated on a
pro rata basis. Investments in entities over which MAP has significant
influence are accounted for using the equity method of accounting and are
carried at MAP's share of net assets plus advances. Differences in the
basis of the investment and the separate net asset value of the investee,
if any, are amortized into income in accordance with the underlying
remaining useful life of the associated assets. Investments in companies
whose stocks have no readily determinable fair value are carried at cost.
Income from equity method investments represents MAP's proportionate share
of income from equity method investments. Other income includes dividend
income from other investments. Dividend income is recognized when dividend
payments are received.
USE OF ESTIMATES - The preparation of financial statements in accordance
with generally accepted accounting principles requires 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.
Items subject to such estimates and assumptions include the carrying value
of property, plant and equipment, goodwill, intangibles and equity method
investments; valuation allowances for receivables and inventories;
environmental remediation liabilities; liabilities for potential tax
deficiencies and potential litigation claims and settlements; and assets
and obligations related to employee benefits. Actual results could differ
from the estimates and assumptions used.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - CONTINUED
REVENUE RECOGNITION - Revenues are recognized generally when products are
shipped or services are provided to customers and the sales price is fixed
or determinable and collectibility is reasonably assured. Costs associated
with revenues are recorded in cost of revenues.
Rebates from vendors are recognized as revenues when the initiating
transaction occurs. Incentives that are derived from contractual provisions
are accrued based on past experience and recognized within cost of
revenues.
Matching buy/sell transactions settled in cash are recorded in both
revenues and cost of revenues as separate sales and purchase transactions.
During the years ended December 31, 2002, 2001 and 2000, matching buy/sell
transactions were $4,335 million, $3,817 million and $3,882 million,
respectively.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand
and on deposit and investments with related parties in highly liquid debt
instruments with maturities of three months or less. See Note D for
information regarding investments with related parties.
INVENTORIES - Inventories are carried at lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
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.
DERIVATIVE INSTRUMENTS - MAP uses commodity-based derivative instruments to
manage its exposure to commodity price risk. Management has authorized the
use of futures, forwards, swaps and combinations of options related to the
purchase or sale of crude oil, refined products and natural gas. Changes in
the fair value of all derivatives are recognized immediately in income,
within revenues or cost of revenues, unless the derivative qualifies as a
hedge of future cash flows or certain foreign currency exposures. During
2002 and 2001, MAP did not elect to designate any derivatives as qualifying
for hedge accounting treatment.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
depreciated principally by the straight-line method over their estimated
useful lives, which range from 3 to 42 years.
When property, plant and equipment depreciated on an individual basis are
sold or otherwise disposed of, any gains or losses are reflected in income.
Gains on disposal of property, plant and equipment are recognized when
earned, which is generally at the time of closing. Included in net gains on
disposal of assets are gains on the sale of SSA stores of $37 million, $23
million and $25 million for 2002, 2001 and 2000, respectively. If a loss on
disposal is expected, such losses are recognized when the assets are
reclassified as held for sale. Proceeds from disposal of property, plant
and equipment depreciated on a group basis are credited to accumulated
depreciation and amortization with no immediate effect on income.
MAJOR MAINTENANCE ACTIVITIES - MAP incurs planned major maintenance costs
primarily for refinery turnarounds. These types of costs include contractor
repair services, materials and supplies, equipment rentals and company
labor costs. Such costs are expensed in the same annual period as incurred;
however, estimated annual turnaround costs are recognized in income
throughout the year on a pro rata basis.
ENVIRONMENTAL LIABILITIES - Environmental expenditures are capitalized if
the costs mitigate or prevent future contamination or if the costs improve
existing assets' environmental safety or efficiency. MAP provides for
remediation costs and penalties when the responsibility to remediate is
probable and the amount of associated costs can be reasonably estimated.
The timing of remediation accruals coincides with completion of a
feasibility study or the commitment to a formal plan of action. Remediation
liabilities are accrued based on estimates of known environmental exposure
and are discounted when the estimated amounts are reasonably fixed and
determinable. At December 31, 2002 and 2001, the portion of the
environmental liability that was discounted was not material. If recoveries
of remediation costs from third parties are probable, a receivable is
recorded.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS - MAP has a noncontributory
defined benefit pension plan with two benefit payment formulas and several
related excess benefit plans covering substantially all employees. Benefits
under its final pay formula are based primarily upon age, years of service
and the highest consecutive three years' earnings during the last ten years
before
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - CONTINUED
retirement. Benefits under its pension equity formula are based primarily
upon age, years of service and the final three years of earnings at
retirement. MAP also participates in a multiemployer plan that provides
coverage for less than 5 percent of its employees, covering both pension
and health care benefits.
MAP also has a retiree health plan covering most employees upon their
retirement. Health benefits are provided through comprehensive hospital,
surgical and major medical benefit provisions or through health maintenance
organizations, subject to various cost sharing features. In addition, life
insurance benefits are provided to certain nonunion and union represented
employees primarily based on annual base salary at retirement. Retiree
health and life insurance benefits (other benefits) have not been
prefunded.
STOCK-BASED COMPENSATION - MAP applies the principles of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," to the stock-based compensation granted to MAP employees by
Marathon, and MAP applies the principles of Statement of Financial
Accounting Standards No. 123, "Accounting For Stock-Based Compensation," as
interpreted by Emerging Issues Task Force Issue 96-18, "Accounting for
Equity Instruments That Are Issued To Other Than Employees For Acquiring,
Or In Conjunction With Selling, Goods Or Services," to the stock-based
compensation granted to MAP employees by Ashland. The amounts of
stock-based compensation recorded in selling, general and administrative
expenses were $3 million in 2002 and 2001. Marathon will adopt the
Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," effective January 1,
2003; and the impact on MAP is expected to be immaterial.
INSURANCE - MAP is insured for catastrophic casualty and certain property
and business interruption 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 - MAP is a limited liability company, and therefore, except
for several small subsidiary corporations, is not subject to U.S. federal
income taxes. Accordingly, the taxable income or loss resulting from
operations of MAP is ultimately included in the U.S. federal income tax
returns of MOC and Ashland. MAP is, however, subject to income taxes in
certain state, local and foreign jurisdictions.
CONCENTRATION OF CREDIT RISK - MAP is exposed to credit risk in the event
of nonpayment by counterparties, a significant portion of which are
concentrated in energy related industries. The creditworthiness of
customers and other counterparties is subject to continuing review,
including the use of master netting agreements, where appropriate. No
single customer accounts for more than 5 percent of annual gross revenues.
RECLASSIFICATIONS - Certain reclassifications of prior years' data have been
made to conform to 2002 classifications.
NOTE C - NEW ACCOUNTING STANDARDS
ADOPTED IN THE REPORTING PERIODS - Effective January 1, 2001, MAP adopted
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended
by SFAS Nos. 137 and 138. This statement requires recognition of all
derivatives as either assets or liabilities at fair value. The transition
adjustment related to adopting SFAS No. 133 on January 1, 2001, was
recognized as a cumulative effect of change in accounting principle. The
unfavorable cumulative effect on net income was $20 million. The favorable
cumulative effect included within Other Comprehensive Income (OCI) was $6
million. A portion of the cumulative effect adjustment relating to the
adoption of SFAS No. 133 was recognized in OCI which relates only to
deferred gains or losses for hedge transactions as of December 31, 2000. A
reconciliation of the changes in OCI relating to derivative instruments is
included in the Statement of Members' Capital.
Effective January 1, 2002, MAP adopted the following Statements of
Financial Accounting Standards:
o No. 141, "Business Combinations" (SFAS No. 141),
o No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142),
and
o No. 144, "Accounting for Impairment or Disposal of Long-Lived
Assets (SFAS No. 144)
SFAS No. 141 requires that all business combinations initiated after June
30, 2001, be accounted for under the purchase method.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - NEW ACCOUNTING STANDARDS - CONTINUED
SFAS No. 142 addresses the accounting for goodwill and other intangible
assets after an acquisition. Effective January 1, 2002, MAP ceased
amortization of existing goodwill, which results in a favorable impact on
annual income of approximately $2 million. MAP has completed the required
transitional impairment test for existing goodwill as of the date of
adoption. No impairment of goodwill was indicated.
SFAS No. 144 establishes a single accounting model for long-lived assets to
be disposed of by sale and provides additional implementation guidance for
assets to be held and used and assets to be disposed of other than by sale.
For long-lived assets to be disposed of by sale, SFAS No. 144 broadens the
definition of those disposals that should be reported separately as
discontinued operations. The adoption of SFAS No. 144 had no initial effect
on MAP's financial statements.
In late 2002 and early 2003, the FASB issued the following:
o Statement of Financial Accounting Standards No. 148 "Accounting
for Stock-Based Compensation - Transition and Disclosure" (SFAS
No. 148),
o FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45), and
o FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities" (FIN 46).
Each of these pronouncements required the immediate adoption of certain
disclosure requirements, which have been reflected in these financial
statements. The accounting requirements of these pronouncements will be
adopted in future periods.
TO BE ADOPTED IN FUTURE PERIODS - In 2001, the FASB issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS No. 143). This statement requires the fair value of an
asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The present
value of the estimated asset retirement costs is capitalized as part of the
carrying amount of the long-lived asset.
While certain assets such as refineries, crude oil and product pipelines
and marketing assets have retirement obligations covered by SFAS No. 143,
those obligations are not expected to be recognized, since the fair value
cannot be estimated due to the uncertainty of the settlement date of the
obligation.
Effective January 1, 2003, MAP will adopt SFAS No. 143, as required. The
cumulative effect on net income of adopting SFAS No. 143 is expected to be
an unfavorable pretax effect of approximately $2 million. At the time of
adoption, total liabilities will increase approximately $2 million. The
amounts recognized upon adoption are based upon estimates and assumptions,
including future retirement costs, future inflation rates, and the
credit-adjusted risk-free interest rate. The impact on income in the near
term is not expected to be material.
Effective for any guarantees issued or modified January 1, 2003 or after,
FIN 45 requires the fair value measurement and recognition of a liability
for the issuance of certain guarantees. Enhanced disclosure requirements
will continue to apply to both new and existing guarantees subject to FIN
45. For details relating to financial guarantees, see Note Q.
FIN 46 identifies certain off-balance sheet arrangements that meet the
definition of a variable interest entity (VIE). The primary beneficiary of
a VIE is the party that is exposed to the majority of the risks and/or
returns of the VIE. In future accounting periods, the primary beneficiary
will be required to consolidate the VIE. In addition, more extensive
disclosure requirements apply to the primary beneficiary, as well as other
significant investors. MAP does not participate in any arrangements that
are subject to the consolidation and disclosure requirements of FIN 46.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - RELATED PARTY TRANSACTIONS
Related parties include:
o Ashland and its affiliates.
o MOC and its affiliates.
o Equity method investees.
Management believes that transactions with related parties were conducted
under terms comparable to those with unrelated parties.
Revenues from related parties were:
Year Ended December 31
----------------------
(Millions)
2002 2001 2000
----------- ----------- -----------
Ashland and its affiliates $ 218 $ 237 $ 285
MOC and its affiliates 147 211 147
Equity investee:
Pilot Travel Centers LLC (PTC) 645 210 --
----------- ----------- -----------
Total $ 1,010 $ 658 $ 432
=========== =========== ===========
Related party sales to Ashland and its affiliates and PTC consist primarily
of refined petroleum products. Related party sales to MOC and its
affiliates consist primarily of liquid hydrocarbons.
Purchases from related parties were:
Year Ended December 31
----------------------
(Millions)
2002 2001 2000
----------- ----------- -----------
Ashland and its affiliates $ 33 $ 29 $ 26
MOC and its affiliates 782 627 573
Equity investees:
PTC 15 -- --
Other 52 54 61
----------- ----------- -----------
Total $ 882 $ 710 $ 660
=========== =========== ===========
Related party purchases from Ashland and its affiliates consist primarily
of refined petroleum products and the net amount of administrative services
provided between the companies. Related party purchases from MOC and its
affiliates consist primarily of crude oil, natural gas and refinery
feedstocks and the net amount of administrative services provided between
the companies. Related party purchases from PTC consist primarily of
refined petroleum products and the purchases from other equity investees
consist primarily of crude oil and refined product transportation.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - RELATED PARTY TRANSASCTIONS - CONTINUED
Receivables from related parties were:
Year Ended December 31
---------------------------
(Millions)
2002 2001
----------- -----------
Ashland and its affiliates $ 18 $ 19
MOC and its affiliates 16 23
Equity investees:
PTC 16 17
Other 2 --
----------- -----------
Total $ 52 $ 59
=========== ===========
Payables to related parties were:
Year Ended December 31
---------------------------
(Millions)
2002 2001
----------- -----------
Ashland and its affiliates $ 3 $ 20
MOC and its affiliates 71 42
Equity investees 7 4
----------- -----------
Total $ 81 $ 66
=========== ===========
As of December 31, 2002 and 2001, accounts payable to Ashland included a
member distribution payable of less than $1 million and $17 million,
respectively.
In connection with the formation of MAP, certain Marathon debt was assigned
to MAP. Marathon agreed to reimburse MAP for this debt and related interest
expense. During 2000, Marathon reimbursed MAP $6 million for debt
repayments. During 2002 and 2001, there were no debt repayment
reimbursements from Marathon.
A revolving credit agreement was entered into as of January 1, 1998, among
Ashland and Marathon (collectively the Lenders) and MAP. This agreement
provides that the Lenders may loan to MAP up to $500 million at defined
short-term market rates. At December 31, 2002 and 2001, there were no
borrowings against this facility. During 2002 and 2001, MAP borrowed and
repaid $701 million and $294 million, respectively, under this revolving
credit facility. The weighted average borrowings outstanding under this
revolving credit facility during the years 2002 and 2001 were $5 million
and $3 million, respectively. During the years ended December 31, 2002 and
2001, interest paid to Marathon on these borrowings was less than $1
million. Interest paid to Marathon for borrowings under this agreement was
$1 million for 2000. Interest paid to Ashland for borrowings under this
agreement was less than $1 million for 2002, 2001 and 2000. MAP is
investigating alternatives for the replacement of this facility upon its
expiration on March 15, 2003.
On November 16, 1998, MAP entered into agreements with MOC and Ashland,
which allow MAP to invest its surplus cash balances on a daily basis at
competitive interest rates with MOC and Ashland in proportion up to their
ownership interests in MAP. These agreements, as previously extended,
expired on March 15, 2002 and have been subsequently amended and extended
with an expiration date of March 15, 2003. At December 31, 2002 and 2001,
there was no cash invested under these agreements. During the years ended
December 31, 2002, 2001 and 2000, interest income earned from these
investments was less than $1 million, $2 million and $6 million,
respectively, from Ashland and $2 million, $1 million and $7 million,
respectively, from MOC.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - OTHER ITEMS
Year Ended December 31
------------------------------------------
(Millions)
2002 2001 2000
----------- ----------- -----------
NET INTEREST AND OTHER FINANCING INCOME (COSTS):
INTEREST AND OTHER FINANCIAL INCOME:
Interest income - third parties $ 3 $ 11 $ 9
Interest income - related parties 2 3 13
----------- ----------- -----------
Total 5 14 22
----------- ----------- -----------
INTEREST AND OTHER FINANCING COSTS:
Interest incurred 2 3 3
Other 8 7 7
----------- ----------- -----------
Total 10 10 10
----------- ----------- -----------
NET INTEREST AND OTHER FINANCING INCOME (COSTS) $ (5) $ 4 $ 12
=========== =========== ===========
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE F - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Pension Benefits Other Benefits
---------------------- ---------------------
(Millions)
2002 2001 2002 2001
--------- --------- --------- ---------
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligations at January 1 $ 727 $ 568 $ 216 $ 189
Service cost 49 40 11 9
Interest cost 47 42 15 14
Actuarial losses 49 130 56 7
Settlements, curtailments and termination benefits -- (6) -- --
Benefits paid (41) (47) (3) (3)
--------- --------- --------- ---------
Benefit obligations at December 31 $ 831 $ 727 $ 295 $ 216
========= ========= ========= =========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at January 1 $ 440 $ 502
Actual return on plan assets (43) (17)
Benefits paid from plan assets (41) (45)
--------- ---------
Fair value of plan assets at December 31 $ 356 $ 440
========= =========
FUNDED STATUS OF PLANS AT DECEMBER 31 $ (475)(a)$ (287)(a) $ (295) $ (216)
Unrecognized net gain from transition (5) (7) -- --
Unrecognized prior service costs (credits) 22 24 (40) (47)
Unrecognized actuarial losses 323 187 82 27
--------- --------- --------- ---------
Accrued benefit cost $ (135) $ (83) $ (253) $ (236)
========= ========= ========= =========
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION:
Accrued benefit liability $ (197) $ (88) $ (253) $ (236)
Intangible asset 24 -- -- --
Accumulated other comprehensive loss 38 5 -- --
--------- --------- --------- ---------
Accrued benefit cost $ (135) $ (83) $ (253) $ (236)
========= ========= ========= =========
(a) Following is information on plans that have accumulated benefit
obligations in excess of plan assets:
2002 2001
------- -------
Aggregate accumulated benefit obligations $ (553) $ (9)
Aggregate projected benefit obligations (831) (26)
Aggregate plan assets 356 --
Pension Benefits Other Benefits
---------------------------------- ---------------------------------
(Millions)
2002 2001 2000 2002 2001 2000
--------- --------- --------- --------- --------- ---------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 49 $ 40 $ 36 $ 11 $ 9 $ 8
Interest cost 47 42 38 15 14 12
Expected return on plan assets (46) (50) (51) -- -- --
Amortization - net transition gain (2) (2) (2) -- -- --
- prior service costs (credits) 2 2 2 (7) (6) (8)
- actuarial (gains) losses 3 1 (4) 2 -- --
Multiemployer and other plans 1 2 1 2 -- --
Settlement and termination (gain) loss -- 3 3 -- -- --
--------- --------- --------- --------- --------- ---------
Net periodic benefit cost $ 54 $ 38 $ 23 $ 23 $ 17 $ 12
========= ========= ========= ========= ========= =========
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - PENSIONS AND OTHER POSTRETIREMENT BENEFITS - CONTINUED
PENSION BENEFITS OTHER
WEIGHTED AVERAGE ACTUARIAL ASSUMPTIONS --------------------------------- ---------------------------
AT DECEMBER 31: 2002 2001 2002 2001
---- ---- ----- -----
Discount rate 6.5% 7.0% 6.5% 7.0%
Expected annual return on plan assets 9.0% 9.5% N/A N/A
Increase in compensation rate 4.5% 5.0% 4.5% 5.0%
For measurement purposes, a 10 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2002. The rate
was assumed to decrease gradually to 5 percent for 2012 and remain at that
level thereafter.
A one-percentage-point change in assumed health care cost trend rates would
have the following effects:
1-Percentage 1-Percentage
Point Increase Point Decrease
---------------------- ----------------------
(Millions)
Effect on total of service and interest
cost components $ 5 $ (4)
Effect on postretirement benefit obligation 51 (41)
MAP is required to fund a cash contribution of approximately $35 million to
its pension plan in the third quarter 2003.
MAP also contributes to several defined contribution plans for salaried
employees. Contributions to these plans, which for the most part are based
on a percentage of the employees' salaries, totaled $26 million, $25
million and $21 million in 2002, 2001 and 2000, respectively.
NOTE G - INCOME TAXES
The taxable income or loss resulting from operations of MAP, except for
several small subsidiary corporations, is ultimately included in the
federal income tax returns of MOC and Ashland. MAP is, however, subject to
taxation in certain state, local and foreign jurisdictions.
Provisions for income taxes:
Year Ended December 31
-------------------------------------------------------------------------------------------------
(Millions)
2002 2001 2000
------------------------------- ----------------------------- ----------------------------
Current Deferred Total Current Deferred Total Current Deferred Total
------- -------- ----- ------- -------- ----- ------- -------- -----
Federal $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
State and local 1 1 2 8 -- 8 5 -- 5
Foreign 1 -- 1 1 -- 1 2 -- 2
------- -------- ----- ------- -------- ----- ------- -------- -----
Total $ 2 $ 1 $ 3 $ 9 $ -- $ 9 $ 7 $ -- $ 7
======= ======== ===== ======= ======== ===== ======= ======== =====
Deferred tax liabilities at December 31, 2002 and 2001 of $5 million and $4
million, respectively, principally arise from differences between the book
and tax basis of inventories and property, plant and equipment. Pretax
income in 2002 included $2 million attributable to foreign sources. Pretax
income in 2001 and 2000 attributable to foreign sources was not material.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - INVENTORIES
Inventories consist of the following: December 31
---------------------------
(Millions)
2002 2001
----------- ------------
Liquid hydrocarbons $ 652 654
Refined products and merchandise 1,191 1,149
Supplies and sundry items 72 67
----------- ------------
Total (at cost) 1,915 1,870
Less inventory market valuation reserve -- 77
----------- ------------
Net inventory carrying value $ 1,915 $ 1,793
=========== ============
The LIFO method accounted for 95 percent and 94 percent of total inventory
at December 31, 2002 and 2001, respectively. Current acquisition costs were
estimated to exceed the above inventory values at December 31, 2002, by
approximately $594 million. Cost of revenues was reduced and income from
operations was increased by less than $1 million in 2002 and $17 million in
2001 as a result of liquidations of LIFO inventories.
NOTE I - INVESTMENTS AND LONG-TERM RECEIVABLES
December 31
---------------------------
(Millions)
2002 2001
----------- -----------
Equity method investments $ 477 $ 468
Receivables due after one year 24 23
Deposits of restricted cash 42 11
----------- -----------
Total $ 543 $ 502
=========== ===========
Summarized financial information of investees accounted for by the equity method
of accounting follows:
Year Ended December 31
------------------------------------------
(Millions)
2002 2001 2000
----------- ----------- -----------
Income data - year:
Revenues and other income $ 4,174 $ 1,462 $ 239
Operating income 153 134 95
Net income 98 90 57
December 31
---------------------------
(Millions)
2002 2001
----------- -----------
Balance sheet data - December 31:
Current assets $ 261 $ 389
Noncurrent assets 2,195 2,156
Current liabilities 374 417
Noncurrent liabilities 828 859
MAP's carrying value of its equity method investments is $113 million lower
than the underlying net assets of investees. This basis difference is being
amortized into income over the lives of the underlying net assets.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - INVESTMENTS AND LONG-TERM RECEIVABLES - CONTINUED
Dividends and partnership distributions received from equity investees were
$39 million, $31 million and $25 million in 2002, 2001 and 2000,
respectively.
Principal unconsolidated equity investees of MAP at December 31, 2002, are
as follows:
Company Ownership Activity
------- --------- --------
Pilot Travel Centers LLC 50.0% Travel centers
Minnesota Pipe Line Company 33.3% Crude oil pipeline system
LOOP LLC 46.7% Offshore oil port
Southcap Pipe Line Company 21.6% Crude oil pipeline system
LOCAP LLC 49.9% Crude oil pipeline system
Centennial Pipeline LLC 33.3% Refined products pipeline system
Pilot Travel Centers LLC (PTC), a MAP joint venture with Pilot Corporation
(Pilot), began operations on September 1, 2001. PTC is the largest operator
of travel centers in the United States with about 225 locations in 34
states. The travel centers offer diesel fuel, gasoline and a variety of
other services, including on-premises brand name restaurants. PTC provides
MAP with the opportunity to participate in the travel center business on a
nationwide basis. Pilot and MAP each own a 50 percent interest in PTC. PTC
is accounted for under the equity method of accounting.
In March 2000, MAP, Panhandle Eastern Pipe Line Company, a subsidiary of
CMS Energy Corporation, and TE Products Pipeline Company, Limited
Partnership, formed a limited liability company with equal one-third
ownership called Centennial Pipeline LLC (Centennial) to develop an
interstate refined petroleum products pipeline extending from the U.S. Gulf
of Mexico to the Midwest. Centennial began deliveries of refined products
in April 2002. Centennial is accounted for under the equity method of
accounting. See Note R.
NOTE J - PROPERTY, PLANT AND EQUIPMENT
December 31
---------------------------
(Millions)
2002 2001
----------- -----------
Refining $ 3,183 $ 2,821
Marketing 2,008 2,005
Transportation 1,490 1,382
Other 37 31
----------- -----------
Total 6,718 6,239
Less accumulated depreciation and amortization 2,514 2,262
----------- -----------
Net $ 4,204 $ 3,977
=========== ===========
Property, plant and equipment at December 31, 2002 and 2001, includes gross
assets acquired under capital leases of $8 million and $8 million,
respectively, with related amounts in accumulated depreciation and
amortization of $1 million and $1 million, respectively.
NOTE K - SHORT-TERM DEBT
MAP has a $350 million short-term revolving credit facility that terminates
in July 2003. Interest is based on defined short-term market rates. During
the term of the agreement, MAP is required to pay a variable facility fee
on total commitments, which at December 31, 2002 was 0.125 percent. There
were no borrowings against this facility at December 31, 2002. This
facility also provides for the issuance of letters of credit in aggregate
amounts not to exceed $75 million. A letter of credit of $40 million was
outstanding at December 31, 2002, which reduced the available credit to
$310 million. In the event that MAP defaults (as defined in the agreement)
on indebtedness in excess of $100 million, Marathon has guaranteed the
payment of outstanding obligations. MAP is investigating alternatives for
the replacement of this facility upon its expiration. Additionally, MAP has
a $500 million revolving credit agreement with Ashland and Marathon, as
discussed in Note D. At December 31, 2002, there were no borrowings against
this facility.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - LONG-TERM DEBT
December 31
---------------------------
(Millions)
2002 2001
----------- -----------
Capital lease obligations $ 6 $ 6
5% Promissory Note due 2009 1 1
----------- ----------
Total (a) 7 7
Amounts due within one year (1) --
----------- -----------
Long-term debt due after one year $ 6 $ 7
=========== ===========
(a) Required payments of long-term debt for the years 2004, 2005, 2006
and 2007 are $1 million, $1 million, $1 million and $1 million,
respectively.
NOTE M - SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended December 31
------------------------------------------
(Millions)
2002 2001 2000
----------- ----------- -----------
CASH PROVIDED FROM OPERATING ACTIVITIES INCLUDES:
Interest and other financial costs paid $ (1) $ (2) $ (3)
Income taxes paid (7) (5) (5)
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Notes received in asset disposal transactions 5 -- --
Net assets contributed to joint ventures -- 246 --
Member capital contributions 26 15 26
NOTE N - LEASES
Future minimum commitments for capital and operating leases having remaining
noncancelable lease terms in excess of one year are as follows:
Capital Operating
Leases Leases
----------- -----------
(Millions)
2003 $ 1 $ 65
2004 1 55
2005 1 29
2006 1 23
2007 1 7
Later years 3 37
Sublease rentals -- (1)
----------- -----------
Total minimum lease payments 8 $ 215
===========
Less imputed interest costs (2)
-----------
Present value of net minimum lease payments
included in long-term debt $ 6
===========
Operating lease rental expense:
Year Ended December 31
------------------------------------------
(Millions)
2002 2001 2000
----------- ----------- -----------
Minimum rental $ 97 $ 73 $ 73
Contingent rental 13 13 10
Sublease rentals (2) (2) (6)
----------- ----------- -----------
Net rental expense $ 108 $ 84 $ 77
=========== =========== ===========
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - LEASES - CONTINUED
MAP leases a wide variety of facilities and equipment under operating
leases, including land and building space, office equipment, production
facilities and transportation equipment. Most long-term leases include
renewal options and, in certain leases, purchase options.
NOTE O - DERIVATIVE INSTRUMENTS
The following table sets forth quantitative information by category of
derivative instrument at December 31, 2002 and 2001. These amounts are
reflected on a gross basis. The amounts exclude the variable margin deposit
balances held in various brokerage accounts. MAP did not have any foreign
currency contracts in place at December 31, 2002 or 2001.
Year Ended December 31
----------------------------------------------------
(Millions)
2002 2001
---------------------------- --------------------------
Assets(a) (Liabilities)(a) Assets(a) (Liabilities)(a)
------ ------------- ------ -------------
NON-HEDGE DESIGNATION:
Exchange-traded commodity futures $ 9 $ (46) $ 7 $ (16)
Exchange-traded commodity options 9 (11) 15 (10)
OTC commodity swaps 3 (5) 5 (6)
OTC commodity options 1 -- -- (1)
NONTRADITIONAL INSTRUMENTS (b) 53 (39) 13 (13)
(a) The fair value and carrying value of derivative instruments are
the same. The fair value amounts for OTC positions are based on
various indices or dealer quotes. The fair values of
exchange-traded positions are based on market price changes for
each commodity. MAP's consolidated balance sheet is reflected on a
net asset/(liability) basis, as permitted by the master netting
agreements, by brokerage firm.
(b) Nontraditional derivative instruments are created due to netting
of physical receipts and delivery volumes with the same
counterparty.
MAP recorded a net derivative loss of $124 million in 2002, with a
derivative loss of $76 million recorded in cost of revenues and a
derivative loss of $48 million recorded in revenue. In 2001, MAP recorded a
net derivative gain of $209 million, with a derivative gain of $226 million
recorded in cost of revenues and a derivative loss of $17 million recorded
in revenues. In 2000, MAP recorded a derivative loss of $205 million, with
$111 million recorded in cost of revenues and $94 million recorded in
revenues.
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of most financial instruments are based on historical
costs. The carrying values of cash and cash equivalents, receivables,
payables, long-term receivables and long-term debt approximate their fair
value.
MAP's unrecognized financial instruments consist of financial guarantees
and commitments to extend credit. For details relating to financial
guarantees, see Note Q.
NOTE Q - CONTINGENCIES AND COMMITMENTS
MAP is the subject of, or party to, a number of pending or threatened legal
actions, contingencies and commitments involving a variety of matters,
including laws and regulations relating to the environment. Certain of
these matters are discussed below. The ultimate resolution of these
contingencies could, individually or in the aggregate, be material to the
MAP financial statements. However, management believes that MAP will remain
a viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE Q - CONTINGENCIES AND COMMITMENTS - CONTINUED
ENVIRONMENTAL MATTERS - MAP 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. Marathon and Ashland
have retained the liabilities, subject to certain thresholds, for costs
associated with remediating properties conveyed to MAP for conditions
existing prior to January 1, 1998. The costs associated with these
thresholds are not expected to be material to the MAP financial statements.
At December 31, 2002 and 2001, MAP's accrued liabilities for remediation
totaled $14 million and $13 million, respectively. It is not presently
possible to estimate the ultimate amount of all remediation costs that
might be incurred or the penalties that may 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 $9 million and $7 million at December 31, 2002 and
2001, respectively.
MAP has made substantial capital expenditures to bring existing facilities
into compliance with various laws relating to the environment. In 2002,
2001 and 2000, such capital expenditures for environmental controls totaled
$119 million, $79 million and $47 million, respectively. MAP 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.
On May 11, 2001, MAP entered into a consent decree with the U.S.
Environmental Protection Agency which commits it to complete certain agreed
upon environmental projects over an eight-year period primarily aimed at
reducing air emissions at its seven refineries. The court approved this
consent decree on August 28, 2001. The total one-time expenditures for
these environmental projects is approximately $360 million over the eight
year period, with about $230 million remaining over the next six years. In
addition, MAP has nearly completed certain agreed upon supplemental
environmental projects as part of this settlement of an enforcement action
for alleged Clean Air Act violations, at a cost of $9 million. MAP believes
that this settlement will provide MAP with increased permitting and
operating flexibility while achieving significant emission reductions.
GUARANTEES - MAP has issued the following guarantees:
Undiscounted Payments
Term As of December 31, 2002
------ -----------------------
(millions)
Indebtness of equity investees:
LOCAP commercial paper (a) Perpetual-Loan Balance Varies $ 14
LOOP Series 1986 Notes (a) 2006 29
LOOP Series E Notes (a) 2003-2010 16
LOOP Series 1991A Notes (a) 2008 29
LOOP Series 1991B Notes (a) 2003-2008 4
LOOP Series 1992A Notes (a) 2008 34
LOOP Series 1992B Notes (a) 2003-2004 17
LOOP Series 1997 Notes (a) 2017 13
LOOP revolving credit agreement (a) Perpetual-Loan Balance Varies 12
Centennial Pipeline Notes (b) 2008-2024 70
Centennial Pipeline revolving credit agreement (b) 2004-Loan Balance Varies 5
Southcap Pipe Line revolving credit agreement (a) Perpetual-Loan Balance Varies 1
----------
244
Other:
Centennial Pipeline catastrophic event (c) Indefinite 33
Mobile transportation equipment leases (d) 2003-2008 2
PTC workers' compensation (e) Indefinite --
----------
Total maximum potential undiscounted payments $ 279
==========
(a) MAP holds interests in several pipelines and a storage facility
that have secured various project financings with throughput and
deficiency (T&D) agreements. A T&D agreement creates a potential
obligation to advance funds to the pipeline or storage facility in
the event of a cash shortfall. When these rights are assigned to a
lender to secure financing, the T&D is considered to be an
indirect guarantee of indebtedness. Under the agreements, MAP is
required to advance funds if the investees are unable to service
debt. Any such advances are considered prepayments of future
transportation charges.
(b) MAP holds an interest in Centennial and has guaranteed the
repayment of the outstanding balance under the Master Shelf
Agreement and Revolver. The guarantee arose in order to obtain
adequate financing. Prior to expiration of the guarantee, MAP
could be relinquished from responsibility under the guarantee
should Centennial meet certain financial tests.
(c) The agreement between Centennial and its members requires that
each member contribute cash in the event of third-party liability
arising from a catastrophic event. Each member is to contribute
cash in proportion to its ownership interest, up to a maximum
amount of $33 million.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE Q - CONTINGENCIES AND COMMITMENTS - CONTINUED
(d) MAP has entered into various operating leases of trucks and
trailers to be used primarily for the transporting of refined
products. These leases contain terminal rental adjustment clauses
which provide that MAP will indemnify the lessor to the extent
that the proceeds from the sale of the asset at the end of the
lease falls short of the specified maximum percent of original
value.
(e) MAP has guarantees to the states of Tennessee and Kentucky which
allow for PTC to operate as a self-insurer under the provisions of
the applicable workers' compensation laws. These guarantees arose
during the formation of PTC and guarantee the payment by PTC of
valid claims for compensation made under the workers' compensation
laws. Due to the remote and contingent nature of these guarantees,
the maximum potential undiscounted payments are not determinable.
COMMITMENTS - At December 31, 2002 and 2001, MAP's contract commitments for
capital expenditures for property, plant and equipment totaled $86 and $87
million, respectively.
In May 2001, MAP entered into a Transportation Agreement with Centennial in
which MAP guarantees to ship certain volumes on the Centennial system or
make deficiency payments for any volume shortfall. Any deficiency payment
made by MAP will be treated as a prepayment of future transportation
charges.
PUT/CALL AGREEMENT - As part of the formation of PTC, MAP and Pilot entered
into a Put/Call and Registration Rights Agreement (Agreement). The
Agreement provides that any time after September 1, 2008, Pilot can sell
its interest in PTC to MAP for an amount of cash and/or MOC, MAP or Ashland
equity securities equal to the product of 90 percent (95 percent if paid in
securities) of the fair market value of PTC at the time multiplied by
Pilot's percentage interest in PTC. At any time after September 1, 2011,
under certain conditions MAP will have the right to purchase Pilot's
interest in PTC for an amount of cash and/or MOC, MAP or Ashland equity
securities equal to the product of 105 percent (110 percent if paid in
securities) of the fair market value of PTC at the time multiplied by
Pilot's percentage interest in PTC.
NOTE R - SUBSEQUENT EVENTS
On February 7, 2003, MAP, through SSA, announced the signing of a
definitive agreement to sell all 193 of its convenience stores located in
Florida, South Carolina, North Carolina and Georgia for $140 million plus
store inventory. The transaction is anticipated to close in the second
quarter of 2003, subject to any necessary regulatory approvals and
customary closing conditions.
On February 10, 2003, MAP increased its ownership in Centennial from 33.3
percent to 50 percent. MAP paid $20 million for the increased ownership
interest. As of February 10, 2003, Centennial is owned 50 percent each by
MAP and TE Products Pipeline Company, Limited Partnership.
In February 2003, MAP's 50 percent owned PTC purchased 60 retail travel
centers including fuel inventory, merchandise and supplies. The 60
locations are in 15 states, primarily in the Midwest, Southeast and the
Southwest regions of the country.
20