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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2004
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 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) of the Act: 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|
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes |X| No |_|
At March 31, 2004, 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 $3,249,782,427. 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 November 30, 2004, there were 71,941,455 shares of Registrant's
common stock outstanding.
Documents Incorporated by Reference
Portions of Registrant's definitive Proxy Statement for its January
27, 2005 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, 2004 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, 2004 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.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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 in this annual report on Form 10-K are listed in the
index on page F-1.
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
2.1* Master Agreement dated as of March 18, 2004, among
Ashland Inc., ATB Holdings Inc., EXM LLC, New EXM
Inc., Marathon Oil Corporation, Marathon Oil Company,
Marathon Domestic LLC and Marathon Ashland Petroleum
LLC (filed as Exhibit 2.1 to Ashland's Form 8-K/A
dated March 18, 2004, and filed November 5, 2004, and
incorporated herein by reference).
2.2* Tax Matters Agreement dated March 18, 2004, among
Ashland Inc., ATB Holdings Inc., EXM LLC, New EXM
Inc., Marathon Oil Corporation, Marathon Oil Company,
Marathon Domestic LLC and Marathon Ashland Petroleum
LLC (filed as Exhibit 2.2 to Ashland's Form 8-K/A
dated March 18, 2004, and filed November 5, 2004, and
incorporated herein by reference).
2.3* Assignment and Assumption Agreement (VIOC Centers)
dated as of March 18, 2004, between Ashland Inc. and
ATB Holdings Inc. (filed as Exhibit 2.3 to Ashland's
Form 8-K/A dated March 18, 2004, and filed November
5, 2004, and incorporated herein by reference).
2.4* Assignment and Assumption Agreement (Maleic Business)
dated as of March 18, 2004, between Ashland Inc. and
ATB Holdings Inc. (filed as Exhibit 2.4 to Ashland's
Form 8-K/A dated March 18, 2004, and filed November
5, 2004, and incorporated herein by reference).
2.5* Amendment No. 2 dated as of March 18, 2004, to the
Amended and Restated Limited Liability Company
Agreement dated as of December 31, 1998, of Marathon
Ashland Petroleum LLC, by and between Ashland Inc.
and Marathon Oil Company (filed as Exhibit 2.5 to
Ashland's Form 8-K/A dated March 18, 2004, and filed
November 5, 2004, and incorporated herein by
reference).
3.1 Third Restated Articles of Incorporation of
Ashland (filed as Exhibit 3(i) 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
(filed as Exhibit 3.2 to Ashland's annual report on
Form 10-K for the fiscal year ended September 30,
2002, and incorporated herein by reference).
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 annual report on 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 annual
report on 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 annual report on Form 10-K for the fiscal
year ended September 30, 2001, and incorporated
herein by reference).
4.5 Amendment No. 1 dated as of March 18, 2004, to Rights
Agreement dated as of May 16, 1996, between Ashland
Inc. and Rights Agent (filed as Exhibit 4 to
Ashland's Form 10-Q for the quarter ended March 31,
2004, and incorporated herein by reference).
The following Exhibits 10.1 through 10.16 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 annual report on 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 (filed as Exhibit 10.2 to
Ashland's Form 10-Q for the quarter ended June 30,
2003, and incorporated herein by reference).
10.3 Ashland Inc. Deferred Compensation Plan (filed
as Exhibit 10.1 to Ashland's Form 10-Q for the
quarter ended June 30, 2003, and incorporated herein
by reference).
10.4 Eleventh Amended and Restated Ashland Inc.
Supplemental Early Retirement Plan for Certain
Employees (filed as Exhibit 10.3 to Ashland's Form
10-Q for the quarter ended June 30, 2003, and
incorporated herein by reference).
10.5 Ashland Inc. Salary Continuation Plan (filed as
Exhibit 10.5 to Ashland's annual report on Form 10-K
for the fiscal year ended September 30, 2002, and
incorporated herein by reference).
10.6 Form of Ashland Inc. Executive Employment Contract
between Ashland Inc. and certain executives of
Ashland (filed as Exhibit 10.6 to Ashland's annual
report on Form 10-K for the fiscal year ended
September 30, 2002, and incorporated herein by
reference).
10.7 Form of employment agreement between Ashland
Inc. and an executive officer.
10.8 Form of Indemnification Agreement between
Ashland Inc. and members of its Board of Directors
(filed as Exhibit 10.7 to Ashland's annual report on
Form 10-K for the fiscal year ended September 30,
2003, and incorporated herein by reference).
10.9 Ashland Inc. Nonqualified Excess Benefit Pension
Plan (filed as Exhibit 10.4 to Ashland's Form 10-Q
for the quarter ended June 30, 2003, and incorporated
herein by reference).
10.10 Ashland Inc. Directors' Charitable Award Program
(filed as Exhibit 10.11 to Ashland's annual report on
Form 10-K for the fiscal year ended September 30,
2002, and incorporated herein by reference).
10.11 Ashland Inc. 1993 Stock Incentive Plan (filed as
Exhibit 10.11 to Ashland's annual report on Form 10-K
for the fiscal year ended September 30, 2000, and
incorporated herein by reference).
10.12 Ashland Inc. 1997 Stock Incentive Plan (filed as
Exhibit 10.14 to Ashland's annual report on Form 10-K
for the fiscal year ended September 30, 2002, and
incorporated herein by reference).
10.13 Amended and Restated Ashland Inc. Incentive Plan
(filed as Exhibit 10.1 to Ashland's Form 10-Q for the
quarter ended June 30, 2004, and incorporated herein
by reference).
10.14 Form of Notice granting Stock Appreciation Rights Awards.
10.15 Form of Notice granting Restricted Stock Awards.
10.16 Form of Notice granting Nonqualified Stock Option Awards.
10.17 Amended and Restated Limited Liability Company
Agreement dated as of December 31, 1998, of Marathon
Ashland Petroleum LLC by and between Ashland Inc. and
Marathon Oil Company.
10.18** Amendment No. 1 dated as March 17, 2004, to the
Amended and Restated Limited Liability Company
Agreement dated as of December 31, 1998, of Marathon
Ashland Petroleum LLC (filed as Exhibit 10.2 to
Ashland's Form 10-Q for the quarter ended March 31,
2004, and incorporated herein by reference).
10.19 Put/Call Registration Rights and Standstill Agreement,
dated as of January 1, 1998, including Amendment No. 1
thereto, dated as of December 31, 1998, among Marathon Oil
Company, USX Corporation, Ashland Inc. and Marathon
Ashland Petroleum LLC.
10.20 Amendment No. 2 dated as of March 17, 2004, to the
Put/Call Registration Rights and Standstill Agreement
dated as of January 1, 1998, among Marathon Oil
Company, USX Corporation, Ashland Inc. and Marathon
Ashland Petroleum LLC (filed as Exhibit 10.1 to
Ashland's Form 10-Q for the quarter ended March 31,
2004, and incorporated herein by reference).
10.21 Three-Year, $250 Million Revolving Credit Agreement
dated as of April 2, 2004.
10.22 364-Day, $100 Million Revolving Credit Agreement
dated as of April 2, 2004.
11 Computation of Earnings Per Share (appearing on page
F-9 of this annual report on Form 10-K).
12 Computation of Ratio of Earnings to Fixed Charges.
21 List of Subsidiaries.
23.1 Consent of Independent Registered Public Accounting Firm.
23.2*** Consent of PricewaterhouseCoopers LLP.
24 Power of Attorney, including resolutions of the
Board of Directors.
31.1*** Certification of James J. O'Brien, Chief
Executive Officer of Ashland, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2*** Certification of J. Marvin Quin, Chief
Financial Officer of Ashland, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32*** Certification of James J. O'Brien, Chief Executive
Officer of Ashland, and J. Marvin Quin, Chief
Financial Officer of Ashland, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.1 Consent of Tillinghast-Towers Perrin.
99.2 Consent of Hamilton, Rabinovitz & Alschuler, Inc.
*Ashland agrees to supplement this filing and furnish a copy of any
omitted schedule to the United States Securities and Exchange
Commission upon request.
**Portions of this document have received confidential treatment.
***Filed herewith.
Upon written or oral request, a copy of the above exhibits will be
furnished at cost.
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
March 15, 2005
EXHIBIT INDEX
23.2 Consent of PricewaterhouseCoopers LLP.
31.1 Certificate of James J. O'Brien, Chief Executive
Officer of Ashland, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certificate of J. Marvin Quin, Chief Financial
Officer of Ashland, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certificate of James J. O'Brien, Chief Executive Officer of
Ashland, and J. Marvin Quin, Chief Financial Officer of
Ashland, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
CONTENTS
PAGE
REPORT OF INDEPENDENT AUDITORS: 1
CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED STATEMENTS OF INCOME ----------------------------------------------------------------------- 2
CONSOLIDATED BALANCE SHEETS ----------------------------------------------------------------------------- 3
CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------------------------------------- 4
CONSOLIDATED STATEMENTS 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 -------------------------------------------------- 7
NOTE C - NEW ACCOUNTING STANDARDS ------------------------------------------------------------------ 11
NOTE D - RELATED PARTY TRANSACTIONS ---------------------------------------------------------------- 12
NOTE E - OTHER ITEMS ------------------------------------------------------------------------------- 14
NOTE F - PENSIONS AND OTHER POSTRETIREMENT BENEFITS ------------------------------------------------ 15
NOTE G - INCOME TAXES ------------------------------------------------------------------------------ 18
NOTE H - INVENTORIES ------------------------------------------------------------------------------- 18
NOTE I - INVESTMENTS AND LONG-TERM RECEIVABLES ----------------------------------------------------- 18
NOTE J - PROPERTY, PLANT AND EQUIPMENT ------------------------------------------------------------- 20
NOTE K - GOODWILL ---------------------------------------------------------------------------------- 20
NOTE L - INTANGIBLE ASSETS ------------------------------------------------------------------------- 20
NOTE M - SHORT-TERM DEBT --------------------------------------------------------------------------- 21
NOTE N - LONG-TERM DEBT ---------------------------------------------------------------------------- 21
NOTE O - ASSET RETIREMENT OBLIGATIONS -------------------------------------------------------------- 21
NOTE P - SUPPLEMENTAL CASH FLOW INFORMATION -------------------------------------------------------- 21
NOTE Q - LEASES ------------------------------------------------------------------------------------ 22
NOTE R - DERIVATIVE INSTRUMENTS -------------------------------------------------------------------- 22
NOTE S - FAIR VALUE OF FINANCIAL INSTRUMENTS ------------------------------------------------------- 23
NOTE T - CONTINGENCIES AND COMMITMENTS ------------------------------------------------------------- 23
NOTE U - ACCOUNTING STANDARDS NOT YET ADOPTED ------------------------------------------------------ 25
PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
1201 Louisiana, Suite 2900
Houston, TX 77002-5678
REPORT OF INDEPENDENT AUDITORS
To the Board of Managers of
Marathon Ashland Petroleum LLC:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of members' capital, and cash
flows present fairly, in all material respects, the financial position of
Marathon Ashland Petroleum LLC and its subsidiaries ("MAP") at December 31,
2004 and 2003, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2004, 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. Those standards 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.
/s/ PricewaterhouseCoopers LLP
March 11, 2005
1
CONSOLIDATED STATEMENTS OF INCOME (Dollars in Millions)
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
Year Ended December 31
-----------------------------------------------------
2004 2003 2002
------------- ------------- -------------
REVENUES AND OTHER INCOME:
Sales and other operating revenues (including consumer
excise taxes) $ 33,437 $ 26,572 $ 21,198
Revenues from matching buy/sell transactions 8,997 6,936 4,191
Sales to related parties - Note D 1,046 912 866
Revenues from related party matching buy/sell transactions -
Note D 150 94 144
Income from equity method investments 81 82 48
Net gains on disposal of assets 33 42 40
Other income 44 30 26
------------ ------------- -------------
Total revenues and other income 43,788 34,668 26,513
------------ ------------- -------------
COSTS AND EXPENSES:
Cost of revenues (excludes items shown below) 27,016 20,718 15,798
Purchases related to matching buy/sell transactions 8,883 6,960 4,207
Purchases from related parties - Note D 694 711 746
Purchases from related party matching buy/sell
transactions - Note D 145 89 139
Consumer excise taxes 4,463 4,285 4,250
Depreciation and amortization 412 372 365
Selling, general and administrative expenses 623 581 489
Other taxes 142 137 138
Inventory market valuation credits -- -- (77)
------------- ------------- -------------
Total costs and expenses 42,378 33,853 26,055
------------- ------------- -------------
INCOME FROM OPERATIONS 1,410 815 458
Net interest and other financing costs - Note E 1 9 5
------------- ------------- -------------
INCOME BEFORE INCOME TAXES 1,409 806 453
Provision for income taxes - Note G 2 5 3
------------- ------------- -------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES
IN ACCOUNTING PRINCIPLES 1,407 801 450
Cumulative effect of changes in accounting principles - Note C -- (2) --
------------- ------------- -------------
NET INCOME $ 1,407 $ 799 $ 450
============= ============= =============
The accompanying notes are an integral part of
these consolidated financial statements.
2
CONSOLIDATED BALANCE SHEETS (Dollars in Millions)
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
December 31
---------------------------------
2004 2003
------------- -------------
ASSETS:
Current assets:
Cash and cash equivalents $ 1,576 $ 80
Receivables, less allowance for doubtful accounts of $6
and $5, respectively 2,372 1,764
Receivables from related parties - Note D 77 53
Inventories - Note H 1,933 1,894
Other current assets 48 42
------------- -------------
Total current assets 6,006 3,833
Investments and long-term receivables - Note I 553 544
Property, plant and equipment - net - Note J 4,781 4,442
Long-term deferred income tax benefits - Note G 1 --
Goodwill - Note K 21 21
Intangibles - Note L 59 62
Other noncurrent assets 18 18
------------- -------------
Total assets $ 11,439 $ 8,920
============= =============
LIABILITIES:
Current liabilities:
Accounts payable $ 3,584 $ 2,734
Payables to related parties - Note D 99 66
Payroll and benefits payable 168 125
Accrued taxes 61 52
Long-term debt due within one year 2 2
------------- -------------
Total current liabilities 3,914 2,979
Long-term debt - Note N 42 44
Long-term debt payable to related party - Notes D & N 122 --
Deferred income taxes - Note G 5 5
Employee benefits obligations - Note F 563 551
Asset retirement obligations - Note O 4 1
Deferred credits and other liabilities 61 55
------------- -------------
Total liabilities 4,711 3,635
------------- -------------
Contingencies and commitments - Note T -- --
MEMBERS' CAPITAL:
Members' contributed capital 4,328 4,310
Retained earnings 2,460 1,053
Accumulated other comprehensive loss (60) (78)
------------- -------------
Total members' capital 6,728 5,285
------------- -------------
Total liabilities and members' capital $ 11,439 $ 8,920
============= =============
The accompanying notes are an integral part of
these consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Millions)
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
Year Ended December 31
----------------------------------------------------
2004 2003 2002
------------ ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $ 1,407 $ 799 $ 450
Adjustments to reconcile to net cash provided from
operating activities:
Depreciation and amortization 412 372 365
Inventory market valuation credits -- -- (77)
Pensions and other postretirement benefits 25 42 69
Cumulative effect of changes in accounting principles -- 2 --
Deferred income taxes (1) -- 1
Net gains on disposal of assets (33) (42) (40)
Equity income from investees (81) (82) (48)
Distributions from investees 80 80 39
Changes in:
Current receivables (610) (565) (105)
Inventories (39) 21 (45)
Accounts payable and other current liabilities 901 631 434
Receivables from/payables to related parties 9 (16) 39
All other - net 25 14 2
------------- ------------- -------------
Net cash provided from operating activities 2,095 1,256 1,084
------------- ------------- -------------
INVESTING ACTIVITIES:
Capital expenditures (769) (755) (611)
Disposal of assets 52 181 89
Loan transactions - principal loaned (35) (27) (14)
- principal collected 36 24 14
Restricted cash - deposits (31) (54) (79)
- withdrawals 30 93 48
Investments - contributions (2) (24) (100)
- loans and advances (4) (4) --
- returns and repayments 4 42 --
------------- ------------- ------------
Net cash used in investing activities (719) (524) (653)
------------- ------------- -------------
FINANCING ACTIVITIES:
Revolving credit facilities - borrowings - Notes D & M 2,116 1,940 701
- repayments - Notes D & M (2,116) (1,940) (701)
Long-term debt - borrowings - Notes D & N 122 -- --
- repayments - Note N (2) (1) --
Member contributions -- 11 --
Member distributions -- (689) (437)
------------- ------------- -------------
Net cash provided from (used in) financing activities 120 (679) (437)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,496 53 (6)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 80 27 33
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,576 $ 80 $ 27
============= ============= =============
See Note P for supplemental cash flow information.
The accompanying notes are an integral part of
these consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL (Dollars in Millions)
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
Members' Capital Comprehensive Income
Year Ended Year Ended
December 31 December 31
---------------------------------------- ----------------------------------------
2004 2003 2002 2004 2003 2002
----------- ----------- ----------- ----------- ----------- -----------
MEMBERS' CONTRIBUTED CAPITAL:
Balance at beginning of year $ 4,310 $ 4,285 $ 4,259
Member contributions 18 25 26
----------- ----------- -----------
Balance at end of year 4,328 4,310 4,285
----------- ----------- -----------
RETAINED EARNINGS:
Balance at beginning of year 1,053 942 912
Net income 1,407 799 450 $ 1,407 $ 799 $ 450
Distributions to members -- (688) (420)
----------- ----------- -----------
Balance at end of year 2,460 1,053 942
----------- ----------- -----------
ACCUMULATED OTHER COMPREHENSIVE
LOSS:
Minimum pension liability adjustments:
Balance at beginning of year (76) (38) (5)
Changes during the year 16 (38) (33) 16 (38) (33)
----------- ----------- -----------
Balance at end of year (60) (76) (38)
----------- ----------- -----------
Deferred gains (losses) on derivative
instruments:
Balance at beginning of year (2) (3) --
Changes in fair value 2 (1) (3) 2 (1) (3)
Reclassification to income -- 2 -- -- 2 --
----------- ----------- ----------- ----------- ----------- -----------
Balance at end of year -- (2) (3)
----------- ----------- -----------
TOTAL (60) (78) (41) $ 1,425 $ 762 $ 414
----------- ----------- ----------- ============ =========== ===========
TOTAL MEMBERS' CAPITAL $ 6,728 $ 5,285 $ 5,186
=========== =========== ===========
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 known as 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% 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"). Pursuant to the terms of Marathon's agreement to acquire the
38% ownership interest in MAP currently held by Ashland, Ashland does not
have the right to exercise its put right and Marathon does not have the
right to exercise its call right under the Put/Call Agreement unless and
until the acquisition agreement is terminated. 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% (90% 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% 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 and 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 ("MAPL"), is actively engaged in the
pipeline transportation of crude oil and petroleum products.
On March 18, 2004, MOC entered into an agreement which would result in the
acquisition of the 38% ownership interest in MAP currently held by Ashland.
In addition, MOC would acquire a portion of Ashland's Valvoline Instant Oil
Change business and its maleic anhydride business. As a result of the
transaction, MAP will become a wholly owned subsidiary of MOC.
As part of the transaction, Ashland will receive approximately $800 million
in cash and accounts receivable from MAP to redeem a portion of its
interest in MAP. MOC will assume approximately $1.9 billion of debt, which
is expected to be repaid immediately following closing. Additionally,
Ashland shareholders will receive $315 million in MOC common stock.
Ashland's liabilities under certain existing environmental indemnification
obligations related to MAP will be capped at $50 million.
The LLC Agreement has been amended to eliminate the requirement for MAP to
make quarterly cash distributions to Marathon and Ashland between the date
the principal transaction agreements were signed and the closing of the
transaction. As a result, the redemption proceeds to Ashland (cash and
accounts receivable) will be increased by an amount equal to approximately
38% of the cash accumulated from MAP's operations during that period,
subject to certain adjustments. At December 31, 2004, Marathon's share of
MAP's distributable cash was $937 million, and Ashland's share was $574
million. In the event of a termination of the acquisition agreement, MAP's
obligation to make cash distributions to Marathon and Ashland would be
restored.
On June 1, 2004, the United States Federal Trade Commission granted early
termination of the pre-closing waiting period mandated by the
Hart-Scott-Rodino Act, thereby indicating that it had no present intent to
challenge the acquisition and permitting the parties to proceed toward
closing. Additionally, MOC and Ashland submitted a request for a letter
ruling to the United States Internal Revenue Service ("IRS") on the
tax-free status of the proposed acquisition. Related to the proposed
acquisition, MOC filed a registration statement on Form S-4 with the United
States Securities and Exchange Commission on October 12, 2004, subsequent
to Ashland filing a preliminary proxy statement on Schedule 14A on June 21,
2004, and
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - BUSINESS DESCRIPTION AND BASIS OF PRESENTATION - CONTINUED
Amendment No. 1 to Schedule 14A on August 31, 2004. The completion of the
acquisition is subject to a number of conditions, including favorable
private letter rulings from the IRS, Ashland shareholder approval and
Ashland public debt holder consents.
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, but not control, 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 accreted into income in accordance with the
remaining useful life of the underlying 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 accounting principles generally accepted in the United States of
America 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, equity method investments and non-exchange traded
derivative contracts; valuation allowances for receivables, inventories and
deferred income tax assets; 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.
REVENUE RECOGNITION - Revenues are recognized when products are shipped or
services are provided to customers, 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 a reduction to cost of 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 - Matching buy/sell transactions are
arrangements in which MAP agrees to buy a specific quantity and quality of
crude oil or refined petroleum products to be delivered at a specific
location while simultaneously agreeing to sell a specified quantity and
quality of crude oil or refined petroleum products at a different location,
usually with the same counterparty. All matching buy/sell transactions are
settled in cash and are recorded in both revenues and costs of revenues as
separate sales and purchase transactions, or on a "gross" basis. The
commodity purchased and the commodity sold generally are similar in nature.
In a typical buy/sell transaction, MAP enters into a contract to sell a
particular grade of crude oil or refined product at a specified location
and date to a particular counterparty, and simultaneously agrees to buy a
particular grade of crude oil or refined product at a different location on
the same or another specified date, typically from the same counterparty.
The value of the purchased volumes rarely equals the sales value of the
sold volumes. The value differences between purchases and sales are
primarily due to 1) grade/quality differentials, 2) location differentials
or 3) timing differences, in those instances when the purchase and sale do
not occur in the same month.
MAP enters into crude oil matching buy/sell transactions to secure the most
profitable refinery supply. Also, MAP enters into refined product matching
buy/sell transactions to meet projected customer demands and to secure the
required volumes in the most cost-effective manner.
The characteristics of MAP's matching buy/sell transactions include gross
invoicing between MAP and its counterparties and cash settlement of the
transactions. Nonperformance by one party to deliver generally does not
relieve the other party's obligation to perform. Both transactions require
physical delivery of the product. The risk and reward of ownership are
evidenced by title transfer, assumption of environmental risk,
transportation scheduling, credit risk, counterparty nonperformance risk
and the fact that MAP has the primary obligation to perform.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - CONTINUED
MAP believes matching buy/sell transactions are monetary in nature and thus
outside the scope of Accounting Principles Board ("APB") Opinion No. 29,
Accounting for Nonmonetary Transactions ("APB No. 29"). Additionally, MAP
has evaluated Emerging Issues Task Force ("EITF") Issue No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent ("EITF No.
99-19") and, based on that evaluation, management believes that the
recording of these transactions on a gross basis is appropriate.
The EITF is currently considering Issue No. 04-13, Accounting for Purchases
and Sales of Inventory with the Same Counterparty, ("EITF No. 04-13"),
which relates to transactions in which an entity sells inventory to another
entity in the same line of business from which it also purchases inventory.
The following questions have been raised regarding the accounting for these
types of transactions and are expected to be addressed by the EITF:
(a) Under what circumstances should two or more transactions with the same
counterparty (counterparties) be viewed as a single nonmonetary
transaction within the scope of APB No. 29?
(b) If nonmonetary transactions within the scope of APB No. 29 involve
inventory, are there any circumstances under which the transactions
should be recognized at fair value?
The EITF has not yet addressed the first question. The EITF discussed the
second question at its November 2004 meeting without reaching any
consensus. If the EITF were to determine that these transactions should be
accounted for as monetary transactions on a gross basis, no change in MAP's
accounting policy for matching buy/sell transactions would be necessary. If
the EITF were to determine that these transactions should be accounted for
as nonmonetary transactions qualifying for fair value recognition and
require a net presentation of such transactions, the amounts of revenues
and cost of revenues associated with matching buy/sell transactions would
be netted in MAP's consolidated statement of income, but there would be no
effect on income from operations, net income or cash flows from operations.
If the EITF were to determine that these transactions should be accounted
for as nonmonetary transactions not qualifying for fair value recognition,
these amounts of revenues and cost of revenues would be netted in MAP's
consolidated statement of income and there could be an impact on income
from operations and net income related to the timing of the ultimate sale
of product purchased in the "buy" side of the matching buy/sell
transaction. However, management does not believe any impact would be
material. There would be no impact on cash flows from operations as a
result of this accounting treatment.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand
and on deposit and investments in highly liquid debt instruments with
maturities generally 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 results when the recorded LIFO cost
basis of crude oil and refined products inventories exceeds net realizable
value. The reserve is decreased when market prices increase and inventories
turn over, and is increased when market prices decrease. Changes in the
inventory market valuation reserve result in noncash charges or credits to
costs and expenses.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS - Trade accounts
receivable are recorded at the invoiced amount and only proprietary credit
card receivables bear interest. Accounts receivable consists mainly of
trade receivables. Account balances are charged to bad debt expense when it
is probable the receivable will not be collected. The allowance for
doubtful accounts is the best estimate of the amount of probable credit
losses in MAP's existing proprietary credit card receivables and other
receivables. MAP determines the allowance based on historical write-off
experience and proprietary credit card sales. MAP reviews the allowance for
doubtful accounts periodically.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - CONTINUED
TRADITIONAL DERIVATIVE INSTRUMENTS - MAP uses commodity-based derivatives
and financial-instrument-related derivatives to manage its exposure to
commodity price risk. As market conditions change, MAP may use selective
derivative instruments that assume market risk in exchange for an upfront
premium. Management has authorized the use of futures, forwards, swaps and
combinations of options, including written or net written options, related
to the purchase or sale of crude oil, natural gas and refined products.
Changes in the fair value of all derivatives are recognized immediately in
income, in revenues, other income or costs of revenues.
For derivative instruments that are classified as trading, changes in the
fair value are recognized immediately in other income. Any premium received
is amortized into income based on the underlying settlement terms of the
derivative position. All related effects of a trading strategy, including
physical settlement of the derivative position, are recognized in other
income.
NONTRADITIONAL DERIVATIVE INSTRUMENTS - Certain contracts involving the
purchase or sale of commodities are not considered normal purchases or
normal sales under generally accepted accounting principles and are
required to be accounted for as derivative instruments. MAP refers to such
contracts as "nontraditional derivative instruments" because, unlike
traditional derivative instruments, nontraditional derivative instruments
have not been entered into to manage a risk exposure. Such contracts are
recorded in the balance sheet at fair value and changes in fair value are
recognized in income as revenues or cost of revenues.
Certain physical commodity contracts are classified as nontraditional
derivative instruments because certain volumes under these contracts are
physically netted at particular delivery locations. The netting process
causes all contracts at that delivery location to be considered derivative
instruments. Other physical contracts that involve flash title are also
accounted for as nontraditional derivative instruments. MAP has made an
election under generally accepted accounting principles to treat contracts
involving flash title as derivative instruments.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is recorded
at cost and depreciated on the straight-line method over the estimated
useful lives of the assets, which range from three 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 $17 million, $30
million and $37 million for 2004, 2003 and 2002, 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.
GOODWILL - Goodwill represents the excess of the purchase price over the
estimated fair value of the net assets acquired. Annually, MAP assesses the
carrying amount of goodwill by testing for impairment. The impairment test
requires allocating goodwill and other assets and liabilities to reporting
units. The fair value of each reporting unit is determined and compared to
the book value of the reporting unit. If the fair value of the reporting
unit is less than the book value, including goodwill, then the recorded
goodwill is impaired down to its implied fair value with a charge to
expense.
INTANGIBLE ASSETS - Intangible assets consist of deferred marketing costs,
intangible contract rights and unrecognized pension plan prior service
costs. The marketing costs relate to refurbishment of various branded
jobber locations. These marketing costs are amortized over five to ten
years depending on the term of the associated marketing agreement.
MAJOR MAINTENANCE ACTIVITIES - MAP incurs costs for planned major refinery
maintenance ("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 REMEDIATION LIABILITIES - Environmental remediation
expenditures are capitalized if the costs mitigate past or prevent future
contamination or if the costs improve environmental safety or efficiency of
the existing assets. 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. If recoveries of
remediation costs from third parties are probable, a receivable is
recorded.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - CONTINUED
ASSET RETIREMENT OBLIGATIONS - The fair value of asset retirement
obligations are recognized in the period in which they are incurred if a
reasonable estimate of fair value can be made. For MAP, asset retirement
obligations primarily relate to certain underground storage tanks at leased
locations and closure of a waste remediation site. Depreciation of
capitalized asset retirement cost and accretion of asset retirement
obligations are recorded over time. The depreciation will generally be
determined on a straight-line basis, while the accretion to be recognized
will escalate over the life of the assets. Asset retirement obligations
have not been recognized for certain refinery, crude oil and product
pipeline and marketing assets because the fair value cannot be estimated
due to the uncertainty of the settlement date of the obligation.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS - MAP has a noncontributory
defined benefit pension plan with two benefit payment formulas covering
substantially all employees. In addition, several excess benefits plans
exist covering employees within defined regulatory compensation limits.
Benefits under its final pay formula are based primarily upon age, years of
participation in the plan and the highest consecutive three years' earnings
during the last ten years before retirement. Benefits under its pension
equity formula are based primarily upon age, years of participation in the
plan and the final three years of earnings at retirement. MAP also
participates in a multi-employer plan that provides coverage for less than
5% of its employees. The benefits provided include both pension and health
care.
MAP also has defined benefit plans for other postretirement benefits
covering most employees. Health care benefits are provided through
comprehensive hospital, surgical and major medical benefit provisions,
subject to various cost sharing features. Life insurance benefits are
provided to certain nonunion and union-represented retiree beneficiaries.
Other postretirement benefits have not been prefunded.
MAP uses a December 31 measurement date for its pension or other
postretirement benefit plans.
STOCK-BASED COMPENSATION - Effective January 1, 2003, MAP applied the
fair-value-based method of accounting to future grants and any modified
grants for MOC stock-based compensation granted to MAP employees. All prior
outstanding and unvested awards continue to be accounted for under the
intrinsic value method. The following table illustrates the effect on net
income if the fair value method had been applied to all outstanding and
unvested awards in each period:
Year Ended December 31
-----------------------------------------------------
(Millions)
2004 2003 2002
------------- ------------- -------------
Net income
As reported $ 1,407 $ 799 $ 450
Add: MOC stock-based employee compensation expense
included in reported net income 6 2 3
Deduct: MOC stock-based employee compensation expense
determined under fair value method for all awards (6) (2) (6)
------------- ------------- -------------
Pro forma net income $ 1,407 $ 799 $ 447
============= ============= =============
The above pro forma amounts were based on a Black-Scholes option-pricing
model, which included the following information and assumptions:
Year Ended December 31
-----------------------------------------------------
2004 2003 2002
------------- ------------- -------------
Weighted-average grant date exercise price per share $ 33.61 $ 25.58 $ 28.12
Expected annual dividends per share $ 1.00 $ .97 $ .92
Expected life in years 5.5 5 5
Expected volatility 32.0% 34.0% 35.0%
Risk-free interest rate 3.9% 3.0% 4.5%
Weighted-average grant date fair value of options granted
during the year, as calculated from above $ 8.83 $ 5.37 $ 7.79
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - CONTINUED
MAP applies the principles of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), as
interpreted by EITF Issue No. 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 MOC and Ashland stock-based compensation recorded in
selling, general and administrative expenses totaled $14 million, $6
million and $3 million during the years ended December 31, 2004, 2003 and
2002, respectively.
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 10% of annual gross revenues.
RECLASSIFICATIONS - Certain reclassifications of prior years' data have
been made to conform to 2004 classifications.
NOTE C - NEW ACCOUNTING STANDARDS
Effective July 1, 2004, MAP adopted Financial Accounting Standards Board
("FASB") Staff Position FAS 106-2 ("FSP FAS 106-2"), Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 ("the Act"). FSP FAS 106-2
includes guidance on recognizing the effects of the new legislation under
the various conditions surrounding the assessment of "actuarial
equivalence." MAP has determined, based on available regulatory guidance,
that the postretirement plan's prescription drug benefits are actuarially
equivalent to the Medicare "Part D" benefit under the Act. The
subsidy-related reduction at July 1, 2004, in the accumulated
postretirement benefit obligation for the MAP postretirement plan is $49
million. The favorable pretax effect of the subsidy-related reduction for
2004 on the measurement of the net periodic postretirement benefit cost
related to service cost, interest cost and actuarial gain amortization is
$4 million.
Effective January 1, 2003, MAP adopted Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement Obligations ("SFAS No.
143"). The transition adjustment related to adopting SFAS No. 143 on
January 1, 2003, was recognized as a cumulative effect of a change in
accounting principle. The cumulative effect on net income of adopting SFAS
No. 143 was a net unfavorable pretax effect of $2 million. At the time of
adoption, total assets increased by less than $1 million and total
liabilities increased $2 million. The amounts recognized on adoption are
based on numerous estimates and assumptions, including future retirement
costs, future inflation rates and the credit-adjusted risk-free interest
rate.
Effective January 1, 2003, MAP adopted the fair value recognition
provisions of SFAS No. 123 for the stock-based compensation granted to MAP
employees by MOC. Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure ("SFAS
No. 148"), an amendment of SFAS No. 123, provides alternative methods for
the transition of the accounting for stock-based compensation from the
intrinsic value method to the fair value method. MAP has applied the fair
value method to grants made, modified or settled on or after January 1,
2003. The impact on MAP's 2003 net income was not materially different than
under previous accounting standards.
Effective January 1, 2003, MAP adopted EITF Issue No. 02-16, Accounting by
a Customer (Including a Reseller) for Cash Consideration Received from a
Vendor ("EITF No. 02-16"), which requires rebates from vendors to be
recorded as reductions to cost of revenues. Restatement of prior year
results is permitted but not required. Rebates from vendors of $169 million
for 2002 are recorded in sales and other operating revenues. There was no
effect on net income related to the adoption of EITF No. 02-16.
11
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 - See Note I for major investees.
Management believes that transactions with related parties were conducted
under terms comparable to those with unrelated parties.
Year Ended December 31
------------------------------------------
(Millions)
2004 2003 2002
----------- ------------ ------------
REVENUES FROM RELATED PARTIES WERE:
Ashland and its affiliates $ 274 $ 258 $ 218
MOC and its affiliates 153 97 147
Equity investees:
Pilot Travel Centers LLC ("PTC") 715 635 645
Centennial Pipeline LLC ("Centennial") 49 16 --
Other 5 -- --
----------- ----------- -----------
Total $ 1,196 $ 1,006 $ 1,010
=========== =========== ===========
Related party sales to Ashland and its affiliates, PTC and Centennial
consist primarily of refined petroleum products. Related party sales to MOC
and its affiliates consist primarily of crude oil matching buy/sell
transactions.
Year Ended December 31
------------------------------------------
(Millions)
2004 2003 2002
------------ ------------- -----------
PURCHASES FROM RELATED PARTIES WERE:
Ashland and its affiliates $ 22 $ 24 $ 33
MOC and its affiliates 685 659 770
Equity investees:
PTC 8 -- 15
Centennial 56 49 16
LOOP LLC ("LOOP") 44 46 32
Other 24 22 19
----------- ----------- -----------
Total $ 839 $ 800 $ 885
=========== =========== ===========
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 (including matching buy/sell
transactions), 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
net amount of administrative services provided between the companies.
Related party purchases from Centennial consist primarily of transmix and
refined product transportation. Related party purchases from LOOP and other
equity investees consist primarily of crude oil transportation.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - RELATED PARTY TRANSACTIONS - CONTINUED
December 31
---------------------------
(Millions)
2004 2003
----------- -----------
RECEIVABLES FROM RELATED PARTIES WERE:
Ashland and its affiliates $ 18 $ 22
MOC and its affiliates 24 7
Equity investees:
PTC 19 16
Centennial 16 8
----------- ----------
Total $ 77 $ 53
=========== ===========
December 31
---------------------------
(Millions)
2004 2003
----------- -----------
PAYABLES TO RELATED PARTIES WERE:
Ashland and its affiliates $ -- $ 1
MOC and its affiliates 81 51
Equity investees:
Centennial 12 10
LOOP 3 3
Other 3 1
----------- -----------
Total $ 99 $ 66
=========== ===========
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. Pursuant to the terms of Marathon's agreement to
acquire the 38% ownership interest in MAP currently held by Ashland, MAP
effectively was restricted from borrowing under this facility after
September 30, 2004. This facility expires on March 15, 2005, and MAP will
not seek a renewal. At December 31, 2004 and 2003, there were no borrowings
against this facility. During 2004 and 2003, MAP borrowed and repaid $1,717
million and $478 million, respectively, under this revolving credit
facility. The weighted-average borrowings outstanding under this revolving
credit facility during the years 2004 and 2003 were $27 million and $3
million, respectively. During the years ended December 31, 2004, 2003 and
2002, interest paid to Marathon on these borrowings was less than $1
million. Interest paid to Ashland for borrowings under this agreement was
less than $1 million for the years 2004, 2003 and 2002.
MAP had a $350 million uncommitted note facility with Marathon that was
entered into on March 31, 2003, expired on July 31, 2003, and was cancelled
on October 6, 2003. During 2003, MAP had borrowings and repayments of $847
million under this facility. During 2003, interest paid to Marathon on the
borrowings under this agreement was less the $1 million. The
weighted-average borrowings outstanding under this note facility during
2003 were $15 million.
Effective August 1, 2003, MAP replaced the above mentioned note facility
with a $350 million committed revolving credit facility with MOC that
terminated on January 31, 2005. During 2004, MAP had borrowings and
repayments of $399 million under this facility. There were no borrowings
against this facility during 2003. During 2004, interest paid to MOC on the
borrowings under this agreement was less than $1 million. The
weighted-average borrowings outstanding under this note facility during
2004 were $3 million.
On March 17, 2004, MAP entered into a $325 million project loan agreement
with Marathon, whereby MAP may borrow funds to finance the Detroit refinery
expansion project at a rate of 6% per annum. During the construction
period, interest is added to the outstanding loan balance. Upon completion
of this expansion project, the Detroit refinery cash flows will be
dedicated to service this debt as the sole source of funds to repay the
borrowings. At December 31, 2004, MAP had a balance of $122 million
outstanding under this agreement. The amount of interest that has been
incurred and added to the loan balance is $2 million.
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.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - RELATED PARTY TRANSACTIONS - CONTINUED
These agreements, as previously extended, expired on March 15, 2004, and
were subsequently amended and extended with an expiration date of March 15,
2005; they were then subsequently cancelled on April 2, 2004. MAP did not
invest any cash under these agreements in 2004. At December 31, 2003, there
was no cash invested under these agreements. Interest income earned from
Ashland on these investments was less than $1 million during the years
ended December 31, 2003 and 2002. Interest income earned from MOC on these
investments was less than $1 million and $2 million during the years ended
December 31, 2003 and 2002, respectively.
In 2004, 2003 and 2002, MAP recorded capital contributions from Marathon of
less than $1 million, $1 million and $3 million, respectively, and from
Ashland of $4 million, $7 million and $20 million, respectively, for
environmental improvements. In 2003, MAP also recorded an $11 million
capital contribution from Marathon related to the acquisition of leased
property. The LLC Agreement stipulates that ownership interest in MAP will
not be adjusted as a result of such contributions. Pursuant to the terms of
Marathon's agreement to acquire the 38% ownership in MAP currently held by
Ashland, Marathon and Ashland have agreed that after September 30, 2004,
there will be no capital contributions made to MAP except in the case of
extraordinary events.
In 2004, 2003 and 2002, MAP recorded capital contributions of $6 million,
$2 million and $3 million, respectively, from Marathon, and in 2004 and
2003, $8 million and $4 million from Ashland related to stock-based
compensation expense which is allocated 100% to Marathon and Ashland,
respectively.
NOTE E - OTHER ITEMS
Year Ended December 31
------------------------------------------
(Millions)
2004 2003 2002
-------------- ------------- -------------
NET INTEREST AND OTHER FINANCING COSTS:
INTEREST AND OTHER FINANCIAL INCOME:
Interest income - third parties $ 10 $ 2 $ 3
Interest income - related parties -- -- 2
Foreign currency adjustments 2 -- --
----------- ----------- -----------
Total 12 2 5
----------- ----------- -----------
Year Ended December 31
------------------------------------------
(Millions)
2004 2003 2002
----------- ----------- -----------
INTEREST AND OTHER FINANCING COSTS:
Interest incurred - third parties $ 3 $ 2 $ 1
Interest incurred - related parties 3 -- --
Less interest capitalized 2 -- --
----------- ----------- -----------
Net interest 4 2 1
Interest on tax issues 1 2 1
Bank fees and other 8 7 8
----------- ----------- -----------
Total 13 11 10
----------- ----------- -----------
Net interest and other financing costs $ 1 $ 9 $ 5
=========== =========== ===========
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Pension Benefits Other Benefits
--------------------- ---------------------
(Millions)
2004 2003 2004 2003
--------- --------- --------- ---------
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligations at January 1 $ 1,051 $ 831 $ 346 $ 295
Service cost 70 64 14 15
Interest cost 64 59 20 19
Actuarial (gains) losses 114 144 (34)(a) 21
Settlement payments (4) -- -- --
Benefits paid (92) (47) (5) (4)
--------- --------- --------- ---------
Benefit obligations at December 31 $ 1,203 $ 1,051 $ 341 $ 346
========= ========= ========= =========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at January 1 $ 473 $ 356
Actual return on plan assets 44 75
Employer contributions 114 89
Settlement payments (4) --
Benefits paid from plan assets (92) (47)
--------- ---------
Fair value of plan assets at December 31 $ 535 $ 473
========= =========
FUNDED STATUS OF PLANS AT DECEMBER 31(b) $ (668) $ (578) $ (341) $ (346)
Unrecognized net transition asset (2) (3) -- --
Unrecognized prior service costs (credits) 18 21 (26) (33)
Unrecognized net losses 502 411 61 98
--------- --------- --------- ---------
Accrued benefit cost $ (150) $ (149) $ (306) $ (281)
========= ========= ========= =========
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION:
Accrued benefit liability $ (230) $ (248) $ (306) $ (281)
Intangible asset 20 23 -- --
Accumulated other comprehensive loss 60 76 -- --
--------- --------- --------- ---------
Accrued benefit cost $ (150) $ (149) $ (306) $ (281)
========= ========= ========= =========
The accumulated benefit obligation for all defined benefit pension plans
was $763 million and $721 million at December 31, 2004 and 2003,
respectively.
(a) Includes the impact related to the Act, which reduced the obligation
by $49 million.
(b) All MAP plans have accumulated benefit obligations in excess of plan
assets:
December 31
------------------------
(Millions)
2004 2003
---------- -----------
Projected benefit obligations $ (1,203) $ (1,051)
Accumulated benefit obligations (763) (721)
Fair value of plan assets 535 473
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - PENSIONS AND OTHER POSTRETIREMENT BENEFITS - CONTINUED
The following summarizes net periodic benefit cost for those plans
sponsored by MAP:
Pension Benefits Other Benefits
--------------------------------- ---------------------------------
(Millions)
2004 2003 2002 2004 2003 2002
--------- --------- --------- --------- --------- ---------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 70 $ 64 $ 49 $ 15 $ 15 $ 11
Interest cost 64 59 47 20 20 15
Expected return on plan assets (45) (40) (46) -- -- --
Amortization - net transition gain (2) (2) (2) -- -- --
- prior service costs (credits) 2 3 2 (7) (7) (7)
- actuarial loss 23 20 3 3 4 2
Multi-employer and other plans 2 2 1 3 2 2
Settlement, curtailment and termination loss 2 -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Net periodic benefit cost $ 116 $ 106 $ 54 $ 34 $ 34 $ 23
========= ========= ========= ========= ========= =========
Pension Benefits Other Benefits
--------------------------------- ---------------------------------
(Millions)
2004 2003 2002 2004 2003 2002
--------- --------- --------- --------- --------- ---------
Increase (decrease) in minimum liability in
other comprehensive loss $ (16) $ 38 $ 33 $ -- $ -- $ --
PLAN ASSUMPTIONS
Pension Benefits Other Benefits
--------------------------------- ---------------------------------
2004 2003 2002 2004 2003 2002
--------- --------- --------- --------- --------- ---------
WEIGHTED-AVERAGE ASSUMPTIONS USED TO
DETERMINE BENEFIT OBLIGATION AT
DECEMBER 31:
Discount rate 5.75% 6.25% 6.50% 5.75% 6.25% 6.50%
Rate of compensation increase 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
WEIGHTED-AVERAGE ACTUARIAL ASSUMPTIONS
USED TO DETERMINE NET PERIODIC BENEFIT
COST FOR YEARS ENDED DECEMBER 31:
Discount rate 6.25% 6.50% 7.00% 6.25% 6.50% 7.00%
Expected long-term return on
plan assets 9.00% 9.00% 9.50% -- -- --
Rate of compensation increase 4.50% 4.50% 5.00% 4.50% 4.50% 5.00%
EXPECTED LONG-TERM RETURN ON PLAN ASSETS - Historical markets are studied
and long-term historical relationships between equities and fixed income
are preserved consistent with the widely accepted capital market principle
that assets with higher volatility generate a greater return over the long
run. Certain components of the asset mix are modeled with various
assumptions regarding inflation, debt returns and stock yields. Peer data
and historical returns are reviewed to check for reasonability and
appropriateness.
ASSUMED HEALTH CARE COST TREND RATES AT DECEMBER 31:
2004 2003
----------- -----------
Health care cost trend rate assumed for next year 9.00% 9.50%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 5.00% 5.00%
Year that the rate reaches the ultimate trend rate 2012 2012
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - PENSIONS AND OTHER POSTRETIREMENT BENEFITS - CONTINUED
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. 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 $ 7 $ (6)
Effect on other postretirement benefit obligations 59 (50)
PLAN ASSETS
The pension plan weighted-average asset allocations by asset category are
as follows:
December 31
-----------------------------------
2004 2003
--------------- ----------------
Asset category:
Equity securities 78% 77%
Debt securities 21% 22%
Real estate 1% 1%
--------------- ----------------
Total 100% 100%
=============== ================
PLAN INVESTMENT POLICIES AND STRATEGIES - The investment policy reflects
the funded status of the plan and the future ability of MAP to make further
contributions. Historical performance results and future expectations
suggest that common stocks will provide higher total investment returns
than fixed-income securities over a long-term investment horizon. As a
result, equity investments will likely continue to exceed 50% of the value
of the fund. Accordingly, bond and other fixed-income investments will
comprise the remainder of the fund. Short-term investments shall reflect
the liquidity requirements for making pension payments. The plan's targeted
asset allocation is comprised of 75% equities and 25% debt securities.
Management of the plan's assets is delegated to the United States Steel and
Carnegie Pension Fund. The fund manager has discretion to move away from
the target allocations based upon the manager's judgment as to current
confidence or concern for the capital markets. Investments are diversified
by industry and type, limited by grade and maturity. The policy prohibits
investments in any securities in the steel industry and allows derivatives
subject to strict guidelines. Investment performance and risk is measured
and monitored on an ongoing basis through quarterly investment meetings and
periodic asset and liability studies.
CASH FLOWS
Contributions
MAP expects to make contributions to its funded pension plan in 2005
approximating $127 million. Cash contributions to be paid from the general
assets of the company for both the unfunded pension and postretirement
benefit plans are expected to be approximately $1 million and $8 million,
respectively, in 2005.
Estimated future benefit payments
The following gross benefit payments, which reflect expected future
service, as appropriate, are expected to be paid:
Pension Benefits Other Benefits(a)
---------------- ----------------
(Millions)
2005 $ 50 $ 8
2006 55 9
2007 68 11
2008 75 12
2009 90 14
Years 2010 - 2014 638 106
(a) Expected Medicare reimbursements for 2006 through 2014 total $7
million.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - PENSIONS AND OTHER POSTRETIREMENT BENEFITS - CONTINUED
MAP also contributes to several defined contribution plans for eligible
employees. Contributions to these plans, which for the most part are based
on a percentage of the employees' salary, totaled $26 million, $26 million
and $26 million in 2004, 2003 and 2002, 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.
Year Ended December 31
-------------------------------------------------------------------------------------------------
(Millions)
2004 2003 2002
------------------------------- ------------------------------- -------------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
--------- --------- ------ ----------- ----------- ------- -------- --------- --------
PROVISIONS FOR INCOME TAXES:
Federal $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
State and local 3 (1) 2 3 -- 3 1 1 2
Foreign -- -- -- 2 -- 2 1 -- 1
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total $ 3 $ (1) $ 2 $ 5 $ -- $ 5 $ 2 $ 1 $ 3
========= ========= ========= ========= ========= ========= ========= ========= =========
Deferred tax liabilities at December 31, 2004 and 2003 of $5 million and $5
million, respectively, principally arise from differences between the book
and tax basis of inventories and property, plant and equipment in certain
state and local jurisdictions.
Separately, a long-term net deferred tax asset of $1 million was recorded
in 2004 to recognize the deferred tax benefit of a state investment tax
credit carryforward of $7 million less a valuation allowance of $5 million
and deferred tax liabilities in that state of $1 million. There was a
deferred tax liability of $1 million in this jurisdiction in 2003. The
investment tax credits expire from 2005 through 2014.
Pretax income included $7 million, $5 million and $2 million attributable
to foreign sources in 2004, 2003 and 2002, respectively.
NOTE H - INVENTORIES
December 31
---------------------------
(Millions)
2004 2003
----------- -----------
INVENTORIES CONSIST OF THE FOLLOWING:
Liquid hydrocarbons $ 644 $ 645
Refined products and merchandise 1,199 1,156
Supplies and sundry items 90 93
----------- ------------
Total (at cost) $ 1,933 $ 1,894
=========== ============
The LIFO method used for financial accounting purposes represented 93% of
total inventory value at December 31, 2004 and 2003. Current acquisition
costs were estimated to exceed the LIFO inventory values at December 31,
2004 and 2003, by approximately $1,270 million and $644 million,
respectively. Cost of revenues was reduced and income from operations was
increased by $4 million in 2004, $10 million in 2003, and less than $1
million in 2002 as a result of liquidations of LIFO inventories.
NOTE I - INVESTMENTS AND LONG-TERM RECEIVABLES
December 31
---------------------------
(Millions)
2004 2003
----------- -----------
Equity method investments:
PTC $ 372 $ 373
Other 162 152
Receivables due after one year 15 16
Deposits of restricted cash 4 3
----------- -----------
Total $ 553 $ 544
=========== ===========
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - INVESTMENTS AND LONG-TERM RECEIVABLES - CONTINUED
Summarized financial information of investees accounted for by the equity
method of accounting follows:
Year Ended December 31
-----------------------------------------
(Millions)
2004 2003 2002
---------- ------------ ------------
Income data - year:
Revenues and other income $ 7,166 $ 5,543 $ 4,174
Operating income 231 237 153
Net income 165 163 98
December 31
---------------------------
(Millions)
2004 2003
----------- -----------
Balance sheet data - December 31:
Current assets $ 333 $ 284
Noncurrent assets 2,296 2,296
Current liabilities 418 392
Noncurrent liabilities 936 908
MAP's carrying value of its equity method investments is $85 million lower
than the underlying net assets of investees. This basis difference is being
accreted into income over the remaining useful lives of the underlying net
assets.
Dividends and partnership distributions received from equity investees
(excluding distributions that represented a return of capital previously
contributed) were $80 million, $80 million and $39 million in 2004, 2003
and 2002, respectively.
Principal unconsolidated equity investees of MAP at December 31, 2004, were
as follows:
Company Ownership Activity
------- --------- --------
Centennial Pipeline LLC 50.0% Refined products pipeline system
Pilot Travel Centers LLC 50.0% Travel centers
LOCAP LLC 49.9% Crude oil pipeline system
LOOP LLC 46.7% Offshore oil port
Minnesota Pipe Line Company 33.3% Crude oil pipeline system
Southcap Pipe Line Company 21.6% Crude oil pipeline system
PTC, a MAP joint venture with Pilot Corporation ("Pilot"), is a nationwide
operator of travel centers in the United States. The travel centers offer
diesel fuel, gasoline and a variety of other services, including
on-premises brand name restaurants. Pilot and MAP each own a 50% interest
in PTC. PTC is accounted for under the equity method of accounting.
On February 10, 2003, MAP increased its ownership in Centennial from 33.3%
to 50%. MAP paid $20 million for the increased ownership interest.
Centennial is an interstate refined petroleum products pipeline extending
from the U.S. Gulf of Mexico to the Midwest. Centennial is accounted for
under the equity method of accounting.
MAP owns a 46.7% interest in LOOP, which is the owner and operator of a
deepwater oil port located 18 miles off the coast of Louisiana. LOOP is
accounted for under the equity method of accounting.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - PROPERTY, PLANT AND EQUIPMENT
December 31
---------------------------
(Millions)
2004 2003
----------- -----------
Refining $ 4,230 $ 3,679
Marketing 1,881 1,850
Transportation 1,660 1,597
Other 64 41
----------- -----------
Total 7,835 7,167
Less accumulated depreciation and amortization 3,054 2,725
----------- -----------
Net $ 4,781 $ 4,442
=========== ===========
Property, plant and equipment at December 31, 2004 and 2003, includes gross
assets acquired under capital leases of $49 million with related amounts in
accumulated depreciation and amortization of $6 million and $2 million,
respectively.
NOTE K - GOODWILL
The carrying amount of goodwill was $21 million for the years ended
December 31, 2004 and 2003. MAP tests for impairment in the fourth quarter
of each year. No impairment in the carrying value has been deemed
necessary.
NOTE L - INTANGIBLE ASSETS
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
----------------- ------------------ ----------------
(Millions)
INTANGIBLE ASSETS AS OF DECEMBER 31, 2004, ARE AS FOLLOWS:
Amortized intangible assets:
Branding agreements $ 53 $ 19 $ 34
Other -- -- --
----------------- ------------------ ----------------
Total $ 53 $ 19 $ 34
================= ================== ================
Unamortized intangible assets:
Unrecognized prior service costs $ 20 $ -- $ 20
Other 5 -- 5
----------------- ------------------ ----------------
Total $ 25 $ -- $ 25
================= ================== ================
INTANGIBLE ASSETS AS OF DECEMBER 31, 2003, ARE AS FOLLOWS:
Amortized intangible assets:
Branding agreements $ 53 $ 19 $ 34
Other 2 1 1
----------------- ------------------ ----------------
Total $ 55 $ 20 $ 35
================= ================== ================
Unamortized intangible assets:
Unrecognized prior service costs $ 23 $ -- $ 23
Other 4 -- 4
----------------- ------------------ ----------------
Total $ 27 $ -- $ 27
================= ================== ================
Amortization expense related to intangibles during 2004, 2003 and 2002
totaled $7 million, $6 million and $6 million, respectively. Estimated
amortization expense for the years 2005-2009 is $6 million, $5 million, $4
million, $4 million and $3 million, respectively.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - SHORT-TERM DEBT
MAP had a $350 million committed revolving credit facility with MOC that
terminated on January 31, 2005. During 2004, MAP borrowed and repaid $399
million under this revolving credit facility. Additionally, MAP has a $500
million revolving credit agreement with Ashland and Marathon that
terminates in March 2005, as discussed in Note D. During 2004, MAP borrowed
and repaid $1,717 million under this revolving credit facility. At December
31, 2004, there were no borrowings against either of these facilities.
NOTE N - LONG-TERM DEBT
December 31
---------------------------
(Millions)
2004 2003
----------- -----------
Capital lease obligations due 2005-2018 $ 44 $ 46
Detroit refinery project loan - Note D 122 --
Revolving credit facility due 2009 (a) -- --
----------- -----------
Total (b) 166 46
Amounts due within one year (2) (2)
----------- -----------
Long-term debt due after one year $ 164 $ 44
=========== ===========
(a) MAP has a $500 million five-year revolving credit facility which
terminates in May 2009. Interest on this facility is based on defined
short-term market rates. During the term of the agreement, MAP is
obligated to pay a variable facility fee on total commitments, which
at December 31, 2004 was 0.125%. At December 31, 2004, there were no
borrowings against this facility.
(b) Required payments of long-term debt for the years 2006-2009, are $2
million, $3 million, $3 million and $3 million, respectively. In
addition, repayments of the Detroit refinery project loan, expected to
begin in 2006, will be funded solely from Detroit refinery cash flows.
NOTE O - ASSET RETIREMENT OBLIGATIONS
Changes in asset retirement obligations during the year were:
(Millions)
-------------------------------
2004 2003
------------- ------------
Asset retirement obligations as of January 1 $ 1 $ 2
Liabilities incurred 3 --
Liabilities settled (a) -- (1)
------------- -------------
Asset retirement obligations as of December 31 $ 4 $ 1
============= =============
(a) Related to assets sold in 2003.
NOTE P - SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended December 31
--------------------------------------------
(Millions)
2004 2003 2002
---------- ---------- -----------
NET CASH PROVIDED FROM OPERATING ACTIVITIES INCLUDED:
Interest and other financing costs paid (net of amount capitalized) $ 4 $ 2 $ 1
Income taxes paid to taxing authorities 3 3 7
NONCASH INVESTING AND FINANCING ACTIVITIES:
Notes received in asset disposal transactions -- -- 5
Net assets contributed to joint ventures 3 42 --
Member capital contributions 18 14 26
Capital lease obligation - asset acquired -- 41 --
Liabilities assumed in connection with capital expenditures 1 1 --
21
NOTES TO CONSOOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE Q - LEASES
MAP leases a wide variety of facilities and equipment under operating
leases, including land and building space, office equipment, storage
facilities and transportation equipment. Most long-term leases include
renewal options and, in certain leases, purchase options. Future minimum
commitments for capital lease obligations and for operating lease
obligations having remaining noncancelable lease terms in excess of one
year are as follows:
Capital Operating
Leases Leases
Obligations Obligations
------------ -----------
(Millions)
2005 $ 5 $ 65
2006 5 48
2007 5 24
2008 5 17
2009 6 12
Later years 40 31
Sublease rentals -- (1)
----------- -----------
Total minimum lease payments $ 66 $ 196
===========
Less imputed interest costs 22
-----------
Present value of net minimum lease payments
included in long-term debt $ 44
===========
Year Ended December 31
--------------------------------------------
(Millions)
2004 2003 2002
OPERATING LEASE RENTAL EXPENSE WAS:
Minimum rental $ 85 $ 85 $ 97
Contingent rental 15 12 13
Sublease rentals -- -- (2)
----------- ----------- -----------
Net rental expense $ 100 $ 97 $ 108
=========== =========== ===========
NOTE R - DERIVATIVE INSTRUMENTS
The following table sets forth quantitative information by category of
derivative instruments at December 31, 2004 and 2003. These amounts are
reported on a gross basis by individual derivative instrument. 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, 2004 or 2003.
Year Ended December 31
-----------------------------------------------------------
(Millions)
2004 2003
--------------------------- ----------------------------
Assets(a) (Liabilities)(a) Assets (a) (Liabilities)(a)
---------- ---------------- ---------- ----------------
COMMODITY INSTRUMENTS, NON-HEDGE DESIGNATION:
Exchange-traded commodity futures $ 216 $ (206) $ 77 $ (83)
Exchange-traded commodity options 79 (65) 5 (11)
Over-the-counter ("OTC") commodity swaps 48 (30) 7 (12)
OTC commodity options 5 (4) 4 (3)
NONTRADITIONAL INSTRUMENTS (b) 86 (91) 70 (61)
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE R - DERIVATIVE INSTRUMENTS - CONTINUED
(a) The fair value and carrying value of derivative instruments are the
same. The fair value amounts for OTC positions are determined using
option-pricing models or dealer quotes. The fair values of
exchange-traded positions are based on market quotes derived from
major exchanges. MAP's consolidated balance sheet is reflected on a
net asset/(liability) basis by brokerage firm, as permitted by the
master netting agreements.
(b) Certain physical commodity contracts are classified as nontraditional
derivative instruments because certain volumes covered by these
contracts are physically netted at particular delivery locations.
Additionally, other physical contracts that involve flash title are
accounted for as nontraditional derivative instruments.
MAP recorded a net derivative loss of $264 million in 2004, with a
derivative loss of $360 million recorded in cost of revenues, a derivative
gain of $88 million recorded in revenue and a gain of $8 million recorded
in other income. In 2003, MAP recorded a net derivative loss of $162
million, with a derivative loss of $133 million recorded in cost of
revenues, a derivative loss of $25 million recorded in revenue and a
derivative loss of $4 million recorded in other income. In 2002, MAP
recorded a net derivative loss of $124 million, with a derivative loss of
$76 million recorded in cost of revenues, a derivative loss of $48 million
recorded in revenues and a derivative loss of less than $1 million
recorded in other income.
NOTE S - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of most financial instruments is 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 T.
NOTE T - 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 MAP's
consolidated 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.
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, 2004 and 2003, MAP's accrued liabilities for remediation
totaled $26 million and $23 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 cleanup efforts related to underground storage tanks at retail marketing
outlets, were $11 million and $13 million at December 31, 2004 and 2003,
respectively.
MAP has made substantial capital expenditures to bring existing facilities
into compliance with various laws relating to the environment. In 2004,
2003 and 2002, such capital expenditures for environmental controls totaled
$397 million, $323 million and $119 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 programs 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 are approximately $370 million over the
eight-year period, with about $240 million incurred through December 31,
2004. In addition, MAP has nearly completed certain agreed on supplemental
environmental projects as part of
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE T - CONTINGENCIES AND COMMITMENTS - CONTINUED
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.
MAP is a defendant, along with many other refining companies, in over 40
cases in 11 states alleging methyl tertiary-butyl ether ("MTBE")
contamination in groundwater. The plaintiffs generally are water providers
or governmental authorities and they allege that refiners, manufacturers
and sellers of gasoline containing MTBE are liable for manufacturing a
defective product and that owners and operators of retail gasoline sites
have allowed MTBE to be discharged into the groundwater. Several of these
lawsuits allege contamination that is outside of MAP's marketing area. A
few of the cases seek approval as class actions. Many of the cases seek
punitive damages or treble damages under a variety of statutes and
theories. MAP stopped producing MTBE at its refineries in October 2002. The
potential impact of these recent cases and future potential similar cases
is uncertain. MAP will defend these cases vigorously.
GUARANTEES - MAP has issued the following guarantees:
UNDISCOUNTED PAYMENTS
Term AS OF DECEMBER 31, 2004
----------- -----------------------
(MILLIONS)
Indebtedness of equity investees:
LOCAP (a) Perpetual-Loan Balance Varies $ 23
LOOP (a) 2005 - 2024 160
Centennial (b) 2007 - 2024 75
Other:
Centennial catastrophic event (c) Indefinite 50
Mobile transportation equipment leases (d) 2005 - 2009 5
Asset sale (e) Indefinite 5
(a) MAP holds interests in an offshore oil port, LOOP, and a crude oil
pipeline system, LOCAP LLC ("LOCAP"). Both LOOP and LOCAP have secured
various project financings with throughput and deficiency ("T&D")
agreements. A T&D agreement creates a potential obligation to advance
funds 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. The terms of the agreements vary but tend to follow the terms
of the underlying debt. Assuming nonpayment by the investees, the
maximum potential amount of future payments under the guarantees is
estimated to be $183 million and $192 million at December 31, 2004 and
2003, respectively. Included in these amounts are a LOOP revolving
credit facility of $25 million at December 31, 2004 and 2003, and a
LOCAP revolving credit facility of $23 million at December 31, 2004
and 2003. The undrawn portion of the revolving credit facilities is
$34 million as of December 31, 2004 and 2003.
(b) MAP holds an interest in a refined products pipeline, Centennial, and
has guaranteed the repayment of Centennial's outstanding balance under
a Master Shelf Agreement, which expires in 2024, and a Credit
Agreement, which expires in 2007. The guarantees arose in order to
obtain adequate financing. Prior to expiration of the Master Shelf
Agreement, MAP could be relinquished from responsibility under the
guarantee should Centennial meet certain financial tests. If
Centennial defaults on its outstanding balance, the estimated maximum
potential amount of future payments is $75 million at December 31,
2004 and 2003.
(c) The agreement between Centennial and its members allows each member to
contribute cash in lieu of Centennial procuring separate insurance in
the event of third-party liability arising from a catastrophic event.
There is an indefinite term for the agreement and each member is to
contribute cash in proportion to its ownership interest, up to a
maximum amount of $50 million at December 31, 2004 and 2003. In
February 2003, MAP's ownership interest in Centennial increased from
33% to 50%. As a result of this modification to the Centennial
catastrophic event guarantee, MAP recorded a $4 million obligation
during 2003.
(d) 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 fall short of the
specified maximum percent of original value.
(e) MAP entered into certain performance and general guarantees and
environmental and general indemnifications in connection with the 2004
sale of a refined products terminal. The terms vary from 2006 to
indefinite and the maximum potential amount of future payments under
the guarantees and indemnifications is estimated to be $5 million.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE T - CONTINGENCIES AND COMMITMENTS - CONTINUED
CONTRACT COMMITMENTS - At December 31, 2004 and 2003, MAP's contract
commitments to acquire property, plant and equipment totaled $268 million
and $273 million, respectively. Included in these contract commitments is
$65 million related to the approximately $300 million in refinery upgrade
and expansion projects for MAP's 74,000 barrels per day Detroit, Michigan
refinery. Marathon will loan MAP the funds necessary for the Detroit
refinery upgrade and expansion projects. The LLC Agreement has been amended
to allow the Detroit refinery cash flows to be dedicated to service this
debt. The Put/Call Agreement was amended to provide that, in the event
Marathon exercises its call right, the Detroit refinery will not be valued
at an amount less than the working capital related to the Detroit refinery,
excluding working capital additions related to the expansion and clean
fuels projects.
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. In 2004 and 2003, MAP made deficiency payments to Centennial of $4
million and $4 million, respectively.
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 will have
the right to 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% (95% 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% (110% if paid in securities) of the
fair market value of PTC at the time multiplied by Pilot's percentage
interest in PTC.
NOTE U - ACCOUNTING STANDARDS NOT YET ADOPTED
During December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123R") as
a revision of Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation. This statement requires entities
to measure the cost of employee services received in exchange for an award
of equity instruments based on the fair value of the award on the grant
date. That cost will be recognized over the period during which an employee
is required to provide service in exchange for the award, usually the
vesting period. In addition, liability awards will be remeasured each
reporting period. In 2003, MAP adopted the fair value method for grants
made, modified or settled on or after January 1, 2003 for MOC stock-based
compensation granted to MAP employees. Accordingly, management does not
expect the adoption of SFAS No. 123R to have a material effect on results
of operations, financial position or cash flows. This statement is
effective for MAP on July 1, 2005. MAP has not yet determined whether to
adopt this standard earlier than the effective date.
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