================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003
Commission file number 1-2918
ASHLAND INC.
(a Kentucky corporation)
I.R.S. No. 61-0122250
50 E. RiverCenter Boulevard
P.O. Box 391
Covington, Kentucky 41012-0391
Telephone Number: (859) 815-3333
Securities Registered Pursuant to Section 12(b):
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, par value $1.00 per share New York Stock Exchange
and Chicago Stock Exchange
Rights to Purchase Series A Participating New York Stock Exchange
Cumulative Preferred Stock and Chicago Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G): NONE
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [x] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this annual
report on Form 10-K or any amendment to this annual report on Form 10-K. [x]
Indicate by check mark whether the Registrant is an accelerated filer.
Yes [x] No
At October 31, 2003, 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 $2,549,347,022. In determining this
amount, the Registrant has assumed that its directors and executive
officers are affiliates. Such assumption shall not be deemed conclusive for
any other purpose.
At October 31, 2003, there were 68,603,477 shares of Registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement for its January
29, 2004 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, 2003 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, 2003 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, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) and (2) Financial Statements and Financial Schedule
The consolidated financial statements and financial schedule of
Ashland presented 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
3.1 Third Restated Articles of Incorporation of Ashland (filed as
Exhibit 3 to Ashland's Form 10-Q for the quarter ended June 30,
2002 and incorporated herein by reference).
3.2 By-laws of Ashland, effective as of November 15, 2002 (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).
The following Exhibits 10.1 through 10.12 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 Indemnification Agreement between Ashland Inc. and members
of its Board of Directors.
10.8 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).
10.9 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).
10.10 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).
10.11 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).
10.12 Amended and Restated Ashland Inc. Incentive Plan (filed as Exhibit
10.15 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 Limited Liability Company Agreement of
Marathon Ashland Petroleum LLC dated as of December 31, 1998
(filed as Exhibit 10.17 to Ashland's annual report on Form 10-K
for the fiscal year ended September 30, 1999 and incorporated
herein by reference).
10.14 Put/Call, Registration Rights and Standstill Agreement as amended
to December 31, 1998 among Marathon Oil Company, USX Corporation,
Ashland Inc. and Marathon Ashland Petroleum (filed as Exhibit
10.18 to Ashland's annual report on Form 10-K for the fiscal year
ended September 30, 1999 and incorporated herein by reference).
11 Computation of Earnings Per Share (appearing on page 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 auditors.
23.2* Consent of PricewaterhouseCoopers LLP.
24 Power of Attorney, including resolutions of the Board of
Directors.
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.
*Filed herewith
Upon written or oral request, a copy of the above exhibits will be
furnished at cost.
(b) REPORTS ON FORM 8-K
During the quarter ended September 30, 2003, and between such date and
the filing of this annual report on Form 10-K, Ashland filed or furnished
the following reports on Form 8-K.
(1) A report on Form 8-K dated July 18, 2003 reporting the filing of a
lawsuit by a third party seeking, among other remedies, a
preliminary and permanent injunction preventing the consummation
of the proposed sale of the net assets of Ashland's Electronic
Chemicals business and certain related subsidiaries.
(2) A report on Form 8-K dated July 22, 2003 reporting Ashland's third
quarter results.
(3) A report on Form 8-K dated July 23, 2003 containing a Regulation
FD disclosure.
(4) A report on Form 8-K dated August 20, 2003 reporting that Ashland
had signed a definitive agreement to sell the net assets of its
Electronic Chemicals business group to Air Products and Chemicals,
Inc.
(5) A report on Form 8-K dated August 27, 2003 containing a Regulation
FD disclosure.
(6) A report on Form 8-K dated August 29, 2003 reporting that Ashland
had completed the sale of its Electronic Chemicals business group
to Air Products and Chemicals, Inc.
(7) A report on Form 8-K dated October 1, 2003 containing a Regulation
FD disclosure.
(8) A report on Form 8-K dated October 21, 2003 reporting Ashland's
fourth quarter and fiscal 2003 results.
(9) A report on Form 8-K dated October 23, 2003 containing a
Regulation FD disclosure.
(10) A report on Form 8-K dated November 26, 2003, as amended by a Form
8-K/A dated November 26, 2003, containing a Regulation FD
disclosure.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
ASHLAND INC.
(Registrant)
By:
/s/ J. Marvin Quin
-----------------------------------
J. Marvin Quin
Senior Vice President and Chief
Financial Officer
Date: March 19, 2004
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, 2003
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 -------------------------------------------------- 6
NOTE C - NEW ACCOUNTING STANDARDS ------------------------------------------------------------------ 9
NOTE D - RELATED PARTY TRANSACTIONS ---------------------------------------------------------------- 11
NOTE E - OTHER ITEMS ------------------------------------------------------------------------------- 13
NOTE F - PENSIONS AND OTHER POSTRETIREMENT BENEFITS ------------------------------------------------ 14
NOTE G - INCOME TAXES ------------------------------------------------------------------------------ 17
NOTE H - INVENTORIES ------------------------------------------------------------------------------- 17
NOTE I - INVESTMENTS AND LONG-TERM RECEIVABLES ----------------------------------------------------- 17
NOTE J - PROPERTY, PLANT AND EQUIPMENT ------------------------------------------------------------- 19
NOTE K - GOODWILL ---------------------------------------------------------------------------------- 19
NOTE L - INTANGIBLE ASSETS ------------------------------------------------------------------------- 19
NOTE M - SHORT-TERM DEBT --------------------------------------------------------------------------- 19
NOTE N - LONG-TERM DEBT ---------------------------------------------------------------------------- 20
NOTE O - SUPPLEMENTAL CASH FLOW INFORMATION -------------------------------------------------------- 20
NOTE P - LEASES ------------------------------------------------------------------------------------ 20
NOTE Q - DERIVATIVE INSTRUMENTS -------------------------------------------------------------------- 21
NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS ------------------------------------------------------- 21
NOTE S - CONTINGENCIES AND COMMITMENTS ------------------------------------------------------------- 22
PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
1201 Louisiana, Suite 2900
Houston, TX 77002-5678
REPORT OF INDEPENDENT AUDITORS
February 25, 2004
To the Board of Managers of
Marathon Ashland Petroleum LLC:
In our opinion, the accompanying consolidated financial statements
appearing on pages 2 through 23 present fairly, in all material respects,
the financial position of Marathon Ashland Petroleum LLC and its
subsidiaries (MAP) at December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are
the responsibility of MAP's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/ s / PricewaterhouseCoopers LLP
1
CONSOLIDATED STATEMENTS OF INCOME (Dollars in Millions)
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
Year Ended December 31
-----------------------------------------------------
2003 2002 2001
------------- ------------- -------------
REVENUES AND OTHER INCOME:
Sales and other operating revenues (including consumer
excise taxes) $ 33,508 $ 25,389 $ 26,587
Sales to related parties - Note D 1,006 1,010 658
Income from equity method investments 82 48 41
Net gains on disposal of assets 42 40 30
Other income 34 26 32
------------ ------------ ------------
Total revenues and other income 34,672 26,513 27,348
------------- ------------- -------------
COSTS AND EXPENSES:
Cost of revenues (excludes items shown below) 27,704 20,020 19,372
Purchases from related parties - Note D 778 870 710
Consumer excise taxes 4,285 4,250 4,404
Depreciation and amortization 372 365 348
Selling, general and administrative expenses 581 489 435
Other taxes 137 138 141
Inventory market valuation charges (credits) -- (77) 77
------------- ------------- -------------
Total costs and expenses 33,857 26,055 25,487
------------- ------------- -------------
INCOME FROM OPERATIONS: 815 458 1,861
Net interest and other financing costs (income) - Note E 9 5 (4)
------------- ------------- -------------
INCOME BEFORE INCOME TAXES: 806 453 1,865
Provision for income taxes - Note G 5 3 9
------------- ------------- -------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES
IN ACCOUNTING PRINCIPLES: 801 450 1,856
Cumulative effect of changes in accounting principles - Note C (2) -- (20)
------------- ------------- -------------
NET INCOME $ 799 $ 450 $ 1,836
============= ============= =============
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
---------------------------------
2003 2002
------------- -------------
ASSETS:
Current assets:
Cash and cash equivalents $ 80 $ 27
Receivables, less allowance for doubtful accounts of $5
and $5 , respectively 1,764 1,196
Receivables from related parties - Note D 53 52
Inventories - Note H 1,894 1,915
Other current assets 42 40
------------- -------------
Total current assets 3,833 3,230
Investments and long-term receivables - Note I 544 543
Property, plant and equipment - net - Note J 4,442 4,204
Goodwill - Note K 21 21
Intangibles - Note L 62 57
Other noncurrent assets 18 26
------------- -------------
Total assets $ 8,920 $ 8,081
============= =============
LIABILITIES:
Current liabilities:
Accounts payable $ 2,734 $ 2,116
Payables to related parties - Note D 66 81
Payroll and benefits payable 125 125
Accrued taxes 52 41
Long-term debt due within one year 2 1
------------- ------------
Total current liabilities 2,979 2,364
Long-term debt - Note N 44 6
Deferred income taxes - Note G 5 5
Employee benefits obligations - Note F 545 465
Asset retirement obligations - Note C 1 --
Deferred credits and other liabilities 61 55
------------- -------------
Total liabilities 3,635 2,895
------------- -------------
Contingencies and commitments - Note S -- --
MEMBERS' CAPITAL
Members' contributed capital 4,310 4,285
Retained earnings 1,053 942
Accumulated other comprehensive loss (78) (41)
------------- -------------
Total members' capital 5,285 5,186
------------- -------------
Total liabilities and members' capital $ 8,920 $ 8,081
============= =============
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
-----------------------------------------------------
2003 2002 2001
------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $ 799 $ 450 $ 1,836
Adjustments to reconcile to net cash provided from
operating activities:
Depreciation and amortization 372 365 348
Inventory market valuation charges (credits) -- (77) 77
Pensions and other postretirement benefits 42 69 44
Cumulative effect of changes in accounting principles 2 -- 20
Deferred income taxes -- 1 --
Net gains on disposal of assets (42) (40) (30)
Equity income from investees (82) (48) (41)
Distributions from investees 80 39 31
Changes in:
Current receivables (565) (105) 300
Inventories 21 (45) (59)
Accounts payable and other current liabilities 631 434 (511)
Receivables from/payables to related parties (16) 39 (26)
All other - net 14 2 35
------------- ------------- -------------
Net cash provided from operating activities 1,256 1,084 2,024
------------- ------------- -------------
INVESTING ACTIVITIES:
Capital expenditures (755) (611) (576)
Disposal of assets 181 89 51
Loan transactions - principal loaned (27) (14) (31)
- principal collected 24 14 35
Restricted cash - deposits (54) (79) (62)
- withdrawals 93 48 54
Investments - contributions (24) (100) (16)
- loans and advances (4) -- (5)
- returns and repayments 42 -- 10
------------- ------------- -------------
Net cash used in investing activities (524) (653) (540)
------------- ------------- -------------
FINANCING ACTIVITIES:
Revolving credit facilities - borrowings - Notes D & M 1,940 701 294
- repayments - Notes D & M (1,940) (701) (294)
Debt repayments (1) -- (1)
Member contributions 11 -- --
Member distributions (689) (437) (1,508)
------------- ------------- -------------
Net cash used in financing activities (679) (437) (1,509)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 53 (6) (25)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 27 33 58
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 80 $ 27 $ 33
============= ============= =============
See Note O 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
---------------------------------------- ----------------------------------------
2003 2002 2001 2003 2002 2001
----------- ----------- ----------- ----------- ----------- -----------
MEMBERS' CONTRIBUTED CAPITAL:
Balance at beginning of year $ 4,285 $ 4,259 $ 4,244
Member contributions 25 26 15
----------- ----------- -----------
Balance at end of year 4,310 4,285 4,259
----------- ----------- -----------
RETAINED EARNINGS:
Balance at beginning of year 942 912 601
Net income 799 450 1,836 $ 799 $ 450 $ 1,836
Distributions to members (688) (420) (1,525)
----------- ----------- -----------
Balance at end of year 1,053 942 912
----------- ----------- -----------
ACCUMULATED OTHER COMPREHENSIVE
LOSS:
Minimum pension liability adjustments:
Balance at beginning of year (38) (5) (4)
Changes during the year (38) (33) (1) (38) (33) (1)
----------- ----------- -----------
Balance at end of year (76) (38) (5)
----------- ----------- -----------
Deferred gains (losses) on derivative
instruments:
Balance at beginning of year (3) -- --
Cumulative effect adjustment -- -- 6 -- -- 6
Reclassification of the cumulative
effect adjustment into
income -- -- (6) -- -- (6)
Changes in fair value (1) (3) -- (1) (3) --
Reclassification to income 2 -- -- 2 -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at end of year (2) (3) --
----------- ----------- -----------
TOTAL (78) (41) (5) $ 762 $ 414 $ 1,835
----------- ----------- ----------- =========== =========== ===========
TOTAL MEMBERS' CAPITAL $ 5,285 $ 5,186 $ 5,166
=========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
NOTE A - BUSINESS DESCRIPTION AND BASIS OF PRESENTATION
On December 12, 1997, Marathon Oil Company (Marathon), a wholly owned
subsidiary of Marathon Oil Corporation (MOC), formerly USX Corporation,
entered into an Asset Transfer and Contribution Agreement with Ashland Inc.
(Ashland) providing for the formation of Marathon Ashland Petroleum LLC
(MAP). Effective January 1, 1998, Marathon contributed substantially all of
its refining, marketing and transportation (RM&T) operations to MAP. Also,
on January 1, 1998, Marathon acquired certain RM&T net assets from Ashland
in exchange for a 38 percent interest in MAP. The purchase price was
determined to be $1.9 billion, based upon an external valuation. The
acquisition of Ashland's net assets was accounted for under the purchase
method of accounting.
In connection with the formation of MAP, Marathon and Ashland entered into
a Limited Liability Company Agreement (LLC Agreement) dated January 1,
1998. The LLC Agreement provides for an initial term expiring on December
31, 2022 (25 years from its formation). The term will automatically be
extended for ten-year periods, unless a termination notice is given by
either party.
Also in connection with the formation of MAP, the parties entered into a
Put/Call, Registration Rights and Standstill Agreement (the Put/Call
Agreement). The Put/Call Agreement provides that at any time after December
31, 2004, Ashland will have the right to sell to Marathon all of Ashland's
ownership interest in MAP, for an amount in cash and/or Marathon or MOC
debt or equity securities equal to the product of 85 percent (90 percent if
equity securities are used) of the fair market value of MAP at that time,
multiplied by Ashland's percentage interest in MAP. Payment could be made
at closing, or at Marathon's option, in three equal annual installments,
the first of which would be payable at closing. At any time after December
31, 2004, Marathon will have the right to purchase all of Ashland's
ownership interests in MAP, for an amount in cash equal to the product of
115 percent of the fair market value of MAP at that time, multiplied by
Ashland's percentage interest in MAP.
MAP is engaged in petroleum supply, refining, marketing & transportation
operations and includes Speedway SuperAmerica LLC (SSA), a wholly owned
subsidiary, which operates retail outlets for petroleum products and
merchandise. In addition, MAP, through its wholly owned subsidiary,
Marathon Ashland Pipe Line LLC, is actively engaged in the pipeline
transportation of crude oil and petroleum products.
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
PRINCIPLES APPLIED IN CONSOLIDATION - The consolidated financial statements
include the accounts of MAP and the majority-owned subsidiaries which it
controls. Investments in undivided interest pipelines are consolidated on a
pro rata basis. Investments in entities over which MAP has significant
influence are accounted for using the equity method of accounting and are
carried at MAP's share of net assets plus advances. Differences in the
basis of the investment and the separate net asset value of the investee,
if any, are amortized into income in accordance with the 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 generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at
year-end and the reported amounts of revenues and expenses during the year.
Items subject to such estimates and assumptions include the carrying value
of property, plant and equipment, goodwill, intangibles, equity method
investments; non-exchange traded derivative contracts; valuation allowances
for receivables and inventories; environmental remediation liabilities;
liabilities for potential tax deficiencies and potential litigation claims
and settlements; and assets and obligations related to employee benefits.
Actual results could differ from the estimates and assumptions used.
REVENUE RECOGNITION - Revenues are recognized generally when products are
shipped or services are provided to customers and the sales price is fixed
or determinable and collectibility is reasonably assured. Costs associated
with revenues are recorded in cost of revenues.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - CONTINUED
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 settled in cash are recorded in both
revenues and cost of revenues as separate sales and purchase transactions.
During the years ended December 31, 2003, 2002 and 2001, matching buy/sell
transactions were $7,030 million, $4,335 million and $3,817 million,
respectively.
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 reflects the extent that the
recorded LIFO cost basis of crude oil and refined products inventories
exceeds net realizable value. The reserve is decreased to reflect increases
in market prices and inventory turnover and increased to reflect decreases
in market prices. Changes in the inventory market valuation reserve result
in noncash charges or credits to costs and expenses.
DERIVATIVE INSTRUMENTS - MAP uses commodity-based 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, within revenues, other income or costs of revenues.
For derivative instruments that are classified as trading, changes in the
fair value are recognized immediately within revenues as a part of 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 reflected within other income.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
depreciated principally by the straight-line method over their estimated
useful lives, which range from 3 to 42 years.
When property, plant and equipment depreciated on an individual basis are
sold or otherwise disposed of, any gains or losses are reflected in income.
Gains on disposal of property, plant and equipment are recognized when
earned, which is generally at the time of closing. Included in net gains on
disposal of assets are gains on the sale of SSA stores of $30 million, $37
million and $23 million for 2003, 2002 and 2001, 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 by MAP. 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 5-10 years
depending on the term of the associated marketing agreement.
MAJOR MAINTENANCE ACTIVITIES - MAP incurs planned major maintenance costs
primarily for refinery turnarounds. These types of costs include contractor
repair services, materials and supplies, equipment rentals and company
labor costs. Such costs are
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - CONTINUED
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 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.
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. 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 and related excess benefit plans. 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 percent of its employees. The benefits provided include both pension and
health care.
MAP also has defined benefit retiree health care and life insurance plans
covering most employees upon their retirement. Health care benefits are
provided through comprehensive hospital, surgical and major medical benefit
provisions or through health maintenance organizations, both 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 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)
-----------------------------------------------------
2003 2002 2001
------------- ------------- -------------
Net income
As reported $ 799 $ 450 $ 1,836
Add: MOC stock-based employee compensation expense
included in reported net income 2 3 1
Deduct: MOC stock-based employee compensation expense
determined under fair value method for all awards (2) (6) (4)
------------- ------------- -------------
Pro forma net income $ 799 $ 447 $ 1,833
============= ============= =============
The above pro forma amounts were based on a Black-Scholes option-pricing
model, which included the following information and assumptions:
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - CONTINUED
Year Ended December 31
-----------------------------------------------------
2003 2002 2001
------------- ------------- -------------
Weighted-average grant-date exercise price per share $ 25.58 $ 28.12 $ 32.52
Expected annual dividends per share $ .97 $ .92 $ .92
Expected life in years 5 5 5
Expected volatility 34.0% 35.0% 34.0%
Risk-free interest rate 3.0% 4.5% 4.9%
Weighted-average grant date fair value of options granted
during the year, as calculated from above $ 5.37 $ 7.79 $ 9.45
MAP applies the principles of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), as
interpreted by Emerging Issues Task Force Issue 96-18, Accounting for
Equity Instruments that are Issued to Other than Employees for Acquiring,
or in Conjunction with Selling, Goods or Services, to the stock-based
compensation granted to MAP employees by Ashland.
The amounts of stock-based compensation recorded in selling, general and
administrative expenses totaled $6 million, $3 million and $3 million
during the years ended December 31, 2003, 2002 and 2001, respectively.
INSURANCE - MAP is insured for catastrophic casualty and certain property
and business interruption exposures, as well as those risks required to be
insured by law or contract. Costs resulting from noninsured losses are
charged against income upon occurrence.
INCOME TAXES - MAP is a limited liability company, and therefore, except
for several small subsidiary corporations, is not subject to U.S. federal
income taxes. Accordingly, the taxable income or loss resulting from
operations of MAP is ultimately included in the U.S. federal income tax
returns of MOC and Ashland. MAP is, however, subject to income taxes in
certain state, local and foreign jurisdictions.
CONCENTRATION OF CREDIT RISK - MAP is exposed to credit risk in the event
of nonpayment by counterparties, a significant portion of which are
concentrated in energy related industries. The creditworthiness of
customers and other counterparties is subject to continuing review,
including the use of master netting agreements, where appropriate. No
single customer accounts for more than 10 percent of annual gross revenues.
RECLASSIFICATIONS - Certain reclassifications of prior years' data have
been made to conform to 2003 classifications.
NOTE C - NEW ACCOUNTING STANDARDS
Effective January 1, 2003, MAP adopted Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement Obligations (SFAS No.
143). This statement requires that the fair value of an asset retirement
obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The present value of the
estimated asset retirement cost is capitalized as part of the carrying
amount of the long-lived asset. SFAS No. 143 requires depreciation of the
capitalized asset retirement cost and accretion of the asset retirement
obligation over time. The depreciation will be calculated on a straight
line basis from the date a reasonable estimate can be made until the
estimated retirement date, while the accretion to be recognized will
escalate over the life of the assets.
While assets such as refineries, crude oil and product pipelines and
marketing assets have retirement obligations covered by SFAS No. 143,
certain of those obligations are not recognized since the fair value cannot
be estimated due to the uncertainty of the settlement date of the
obligation. MAP has recognized asset retirement obligations for certain
underground storage tanks at leased locations. 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 upon adoption are based upon estimates and assumptions,
including future retirement costs, future inflation rates and the
credit-adjusted risk-free interest rate. Changes in asset retirement
obligations during the year were:
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - NEW ACCOUNTING STANDARDS - CONTINUED
(Millions)
Pro Forma
2003 2002 (a)
------------- -------------
Asset retirement obligations as of January 1 $ 2 $ 2
Liabilities incurred during 2003 -- --
Liabilities settled during 2003 (b) (1) --
Accretion expense (included in depreciation and amortization) -- --
------------- -------------
Asset retirement obligations as of December 31 $ 1 $ 2
============= =============
(a) Pro forma data as if SFAS No. 143 had been adopted on January 1,
2002. If adopted, income before cumulative effect of changes in
accounting principles for 2002 would have been decreased by less
than $1 million.
(b) Related to assets sold in 2003.
Effective January 1, 2003, MAP adopted Statement of Financial Accounting
Standards No. 146, Accounting for Exit or Disposal Activities (SFAS No.
146). SFAS No. 146 is effective for exit or disposal activities initiated
after December 31, 2002. There were no adjustments necessary upon the
initial adoption of SFAS No. 146.
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.
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (SFAS No. 149), on April 30,
2003. SFAS No. 149 is effective for derivative contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. The adoption of SFAS No. 149 did not have an effect on MAP's
financial position, cash flows or results of operations.
The FASB issued Statement of Financial Accounting Standards No. 150,
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity (SFAS No. 150), on May 30, 2003. The adoption of
SFAS No. 150, effective July 1, 2003, did not have an effect on MAP's
financial position or results of operations.
Effective January 1, 2003, FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45), requires the fair-value
measurement and recognition of a liability for the issuance or modification
of certain guarantees. There were no cumulative effect adjustments
necessary upon the initial adoption of FIN 45. Enhanced disclosure
requirements apply to both new and existing guarantees subject to FIN 45.
See Note S for outstanding guarantees.
FASB Interpretation No. 46, Consolidation of Variable Interest Entities
(FIN 46R), identifies certain off-balance sheet arrangements that meet the
definition of a variable interest entity (VIE). The primary beneficiary of
a VIE is the party that is exposed to the majority of the risks and/or
returns of the VIE. The primary beneficiary is required to consolidate the
VIE. In addition, more extensive disclosure requirements apply to the
primary beneficiary, as well as other significant investors. FIN 46R was
effective immediately for VIE's created after January 31, 2003. For
special-purposes entities (SPEs) created prior to February 1, 2003, FIN 46R
is effective at the first interim or annual reporting period ending after
December 15, 2003, or December 31, 2003 for MAP. For non-SPE's created
prior to February 1, 2003, FIN 46R is effective for MAP as of March 31,
2004. The adoption of this interpretation did not and is not expected to
have any effect on MAP's financial statements.
The FASB issued Statement of Financial Accounting Standards No. 132
(revised 2003), Employers' Disclosures about Pensions and Other
Postretirement Benefits (SFAS No. 132), effective for interim periods
beginning after December 15, 2003. This statement retains the disclosure
requirements contained in Statement of Financial Accounting Standards No.
132, Employers' Disclosures about Pensions and Other Postretirement
Benefits, which it replaces, but requires additional disclosures about the
assets, obligations, cash flows, and net periodic benefit cost of defined
benefit pension plans and other defined benefit
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - NEW ACCOUNTING STANDARDS - CONTINUED
postretirement plans. Certain required disclosures of information relating
to foreign plans and estimated future benefit payments of all defined
benefit plans have a delayed effective date for fiscal years ending after
June 15, 2004. MAP has elected earlier application of the entire disclosure
provisions of SFAS No. 132.
On January 12, 2004, the FASB released FASB Staff Position No. FAS 106-1
(FSP 106-1), Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Act). Due
to uncertainties as to the effect of the provisions of the Act and certain
accounting issues raised by the Act that are not addressed by Statement of
Financial Accounting Standards No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, FSP 106-1 allows plan sponsors
to elect a one-time deferral of the accounting for the Act. MAP has elected
to apply the one-time deferral until further guidance is provided by the
FASB or the remeasurement of plan assets and obligations occurs subsequent
to January 31, 2004. Accordingly, any measures of accumulated
postretirement benefit obligation or net periodic postretirement benefit
cost in the financial statements and accompanying notes does not reflect
the effects of the Act on MAP's plans.
Effective January 1, 2003, MAP adopted Emerging Issues Task Force (EITF)
Abstract No. 02-16, Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor (EITF 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 $159 million for 2003 are recorded as a reduction to cost
of revenues. Rebates from vendors of $169 million and $149 million for 2002
and 2001, respectively, are recorded in sales and other operating revenues.
There was no effect on net income related to the adoption of EITF 02-16.
At the May 2003 EITF meeting, a consensus was reached on EITF Abstract No.
01-8, Determining Whether an Arrangement Is a Lease, (EITF 01-8). This
guidance, under certain conditions, modifies the accounting for agreements
that historically have not been considered leases. EITF 01-8 is effective
for all arrangements that are agreed upon, committed to, or modified after
July 1, 2003. The adoption of EITF 01-8 did not have a material effect on
MAP's financial position or results of operations.
Effective January 1, 2001, MAP adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133), as amended by SFAS Nos. 137 and 138. This
statement requires recognition of all derivatives as either assets or
liabilities at fair value. The transition adjustment related to adopting
SFAS No. 133 on January 1, 2001, was recognized as a cumulative effect of
change in accounting principle. The unfavorable cumulative effect on net
income was $20 million. The favorable cumulative effect included within
Other Comprehensive Income (OCI) was $6 million. A portion of the
cumulative effect adjustment relating to the adoption of SFAS No. 133 was
recognized in OCI which relates only to deferred gains or losses for hedge
transactions as of December 31, 2000. A reconciliation of the changes in
OCI relating to derivative instruments is included in the Statement of
Members' Capital.
NOTE D - RELATED PARTY TRANSACTIONS
Related parties include:
o Ashland and its affiliates.
o MOC and its affiliates.
o Equity method investees.
Management believes that transactions with related parties were conducted
under terms comparable to those with unrelated parties.
Year Ended December 31
------------------------------------------
(Millions)
2003 2002 2001
----------- ----------- -----------
REVENUES FROM RELATED PARTIES WERE:
Ashland and its affiliates $ 258 $ 218 $ 237
MOC and its affiliates 97 147 211
Equity investees:
Pilot Travel Centers LLC (PTC) 635 645 210
Centennial Pipeline LLC (Centennial) 16 -- --
----------- ----------- -----------
Total $ 1,006 $ 1,010 $ 658
=========== =========== ===========
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - RELATED PARTY TRANSACTIONS - CONTINUED
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 liquid hydrocarbons.
Year Ended December 31
------------------------------------------
(Millions)
2003 2002 2001
----------- ----------- -----------
PURCHASES FROM RELATED PARTIES WERE:
Ashland and its affiliates $ 24 $ 33 $ 29
MOC and its affiliates 659 770 627
Equity investees:
PTC -- 15 --
Centennial 27 -- --
LOOP LLC (LOOP) 46 32 32
Other 22 20 22
----------- ----------- -----------
Total $ 778 $ 870 $ 710
=========== =========== ===========
Related party purchases from Ashland and its affiliates consist primarily
of refined petroleum products and the net amount of administrative services
provided between the companies. Related party purchases from MOC and its
affiliates consist primarily of crude oil, natural gas and refinery
feedstocks and the net amount of administrative services provided between
the companies. Related party purchases from PTC consist primarily of
refined petroleum products and the net amount of administrative services
provided between the companies. Related party purchases from Centennial,
LOOP and other equity investees consist primarily of crude oil and refined
product transportation.
December 31
---------------------------
(Millions)
2003 2002
----------- -----------
RECEIVABLES FROM RELATED PARTIES WERE:
Ashland and its affiliates $ 22 $ 18
MOC and its affiliates 7 16
Equity investees:
PTC 16 16
Centennial 8 2
----------- -----------
Total $ 53 $ 52
=========== ===========
December 31
---------------------------
(Millions)
2003 2002
----------- -----------
PAYABLES TO RELATED PARTIES WERE:
Ashland and its affiliates $ 1 $ 3
MOC and its affiliates 51 71
Equity investees:
Centennial 10 2
LOOP 3 3
Other 1 2
----------- -----------
Total $ 66 $ 81
=========== ===========
As of December 31, 2003, there was no member distribution payable to
Ashland. As of December 31, 2002, accounts payable to Ashland included a
member distribution payable of less than $1 million.
A revolving credit agreement was entered into as of January 1, 1998, among
Ashland and Marathon (collectively the Lenders) and MAP. This agreement
provides that the Lenders may loan to MAP up to $500 million at defined
short-term market rates. At December 31, 2003 and 2002, there were no
borrowings against this facility. During 2003 and 2002, MAP borrowed and
repaid $478 million and $701 million, respectively, under this revolving
credit facility. The weighted average borrowings outstanding under this
revolving credit facility during the years 2003 and 2002 were $3 million
and $5 million, respectively. During the years ended December 31, 2003,
2002 and 2001, interest paid to Marathon on these borrowings was less than
$1 million. Interest paid to
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - RELATED PARTY TRANSACTIONS - CONTINUED
Ashland for borrowings under this agreement was less than $1 million for
the years 2003, 2002 and 2001. MAP is investigating alternatives for the
replacement of this facility upon its expiration on March 15, 2004.
MAP had a $350 million uncommitted note facility with Marathon that was
entered into on March 31, 2003 and expired on July 31, 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
terminates on January 31, 2004. This facility was extended to January 31,
2005. There were no borrowings against this facility during 2003.
On November 16, 1998, MAP entered into agreements with MOC and Ashland,
which allow MAP to invest its surplus cash balances on a daily basis at
competitive interest rates with MOC and Ashland in proportion up to their
ownership interests in MAP. These agreements, as previously extended,
expired on March 15, 2003 and have been subsequently amended and extended
with an expiration date of March 15, 2004. At December 31, 2003 and 2002,
there was no cash invested under these agreements. During the years ended
December 31, 2003, 2002 and 2001, interest income earned from these
investments was less than $1 million, less than $1 million and $2 million,
respectively, from Ashland and less than $1 million, $2 million and $1
million, respectively, from MOC.
In 2003, 2002 and 2001, MAP recorded capital contributions from Marathon of
$1 million, $3 million and $2 million, respectively, and from Ashland of $7
million, $20 million and $10 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. In 2003, 2002 and 2001, MAP
recorded capital contributions of $2 million, $3 million and $1 million,
respectively, from Marathon, and in 2003 and 2001, $4 million and $2
million from Ashland related to stock-based compensation expense which is
allocated 100 percent to Marathon and Ashland, respectively.
NOTE E - OTHER ITEMS
Year Ended December 31
------------------------------------------
(Millions)
2003 2002 2001
----------- ----------- -----------
NET INTEREST AND OTHER FINANCING COSTS (INCOME):
INTEREST AND OTHER FINANCIAL INCOME:
Interest income - third parties $ 2 $ 3 $ 11
Interest income - related parties -- 2 3
----------- ----------- -----------
Total 2 5 14
----------- ----------- -----------
INTEREST AND OTHER FINANCING COSTS:
Interest incurred 4 2 3
Other 7 8 7
----------- ----------- -----------
Total 11 10 10
----------- ----------- -----------
Net interest and other financing costs (income) $ 9 $ 5 $ (4)
=========== =========== ===========
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Pension Benefits Other Benefits
--------------------- ---------------------
(Millions)
2003 2002 2003 2002
--------- --------- --------- ---------
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligations at January 1 $ 831 $ 727 $ 295 $ 216
Service cost 64 49 15 11
Interest cost 59 47 19 15
Actuarial losses 144 49 21 56
Benefits paid (47) (41) (4) (3)
--------- --------- --------- ---------
Benefit obligations at December 31 $ 1,051 $ 831 $ 346 $ 295
========= ========= ========= =========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at January 1 $ 356 $ 440
Actual return on plan assets 75 (43)
Employer contributions 89 --
Benefits paid from plan assets (47) (41)
--------- ---------
Fair value of plan assets at December 31 $ 473 $ 356
========= =========
FUNDED STATUS OF PLANS AT DECEMBER 31(a) $ (578) $ (475) $ (346) $ (295)
Unrecognized net transition asset (3) (5) -- --
Unrecognized prior service costs (credits) 21 22 (33) (40)
Unrecognized net losses 411 323 98 82
--------- --------- --------- ---------
Accrued benefit cost $ (149) $ (135) $ (281) $ (253)
========= ========= ========= =========
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION:
Accrued benefit liability $ (248) $ (197) $ (281) $ (253)
Intangible asset 23 24 -- --
Accumulated other comprehensive loss 76 38 -- --
--------- --------- --------- ---------
Accrued benefit cost $ (149) $ (135) $ (281) $ (253)
========= ========= ========= =========
The accumulated benefit obligation for all defined benefit pension plans
was $721 million and $553 million at December 31, 2003 and 2002,
respectively.
(a) All MAP plans have accumulated benefit obligations in excess of
plan assets:
December 31
----------------------
(Millions)
2003 2002
---------- ----------
Projected benefit obligations $ (1,051) $ (831)
Accumulated benefit obligations (721) (553)
Fair value of plan assets 473 356
14
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)
2003 2002 2001 2003 2002 2001
--------- --------- --------- --------- --------- ---------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 64 $ 49 $ 40 $ 15 $ 11 $ 9
Interest cost 59 47 42 20 15 14
Expected return on plan assets (40) (46) (50) -- -- --
Amortization - net transition gain (2) (2) (2) -- -- --
- prior service costs (credits) 3 2 2 (7) (7) (6)
- actuarial loss 20 3 1 4 2 --
Multi-employer and other plans 2 1 2 2 2 --
Settlement and termination loss -- -- 3 -- -- --
--------- --------- --------- --------- --------- ---------
Net periodic benefit cost $ 106 $ 54 $ 38 $ 34 $ 23 $ 17
========= ========= ========= ========= ========= =========
Pension Benefits Other Benefits
--------------------------------- ---------------------------------
(Millions)
2003 2002 2001 2003 2002 2001
--------- --------- --------- --------- --------- ---------
Increase in minimum liability in
other comprehensive loss $ 38 $ 33 $ 1 $ -- $ -- $ --
PLAN ASSUMPTIONS
Pension Benefits Other Benefits
--------------------------------- ---------------------------------
(Millions)
2003 2002 2001 2003 2002 2001
--------- --------- --------- --------- --------- ---------
WEIGHTED-AVERAGE ASSUMPTIONS USED TO
DETERMINE BENEFIT OBLIGATION AT
DECEMBER 31:
Discount rate 6.25% 6.50% 7.00% 6.25% 6.50% 7.00%
Rate of compensation increase 4.50% 4.50% 5.00% 4.50% 4.50% 5.00%
WEIGHTED-AVERAGE ACTUARIAL ASSUMPTIONS
USED TO DETERMINE NET PERIODIC BENEFIT
COST FOR YEARS ENDED DECEMBER 31:
Discount rate 6.50% 7.00% 7.50% 6.50% 7.00% 7.50%
Expected long-term return on
plan assets 9.00% 9.50% 9.50% -- -- --
Rate of compensation increase 4.50% 5.00% 5.00% 4.50% 5.00% 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:
2003 2002
----------- -----------
Health care cost trend rate assumed for next year 9.50% 10.00%
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
15
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 (48)
PLAN ASSETS
The pension plan weighted-average asset allocations at December 2003 and 2002,
by asset category are as follows:
Plan Assets at December 31
-----------------------------------
2003 2002
--------------- ----------------
Asset Category:
Equity securities 77% 78%
Debt securities 22% 21%
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. Management of the
plan's assets is delegated to the United States Steel and Carnegie Pension
Fund. 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
MAP expects to contribute approximately $93 million to its funded pension
plan in 2004.
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
Pension Benefits Other Benefits
---------------- --------------
(Millions)
2004 $ 36 $ 8
2005 45 9
2006 48 11
2007 56 13
2008 59 15
Years 2009 - 2013 394 123
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 $25 million in 2003, 2002 and 2001, respectively.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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)
2003 2002 2001
--------------------------- ------------------------- -------------------------
Current Deferred Total Current Deferred Total Current Deferred Total
------- -------- ----- ------- -------- ----- ------- -------- -----
PROVISIONS FOR INCOME TAXES:
Federal $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
State and local 3 -- 3 1 1 2 8 -- 8
Foreign 2 -- 2 1 -- 1 1 -- 1
------- -------- ----- ------- -------- ----- ------- -------- ------
Total $ 5 $ -- $ 5 $ 2 $ 1 $ 3 $ 9 $ -- $ 9
======= ======== ===== ======= ======== ===== ======= ======== ======
Deferred tax liabilities at December 31, 2003 and 2002 of $5 million and $5
million, respectively, principally arise from differences between the book
and tax basis of inventories and property, plant and equipment. Pretax
income included $5 million and $2 million attributable to foreign sources
in 2003 and 2002, respectively. Pretax income attributable to foreign
sources was not material in 2001.
NOTE H - INVENTORIES
December 31
--------------------------
(Millions)
2003 2002
----------- -----------
INVENTORIES CONSIST OF THE FOLLOWING:
Liquid hydrocarbons $ 645 $ 652
Refined products and merchandise 1,156 1,191
Supplies and sundry items 93 72
----------- ------------
Total (at cost) $ 1,894 $ 1,915
=========== ============
The LIFO method used for financial accounting purposes represented 93
percent and 95 percent of total inventory value at December 31, 2003 and
2002, respectively. Current acquisition costs were estimated to exceed the
above inventory values at December 31, 2003 and 2002, by approximately $644
million and $594 million, respectively. Cost of revenues was reduced and
income from operations was increased by $10 million in 2003, less than $1
million in 2002 and $17 million in 2001 as a result of liquidations of LIFO
inventories.
NOTE I - INVESTMENTS AND LONG-TERM RECEIVABLES
December 31
---------------------------
(Millions)
2003 2002
----------- -----------
Equity method investments $ 525 $ 489
Receivables due after one year 16 12
Deposits of restricted cash 3 42
----------- -----------
Total $ 544 $ 543
=========== ===========
17
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)
2003 2002 2001
---------- ----------- ----------
Income data - year:
Revenues and other income $ 5,513 $ 4,174 $ 1,462
Operating income 237 153 134
Net income 163 98 90
December 31
--------------------------
(Millions)
2003 2002
----------- ----------
Balance sheet data - December 31:
Current assets $ 284 $ 261
Noncurrent assets 2,296 2,195
Current liabilities 392 374
Noncurrent liabilities 908 828
MAP's carrying value of its equity method investments is $97 million lower
than the underlying net assets of investees. This basis difference is being
amortized into income over the remaining useful lives of the underlying net
assets.
Dividends and partnership distributions received from equity investees were
$80 million, $39 million and $31 million in 2003, 2002 and 2001,
respectively.
Principal unconsolidated equity investees of MAP at December 31, 2003, 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), began operations
on September 1, 2001. 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 percent 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
percent to 50 percent. 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 percent 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.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - PROPERTY, PLANT AND EQUIPMENT
December 31
---------------------------
(Millions)
2003 2002
----------- -----------
Refining $ 3,679 $ 3,183
Marketing 1,850 2,008
Transportation 1,597 1,490
Other 41 37
----------- -----------
Total 7,167 6,718
Less accumulated depreciation and amortization 2,725 2,514
----------- -----------
Net $ 4,442 $ 4,204
=========== ===========
Property, plant and equipment at December 31, 2003 and 2002, includes gross
assets acquired under capital leases of $49 million and $8 million,
respectively, with related amounts in accumulated depreciation and
amortization of $2 million and $1 million, respectively.
NOTE K - GOODWILL
The carrying amount of goodwill was $21 million for the years ended
December 31, 2003 and 2002. The tests for impairment are completed 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
----------------- ------------------ ----------------
INTANGIBLE ASSETS AS OF DECEMBER 31, 2003, ARE AS FOLLOWS: (Millions)
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 2003, 2002 and 2001
totaled $6 million, $6 million and $5 million, respectively. Estimated
amortization expense for the years 2004-2008 is $6 million, $5 million, $4
million, $4 million and $3 million, respectively.
NOTE M - SHORT-TERM DEBT
MAP had a $350 million short-term revolving credit facility that terminated
in July 2003. During 2003, MAP borrowed and repaid $615 million under this
revolving credit facility. This facility also provided for the issuance of
letters of credit in aggregate amounts not to exceed $75 million. A letter
of credit of $40 million was outstanding at December 31, 2002.
Additionally, MAP has a $500 million revolving credit agreement with
Ashland and Marathon and a $350 million uncommitted note facility with
Marathon that was replaced by a $350 million committed revolving credit
facility with MOC, as discussed in Note D. At December 31, 2003, there were
no borrowings against any of these facilities.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - LONG-TERM DEBT
December 31
---------------------------
(Millions)
2003 2002
----------- -----------
Capital lease obligations due 2004-2018 $ 46 $ 6
5% Promissory Note due 2009 -- 1
----------- -----------
Total (a) 46 7
Amounts due within one year (2) (1)
----------- -----------
Long-term debt due after one year $ 44 $ 6
=========== ===========
(a) Required payments of long-term debt for the years 2005-2008, are
$2 million, $2 million, $3 million and $3 million, respectively.
NOTE O - SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended December 31
------------------------------------------
(Millions)
2003 2002 2001
----------- ------------ -----------
CASH PROVIDED FROM OPERATING ACTIVITIES INCLUDES:
Interest and other financing costs paid $ (2) $ (1) $ (2)
Income taxes paid to taxing authorities (3) (7) (5)
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Notes received in asset disposal transactions -- 5 --
Net assets contributed to joint ventures 42 -- 246
Member capital contributions 14 26 15
Capital lease obligation - asset acquired 41 -- --
NOTE P - LEASES
Future minimum commitments for capital and operating leases having
remaining noncancelable lease terms in excess of one year are as follows:
Capital Operating
Leases Leases
---------- -----------
(Millions)
2004 $ 5 $ 69
2005 5 50
2006 5 38
2007 5 15
2008 6 10
Later years 45 37
Sublease rentals -- (1)
----------- -----------
Total minimum lease payments $ 71 $ 218
===========
Less imputed interest costs 25
-----------
Present value of net minimum lease payments
included in long-term debt $ 46
===========
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE P - LEASES - CONTINUED
Year Ended December 31
------------------------------------------
(Millions)
2003 2002 2001
----------- ----------- -----------
OPERATING LEASE RENTAL EXPENSE WAS:
Minimum rental $ 85 $ 97 $ 73
Contingent rental 12 13 13
Sublease rentals -- (2) (2)
----------- ----------- -----------
Net rental expense $ 97 $ 108 $ 84
=========== =========== ===========
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.
NOTE Q - DERIVATIVE INSTRUMENTS
The following table sets forth quantitative information by category of
derivative instruments at December 31, 2003 and 2002. These amounts are
reflected 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, 2003 or 2002.
Year Ended December 31
-------------------------------------------------------
(Millions)
2003 2002
--------------------------- ------------------------
Assets(a) (Liabilities)(a) Assets (a) (Liabilities)(a)
------ ------------- ------ -------------
NON-HEDGE DESIGNATION:
Exchange-traded commodity futures $ 77 $ (83) $ 9 $ (46)
Exchange-traded commodity options 5 (11) 9 (11)
OTC commodity swaps 7 (12) 3 (5)
OTC commodity options 4 (3) 1 --
NONTRADITIONAL INSTRUMENTS (b) 70 (61) 53 (39)
(a) The fair value and carrying value of derivative instruments are
the same. The fair value amounts for OTC positions are based on
various indices or dealer quotes. The fair values of
exchange-traded positions are based on market 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) Nontraditional derivative instruments are created due to netting
of physical receipts and delivery volumes with the same
counterparty.
MAP recorded a net derivative loss of $162 million in 2003, with a
derivative loss of $129 million recorded in cost of revenues and a
derivative loss of $33 million recorded in revenue. In 2002, MAP recorded a
net derivative loss of $124 million, with a derivative loss of $76 million
recorded in cost of revenues and a derivative loss of $48 million recorded
in revenue. In 2001, MAP recorded a net derivative gain of $209 million,
with a derivative gain of $226 million recorded in cost of revenues and a
derivative loss of $17 million recorded in revenues.
NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of most financial instruments are based on historical
costs. The carrying values of cash and cash equivalents, receivables,
payables, long-term receivables and long-term debt approximate their fair
value.
MAP's unrecognized financial instruments consist of financial guarantees
and commitments to extend credit. For details relating to financial
guarantees, see Note S.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE S - 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, 2003 and 2002, MAP's accrued liabilities for remediation
totaled $23 million and $14 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 $13 million and $9 million at December 31, 2003 and 2002,
respectively.
MAP has made substantial capital expenditures to bring existing facilities
into compliance with various laws relating to the environment. In 2003,
2002 and 2001, such capital expenditures for environmental controls totaled
$323 million, $119 million and $79 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 $330 million over the
eight-year period, with about $170 million incurred through December 31,
2003. In addition, MAP has nearly completed certain agreed upon
supplemental environmental projects as part of this settlement of an
enforcement action for alleged Clean Air Act violations, at a cost of $9
million. MAP believes that this settlement will provide MAP with increased
permitting and operating flexibility while achieving significant emission
reductions.
GUARANTEES - MAP has issued the following guarantees:
Undiscounted Payments
Term As of December 31, 2003
------ -----------------------
(Millions)
Indebtedness of equity investees:
LOCAP commercial paper (a) Perpetual-Loan Balance Varies $ 23
LOOP Series 1991A Notes (a) 2008 7
LOOP Series 1992A Notes (a) 2008 34
LOOP Series 1992B Notes (a) 2004 9
LOOP Series 1997 Notes (a) 2017 13
LOOP revolving credit agreement (a) Perpetual-Loan Balance Varies 25
LOOP Series 2003 Notes (a) 2004 - 2023 81
Centennial Notes (b) 2008 - 2024 70
Centennial revolving credit agreement (b) 2004-Loan Balance Varies 5
Other:
Centennial catastrophic event (c) Indefinite 50
Mobile transportation equipment leases (d) 2004 - 2008 6
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE S - CONTINGENCIES AND COMMITMENTS - CONTINUED
(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. In April 2003, LOOP refinanced $81 million for certain of
its series of outstanding bonds subject to these T&D agreements.
The refinancing consisted of changes to maturity dates, as well as
interest rates. Although certain series were paid down and new
series issued, the total principal outstanding changed by only $2
million. Assuming non-payment by the investees, the maximum
potential amount of future payments under the guarantees is
estimated to be $193 million and $197 million at December 31, 2003
and 2002, respectively. Included in these amounts is a LOOP
revolving credit facility of $25 million at December 31, 2003 and
2002, and a LOCAP revolving credit facility of $20 million and $25
million at December 31, 2003 and 2002, respectively. The undrawn
portion of the revolving credit facilities is $35 million and $28
million as of December 31, 2003 and 2002, respectively.
(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 and Revolver, which expires
in 2024. The guarantee arose in order to obtain adequate
financing. Prior to expiration of the guarantee, MAP could be
relinquished from responsibility under the guarantee should
Centennial meet certain financial tests. If Centennial defaults on
its outstanding balance, the estimated maximum potential amount of
future payments is $75 million at December 31, 2003 and 2002.
(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 and $33
million at December 31, 2003 and 2002, respectively. In February
2003, MAP's ownership interest in Centennial increased from 33
percent to 50 percent. 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.
CONTRACT COMMITMENTS - At December 31, 2003 and 2002, MAP's contract
commitments to acquire property, plant and equipment totaled $273 million
and $86 million, respectively.
In May 2001, MAP entered into a Transportation Agreement with Centennial in
which MAP guarantees to ship certain volumes on the Centennial system or
make deficiency payments for any volume shortfall. Any deficiency payment
made by MAP will be treated as a prepayment of future transportation
charges. In 2003, MAP made a $4 million deficiency payment to Centennial.
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 percent
(95 percent if paid in securities) of the fair market value of PTC at the
time multiplied by Pilot's percentage interest in PTC. At any time after
September 1, 2011, under certain conditions MAP will have the right to
purchase Pilot's interest in PTC for an amount of cash and/or MOC, MAP or
Ashland equity securities equal to the product of 105 percent (110 percent
if paid in securities) of the fair market value of PTC at the time
multiplied by Pilot's percentage interest in PTC.
23