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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, 2001
Commission file number 1-2918
ASHLAND INC.
(a Kentucky corporation)
I.R.S. No. 61-0122250
50 E. RiverCenter Boulevard
P.O. Box 391
Covington, Kentucky 41012-0391
Telephone Number: (859) 815-3333
Securities Registered Pursuant to Section 12(b):
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, par value $1.00 per share New York Stock Exchange
and Chicago Stock Exchange
Rights to Purchase Series A Participating New York Stock Exchange
Cumulative Preferred Stock and Chicago Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G): NONE
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
At October 31, 2001, 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 $2,759,644,567. 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, 2001, there were 69,041,473 shares of Registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Annual Report to Shareholders for the fiscal
year ended September 30, 2001 are incorporated by reference into Parts I,
II and IV.
Portions of Registrant's definitive Proxy Statement for its January
31, 2002 Annual Meeting of Shareholders are incorporated by reference into
Part III.
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EXPLANATORY NOTE
----------------
This amendment to the Annual Report on Form 10-K for the fiscal year
ended September 30, 2001 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, 2001 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 Exchange Act of 1934, as
amended, the text of the amended item is set forth in its entirety in the
pages attached hereto.
A consent of PricewaterhouseCoopers LLP, independent accountants for
MAP, is being filed as an exhibit hereto.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT
(1) and (2) Financial Statements and Financial Schedule
The consolidated financial statements and financial schedule of
Ashland presented or incorporated by reference in this report are listed in
the index on page 19.
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 - Second Restated Articles of Incorporation of Ashland, as amended
to January 30, 1998 (filed as Exhibit 3 to Ashland's Form 10-Q for
the quarter ended December 31, 1997 and incorporated herein by
reference).
3.2 - By-laws of Ashland, effective as of June 21, 2001 (filed as
Exhibit 3.2 to Ashland's Form 10-Q for the quarter ended June 30,
2001 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.
4.3 - Indenture, dated as of September 7, 2001, between Ashland and
U.S. Bank National Association, as Trustee.
4.4 - Rights Agreement, dated as of May 16, 1996, between Ashland Inc.
and the Rights Agent, together with Form of Right Certificate.
The following Exhibits 10.1 through 10.15 are compensatory plans or
arrangements or management contracts required to be filed as exhibits
pursuant to Item 601(b)(10)(ii)(A) of Regulation S-K.
10.1 - Amended Stock Incentive Plan for Key Employees of Ashland Inc.
and its Subsidiaries (filed as Exhibit 10.1 to Ashland's Form 10-K
for the fiscal year ended September 30, 1999 and incorporated
herein by reference).
10.2 - Ashland Inc. Deferred Compensation Plan for Non-Employee
Directors (filed as Exhibit 10.2 to Ashland's Form 10-K for the
fiscal year ended September 30, 1999 and incorporated herein by
reference).
10.3 - Ashland Inc. Deferred Compensation Plan (filed as Exhibit 10.14
to Ashland's Form 10-K for the fiscal year ended September 30,
2000 and incorporated herein by reference).
10.4 - Tenth Amended and Restated Ashland Inc. Supplemental Early
Retirement Plan for Certain Employees, as amended (filed as
Exhibit 10.2 to Ashland's Form 10-Q for the quarter ended December
31, 2000 and incorporated herein by reference).
10.5 - Ashland Inc. Salary Continuation Plan.
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 Form 10-K for the fiscal year ended September
30, 1999 and incorporated herein by reference).
10.7 - Form of Separation Agreement and General Release between Ashland
Inc. and James R. Boyd, an executive officer of Ashland.
10.8 - Form of Indemnification Agreement between Ashland Inc. and each
member of its Board of Directors.
10.9 - Ashland Inc. Nonqualified Excess Benefit Pension Plan (filed as
Exhibit 10.11 to Ashland's Form 10-K for the fiscal year ended
September 30, 1998 and incorporated herein by reference).
10.10 - Ashland Inc. Long-Term Incentive Plan (filed as Exhibit 10.9
to Ashland's Form 10-K for the fiscal year ended September 30,
2000 and incorporated herein by reference).
10.11 - Ashland Inc. Directors' Charitable Award Program (filed as
Exhibit 10.10 to Ashland's Form 10-K for the fiscal year ended
September 30, 2000 and incorporated herein by reference).
10.12 - Ashland Inc. 1993 Stock Incentive Plan (filed as Exhibit 10.11
to Ashland's Form 10-K for the fiscal year ended September 30,
2000 and incorporated herein by reference).
10.13 - Ashland Inc. 1995 Performance Unit Plan (filed as Exhibit
10.12 to Ashland's Form 10-K for the fiscal year ended September
30, 2000 and incorporated herein by reference).
10.14 - Ashland Inc. 1997 Stock Incentive Plan (filed as Exhibit 10.15
to Ashland's Form 10-K for the fiscal year ended September 30,
2000 and incorporated herein by reference).
10.15 - Ashland Inc. Amended and Restated Ashland Inc. Incentive Plan
(filed as Exhibit 10.1 to Ashland's Form 10-Q for the quarter
ended December 31, 2000 and incorporated herein by reference).
10.16 - Amended and Restated Limited Liability Company Agreement of
Marathon Ashland Petroleum LLC dated as of December 31, 1998
(filed as Exhibit 10.17 to Ashland's Form 10-K for the fiscal year
ended September 30, 1999 and incorporated herein by reference).
10.17 - Put/Call, Registration Rights and Standstill Agreement as
amended to December 31, 1998 among Marathon Oil Company, USX
Corporation, Ashland Inc. and Marathon Ashland Petroleum (filed as
Exhibit 10.18 to Ashland's Form 10-K for the fiscal year ended
September 30, 1999 and incorporated herein by reference).
11 - Computation of Earnings Per Share (appearing on page 43 of
Ashland's Annual Report to Shareholders, incorporated by reference
herein, for the fiscal year ended September 30, 2001).
12 - Computation of Ratios of Earnings to Fixed Charges and Earnings
to Combined Fixed Charges and Preferred Stock Dividends.
13 - Portions of Ashland's Annual Report to Shareholders,
incorporated by reference herein, for the fiscal year ended
September 30, 2001.
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.
*Filed herewith
Upon written or oral request, a copy of the above exhibits will be
furnished at cost.
(B) REPORTS ON FORM 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Amendment to be signed on its behalf by
the undersigned thereunto duly authorized.
ASHLAND INC.
--------------------------
(Registrant)
Date: March 14, 2002 /s/ David L. Hausrath
--------------------------
Name: David L. Hausrath
Title: Vice President and
General Counsel
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
CONTENTS
PAGE
REPORT OF INDEPENDENT ACCOUNTANTS: 1
CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED STATEMENT OF OPERATIONS -------------------------------------------------------------------- 2
CONSOLIDATED BALANCE SHEET ------------------------------------------------------------------------------ 3
CONSOLIDATED STATEMENT OF CASH FLOWS -------------------------------------------------------------------- 4
CONSOLIDATED STATEMENT OF MEMBERS' CAPITAL -------------------------------------------------------------- 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
NOTE A - BUSINESS DESCRIPTION AND BASIS OF PRESENTATION -------------------------------------------- 6
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES -------------------------------------------------- 7
NOTE C - NEW ACCOUNTING STANDARDS ------------------------------------------------------------------ 8
NOTE D - RELATED PARTY TRANSACTIONS ---------------------------------------------------------------- 9
NOTE E - OTHER ITEMS ------------------------------------------------------------------------------- 10
NOTE F - PENSIONS AND OTHER POSTRETIREMENT BENEFITS ------------------------------------------------ 10
NOTE G - INCOME TAXES ------------------------------------------------------------------------------ 12
NOTE H - INVENTORIES ------------------------------------------------------------------------------- 13
NOTE I - INVESTMENTS AND LONG-TERM RECEIVABLES ----------------------------------------------------- 13
NOTE J - PROPERTY, PLANT AND EQUIPMENT ------------------------------------------------------------- 14
NOTE K - SHORT-TERM DEBT --------------------------------------------------------------------------- 14
NOTE L - LONG-TERM DEBT ---------------------------------------------------------------------------- 15
NOTE M - SUPPLEMENTAL CASH FLOW INFORMATION -------------------------------------------------------- 15
NOTE N - LEASES ------------------------------------------------------------------------------------ 15
NOTE O - DERIVATIVE INSTRUMENTS -------------------------------------------------------------------- 16
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS ------------------------------------------------------- 16
NOTE Q - CONTINGENCIES AND COMMITMENTS ------------------------------------------------------------- 17
PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
600 Grant Street
Pittsburgh, PA 15219
Report of Independent Accountants
February 15, 2002
To the Board of Managers of
Marathon Ashland Petroleum LLC:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, cash flows and members' capital
present fairly, in all material respects, the financial position of
Marathon Ashland Petroleum LLC and its subsidiaries (MAP) at December 31,
2001 and 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of MAP's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements
in accordance with auditing standards generally accepted in the United
States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
As discussed in Note C to the financial statements, MAP changed its method
of accounting for derivatives in 2001.
/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
1
CONSOLIDATED STATEMENT OF OPERATIONS (Dollars in Millions)
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
Year Ended December 31
-----------------------------------------------------
2001 2000 1999
------------- ------------- -------------
REVENUES AND OTHER INCOME:
Revenues * $ 27,245 $ 28,775 $ 20,008
Dividend and investee income 44 24 18
Net gains (losses) on disposal of assets 30 28 (3)
Other income 29 28 24
------------- ------------- --------------
Total revenues and other income 27,348 28,855 20,047
------------- ------------- --------------
COSTS AND EXPENSES:
Cost of revenues (excludes items shown below) 20,061 22,366 14,675
Selling, general and administrative expenses 456 394 369
Depreciation and amortization 348 316 283
Taxes other than income taxes * 4,545 4,474 4,098
Inventory market valuation charges (credits) - Note H 77 -- (552)
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Total costs and expenses 25,487 27,550 18,873
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INCOME FROM OPERATIONS: 1,861 1,305 1,174
Net interest and other financial income - Note E 4 12 5
------------- ------------- --------------
INCOME BEFORE INCOME TAXES: 1,865 1,317 1,179
Provision for income taxes - Note G 9 7 2
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INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE: 1,856 1,310 1,177
Cumulative effect of change in derivatives accounting - Note C (20) -- --
------------- ------------- --------------
NET INCOME $ 1,836 $ 1,310 $ 1,177
============= ============= ==============
* Included in revenues and costs and expenses for 2001, 2000 and
1999 were $4,404 million, $4,344 million and $3,973 million,
respectively, representing consumer excise taxes on petroleum
products and merchandise.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
2
CONSOLIDATED BALANCE SHEET (Dollars in Millions)
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
December 31
---------------------------------
2001 2000
------------- -------------
ASSETS:
Current assets:
Cash and cash equivalents $ 33 $ 58
Receivables, less allowance for doubtful accounts of $3
and $3 1,104 1,415
Inventories - Note H 1,793 1,824
Related party receivables - Note D 42 43
Other current assets 41 44
------------- -------------
Total current assets 3,013 3,384
Investments and long-term receivables - Note I 502 113
Property, plant and equipment - net - Note J 3,977 4,022
Other noncurrent assets 66 72
------------- -------------
Total assets $ 7,558 $ 7,591
============= =============
LIABILITIES:
Current liabilities:
Accounts payable $ 1,740 $ 2,180
Accounts payable to related parties - Note D 62 66
Payroll and benefits payable 166 159
Accrued taxes 42 38
------------ -------------
Total current liabilities 2,010 2,443
Long-term debt - Note L 7 8
Deferred income taxes - Note G 4 4
Employee benefits - Note F 336 288
Deferred credits and other liabilities 35 7
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Total liabilities 2,392 2,750
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MEMBERS' CAPITAL (details on page 5)
Members' contributed capital 4,259 4,244
Retained earnings 912 601
Accumulated other comprehensive income (losses) (5) (4)
------------- -------------
Total members' capital 5,166 4,841
------------- -------------
Total liabilities and members' capital $ 7,558 $ 7,591
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
3
CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in Millions)
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
Year Ended December 31
-----------------------------------------------------
2001 2000 1999
------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $ 1,836 $ 1,310 $ 1,177
Adjustments to reconcile to net cash provided from
operating activities:
Depreciation and amortization 348 316 283
Inventory market valuation charges (credits) 77 -- (552)
Pensions and other postretirement benefits 44 30 44
Cumulative effect of change in accounting principle 20 -- --
Deferred income taxes -- -- (1)
Net (gains) losses on disposal of assets (30) (28) 3
Changes in:
Current receivables 283 (278) (465)
Inventories (59) (5) (41)
Current accounts payable and accrued expenses (517) 378 749
Net receivables and payables with related parties (3) 31 22
All other - net 25 (38) 38
------------- ------------- -------------
Net cash provided from operating activities 2,024 1,716 1,257
------------- ------------- -------------
INVESTING ACTIVITIES:
Capital expenditures (576) (637) (597)
Disposal of assets 51 70 162
Loans for Section 1031 transactions - principal loaned (31) (46) --
- principal collected 35 42 --
Property exchange trust - deposits (62) (54) (4)
- withdrawals 54 53 2
Investees - investments (16) (1) --
- loans and advances (5) (5) --
- returns and repayments 10 -- --
------------- ------------- -------------
Net cash used in investing activities (540) (578) (437)
------------- ------------- -------------
FINANCING ACTIVITIES:
Revolving credit facilities - borrowings - Note D 294 931 386
- repayments - Note D (294) (931) (386)
Debt repayments (1) (14) --
Member distributions (1,508) (1,104) (1,054)
------------- -------------- --------------
Net cash used in financing activities (1,509) (1,118) (1,054)
------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (25) 20 (234)
Cash and cash equivalents at beginning of year 58 38 272
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 33 $ 58 $ 38
============= ============= =============
See Note M for supplemental cash flow information.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
4
CONSOLIDATED STATEMENT OF MEMBERS' CAPITAL (Dollars in Millions)
MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
Members' Capital Comprehensive Income
Year Ended Year Ended
December 31 December 31
---------------------------------------- ----------------------------------------
2001 2000 1999 2001 2000 1999
----------- ----------- ----------- ----------- ----------- -----------
MEMBERS' CONTRIBUTED CAPITAL:
Balance at beginning of year $ 4,244 $ 4,218 $ 4,188
Member contributions 15 26 30
------------ ----------- -----------
Balance at end of year 4,259 4,244 4,218
------------ ----------- -----------
RETAINED EARNINGS:
Balance at beginning of year 601 395 --
Net income 1,836 1,310 1,177 $ 1,836 $ 1,310 $ 1,177
Distributions to members (1,525) (1,104) (782)
------------ ----------- -----------
Balance at end of year 912 601 395
------------ ----------- -----------
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS):
Minimum pension liability adjustments:
Balance at beginning of year (4) -- (5)
Changes during the year (1) (4) 5 (1) (4) 5
----------- ----------- -----------
Balance at end of year (5) (4) --
----------- ----------- -----------
Deferred gains (losses) on derivative
instruments:
Balance at beginning of year -- -- --
Cumulative effect adjustment 6 -- -- 6 -- --
Reclassification of the cumulative
effect adjustment into
earnings (6) -- -- (6) -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at end of year -- -- --
----------- ----------- -----------
TOTAL COMPREHENSIVE INCOME $ 1,835 $ 1,306 $ 1,182
============ ============ ============
TOTAL MEMBERS' CAPITAL $ 5,166 $ 4,841 $ 4,613
=========== =========== ===========
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% 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% (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 & 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.
Pilot Travel Centers LLC (PTC), a joint venture owned 50 percent each by
MAP and Pilot Corporation, began operations on September 1, 2001. MAP,
through its wholly owned retail unit, SSA, contributed 94 travel centers
and other assets in the formation of PTC. PTC is now the largest travel
center network in the United States with about 230 locations in 35 states.
The new venture, based in Knoxville, Tennessee, has approximately 11,000
employees. PTC is accounted for under the equity method of accounting.
In June 2001, MAP acquired an interest in approximately 50 convenience
stores located in Indiana and Michigan from Welsh, Inc. The acquisition of
these retail outlets increases MAP's presence in these markets.
In 2001, 2000 and 1999, MAP recorded capital contributions from Marathon of
$2 million, $2 million and $2 million, respectively, and from Ashland of
$10 million, $24 million and $28 million, respectively, for environmental
improvements. The LLC Agreement stipulates that ownership interest in MAP
will not be adjusted as a result of such contributions. In 2001, MAP
recorded capital contributions of $1 million from Marathon and $2 million
from Ashland related to stock-based compensation expense which is allocated
100% to Marathon and Ashland, respectively.
In March 2000, MAP, Panhandle Eastern Pipe Line Company, a subsidiary of
CMS Energy Corporation, and TE Products Pipe Line Company, Limited
Partnership, formed a limited liability company with equal one-third
ownership called Centennial Pipeline LLC (Centennial) to develop an
interstate refined petroleum products pipeline extending from the U.S. Gulf
of Mexico to the Midwest. In March 2001, the Federal Energy Regulatory
Commission approved the abandonment of a 720-mile pipeline from natural gas
service, thereby allowing Centennial to convert the line to refined
products transportation. Centennial is accounted for under the equity
method of accounting.
During 2000, MAP sold 159 Speedway SuperAmerica non-core stores for $48
million. MAP recorded a pretax gain of $19 million related to these sales.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE A - BUSINESS DESCRIPTION AND BASIS OF PRESENTATION - Continued
In 1999, MAP sold Scurlock Permian LLC, its crude oil gathering business,
to Plains Marketing, L.P. for $137 million. In 1999, MAP recorded a pretax
loss of $16 million related to the sale.
In 1999, MAP finalized the transaction with Ultramar Diamond Shamrock
("UDS") to purchase 178 UDS owned and operated convenience stores and 5
product terminals. In addition, MAP was assigned supply contracts with UDS
branded jobbers who supplied 242 branded jobber stations in Michigan. This
transaction was accounted for under the purchase method of accounting.
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 other 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 earnings in accordance with the
underlying remaining useful life of the associated assets. Investments in
companies whose stocks have no readily determinable fair value are carried
at cost.
Dividend and investee income includes MAP's proportionate share of income
from equity method investments and dividend income from other investments.
Dividend income is recognized when dividend payments are received.
USE OF ESTIMATES - Generally accepted accounting principles require
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at year-end and the reported amounts of revenues and expenses
during the year. Significant items subject to such estimates and
assumptions include the carrying value of property, plant and equipment;
valuation allowances for receivables and inventories; environmental
liabilities; liabilities for potential tax deficiencies and potential
litigation claims and settlements; and assets and obligations related to
employee benefits. Additionally, certain estimated liabilities are recorded
when management commits to a plan to close an operating facility or to exit
a business activity. 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, the sales price is fixed and
determinable, and collectibility is reasonably assured. Costs associated
with revenues, including shipping and other transportation costs, are
recorded in 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, with no net effect on income.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand
and on deposit and investments with related parties in highly liquid debt
instruments with maturities of three months or less. See Note D for
information regarding investments with related parties.
INVENTORIES - Inventories are carried at lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
DERIVATIVE INSTRUMENTS - MAP uses commodity-based derivative instruments to
manage its exposure to price risk. Management has authorized the use of
futures, forwards, swaps and options to reduce the effects of fluctuations
related to the purchase or sale of crude oil, refined products and natural
gas. Changes in the fair value of all derivatives are recognized
immediately in earnings, either within revenues or cost of revenues, unless
the derivative qualifies as a hedge of future cash flows or certain foreign
currency exposures. During 2001, MAP did not elect to designate any
derivatives as qualifying for hedge accounting treatment.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
depreciated principally by the straight-line method over their useful
lives. MAP evaluates impairment of its assets on an individual asset basis
or by logical groupings of assets. Assets deemed to be impaired are written
down to their fair value, including any related goodwill, using discounted
future cash flows and, if available, comparable market values.
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. 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.
7
NOTES TO CONSOLIDATED FINNCIAL STATEMENTS - Continued
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - Continued
MAJOR MAINTENANCE ACTIVITIES - MAP incurs planned major maintenance costs
primarily for refinery turnarounds. These types of costs include contractor
repair services, materials and supplies, equipment rentals and company
labor costs. Such costs are expensed in the same annual period as incurred;
however, estimated annual turnaround costs are recognized in income
throughout the year on a pro rata basis.
ENVIRONMENTAL LIABILITIES - Environmental expenditures are capitalized if
the costs mitigate or prevent future contamination or if the costs improve
existing assets' environmental safety or efficiency. MAP provides for
remediation costs and penalties when the responsibility to remediate is
probable and the amount of associated costs is reasonably determinable.
Generally, 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 in certain instances. If
recoveries of remediation costs from third parties are probable, a
receivable is recorded.
STOCK-BASED COMPENSATION - MAP applies the principles of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," to the stock-based compensation granted to MAP employees by
Marathon, and MAP applies the principles of Statement of Financial
Accounting Standards No. 123, "Accounting For Stock-Based Compensation," as
interpreted by Emerging Issues Task Force Issue 96-18, "Accounting for
Equity Instruments That Are Issued To Other Than Employees For Acquiring,
Or In Conjunction With Selling, Goods Or Services," to the stock-based
compensation granted to MAP employees by Ashland.
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.
RECLASSIFICATIONS - Certain reclassifications of prior years' data have
been made to conform to 2001 classifications. These changes had no impact
on previously reported results of operations or members' capital.
NOTE C - NEW ACCOUNTING STANDARDS
ADOPTED IN 2001 - 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, as amended, requires recognition of all
derivatives at fair value as either assets or liabilities.
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.
MAP did not have any foreign currency contracts in place at December 31,
2001.
TO BE ADOPTED IN FUTURE PERIODS - In June 2001, the Financial Accounting
Standards Board (FASB) issued Statements of Financial Accounting Standards
No. 141 "Business Combinations" (SFAS No. 141), No. 142 "Goodwill and Other
Intangible Assets" (SFAS No. 142) and No. 143 "Accounting for Asset
Retirement Obligations" (SFAS No. 143).
8
NOTES TO CONSOLIDATED FINNCIAL STATEMENTS - Continued
NOTE C - NEW ACCOUNTING STANDARDS - Continued
SFAS No. 141 requires that all business combinations initiated after June
30, 2001, be accounted for under the purchase method. This Statement
establishes specific criteria for the allocation of purchase price to
intangible assets separately from goodwill for all business combinations
made after June 30, 2001.
SFAS No. 142 addresses the accounting for goodwill and other intangible
assets after an acquisition. The most significant changes made by SFAS No.
142 are: 1) goodwill and intangible assets with indefinite lives will no
longer be amortized; 2) goodwill and intangible assets with indefinite
lives must be tested for impairment at least annually; and 3) the
amortization period for intangible assets with finite lives will no longer
be limited to forty years. MAP will adopt SFAS No. 142 effective January 1,
2002, as required. At that time, annual amortization of existing goodwill
of $2 million will cease on the unamortized portion associated with
previous acquisitions. As required, a transitional impairment test is
required for existing goodwill as of the date of adoption of this Standard.
This test must be completed within the first year. Any impairment loss
resulting from applying the goodwill impairment test will be reported as a
cumulative effect of a change in accounting principle. Goodwill recorded
after adoption of this Standard is to be tested for impairment at least
annually and any resulting impairment is not considered part of the change
in accounting principle.
SFAS No. 143 establishes a new accounting model for the recognition and
measurement of retirement obligations associated with tangible long-lived
assets. SFAS No. 143 requires that an asset retirement cost be capitalized
as part of the cost of the related long-lived asset and subsequently
allocated to expense using a systematic and rational method. MAP will adopt
the Statement effective January 1, 2003, as required. The transition
adjustment resulting from the adoption of SFAS No. 143 will be reported as
a cumulative effect of a change in accounting principle. At this time, MAP
cannot reasonably estimate the effect of the adoption of this Statement on
either its financial position or results of operations.
In August 2001, the FASB approved SFAS No. 144, "Accounting for Impairment
or Disposal of Long-Lived Assets" (SFAS No. 144). This Statement
establishes a single accounting model for long-lived assets to be disposed
of by sale and provides additional implementation guidance for assets to be
held and used and assets to be disposed of other than by sale. MAP will
adopt the Statement prospectively effective January 1, 2002.
NOTE D - RELATED PARTY TRANSACTIONS
MAP sales in 2001, 2000 and 1999 to Ashland and its affiliates were $237
million, $285 million and $198 million, respectively; and sales to MOC and
its affiliates were $209 million, $145 million and $50 million,
respectively. MAP purchases in 2001, 2000 and 1999 from Ashland and its
affiliates totaled $23 million, $19 million and $9 million, respectively;
and purchases from MOC and its affiliates totaled $610 million, $540
million and $297 million, respectively. Such transactions were in the
ordinary course of business and included the purchase, sale and
transportation of crude oil, natural gas, refinery feedstocks and refined
petroleum products. These transactions were conducted under terms
comparable to those with unrelated parties.
During the years ended December 31, 2001, 2000 and 1999, Ashland and its
affiliates, and MOC and its affiliates provided certain information
technology and administrative services and facilities to MAP. Billings to
MAP for these services and facilities for the years ended December 31,
2001, 2000 and 1999 from Ashland and its affiliates totaled $6 million, $7
million and $13 million, respectively. Billings to MAP for these services
and facilities for the years ended December 31, 2001, 2000 and 1999 from
MOC and its affiliates totaled $39 million, $48 million and $47 million,
respectively.
As of December 31, 2001 and 2000, related party receivables included $19
million and $35 million, respectively, of accounts receivable due from
Ashland and its affiliates; and accounts payable to related parties
included $20 million and $2 million, respectively, due to Ashland and its
affiliates. Included in the December 31, 2001, accounts payable to Ashland
is a $17 million member distribution payable. As of December 31, 2001 and
2000, related party receivables included $23 million and $8 million,
respectively, of accounts receivable due from MOC and its affiliates; and
accounts payable to related parties included $42 million and $64 million,
respectively, due to MOC and its affiliates.
In connection with the formation of MAP, certain Marathon debt was assigned
to MAP. Marathon agreed to reimburse MAP for this debt and related interest
expense. During 2001, 2000 and 1999, Marathon reimbursed MAP $0 million, $6
million and $0 million, respectively, for debt repayments.
A revolving credit agreement was entered into as of January 1, 1998, among
Ashland and Marathon (collectively the Lenders) and MAP (Borrower). This
agreement provides that the Lenders may loan to the Borrower up to $500
million at defined short-term
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE D - RELATED PARTY TRANSACTIONS - Continued
market rates. At December 31, 2001 and 2000, there were no borrowings
against this facility. During 2001 and 2000, MAP borrowed and repaid $294
million and $931 million, respectively, under this revolving credit
facility. The weighted average borrowings outstanding under this revolving
credit facility during the years 2001 and 2000 were $3 million and $14
million, respectively. During the years ended December 31, 2001, 2000 and
1999, interest expense paid on these borrowings were $0 million, $1 million
and $0 million, respectively, to Marathon.
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, 2001 and have been subsequently amended and extended
with an expiration date of March 15, 2002. At December 31, 2001 and 2000,
there was no cash invested under these agreements. During the years ended
December 31, 2001, 2000 and 1999, interest income earned from these
investments was $2 million, $6 million and $4 million, respectively, from
Ashland and $1 million, $7 million and $5 million, respectively, from MOC.
NOTE E - OTHER ITEMS
Year Ended December 31
------------------------------------------
(Millions)
2001 2000 1999
----------- ----------- -----------
NET INTEREST AND OTHER FINANCIAL INCOME
INTEREST AND OTHER FINANCIAL INCOME:
Interest income - third parties $ 11 $ 9 $ 3
Interest income - related parties 3 13 9
----------- ----------- -----------
Total 14 22 12
----------- ----------- -----------
INTEREST AND OTHER FINANCIAL COSTS:
Interest incurred 3 3 2
Other 7 7 5
----------- ----------- -----------
Total 10 10 7
----------- ----------- -----------
NET INTEREST AND OTHER FINANCIAL INCOME $ 4 $ 12 $ 5
=========== =========== ===========
NOTE F - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
MAP has a noncontributory defined benefit pension plan and several related
excess benefit plans covering substantially all employees. Benefits under
its final pay formula are based primarily upon age, years of service and
the highest three years earnings during the last ten years before
retirement. Benefits under its pension equity formula are based primarily
upon age, years of service and the final three years of earnings at
retirement.
MAP also has defined benefit retiree health and life insurance plans (other
benefits) covering most employees upon their retirement. Health benefits
are provided, for the most part, 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 primarily based on employees'
annual base salary at retirement. Other benefits have not been prefunded.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE F - PENSIONS AND OTHER POSTRETIREMENT BENEFITS - Continued
Pension Benefits Other Benefits
---------------------- ---------------------
(Millions)
2001 2000 2001 2000
--------- --------- --------- ---------
CHANGE IN PROJECTED BENEFIT OBLIGATION:
Benefit obligation at January 1 $ 568 $ 482 $ 189 $ 152
Service cost 40 36 9 8
Interest cost 42 38 14 12
Plan amendments -- 4 -- 1
Actuarial (gains) losses 130 64 7 19
Benefits paid (47) (56) (3) (3)
Settlement (6) -- -- --
--------- --------- --------- ---------
Benefit obligations at December 31 $ 727 $ 568 $ 216 $ 189
========= ========= ========= =========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at January 1 $ 502 $ 560
Actual return on plan assets (17) (4)
Employer contributions -- 1
Benefits paid (45) (55)
--------- ---------
Fair value of plan assets at December 31 $ 440 $ 502
========= =========
FUNDED STATUS OF PLANS AT DECEMBER 31: (a) $ (287) $ (66) $ (216) $ (189)
Unrecognized net gain from transition (7) (9) -- --
Unrecognized prior service costs (credits) 24 25 (47) (54)
Unrecognized actuarial (gains) losses 187 (5) 27 21
Additional minimum liability (b) (5) (6) -- --
--------- --------- --------- ---------
Accrued benefit cost $ (88) $ (61) $ (236) $ (222)
========= ========= ========= =========
(a) Includes several small plans that have
accumulated benefit obligations and no
plan assets:
Accumulated benefit obligation $ (9) $ (12)
Projected benefit obligation (26) (17)
(b) Additional minimum liability recorded
was offset by the following:
Intangible asset $ -- $ 2
--------- ---------
Accumulated other comprehensive income (loss):
Beginning of year $ (4) $ --
Change during year (1) (4)
--------- ---------
Balance at end of year $ (5) $ (4)
========= =========
Pension Benefits Other Benefits
---------------------------------- ---------------------------------
(Millions)
2001 2000 1999 2001 2000 1999
--------- --------- --------- ------ ------- -------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 40 $ 36 $ 41 $ 9 $ 8 $ 10
Interest cost 42 38 33 14 12 13
Expected return on plan assets (50) (51) (46) -- -- --
Amortization of prior service costs 2 2 1 (6) (8) (6)
Amortization of actuarial losses 1 (4) 1 -- -- 3
Amortization of transition gain (2) (2) (2) -- -- --
Other plans 2 1 2 -- -- --
Settlement, curtailment and termination benefits 3 3 2 -- -- (1)
--------- --------- --------- --------- ------- ---------
Net periodic benefit cost $ 38 $ 23 $ 32 $ 17 $ 12 $ 19
========= ========= ========= ========= ======= =========
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE F - PENSIONS AND OTHER POSTRETIREMENT BENEFITS - Continued
Pension Benefits Other Benefits
--------------------- ---------------------
ACTUARIAL ASSUMPTIONS AT DECEMBER 31: 2001 2000 2001 2000
--------- --------- --------- ---------
Discount rate 7.0% 7.5% 7.0% 7.5%
Expected annual return on plan assets 9.5% 9.5% N/A N/A
Increase in compensation rate 5.0% 5.0% 5.0% 5.0%
For measurement purposes, a 7.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2002. The rate was
assumed to decrease gradually to 5% for 2007 and remain at that level
thereafter.
A one-percentage-point change in assumed health care cost trend rates would
have the following effects:
1-Percentage 1-Percentage
Point Increase Point Decrease
---------------------- ----------------------
(Millions)
Effect on total of service and interest
cost components $ 5 $ (4)
Effect on postretirement benefit obligation 34 (27)
MAP also contributes to several defined contributions plans for salaried
employees. Contributions to these plans, which for the most part are based on a
percentage of the employees' salaries, totaled $25 million, $21 million and $22
million in 2001, 2000 and 1999, respectively.
NOTE G - INCOME TAXES
The taxable income or loss resulting from operations of MAP, except for several
small subsidiary corporations, is ultimately included in the federal income tax
returns of MOC and Ashland. MAP is, however, subject to taxation in certain
state, local and foreign jurisdictions.
Provisions (credits) for income taxes:
Year Ended December 31
------------------------------------------------------------------------------------------
(Millions)
2001 2000 1999
---------------------------- ----------------------------- -----------------------------
CURRENT DEFERRED TOTAL Current Deferred Total Current Deferred Total
------- -------- ------ ------- -------- --------- ------- -------- --------
Federal $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ (1) $ (1)
State and local 8 -- 8 5 -- 5 1 -- 1
Foreign 1 - 1 2 -- 2 2 -- 2
------- -------- ------ ------- --------- --------- ------- --------- ---------
Total $ 9 $ - $ 9 $ 7 $ -- $ 7 $ 3 $ (1) $ 2
======= ======== ====== ======= ======== ========= ======= ========= =========
Deferred tax liabilities at December 31, 2001 and 2000 of $4 million and $4
million, respectively, principally arise from differences between the book
and tax basis of inventories and property, plant and equipment. Pretax
income in 2001, 2000 and 1999 included $0 million, $0 million and $3
million, respectively, attributable to foreign sources.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE H - INVENTORIES
Inventories consist of the following:
December 31
---------------------------
(Millions)
2001 2000
----------- -----------
Crude oil and natural gas liquids $ 654 $ 674
Refined products and merchandise 1,149 1,074
Supplies and sundry items 67 76
----------- ------------
Total (at cost) 1,870 1,824
Less inventory market valuation reserve 77 --
----------- ------------
Net inventory carrying value $ 1,793 $ 1,824
=========== ============
Inventories of crude oil and refined products are valued by the LIFO
method. The LIFO method accounted for 94% and 95% of total inventory at
December 31, 2001 and 2000, respectively. Current acquisition costs were
estimated to exceed the above inventory values at December 31, 2000 by $476
million. Cost of revenues was reduced and income from operations was
increased by $17 million in 2001 and $14 million in 2000 as a result of
liquidations of LIFO inventories.
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. During 2000, there
were no charges or credits to costs and expenses.
NOTE I - INVESTMENTS AND LONG-TERM RECEIVABLES
December 31
---------------------------
(Millions)
2001 2000
----------- -----------
Equity method investments $ 468 $ 104
Receivables due after one year 23 6
Property exchange trust 11 3
----------- -----------
Total $ 502 $ 113
=========== ===========
The following represents summarized financial information of investees
accounted for by the equity method of accounting:
Year Ended December 31
------------------------------------------
(Millions)
2001 2000 1999
----------- ----------- -----------
Income data:
Revenues $ 1,462 $ 239 $ 207
Operating income 134 95 78
Net income 90 57 44
December 31
---------------------------
(Millions)
2001 2000
----------- -----------
Balance sheet data:
Current assets $ 389 $ 99
Noncurrent assets 2,156 605
Current liabilities 417 93
Noncurrent liabilities 859 418
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE I - INVESTMENTS AND LONG-TERM RECEIVABLES - Continued
MAP's carrying value of its equity method investments is $129 million lower
than the underlying net assets of investees. Generally this basis
difference is being amortized into earnings over the lives of the
underlying net assets which average approximately 16 years.
In the third quarter of 2001, MAP and Pilot Corporation formed a joint
venture combining their travel center operations. The joint venture
company, named Pilot Travel Centers LLC (PTC), commenced operations on
September 1, 2001 and is accounted for under the equity method of
accounting. MAP sales to PTC totaled $210 million in 2001. There were no
sales to PTC in 2000 or 1999.
Dividends and partnership distributions received from equity investees were
$31 million, $25 million and $18 million in 2001, 2000 and 1999,
respectively. MAP purchases from equity investees totaled $53 million, $61
million and $50 million in 2001, 2000 and 1999, respectively.
Principal unconsolidated equity investees of MAP at December 31, 2001, are
as follows:
Company Ownership Activity
------- --------- --------
Pilot Travel Centers LLC 50.0% Travel centers
Minnesota Pipe Line Company 33.3% Crude oil pipeline system
LOOP LLC 46.7% Offshore oil port
Southcap Pipe Line Company 21.6% Crude oil pipeline system
LOCAP LLC 49.9% Crude oil pipeline system
Centennial Pipeline LLC 33.3% Refined products pipeline system
NOTE J - PROPERTY, PLANT AND EQUIPMENT
December 31
---------------------------
(Millions)
2001 2000
----------- -----------
Refining $ 2,821 $ 2,555
Marketing 2,005 2,270
Transportation 1,382 1,296
Other 31 20
----------- -----------
Total 6,239 6,141
Less accumulated depreciation and amortization 2,262 2,119
----------- -----------
Net $ 3,977 $ 4,022
=========== ===========
Property, plant and equipment at December 31, 2001 and 2000, includes gross
assets acquired under capital leases of $8 million and $8 million,
respectively, with related amounts in accumulated depreciation and
amortization of $1 million and $0 million, respectively.
NOTE K - SHORT-TERM DEBT
In July 2001, MAP renewed its $100 million 364-day revolving credit
agreement with a group of banks, which now terminates in July 2002.
Interest is based on defined short-term market rates. During the term of
the agreement, MAP is required to pay a facility fee on total commitments,
which at December 31, 2001 was 0.11%. At December 31, 2001, there were no
borrowings against this facility. Additionally, MAP has a revolving credit
agreement with Ashland and Marathon as discussed in Note D.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE L - LONG-TERM DEBT
December 31
---------------------------
(Millions)
2001 2000
----------- -----------
Capital lease obligations $ 6 $ 7
5% Promissory Note due 2009 1 1
Revolving credit facilities (a) (b) -- --
----------- -----------
Total (c) $ 7 $ 8
=========== ===========
(a) MAP has a $350 million revolving credit facility with a group of
banks that terminates in July 2003. Interest is based on defined
short-term market rates. During the term of the agreement, MAP is
required to pay a variable facility fee on total commitments,
which at December 31, 2001, was 0.125%. At December 31, 2001,
there were no borrowings or letters of credit outstanding against
the revolving credit facility. In the event that MAP defaults on
indebtedness (as defined in the agreement) in excess of $100
million, MOC has guaranteed the payment of any outstanding
obligations.
(b) In 1998, MAP entered into a revolving credit agreement with
Marathon and Ashland for $500 million that terminated on December
31, 1998, and which was renewed on an uncommitted basis for 1999.
This agreement expired on December 31, 1999, but has been extended
with an expiration date of March 15, 2002. Interest is based on
defined short-term market rates. At December 31, 2001, the unused
and available credit was $500 million.
(c) Required payments of long-term debt for the years 2004, 2005 and
2006 are $1 million, $1 million and $1 million, respectively. No
other significant payments of long-term debt are required in other
years.
NOTE M - SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended December 31
------------------------------------------
(Millions)
2001 2000 1999
----------- ----------- -----------
CASH PROVIDED FROM OPERATING ACTIVITIES INCLUDES:
Interest and other financial costs paid $ (2) $ (3) $ (2)
Income taxes paid (5) (5) (5)
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Liabilities assumed in acquisitions -- -- 16
Net assets contributed to joint ventures 246 -- --
NOTE N - LEASES
Future minimum commitments for capital and operating leases having
noncancelable lease terms in excess of one year are as follows:
Capital Operating
Leases Leases
----------- -----------
(Millions)
2002 $ 1 $ 45
2003 1 33
2004 1 23
2005 1 12
2006 1 8
Later years 4 40
Sublease rentals -- (2)
----------- -----------
Total minimum lease payments 9 $ 159
===========
Less imputed interest costs: (3)
-----------
Present value of minimum lease payments
included in long-term debt $ 6
===========
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE N - LEASES - Continued
Operating lease rental expense:
Year Ended December 31
------------------------------------------
(Millions)
2001 2000 1999
----------- ----------- -----------
Minimum rental $ 73 $ 73 $ 66
Contingent rental 13 10 11
Sublease rentals (2) (6) (6)
----------- ----------- -----------
Net rental expense $ 84 $ 77 $ 71
=========== =========== ===========
MAP leases a wide variety of facilities and equipment under operating
leases, including land and building space, office equipment, production
facilities and transportation equipment. Most long-term leases include
renewal options and, in certain leases, purchase options.
NOTE O - DERIVATIVE INSTRUMENTS
The following table sets forth quantitative information by category of
derivative instrument at December 31, 2001. 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, 2001.
Fair Fair Carrying Carrying
Value Value Value Value
(In Millions) Assets(a) (Liabilities)(a) Assets(b) (Liabilities)(b)
---------------------------------------------------------------------------------------------------------------------------------
NON-HEDGE DESIGNATION (c) :
Exchange-traded commodity futures $ 7 $ (16) $ 7 $ (16)
Exchange-traded commodity options 15 (10) 15 (10)
OTC commodity swaps 5 (6) 5 (6)
OTC commodity options 0 (1) 0 (1)
(a) The fair value amounts for OTC positions are based on various
indices or dealer quotes. The fair value of exchange-traded
positions are based on market price changes for each commodity.
(b) The carrying values represent the value of the derivative
instruments. This excludes any margin deposit amounts with
respective brokers. These amounts are reflected on a gross basis.
MAP's consolidated balance sheet is reflected on a net
asset/(liability) basis, as permitted by the master netting
agreements, by brokerage firm.
(c) The table excludes nontraditional derivative instruments which are
created due to netting of physical receipts and delivery volumes
with the same counterparty. At December 31, 2001, the fair value
of these assets and liabilities was $13 million and $13 million,
respectively.
MAP recorded a net derivative gain of $209 million in 2001, with a
derivative gain of $226 million recorded in cost of revenues and a
derivative loss of $17 million recorded in revenues. In 2000, MAP recorded
a derivative loss of $205 million, with $111 million recorded in cost of
revenues and $94 million recorded in revenues. MAP recorded a net
derivative gain of $20 million in 1999, with a derivative gain of $23
million recorded in cost of revenues and a derivative loss of $3 million
recorded in revenues.
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of most financial instruments are based on historical
costs. The carrying values of cash and cash equivalents, receivables,
payables, long-term receivables and long-term debt approximate their fair
value.
MAP's unrecognized financial instruments consist of financial guarantees
and commitments to extend credit. It is not practicable to estimate the
fair value of these forms of financial instrument obligations because there
are no quoted market prices for transactions which are similar in nature.
For details relating to financial guarantees, see Note Q.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENETS - Continued
NOTE Q - CONTINGENCIES AND COMMITMENTS
MAP is the subject of, or party to, a number of pending or threatened legal
actions, contingencies and commitments involving a variety of matters,
including laws and regulations relating to the environment. Certain of
these matters are discussed below. The ultimate resolution of these
contingencies could, individually or in the aggregate, be material to the
MAP financial statements. However, management believes that MAP will remain
a viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably.
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, 2001 and 2000, MAP's accrued liabilities for remediation
totaled $13 million and $10 million, respectively. It is not presently
possible to estimate the ultimate amount of all remediation costs that
might be incurred or the penalties that may be imposed. Receivables for
recoverable costs from certain states, under programs to assist companies
in clean up efforts related to underground storage tanks at retail
marketing outlets, were $7 million and $4 million at December 31, 2001 and
2000, respectively.
MAP has made substantial capital expenditures to bring existing facilities
into compliance with various laws relating to the environment. In 2001,
2000 and 1999, such capital expenditures for environmental controls totaled
$37 million, $47 million and $24 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. This consent decree was
approved by the court on August 28, 2001. The current estimated cost to
complete these programs is approximately $300 million in expenditures over
the next seven years. In addition, MAP is required to complete certain
agreed upon supplemental environmental projects as part of this settlement
of an enforcement action for alleged Clean Air Act violations, at a current
estimated cost of $8 million.
GUARANTEES - At December 31, 2001 and 2000, MAP's pro rata share of
obligations of LOCAP LLC and Southcap Pipe Line Company secured by
throughput and deficiency agreements totaled $14 million and $14 million,
respectively. Under the agreements, MAP is required to advance funds if the
investees are unable to service debt. Any such advances are treated as
prepayments of future transportation charges.
At December 31, 2001, MAP had guaranteed the repayment of $35 million of
the outstanding balance of Centennial Pipeline LLC's Master Shelf
Agreement. Once Centennial Pipeline commences operations and achieves
certain financial targets, MAP's guarantee will be released.
CONCENTRATION OF CREDIT RISK - MAP is exposed to credit risk in the event
of nonpayment by counterparties, a significant portion of which are
concentrated in energy related industries. The creditworthiness of
customers and other counterparties is subject to continuing review,
including the use of master netting agreements, where appropriate. No
single customer accounts for more than 5% of annual gross revenues.
COMMITMENTS - At December 31, 2001 and 2000, MAP's contract commitments for
capital expenditures for property, plant and equipment totaled $87 million
and $89 million, respectively.
In May 2001, MAP entered into a Transportation Agreement with Centennial
Pipeline LLC in which MAP guarantees to ship certain volumes on the
Centennial system or make deficiency payments for any volume shortfall. Any
deficiency payment made by MAP will be treated as a prepayment of future
transportation charges.
PUT/CALL AGREEMENT - As part of the formation of Pilot Travel Centers LLC
(PTC), MAP and Pilot Corporation (Pilot) entered into a Put/Call and
Registration Rights Agreement (Agreement). The Agreement provides that any
time after September 1, 2006, Pilot can sell its interest in PTC to MAP for
an amount of cash and/or MOC, MAP or Ashland equity securities equal to the
product of
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENETS - Continued
NOTE Q - CONTINGENCIES AND COMMITMENTS - Continued
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.
18
EXHIBIT INDEX
NO. DESCRIPTION
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23.2 Consent of PricewaterhouseCoopers LLP