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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-K/A
AMENDMENT NO. 1
ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission file number 1-32532
ASHLAND INC.
Kentucky 20-0865835
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
50 E. RiverCenter Boulevard
P.O. Box 391
Covington, Kentucky 41012-0391
Telephone Number (859) 815-3333
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, par value $.01 per share New York Stock Exchange
and Chicago Stock Exchange
Rights to purchase Series A Participating New York Stock Exchange
Cumulative Preferred Stock and Chicago Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes |X| No |_|
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|
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. |_|
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
At March 31, 2005, the aggregate market value of voting stock held by
non-affiliates of the Registrant was approximately $4,905,417,887. 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 February 28, 2006, there were 71,118,940 shares of Registrant's
common stock outstanding.
Documents Incorporated by Reference
Portions of Registrant's definitive Proxy Statement (the "Proxy
Statement") for its January 26, 2006 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, 2005 of Ashland Inc. ("Ashland") is being filed to
include the audited financial statements of Marathon Petroleum Company LLC
("MPC"), formerly known as Marathon Ashland Petroleum LLC, for the six
months ended June 30, 2005, as required by Rule 3-09 of Regulation S-X.
Ashland had a 38% equity interest in MPC through June 30, 2005. 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
MPC, is being filed as an exhibit hereto.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) and (2) Financial Statements and Financial Schedule
(3) See Item 15(b) in this annual report on Form 10-K
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 Petroleum Company LLC
(formerly 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.
(b) DOCUMENTS REQUIRED BY ITEM 601 OF REGULATION S-K
3.1 Second Restated Articles of Incorporation of Ashland
effective July 21, 2005 (filed as Exhibit 3(i) to Ashland's
Form 10-Q for the quarter ended June 30, 2005, and
incorporated herein by reference).
3.2 By-laws of Ashland, effective as of June 30, 2005 (filed as
Exhibit 3(ii) to Ashland's Form 10-Q for the quarter ended
June 30, 2005, 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 Rights Agreement, dated as of May 16, 1996, between Ashland
Inc. and the Rights Agent, together with Form of Right
Certificate (filed as Exhibit 4.4 to Ashland's annual
report on Form 10-K for the fiscal year ended September 30,
2001, and incorporated herein by reference).
4.4 Amendment No. 1 dated as of March 18, 2004, to Rights
Agreement dated as of May 16, 1996, between Ashland Inc.
and Rights Agent (filed as Exhibit 4 to Ashland's Form 10-Q
for the quarter ended March 31, 2004, and incorporated
herein by reference).
4.5 Amendment No. 2 dated as of April 27, 2005, to Rights
Agreement dated as of May 16, 1996, between Ashland Inc.
and Rights Agent (filed as Exhibit 4.7 to Ashland's Form
S-4/A on May 2, 2005, and incorporated herein by
reference).
The following Exhibits 10.1 through 10.18 are contracts or
compensatory plans or arrangements or management contracts required to be
filed as exhibits pursuant to Items 601(b)(10)(ii)(A) and
601(b)(10)(iii)(A) and (B) of Regulation S-K.
10.1 Ashland Inc. Deferred Compensation Plan for Non-Employee
Directors (filed as Exhibit 10.5 to Ashland's Form 10-Q for
the quarter ended December 31, 2004, and incorporated
herein by reference).
10.2 Ashland Inc. Deferred Compensation Plan (filed as Exhibit
10.3 to Ashland's Form 10-Q for the quarter ended December
31, 2004, and incorporated herein by reference).
10.3 Ashland Inc. Deferred Compensation Plan for Employees
(2005) (filed as Exhibit 10 to Ashland's Form 10-Q for the
quarter ended March 31, 2005, and incorporated herein by
reference).
10.4 Amendment No. 1 to Ashland Inc. Deferred Compensation Plan
for Employees (2005) dated October 28, 2005.
10.5 Ashland Inc. Deferred Compensation Plan for Non-Employee
Directors (2005) (filed as Exhibit 10.6 to Ashland's Form
10-Q for the quarter ended December 31, 2004, and
incorporated herein by reference).
10.6 Eleventh Amended and Restated Ashland Inc. Supplemental
Early Retirement Plan for Certain Employees (filed as
Exhibit 10.2 to Ashland's Form 10-Q for the quarter ended
December 31, 2004, and incorporated herein by reference).
10.7 Amendment No. 1 to Eleventh Amended and Restated Ashland
Inc. Supplemental Early Retirement Plan for Certain
Employees dated December 20, 2004.
10.8 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).
10.9 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).
10.10 Form of Indemnification Agreement between Ashland Inc. and
members of its Board of Directors.
10.11 Ashland Inc. Nonqualified Excess Benefit Pension Plan -
2003 Restatement (filed as Exhibit 10.1 to Ashland's Form
10-Q for the quarter ended December 31, 2004, and
incorporated herein by reference).
10.12 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).
10.13 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).
10.14 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).
10.15 Amended and Restated Ashland Inc. Incentive Plan (filed as
Exhibit 10.1 to Ashland's Form 10-Q for the quarter ended
June 30, 2004, and incorporated herein by reference).
10.16 Forms of Notice granting Stock Appreciation Rights Awards.
10.17 Form of Notice granting Restricted Stock Awards.
10.18 Form of Notice granting Nonqualified Stock Option Awards.
10.19 Five-Year, $350 Million Revolving Credit Agreement dated as
of March 21, 2005 (filed as Exhibit 10.1 to Ashland's Form
8-K filed on March 24, 2005, and incorporated herein by
reference).
10.20* Master Agreement dated as of March 18, 2004, and Amendment
No. 1 dated as of April 27, 2005, among Ashland Inc., ATB
Holdings Inc., EXM LLC, New EXM Inc., Marathon Oil
Corporation, Marathon Oil Company, Marathon Domestic LLC
and Marathon Ashland Petroleum LLC (filed as Exhibit 2.1 to
Ashland's Form S-4/A dated and filed May 19, 2005, and
incorporated herein by reference).
10.21* Amended and Restated Tax Matters Agreement dated April 27,
2005, among Ashland Inc., ATB Holdings Inc., EXM LLC, New
EXM Inc., Marathon Oil Corporation, Marathon Oil Company,
Marathon Domestic LLC and Marathon Ashland Petroleum LLC
(filed as Annex B to Ashland's Form S-4/A dated and filed
May 19, 2005, and incorporated herein by reference).
10.22* Assignment and Assumption Agreement (VIOC Centers) dated as
of March 18, 2004, between Ashland Inc. and ATB Holdings
Inc. (filed as Annex D to Ashland's Form S-4/A dated and
filed May 19, 2005, and incorporated herein by reference).
10.23* Assignment and Assumption Agreement (Maleic Business) dated
as of March 18, 2004, between Ashland Inc. and ATB Holdings
Inc. (filed as Annex C to Ashland's Form S-4/A dated and
filed May 19, 2005, and incorporated herein by reference).
10.24* Amendment No. 2 dated as of March 18, 2004, and Amendment
No. 3 dated as of April 27, 2005, to the Amended and
Restated Limited Liability Company Agreement dated as of
December 31, 1998, of Marathon Ashland Petroleum LLC, by
and between Ashland Inc. and Marathon Oil Company (filed as
Annex E to Ashland's Form S-4/A dated and filed May 19,
2005, and incorporated herein by reference).
10.25** Amendment No. 1 dated as of March 17, 2004, to the Amended
and Restated Limited Liability Company Agreement dated as
of December 31, 1998, of Marathon Ashland Petroleum LLC
(filed as Exhibit 10.2 to Ashland's Form 10-Q for the
quarter ended March 31, 2004, and incorporated herein by
reference).
10.26* Amendment No. 2 dated as of March 17, 2004, to the Put/Call
Registration Rights and Standstill Agreement dated as of
January 1, 1998, among Marathon Oil Company, USX
Corporation, Ashland Inc. and Marathon Ashland Petroleum
LLC (filed as Exhibit 10.1 to Ashland's Form 10-Q for the
quarter ended March 31, 2004, and incorporated herein by
reference).
11 Computation of Earnings Per Share (appearing on page F-12
of this annual report on Form 10-K).
12 Computation of Ratio of Earnings to Fixed Charges.
21 List of Subsidiaries.
23.1 Consent of Independent Registered Public Accounting Firm.
23.2 Consent of Tillinghast-Towers Perrin.
23.3 Consent of Hamilton, Rabinovitz & Alschuler, Inc.
23.4*** Consent of PricewaterhouseCoopers LLP.
24 Power of Attorney, including resolutions of the Board of
Directors.
31.1*** Certification of James J. O'Brien, Chief Executive Officer
of Ashland, pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2*** Certification of J. Marvin Quin, Chief Financial Officer of
Ashland, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32*** Certification of James J. O'Brien, Chief Executive Officer
of Ashland, and J. Marvin Quin, Chief Financial Officer of
Ashland, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
*Ashland agrees to supplement this filing and furnish a copy of any
omitted schedule to the United States Securities and Exchange
Commission upon request.
**Portions of this document have received confidential treatment.
***Filed herewith.
Upon written or oral request, a copy of the above exhibits will be
furnished at cost.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ASHLAND INC.
------------------------------------------
(Registrant)
By: /s/ J. Marvin Quin
-------------------------------------------
J. Marvin Quin
Senior Vice President and Chief
Financial Officer
Date: March 30, 2006
EXHIBIT INDEX
23.4 Consent of PricewaterhouseCoopers LLP.
31.1 Certification of James J. O'Brien, Chief Executive Officer
of Ashland, pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of J. Marvin Quin, Chief Financial Officer of
Ashland, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32 Certification of James J. O'Brien, Chief Executive Officer
of Ashland, and J. Marvin Quin, Chief Financial Officer of
Ashland, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
MARATHON PETROLEUM COMPANY LLC AND SUBSIDIARIES
(FORMERLY MARATHON ASHLAND PETROLEUM LLC)
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
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 ------------------------------------------------------------------ 10
NOTE D - PARTIAL REDEMPTION AND CHANGE IN OWNERSHIP ------------------------------------------------ 11
NOTE E - RELATED PARTY TRANSACTIONS ---------------------------------------------------------------- 12
NOTE F - OTHER ITEMS ------------------------------------------------------------------------------- 14
NOTE G - PENSIONS AND OTHER POSTRETIREMENT BENEFITS ------------------------------------------------ 15
NOTE H - INCOME TAXES ------------------------------------------------------------------------------ 18
NOTE I - INVENTORIES ------------------------------------------------------------------------------- 19
NOTE J - INVESTMENTS AND LONG-TERM RECEIVABLES ----------------------------------------------------- 19
NOTE K - PROPERTY, PLANT AND EQUIPMENT ------------------------------------------------------------- 20
NOTE L - GOODWILL ---------------------------------------------------------------------------------- 20
NOTE M - INTANGIBLE ASSETS ------------------------------------------------------------------------- 20
NOTE N - LONG-TERM DEBT ---------------------------------------------------------------------------- 21
NOTE O - ASSET RETIREMENT OBLIGATIONS -------------------------------------------------------------- 21
NOTE P - SUPPLEMENTAL CASH FLOW INFORMATION -------------------------------------------------------- 22
NOTE Q - LEASES ------------------------------------------------------------------------------------ 22
NOTE R - DERIVATIVE INSTRUMENTS -------------------------------------------------------------------- 22
NOTE S - FAIR VALUE OF FINANCIAL INSTRUMENTS ------------------------------------------------------- 23
NOTE T - CONTINGENCIES AND COMMITMENTS ------------------------------------------------------------- 23
NOTE U - ACCOUNTING STANDARDS NOT ADOPTED AT JUNE 30, 2005------------------------------------------ 25
PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
1201 Louisiana, Suite 2900
Houston, TX 77002-5678
REPORT OF INDEPENDENT AUDITORS
To the Board of Managers of
Marathon Petroleum Company LLC
(formerly Marathon Ashland Petroleum LLC):
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of members' capital, and cash
flows present fairly, in all material respects, the financial position of
Marathon Petroleum Company LLC (a wholly owned indirect subsidiary of
Marathon Oil Corporation) and its subsidiaries (the "Company") at June 30,
2005 and December 31, 2004, and the results of their operations and their
cash flows for the six-month period ended June 30, 2005 and for each of the
two years in the period ended December 31, 2004 in conformity with
accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements
in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
/s/ PricewaterhouseCoopers LLP
March 24, 2006
1
CONSOLIDATED STATEMENTS OF INCOME (Dollars in Millions)
MARATHON PETROLEUM COMPANY LLC AND SUBSIDIARIES
SIX MONTHS ENDED Year Ended December 31
JUNE 30, 2005 2004 2003
-------------- ------------- -------------
REVENUES AND OTHER INCOME:
Sales and other operating revenues (including consumer
excise taxes) $ 18,643 $ 33,359 $ 26,547
Revenues from matching buy/sell transactions 6,306 9,075 6,961
Sales to related parties - Note E 647 1,046 912
Revenues from related party matching buy/sell transactions -
Note E 82 150 94
Income from equity method investments 34 81 82
Net gains on disposal of assets 12 33 42
Other income (loss) (19) 44 30
------------- ------------- -------------
Total revenues and other income 25,705 43,788 34,668
------------ ------------- -------------
COSTS AND EXPENSES:
Cost of revenues (excludes items shown below) 15,188 27,016 20,687
Purchases related to matching buy/sell transactions 6,207 8,883 6,991
Purchases from related parties - Note E 374 694 711
Purchases from related party matching buy/sell
transactions - Note E 77 145 89
Consumer excise taxes 2,294 4,463 4,285
Depreciation and amortization 206 412 372
Selling, general and administrative expenses 320 623 581
Other taxes 78 142 137
------------- ------------- -------------
Total costs and expenses 24,744 42,378 33,853
------------- ------------- -------------
INCOME FROM OPERATIONS 961 1,410 815
Net interest and other financing income (costs) - Note F 19 (1) (9)
------------- ------------- -------------
INCOME BEFORE INCOME TAXES 980 1,409 806
Provision for income taxes - Note H 36 2 5
------------- ------------- -------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 944 1,407 801
Cumulative effect of change in accounting principle - Note C -- -- (2)
------------- ------------- -------------
NET INCOME $ 944 $ 1,407 $ 799
============= ============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
2
CONSOLIDATED BALANCE SHEETS (Dollars in Millions)
MARATHON PETROLEUM COMPANY LLC AND SUBSIDIARIES
JUNE 30 December 31
2005 2004
------------- -------------
ASSETS:
Current assets:
Cash and cash equivalents $ 877 $ 1,576
Receivables, less allowance for doubtful accounts of $2
and $6, respectively 1,803 2,372
Receivables from related parties - Note E 76 77
Inventories - Note I 2,515 1,933
Other current assets 77 47
------------- -------------
Total current assets 5,348 6,005
Investments and long-term receivables - Note J 580 553
Property, plant and equipment - net - Note K 4,860 4,781
Deferred income tax benefits - Note H 1 1
Goodwill - Note L 21 21
Intangibles - net - Note M 68 69
Other noncurrent assets 9 9
------------- -------------
Total assets $ 10,887 $ 11,439
============= =============
LIABILITIES:
Current liabilities:
Accounts payable $ 4,080 $ 3,584
Payables to related parties - Note E 112 99
Payroll and benefits payable 132 168
Accrued taxes 68 61
Long-term debt due within one year 2 2
Long-term debt due within one year to related party -
Notes E & N 16 --
------------- -------------
Total current liabilities 4,410 3,914
Long-term debt - Note N 40 42
Long-term debt payable to related party - Notes E & N 205 122
Deferred income taxes - Note H 26 5
Employee benefits obligations - Note G 572 563
Asset retirement obligations - Note O 3 4
Deferred credits and other liabilities 65 61
------------- -------------
Total liabilities 5,321 4,711
------------- -------------
Contingencies and commitments - Note T
MEMBERS' CAPITAL:
Members' contributed capital 2,935 4,328
Retained earnings 2,689 2,460
Accumulated other comprehensive loss (58) (60)
------------- -------------
Total members' capital 5,566 6,728
------------- -------------
Total liabilities and members' capital $ 10,887 $ 11,439
============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Millions)
MARATHON PETROLEUM COMPANY LLC AND SUBSIDIARIES
SIX MONTHS ENDED Year Ended December 31
JUNE 30, 2005 2004 2003
-------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $ 944 $ 1,407 $ 799
Adjustments to reconcile to net cash provided from
operating activities:
Depreciation and amortization 206 412 372
Pension and other postretirement benefits - net 12 25 42
Cumulative effect of change in accounting principle -- -- 2
Deferred income taxes 21 (1) --
Net gains on disposal of assets (12) (33) (42)
Income from equity method investees (34) (81) (82)
Distributions from equity method investees 20 80 80
Changes in:
Current receivables (346) (610) (565)
Inventories (582) (39) 21
Accounts payable and other current liabilities 468 901 631
Receivables from/payables to related parties 14 9 (16)
All other - net (20) 35 30
------------- ------------- -------------
Net cash provided from operating activities 691 2,105 1,272
------------- ------------- -------------
INVESTING ACTIVITIES:
Capital expenditures (301) (779) (771)
Disposal of assets 20 52 181
Loan transactions - principal loaned -- (35) (27)
- principal collected 1 36 24
Restricted cash - deposits (8) (31) (54)
- withdrawals 3 30 93
Investments - contributions -- (2) (24)
- loans and advances (1) (4) (4)
- returns and repayments -- 4 42
------------- ------------- -------------
Net cash used in investing activities (286) (729) (540)
------------- ------------- -------------
FINANCING ACTIVITIES:
Revolving credit facilities - borrowings - Notes E & N -- 2,116 1,940
- repayments - Notes E & N -- (2,116) (1,940)
Long-term debt - borrowings - Notes E & N 99 122 --
- repayments - Note N (1) (2) (2)
Member contributions -- -- 11
Member distributions (715) -- (688)
Partial redemption of ownership interest - Note D (487) -- --
------------- ------------- -------------
Net cash provided from (used in) financing activities (1,104) 120 (679)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (699) 1,496 53
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,576 80 27
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 877 $ 1,576 $ 80
============= ============= =============
See Note P for supplemental cash flow information.
The accompanying notes are an integral part of these consolidated
financial statements.
4
CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL (Dollars in Millions)
MARATHON PETROLEUM COMPANY LLC AND SUBSIDIARIES
Members' Capital Comprehensive Income
SIX MONTHS SIX MONTHS
ENDED Year Ended ENDED Year Ended
JUNE 30 December 31 JUNE 30 December 31
2005 2004 2003 2005 2004 2003
----------- ----------- ----------- ----------- ----------- -----------
MEMBERS' CONTRIBUTED CAPITAL:
Balance at beginning of period $ 4,328 $ 4,310 $ 4,285
Partial redemption of ownership
interest - Note D (1,398) -- --
Member contributions 5 18 25
----------- ----------- -----------
Balance at end of period 2,935 4,328 4,310
----------- ----------- -----------
RETAINED EARNINGS:
Balance at beginning of period 2,460 1,053 942
Net income 944 1,407 799 $ 944 $ 1,407 $ 799
Distributions to members (715) -- (688)
----------- ---------- -----------
Balance at end of period 2,689 2,460 1,053
----------- ----------- -----------
ACCUMULATED OTHER COMPREHENSIVE
LOSS:
Minimum pension liability adjustments:
Balance at beginning of period (60) (76) (38)
Changes during the period 2 16 (38) 2 16 (38)
----------- ---------- -----------
Balance at end of period (58) (60) (76)
----------- ----------- -----------
Deferred gains (losses) on derivative
instruments:
Balance at beginning of period -- (2) (3)
Changes in fair value -- 2 (1) -- 2 (1)
Reclassification to income -- -- 2 -- -- 2
----------- ----------- ----------- ----------- ----------- -----------
Balance at end of period -- -- (2)
----------- ----------- -----------
TOTAL (58) (60) (78) $ 946 $ 1,425 $ 762
----------- ----------- ----------- =========== =========== ===========
TOTAL MEMBERS' CAPITAL $ 5,566 $ 6,728 $ 5,285
=========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARATHON PETROLEUM COMPANY LLC AND SUBSIDIARIES
NOTE A - BUSINESS DESCRIPTION AND BASIS OF PRESENTATION
On December 12, 1997, Marathon Oil Company ("Marathon"), a wholly owned
subsidiary of Marathon Oil Corporation ("MOC"), formerly known as USX
Corporation, entered into an Asset Transfer and Contribution Agreement with
Ashland Inc. ("Ashland") providing for the formation of Marathon Ashland
Petroleum LLC ("MAP"). Effective January 1, 1998, Marathon contributed
substantially all of its refining, marketing and transportation ("RM&T")
operations to MAP. Also, on January 1, 1998, Marathon acquired certain RM&T
net assets from Ashland in exchange for a 38 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 provided for an
initial term expiring on December 31, 2022 (25 years from its formation).
On June 30, 2005, MOC acquired the 38 percent ownership interest in MAP
previously held by Ashland. In addition, MOC acquired a portion of
Ashland's Valvoline Instant Oil Change business, its maleic anhydride
business, its interest in LOOP LLC ("LOOP"), which owns and operates the
only U.S. deepwater oil port, and its interest in LOCAP LLC ("LOCAP"),
which owns a crude oil pipeline. As a result of the transactions (the
"Acquisition"), MAP became wholly owned by MOC. MAP changed its name to
Marathon Petroleum Company LLC ("MPC") effective September 1, 2005.
The total consideration for the Acquisition, including debt assumed, is
presented in Note D. The accompanying consolidated financial statements and
notes are as of June 30, 2005, including the redemption of an 8.63 percent
ownership interest in MPC held by Ashland (the "Partial Redemption").
Subsequent to June 30, 2005, MPC's portion of the purchase accounting
adjustments resulting from the Acquisition were pushed down to its separate
consolidated financial statements.
MPC is engaged in petroleum supply, refining, marketing and transportation
operations, primarily in the Midwest, the upper Great Plains and the
Southeastern United States. Speedway SuperAmerica LLC ("SSA"), a wholly
owned subsidiary, operates retail outlets for petroleum products and
merchandise. In addition, MPC, through its wholly owned subsidiary,
Marathon 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 MPC 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 MPC has significant
influence, but not control, are accounted for using the equity method of
accounting and are carried at MPC's share of net assets plus advances. This
includes entities in which MPC holds majority ownership but the minority
shareholders have substantive participating rights in the investee.
Differences in the basis of the investment and the separate net asset value
of the investee, if any, are amortized into income over the remaining
useful life of the underlying assets. Income from equity method investments
represents MPC's proportionate share of income generated by the equity
method investees.
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 and the disclosure of contingent assets and liabilities as of
the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the respective reporting periods.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - CONTINUED
REVENUE RECOGNITION - Revenues are recognized when products are shipped or
services are provided to customers, the sales price is fixed or
determinable and collectibility is reasonably assured. Costs associated
with revenues are recorded in cost of revenues.
Rebates from vendors are recognized as a reduction to cost of revenues when
the initiating transaction occurs. Incentives that are derived from
contractual provisions are accrued based on past experience and recognized
within cost of revenues.
MATCHING BUY/SELL TRANSACTIONS - MPC considers matching buy/sell
transactions to be arrangements in which MPC agrees to buy a specific
quantity and quality of crude oil or refined petroleum products to be
delivered at a specific location while simultaneously agreeing to sell a
specified quantity and quality of crude oil or refined petroleum products
at a different location, usually with the same counterparty. All matching
buy/sell transactions are settled in cash and are recorded in both revenues
and costs of revenues as separate sales and purchase transactions, or on a
"gross" basis. The commodity purchased and the commodity sold generally are
similar in nature.
In a typical buy/sell transaction, MPC enters into a contract to sell a
particular grade of crude oil or refined product at a specified location
and date to a particular counterparty, and simultaneously agrees to buy a
particular grade of crude oil or refined product at a different location on
the same or another specified date, typically from the same counterparty.
The value of the purchased volumes rarely equals the sales value of the
sold volumes. The value differences between purchases and sales are
primarily due to (1) grade/quality differentials, (2) location
differentials and/or (3) timing differences in those instances when the
purchase and sale do not occur in the same month.
MPC enters into crude oil matching buy/sell transactions to secure the most
profitable refinery supply and enters into refined product matching
buy/sell transactions to meet projected customer demands and to secure the
required volumes in the most cost-effective manner.
The characteristics of MPC's matching buy/sell transactions include gross
invoicing between MPC and its counterparties and cash settlement of the
transactions. Nonperformance by one party to deliver generally does not
relieve the other party's obligation to perform. Both transactions require
physical delivery of the product. The risks and rewards of ownership are
evidenced by title transfer, assumption of environmental risk,
transportation scheduling, credit risk, counterparty nonperformance risk
and the fact that MPC has the primary obligation to perform.
MPC will be required to change its accounting for purchases and sales of
inventory with the same counterparty, including certain matching buy/sell
transactions, in the second quarter of 2006. See Note U for further
information.
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 E 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.
An inventory market valuation reserve results when the recorded LIFO cost
basis of crude oil and refined products inventories exceeds net realizable
value. The reserve is decreased when market prices increase and inventories
turn over and is increased when market prices decrease. Changes in the
inventory market valuation reserve result in noncash charges or credits to
costs and expenses.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS - MPC's receivables
primarily consist of customer accounts receivable, including proprietary
credit card receivables. The allowance for doubtful accounts is the best
estimate of the amount of probable credit losses in MPC's proprietary
credit card receivables. MPC determines the allowance based on historical
write-off experience and the volume of proprietary credit card sales. MPC
reviews the allowance for doubtful accounts quarterly, and past-due
balances over 180 days are reviewed individually for collectibility. All
other customer receivables are recorded at the invoiced amounts and
generally do not bear interest. Account balances for these customer
receivables are charged directly to bad debt expense when it becomes
probable the receivable will not be collected.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - CONTINUED
TRADITIONAL DERIVATIVE INSTRUMENTS - MPC uses derivatives to manage its
exposure to commodity price risk. 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, refined products, feedstocks and ethanol. Changes in the fair value of
all derivatives are recognized immediately in income, in revenues, other
income or cost of revenues.
As market conditions change, MPC may use selective derivative instruments
that assume market risk. For derivative instruments that are classified as
trading, changes in the fair value are recognized immediately in other
income. Any premium received is amortized into income based on the
underlying settlement terms of the derivative position. All related effects
of a trading strategy, including physical settlement of the derivative
position, are recognized in other income.
NONTRADITIONAL DERIVATIVE INSTRUMENTS - Certain contracts involving the
purchase or sale of commodities are not considered normal purchases or
normal sales under generally accepted accounting principles and are
required to be accounted for as derivative instruments. MPC refers to such
contracts as "nontraditional derivative instruments" because, unlike
traditional derivative instruments, nontraditional derivative instruments
have not been entered into to manage a risk exposure. Such contracts are
recorded in the balance sheet at fair value and changes in fair value are
recognized in income as revenues or cost of revenues.
Certain physical commodity contracts are classified as nontraditional
derivative instruments because certain volumes under these contracts are
physically netted at particular delivery locations. The netting process
causes all contracts at that delivery location to be considered derivative
instruments. Other physical contracts that involve flash title are also
accounted for as nontraditional derivative instruments as MPC has not
elected to treat these contracts as normal purchases or normal sales.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is recorded
at cost and depreciated on the straight-line method over the estimated
useful lives of the assets, which range from 3 to 42 years. Such assets are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If
the sum of the expected future cash flows from the use of the asset and its
eventual disposition is less than the carrying amount of the asset, an
impairment loss is recognized based on the fair value of the asset.
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 classified 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 in the acquisition of a
business. Such goodwill is not amortized, but rather is tested for
impairment annually and when events or changes in circumstances indicate
that the fair value of a reporting unit with goodwill has been reduced
below carrying value. The impairment test requires allocating goodwill and
other assets and liabilities to reporting units. MPC is composed of three
reporting units: refining and marketing, pipeline transportation and retail
marketing. 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 to its implied fair value with a charge to expense.
INTANGIBLE ASSETS - Intangible assets primarily include intangible contract
rights, marketing branding agreements and unrecognized pension plan prior
service costs. The amortizable intangible assets are amortized over their
estimated useful lives or the expected lives of the related contracts, as
applicable, which range from five to ten years. Such assets are reviewed
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. If the sum of the
expected future cash flows from the use of the asset and its eventual
disposition is less than the carrying amount of the asset, an impairment
loss is recognized based on the fair value of the asset.
MAJOR MAINTENANCE ACTIVITIES - MPC incurs costs for planned major refinery
maintenance ("turnarounds"). These types of costs include contractor repair
services, materials and supplies, equipment rentals and company labor
costs. Such costs are expensed in the same annual period as incurred;
however, estimated annual turnaround costs are recognized as expense
throughout the year on a pro rata basis.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - CONTINUED
ENVIRONMENTAL REMEDIATION LIABILITIES - Environmental remediation
expenditures are capitalized if the costs mitigate past or prevent future
contamination or if the costs improve environmental safety or efficiency of
the existing assets. MPC 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
and is discounted when the estimated amount is reasonably fixed and
determinable.
ASSET RETIREMENT OBLIGATIONS - The fair values of asset retirement
obligations are recognized in the period in which they are incurred if a
reasonable estimate of fair value can be made. Asset retirement obligations
have been recognized for the removal of equipment at certain leased retail
marketing locations and closure of a waste remediation site. Asset
retirement obligations have not been recognized for the removal of
materials and equipment from or the closure of certain refinery, pipeline
and marketing assets because the fair value cannot be reasonably estimated
due to an indeterminate settlement date of the obligation.
Current inflation rates and credit-adjusted-risk-free interest rates are
used to estimate the fair values of asset retirement obligations.
Depreciation of capitalized asset retirement costs and accretion of asset
retirement obligations are recorded over time. The depreciation will
generally be determined on a straight-line basis for refining and marketing
facilities, while the accretion to be recognized will escalate over the
lives of the assets.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS - MPC has a noncontributory
defined benefit pension plan with two benefit payment formulas covering
substantially all employees. In addition, several excess benefits plans
exist covering employees within defined regulatory compensation limits.
Benefits under its final pay formula are based primarily upon age, years of
participation in the plan and the highest consecutive three years' earnings
during the last ten years before retirement. Benefits under its pension
equity formula are based primarily upon age, years of participation in the
plan and the final three years of earnings at retirement.
MPC also has defined benefit plans for other postretirement benefits
covering most employees. Health care benefits are provided through
comprehensive hospital, surgical and major medical benefit provisions,
subject to various cost sharing features. Life insurance benefits are
provided to certain nonunion and union-represented retiree beneficiaries.
Other postretirement benefits have not been funded in advance.
MPC uses a December 31 measurement date for its pension and other
postretirement benefit plans unless circumstances require a remeasurement
at an interim date.
STOCK-BASED COMPENSATION - Effective January 1, 2003, MPC has applied the
fair value based method of accounting to all grants and any modified grants
for MOC stock-based compensation granted to MPC 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:
SIX MONTHS
ENDED Year Ended December 31
6/30/2005 2004 2003
------------- ------------- -------------
(Millions)
Net income:
As reported $ 944 $ 1,407 $ 799
Add: MOC stock-based employee compensation expense
included in reported net income 3 6 2
Deduct: MOC stock-based employee compensation expense
determined under fair value method for all awards (3) (6) (2)
------------- ------------- -------------
Pro forma net income $ 944 $ 1,407 $ 799
============= ============= =============
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - CONTINUED
MPC records compensation cost over the stated vesting period for stock
options that are subject to specific vesting conditions and specify (1)
that an employee vests in the award upon becoming "retirement eligible" or
(2) that the employee will continue to vest in the award after retirement
without providing any additional service. Upon adoption of Statement of
Financial Accounting Standards ("SFAS") No. 123 (Revised 2004),
"Share-Based Payment," such compensation cost will be recognized
immediately for awards granted to retirement-eligible employees or over the
period from the grant date to the retirement eligibility date if retirement
eligibility will be reached during the stated vesting period. The
compensation cost determined under these two approaches did not differ
materially for the periods presented above.
The above MOC stock-based compensation amounts were based on a
Black-Scholes option-pricing model, which included the following
information and assumptions:
SIX MONTHS
ENDED Year Ended December 31
6/30/2005 2004 2003
------------- ------------- -------------
Weighted-average grant date exercise price per share $ 50.28 $ 33.61 $ 25.58
Expected annual dividends per share $ 1.32 $ 1.00 $ 0.97
Expected life in years 5.5 5.5 5.0
Expected volatility 28% 32% 34%
Risk-free interest rate 3.8% 3.9% 3.0%
Weighted-average grant date fair value of options granted
during the period, as calculated from above $ 12.30 $ 8.83 $ 5.37
MPC applies the principles of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), as interpreted by Emerging Issues Task
Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments That Are
Issued to Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services," to the stock-based compensation granted to MPC
employees by Ashland.
The amounts of MOC and Ashland stock-based compensation recorded in
selling, general and administrative expenses totaled $5 million, $14
million and $6 million during the six months ended June 30, 2005 and the
years ended December 31, 2004 and 2003, respectively.
INCOME TAXES - MPC 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 the
operations of MPC is ultimately included in the U.S. federal income tax
returns of MOC and Ashland. MPC is, however, subject to income taxes in
certain state, local and foreign jurisdictions.
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their tax bases as
reported in MPC's filings with the respective taxing authorities. The
realization of deferred tax assets is assessed periodically based on MPC's
expectation to generate sufficient future taxable income.
CONCENTRATION OF CREDIT RISK - MPC 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 2005 classifications.
NOTE C - NEW ACCOUNTING STANDARDS
Effective July 1, 2004, MPC adopted Financial Accounting Standards Board
("FASB") Staff Position No. FAS 106-2 ("FSP FAS 106-2"), "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003" (the "Act"). FSP FAS 106-2
includes guidance on recognizing the effects of the new legislation under
the various conditions surrounding the assessment of "actuarial
equivalence." MPC has determined, based on available regulatory guidance,
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - NEW ACCOUNTING STANDARDS - CONTINUED
that the postretirement plan's prescription drug benefits are actuarially
equivalent to the Medicare "Part D" benefit under the Act. The
subsidy-related reduction at July 1, 2004 in the accumulated postretirement
benefit obligation for the MPC postretirement plan was $49 million. The
favorable pretax effect of the subsidy-related reduction for 2004 on the
measurement of the net periodic postretirement benefit cost related to
service cost, interest cost and actuarial gain amortization was $4 million.
Effective January 1, 2003, MPC adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations." The transition adjustment related to adopting SFAS
No. 143 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.
Effective January 1, 2003, MPC adopted the fair value recognition
provisions of SFAS No. 123 for the stock-based compensation granted to MPC
employees by MOC. SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," 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. MPC
has applied the fair value method to grants made, modified or settled on or
after January 1, 2003.
NOTE D - PARTIAL REDEMPTION AND CHANGE IN OWNERSHIP
The total consideration for the Acquisition, including debt assumed, is
shown in the following table. The cash and MPC accounts receivable included
in the purchase price, which total $1,398 million, were distributed by MPC
to Ashland in the Partial Redemption. Immediately following that part of
the Acquisition transactions, MOC provided the other components of the
total consideration to Ashland in exchange for Ashland's remaining
ownership interest in MPC.
(Millions)
------------
Cash (a) $ 487
MPC accounts receivable (a) 911
MOC common stock (b) 955
Estimated additional consideration related to tax matters 58
Transaction-related costs 10
------------
Purchase price 2,421
Assumption of debt (c) 1,920
------------
Total consideration including debt assumption (d) $ 4,341
============
(a) The LLC Agreement was amended to eliminate the requirement for MPC
to make quarterly cash distributions to Marathon and Ashland
between the date the principal transaction agreements were signed
and the closing of the Acquisition. Cash and MPC accounts
receivable above included $506 million representing Ashland's 38
percent of MPC's distributable cash as of June 30, 2005.
(b) Ashland shareholders received 17.539 million shares valued at
$54.45 per share, which was MOC's average common stock price over
the trading days between June 23 and June 29, 2005. The exchange
ratio was designed to provide an aggregate number of MOC shares
worth $915 million based on MOC's average common stock price for
each of the 20 consecutive trading days ending with the third
complete trading day prior to June 30, 2005.
(c) Assumed debt was repaid by MOC on July 1, 2005.
(d) MOC is entitled to the tax deductions for Ashland's future
payments of certain contingent liabilities related to businesses
previously owned by Ashland. However, pursuant to the terms of the
Tax Matters Agreement, MOC has agreed to reimburse Ashland for a
portion of these future payments. This contingent consideration
will be included in the purchase price as such payments are made
to Ashland.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - RELATED PARTY TRANSACTIONS
Related parties include:
o Ashland and its affiliates;
o MOC and its affiliates; and
o Equity method investees. Principal unconsolidated equity investees
of MPC, at June 30, 2005, which are accounted for under the equity
method of accounting, were as follows:
Company Ownership Activity
------- --------- --------
Centennial Pipeline LLC ("Centennial") 50.0% Refined products pipeline system
Pilot Travel Centers LLC ("PTC") 50.0% Travel centers
LOCAP 49.9% Crude oil pipeline system
LOOP 46.7% Offshore crude oil unloading port
Minnesota Pipe Line Company 33.3% Crude oil pipeline system
Southcap Pipe Line Company 21.6% Crude oil pipeline system
Management believes that transactions with related parties were conducted
under terms comparable to those with unrelated parties.
SIX MONTHS
ENDED Year Ended December 31
6/30/2005 2004 2003
------------- ------------- ------------
(Millions)
REVENUES FROM RELATED PARTIES WERE:
Ashland and its affiliates $ 132 $ 274 $ 258
MOC and its affiliates 83 153 97
Equity method investees:
PTC 482 715 635
Centennial 30 49 16
Other 2 5 --
----------- ----------- -----------
Total $ 729 $ 1,196 $ 1,006
=========== =========== ===========
Related party sales to Ashland and its affiliates, PTC and Centennial
consist primarily of refined petroleum products. Related party sales to MOC
and its affiliates consist primarily of crude oil matching buy/sell
transactions.
SIX MONTHS
ENDED Year Ended December 31
6/30/2005 2004 2003
------------- ------------- ------------
(Millions)
PURCHASES FROM RELATED PARTIES WERE:
Ashland and its affiliates $ 12 $ 22 $ 24
MOC and its affiliates 355 685 659
Equity method investees:
PTC 4 8 --
Centennial 44 56 49
LOOP 20 44 46
Other 16 24 22
----------- ----------- -----------
Total $ 451 $ 839 $ 800
=========== =========== ===========
Related party purchases from Ashland and its affiliates consist primarily
of refined petroleum products and the net amount of administrative services
provided between the companies. Related party purchases from MOC and its
affiliates consist primarily of crude oil (including matching buy/sell
transactions), natural gas and refinery feedstocks and the net amount of
administrative services provided between the companies. Related party
purchases from PTC consist primarily of refined petroleum products and the
net amount of administrative services provided between the companies.
Related party purchases from Centennial consist
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - RELATED PARTY TRANSACTIONS - CONTINUED
primarily of transmix and refined product transportation. Related party
purchases from LOOP and other equity method investees consist primarily of
crude oil transportation.
JUNE 30 December 31
2005 2004
----------- -----------
(Millions)
RECEIVABLES FROM RELATED PARTIES WERE:
Ashland and its affiliates $ 29 $ 18
MOC and its affiliates 24 24
Equity method investees:
PTC 2 19
Centennial 21 16
----------- -----------
Total $ 76 $ 77
=========== ===========
PAYABLES TO RELATED PARTIES WERE:
Ashland and its affiliates $ 3 $ --
MOC and its affiliates 86 81
Equity method investees:
Centennial 18 12
LOOP 3 3
Other 2 3
----------- -----------
Total $ 112 $ 99
=========== ===========
A revolving credit agreement was entered into as of January 1, 1998, among
Ashland and Marathon (collectively "the Lenders") and MPC. This agreement
provided that the Lenders could loan to MPC up to $500 million at defined
short-term market rates. Pursuant to the terms of MOC's agreement to
acquire the 38 percent ownership interest in MPC held by Ashland, MPC
effectively was restricted from borrowing under this facility after
September 30, 2004. This facility expired on March 15, 2005. At December
31, 2004, there were no borrowings against this facility, and there were no
borrowings against this facility during 2005. During 2004, MPC borrowed and
repaid $1,717 million under this revolving credit facility. The
weighted-average borrowings outstanding under this revolving credit
facility during 2004 were $27 million. During the years ended December 31,
2004 and 2003, interest paid to each of Marathon and Ashland on these
borrowings was less than $1 million.
Effective August 1, 2003, MPC entered into a $350 million committed
revolving credit facility with MOC that terminated on January 31, 2005.
There were no borrowings against this facility during 2005 and 2003. During
2004, MPC had borrowings and repayments of $399 million under this
facility. During 2004, interest paid to MOC on the borrowings under this
agreement was less than $1 million. The weighted-average borrowings
outstanding under this note facility during 2004 were $3 million.
On March 17, 2004, MPC entered into a $325 million project loan agreement
with Marathon, whereby MPC may borrow funds to finance the Detroit refinery
expansion project at a rate of 6 percent per annum. During the construction
period, interest was added to the outstanding loan balance. Upon completion
of this expansion project, the Detroit refinery cash flows will be
dedicated to service this debt as the sole source of funds to repay the
borrowings. At June 30, 2005 and December 31, 2004, MPC had a balance of
$221 million and $122 million, respectively, outstanding under this
agreement. The amount of interest that has been incurred and added to the
loan balance is $8 million as of June 30, 2005. Repayments are expected to
begin in 2006.
On November 16, 1998, MPC entered into agreements with MOC and Ashland,
which allowed MPC 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 MPC.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - RELATED PARTY TRANSACTIONS - CONTINUED
These agreements were cancelled on April 2, 2004. MPC did not invest any
cash under these agreements in 2004. Effective February 4, 2005, the
agreement with Ashland was reactivated and then effectively terminated as
of June 30, 2005. Interest income earned from Ashland on these investments
was less than $1 million during the six months ended June 30, 2005 and the
year ended December 31, 2003. Interest income earned from MOC on these
investments was less than $1 million for the year ended December 31, 2003.
Pursuant to the terms of MOC's agreement to acquire the 38 percent
ownership in MPC held by Ashland, there were no cash capital contributions
made to MPC after September 30, 2004. In 2004 and 2003, MPC recorded
capital contributions from Marathon of less than $1 million and $1 million,
respectively, and from Ashland of $4 million and $7 million, respectively,
for environmental improvements. In 2003 MPC also recorded an $11 million
capital contribution from Marathon related to the acquisition of leased
property. The LLC Agreement stipulated that ownership interest in MPC would
not be adjusted as a result of such contributions.
MPC recorded noncash capital contributions related to stock-based
compensation expense from Marathon of $3 million, $6 million and $2
million, in the six months ended June 30, 2005, and the years ended
December 31, 2004 and 2003, respectively. This stock-based compensation
expense is allocated 100 percent to Marathon.
MPC recorded noncash capital contributions related to stock-based
compensation expense from Ashland of $2 million, $8 million and $4 million,
in the six months ended June 30, 2005, and the years ended December 31,
2004 and 2003, respectively. This stock-based compensation expense is
allocated 100 percent to Ashland.
NOTE F - OTHER ITEMS
SIX MONTHS
ENDED Year Ended December 31
6/30/2005 2004 2003
------------- ------------- ------------
(Millions)
NET INTEREST AND OTHER FINANCING COSTS:
INTEREST AND OTHER FINANCIAL INCOME:
Interest income - third parties $ 23 $ 10 $ 2
Interest income - related parties 1 -- --
Foreign currency adjustments -- 2 --
---------- ----------- -----------
Total 24 12 2
---------- ----------- -----------
INTEREST AND OTHER FINANCING COSTS:
Interest incurred - third parties 2 3 2
Interest incurred - related parties 5 3 --
Less interest capitalized 7 2 --
----------- ----------- -----------
Net interest -- 4 2
Interest on tax issues 1 1 2
Bank fees and other 4 8 7
----------- ----------- -----------
Total 5 13 11
----------- ----------- -----------
Net interest and other financing income (costs) $ 19 $ (1) $ (9)
=========== =========== ===========
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
OBLIGATIONS AND FUNDED STATUS
The following summarizes the obligations and funded status for MPC's
pension and other postretirement benefit plans:
Pension Benefits Other Benefits
--------------------- ---------------------
SIX SIX
MONTHS Year MONTHS Year
ENDED Ended ENDED Ended
6/30/2005 12/31/2004 6/30/2005 12/31/2004
---------- ---------- --------- ----------
(Millions)
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligations at beginning of period $ 1,203 $ 1,051 $ 341 $ 346
Service cost 40 70 7 15
Interest cost 35 64 10 20
Actuarial (gains) losses 34 114 (2) (34)(a)
Plan amendment -- -- 9 --
Settlement payments -- (4) -- --
Benefits paid (37) (92) (5) (6)
--------- --------- --------- ---------
Benefit obligations at end of period $ 1,275 $ 1,203 $ 360 $ 341
========= ========= ========= =========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of period $ 535 $ 473
Actual return on plan assets 2 44
Employer contributions 68 114
Settlement payments -- (4)
Benefits paid from plan assets (37) (92)
--------- ---------
Fair value of plan assets at end of period $ 568 $ 535
========= =========
FUNDED STATUS OF PLANS AT END OF PERIOD: $ (707) $ (668) $ (360) $ (341)
Unrecognized net transition asset (1) (2) -- --
Unrecognized prior service costs (benefits) 17 18 (15) (26)
Unrecognized net losses 542 502 58 61
--------- --------- --------- ---------
Accrued benefit cost $ (149) $ (150) $ (317) $ (306)
========= ========= ========= =========
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET:
Accrued benefit liability $ (226) $ (230) $ (317) $ (306)
Intangible asset 19 20 -- --
Accumulated other comprehensive loss 58 60 -- --
--------- --------- --------- ---------
Accrued benefit cost $ (149) $ (150) $ (317) $ (306)
========= ========= ========= =========
(a) Includes the impact related to the Act, which reduced the obligation by
$49 million.
The accumulated benefit obligation for all defined benefit pension plans
was $791 million and $763 million at June 30, 2005 and December 31, 2004,
respectively.
All MPC defined benefit pension plans have accumulated benefit obligations
in excess of plan assets as summarized below:
JUNE 30 December 31
2005 2004
---------- -----------
(Millions)
Projected benefit obligations $ (1,275) $ (1,203)
Accumulated benefit obligations (791) (763)
Fair value of plan assets 568 535
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - PENSIONS AND OTHER POSTRETIREMENT BENEFITS - CONTINUED
NET PERIODIC BENEFIT COST
The following summarizes the net periodic benefit costs for MPC's pension
and other postretirement benefit plans:
Pension Benefits Other Benefits
-------------------------------- ---------------------------------
SIX SIX
MONTHS Year Ended MONTHS Year Ended
ENDED December 31 ENDED December 31
6/30/2005 2004 2003 6/30/2005 2004 2003
---------- --------- --------- --------- --------- ---------
(Millions)
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 40 $ 70 $ 64 $ 7 $ 15 $ 15
Interest cost 35 64 59 10 20 20
Expected return on plan assets (24) (45) (40) -- -- --
Amortization - net transition gain (1) (2) (2) -- -- --
- prior service costs (credits) 1 2 3 (3) (7) (7)
- actuarial loss 16 23 20 1 3 4
Multi-employer and other plans 1 2 2 1 3 2
Settlement, curtailment and termination loss -- 2 -- -- -- --
--------- --------- --------- --------- --------- ---------
Net periodic benefit cost $ 68 $ 116 $ 106 $ 16 $ 34 $ 34
========= ========= ========= ========= ========= =========
Increase (decrease) in minimum liability in
other comprehensive loss $ (2) $ (16) $ 38 N/A N/A N/A
PLAN ASSUMPTIONS
The following summarizes the assumptions used to determine the benefit
obligation and net periodic benefit costs for MPC's pension and other
postretirement benefit plans:
Pension Benefits Other Benefits
--------------------------------- ---------------------------------
JUNE 30 December 31 JUNE 30 December 31
2005 2004 2003 2005 2004 2003
---- ---- ---- ---- ----- -----
WEIGHTED-AVERAGE ASSUMPTIONS USED TO
DETERMINE BENEFIT OBLIGATION AT:
Discount rate 5.75% 5.75% 6.25% 5.75% 5.75% 6.25%
Rate of compensation increase 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
Pension Benefits Other Benefits
--------------------------------- ---------------------------------
SIX SIX
MONTHS Year Ended MONTHS Year Ended
ENDED December 31 ENDED December 31
6/30/2005 2004 2003 6/30/2005 2004 2003
--------- ----- ----- --------- ------ ------
WEIGHTED-AVERAGE ACTUARIAL ASSUMPTIONS
USED TO DETERMINE NET PERIODIC BENEFIT
COST:
Discount rate 5.75% 6.25% 6.50% 5.75% 6.25% 6.50%
Expected long-term return on
plan assets 8.50% 9.00% 9.00% N/A N/A N/A
Rate of compensation increase 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - PENSIONS AND OTHER POSTRETIREMENT BENEFITS - CONTINUED
DISCOUNT RATES - MPC develops demographics and utilizes the work of
third-party actuaries to assist in the measurement of benefit obligations
and net periodic benefit costs. In determining the assumed discount rates,
the method includes a review of market yields on high-quality corporate
debt and use of a third-party actuary's discount rate modeling tool. This
tool applies a yield curve to the projected benefit plan cash flows using a
hypothetical Aa yield curve. The yield curve represents a series of
annualized individual discount rates from 1.5 to 30 years. The bonds used
are rated Aa or higher by a recognized rating agency, and only non-callable
bonds are included. Each issue is required to have at least $150 million
par value outstanding. The top quartile bonds are selected within each
maturity group to construct the yield curve.
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. Our
assumptions are compared to those of peer companies and historical returns
for reasonableness and appropriateness.
ASSUMED HEALTH CARE COST TREND RATES AT:
JUNE 30 December 31
2005 2004 2003
--------- --------- ---------
Health care cost trend rate assumed for next year 8.5% 9.0% 9.5%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 5.0% 5.0% 5.0%
Year that the rate reaches the ultimate trend rate 2012 2012 2012
Assumed health care cost trend rates have a significant effect on the
amounts reported for the retiree 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 $ 8 $ (6)
Effect on other postretirement benefit obligations 81 (68)
PLAN ASSETS
The pension plan's weighted-average asset allocations by asset category are
as follows:
JUNE 30 December 31
2005 2004
--------------- ----------------
Asset category:
Equity securities 79% 78%
Debt securities 19% 21%
Real estate 2% 1%
--------------- ----------------
Total 100% 100%
=============== ================
PLAN INVESTMENT POLICIES AND STRATEGIES - The investment policy reflects
the funded status of the plan and MPC's future ability to make further
contributions. Historical performance 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 percent of the value
of the fund. Accordingly, bond and other fixed-income investments will
comprise the remainder of the fund. Short-term investments shall reflect
the liquidity requirements for making pension payments. The plan's targeted
asset allocation is comprised of 75 percent equities and 25 percent debt
securities. Management of the plan's assets is delegated to the United
States Steel and Carnegie Pension Fund. The fund manager has discretion to
move away from the target allocations based upon the manager's judgment as
to current confidence or concern for the capital markets. Investments are
diversified by industry and type, limited by grade and maturity. The policy
prohibits investments in any securities in the steel industry and allows
derivatives subject to strict guidelines. Investment performance and risk
is measured and monitored on an ongoing basis through quarterly investment
meetings and periodic asset and liability studies.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - PENSIONS AND OTHER POSTRETIREMENT BENEFITS - CONTINUED
CASH FLOWS
Contributions
MPC contributed $60 million to its funded pension plan in the six months
ended December 31, 2005 and expects to contribute between $140 million and
$190 million in 2006. Cash contributions to be paid from the general assets
of MPC for both the unfunded pension and postretirement benefit plans were
less than $1 million and $2 million in the six months ended December 31,
2005 and are expected to be approximately $1 million and $12 million in
2006.
Estimated future benefit payments
The following gross benefit payments, which reflect expected future
service, as appropriate, are expected to be paid:
Pension Benefits Other Benefits (a)
---------------- ------------------
(Millions)
July to December 2005 $ 26 $ 2
January to December 2006 80 12
January to December 2007 91 14
January to December 2008 105 16
January to December 2009 117 19
January to December 2010 126 21
Years 2011 - 2015 782 146
(a) Expected Medicare reimbursements for 2006 through
2015 total $13 million.
MPC also contributes to several defined contribution plans for eligible
employees. Contributions to these plans totaled $15 million in the six
months ended June 30, 2005, $26 million in the year 2004 and $26 million in
the year 2003.
NOTE H - INCOME TAXES
The taxable income or loss resulting from the operations of MPC, except for
several small subsidiary corporations, is ultimately included in the
federal income tax returns of MOC and Ashland. MPC is, however, subject to
taxation in certain state, local and foreign jurisdictions.
SIX MONTHS ENDED Year Ended December 31
6/30/2005 2004 2003
------------------------------- ------------------------------- --------------------------------
CURRENT DEFERRED TOTAL Current Deferred Total Current Deferred Total
----------- -------- -------- ---------- -------- --------- --------- --------- ---------
(Millions)
PROVISIONS (CREDITS)FOR
INCOME TAXES:
State and local $ 14 $ 21 $ 35 $ 3 $ (1) $ 2 $ 3 $ -- $ 3
Foreign 1 -- 1 -- -- -- 2 -- 2
--------- --------- --------- --------- --------- --------- --------- --------- --------
Total $ 15 $ 21 $ 36 $ 3 $ (1) $ 2 $ 5 $ -- $ 5
========= ======== ========= ========= ========= ========= ========= ========= ========
In the first quarter of 2005, the state of Kentucky enacted legislation
which caused limited liability companies to be subject to Kentucky's
corporation income tax. The deferred tax provision for the six months ended
June 30, 2005 included $20 million related to the effects of this Kentucky
income tax on deferred tax assets and liabilities as of January 1, 2005. In
addition, the current tax provision attributable to Kentucky was $10
million for the six months ended June 30, 2005.
Deferred tax liabilities at June 30, 2005 and December 31, 2004 of $26
million and $5 million, respectively, principally arise from differences
between the book and tax basis of inventories and property, plant and
equipment in certain state and local jurisdictions.
A net deferred tax asset of $1 million was separately recorded at June 30,
2005 to recognize the deferred tax benefit of a state investment tax credit
carryforward of $5 million less a valuation allowance of $3 million and
deferred tax liabilities in that state of $1 million. A net deferred tax
asset of $1 million was separately recorded at December 31, 2004 to
recognize the deferred tax benefit of a state investment tax credit
carryforward of $7 million less a valuation allowance of $5 million and
deferred tax liabilities in that state of $1 million. The investment tax
credits expire in 2012.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - INCOME TAXES - CONTINUED
Pretax income included $5 million, $7 million and $5 million attributable
to foreign sources in the six months ended June 30, 2005, and the years
ended December 31, 2004 and 2003, respectively.
NOTE I - INVENTORIES
JUNE 30 December 31
2005 2004
----------- -----------
(Millions)
INVENTORIES CONSIST OF THE FOLLOWING:
Liquid hydrocarbons $ 1,133 $ 644
Refined products and merchandise 1,292 1,199
Supplies and sundry items 90 90
----------- ------------
Total (at cost) $ 2,515 $ 1,933
=========== ============
The LIFO method used for financial accounting purposes accounted for 95
percent and 93 percent of total inventory value at June 30, 2005 and
December 31, 2004, respectively. Current acquisition costs were estimated
to exceed the LIFO inventory values at June 30, 2005 and December 31, 2004
by approximately $2,142 million and $1,270 million, respectively. Cost of
revenues was reduced and income from operations was increased by $3 million
in the six months ended June 30, 2005, $4 million in 2004 and $10 million
in 2003 as a result of liquidations of LIFO inventories.
NOTE J - INVESTMENTS AND LONG-TERM RECEIVABLES
JUNE 30 December 31
2005 2004
----------- -----------
(Millions)
Equity method investments:
PTC $ 375 $ 372
LOOP 72 60
Centennial 36 36
Other 66 66
Receivables due after one year 22 15
Deposits of restricted cash 9 4
----------- -----------
Total $ 580 $ 553
=========== ===========
Summarized financial information of investees accounted for by the equity
method of accounting follows:
SIX MONTHS
ENDED Year Ended December 31
6/30/2005 2004 2003
--------------- ---------- ----------
(Millions)
Income data:
Revenues and other income $ 4,364 $ 7,166 $ 5,543
Operating income 106 231 237
Net income 70 165 163
JUNE 30 December 31
2005 2004
----------- -----------
(Millions)
Balance sheet data:
Current assets $ 472 $ 333
Noncurrent assets 2,315 2,296
Current liabilities 580 418
Noncurrent liabilities 924 936
MPC's carrying value of its equity method investments is $73 million lower
than the underlying net assets of investees. This basis difference is being
accreted into income over the remaining useful lives of the underlying net
assets.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - INVESTMENTS AND LONG-TERM RECEIVABLES - CONTINUED
Dividends and partnership distributions received from equity method
investees (excluding distributions that represented a return of capital
previously contributed) were $20 million, $80 million and $80 million in
the six months ended June 30, 2005, and the years ended December 31, 2004
and 2003, respectively.
NOTE K - PROPERTY, PLANT AND EQUIPMENT
JUNE 30 December 31
2005 2004
----------- -----------
(Millions)
Refining $ 4,443 $ 4,230
Marketing 1,878 1,881
Transportation 1,708 1,660
Other 59 64
----------- -----------
Total 8,088 7,835
Less accumulated depreciation and amortization 3,228 3,054
----------- -----------
Net $ 4,860 $ 4,781
=========== ===========
Property, plant and equipment includes gross assets acquired under capital
leases of $49 million at both June 30, 2005 and December 31, 2004. Related
amounts in accumulated depreciation and amortization are $7 million and $6
million at June 30, 2005 and December 31, 2004, respectively.
NOTE L - GOODWILL
The carrying amount of goodwill was $21 million as of June 30, 2005 and
December 31, 2004. MPC tests for impairment in the fourth quarter of each
year. No impairment in the carrying value was identified in the fourth
quarter of 2004, and no indicators of impairment were identified in the
subsequent periods.
NOTE M - INTANGIBLE ASSETS
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
----------------- ------------------ ----------------
(Millions)
INTANGIBLE ASSETS AS OF JUNE 30, 2005, ARE AS FOLLOWS:
Amortized intangible assets:
Branding agreements $ 54 $ 21 $ 33
Other 12 1 11
----------------- ------------------ ----------------
Total $ 66 $ 22 $ 44
================= ================== ================
Unamortized intangible assets:
Unrecognized prior service costs and other $ 24 $ -- $ 24
================= ================== ================
INTANGIBLE ASSETS AS OF DECEMBER 31, 2004, ARE AS FOLLOWS:
Amortized intangible assets:
Branding agreements $ 53 $ 19 $ 34
Other 10 -- 10
----------------- ------------------ ----------------
Total $ 63 $ 19 $ 44
================= ================== ================
Unamortized intangible assets:
Unrecognized prior service costs and other $ 25 $ -- $ 25
================= ================== ================
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - INTANGIBLE ASSETS - CONTINUED
Amortization expense related to intangibles during the six months ended
June 30, 2005 and the years ended December 31, 2004 and 2003 totaled $4
million, $7 million and $6 million, respectively. Estimated amortization
expense for the six months ended December 31, 2005 is $4 million. Estimated
amortization expense for the years 2006-2010 is $8 million, $7 million, $6
million, $5 million and $5 million, respectively.
NOTE N - LONG-TERM DEBT
JUNE 30 December 31
2005 2004
----------- -----------
(Millions)
Capital lease obligations due July 1, 2005 - 2018 $ 42 $ 44
Detroit refinery project loan - Note E 221 122
Revolving credit facility due 2009 (a) -- --
----------- -----------
Total (b) 263 166
Amounts due within one year (18) (2)
----------- -----------
Long-term debt due after one year $ 245 $ 164
=========== ===========
(a) MPC has a $500 million five-year revolving credit facility which
terminates in May 2009. This facility requires a representation at an
initial borrowing that there has been no change in the borrower's
consolidated financial position or operations, considered as a whole,
that would materially and adversely affect such borrower's ability to
perform its obligations under the revolving credit facility. Interest
on this facility is based on defined short-term market rates. During
the term of the agreement, MPC is obligated to pay a variable facility
fee on total commitments, which at June 30, 2005, was 0.125 percent.
During the six months ended June 30, 2005, MPC had no borrowings under
this credit facility.
(b) Required payments of long-term debt for the six months ended December
31, 2006 are $1 million. Required payments of long-term debt for the
years 2007-2010 are $3 million, $3 million, $3 million and $3 million,
respectively. In addition, repayments of the Detroit refinery project
loan, expected to be $16 million in the period July 1, 2005 through
June 30, 2006, will be funded solely from available Detroit refinery
cash flows.
NOTE O - ASSET RETIREMENT OBLIGATIONS
Changes in asset retirement obligations were:
SIX MONTHS
ENDED Year Ended
6/30/2005 12/31/2004
------------ --------------
(Millions)
Asset retirement obligations as of beginning of period $ 4 $ 1
Liabilities incurred -- 3
Liabilities settled (1) --
------------- -------------
Asset retirement obligations as of end of period $ 3 $ 4
============= =============
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE P - SUPPLEMENTAL CASH FLOW INFORMATION
SIX MONTHS Year Ended
ENDED December 31
6/30/2005 2004 2003
------------ ------------ ------------
(Millions)
NET CASH PROVIDED FROM OPERATING ACTIVITIES INCLUDED:
Interest and other financing costs paid (net of amounts capitalized) $ -- $ 4 $ 2
Income taxes paid to taxing authorities 13 3 3
NONCASH INVESTING AND FINANCING ACTIVITIES:
Asset retirement costs capitalized -- 3 --
Net assets contributed to joint ventures -- 3 42
Receivables transferred in the Partial Redemption 911 -- --
Member capital contributions 5 18 14
Capital lease obligation - asset acquired -- -- 41
Liabilities assumed in connection with capital expenditures -- 1 1
NOTE Q - LEASES
MPC leases a wide variety of facilities and equipment under operating
leases, including land and building space, office equipment, storage
facilities and transportation equipment. Most long-term leases include
renewal options and, in certain leases, purchase options. Future minimum
commitments for capital lease obligations and operating lease obligations
having remaining noncancelable lease terms in excess of one year as of June
30, 2005 are as follows:
Capital Operating
Lease Lease
Obligations Obligations
----------- -----------
(Millions)
July to December 2005 $ 3 $ 42
January to December 2006 5 67
January to December 2007 5 31
January to December 2008 5 24
January to December 2009 5 20
January to December 2010 5 11
Later years 35 26
----------- -----------
Total minimum lease payments $ 63 $ 221
===========
Less imputed interest costs 21
-----------
Present value of net minimum lease payments
included in long-term debt $ 42
===========
SIX MONTHS Year Ended
ENDED December 31
6/30/2005 2004 2003
------------ ------------ ------------
(Millions)
OPERATING LEASE RENTAL EXPENSE WAS:
Minimum rental $ 44 $ 85 $ 85
Contingent rental 10 15 12
----------- ----------- -----------
Total rental expense $ 54 $ 100 $ 97
=========== =========== ===========
NOTE R - DERIVATIVE INSTRUMENTS
The following table sets forth quantitative information by category of
derivative instruments at June 30, 2005 and December 31, 2004. These
amounts are reported on a gross basis by individual derivative instrument.
MPC did not have any foreign currency contracts in place at June 30, 2005
or December 31, 2004.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE R - DERIVATIVE INSTRUMENTS - CONTINUED
JUNE 30, 2005 December 31, 2004
------------------------------ -----------------------------
ASSETS(a) (LIABILITIES)(a) Assets (a) (Liabilities)(a)
---------- ---------------- ------------ ---------------
(Millions)
COMMODITY INSTRUMENTS, NON-HEDGE DESIGNATION:
Exchange-traded commodity futures $ 412 $ (516) $ 216 $ (206)
Exchange-traded commodity options 92 (89) 79 (65)
Over-the-counter ("OTC") commodity swaps 26 (14) 48 (30)
OTC commodity options 7 (17) 5 (4)
NONTRADITIONAL INSTRUMENTS (b) 89 (76) 86 (91)
(a) The fair value and carrying value of derivative instruments are the
same. The fair value amounts for OTC positions are determined using
option-pricing models or dealer quotes. The fair values of
exchange-traded positions are based on market quotes derived from
major exchanges. MPC's consolidated balance sheet is reported on a net
asset/(liability) basis by brokerage firm, as permitted by the master
netting agreements.
(b) Certain physical commodity contracts are classified as nontraditional
derivative instruments because certain volumes covered by these
contracts are physically netted at particular delivery locations.
Additionally, other physical contracts that involve flash title are
accounted for as nontraditional derivative instruments.
MPC recorded a net derivative loss of $173 million in the six months ended
June 30, 2005, with a derivative loss of $107 million recorded in revenue,
a derivative loss of $32 million recorded in cost of revenues and a
derivative loss of $34 million recorded in other income. In 2004, MPC
recorded a net derivative loss of $264 million, with a derivative loss of
$360 million recorded in cost of revenues, a derivative gain of $88 million
recorded in revenue and a derivative gain of $8 million recorded in other
income. In 2003, MPC recorded a net derivative loss of $162 million, with a
derivative loss of $133 million recorded in cost of revenues, a derivative
loss of $25 million recorded in revenue and a derivative loss of $4 million
recorded in other income.
NOTE S - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of most financial instruments is based on historical
costs. The carrying values of cash and cash equivalents, receivables,
payables, long-term receivables and long-term debt approximate their fair
value.
MPC's unrecognized financial instruments consist of financial guarantees
and commitments to extend credit. For details relating to financial
guarantees, see Note T.
NOTE T - CONTINGENCIES AND COMMITMENTS
MPC 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 MPC's
consolidated financial statements. However, management believes that MPC
will remain a viable and competitive enterprise even though it is possible
that these contingencies could be resolved unfavorably.
ENVIRONMENTAL MATTERS - MPC 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 MPC for conditions
existing prior to January 1, 1998. The costs associated with these
thresholds are not expected to be material to the MPC financial statements.
At June 30, 2005 and December 31, 2004, MPC's accrued liabilities for
remediation totaled $29 million and $26 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 $15 million and $11 million at June 30, 2005 and
December 31, 2004, respectively.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE T - CONTINGENCIES AND COMMITMENTS - CONTINUED
On May 11, 2001, MPC 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 $420 million over the
eight-year period, with about $250 million incurred through June 30, 2005.
In addition, MPC has nearly completed certain agreed on supplemental
environmental projects as part of this settlement of an enforcement action
for alleged Clean Air Act violations, at a cost of $9 million. MPC believes
that this settlement will provide MPC with increased permitting and
operating flexibility while achieving significant emission reductions.
MPC is a defendant along with many other refining companies in over 40
cases in 11 states alleging methyl tertiary-butyl ether ("MTBE")
contamination in groundwater. All of these cases have been consolidated in
a multi-district litigation in the Southern District of New York for
preliminary proceedings. The judge in this multi-district litigation ruled
on April 20, 2005 that some form of market share liability would apply.
Market share liability enables a plaintiff to sue manufacturers who
represent a substantial share of a market for a particular product and
shift the burden of identification of who actually made the product to the
defendants, effectively forcing a defendant to show that it did not produce
the MTBE which allegedly caused the damage. The judge further allowed cases
to go forward in New York and 11 other states, based upon varying theories
of collective liability, and predicted that a new theory of market share
liability would be recognized in Connecticut, Indiana and Kansas. The
plaintiffs generally are water providers or governmental authorities and
they allege that refiners, manufacturers and sellers of gasoline containing
MTBE are liable for manufacturing a defective product and that owners and
operators of retail gasoline sites have allowed MTBE to be discharged into
the groundwater. Several of these lawsuits allege contamination that is
outside of MPC's marketing area. A few of the cases seek approval as class
actions. Many of the cases seek punitive damages or treble damages under a
variety of statutes and theories. MPC stopped producing MTBE at its
refineries in October 2002. The potential impact of these recent cases and
future potential similar cases is uncertain. MPC will defend these cases
vigorously.
GUARANTEES - MPC has issued the following guarantees:
MAXIMUM POTENTIAL
UNDISCOUNTED PAYMENTS
Term AS OF JUNE 30, 2005
---- ---------------------
(MILLIONS)
Indebtedness of equity method investees:
LOCAP (a) Perpetual-Loan Balance Varies $ 23
LOOP (a) 2005 - 2024 160
Centennial (b) 2007 - 2024 75
Other:
Centennial catastrophic event (c) Indefinite 50
Mobile transportation equipment leases (d) 2005 - 2009 5
Terminal asset sale (e) Indefinite 5
(a) MPC holds interests in an offshore crude oil unloading port, LOOP, and
a crude oil pipeline system, LOCAP. Both LOOP and LOCAP have secured
various project financings with throughput and deficiency agreements.
Under the agreements, MPC is required to advance funds if the
investees are unable to service debt. Any such advances are considered
prepayments of future transportation charges. The terms of the
agreements vary but tend to follow the terms of the underlying debt.
Assuming nonpayment by the investees, the maximum potential amount of
future payments under the guarantees is estimated to be $183 million.
Included in these amounts are a LOOP revolving credit facility of $25
million and a LOCAP revolving credit facility of $23 million. The
undrawn portion of the revolving credit facilities is $35 million.
(b) MPC holds an interest in a refined products pipeline, Centennial, and
has guaranteed the repayment of Centennial's outstanding balance under
a Master Shelf Agreement, which expires in 2024, and a Credit
Agreement, which expires in 2007. The guarantees arose in order to
obtain adequate financing. Prior to expiration of the Master Shelf
Agreement, MPC 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.
(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.
(d) These leases contain terminal rental adjustment clauses which provide
that MPC 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 minimum percent of the fair market value of the asset at the
time of sale.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE T - CONTINGENCIES AND COMMITMENTS - CONTINUED
(e) MPC entered into certain performance and general guarantees and
environmental and general indemnifications in connection with the 2004
sale of a refined products terminal. The terms vary from 2006 to
indefinite, and the maximum potential amount of future payments under
the guarantees and indemnifications is estimated to be $5 million.
CONTRACT COMMITMENTS - At June 30, 2005 and December 31, 2004, MPC's
contract commitments to acquire property, plant and equipment totaled $257
million and $268 million, respectively.
In May 2001, MPC entered into a Transportation Agreement with Centennial in
which MPC guarantees to ship certain volumes on the Centennial system or
make deficiency payments for any volume shortfall. Any deficiency payment
made by MPC will be treated as a prepayment of future transportation
charges. In the six months ended June 30, 2005, and the years ended
December 31, 2004 and 2003, MPC made deficiency payments to Centennial of
$1 million, $4 million and $4 million, respectively.
PUT/CALL AGREEMENT - As part of the formation of PTC, MPC 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 MPC for an amount of cash and/or
MOC, MPC 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, MPC will have the right to
purchase Pilot's interest in PTC for an amount of cash and/or MOC, MPC 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. Under the Agreement, MPC
would determine the form of consideration to be paid upon exercise of the
rights.
NOTE U - ACCOUNTING STANDARDS NOT ADOPTED AT JUNE 30, 2005
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and
140." SFAS No. 155 simplifies the accounting for certain hybrid financial
instruments, eliminates the FASB's interim guidance which provides that
beneficial interests in securitized financial assets are not subject to the
provisions of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," and eliminates the restriction on the passive
derivative instruments that a qualifying special-purpose entity may hold.
SFAS No. 155 is effective for all financial instruments acquired or issued
after the beginning of an entity's first fiscal year that begins after
September 15, 2006. MPC is currently studying the provisions of this
statement to determine the impact on its consolidated financial statements.
In September 2005, the FASB ratified the consensus reached by the EITF on
Issue No. 04-13, "Accounting for Purchases and Sales of Inventory with the
Same Counterparty." The issue defines when a purchase and a sale of
inventory with the same party that operates in the same line of business is
recorded at fair value or considered a single nonmonetary transaction
subject to the fair value exception of Accounting Principles Board ("APB")
Opinion No. 29. The purchase and sale transactions may be pursuant to a
single contractual arrangement or separate contractual arrangements and the
inventory purchased or sold may be in the form of raw materials,
work-in-process, or finished goods. In general, two or more transactions
with the same party are treated as one if they are entered into in
contemplation of each other. The rules apply to new arrangements entered
into in reporting periods beginning after March 15, 2006. The accounting
for certain of the transactions that MPC considers as matching buy/sell
transactions will be affected by this consensus and therefore, upon
adoption, these transactions will no longer be recorded on a gross basis.
MPC is currently studying the provisions of this consensus to determine the
impact on its consolidated financial statements; however, management does
not believe any impact on net income would be material. There will be no
impact on cash flows from operations as a result of adoption.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No.
3." SFAS No. 154 requires companies to recognize (1) voluntary changes in
accounting principle and (2) changes required by a new accounting
pronouncement, when the pronouncement does not include specific transition
provisions, retrospectively to prior periods' financial statements, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS No. 154 is effective for accounting
changes and correction of errors made in fiscal years beginning after
December 15, 2005.
In March 2005, the FASB issued FASB Interpretation ("FIN") No. 47,
"Accounting for Conditional Asset Retirement Obligations - an
interpretation of FASB Statement No. 143." This interpretation clarifies
that an entity is required to recognize a liability for a legal obligation
to perform asset retirement activities when the retirement is conditional
on a future event if the liability's fair value
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE U - ACCOUNTING STANDARDS NOT ADOPTED AT JUNE 30, 2005 - CONTINUED
can be reasonably estimated. If the liability's fair value cannot be
reasonably estimated, then the entity must disclose (1) a description of
the obligation, (2) the fact that a liability has not been recognized
because the fair value cannot be reasonably estimated, and (3) the reasons
why the fair value cannot be reasonably estimated. FIN No. 47 also
clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. MPC adopted FIN
No. 47 as of December 31, 2005. A charge of $43 million related to adopting
FIN No. 47 was recognized as a cumulative effect of a change in accounting
principle in the six months ended December 31, 2005.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets - an amendment of APB Opinion No. 29." This amendment eliminates the
APB Opinion No. 29 exception for fair value recognition of nonmonetary
exchanges of similar productive assets and replaces it with an exception
for exchanges of nonmonetary assets that do not have commercial substance.
MPC adopted SFAS No. 153 on a prospective basis as of July 1, 2005.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payment," ("SFAS No. 123(R)") as a revision of SFAS No. 123, "Accounting
for Stock-Based Compensation." This statement requires entities to measure
the cost of employee services received in exchange for an award of equity
instruments based on the fair value of the award on the grant date. That
cost will be recognized over the period during which an employee is
required to provide service in exchange for the award, usually the vesting
period. In addition, awards classified as liabilities will be remeasured
each reporting period. MPC adopted the fair value method under SFAS No. 123
for grants made, modified or settled on or after January 1, 2003.
Accordingly, MPC does not expect the adoption of SFAS No. 123(R) to have a
material effect on its consolidated results of operations, financial
position or cash flows. The statement provided for an effective date of
July 1, 2005, for MPC. However, in April 2005, the Securities and Exchange
Commission adopted a rule that, for MPC, deferred the effective date until
January 1, 2006. MPC adopted the provisions of this statement on January 1,
2006.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4." This statement requires that items
such as idle facility expense, excessive spoilage, double freight, and
re-handling costs be recognized as a current-period charge. MPC is required
to implement this statement in the first quarter of 2006. MPC does not
expect the adoption of SFAS No. 151 to have a material effect on its
consolidated results of operations, financial position or cash flows.
26