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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
Commission file number 1-2918
ASHLAND INC.
(a Kentucky corporation)
I.R.S. No. 61-0122250
1000 Ashland Drive
Russell, Kentucky 41169
Telephone Number: (606) 329-3333
Securities Registered Pursuant to Section 12(b):
Name of each exchange
Title of each class on which registered
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Common Stock, par value $1.00 per share New York Stock Exchange
and Chicago Stock Exchange
Rights to Purchase Series A Participating New York Stock Exchange
Cumulative Preferred Stock and Chicago Stock Exchange
Securities Registered Pursuant to Section 12(g): None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) as
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. [ ]
At October 31, 1997, based on the New York Stock Exchange closing
price, the aggregate market value of voting stock held by non-affiliates of
the Registrant was approximately $3,174,811,812. In determining this
amount, Ashland Inc. has assumed that directors, certain of its executive
officers, and persons known to it to be the beneficial owners of more than
five percent of its common stock are affiliates. Such assumption shall not
be deemed conclusive for any other purpose.
At October 31, 1997, there were 75,019,275 shares of Registrant's
common stock outstanding.
Documents Incorporated by Reference
Portions of Registrant's Annual Report to Shareholders for the fiscal
year ended September 30, 1997 are incorporated by reference into Parts I
and II.
Portions of Registrant's definitive Proxy Statement for its January
29, 1998 Annual Meeting of Shareholders are incorporated by reference into
Part III.
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TABLE OF CONTENTS
Page
PART I
Item 1. Business 1
Corporate Developments 1
Chemical 2
Valvoline 3
APAC 4
Refining and Marketing 5
Petroleum 5
SuperAmerica 7
Coal 7
Miscellaneous 9
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a
Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Stock and
Related Security Holder Matters 13
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 13
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 13
PART III
Item 10. Directors and Executive Officers of the
Registrant 13
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial
Owners and Management 15
Item 13. Certain Relationships and Related Transactions 15
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 15
PART I
ITEM 1. BUSINESS
Ashland Inc. is a Kentucky corporation, organized on October 22, 1936,
with its principal executive offices located at 1000 Ashland Drive,
Russell, Kentucky 41169 (Mailing Address: P.O. Box 391, Ashland, Kentucky
41114) (Telephone: (606) 329-3333). The terms "Ashland" and the "Company"
as used herein include Ashland Inc. and its consolidated subsidiaries,
except where the context indicates otherwise.
Ashland's businesses are grouped into five industry segments:
Chemical, Valvoline, APAC, Refining and Marketing and Coal. Financial
information about these segments for the five fiscal years ended September
30, 1997 is set forth on Pages 62 and 63 of Ashland's Annual Report to
Shareholders for the fiscal year ended September 30, 1997 ("Annual
Report").
Ashland Chemical distributes industrial chemicals, solvents,
thermoplastics and resins, and fiberglass materials, and manufactures and
sells a wide variety of specialty chemicals and certain petrochemicals.
Valvoline is a marketer of branded, packaged motor oil and automotive
chemicals, antifreeze, filters, rust preventives and coolants. In addition,
Valvoline is engaged in the "fast oil change" business through outlets
operating under the Valvoline Instant Oil Change(R) and Valvoline Rapid Oil
Change(R) names.
APAC performs contract construction work, including highway paving and
repair, excavation and grading, and bridge construction, and produces
asphaltic and ready-mix concrete, crushed stone and other aggregate,
concrete block and certain specialized construction materials in the
southern and midwestern United States.
Refining and Marketing operations are conducted by Ashland Petroleum
and SuperAmerica. Ashland Petroleum is an independent petroleum refiner and
a supplier of petroleum products to the transportation and commercial fleet
industries, other industrial customers and independent marketers, and to
SuperAmerica for retail distribution. In addition, Ashland Petroleum
gathers and transports crude oil and petroleum products and distributes
petroleum products under the Ashland(R) brand name. SuperAmerica operates
combination gasoline and merchandise stores under the SuperAmerica(R) and
Rich(R) brand names.
Ashland's coal operations are conducted by Arch Coal, Inc., which is
54% owned by Ashland and is publicly traded, and which produces and markets
bituminous coal in Central Appalachia, the Illinois Basin and the Hanna
Basin in Wyoming for sale to domestic and foreign electric utility and
industrial customers.
At September 30, 1997, Ashland and its consolidated subsidiaries had
approximately 37,200 employees (excluding contract employees).
CORPORATE DEVELOPMENTS
In May 1997, USX Corporation and Ashland announced the signing of a
letter of intent to pursue a combination of the major elements of the
petroleum supply, refining, marketing and transportation operations of
USX's Marathon Group and Ashland. USX-Marathon would own a 62 percent
ownership interest and Ashland would own a 38 percent ownership interest in
the joint venture to be known as Marathon Ashland Petroleum LLC. The joint
venture is expected to be formed following regulatory reviews, execution of
definitive agreements and approval by the Ashland and USX Boards of
Directors.
On July 1, 1997, Ashland sold the domestic exploration and production
assets of Blazer Energy Corporation (formerly Ashland Exploration, Inc.) to
the Norwegian energy company, Statoil, through its U.S. energy management
subsidiary, The Eastern Group, for $566 million. Ashland has entered into
an agreement to sell its Nigerian exploration and production operations,
which is subject to the approval of the Nigerian government and other
conditions. For further information, see Note B to the Consolidated
Financial Statements on Page 50 in Ashland's Annual Report.
On July 1, 1997, Ashland Coal, Inc. and Arch Mineral Corporation
merged into a new, publicly traded corporation, named Arch Coal, Inc.
Ashland owns 54% of the new company. The merger created the sixth largest
coal company in the United States by tons mined. For further information
relating to Arch Coal, see "Coal".
CHEMICAL
Ashland Chemical Company, a division of Ashland, is engaged in the
manufacture, distribution and sale of a wide variety of chemical and
plastic products. Ashland Chemical owns and operates 34 manufacturing
facilities and participates in 12 manufacturing joint ventures in 10 states
and 14 foreign countries. In addition, Ashland Chemical owns or leases
approximately 100 distribution facilities in North America and 25
distribution facilities in 17 foreign countries. Ashland Chemical is
comprised of the following operations:
DISTRIBUTION
INDUSTRIAL CHEMICALS & SOLVENTS DIVISION ("IC&S") - IC&S markets
chemical products, ingredients and solvents to industrial chemical users in
major markets through distribution centers in the United States, Canada,
Mexico and Puerto Rico. It distributes approximately 3,500 chemical
products made by many of the nation's leading chemical manufacturers and a
growing number of off-shore producers, as well as petrochemicals from
Ashland's refineries. It specializes in supplying mixed truckloads and
less-than-truckload quantities to many industries, including the paint and
coatings, inks, adhesives, polymer, rubber, industrial and institutional
compounding, automotive, appliance and paper industries. It also offers
customers chemical waste collection, disposal and recycling services,
working in cooperation with major chemical waste services companies.
FINE INGREDIENTS DIVISION - This division (formerly part of the IC&S
division) distributes cosmetic and pharmaceutical specialty chemicals, and
food-grade and nutritional additives and ingredients across North America.
FRP SUPPLY DIVISION - This division markets to customers in the
reinforced plastics and cultured marble industries mixed truckload and
less-than-truckload quantities of polyester resins, fiberglass and other
specialty reinforcements, catalysts and allied products from more than 50
distribution locations throughout North America.
GENERAL POLYMERS DIVISION - This division markets a broad range of
thermoplastic injection molding and extrusion materials to processors in
the plastics industry through distribution locations in the United States,
Canada, Mexico and Puerto Rico. It also provides plastic material transfer
and packaging services and less-than-truckload quantities of packaged
thermoplastics. The basic resins business unit markets bulk thermoplastic
resins to a variety of proprietary processors in North America.
ASHLAND PLASTICS EUROPE - This division (formerly known as the Ashland
Plastics Division) markets a broad range of thermoplastics to processors in
Europe, including Finland, Norway, Sweden and Germany. Ashland Plastics has
distribution centers located in Belgium, France, Italy, the Netherlands,
Ireland, Spain, and the United Kingdom. The division has compounding
manufacturing facilities located in Italy and Spain.
SPECIALTY CHEMICALS
COMPOSITE POLYMERS DIVISION - This division manufactures and sells a
broad range of chemical-resistant, fire-retardant and general-purpose
grades of unsaturated polyester and vinyl ester resins for the reinforced
plastics industry. Key markets include the transportation, construction and
marine industries. It has manufacturing plants in Jacksonville, Arkansas;
Colton and Los Angeles, California; Bartow, Florida; Ashtabula, Ohio;
Philadelphia and Neville Island, Pennsylvania; and Benicarlo, Spain.
In September 1997, the company reached an agreement in principle to
purchase the unsaturated polyester resins business of Buna Sow Leuna
Olefinvergund GmbH (BSL). The agreement is subject to the execution of a
definitive agreement and is expected to close by the first calendar quarter
of 1998. This acquisition will add a manufacturing facility in Schkopau,
Germany.
SPECIALTY POLYMERS & ADHESIVES DIVISION - This division manufactures
and sells specialty phenolic resins for paper impregnation and friction
material bonding; acrylic polymers for pressure-sensitive adhesives;
emulsion polymer isocyanate adhesives for structural wood bonding;
polyurethane and epoxy structural adhesives for bonding fiberglass
reinforced plastics, composites, thermoplastics and metals in automotive,
recreational, and industrial applications; induction bonding systems for
thermoplastic materials; elastomeric polymer adhesives and butyl rubber
roofing tapes for commercial roofing applications; and vapor curing,
high-performance urethane coatings systems. It has manufacturing plants in
Calumet City, Illinois; Norwood, New Jersey; and Ashland, Ohio.
DREW AMEROID MARINE DIVISION - This division supplies specialty
chemicals for water and fuel treatment and general maintenance as well as
refrigeration services, sealing products, welding and refrigerant products
and fire fighting and safety services to the world's merchant marine fleet.
Drew Ameroid Marine currently provides shipboard technical service for more
than 10,000 vessels from more than 30 locations serving 700 ports
throughout the world.
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ELECTRONIC CHEMICALS DIVISION - This division manufactures and sells a
variety of ultra-high purity chemicals for the worldwide semiconductor
manufacturing industry through various manufacturing locations and also
custom blends and packages high-purity liquid chemicals to customer
specifications. It has manufacturing plants in Newark, California; Milan,
Italy; Easton, Pennsylvania; Dallas, Texas, and Campbell, California. In
addition, it also enters into long-term agreements to provide complete
chemical management services, including purchasing, warehousing and
delivering chemicals for in-plant use, for major facilities of large
consumers of high-purity chemicals. Ashland Chemical is currently building
a new, ultra-high purity manufacturing and packaging facility in Pueblo,
Colorado, targeted for completion in spring 1998.
FOUNDRY PRODUCTS DIVISION - This division manufactures and sells
foundry chemicals worldwide, including sand-binding resin systems,
refractory coatings, release agents, engineered sand additives, riser
sleeves, and die lubricants. The division purchased the remaining 50%
ownership interest in its Brazilian affiliate, Ashland Bentonit Resinas,
Ltda., from Bentonit Uniao Nordeste, S.A. in September 1997. This division
serves the global metal casting industry from 22 locations in 18 countries.
DREW INDUSTRIAL DIVISION - This division supplies specialized
chemicals and consulting services for the treatment of boiler water,
cooling water, steam, fuel and waste streams. It also supplies process
chemicals and technical services to the pulp and paper and mining
industries and additives to manufacturers of latex and paints. It conducts
operations throughout North America, Europe and the Far East through
subsidiaries, joint venture companies and distributors. The division has
manufacturing plants in Kansas City, Kansas; Kearny, New Jersey; Houston,
Texas; Ajax, Ontario, Canada; Singapore; Sydney and Perth, Australia; and
Auckland, New Zealand.
PETROCHEMICALS
This division markets aromatic and aliphatic solvents manufactured at
facilities located at the Catlettsburg, Kentucky refinery. It also
manufactures maleic anhydride at Neal, West Virginia, and Neville Island,
Pennsylvania, and methanol near Plaquemine, Louisiana. The division formed
an Energy Services business unit in July 1997 to provide industrial and
commercial businesses with expert management of their total energy
requirements. The new business will source and supply natural gas,
electricity and natural gas liquids.
OTHER MATTERS
MELAMINE CHEMICALS, INC. ("MCI") - In October 1997, MCI and Borden
Chemicals Inc. ("Borden") announced that a definitive agreement had been
reached providing for Borden to tender for all of the outstanding shares of
MCI for $20.50 per share. Ashland tendered its 1,275,000 shares under the
terms of the offer and received $26,137,500 for such shares.
DUBLIN, OHIO HEADQUARTERS TECHNICAL CENTER EXPANSION - Ashland
Chemical is constructing a 115,000-square-foot facility to expand its
Technical Center in Dublin, Ohio. The project is targeted for completion in
late calendar year 1998.
For information relating to the Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA") and the Superfund Amendments and
Reauthorization Act of 1986 ("SARA") (CERCLA and SARA hereinafter sometimes
referred to collectively as "Superfund"), and the Resource Conservation and
Recovery Act ("RCRA"), see "Miscellaneous-Governmental Regulation and
Action-Environmental Protection."
VALVOLINE
The Valvoline Company, a division of Ashland, is a marketer of
automotive and industrial oils, automotive chemicals, and automotive and
environmental services, with sales in more than 140 countries. The
Valvoline(R) trademark was federally registered in 1873 and is the oldest
trademark for a lubricating oil in the United States. See also "Refining
and Marketing." Valvoline has diversified its operations in recent years
and is comprised of the following business units:
NORTH AMERICAN PRODUCTS - Valvoline's largest division, North
American, markets automotive, commercial, and industrial lubricants and
automotive chemicals to a broad network of North American customers.
Valvoline branded motor oil is one of the top selling brands in the U.S.
private passenger car and light truck market.
North American markets Zerex(R) antifreeze and Pyroil(R) automotive
chemicals. Zerex(R) is the second-leading antifreeze brand in the U.S. This
division also markets R-12, an automotive refrigerant that was phased out
of production in 1995. R-12 is being replaced in the market by
new-generation refrigerants.
The domestic commercial/fleet group continued its strategic alliance
with the Cummins Engine Company to distribute heavy-duty lubricants to the
commercial market.
3
VALVOLINE INTERNATIONAL - Valvoline International markets Valvoline(R)
branded products and TECTYL(R) rust preventives worldwide through
company-owned affiliates or divisions in Australia, Denmark, Great Britain,
the Netherlands, Sweden, Germany, Switzerland, Austria, France, Italy,
Belgium and South Africa. Licensees and distributors market products in
other parts of Europe, Central and South America, the Far East, the Middle
East and certain African countries. Joint ventures have been established in
Argentina, Ecuador, Thailand and India. Packaging and blending plants and
distribution centers in Australia, Canada, Denmark, Sweden, Great Britain,
the Netherlands and the United States supply international customers.
VALVOLINE INSTANT OIL CHANGE(R) ("VIOC") - VIOC is one of the largest
competitors in the expanding U.S. "fast oil change" service business,
providing Valvoline with a significant share of the installed segment of
the passenger car and light truck motor oil market. Incorporation of the
Valvoline name and trademark in VIOC's name, store signage and advertising
provides an ongoing Valvoline presence in the communities in which VIOC
stores are located. As of September 30, 1997, 382 company-owned and 137
franchise service centers were operating in 15 and 27 states, respectively.
In 1997, the "MVP" (Maximum Vehicle Performance) program continued
VIOC's industry leadership in customer-service innovation. MVP is a
computer-based program that maintains service records on all customer
vehicles, system-wide. MVP also contains a database on all car makes and
models, which allows service recommendations based on vehicle owner's
manual recommendations.
FIRST RECOVERY - As of September 30, 1997, Ecogard, Inc., through its
First Recovery division, was collecting used motor oil at an annual rate of
64 million gallons from a network of automotive aftermarket retailers and
service businesses in 48 states. Completing Valvoline's "total fluid
management" approach to customer service, First Recovery provides an
environmental service to Valvoline customers in the U.S., collecting used
antifreeze and oil filters as well.
APAC
The APAC group of companies, which are located in 13 southern and
midwestern states, perform construction work such as paving, repair and
resurfacing highways, streets, airports, residential and commercial
developments, sidewalks, and driveways; grading and base work; and
excavation and related activities in the construction of bridges and
structures, drainage facilities and underground utilities. APAC also
produces and sells construction materials, such as hot-mix asphalt and
ready-mix concrete, crushed stone and other aggregate and, in certain
markets, concrete block and specialized construction materials, such as
architectural block.
To deliver its services and products, APAC utilizes extensive
aggregate-producing properties and construction equipment. It currently has
18 permanent operating quarry locations, 32 other aggregate production
facilities, 34 ready-mix concrete plants, 145 hot-mix asphalt plants, and a
fleet of over 9,000 mobile equipment units, including heavy construction
equipment and transportation-related equipment.
Raw aggregate generally consists of sand, gravel, granite, limestone
and sandstone. About 26% of the raw aggregate produced by APAC is used in
APAC's own contract construction work and the production of various
processed construction materials. The remainder is sold to third parties.
APAC also purchases substantial quantities of raw aggregate from other
producers whose proximity to the job site render it economically feasible.
Most other raw materials, such as liquid asphalt, portland cement and
reinforcing steel, are purchased from others. APAC is not dependent upon
any one supplier or customer.
Approximately 60% of APAC's revenues are derived directly from highway
and other public sector sources. The other 40% are derived from industrial
and commercial customers, and other private developers, and other
contractors to the public sector.
Climate and weather significantly affect revenues in the construction
business. Due to its location, APAC tends to enjoy a relatively long
construction season. Most of APAC's operating income is generated during
the construction period of May to October.
Total backlog at September 30, 1997 was $693 million, compared to $647
million at September 30, 1996. The backlog orders at September 30, 1997 are
considered firm, and a major portion is expected to be filled during fiscal
1998.
4
REFINING AND MARKETING
Refining and Marketing operations are conducted by Ashland Petroleum
and SuperAmerica. Ashland Petroleum, a division of Ashland, has
responsibility for obtaining Ashland's crude oil requirements, operating
Ashland's refineries, marketing the refined petroleum products and
transporting and storing crude oil and refined products. SuperAmerica
Group, a division of Ashland, conducts retail petroleum marketing
operations under the SuperAmerica(R) and Rich(R) names. See "Corporate
Developments" for information relating to the proposed joint venture with
USX-Marathon.
PETROLEUM
CRUDE OIL SUPPLY - The crude oil processed in Ashland Petroleum's
refineries is obtained from negotiated lease, contract and spot purchases
or exchanges. During fiscal 1997, Ashland Petroleum's negotiated lease,
contract and spot purchases of United States crude oil for refinery input
averaged 111,392 barrels per day (1 barrel = 42 U.S. gallons), including
93,122 barrels per day acquired through Ashland's Scurlock Permian
subsidiary. During fiscal 1997, Ashland Petroleum's foreign crude oil
requirements were met largely through purchases from various foreign
national oil companies, producing companies and traders, as well as
purchases of an average of 60,800 barrels per day during fiscal 1997 from
Canada through Scurlock Permian's Canadian subsidiary. Purchases of foreign
crude oil (including Canada) represented 68% of Ashland Petroleum's crude
oil requirements during fiscal 1997 and in fiscal 1996.
In addition to providing crude oil for Ashland Petroleum's refineries,
Scurlock Permian and its Canadian subsidiary are actively engaged in
purchasing, selling and trading crude oil, principally at Midland, Texas,
Cushing, Oklahoma, and St. James, Louisiana, three of the major
distribution points for United States crude oil, as well as major trading
and distribution hubs in western Canada.
REFINING AND WHOLESALE MARKETING - Ashland Petroleum owns and operates
three refineries, located in its key markets, with an aggregate rated
refining capacity of 360,000 barrels of crude oil per calendar day. The
Catlettsburg, Kentucky, refinery has a refining capacity of 220,000 barrels
per day, and the St. Paul Park, Minnesota, and Canton, Ohio, refineries
each have rated refining capacities of 70,000 barrels per day. Ashland
Petroleum's refineries are complex and include crude oil atmospheric and
vacuum distillation, fluid catalytic cracking, catalytic reforming,
desulfurization and sulfur recovery units. Each has the capability to
process a wide variety of crude oils and to produce normal refinery
products, including reformulated gasoline. In addition, the Catlettsburg
refinery manufactures lubricating oils and a wide range of petrochemicals.
Ashland Petroleum's principal marketing areas for gasoline and fuel
oils include the Ohio River Valley, the upper Midwest, the upper Great
Plains and the southeastern United States.
Ashland Petroleum's production of gasoline, kerosene and light fuel
oils is sold in 20 states through wholesale channels of distribution
(including company owned and exchange terminals and 17 Ashland brand bulk
plants in 4 states) and at retail through Ashland(R) brand distributor
locations, SuperAmerica(R) and Rich(R). Gasoline is sold at wholesale
primarily to independent marketers, jobbers, and chain retailers who resell
through several thousand retail outlets principally under their own names,
and also under the Ashland(R) brand name. As of September 30, 1997, 37
jobbers were committed to Ashland's jobber program and 601 units had been
reimaged. Ashland also supplies 46 reseller outlets using the Ashland(R)
brand name. Gasoline, kerosene, distillates and aviation products are also
sold to utilities, railroads, river towing companies, commercial fleet
operators, airlines and governmental agencies.
Ashland Petroleum also produces asphalt cements, polymerized asphalt,
asphalt emulsions and industrial asphalts and markets these products in 18
states. Additionally, Ashland Petroleum manufactures petroleum pitch,
primarily used in the graphite electrode, clay target and refractory
industries.
The table below shows Ashland's refining operations for the last three
fiscal years.
Years Ended September 30
-------------------------
1997 1996 1995
----- ----- -----
REFINERY INPUT (IN THOUSANDS OF BARRELS PER DAY) 362.6 372.3 353.8
------------------------------------------------
REFINERY PRODUCTION (IN THOUSANDS OF BARRELS PER DAY)
-----------------------------------------------------
Gasoline 178.3 183.5 176.8
Distillates and Kerosene 98.0 102.1 92.5
Asphalt 29.9 30.4 31.5
Jet and Turbine Fuel 11.6 11.4 11.1
Heavy Fuel Oils 7.9 7.1 6.7
Lubricants 7.1 7.7 7.7
Other 20.7 20.0 16.8
5
The table below shows the average daily consolidated sales (excluding
intercompany sales) of petroleum products and crude oil by Ashland
Petroleum, SuperAmerica and Valvoline for the last three fiscal years.
Sales of gasoline (excluding excise taxes) represented approximately 17%,
18% and 17% of Ashland's consolidated sales and operating revenues
(excluding excise taxes) in fiscal years 1997, 1996 and 1995, respectively.
Years Ended September 30
-------------------------
1997 1996 1995
----- ----- -----
CONSOLIDATED PRODUCT SALES (IN THOUSANDS OF BARRELS PER DAY)
Gasoline 197.1 197.6 193.7
Crude Oil 108.6 116.3 112.5
Distillates and Kerosene 108.5 112.8 102.8
Asphalt 37.4 37.0 36.8
Jet and Turbine Fuel 12.4 9.6 9.6
Heavy Fuel Oils 7.5 7.0 7.1
Lubricants 13.8 14.8 15.0
Other 29.9 28.0 28.3
TRANSPORTATION AND STORAGE - Ashland owns, leases or has an ownership
interest in 5,790 miles of active pipeline in 13 states. This network
transports crude oil and refined products to and from terminals, refineries
and other pipelines. This includes 2,545 miles of crude oil gathering
lines, 2,729 miles of crude oil trunk lines, 475 miles of refined product
lines and 41 miles of natural gas liquid lines.
Ashland has an 18.6% ownership interest in LOOP LLC ("LOOP"), the only
U.S. deep water port facility capable of receiving crude oil from very
large crude carriers and which has a capacity to off-load 1,000,000 to
1,200,000 barrels per day. Ashland also has a 21.4% ownership interest in
LOCAP INC. ("LOCAP"), a pipeline operation which has a capacity of
1,200,000 barrels per day, and a 21.6% undivided ownership interest in the
Capline Pipeline System, which has a nominal capacity of 1,175,000 barrels
per day. LOCAP owns a pipeline connecting LOOP and the Capline System that
originates at St. James, Louisiana. These port and pipeline systems provide
Ashland Petroleum with access to common carrier transportation from the
Louisiana Gulf Coast to Patoka, Illinois. At Patoka, the Capline System
connects with other common carrier pipelines owned or leased by Ashland
which provide transportation to Ashland Petroleum's refineries in Kentucky
and Ohio. For summarized financial statements and information with respect
to advances and transportation payments made by Ashland to LOOP and LOCAP,
see Notes D and I of Notes to Consolidated Financial Statements in
Ashland's Annual Report.
In addition, Ashland owns a 33% stock interest in Minnesota Pipe Line
Company, which owns a crude oil pipeline in Minnesota. Minnesota Pipe Line
Company provides Ashland Petroleum with access to 270,000 barrels per day
nominal capacity of crude oil common carrier transportation from
Clearbrook, Minnesota to Cottage Grove, Minnesota, which is in the vicinity
of Ashland Petroleum's St. Paul Park, Minnesota, refinery.
Ashland Petroleum's river transportation operations include 8 towboats
(6 owned, 2 leased) and 170 barges that transport crude oil and refined
products on the Ohio, Mississippi and Illinois rivers, their tributaries,
and the Intracoastal Waterway. In 1995, Ashland entered into an agreement
with Jeffboat, a division of American Commercial Marine Service Company, to
construct 42 new double-hulled inland river tank barges. As of September
30, 1997, construction on 34 of the new double-hulled units has been
completed. These barges will replace current single-hulled barges owned and
operated by Ashland in order to comply with requirements of the Oil
Pollution Act of 1990. Displaced single-hulled units will be divested or
recycled into dock floats within Ashland's system. See also "Miscellaneous
- - Governmental Regulation and Action - Environmental Protection."
Ashland Petroleum leases on a long-term basis two 80,000 ton
deadweight tankers, which are primarily used for third party delivery of
foreign crude oil to the United States. Ashland Petroleum's requirements
for tankers are met by chartering tankers for individual voyages.
Ashland Petroleum leases rail cars in various sizes and capacities for
movement of petroleum products and chemicals. Ashland Petroleum also owns a
large number of tractor-trailers, additional trailers, and a large fleet of
tank trucks and general service trucks.
6
Ashland Petroleum owns or has an interest in 34 terminal facilities
from which it sells a wide range of petroleum products. These facilities
are supplied by a combination of river barge, pipeline, truck and rail.
Ashland Petroleum also owns or operates a number of other terminals that
are used in connection with the transportation of petroleum products or
crude oil.
OTHER MATTERS - There are traditional seasonal variations in Ashland
Petroleum's sales and operating results. The seasonality that Ashland
Petroleum experiences is due primarily to increased demand for gasoline
during the summer driving season, higher demand for distillate during the
winter heating season, and increased demand for asphalt from the road
paving industry during the last six months of Ashland's fiscal year. The
refining industry experiences a similar seasonality. For Ashland's fiscal
years 1995 through 1997, refining margins for Ashland Petroleum have
averaged $3.69 per barrel for the six-month periods ended March 31 and
$5.19 per barrel for the six-month periods ended September 30.
For information on federal, state and local statutes and regulations
relating to releases into the environment or protection of the environment,
see "Miscellaneous-Governmental Regulation and Action-Environmental
Protection." For information relating to certain environmental litigation,
see "Legal Proceedings-Environmental Proceedings."
SUPERAMERICA
SUPERAMERICA(R) STORES - SuperAmerica operates 641 (497 owned and 144
leased) combination gasoline and merchandise stores in 10 states in the
Ohio Valley and upper Midwest under the SuperAmerica(R) name. These stores
are designed for high volume sales. SuperAmerica stores offer consumers
gasoline, diesel fuel (at selected locations) and a broad mix of other
goods and services, such as fresh-baked goods, automated teller machines,
video rentals, automotive accessories and a line of private-label items.
SuperAmerica has also added on-premise brand-name restaurants at some
outlets to enhance overall profitability. At September 30, 1997, there were
81 SuperAmerica locations with branded food service.
SuperAmerica operates warehouse distribution centers in Bloomington,
Minnesota, and Ashland, Kentucky, that distribute certain merchandise to
its stores. SuperAmerica also operates a commissary in Russell, Kentucky,
that produces sandwiches, salads and other food products for distribution
to stores in the Ohio Valley. A wholly owned subsidiary of Ashland also
operates a large bakery and commissary in St. Paul Park, Minnesota, under
the name SuperMom's(R) that supplies baked goods, sandwiches and salads.
In addition to its product and service innovations, SuperAmerica has
adopted a number of technological enhancements that improve efficiency and
service. SuperAmerica has bar code scanning and home office to store
satellite communication links. SuperAmerica is also one of the first in the
industry to operate a data warehouse to collect and analyze data from its
stores.
In addition to the 641 company-owned and leased SuperAmerica stores,
SuperAmerica has 27 jobber/franchisees who operate 43 stores in Minnesota
and Wisconsin. During fiscal 1997, 33 new or rebuilt SuperAmerica retail
outlets were opened. During fiscal 1997, 38% of the revenues of the
SuperAmerica stores (excluding excise taxes) were derived from the sale of
merchandise and 62% of such revenues were derived from the sale of gasoline
and diesel fuel.
RICH OIL - SuperAmerica also operates 125 (97 owned and 28 leased)
retail gasoline outlets in Kentucky, Ohio and West Virginia under the
Rich(R) name. These outlets are generally smaller, are located in
less-densely-populated areas and generate lower gasoline volumes than the
average SuperAmerica store.
OTHER MATTERS
For information on federal, state and local statutes and regulations
relating to releases into the environment or protection of the environment,
see "Miscellaneous-Governmental Regulation and Action-Environmental
Protection." For information relating to certain environmental litigation,
see "Legal Proceedings-Environmental Proceedings."
COAL
ARCH COAL, INC. ("ARCH COAL") - Ashland owns approximately 54% of Arch
Coal, a publicly traded Delaware corporation (NYSE:ACI) resulting from the
merger of Ashland Coal, Inc. and Arch Mineral Corporation. See "Corporate
Developments" for a discussion of the July 1, 1997 merger transaction. The
unaudited pro forma combined operating data below are not representative of
the operating results which would have occurred had the merger occurred as
of the beginning of the periods presented or dates indicated or of the
operating results which may be achieved in the future.
7
Arch Coal is engaged in the production, transportation, processing and
marketing of bituminous coal produced in Central Appalachia, the Illinois
Basin and the Hanna Basin in Wyoming. Arch Coal concentrates primarily on
acquiring and developing low-sulfur steam coal reserves for sale to
electric utility customers in the United States and abroad. Arch Coal
relies on third-party rail, barge and truck transportation to deliver coal
to its domestic customers. A substantial portion of shipments to
international customers are made primarily from the Dominion Terminal
Associates terminal facility in Newport News, Virginia. Arch Coal
subsidiaries are partners in the partnership that owns and operates this
terminal.
For its fiscal year ended December 31, 1996, on a pro forma combined
basis, Arch Coal and its independent operating subsidiaries sold 51.3
million tons of coal, as compared to 49.2 and 48.1 million tons sold in
1995 and 1994, respectively. Of the total number of tons sold during fiscal
1996, approximately 68% were under long term contracts, as compared to 69%
for 1995 and 67% for 1994, with the balance being sold on the spot market.
In fiscal 1996, Arch Coal and its independent operating subsidiaries sold
2.4 million tons of coal in the export market, compared to 3.5 million tons
in 1995 and 2.2 million tons in 1994. Sales of coal represented
approximately 10%, 5% and 6% of Ashland's consolidated revenues in its
fiscal years ended September 30, 1997, 1996 and 1995, respectively.
For its fiscal year ended December 31, 1996, Arch Coal's independent
operating subsidiaries produced approximately 47.4 million tons of coal, as
compared to 46.5 and 46.6 million tons for 1995 and 1994, respectively. In
addition, Arch Coal purchased for resale approximately 3.9 million tons of
coal during 1996 and approximately 2.6 and 2.5 million tons of coal during
1995 and 1994.
Approximately 66%, 70% and 68% of total revenues for fiscal years
1996, 1995 and 1994, respectively, were derived from long-term contracts.
In the nine months ended September 30, 1997, on a pro forma combined basis,
Arch Coal sold 40.1 million tons of coal, 69% of which was sold under
contracts with a duration of more than one year. During this period, 94% of
Arch Coal's total sales came from the production of its subsidiaries, while
the remaining coal sold came from brokerage activities. During this
nine-month period, 58% of Arch Coal's production was from its surface mines
and the remainder was from its underground and auger mines.
During its fiscal year ended December 31, 1996, Arch Coal's pro forma
combined sales to affiliates of The Southern Company and affiliates of
American Electric Power accounted for approximately 14.6% and 13.1%,
respectively, of pro forma combined revenues from coal sales for such
period. The loss of such customers would have a material adverse effect on
Arch Coal.
As of September 30, 1997, Arch Coal estimates it owned or controlled
recoverable coal reserves in the proven and probable categories of
approximately 2.1 billion tons. Arch Coal believes that a majority of these
reserves have a sulfur content of less than 1.6 pounds of sulfur dioxide
per million Btu and a substantial portion have a sulfur content of less
than 1.2 pounds of sulfur dioxide per million Btu. Ashland has not made an
independent verification of this information.
Arch Coal's coal properties are owned outright and controlled by
lease. Royalties paid to lessors on leased properties are either on a fixed
price per ton basis or on a percentage of the gross sales price basis. Most
of these leases run until the exhaustion of mineable and merchantable coal.
The remaining leases have primary terms ranging from one to 40 years from
the date of their execution, with many containing options to renew. Those
term leases covering principal reserves under Arch Coal's current mining
plans are not scheduled to expire prior to expiration of those plans in
2003 (at Arch Coal's Coal Mac, Inc. operations) and 2006 (at the balance of
Arch Coal's operations). Mining plans are not necessarily indicative of the
life of the mine. The extent to which reserves will eventually be mined
depends upon a variety of factors, including future economic conditions and
governmental actions affecting both the mining and marketability of
low-sulfur steam coal.
Arch Coal's Apogee Coal Company ("Apogee") and Hobet Mining, Inc.
("Hobet") subsidiaries, are members of the Bituminous Coal Operators
Association ("BCOA") and each is a signatory to a five year collective
bargaining agreement with the United Mine Workers of America that expires
on August 1, 1998. In the nine months ended September 30, 1997, Apogee's
and Hobet's combined production represented approximately 55% of Arch
Coal's total production on a pro forma combined basis. Two other Arch Coal
subsidiaries are signatories to collective bargaining agreements with
independent employee associations. Employees of the remainder of Arch
Coal's operating subsidiaries are not represented by labor unions.
Arch Coal is subject to extensive federal and state environmental laws
and regulations, including the federal Surface Mining Control and
Reclamation Act of 1977, the Clean Water Act, RCRA and the Clean Air Act,
as well as related federal environmental regulations and similar state
enactments. In addition, the Federal Mine Safety and Health Act of 1977
("MSHA") imposes health and safety standards on all mining operations.
Regulations under MSHA are comprehensive and affect numerous aspects of
mining operations, including the
8
training of mine personnel, mining procedures, blasting and the equipment
used in mining operations. Although the cost of compliance with these laws,
regulations and requirements is substantial, it is not expected to have a
material adverse impact on Arch Coal's results of operations, financial
condition or competitive position.
The Clean Air Act contains acid rain provisions which require
substantial reductions in sulfur dioxide emissions by power plants in the
United States. Typically, power plants burn low-sulfur coal as a means of
reducing sulfur dioxide emissions. Because Arch Coal has significant
low-sulfur coal reserves, future sales should be positively affected by
stringent enforcement of sulfur dioxide emission standards.
MISCELLANEOUS
GOVERNMENTAL REGULATION AND ACTION
Ashland's operations are affected by political developments and laws
and regulations, such as restrictions on production, restrictions on
imports and exports, the maintenance of specified reserves, price controls,
tax increases and retroactive tax claims, expropriation of property,
cancellation of contract rights, environmental protection controls and laws
pertaining to workers' health and safety. As discussed in part below, a
number of bills have been enacted or proposed by the United States Congress
and various state governments which have, or could have, a significant
impact on Ashland.
GENERAL - As a refiner, Ashland is substantially affected by changes
in world crude oil prices. Many world and regional events can have
substantial effects on world crude oil prices and can increase volatility
in world markets. Ashland expects to be able to acquire adequate supplies
of crude oil at competitive prices. However, Ashland cannot predict whether
foreign and United States petroleum product price levels will permit its
refineries to operate on a profitable basis. Neither can it predict the
effect on its operations and financial condition from possible changes in
the policies of the Organization of Petroleum Exporting Countries ("OPEC")
or in actions by the President of the United States and the Congress, from
changes in taxes and federal regulation of the oil and gas business in the
United States, or from other developments that cannot be foreseen.
The stability of Ashland's crude oil supply from foreign sources is
subject to factors beyond its control, such as military conflict involving
oil-producing countries, the possibility of nationalization of assets,
embargoes of the type imposed by OPEC in 1973, internal instability in one
or more oil-producing countries, and rapid increases in crude oil prices.
Although Ashland will continue, for economic reasons, to rely upon foreign
crude oil sources for a substantial portion of its crude oil supply, the
extent of operation in the domestic crude oil market afforded by its
Scurlock Permian subsidiary assists in offsetting the adverse effects
frequently associated with market volatility. See "Refining and Marketing -
Petroleum-Crude Oil Supply" for Ashland's crude oil processing
requirements.
Imported crude oil is subject at present to payment of duty, which is
10.5(cent) per barrel for crudes over 25(degree) API gravity (2.1(cent) per
barrel for Canadian imports) and 5.25(cent) per barrel for crudes below
25(degree) API gravity (1.05(cent) per barrel for Canadian imports).
Imported crude oil is also subject to a customs users fee of .17% of the
value of the crude oil. For information with respect to tax assessments on
crude oil, see also "Miscellaneous Governmental Regulation and Action -
Environmental Protection."
Retail marketing "divorcement" legislation and wholesale and retail
pricing regulations have been adopted in some states. They are proposed
from time to time in other states and at the federal level. If such
legislation were adopted at the federal level or in the states where
SuperAmerica sells petroleum products, it could have a material adverse
impact on Ashland's results of operations.
ENVIRONMENTAL PROTECTION - Federal, state and local statutes and
regulations relating to the protection of the environment have a
significant impact on the conduct of Ashland's businesses. Ashland's
capital and operating expenditures for air, water and solid waste control
facilities for continuing operations are summarized below.
Years Ended September 30
-----------------------------------------
(In millions) 1997 1996 1995
-------------------------------------- ------ ------ -----
Capital expenditures $ 26 $ 38 $ 42
Operating expenditures 155 153 148
At September 30, 1997, Ashland's reserves for environmental
assessments and remediation efforts were $150 million, reflecting Ashland's
estimates of the costs which are most likely to be incurred over an
extended period to remediate identified environmental conditions for which
costs are reasonably estimable.
9
Based on current environmental regulations, Ashland estimates capital
expenditures for air, water and solid waste control facilities to be $30
million in 1998. Expenditures for investigatory and remedial efforts in
future years are subject to the uncertainties associated with environmental
exposures, including identification of new environmental sites and changes
in laws and regulations and their application. Such expenditures, however,
are not expected to have a material adverse effect on Ashland's
consolidated financial position, cash flow or liquidity. For information
regarding the 1996 multimedia inspections which were conducted by the
United States Environmental Protection Agency ("USEPA") at Ashland
Petroleum's three refineries, see "Legal Proceedings".
Federal, state and local environmental laws and regulations have had,
and will continue to have, a significant impact on the manner in which
Ashland conducts its business, manages its refining, storage, pipeline and
retail facilities and selects its range of refined products. A summary of
the effects of the most significant of these laws and regulations is set
forth below.
The USEPA and the states in which Ashland conducts petroleum marketing
operations have adopted regulations and laws concerning underground storage
tanks covering, among other things, registration of tanks, release
detection, corrosion protection, response to releases, and closure of, and
financial responsibility for, underground storage tank systems. Under RCRA,
underground storage tanks used for retail distribution of petroleum
products must be brought into compliance with the variety of engineering
specifications and leak protection technologies by calendar year-end 1998.
In anticipation of this compliance deadline, Ashland's retail petroleum
marketing operations have upgraded the underground storage tanks at
approximately 96% of the Company's existing marketing locations, and
Ashland anticipates that the remaining locations will be brought into
timely compliance.
As originally enacted, Superfund provided for the establishment of a
fund to be used for a hazardous substance clean-up program, administered by
the USEPA and funded by: (i) a petroleum tax on domestic crude oil and on
imported crude oil equalized at 9.7(cent) per barrel plus a 5(cent) per
barrel oil spill tax, as more fully described below, (ii) a chemical
feedstock tax, (iii) a tax on imported chemical derivatives, (iv) an
"environmental tax" based on corporate alternative minimum taxable income,
and (v) the motor fuel tax to finance the new Underground Storage Tank
Trust Fund. During 1996, the tax provisions of Superfund expired. As a
result Ashland paid no Superfund taxes during fiscal 1997. Superfund is
undergoing consideration for significant amendments, including
reauthorization of the taxing provisions as well as a reevaluation of the
cleanup liability allocation scheme and improved cleanup remedy selection.
However, it is uncertain at this time what revisions will be formally
considered by Congress, or if any such revisions will in fact be adopted.
The Oil Pollution Act of 1990 ("OPA 90") established a $1 billion
trust fund to cover cleanup-related costs of oil spills after statutory
liability limits for a responsible party have been reached, or where the
responsible party is otherwise unidentifiable or unable to pay. The trust
fund is financed, when depleted below specified levels, through an excise
tax of 5(cent) per barrel on domestic crude oil and imported petroleum oil
products (pursuant to Superfund). OPA 90 subjects responsible parties to
strict liability for removal costs and damages (including natural resource
damages) resulting from oil spills, and requires the preparation and
implementation of spill-response plans for designated vessels and
facilities. Additionally, OPA 90 requires that new tank vessels entering or
operating in domestic waters be double-hulled, and that existing tank
vessels that are not double-hulled be retrofitted or removed from domestic
service according to a phase-out schedule.
On July 1, 1994, the United States Coast Guard issued interim final
regulations dealing with financial responsibility for water pollution under
OPA 90 and CERCLA. The regulations require self-propelled tank vessel
owners and operators to maintain evidence of financial responsibility,
effective December 28, 1994, sufficient to meet their potential liability
defined under OPA 90 and CERCLA for spills of oil or hazardous substances.
The Director, Coast Guard National Pollution Funds Center, has granted
permission to Ashland to self-insure the financial responsibility amount
for liability purposes for Ashland's ocean tankers, as provided in OPA 90.
The Federal Clean Air Act required the refining industry to market
cleaner-burning, reformulated gasoline ("RFG") beginning January 1, 1995,
for use in nine specified metropolitan areas across the country. Ashland
does not directly supply gasoline in any of the nine metropolitan areas.
However, several urban locations within Ashland's marketing area have opted
into the RFG program, and Ashland has been able to meet expected demand for
RFG in its marketing area. The Clean Air Act also required the refining
industry to supply 39 carbon monoxide (CO) non-attainment areas with
gasoline containing 2.7 weight percent oxygen for four winter months each
year. Upon being re-designated CO attainment, several of these areas are
seeking to opt-out of the oxygenated gasoline requirements. Ashland
believes it will have a continuing need to supply oxygenated gasoline only
at St. Paul Park, Minnesota, whose primary market is a CO non-attainment
area.
10
RCRA, which requires management of hazardous waste, is scheduled to be
reauthorized by Congress, although timing of such reauthorization is
uncertain. Reauthorization issues may include an expansion of hazardous
waste program coverage, recycling, used oil, and solid waste management.
These issues may be addressed in additional USEPA rulemakings unrelated to
the statutory reauthorization efforts. It is anticipated that both the
reauthorization and other future rulemakings will result in increased
environmental compliance costs which cannot currently be estimated.
RESEARCH
Ashland conducts a program of research and development to invent and
improve products and processes and to improve environmental controls for
its existing facilities. It maintains its primary research facilities in
Catlettsburg, Kentucky, and Dublin, Ohio. Research and development costs
are expensed as incurred ($29 million in 1997, $28 million in 1996 and $24
million in 1995).
COMPETITION
In all of its operations, Ashland is subject to intense competition
both from companies in the respective industries in which it operates and
from products of companies in other industries. In most of these segments,
competition is based primarily on price, with factors such as reliability
of supply, service and quality being considered. Ashland Chemical competes
in a number of chemical distribution, specialty chemical and petrochemical
markets. Its chemicals and solvents distribution businesses compete with
national, regional and local companies throughout North America. Its
plastics distribution businesses compete worldwide. Ashland Chemical's
specialty chemicals businesses compete globally in selected niche markets,
largely on the basis of technology and service, while holding proprietary
technology in virtually all their specialty chemicals businesses.
Petrochemicals are largely commodities, with pricing and quality being the
most important factors. Valvoline competes primarily with domestic oil
companies and, to a lesser extent, with international oil companies on a
worldwide basis. Valvoline's brand recognition and increasing market share
in the "fast oil change" market are important competitive factors.
The majority of the business for which APAC competes is obtained by
competitive bidding. Ashland Petroleum competes primarily with other
domestic refiners and, to a lesser extent, with imported products.
Ashland's refineries are located close to its market areas, giving the
Company a geographic advantage in supplying these areas. While some
integrated competitors have sources of controlled crude production, few
competitors in Ashland Petroleum's market areas are significantly crude
self-sufficient. SuperAmerica competes with major oil companies,
independent oil companies and independent marketers. Virtually all of
SuperAmerica's refined products are supplied by Ashland Petroleum.
SuperAmerica strives to provide high quality and efficient service and
enjoys gasoline and merchandise sales per store exceeding the convenience
store industry average, based on the 1997 National Association of
Convenience Store State of the Industry Survey. The coal industry is highly
competitive, and Arch Coal competes (principally in price, location and
quality of coal) with a large number of other coal producers, some of which
are substantially larger and have greater financial resources and larger
reserve bases than Arch Coal.
FORWARD LOOKING STATEMENTS
This Form 10-K, and the documents incorporated by reference, contain
forward-looking statements within the meaning of Section 27A of the
Securities and Exchange Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including various information within the Capital
Resources, Derivative Instruments and Outlook sections in Management's
Discussion and Analysis in Ashland's Annual Report. Although Ashland
believes that its expectations are based on reasonable assumptions, it
cannot assure that the expectations contained in such statements will be
achieved. Important factors which could cause actual results to differ
materially from those contained in such statements are discussed
immediately below, as well as in other portions of this Form 10-K and in
Note A to the Consolidated Financial Statements under risks and
uncertainties in Ashland's Annual Report.
Ashland's operations are affected by domestic and international
political, legislative, regulatory and legal actions. Such actions may
include changes in the policies of OPEC or other developments involving or
affecting oil-producing countries, including military conflict, embargoes,
internal instability or actions or reactions of the government of the
United States in anticipation of or in response to such developments.
Domestic and international economic conditions, such as recessionary
trends, inflation, interest and monetary exchange rates, as well as changes
in the availability and market prices of crude oil and petroleum products,
can also have a significant effect on Ashland's operations. While Ashland
maintains reserves for anticipated liabilities and carries various levels
of insurance, Ashland could be affected by civil, criminal, regulatory or
administrative actions, claims or proceedings. In addition, climate and
weather can significantly affect Ashland in several of its operations such
as its construction, heating oil and coal businesses.
11
ITEM 2. PROPERTIES
Ashland's corporate headquarters, which is leased, and the principal
location of Ashland Petroleum, which is owned, are located in Russell,
Kentucky. Principal offices of other major operations are located in
Lexington, Kentucky (SuperAmerica and Valvoline); Dublin, Ohio (Chemical);
Atlanta, Georgia (APAC); and St. Louis, Missouri (Arch Coal), all of which
are leased. Ashland's principal manufacturing, marketing and other
materially important physical properties are described under the
appropriate segment under Item 1. Additional information concerning certain
leases may be found in Note I of Notes to Consolidated Financial Statements
in Ashland's Annual Report.
ITEM 3. LEGAL PROCEEDINGS
ENVIRONMENTAL PROCEEDINGS - (1) As of September 30, 1997, Ashland had
been identified as a "potentially responsible party" ("PRP") under
Superfund or similar state laws for potential joint and several liability
for cleanup costs in connection with alleged releases of hazardous
substances in connection with 78 waste treatment or disposal sites. These
sites are currently subject to ongoing investigation and remedial
activities, overseen by the USEPA or a state agency, in which Ashland may
be participating as a member of various PRP groups. Generally, the type of
relief sought includes remediation of contaminated soil and/or groundwater,
reimbursement for the costs of site cleanup or oversight expended, and/or
long-term monitoring of environmental conditions at the sites. Ashland
carefully monitors the investigatory and remedial activity at many of these
sites. Based on its experience with site remediation, its familiarity with
current environmental laws and regulations, its analysis of the specific
hazardous substances at issue, the existence of other financially viable
PRPs and its current estimates of investigatory, clean-up and monitoring
costs at each site, Ashland believes that its liability at these sites,
either individually or in the aggregate, after taking into account
established reserves, will not have a material adverse effect on Ashland's
consolidated financial position, cash flow or liquidity. Estimated costs
for these matters are recognized in accordance with generally accepted
accounting principles governing the likelihood that costs will be incurred
and Ashland's ability to reasonably estimate future costs. For additional
information regarding Superfund, see "Miscellaneous - Governmental
Regulation and Action-Environmental Protection".
(2) On March 19, 1996, after consultation with the USEPA, the Kentucky
Division for Air Quality issued a finding that Ashland had not demonstrated
compliance with certain air regulations governing emissions of volatile
organic compounds ("VOC") at its Catlettsburg, Kentucky refinery, and
referred the matter to USEPA - Region IV for formal enforcement action. On
May 27, 1997, Kentucky and Ashland entered into an Agreed Order resolving
the issues in contention. Under the terms of the Agreed Order, Ashland
agreed to pay a civil penalty and to design, construct and install
additional VOC controls. Separately, the USEPA issued a Notice of Violation
to Ashland regarding this matter.
(3) In the fall of 1996, the USEPA conducted multimedia inspections of
Ashland's three refineries. Over the past several months, the USEPA and
Ashland have engaged in discussions to resolve the issues identified during
these inspections. The parties have reached a tentative agreement and have
begun the process of drafting a settlement document. Resolution is expected
to involve both a penalty payment and environmental projects. Ashland
expects to finalize the settlement agreement before the end of calendar
year 1997 or early calendar 1998.
(4) On October 24, 1996, the rock strata overlaying an abandoned
underground mine adjacent to the coal-refuse impoundment used by an Arch
Coal subsidiary's preparation plant failed, resulting in an accidental
discharge of approximately 6.3 million gallons of water and fine coal
slurry into a tributary of the Powell River in Lee County, Virginia. As a
consequence, the Director of the State Water Control Board and the
Department of Mines, Minerals and Energy of the Commonwealth of Virginia
filed a suit in Lee County Virginia Circuit Court against the Arch Coal
subsidiary, Lone Mountain Processing, Inc., alleging violations of effluent
limitations and reporting violations under Lone Mountain's National
Pollutant Discharge Elimination System permits under the Clean Water Act.
The Commonwealth of Virginia agreed to vacate two notices of violation and
a show cause order in exchange for Lone Mountain's payment to the
Commonwealth of a fine of approximately $1.4 million. A final order
effectuating the settlement was entered as a judgment by the court on
October 29, 1997. At the request of the USEPA and the U.S. Fish & Wildlife
Service, the United States Attorney for the Western District of Virginia
also has opened a criminal investigation of the 1996 incident. Arch Coal is
cooperating with the investigation, the results of which are not expected
until sometime in calendar 1998.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders through the
solicitation of proxies or otherwise, during the quarter ended September
30, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
There is hereby incorporated by reference the information appearing in
Note N of Notes to Consolidated Financial Statements in Ashland's Annual
Report.
At September 30, 1997, there were approximately 22,000 holders of
record of Ashland's Common Stock. Ashland Common Stock is listed on the New
York and Chicago stock exchanges (ticker symbol ASH) and has trading
privileges on the Boston, Cincinnati, Pacific, Philadelphia and Amsterdam
stock exchanges.
ITEM 6. SELECTED FINANCIAL DATA
There is hereby incorporated by reference the information appearing
under the caption "Five-Year Selected Financial Information" on Page 61 in
Ashland's Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
There is hereby incorporated by reference the information appearing
under the caption "Management's Discussion and Analysis" on Pages 36 to 42
in Ashland's Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There is hereby incorporated by reference the information appearing
under the caption "Derivative Instruments" on Page 41 in Ashland's Annual
Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
There is hereby incorporated by reference the consolidated financial
statements appearing on Pages 43 through 59 and the supplemental
information appearing on Pages 62 and 63 in Ashland's Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated by reference the information to appear
under the caption "Election of Directors" in Ashland's definitive Proxy
Statement for its January 29, 1998 Annual Meeting of Shareholders, which
will be filed with the SEC within 120 days after September 30, 1997 ("Proxy
Statement").
The following is a list of Ashland's executive officers, their ages
and their positions and offices during the last five years (listed
alphabetically after the top two officers as to other Senior Vice
Presidents, Administrative Vice Presidents and other executive officers.)
PAUL W. CHELLGREN* (age 54) was elected as Chairman of the Board on
January 30, 1997, and is Chief Executive Officer and Director of Ashland
and a Director of Arch Coal, Inc. , having served in such capacities since
1996, 1992 and 1997 respectively. During the past five years, he has also
served as President and Chief Operating Officer of Ashland.
JOHN A. BROTHERS* (age 57) is Executive Vice President of Ashland and
has served in such capacity since January 1997. During the last five years,
he has also served as Senior Vice President and Group Operating Officer -
SuperAmerica Group, The Valvoline Company and Ashland Chemical Company.
- -----------------------
*Member of Ashland's Executive Committee
13
JAMES R. BOYD* (age 51) is Senior Vice President and Group Operating
Officer of Ashland - Ashland Services Company, APAC, Inc. and a Director of
Arch Coal, Inc., having served in such capacities since 1989, 1990, 1993
and 1997 respectively.
DAVID J. D'ANTONI* (age 52) is Senior Vice President of Ashland and
President of Ashland Chemical Company and has served in such capacities
since 1988.
THOMAS L. FEAZELL* (age 60) is Senior Vice President, General Counsel
and Secretary of Ashland and a Director of Arch Coal, Inc. and has served
in such capacities since 1992, 1981, 1992 and 1997, respectively.
D. DUANE GILLIAM* (age 53) is Senior Vice President of Ashland and
President of Ashland Petroleum Company and has served in such capacities
since October 1997. During the past five years he has also served as
Executive Vice President of Ashland Petroleum Company and Group Vice
President for Ashland Petroleum's Scurlock Permian division.
J. MARVIN QUIN* (age 50) is Senior Vice President and Chief Financial
Officer of Ashland and a Director of Arch Coal, Inc. and has served in such
capacities since 1992 and 1997, respectively.
HARRY M. ZACHEM* (age 53) is Senior Vice President - Public Affairs
and has served in such capacity since 1988.
JAMES J. O'BRIEN (age 43) is Senior Vice President of Ashland and
President of The Valvoline Company and has served in such capacities since
January 1997 and October 1995, respectively. During the past five years he
has also served as Vice President of Ashland, Vice President of Ashland
Petroleum Company, Executive Assistant to the Chief Executive Officer and
Regional Manager of Ashland Chemical's General Polymers division.
JOHN F. PETTUS (age 54) is Senior Vice President of Ashland and
President of SuperAmerica Group and has served in such capacities since
1989 and 1988, respectively.
CHARLES F. POTTS (age 53) is Senior Vice President of Ashland and
President of APAC, Inc. and has served in such capacities since 1992.
KENNETH L. AULEN (age 48) is Administrative Vice President and
Controller of Ashland and has served in such capacities since 1992. During
the past five years he has also served as Auditor of Ashland.
PHILIP W. BLOCK* (age 50) is Administrative Vice President - Human
Resources of Ashland and has served in such capacity since 1992.
JOHN W. DANSBY (age 52) is Administrative Vice President and Treasurer
of Ashland and has served in such capacities since 1992.
WILLIAM R. SAWRAN (age 52) is Vice President and Chief Information
Officer of Ashland, and President of Ashland Services Company and has
served in such capacities since 1984, with the exception of Chief
Information Officer which he assumed in 1994.
WILLIAM P. TIEFEL (age 48) is Vice President of Ashland and President
of Ashland Exploration Holdings, Inc. and has served in such capacities
since February 1997.
FRED E. LUTZEIER (age 45) is Auditor of Ashland and has served in such
capacity since December 1992. During the past five years he has also served
as Vice President and Controller of Arch Mineral Corporation.
Each executive officer (other than Vice Presidents who are appointed
by Ashland's management) is elected by the Board of Directors to a term of
one year, or until the successor is duly elected, at the annual meeting of
the Board of Directors, except in those instances where the officer is
elected at other than an annual meeting of the Board of Directors, in which
case the tenure will expire at the next annual meeting of the Board of
Directors unless the officer is re-elected.
- --------------------------
*Member of Ashland's Executive Committee
14
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information to appear
under the captions "Executive Compensation" and "Compensation of Directors"
in Ashland's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference the information to appear
under the caption "Election of Directors" and the information regarding the
ownership of securities of Ashland in Ashland's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information to appear
under the caption "Compensation Committee Interlocks and Insider
Participation" in Ashland's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) and (2) Financial Statements and Financial Schedule
The consolidated financial statements and financial schedule of
Ashland presented or incorporated by reference in this report are listed in
the index on Page 19.
(3) Exhibits
3.1 - Second Restated Articles of Incorporation of Ashland, as
amended to May 16, 1996 (filed as Exhibit 3.1 to Ashland's
Form 8-K dated May 16, 1996, and incorporated herein by
reference).
3.2 - Bylaws of Ashland, as amended to January 30, 1997 (filed as
Exhibit 3.2 to Ashland's Form 10-Q for the quarter ended
December 31, 1996, 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(a) to
Ashland's Form 10-K for the fiscal year ended September 30,
1991, and incorporated herein by reference).
4.3 - Rights Agreement, dated as of May 16, 1996, between Ashland
Inc. and Harris Trust and Savings Bank, together with Form
of Right Certificate (filed as Exhibits 4(a) and 4(c),
respectively, to Ashland's Form 8-A filed with the SEC on
May 16, 1996, and incorporated herein by reference).
The following Exhibits 10.1 through 10.18 are compensatory plans or
arrangements or management contracts required to be filed as exhibits
pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K.
10.1 - Amended Stock Incentive Plan for Key Employees of Ashland
Inc. and its Subsidiaries (filed as Exhibit 10(c).1 to
Ashland's Form 10-K for the fiscal year ended September 30,
1996, and incorporated herein by reference).
10.2 - Ashland Inc. Deferred Compensation and Stock Incentive Plan
for Non-Employee Directors.
10.3 - Ashland Inc. Director Retirement Plan (filed as Exhibit
10(c).3 to Ashland's Form 10-K for the fiscal year ended
September 30, 1988, and incorporated herein by reference).
10.4 - Ninth Amended and Restated Ashland Inc. Supplemental Early
Retirement Plan for Certain Key Executive Employees.
10.5 - Ashland Inc. Amended Performance Unit Plan (filed as Exhibit
10(c).5 to Ashland's Form 10-K for the fiscal year ended
September 30, 1994, and incorporated herein by reference).
15
10.6 - Ashland Inc. Incentive Compensation Plan (filed as Exhibit
10(c).6 to Ashland's Form 10-K for the fiscal year ended
September 30, 1993, and incorporated herein by reference).
10.7 - Ashland Inc. Director Death Benefit Program (filed as
Exhibit 10(c).10 to Ashland's Form 10-K for the fiscal year
ended September 30, 1990, and incorporated herein by
reference).
10.8 - Ashland Inc. Salary Continuation Plan (filed as Exhibit
10(c).11 to Ashland's Form 10-K for the fiscal year ended
September 30, 1988, and incorporated herein by reference).
10.9 - Forms of Ashland Inc. Executive Employment Contract between
Ashland Inc. and certain executive officers of Ashland
(filed as Exhibit 10(c).12 to Ashland's Form 10-K for the
fiscal year ended September 30, 1989, and incorporated
herein by reference).
10.10 - Form of Indemnification Agreement between Ashland Inc. and
each member of its Board of Directors (filed as Exhibit
10(c).13 to Ashland's Form 10-K for the fiscal year ended
September 30, 1990, and incorporated herein by reference).
10.11 - Ashland Inc. Nonqualified Excess Benefit Pension Plan.
10.12 - Ashland Inc. Long-Term Incentive Plan (filed as Exhibit
10(c).12 to Ashland's Form 10-K for the fiscal year ended
September 30, 1996, and incorporated herein by reference).
10.13 - Ashland Inc. Directors' Charitable Award Program (filed as
Exhibit 10(c).13 to Ashland's Form 10-K for the fiscal year
ended September 30, 1996, and incorporated herein by
reference).
10.14 - Ashland Inc. 1993 Stock Incentive Plan (filed as Exhibit
10(c).14 to Ashland's Form 10-K for the fiscal year ended
September 30, 1996, and incorporated herein by reference).
10.15 - Ashland Inc. 1995 Performance Unit Plan (filed as Exhibit
10(c).15 to Ashland's Form 10-K for the fiscal year ended
September 30, 1996, and incorporated herein by reference).
10.16 - Ashland Inc. Incentive Compensation Plan for Key Executives
(filed as Exhibit 10(c).16 to Ashland's Form 10-K for the
fiscal year ended September 30, 1996, and incorporated
herein by reference).
10.17 - Ashland Inc. Deferred Compensation Plan.
10.18 - Ashland Inc. 1997 Stock Incentive Plan.
11 - Computation of Earnings Per Share (appearing on Page 22 of
Ashland's Form 10-K for the fiscal year ended September 30,
1997).
13 - Portions of Ashland's Annual Report to Shareholders,
incorporated by reference herein, for the fiscal year ended
September 30, 1997.
21 - List of Subsidiaries.
23 - Consent of independent auditors.
24 - Power of Attorney, including resolutions of the Board of
Directors.
27 - Financial Data Schedule.
Upon written or oral request, a copy of the above exhibits will be
furnished at cost.
(B) REPORTS ON FORM 8-K
None
16
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/ Kenneth L. Aulen
---------------------------------
(Kenneth L. Aulen, Administrative
Vice President and Controller)
Date: November 25, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant, in the capacities indicated, on November 25, 1997.
Signatures Capacity
/s/ PAUL W. CHELLGREN
- -------------------- Chairman of the Board, Chief Executive Officer
PAUL W. CHELLGREN and Director
/s/ J. MARVIN QUIN
- -------------------- Senior Vice President and Chief
J. MARVIN QUIN Financial Officer
/s/ KENNETH L. AULEN
- -------------------- Administrative Vice President,
KENNETH L. AULEN Controller and Principal Accounting Officer
* Director
- --------------------
JACK S. BLANTON
* Director
- --------------------
THOMAS E. BOLGER
* Director
- --------------------
SAMUEL C. BUTLER
* Director
- --------------------
FRANK C. CARLUCCI
* Director
- --------------------
RALPH E. GOMORY
* Director
- --------------------
MANNIE L. JACKSON
* Director
- --------------------
PATRICK F. NOONAN
* Director
- --------------------
JANE C. PFEIFFER
17
* Director
- --------------------
MICHAEL D. ROSE
* Director
- --------------------
WILLIAM L. ROUSE , JR.
* Director
- --------------------
ROBERT B. STOBAUGH
* BY: /S/ THOMAS L. FEAZELL
------------------------
THOMAS L. FEAZELL
ATTORNEY-IN-FACT
DATE: November 25, 1997
18
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL SCHEDULES
Page
Consolidated financial statements and supplemental information:
Statements of consolidated income................................ *
Consolidated balance sheets...................................... *
Statements of consolidated stockholders' equity.................. *
Statements of consolidated cash flows............................ *
Notes to consolidated financial statements....................... *
Five-year information by industry segment........................ *
Consolidated financial schedule:
II - Valuation and qualifying accounts........................... 21
- -----------
*The consolidated financial statements appearing on Pages 43 through
59 and the supplemental information appearing on Pages 61 through 63 in
Ashland's Annual Report are incorporated by reference in this Annual Report
on Form 10-K.
Schedules other than that listed above have been omitted because
of the absence of the conditions under which they are required or because
the information required is shown in the consolidated financial statements
or the notes thereto. Separate financial statements of unconsolidated
affiliates are omitted because each company does not constitute a
significant subsidiary using the 20% tests when considered individually.
Summarized financial information for such affiliates is disclosed in Note D
of Notes to Consolidated Financial Statements in Ashland's Annual Report.
19
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements and schedule of
Ashland Inc. and subsidiaries listed in the accompanying index to financial
statements and financial schedules (Item 14(a)). These financial statements
and schedule are the responsibility of Ashland's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements listed in the accompanying
index to financial statements (Item 14(a)) present fairly, in all material
respects, the consolidated financial position of Ashland Inc. and
subsidiaries at September 30, 1997 and 1996, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended September 30, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note A to the consolidated financial statements, in
fiscal 1995 Ashland changed its method of accounting relative to
impairments of long-lived assets.
ERNST & YOUNG LLP
Louisville, Kentucky
November 5, 1997
20
- --------------------------------------------------------------------------------------------------------------------------------
Ashland Inc. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
=================================================================================================================================
(In millions) Balance at Provisions Balance
beginning charged to Reserves Other at end
Description of year earnings utilized changes of year
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1997
Reserves deducted from asset accounts
Accounts receivable $27 $ 8 $(10)(1) $ (1) $24
Inventories 10 2 (1) - 11
=================================================================================================================================
YEAR ENDED SEPTEMBER 30, 1996
Reserves deducted from asset accounts
Accounts receivable $25 $10 $ (8)(1) $ - $27
Inventories 6 6 (2) - 10
=================================================================================================================================
YEAR ENDED SEPTEMBER 30, 1995
Reserves deducted from asset accounts
Accounts receivable $23 $ 9 $ (7)(1) $ - $25
Inventories 6 3 (3) - 6
=================================================================================================================================
(1) Uncollected amounts written off, net of recoveries of $2 million in 1997, $2 million in 1996 and $1 million in 1995.
21
Ashland Inc. and Subsidiaries
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
Years Ended September 30
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions except per share data) 1997 1996 1995
====================================================================================================================================
PRIMARY EARNINGS PER SHARE
Income available to common shares
Net income $ 279 $ 211 $ 24
Dividends on convertible preferred stock (9) (19) (19)
- ------------------------------------------------------------------------------------------------------------------------------------
$ 270 $ 192 $ 5
- ------------------------------------------------------------------------------------------------------------------------------------
Average common shares and equivalents outstanding
Average common shares outstanding 70 64 62
Common shares issuable upon exercise of stock options 1 1 -
- ------------------------------------------------------------------------------------------------------------------------------------
71 65 62
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per share $3.80 $2.97 $ .08
====================================================================================================================================
EARNINGS PER SHARE ASSUMING FULL DILUTION
Income available to common shares
Net income $ 279 $ 211 $ 24
Interest on convertible debentures (net of income taxes) - 5 -
Dividends on convertible preferred stock - - (19)
- ------------------------------------------------------------------------------------------------------------------------------------
$ 279 $ 216 $ 5
- ------------------------------------------------------------------------------------------------------------------------------------
Average common shares and equivalents outstanding
Average common shares outstanding 70 64 62
Common shares issuable upon
Exercise of stock options 2 1 1
Conversion of debentures - 3 -
Conversion of preferred stock 4 9 -
- ------------------------------------------------------------------------------------------------------------------------------------
76 77 63
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per share $3.67 $2.82 $ .08
====================================================================================================================================
22