Paul Chellgren
Chairman and Chief Executive Officer of Ashland, Inc.

In 1997, Ashland, Inc. elected to merge Ashland Petroleum, a company comprised of three refineries, 641 Super America stores and 125 Rich Oil Stations, into a new joint venture company of which Ashland and Marathon/USX Corporation would own 38 percent and 62 percent, respectively. The new joint venture, Marathon Ashland Petroleum LLC (MAPL), is expected to achieve cost savings in excess of $200 million a year.

MAPL will have six percent of total U.S refining capacity; more than 5,400 retail marketing outlets in 20 states; 10,600 miles of pipelines; $7 billion in assets; and annual sales in excess of $20 billion. Some Ashland, Inc. employees in Ashland and Lexington will move to Findlay, Ohio, which will be the location of the company's corporate headquarters.

After merging the refining and marketing segment of its business with Marathon, Ashland, Inc. will wholly operate Ashland Chemical (a plastics and chemical distributor, and specialty chemical producer), Valvoline (motor oils, Zerex, Pyroil and Valvoline Instant Oil Change Centers), APAC (a highway construction contractor), and own 54 percent of ARCH COAL (a publicly-traded producer of low sulfur coal).

In 1997, Ashland sold its domestic oil and gas properties to the Eastern Group for $566 million and completed the merger of Ashland Coal and Arch Mineral. By reducing debt and increasing stockholders equity, debt as a percentage of capital declined to 43 percent from 50 percent at the end of fiscal year 1996.

If Marathon Ashland Petroleum LLC successfully maintains pre-joint venture sales levels and improves operating efficiencies by $200 million dollars annually, Ashland's operating income from the joint venture could increase substantially (38 percent of $200 million or $76 million). Company officials say these increases may take several years to achieve because of reorganization costs. The profitability of the refining business has traditionally been volatile because of world market forces that can cause crude oil, refining, and marketing costs to exceed the retail prices of gasoline and oil.

On January 3, 1998, shortly after the Marathon – Ashland merger was completed, Paul W. Chellgren, chairman and chief executive officer of Ashland, Inc. discussed the newly-reformulated, higher octane Ashland, Inc.

Merging Ashland's core business of refining and marketing (which accounted for almost 50 percent of Ashland's 1997 annual sales) with Marathon makes a powerful statement that the company is repositioning for the future. What were the key factors in Ashland lnc.'s decision to restructure and reposition its business?

You are right that historically the refining and marketing business has been Ashland's core business. We have not disinvested from the business; we have not withdrawn from the business. Ashland has changed the nature of its ownership. We have moved this unit of Ashland from a 100 percent-owned entity of a certain size to 38 percent-owned entity of essentially two-and-a-half times that size. Ashland will still be the largest customer by far of the new company – Marathon Ashland Petroleum LLC (MAPL).

Your question is why have we done what we did. The answer to that is a complex one. This is a mature business growing at perhaps one percent a year in volumetric real terms. It is a business that is very capital intensive. It is a business that is increasingly economically transparent and competitive with the futures markets. It is a business with some very low cost competitors and lots of industry changes. It is also a business driven by the capital requirements of the 1990 Clean Air Act. Ashland and a number of its competitors have gone through a reappraisal and individually have decided that a very dramatic structural change was necessary to try to improve each company's performance and to be responsive and proactive to industry trends, to be on the offense in this business rather than be on the defense, to be a consolidator in a business that is in a dramatic way constantly trying to consolidate – like mature industries normally do.

Obviously, a major goal was to increase Ashland's profitability. How will shareholders benefit?

In the short term, shareholders will be benefited by what we anticipate is dramatically improved performance, increased operating income, and net free cash flow coming from our refining and marketing sector. Additionally, shareholders will benefit because the investment community will perceive that Ashland (in the financial sense) has reduced its exposure to this business. We still own it, we still have exposure to the volatility, but we are detached from it in terms of it having any calls on the parent company's credit rating and cash flow.

What, if any, are the negative aspects of the joint venture?

There are certainly some. The very real one is the social cost that Ashland is incurring, especially in Ashland, Kentucky. There will be job losses and a number of jobs will be transferred out of Ashland, Kentucky to the headquarters of the joint venture, which will be Findlay, Ohio. We have made some preliminary estimates of those numbers and that is a very real, very painful, difficult issue with which to deal. The second one is the loss of autonomy and independence, the ability to do things unilaterally instead of through consensus.

How many employees of Ashland, Inc. will be employed by the joint venture?

Ashland has about 35,000 total employees. Of course that includes Super America. Something between 14,000 to 15,000 will be transferred to MAPL. So Ashland Inc. will be left with something over 20,000 employees.

With regard to managers and staff that work in the Ashland and the Lexington corporate offices, do you have any estimates on those?

Currently, in both Ashland and Lexington there are approximately 1,000 employees.

If in the future the joint venture does not work out, do the merger partners have a sort of prenuptial agreement?

Yes, but we tend to look at the joint venture more on the positive side rather than the negative side.

Will Ashland and Super America stations operate under the Marathon trademark after the joint venture is completed?

The branding strategy has not been determined. Because of the nature of anti-trust regulations, the corporate management of both companies could not talk about marketing until the merger was completed.

In deciding to reorganize Ashland, how much bearing did input from shareholders, directors, outside consultants and corporate managers have on the initial decision to reorganize, as well as decisions relating to the final restructuring?

You can't quantitatively weigh or measure them individually. Many of the ideas relating to restructuring are ones that management has been working on for many years.

When Ashland's top management reached the point where it was serious about finalizing the joint venture, about how long a period of time transpired from when you first thought you had a deal made to when you finally decided to do it?

Ashland and Marathon have known each other from the beginning of time from a competitive point of view. We do joint ventures together – pipelines and terminals. The number of potential candidates for a joint venture is not long. If you are looking for synergy the list gets very short. Marathon was head and shoulders the most attractive joint venture candidate for us. There was no one else to compare in terms of the geographic and business culture overlaps. The first hard discussions to explore this combination occurred in November of 1996. We then jointly agreed to get some financial advisors to put the numbers together using a common valuation methodology. We did it with a very small group of people from November of '96 till May of '97, when we signed the comprehensive letter of intent.

Since the announcement of the deal with Marathon, has Ashland, Inc. been approached by any city or state regarding relocation of the company's corporate headquarters?

Ashland's two big operational headquarters (Ashland Chemical and Valvoline) will be located in a suburb of Columbus, Ohio (Dublin) and Lexington, respectively. We have no current plans to move Ashland's corporate headquarters out of Ashland. One never says never, but there are no current plans. There have been a few questions asked by officials as to whether that matter is under consideration and our response has been that we have no current plans.

As you are aware Kentucky offers major incentives for companies to move corporate headquarters and white collar jobs to the state. Do you think there is any chance that the joint venture will consider Kentucky for its headquarters?

I don't think it will change from Findlay, Ohio. Marathon is the majority owner of the company.

In looking at the big perspective, would it be accurate to state that Ashland, Inc. is changing to an international marketing company from a regional energy company?

That would tend to be true for Ashland Chemical and Valvoline. Our road construction company, APAC – a very important, very profitable, and very high-return part of our company – would be an exception in that it operates only in the United States.

Which remaining divisions of Ashland, Inc. offer the highest potential for future profitability?

The three wholly-owned businesses that we have left (Ashland Chemical, Valvoline, or APAC) each in their own way offer opportunity. Our highest return business is APAC, our road construction business that is headquartered in Atlanta. Ashland is going to aggressively grow its business. We have announced some acquisitions. We hope to do some more.

How aggressively will Ashland, Inc. seek to acquire additional products/services or to merge with existing businesses/products?

Ashland will have $100 million of acquisitions in the next 60 days. We are not a company that historically has done big deals. Our greatest success has been doing a lot of small transactions and growing them into bigger businesses.

As when Valvoline acquired Zerex and Pyroil?

Yes, that's right. At Valvoline the real thrust is in two areas: to internationalize the brand and to develop car care products and chemicals. The domestic motor oil business is mature and growth is limited. However, that is not the situation for Valvoline internationally.

What is Ashland's goal to increase profits?

We have not articulated a specific percentage goal. What we have said is that we would like to be a top quartile performer compared with the S&P 500 in terms of delivering total return to our shareholders. Total return is defined as increase in stock price and dividends.

Is the Valvoline Instant Oil Change (VIOC) division capital intensive?

Yes. And that is one of the reasons that the focus at VIOC tends to be in franchising. Each unit can cost $500 thousand including land.

Is Ashland Chemical a marketing or manufacturing company?

A marketing company, primarily. We are almost never the producer of the basic chemical. Ashland buys in bulk, we repackage; we are a supermarket for chemicals and related products. We are broadening that quite a bit. Just this past year, we have moved quite aggressively into what we call the fine ingredients business (food grade chemicals, toiletries, cosmetics, and pharmaceutical raw materials). Ashland has positioned its business in sectors of the economy that nave: a) rapid growth, b) less volatility, and c) higher market shares.

With so much public emphasis on conservation, what is Ashland, Inc. doing to protect the environment and what effect does this have on company profits?

We pride ourselves on being a very responsible company in environmental stewardship. In APAC, we are the largest producer of recycled asphalt payment. In Valvoline, we are the leading collector of used motor oil and the recycles of used motor oil. In our chemical company again we are a major backhauler of spent chemicals. We are not the disposer because we don't have toxic waste disposal sites, but we will collect and take it to the sites owned by others.

Will Ashland's outstanding efforts to promote education in Kentucky be affected significantly by the restructuring?

We don't think the restructuring will diminish our efforts to promote education in Kentucky. The form and structure may change somewhat because Super America will be in a different entity. But the resources available in the corporation will still be there.

What do you consider will be the three top issues that Kentucky will face during the next 20 years?

The top two are probably going to be education and jobs. For number three, you have a lot of things to argue about. The top two are really linked in many ways. I think we have received excellent leadership in the state of Kentucky from our governor and some other responsible public officials. Also, we have involved, private-sector leadership at a lot of different levels. Kentucky has some excellent opportunities. For example, reforming the community colleges and the vocational technical schools is quite constructive and can lead to a well-educated work force that attracts employers and creates jobs.

How do you rate Governor Paul Patton's overall job performance?

I think Paul Patton is smart and hard working. He is focused and dedicated. He has shown an ability to focus on specific issues. As an engaged observer, I think he has shown an extremely strong performance in the couple of years he has been governor. He has been almost everything anyone could hope for.

The state has proposed development of a major business park in Eastern Kentucky. The park would endeavor to attract employers and create jobs for a six- to eight-county area where unemployment is high. Do you have any comment on that?

Ashland, Inc. staff have followed the development of the proposal, but I am not familiar with the specific details of the project. Occasionally seed money can be constructive. I would not build infrastructure other than utilities and roads. If more than that is planned, I would generally be opposed to constructing office buildings, plants, physical facilities and then search for someone to occupy them. I guess I am not a great believer in the field of dreams approach to economic development, the "build it and they will come" strategy. Individual employers and economic enterprises better understand their own needs. In a competitive sense, most economic development still occurs from indigenous growth with existing employers. It's that two jobs here and five jobs there that really counts.

How would you assess Ashland, lnc.'s economic future?

I am about as positive and upbeat as I have been in a long time about the prospects for the company.

Ed G. Lane is chief executive of Lane Consultants, Inc. and publisher of The Lane Report.

Back to February Issue

Back to One-on-One Index

Copyright 1996-98, by Kentucky Business Online, LLC.  All rights reserved.

Editorial content is copyright 1998, Lane Communications Group
All editorial materials is fully protected and must not be reproduced in any manner without prior permission. 

Buzzword and the Buzzword balloon are registered trademarks of Buzzword, Inc.  The Lane Report is a trademark of Lane Communications Group.  All other trademarks are the property of their respective owners.