SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
________________
For the quarterly period ended June 30, 1994
Commission file number 1-1196
________________
ATLANTIC RICHFIELD COMPANY
(Exact name of registrant as specified in its charter)
_________________
Delaware 23-0371610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
515 South Flower Street
Los Angeles, California 90071
(Address of principal executive offices) (Zip code)
__________________
(213) 486-3511
(Registrant's telephone number, including area code)
__________________
Not Applicable
(Former name, former address and former fiscal
year, if changed since last report)
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 pre-ceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares of Common Stock, $2.50 par value, outstanding as of
June 30, 1994: 160,604,859.
PART I. FINANCIAL INFORMATION
ATLANTIC RICHFIELD COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended Six Months Ended
June 30, June30,
------------------ ----------------
1994 1993 1994 1993
---- ---- ---- ----
(Millions of dollars except
per share amounts)
Revenues
Sales and other operating revenues,
including excise taxes . . . . . . $4,174 $4,670 $7,974 $9,177
Income from equity investments . . . 24 - 41 15
Interest . . . . . . . . . . . . . . 56 37 101 79
Other revenues . . . . . . . . . . . 83 193 146 297
----- ----- ----- -----
4,337 4,900 8,262 9,568
----- ----- ----- -----
Expenses
Trade purchases. . . . . . . . . . . 1,558 1,808 2,825 3,552
Operating expenses . . . . . . . . . 823 822 1,578 1,569
Exploration expenses (including
undeveloped leasehold
amortization). . . . . . . . . . . 91 148 195 284
Selling, general and administrative
expenses . . . . . . . . . . . . . 429 461 824 885
Taxes other than excise and
income taxes . . . . . . . . . . . 184 301 368 607
Excise taxes . . . . . . . . . . . . 382 336 742 626
Depreciation, depletion and
amortization . . . . . . . . . . . 414 387 835 786
Interest . . . . . . . . . . . . . . 187 176 371 356
Unusual items. . . . . . . . . . . . 249 - 249 -
----- ----- ----- -----
4,317 4,439 7,987 8,665
----- ----- ----- -----
Income before income taxes and
minority interest 20 461 275 903
Provision (benefit) for taxes on
income . . . . . . . . . . . . . . . (17) 182 80 355
Minority interest in earnings of
subsidiaries . . . . . . . . . . . . 13 8 22 17
----- ----- ----- -----
Net Income . . . . . . . . . . . . . . $ 24 $ 271 $ 173 $ 531
===== ===== ===== =====
Earned per Share . . . . . . . . . . . $ 0.14 $ 1.67 $ 1.06 $ 3.27
===== ===== ===== =====
Cash Dividends Paid per Share of
Common Stock . . . . . . . . . . . . $1.375 $1.375 $ 2.75 $ 2.75
===== ===== ===== =====
The accompanying notes are an integral part of these statements.
-1-
ATLANTIC RICHFIELD COMPANY
CONSOLIDATED BALANCE SHEET
June 30, December 31,
1994 1993
---- ----
(Millions of dollars)
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 1,009 $ 1,458
Short-term investments. . . . . . . . . . . . . 2,192 2,289
Accounts receivable . . . . . . . . . . . . . . 1,343 1,333
Inventories . . . . . . . . . . . . . . . . . . 843 914
Prepaid expenses and other current assets . . . 470 237
------ ------
Total current assets. . . . . . . . . . . . . . 5,857 6,231
------ ------
Investments and long-term receivables:
Investments accounted for on the equity
method. . . . . . . . . . . . . . . . . . . . 277 266
Other investments and long-term receivables . . 245 221
------ ------
522 487
------ ------
Fixed assets:
Property, plant and equipment . . . . . . . . . 31,958 31,494
Less accumulated depreciation, depletion
and amortization . . . . . . . . . . . . . . . 16,068 15,628
------ ------
15,890 15,866
------ ------
Deferred charges and other assets . . . . . . . . 1,270 1,310
------ ------
Total assets. . . . . . . . . . . . . . . . . . . $23,539 $23,894
====== ======
The accompanying notes are an integral part of these statements.
-2-
ATLANTIC RICHFIELD COMPANY
CONSOLIDATED BALANCE SHEET
June 30, December 31,
1994 1993
---- ----
(Millions of dollars)
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable . . . . . . . . . . . . . . . . . . $ 1,433 $ 1,510
Accounts payable. . . . . . . . . . . . . . . . . 970 1,091
Taxes payable, including excise taxes . . . . . . 350 272
Long-term debt due within one year. . . . . . . . 108 165
Accrued interest. . . . . . . . . . . . . . . . . 188 190
Other . . . . . . . . . . . . . . . . . . . . . . 1,121 1,107
------ ------
Total current liabilities . . . . . . . . . . . . 4,170 4,335
------ ------
Long-term debt. . . . . . . . . . . . . . . . . . . 7,021 7,089
Deferred income taxes . . . . . . . . . . . . . . . 2,667 2,779
Other deferred liabilities and credits. . . . . . . 3,322 3,177
Minority interest . . . . . . . . . . . . . . . . . 392 387
Stockholders' equity:
Preference stocks . . . . . . . . . . . . . . . . 1 1
Common stock. . . . . . . . . . . . . . . . . . . 402 402
Capital in excess of par value of stock . . . . . 650 661
Retained earnings . . . . . . . . . . . . . . . . 5,039 5,308
Pension liability adjustment. . . . . . . . . . . (33) (29)
Treasury stock, at cost . . . . . . . . . . . . . (15) (83)
Foreign currency translation. . . . . . . . . . . (77) (133)
------ ------
Total stockholders' equity. . . . . . . . . . . . 5,967 6,127
------ ------
Total liabilities and stockholders' equity. . . . . $23,539 $23,894
====== ======
The accompanying notes are an integral part of these statements.
-3-
ATLANTIC RICHFIELD COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended
June 30,
----------------
1994 1993
---- ----
(Millions of dollars)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 173 $ 531
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization . . . . . . . 835 786
Dry hole expense and undeveloped leasehold
amortization . . . . . . . . . . . . . . . . . . . . 96 172
Net gain on asset sales. . . . . . . . . . . . . . . . - (152)
Income from equity investments . . . . . . . . . . . . (41) (15)
Dividends from equity investments. . . . . . . . . . . 29 59
Noncash provisions greater than cash payments. . . . . 249 37
Deferred income taxes. . . . . . . . . . . . . . . . . (135) (2)
Net change in accounts receivable, inventories
and accounts payable. . . . . . . . . . . . . . . . . (128) (109)
Net change in other working capital accounts . . . . . (261) (166)
Other. . . . . . . . . . . . . . . . . . . . . . . . . (19) 40
----- -----
Net cash provided by operating activities. . . . . . 798 1,181
----- -----
Cash flows from investing activities:
Additions to fixed assets (including dry hole costs) . (846) (991)
Net cash provided (used) by short-term investments . . 94 (202)
Proceeds from asset sales. . . . . . . . . . . . . . . 46 286
Payments received on notes for sales of property . . . 48 -
Other. . . . . . . . . . . . . . . . . . . . . . . . . 83 (72)
----- -----
Net cash used by investing activities. . . . . . . . (575) (979)
----- -----
Cash flows from financing activities:
Repayments of long-term debt . . . . . . . . . . . . . (445) (624)
Proceeds from issuance of long-term debt . . . . . . . 276 5
Net cash provided (used) by notes payable. . . . . . . (105) 276
Dividends paid . . . . . . . . . . . . . . . . . . . . (442) (439)
Treasury stock contributed to benefit plans. . . . . . 56 28
Other. . . . . . . . . . . . . . . . . . . . . . . . . (19) (13)
----- -----
Net cash used by financing activities. . . . . . . . (679) (767)
----- -----
Effect of exchange rate changes on cash. . . . . . . . . 7 (39)
----- -----
Net decrease in cash and cash equivalents. . . . . . . . (449) (604)
Cash and cash equivalents at beginning of period . . . . 1,458 1,414
----- -----
Cash and cash equivalents at end of period . . . . . . . $1,009 $ 810
===== =====
The accompanying notes are an integral part of these statements.
-4-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE A. Unusual Items.
Unusual items included net charges of $249 million before tax related
to a restructure and personnel reductions announced by the Company on July
18, 1994. Approximately 2,000 jobs will be eliminated in 1994 and 1995,
including 750 in Alaska and reductions at corporate headquarters in Los
Angeles and other operating units.
NOTE B. Investments.
In May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company has adopted the
provisions of SFAS No. 115 for investments held as of or acquired after
January 1, 1994. Investments subject to this standard are required to be
carried at fair value, unless they are held to maturity. In accordance
with SFAS No. 115, prior period financial statements have not been restated
to reflect this change in accounting principle. The effect of adopting
SFAS No. 115 had no impact on income for the three-month and six-month
periods ended June 30, 1994.
As of June 30, 1994 and January 1, 1994, the Company held
approximately $1.0 billion and $1.6 billion, respectively, of investments
in debt securities classified as held-to-maturity. As of June 30, 1994 and
January 1, 1994, the Company held approximately $1.3 billion and $1.2
billion, respectively, of investments in debt securities classified as
available-for-sale. The securities were composed principally of
investments in U.S. Treasury securities, corporate debt instruments, and
municipal securities and were included in cash equivalents or short-term
investments on the balance sheet depending on their maturities, which range
from 1 day to 36 months. The securities are recorded at cost which
approximated their estimated fair value.
The Company realized losses of $6 million and $7 million respectively,
on sales of available-for-sale securities during the three-month and six-
month periods ended June 30, 1994. Proceeds from the sales were $0.9
billion and $3.0 billion, respectively.
NOTE C. Inventories.
Inventories at June 30, 1994 and December 31, 1993 comprised the
following:
June 30, December 31,
1994 1993
---- ----
(Millions of dollars)
Crude oil and petroleum products. . . . . . . . . $ 206 $ 266
Chemical products . . . . . . . . . . . . . . . . 368 373
Other products. . . . . . . . . . . . . . . . . . 33 32
Materials and supplies. . . . . . . . . . . . . . 236 243
----- -----
Total. . . . . . . . . . . . . . . . . . . . . $ 843 $ 914
===== =====
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE D. Capital Stock.
Detail of the Company's capital stock was as follows:
June 30, December 31,
1994 1993
---- ----
(Thousands of dollars)
$3.00 Cumulative convertible preference stock,
par $1 . . . . . . . . . . . . . . . . . . . $ 77 $ 81
$2.80 Cumulative convertible preference stock,
par $1 . . . . . . . . . . . . . . . . . . . 830 854
Common stock, par $2.50 . . . . . . . . . . . . 401,867 401,865
------- -------
Total . . . . . . . . . . . . . . . . . . . . $402,774 $402,800
======= =======
NOTE E. Capitalization of Interest.
Interest expense excluded capitalized interest of $10 million and $16
million, respectively, for the three-month periods ended June 30, 1994 and
1993, and $17 million and $37 million, respectively, for the six-month
periods ended June 30, 1994 and 1993.
NOTE F. Income Taxes.
Provision (benefit) for taxes on income:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1994 1993 1994 1993
---- ---- ---- ----
(Millions of dollars)
Federal:
Current . . . . . . . . . . . . . . $ 86 $ 167 $ 157 $ 294
Deferred. . . . . . . . . . . . . . (88) (12) (103) (24)
---- ---- ---- ----
(2) 155 54 270
---- ---- ---- ----
Foreign:
Current . . . . . . . . . . . . . . 5 (2) 30 16
Deferred. . . . . . . . . . . . . . (15) 4 (9) 21
---- ---- ---- ----
(10) 2 21 37
State:
Current . . . . . . . . . . . . . . 18 24 28 47
Deferred. . . . . . . . . . . . . . . (23) 1 (23) 1
---- ---- ---- ----
(5) 25 5 48
---- ---- ---- ----
Total . . . . . . . . . . . . . . $ (17) $ 182 $ 80 $ 355
==== ==== ==== ====
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
Note G. Income Taxes (Continued).
Reconciliation of provision (benefit) for taxes on income with tax at
federal statutory rate:
Three Months Ended
June 30,
-----------------------------------
1994 1993
---------------- ---------------
Percent Percent
of of
Pretax Pretax
Amount Income Amount Income
------ ------- ------ ------
(Millions of dollars)
Income before income taxes and
minority interest. . . . . . . . . . $ 20 100.0 $ 461 100.0
==== ===== ==== =====
Tax at federal statutory rate. . . . . $ 7 35.0 $ 157 34.0
Increase (reduction) in taxes
resulting from:
Dividend exclusion . . . . . . . . (3) (15.0) 3 .7
Taxes on foreign income in
excess of statutory rate . . . . 21 105.0 17 3.7
Foreign deferred tax asset
recognition . . . . . . . . . . (26) (130.0) - -
State income taxes (net of
federal effect). . . . . . . . . (4) (20.0) 17 3.7
Tax credits. . . . . . . . . . . . (15) (75.0) (9) (2.0)
Other. . . . . . . . . . . . . . . 3 15.0 (3) (.6)
---- ----- ---- -----
Provision (benefit) for taxes on
income . . . . . . . . . . . . . . . $ (17) (85.0) $ 182 39.5
---- ----- ---- -----
Six Months Ended
June 30,
------------------------------------
1994 1993
---------------- ----------------
Percent Percent
of of
Pretax Pretax
Amount Income Amount Income
------ ------ ------ ------
(Millions of dollars)
Income before income taxes and
minority interest. . . . . . . . . . $ 275 100.0 $ 903 100.0
==== ===== ==== =====
Tax at federal statutory rate. . . . . $ 96 35.0 $ 307 34.0
Increase (reduction) in taxes
resulting from:
Dividend exclusion . . . . . . . . (5) (1.8) 2 .2
Taxes on foreign income in
excess of statutory rate . . . . 46 16.7 36 4.0
Foreign deferred tax asset
recognition. . . . . . . . . . . (26) (9.5) - -
State income taxes (net of
federal effect). . . . . . . . . 3 1.1 32 3.5
Tax credits. . . . . . . . . . . . (28) (10.2) (17) (1.9)
Other. . . . . . . . . . . . . . . (6) (2.2) (5) (.5)
---- ----- ---- -----
Provision for taxes on income. . . . . $ 80 29.1 $ 355 39.3
==== ===== ==== =====
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE H. Earned Per Share.
Earned per share is based on the average number of common shares
outstanding during each period, including common stock equivalents that
consist of certain outstanding options and all outstanding convertible
securities.
The information necessary for the calculation of earned per share is
as follows:
Three Months Ended
June 30,
------------------
1994 1993
---- ----
(Millions of Shares)
Average number of common shares outstanding. . . . . 160.4 159.2
Common stock equivalents . . . . . . . . . . . . . . 2.7 3.2
----- -----
Total . . . . . . . . . . . . . . . . . . . . . . 163.1 162.4
===== =====
Six Months Ended
June 30,
-----------------
1994 1993
---- ----
(Millions of Shares)
Average number of common shares outstanding. . . . . 160.3 159.1
Common stock equivalents . . . . . . . . . . . . . . 2.7 3.2
----- -----
Total . . . . . . . . . . . . . . . . . . . . . . 163.0 162.3
===== =====
NOTE I. Supplemental Income Statement Information.
Taxes other than excise and income taxes comprised the following:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1994 1993 1994 1993
---- ---- ---- ----
(Millions of dollars)
Production/severance . . . . . . . . . $ 76 $ 89 $142 $180
Property . . . . . . . . . . . . . . . 46 51 96 103
Value added. . . . . . . . . . . . . . - 86 - 165
Other. . . . . . . . . . . . . . . . . 62 75 130 159
--- --- --- ---
Total. . . . . . . . . . . . . . . . $184 $301 $368 $607
=== === === ===
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE J. Supplemental Cash Flow Information.
Following is supplemental cash flow information for the six months
ended June 30, 1994 and 1993:
Six Months Ended
June 30,
-----------------
1994 1993
(Millions of dollars)
Gross maturities of short-term investments . . . . . . $ 3,880 $ 2,444
Gross purchases of short-term investments. . . . . . . (3,786) (2,646)
------ ------
Net cash provided (used) by short-term investments . . $ 94 $ (202)
====== ======
Gross proceeds from issuance of notes payable. . . . . $ 4,954 $ 4,771
Gross repayments of notes payable. . . . . . . . . . . (5,059) (4,495)
------ ------
Net cash provided (used) by notes payable . . . . . . $ (105) $ 276
====== ======
Gross noncash provisions charged to income . . . . . . $ 475 $ 246
Cash payments of previously accrued items. . . . . . . (226) (209)
------ ------
Noncash provisions greater than cash payments. . . . . $ 249 $ 37
====== ======
Interest paid during the six-month periods ended June 30, 1994 and
1993 was $373 million and $380 million, respectively.
Income taxes paid during the six-month periods ended June 30, 1994 and
1993 were $157 million and $354 million, respectively.
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE K. Summarized Financial Information.
Summarized financial information for Lyondell Petrochemical Company
("Lyondell"), a company of which Atlantic Richfield Company ("ARCO") owned
a 49.9 percent interest at June 30, 1994, was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1994 1993 1994 1993
---- ---- ---- ----
(Millions of dollars)
Revenues (including sales to ARCO
and ARCO Chemical Company). . . . . $ 900 $1,080 $1,724 $2,144
Sales to ARCO and ARCO Chemical
Company . . . . . . . . . . . . . . 82 77 151 146
Operating income. . . . . . . . . . . 71 5 125 12
Income (loss) before income taxes
and cumulative effect of changes
in accounting principles . . . . . 51 (14) 85 (24)
Net income (loss) . . . . . . . . . . 32 (11) 54 3
________________________
ARCO's equity in net income (loss)
of Lyondell . . . . . . . . . . . . 16 (5) 27 2
Cash dividends received from
Lyondell . . . . . . . . . . . . . 9 18 18 36
----------------------------
June 30, December 31,
1994 1993
---- ----
(Millions of dollars)
Current assets. . . . . . . . . . . . . . . $ 542 $ 523
Noncurrent assets . . . . . . . . . . . . . 766 708
Current liabilities . . . . . . . . . . . . 328 299
Long-term debt. . . . . . . . . . . . . . . 707 717
Other liabilities . . . . . . . . . . . . . 187 179
Minority interest . . . . . . . . . . . . . 156 124
Stockholders' deficit . . . . . . . . . . . (70) (88)
-10-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE L. Other Commitments and Contingencies.
ARCO has commitments, including those related to the acquisition,
construction and development of facilities, all made in the normal course
of business.
At June 30, 1994 and December 31, 1993, there were contingent
liabilities primarily with respect to guarantees of securities of other
issuers of approximately $112 million and $111 million, respectively, of
which approximately $41 million were indemnified at December 31, 1993.
None of the contingent liabilities were indemnified at June 30, 1994.
Following the March 1989 EXXON VALDEZ oil spill, Alyeska Pipeline
Service Company (Alyeska) and Alyeska's owner companies were the subject of
numerous lawsuits by the State of Alaska, the United States and private
plaintiffs. ARCO Transportation Alaska, Inc. (ATA) owns approximately 21
percent of Alyeska. In July 1993, it was announced that Alyeska and its
owner companies had agreed to pay $98 million in settlement of all but a
handful of the lawsuits by private plaintiffs, of which $20.9 million was
ATA's share. In October 1993, the settlement was tentatively approved;
however, there remain certain issues concerning claims asserted by Exxon
Shipping against Alyeska and its owner companies that must be resolved
before the settlement becomes final.
ARCO and former producers of lead pigments have been named as
defendants in cases filed by a municipal housing authority, a purported
class and several individuals seeking damages and injunctive relief as a
consequence of the presence of lead-based paint in certain housing units.
ARCO and its subsidiary, Atlantic Richfield Hanford Company (ARHCO),
and several other companies have been named as defendants in lawsuits filed
on behalf of individual persons and a number of purported classes. These
lawsuits arise out of radioactive and non-radioactive toxic and hazardous
substances allegedly generated at the Hanford Nuclear Reservation in
Richland, Washington (HNR). The claims against ARCO and ARHCO arise out of
the performance by ARHCO of a contract with the Atomic Energy Commission to
provide chemical processing, waste management and support services at HNR
from 1967 to 1977. ARCO and ARHCO believe that, should either or both
ultimately be held liable, they will be entitled to indemnification by the
federal government as provided under the Price-Anderson Act, and pursuant
to the terms of the contract between ARHCO and the Atomic Energy
Commission.
ARCO is also the subject of or party to a number of pending or
threatened legal actions. Although any ultimate liability arising from any
of these suits, or from any of the proceedings described above, if
aggregated and assumed to occur in a single fiscal period, would be
material to ARCO's results of operations, the likelihood of such occurrence
is considered remote. On the basis of management's best assessment of the
ultimate amount and timing of these events, such expenses or judgments are
not expected to have a material adverse effect on ARCO's consolidated
financial statements.
ARCO is subject to other loss contingencies pursuant to federal, state
and local environmental laws and regulations. These include possible
obligations to remove or mitigate the effects on the environment of the
disposal or release of certain chemical, mineral and petroleum substances
at various sites, including the restoration of natural resources located at
these sites and damages for loss of use and non-use values. ARCO is
currently participating in environmental assessments and cleanups
under these laws at
-11-
NOTE L. Other Commitments and Contingencies (Continued).
federal Superfund and state-managed sites, as well as other clean-up sites,
including service stations, refineries, terminals, chemical facilities,
third-party landfills, former nuclear processing facilities, and sites
associated with discontinued operations. ARCO may in the future be
involved in additional environmental assessments and cleanups, including
the restoration of natural resources and damages for loss of use and non-
use values. The amount of such future costs will depend on such factors as
the unknown nature and extent of contamination at many sites, the unknown
timing, extent and method of the remedial actions which may be required and
the determination of ARCO's liability in proportion to other responsible
parties.
ARCO continues to estimate the amount of these costs in periodically
establishing reserves based on progress made in determining the magnitude
of remediation costs, experience gained from sites on which remediation has
been completed, the timing and extent of remedial actions required by the
applicable governmental authorities and an evaluation of the amount of
ARCO's liability considered in light of the liability and financial
wherewithal of the other responsible parties. At June 30, 1994, the
reserve balance is $637 million. As the scope of ARCO's obligations
becomes more clearly defined, there may be changes in these estimated
costs, which might result in future charges against ARCO's earnings.
ARCO's reserve covers federal Superfund and state-managed sites as
well as other clean-up sites, including service stations, refineries,
terminals, chemical facilities, third-party landfills, former nuclear
processing facilities and sites associated with discontinued operations.
ARCO has been named a potentially responsible party (PRP) for 123 sites.
The number of PRP sites in and of itself does not represent a relevant
measure of liability, because the nature and extent of environmental
concerns varies from site to site and ARCO's share of responsibility varies
from sole responsibility to very little responsibility. ARCO reviews all
of the PRP sites, along with other sites as to which no claims have been
asserted, in estimating the amount of the reserve. ARCO's future costs at
these sites could exceed the reserve by as much as $1 billion.
Approximately half of the reserve related to sites associated with
ARCO's discontinued operations, primarily mining activities in the states
of Montana, Utah and New Mexico. Another significant component related to
currently and formerly owned chemical, nuclear processing, and refining and
marketing facilities, and other sites which received wastes from these
facilities. The remainder related to other sites with reserves ranging
from $1 million to $10 million per site. No one site represents more than
15 percent of the total reserve. Substantially all amounts accrued in the
reserve are expected to be paid out over the next five to six years.
Claims for recovery of remediation costs already incurred and to be
incurred in the future have been filed against various insurance companies
and other third parties. None of these claims has been resolved. Due to
the uncertainty as to ultimate recovery from these parties, ARCO has
neither recorded any asset nor reduced any liability in anticipation of
such recovery.
Environmental loss contingencies also include claims for personal
injuries allegedly caused by exposure to toxic materials manufactured or
used by ARCO. Although these contingencies could result in significant
expenses or judgments that, if aggregated and assumed to occur within a
single fiscal period, would be material to ARCO's results of operations,
the likelihood of such occurrence is considered remote. On the basis of
management's best assessment of the ultimate amount and timing of
these events, such
-12-
NOTE L. Other Commitments and Contingencies (Continued).
expenses or judgments are not expected to have a material adverse effect on
ARCO's consolidated financial statements.
The operations and consolidated financial position of ARCO continue to
be affected from time to time in varying degrees by domestic and foreign
political developments as well as legislation, regulations and litigation
pertaining to restrictions on production, imports and exports, tax
increases, environmental regulations, cancellation of contract rights and
expropriation of property. Both the likelihood of such occurrences and
their overall effect on ARCO vary greatly and are not predictable.
These uncertainties are part of a number of items that ARCO has taken
and will continue to take into account in periodically establishing
reserves.
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Second Quarter 1994 vs. Second Quarter 1993
Net income for the second quarter of 1994 was $24 million, or $0.14
per share, compared to $271 million, or $1.67 per share for the second
quarter of 1993. The 1994 second quarter results included net charges of
$154 million after tax. Included in those net charges were unusual items
of $249 million before tax, $153 million after tax, related to the
restructure and personnel reductions announced by the Company. The 1993
second quarter results included a net benefit of $48 million after tax.
In addition, the earnings decline in the second quarter of 1994 also
resulted from lower crude oil prices and margins on refined products,
partially offset by higher natural gas and petrochemical volumes, higher
petrochemical margins and lower exploration costs.
Sales and other operating revenues were $4,174 million in the second
quarter of 1994, compared to $4,670 million in the second quarter of 1993.
The decrease in revenues primarily resulted from the sale of ARCO's
Brazilian marketing operations in December 1993. Lower crude oil and
refined product prices were partially offset by increased natural gas
marketing activity.
Other revenues were $83 million in the second quarter of 1994,
compared to $193 million for the same period in 1993. Other revenues for
the second quarter of 1993 included before-tax gains of approximately $117
million from the sale of Lower 48 oil and gas properties.
Trade purchases decreased to $1,558 million in the second quarter of
1994, compared to $1,808 million in the second quarter of 1993. Trade
purchases were lower in 1994 primarily as a result of the sale of ARCO's
Brazilian marketing operations, partially offset by increased natural gas
marketing activity.
Taxes other than excise and income taxes decreased to $184 million in
the second quarter of 1994, compared to $301 million in the second quarter
of 1993. The decline primarily reflected the absence of value added taxes
associated with the Brazilian marketing operations. Production taxes were
also lower as a result of lower crude oil prices in the second quarter of
1994.
Excise taxes increased to $382 million in the second quarter of 1994,
compared to $336 million in the same period last year. The change
primarily resulted from the fourth quarter 1993 increase in the federal
excise tax rate.
After-tax earnings for worldwide oil and gas operations were $81
million in the second quarter of 1994, compared to $233 million in the
second quarter of 1993. Included in the second quarter 1994 results was a
net charge of $38 million related primarily to personnel reductions in
Alaska, partially offset by a tax benefit associated with international
operations. The second quarter 1993 results included after-tax gains of
$73 million from Lower 48 property sales. The earnings decline in the
second quarter of 1994 also resulted from higher foreign natural gas
volumes and lower exploration and operating costs being more than offset by
the decline in crude oil prices. The decrease in operating costs are the
result of the Company's Lower 48 restructuring and personnel reductions in
1993.
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Worldwide exploration expenses were $91 million for the second quarter
of 1994, compared to $148 million in the same period in 1993. The decrease
primarily reflected lower dryhole costs internationally and in Alaska.
ARCO's average domestic crude oil price was $10.30 per barrel in the
second quarter of 1994, compared to $13.43 per barrel in the second quarter
of 1993. ARCO's average domestic natural gas price was $1.73 per thousand
cubic feet in the second quarter of 1994, compared to $2.07 per thousand
cubic feet in the same period last year.
Worldwide crude oil and natural gas liquids production averaged
655,500 barrels per day during the second quarter of 1994 versus 667,100
barrels per day during the same period last year. Production increases
internationally and in Alaska were more than offset by a decline in Lower
48 production which resulted from both the impact of producing property
sales in 1993 and natural field declines.
Domestic natural gas production was 969 million cubic feet per day in
the second quarter of 1994, compared to 952 million cubic feet per day in
the second quarter of 1993. New production from the Mustang Island field
in the Gulf of Mexico and improved field performance offset the impact of
producing property sales and natural field declines.
ARCO's foreign natural gas production was 527 million cubic feet per
day in the 1994 second quarter, an increase from 263 million cubic feet per
day in the same period last year, primarily as a result of new production
from natural gas fields in Indonesia and the United Kingdom North Sea.
After-tax earnings from ARCO's coal operations were $12 million for
the second quarter of 1994, compared to $26 million for the same 1993
quarter. The decrease was caused by the expiration of higher priced
contracts in the U.S., lower export prices from Australia and an
unfavorable foreign exchange rate. A favorable legal settlement related to
a customer sales contract was partially offset by a charge of $3 million
for U.S. staff reductions.
Second quarter 1994 after-tax earnings from refining and marketing
operations were $16 million, including a $28 million after-tax charge for
restructuring, compared to $79 million in the second quarter of 1993. The
decrease in earnings resulted from lower West Coast margins for refined
products. The lower margins resulted from increases in refined product
prices lagging behind increases in crude oil prices.
Transportation operations contributed after-tax earnings of $25
million in the second quarter of 1994, compared to $50 million in the same
period last year. The transportation results included $26 million after
tax for restructuring charges.
The intermediate chemicals and specialty products segment, reflecting
ARCO's 83.3 percent interest in ARCO Chemical Company, had after-tax
earnings of $68 million in the second quarter of 1994, compared to $55
million in the same period last year. The 1994 results were impacted by
higher propylene oxide and styrene monomer volumes and margins, which
reflected a stronger U.S. economy and increased export sales.
ARCO earned $16 million after tax from its 49.9 percent equity
interest in Lyondell Petrochemical Company (Lyondell) in the second quarter
of 1994. This compared to a loss of $5 million in the second quarter of
1993. Lyondell's performance improved in the second quarter of 1994
primarily as a result of higher margins for petrochemicals. Lyondell's
results in the second quarter of 1993 were reduced by approximately $4
million of charges net to ARCO, primarily for cancellation of a capital
project.
-15-
The $154 million in net charges in the 1994 second quarter also
included after-tax charges of $32 million for personnel reductions at the
Company's corporate headquarters, $14 million to reimburse money market
losses in certain employee benefit plans and $13 million for future
environmental remediation costs. The 1993 second quarter earnings included
a $25 million after-tax charge for future environmental remediation costs.
The Company recorded a net tax benefit for second quarter 1994 as a
result of the recognition of a foreign deferred tax asset associated with
international oil and gas operations.
Six Month Period Ended June 30, 1994 vs. Same Six Month Period 1993
Net income for the first six months of 1994 was $173 million, or $1.06
per share, compared to $531 million, or $3.27 per share for the first six
months of 1993. For the first six months of 1994, higher foreign natural
gas and chemical products volumes and lower exploration costs were more
than offset by lower crude oil prices and volumes and lower refined product
margins.
The average domestic price for crude oil for the first half of 1994
was $9.02 per barrel versus $12.86 per barrel in the first half of 1993.
Domestic natural gas prices were $1.90 per thousand cubic feet in the first
half of 1994, compared to $1.89 per thousand cubic feet in the first half
of 1993.
Sales and other operating revenues, trade purchases and taxes other
than excise and income taxes decreased in the first six months of 1994,
compared to the same period in 1993, primarily as a result of the sale of
ARCO's Brazilian marketing operations.
In addition, sales and other operating revenues decreased as a result
of lower crude oil and refined product prices, partially offset by higher
natural gas marketing activities. Taxes other than excise and income taxes
also decreased in the first half of 1994 as a result of lower production
taxes which reflected the lower crude oil prices.
Excise taxes increased to $742 million in the first half of 1994,
compared to $626 million in the same period last year. The change
primarily resulted from the fourth quarter 1993 increase in the federal
excise tax rate.
The Company's effective tax rate for the first six months of 1994 was
29.1 percent, compared to 39.3 percent for the same period in 1993. The
decrease in the 1994 effective tax rate is primarily the result of the
Company recognizing a foreign deferred tax asset.
Financial Position and Liquidity
Cash flows from operating activities totaled $798 million for the
first six months of 1994. The net cash used by investing activities in the
first half of 1994 was $575 million and included expenditures for additions
to fixed assets of $846 million offset by proceeds from asset sales of $46
million and net cash provided by short-term investments of $94 million.
The net cash used by financing activities in the first six months of
1994 was $679 million and included repayments of long-term debt of $445
million, dividend payments of $442 million and net repayments of short-term
debt of $105 million, offset by proceeds from issuance of long-term debt of
$276 million.
-16-
Cash and cash equivalents and short-term investments totaled $3.2
billion, and short-term borrowings were $1.4 billion at June 30, 1994.
On July 5, 1994 Vastar Resources, Inc. (Vastar) consummated the sale
of 17,250,000 shares of its common stock to the public at an initial
offering price of $28 per share. Proceeds to Vastar, net of the
underwriting discount and expenses, were approximately $453 million. Prior
to the offering, Vastar was a wholly owned subsidiary of ARCO. Currently,
ARCO owns 80,000,001 shares of Vastar's common stock, which represents 82.3
percent of Vastar's outstanding common stock. ARCO will realize an after-
tax gain of approximately $270 million in the third quarter of 1994 as a
result of the initial public offering by Vastar.
On August 8, 1994, ARCO expects to issue 39,921,400 9% Exchangeable
Notes due September 15, 1997 at a price of $24.75 per note. The aggregate
principal amount of the Notes will be approximately $988 million. The
proceeds to ARCO, net of the underwriting discount of $0.75 per note, will
be approximately $958 million. When the Notes mature, holders will receive
in exchange for the principal amount of the Notes, shares of Lyondell
common stock, or at ARCO's option, cash with an equal value. The number of
shares or the amount of such cash will be determined using a formula based
on the price of Lyondell common stock at the maturity of the Notes.
It is expected that future cash requirements for capital expenditures,
dividends, debt repayments and any treasury stock purchases will come from
cash generated from operating activities, future financings and existing
cash balances.
____________________
Management cautions against projecting any future results based on
present earnings levels because of economic uncertainties, the extent and
form of existing or future governmental regulations and other possible
actions by governments.
The foregoing financial information is unaudited and has been prepared
from the books and records of the Company. Certain previously reported
amounts have been restated to conform to classifications adopted in 1994.
In the opinion of the Company, the financial information reflects all
adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial position and results of operations in
conformity with generally accepted accounting principles.
-17-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
1. Reference is made to the disclosure on page 18 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1993
(hereinafter, the "1993 Form 10-K Report") and on page 16 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 (the
"First Quarter 10-Q Report") regarding the Hanford litigation. On May 11,
1994, a new action entitled Barbara Thomson, et al. v. E.I. DuPont de
Nemours and Company, et al. (Case No. 94 2 01000 9) was filed in the
Superior Court of the State of Washington for the county of Yakima. The
complaint, which names ARCO and ARHCO as defendants, was filed on behalf of
a purported class that includes all people who have lived, resided, or
worked, at any time from 1942 through the present, within the Washington
and Oregon counties surrounding the Reservation. This action seeks medical
monitoring and surveillance services for the plaintiffs and the members of
the class to detect diseases allegedly caused by the release of radioactive
and non-radioactive waste from the Reservation. Defendants plan to handle
this claim in a similar manner to claims previously filed in state court by
removing the case to federal court and seeking to have it consolidated with
the In Re Hanford Nuclear Reservation litigation. With respect to all of
these actions, the Company and ARHCO believe that, should either or both
ultimately be held liable, they will be entitled to indemnification by the
federal government as provided under the Price-Anderson Act, and pursuant
to the terms of the contract between ARHCO and the Atomic Energy
Commission. Without confirming or denying the government's indemnity
obligations, the DOE has instructed the defendants to proceed with the good
faith defense of the lawsuits.
2. Reference is made to the disclosure on page 20 of the Company's
1993 Form 10-K Report regarding the suit brought by the City of New York
and the New York City Housing Authority against former lead pigment
manufacturers. On June 2, 1994, the trial court entered an order dismissing
plaintiffs' claims for restitution and indemnification, from which plaintiffs
noticed an appeal on June 20, 1994.
3. Reference is made to the disclosure on page 21 of the Company's
1993 Form 10-K Report regarding ARCO Chemical Company's Monaca, Pennsylvania
(Beaver Valley) plant. ARCO Chemical Company has entered into a Consent
Order and Agreement (the "Consent Agreement") with the Pennsylvania
Department of Environmental Resources ("PADER") pursuant to which ARCO
Chemical Company and PADER have agreed upon a work plan for testing and
remedial process design with regard to the conditions at the plant. Under
the terms of the Consent Agreement, ARCO Chemical Company will pay a civil
penalty of $300,000 (representing an amount previously agreed upon by ARCO
Chemical Company with PADER in 1988 and previously disclosed) and an
additional penalty of $63,000 each year from 1994 until the commencement of
active remediation at the plant, after which the amount of such annual
penalty shall be reduced based on the extent of remediation commenced at
the plant.
4. In January 1994, the California Air Resources Board ("CARB")
requested information regarding any failure by a terminal, within the
period starting January 1, 1992 and ending December 31, 1993, to meet
CARB's minimum additive injection standards for gasoline. CARB's
regulations require monthly records at each terminal of the volume
of each grade of gasoline, the volume of additive injected, and the minimum
volume of additive required, as a way of monitoring compliance. Although
some terminals' monthly records showed less than the minimum amount of
additive injected during one month in 1992, the other terminals' monthly
records demonstrated compliance with CARB's minimum additive injection
rules. Nonetheless, CARB has obtained the daily additive injection records
from each terminal. These daily records were not maintained in a manner
designed to measure compliance, because CARB's regulations required
monthly, not daily, record keeping. If
-18-
Item 1. Legal Proceedings (Continued).
CARB is able to use these daily records to measure compliance for the last
two years, ARCO believes that CARB may impose penalties for failure to
comply; in such event, ARCO would negotiate with CARB the amount of such
penalty.
5. In July 1994, Atlantic Richfield and Snyder Oil Company signed
a consent decree in settlement of the claims made by the Environmental
Protection Agency alleging (a) that Atlantic Richfield constructed
and operated certain pieces of equipment at the Riverton Dome Gas Plant
without the appropriate permit under the Clean Air Act and that (b) Snyder,
who purchased the plant from ARCO, continued to operate the plant without
the requisite permit. The decree has been forwarded to the U.S. Department
of Justice; it is expected that final settlement will occur sometime
before the end of the year. The consent decree will impose a fine, but
will not impose any affirmative injunctive relief on Atlantic Richfield.
6. Reference is made to the Company's 1993 Form 10-K Report for
information on other legal proceedings matters reported herein.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3 Restated Certificate of Incorporation of Atlantic Richfield
Company as of June 27, 1994.
12 Statement of computation of ratio of earnings to fixed
charges.
(b) Reports on Form 8-K.
The following Current Report on Form 8-K was filed during
the quarter ended June 30, 1994 and through the date hereof.
Date of Report Item No. Financial Statements
-------------- -------- --------------------
July 27, 1994 5 None
-19-
SIGNATURE
Pursuant to the requirements 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.
ATLANTIC RICHFIELD COMPANY
(Registrant)
Dated: August 5, 1994 /s/ ALLAN L. COMSTOCK
--------------------------
(signature)
Allan L. Comstock
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
-20-