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 September 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 preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares of Common Stock, $2.50 par value, outstanding as of
September 30, 1994: 160,666,969.
PART I. FINANCIAL INFORMATION
ATLANTIC RICHFIELD COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended Nine Months Ended
(Millions of dollars except September 30, September 30,
per share amounts) ------------- -------------
1994 1993 1994 1993
---- ---- ---- ----
Revenues
Sales and other operating revenues,
including excise taxes . . . . . . $4,271 $4,553 $12,245 $13,730
Income from equity investments . . . 45 17 86 32
Interest . . . . . . . . . . . . . . 51 38 142 117
Other revenues . . . . . . . . . . . 49 84 205 381
----- ----- ------ ------
4,416 4,692 12,678 14,260
----- ----- ------ ------
Expenses
Trade purchases. . . . . . . . . . . 1,489 1,782 4,314 5,334
Operating expenses . . . . . . . . . 802 876 2,380 2,445
Exploration expenses (including
undeveloped leasehold amortization) 167 178 362 462
Selling, general and administrative
expenses . . . . . . . . . . . . . 432 450 1,256 1,335
Taxes other than excise and
income taxes . . . . . . . . . . . 175 281 543 888
Excise taxes . . . . . . . . . . . . 407 314 1,149 940
Depreciation, depletion and
amortization . . . . . . . . . . . 405 402 1,240 1,188
Interest . . . . . . . . . . . . . . 194 176 565 532
Unusual items. . . . . . . . . . . . 68 - 317 -
----- ----- ------ ------
4,139 4,459 12,126 13,124
----- ----- ------ ------
Income before gain on issuance of
stock by subsidiary . . . . . . . 277 233 552 1,136
Gain on issuance of stock by
subsidiary . . . . . . . . . . . . 459 - 459 -
----- ----- ------ ------
Income before income taxes and
minority interest . . . . . . . . 736 233 1,011 1,136
Provision for taxes on income. . . . 281 157 361 512
Minority interest in earnings of
subsidiaries . . . . . . . . . . . 20 8 42 25
----- ----- ------ ------
Net Income . . . . . . . . . . . . . . $ 435 $ 68 $ 608 $ 599
===== ===== ====== ======
Earned per Share . . . . . . . . . . . $ 2.67 $ 0.42 $ 3.73 $ 3.69
===== ===== ====== ======
Cash Dividends Paid per
Share of Common Stock. . . . . . . . $1.375 $1.375 $ 4.125 $ 4.125
===== ===== ====== ======
The accompanying notes are an integral part of these statements.
-1-
ATLANTIC RICHFIELD COMPANY
CONSOLIDATED BALANCE SHEET
September 30, December 31,
1994 1993
---- ----
(Millions of dollars)
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . $ 1,537 $ 1,458
Short-term investments. . . . . . . . . . . . 3,013 2,289
Accounts receivable . . . . . . . . . . . . . 1,398 1,333
Inventories . . . . . . . . . . . . . . . . . 828 914
Prepaid expenses and other current assets . . 300 237
------ ------
Total current assets. . . . . . . . . . . . . 7,076 6,231
------ ------
Investments and long-term receivables:
Investments accounted for on the equity method 303 266
Other investments and long-term receivables . 236 221
------ ------
539 487
------ ------
Fixed assets:
Property, plant and equipment . . . . . . . . 32,040 31,494
Less accumulated depreciation, depletion
and amortization. . . . . . . . . . . . . . 16,272 15,628
------ ------
15,768 15,866
Deferred charges and other assets . . . . . . . 1,278 1,310
------ ------
Total assets. . . . . . . . . . . . . . . . . . $24,661 $23,894
====== ======
The accompanying notes are an integral part of these statements.
-2-
ATLANTIC RICHFIELD COMPANY
CONSOLIDATED BALANCE SHEET
September 30, December 31,
1994 1993
---- ----
(Millions of dollars)
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable . . . . . . . . . . . . . . . $ 1,413 $ 1,510
Accounts payable. . . . . . . . . . . . . . 843 1,091
Taxes payable, including excise taxes . . . 332 272
Long-term debt due within one year. . . . . 604 165
Accrued interest. . . . . . . . . . . . . . 138 190
Other . . . . . . . . . . . . . . . . . . . 1,069 1,107
------ ------
Total current liabilities . . . . . . . . . 4,399 4,335
------ ------
Long-term debt. . . . . . . . . . . . . . . . 7,403 7,089
Deferred income taxes . . . . . . . . . . . . 2,898 2,779
Other deferred liabilities and credits. . . . 3,357 3,177
Minority interest . . . . . . . . . . . . . . 400 387
Stockholders' equity
Preference stocks . . . . . . . . . . . . . 1 1
Common stock. . . . . . . . . . . . . . . . 402 402
Capital in excess of par value of stock . . 646 661
Retained earnings . . . . . . . . . . . . . 5,252 5,308
Pension liability adjustment. . . . . . . . (33) (29)
Treasury stock, at cost . . . . . . . . . . (9) (83)
Foreign currency translation. . . . . . . . (55) (133)
------ ------
Total stockholders' equity. . . . . . . . . 6,204 6,127
------ ------
Total liabilities and stockholders' equity. . $24,661 $23,894
====== ======
The accompanying notes are an integral part of these statements.
-3-
ATLANTIC RICHFIELD COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended
September 30,
-------------
1994 1993
---- ----
(Millions of dollars)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . $ 608 $ 599
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization . . . . . 1,240 1,188
Dry hole expense and undeveloped leasehold
amortization . . . . . . . . . . . . . . . . . . 213 282
Gain on issuance of stock by subsidiary. . . . . . (459) -
Net (gain) loss on asset sales . . . . . . . . . . 7 (177)
Income from equity investments . . . . . . . . . . (86) (32)
Dividends from equity investments. . . . . . . . . 48 79
Noncash provisions greater than cash payments. . . 260 37
Deferred income taxes. . . . . . . . . . . . . . . 112 79
Net change in accounts receivable, inventories
and accounts payable. . . . . . . . . . . . . . . (301) (100)
Net change in other working capital accounts . . . (203) 16
Other. . . . . . . . . . . . . . . . . . . . . . . (40) 41
----- -----
Net cash provided by operating activities. . . . 1,399 2,012
----- -----
Cash flows from investing activities:
Additions to fixed assets (including dry hole
costs) . . . . . . . . . . . . . . . . . . . . . (1,224) (1,514)
Net cash used by short-term investments. . . . . . (734) (205)
Proceeds from asset sales. . . . . . . . . . . . . 85 346
Payments received on notes for sales of property . 48 -
Other. . . . . . . . . . . . . . . . . . . . . . . 138 (23)
----- -----
Net cash used by investing activities. . . . . . (1,687) (1,396)
----- -----
Cash flows from financing activities:
Repayments of long-term debt . . . . . . . . . . . (562) (674)
Proceeds from issuance of long-term debt . . . . . 1,230 5
Proceeds from issuance of common stock by subsidiary 453 -
Net cash provided (used) by notes payable. . . . . (143) 210
Dividends paid . . . . . . . . . . . . . . . . . . (664) (659)
Treasury stock contributed to benefit plans. . . . 56 56
Other. . . . . . . . . . . . . . . . . . . . . . . (26) (18)
----- -----
Net cash provided (used) by financing activities 344 (1,080)
----- -----
Effect of exchange rate changes on cash. . . . . . . 23 (53)
----- -----
Net increase (decrease) in cash and cash equivalents 79 (517)
Cash and cash equivalents at beginning of period . . 1,458 1,414
----- -----
Cash and cash equivalents at end of period . . . . . $1,537 $ 897
===== =====
The accompanying notes are an integral part of these statements.
-4-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE A. Public Offering of Vastar Resources, Inc. Common Stock.
In September 1993, ARCO established Vastar Resources, Inc. (Vastar), a
wholly-owned subsidiary of ARCO. Effective October 1, 1993 ARCO conveyed
to Vastar beneficial title to certain producing properties together with
certain developed and undeveloped acreage. ARCO also conveyed to Vastar
100 percent of the common stock of the following subsidiaries of ARCO:
Vastar Gas Marketing, Inc., F & H Pipe Line Company, Grant Gathering
Company and Wilburton Hub, Inc. On May 19, 1994, Vastar declared an
800,000.01-to-one stock split, resulting in an increase in ARCO's ownership
from 100 to 80,000,001 shares, which shares represented all of the issued
and outstanding common stock of Vastar.
In July 1994, Vastar completed an initial public offering of
17,250,000 shares of its common stock, thereby decreasing ARCO's percentage
ownership to 82.3 percent. ARCO recognized an after-tax gain of $273
million from this transaction. The portion of Vastar's equity relating to
the shares not owned by ARCO and the earnings relating thereto are included
as "Minority Interest" in the accompanying financial statements.
NOTE B. Unusual Items.
On July 18, 1994 the Company announced a restructuring program under
which approximately 2,000 positions were eliminated. The program covered
all operating units, excluding Lower 48 oil and gas operations, along with
the corporate headquarters. The Company accrued $249 million before tax in
the second quarter of 1994, consisting primarily of personnel costs
(pension enhancements, severance and other ancillary costs) associated with
the terminations. In the third quarter of 1994 the Company accrued an
additional $68 million before tax to reflect a revision of estimated per
head costs along with an additional 200 positions.
Of the $317 million accrued in total, approximately $145 million
related to severance and other ancillary costs that will be paid from
Company funds over the next two years. Approximately $100 million related
to enhanced pension benefits which will be paid from the assets of
qualified pension plans, not from Company funds. An additional $50 million
related to enhanced non-qualified pension benefits and postretirement
benefits other than pensions which are currently unfunded. These benefits
will be paid after retirement and over the remaining lives of the
terminated employees; as such, it will not be practical to determine the
actual payments of these benefits.
Through September 30, 1994, approximately 690 employees have been
terminated under the program, and approximately $15 million of severance
and ancillary benefits have been paid and charged against the accrual.
Payments made do not necessarily correlate to the number of terminations
due to the ability of terminees to defer receipt of certain payments.
NOTE C. 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
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
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 nine-month
periods ended September 30, 1994.
As of September 30, 1994 and January 1, 1994, the Company held
approximately $1.7 billion and $1.6 billion, respectively, of investments
in debt securities classified as held-to-maturity. As of September 30,
1994 and January 1, 1994, the Company held approximately $1.6 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 40 months. The securities are recorded at amortized cost
which approximated their estimated fair value.
The Company realized losses of $0.9 million and $7.9 million,
respectively, on sales of available-for-sale securities during the three-
month and nine-month periods ended September 30, 1994. Proceeds from the
sales were $0.7 billion and $3.7 billion, respectively.
NOTE D. Inventories.
Inventories at September 30, 1994 and December 31, 1993 comprised the
following:
September 30, December 31,
1994 1993
---- ----
(Millions of dollars)
Crude oil and petroleum products. . . . . . . . $ 194 $ 266
Chemical products . . . . . . . . . . . . . . . 359 373
Other products. . . . . . . . . . . . . . . . . 44 32
Materials and supplies. . . . . . . . . . . . . 231 243
---- ----
Total. . . . . . . . . . . . . . . . . . . . $ 828 $ 914
==== ====
NOTE E. Capital Stock.
Detail of the Company's capital stock was as follows:
September 30, December 31,
1994 1993
---- ----
(Thousands of dollars)
$3.00 Cumulative convertible preference
stock, par $1 . . . . . . . . . . . . . . . . $ 76 $ 81
$2.80 Cumulative convertible preference
stock, par $1 . . . . . . . . . . . . . . . . 813 854
Common stock, par $2.50 . . . . . . . . . . . . 401,876 401,865
------- -------
Total. . . . . . . . . . . . . . . . . . . . $402,765 $402,800
======= =======
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE F. Capitalization of Interest.
Interest expense excludes capitalized interest of $11 million and $12
million, respectively, for the three-month periods ended September 30, 1994
and 1993, and $28 million and $49 million, respectively, for the nine-month
periods ended September 30, 1994 and 1993.
NOTE G. Income Taxes.
Provision for taxes on income:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1994 1993 1994 1993
---- ---- ---- ----
(Millions of dollars)
Federal:
Current . . . . . . . . . . . . $ 25 $ 65 $182 $359
Deferred . . . . . . . . . . . . 200 73 97 49
--- --- --- ---
225 138 279 408
--- --- --- ---
Foreign:
Current . . . . . . . . . . . . 15 9 45 25
Deferred . . . . . . . . . . . . 9 (1) - 20
--- --- --- ---
24 8 45 45
--- --- --- ---
State:
Current . . . . . . . . . . . . (6) 2 22 49
Deferred . . . . . . . . . . . . 38 9 15 10
--- --- --- ---
32 11 37 59
--- --- --- ---
Total . . . . . . . . . . . . $281 $157 $361 $512
=== === === ===
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
Note G. Income Taxes (Continued).
Reconciliation of provision for taxes on income with tax at federal
statutory rate:
Three Months Ended September 30,
--------------------------------
1994 1993
---- ----
Percent Percent
of of
Pretax Pretax
Amount Income Amount Income
------ ------- ------ -------
(Millions of dollars)
Income before income taxes and
minority interest . . . . . . . . . $ 736 100.0 $ 233 100.0
==== ===== ==== =====
Tax at federal statutory rate . . . . $ 258 35.0 $ 82 35.0
Increase (reduction) in taxes
resulting from:
Impact of federal rate change on
deferred tax liability . . . . . - - 65 27.9
Dividend exclusion. . . . . . . . . (12) (1.6) 4 1.7
Taxes on foreign income in excess
of statutory rate . . . . . . . . 32 4.3 31 13.3
Foreign deferred tax asset
recognition . . . . . . . . . . . (3) (0.4) (24) (10.3)
State income taxes (net of federal
effect) . . . . . . . . . . . . . 21 2.9 7 3.0
Tax credits . . . . . . . . . . . . (16) (2.2) (11) (4.7)
Other . . . . . . . . . . . . . . . 1 0.2 3 1.5
---- ----- ---- -----
Provision for taxes on income . . . . $ 281 38.2 $ 157 67.4
==== ===== ==== =====
Nine Months Ended September 30,
-------------------------------
1994 1993
---- ----
Percent Percent
of of
Pretax Pretax
Amount Income Amount Income
------ ------- ------ -------
(Millions of dollars)
Income before income taxes and
minority interest . . . . . . . . $1,011 100.0 $1,136 100.0
===== ===== ===== =====
Tax at federal statutory rate. . . . $ 354 35.0 $ 398 35.0
Increase (reduction) in taxes
resulting from:
Impact of federal rate change on
deferred tax liability . . . . . - - 65 5.8
Dividend exclusion . . . . . . . . (17) (1.7) 6 .5
Taxes on foreign income in excess
of statutory rate. . . . . . . . 78 7.7 67 5.9
Foreign deferred tax asset
recognition . . . . . . . . . . (29) (2.9) (24) (2.1)
State income taxes (net of federal
effect) . . . . . . . . . . . . 24 2.4 39 3.4
Tax credits . . . . . . . . . . . (44) (4.3) (28) (2.5)
Other . . . . . . . . . . . . . . (5) (0.5) (11) (0.9)
----- ----- ----- -----
Provision for taxes on income. . . . $ 361 35.7 $ 512 45.1
===== ===== ===== =====
-8-
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
September 30,
-------------
1994 1993
---- ----
(Millions of Shares)
Average number of common shares outstanding. . . . . 160.6 159.5
Common stock equivalents . . . . . . . . . . . . . . 2.7 3.0
----- -----
Total. . . . . . . . . . . . . . . . . . . . . . . 163.3 162.5
===== =====
Nine Months Ended
September 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
===== =====
NOTE I. Supplemental Income Statement Information.
Taxes other than excise and income taxes comprised the following:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1994 1993 1994 1993
---- ---- ---- ----
(Millions of dollars)
Production/severage . . . . . . . . $ 79 $ 74 $221 $254
Property . . . . . . . . . . . . . 46 55 142 158
Value added . . . . . . . . . . . . - 90 - 255
Other . . . . . . . . . . . . . . . 50 62 180 221
--- --- --- ---
Total . . . . . . . . . . . . . $175 $281 $543 $888
=== === === ===
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE J. Supplemental Cash Flow Information.
Following is supplemental cash flow information for the nine months
ended September 30, 1994 and 1993:
Nine Months Ended
September 30,
-------------
1994 1993
---- ----
(Millions of dollars)
Gross maturities of short-term investments . . . . . $ 4,827 $ 3,947
Gross purchases of short-term investments. . . . . . (5,561) (4,152)
------ ------
Net cash used by short-term investments. . . . . . . $ (734) $ (205)
====== ======
Gross proceeds from issuance of notes payable. . . . $ 7,139 $ 6,821
Gross repayments of notes payable. . . . . . . . . . (7,282) (6,611)
------ ------
Net cash provided (used) by notes payable . . . . . $ (143) $ 210
====== ======
Gross noncash provisions charged to income . . . . . $ 687 $ 373
Cash payments of previously accrued items. . . . . . (427) (336)
------ ------
Noncash provisions greater than cash payments. . . . $ 260 $ 37
====== ======
Interest paid during the nine-month periods ended September 30, 1994
and 1993 was $617 million and $611 million, respectively.
Income taxes paid during the nine-month periods ended September 30,
1994 and 1993 were $227 million and $396 million, respectively.
-10-
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 September 30, 1994, was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1994 1993 1994 1993
---- ---- ---- ----
(Millions of dollars)
Revenues (including sales to ARCO
and ARCO Chemical Company). . . . . $ 1,040 $ 885 $2,764 $3,030
Sales to ARCO and ARCO Chemical
Company . . . . . . . . . . . . . . 89 66 240 212
Operating income. . . . . . . . . . . 124 38 249 50
Income (loss) before income taxes and
cumulative effect of changes in
accounting principles . . . . . . . 105 18 190 (6)
Net income. . . . . . . . . . . . . . 66 9 120 12
_____________________________
ARCO's equity in net income of
Lyondell. . . . . . . . . . . . . . 33 4 60 6
Cash dividends received from Lyondell 9 9 27 45
________________________
September 30, December 31,
1994 1993
---- ----
(Millions of dollars)
Current assets. . . . . . . . . . . . . . . . $ 605 $ 523
Noncurrent assets . . . . . . . . . . . . . . 833 708
Current liabilities . . . . . . . . . . . . . 366 299
Long-term debt. . . . . . . . . . . . . . . . 707 717
Other liabilities . . . . . . . . . . . . . . 190 179
Minority interest . . . . . . . . . . . . . . 197 124
Stockholders' deficit . . . . . . . . . . . . (22) (88)
-11-
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 September 30, 1994 and December 31, 1993, there were contingent
liabilities primarily with respect to guarantees of securities of other
issuers of approximately $121 million and $111 million, respectively,
of which approximately $41 million were indemnified at December 31, 1993.
None of the contingent liabilities were indemnified at September 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. The settlement became final and the $98 million was paid
after Exxon Shipping dismissed its challenge to the settlement. However,
other issues relating to liability for the spill remain unresolved between
the Exxon companies, on the one hand, and Alyeska and its owners, on the
other hand.
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. On October 13, 1994, the Department of Energy
determined that the government will indemnify ARCO and ARHCO for any
judgment or settlement in the action pursuant to the contract between ARHCO
and the Atomic Energy Commission and the provisions of the Price-Anderson
Act.
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
-12-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE L. Other Commitments and Contingencies (Continued).
currently participating in environmental assessments and cleanups
under these laws at 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 September 30, 1994, the
reserve balance is $673 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE L. Other Commitments and Contingencies (Continued).
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.
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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Third Quarter 1994 v. Third Quarter 1993
The Company had net income of $435 million, or $2.67 per share
for the third quarter of 1994, compared to net income of $68 million,
or $0.42 per share for the third quarter of 1993.
The third quarter 1994 results reflected higher volumes and
margins for petrochemical products, lower operating expenses and
higher crude oil prices, partially offset by lower crude oil volumes
and natural gas prices. The operating expenses were lower in the 1994
third quarter, compared to the 1993 third quarter as a result of the
Company's cost reduction efforts.
The 1994 third quarter included a net benefit of approximately
$200 million after tax which reflected the gain of $459 million before
tax ($273 million after tax) from the initial public offering of
Vastar Resources, Inc., partially offset by charges for additional
personnel reductions and other items. Included in those charges were
unusual items of $68 million before tax consisting primarily of
charges for personnel reductions. The 1993 third quarter included net
charges of approximately $115 million after tax associated with a
federal corporate tax rate increase and litigation-related issues.
Sales and other operating revenues were $4,271 million in the
third quarter of 1994, compared to $4,553 million in the third quarter
of 1993. The decrease primarily resulted from the sale of ARCO's
Brazilian marketing operations in December 1993, partially offset by
higher petrochemical products prices and volumes and higher excise
taxes.
Trade purchases decreased to $1,489 million in the third quarter
of 1994, compared to $1,782 million in the third quarter of 1993.
Trade purchases were lower in 1994 primarily as a result of the sale
of ARCO's Brazilian marketing operations.
Operating expenses were $802 million in the third quarter of
1994, compared to $876 million in the third quarter of 1993. The
decrease primarily resulted from lower lease operating expenses in
both the Lower 48 and Alaska and the absence of charges related to
litigation accruals recorded in last year's third quarter, partially
offset by higher charges for future environmental remediation costs.
Taxes other than excise and income taxes decreased to $175
million in the third quarter of 1994, compared to $281 million in the
third quarter of 1993. The decline primarily reflected the absence of
value added taxes associated with the Brazilian marketing operations.
Excise taxes increased to $407 million in the third quarter of
1994, compared to $314 million in the same period last year. The
change primarily resulted from the fourth quarter 1993 increase in the
federal excise tax rate and a change in the collection responsibility
for excise taxes on diesel fuel.
Worldwide oil and gas exploration and production operations had
net income of $125 million in the third quarter of 1994, compared to
net income of $17 million in the third quarter of 1993. Included in
the third quarter 1993 results were $47 million of charges related to
an increase in the federal corporate income tax rate.
-15-
The 1994 earnings were favorably impacted by lower operating and
exploration expenses and higher crude oil prices, partially offset by
lower domestic natural gas prices and reduced crude oil volumes.
Worldwide exploration expenses totaled $167 million for the third
quarter of 1994, compared to $178 million in the same period in 1993.
The reduction reflected lower exploration expense in Alaska, partially
offset by higher dry hole expense in international operations.
ARCO's average domestic crude oil price was $12.04 per barrel in
the third quarter of 1994, compared to $11.16 per barrel in the third
quarter of 1993. ARCO's average domestic natural gas price was $1.64
per thousand cubic feet in the third quarter of 1994, compared to
$2.00 per thousand cubic feet in the third quarter of 1993.
Worldwide production of crude oil and natural gas liquids
averaged 640,500 barrels per day during the third quarter of 1994
versus 654,300 barrels per day during the same period last year.
Production benefited from start up of the Point McIntyre field in the
fourth quarter of 1993 and completion of the initial phase of an
expanded gas handling system (GHX-2) at Prudhoe Bay in September 1993.
However, these improvements were more than offset by the impact of
property sales and natural field declines. Completion of GHX-2's
second phase in the 1994 third quarter is expected to further increase
oil production at the oil field starting in the fourth quarter of
1994.
ARCO's foreign natural gas production grew to 419 million cubic
feet per day in the 1994 third quarter, compared to 199 million cubic
feet per day in the 1993 third quarter. The increase resulted from
new production from two natural gas fields in Indonesia and two fields
in the United Kingdom North Sea.
The Company's domestic natural gas production in the 1994 third
quarter increased to an average of 945 million cubic feet per day, up
from 868 million cubic feet per day in the same period last year. The
increased production represented new production from the Mustang
Island 805 field in the Gulf of Mexico as well as production increases
in the San Juan Basin. Most of ARCO's Lower 48 natural gas production
is owned and operated by Vastar Resources, Inc. in which ARCO holds an
82.3 percent interest.
After-tax earnings from ARCO's coal operations were $22 million
for the third quarter of 1994, compared to $24 million for the 1993
third quarter. Included in the 1993 results was a net benefit of $10
million after tax primarily reflecting a favorable reversal of an
accounting reserve related to the 1991 writedown of an Australian
mine, partially offset by a $4 million charge for an increase in the
federal corporate income tax rate. Increased volumes in the United
States and Australia more than offset lower average coal prices in the
United States and lower export prices overseas. The lower prices in
the United States resulted from the expiration of certain higher
priced contracts.
Third quarter 1994 after-tax earnings from refining and marketing
operations were $26 million, compared to $71 million in the third
quarter of 1993. The 1994 results were negatively impacted by reduced
West Coast margins, the sale of ARCO's Brazilian marketing operations
in late 1993 and after-tax charges totaling $45 million primarily for
personnel reductions. The 1993 third quarter included charges of
approximately $60 million after tax related to litigation accruals and
the federal tax rate change.
-16-
Transportation operations contributed after-tax earnings of $36
million in the third quarter of 1994, compared to $30 million in the
same period last year. The 1994 results included a charge of $9 million
related to the previously announced sale of midcontinent product pipelines.
The 1993 results included a charge of $16 million for the federal tax
rate change.
The intermediate chemicals and specialty products segment, which
reflects ARCO's 83.3 percent interest in ARCO Chemical Company, had
after-tax earnings of $77 million in the third quarter of 1994,
compared to $55 million in the same period last year. The improved
results reflected higher worldwide sales volumes and higher margins on
propylene oxide and derivatives and styrene monomer in the 1994 third
quarter.
ARCO's 1994 third quarter earnings from its 49.9 percent equity
interest in Lyondell Petrochemical Company (Lyondell) were $33
million, compared to $4 million in the third quarter of 1993. The
improved results reflected higher olefins and methanol margins, as
well as increased olefins volumes.
Nine Month Period Ended September 30, 1994 vs. Same Nine Month Period 1993
For the first nine months of 1994, net income was $608 million or
$3.73 per share compared to $599 million or $3.69 per share for the
first nine months of 1993.
For the first nine months of 1994, higher petrochemical products and
foreign natural gas volumes and lower exploration, selling, general and
administrative and operating expenses were more than offset by lower crude
oil and natural gas prices, lower crude oil volumes and lower refined product
margins.
Included in the 1994 results was a net benefit of $35 million
after tax which represented the gain from the Vastar initial public
offering partially offset by charges for personnel reductions and
other items which totaled $238 million. The 1993 results reflected
net after-tax charges of approximately $67 million.
Other revenues were $205 million for the first nine months of
1994, compared to $381 million for the same period in 1993. Other
revenues in 1993 included before-tax gains of approximately $156
million from the sale of Lower 48 oil and gas properties.
The average domestic price for crude oil for the first nine
months of 1994 was $10.10 per barrel versus $12.31 per barrel in the
first nine months of 1993. Domestic natural gas prices decreased to
$1.81 per thousand cubic feet in the first nine months of 1994 from
$1.92 per thousand cubic feet in the first nine months of 1993.
Sales and other operating revenues, trade purchases and taxes
other than excise and income taxes decreased in the first nine months
of 1994, compared to the same period in 1993 primarily as a result of
the sale of ARCO's Brazilian marketing operations.
Exploration expenses decreased to $362 million for the first nine
months of 1994 from $462 million for the same period in 1993 as a
result of lower dry hole costs in Alaskan and foreign operations, as
well as lower undeveloped leasehold amortization in the Company's
Lower 48 operations.
-17-
Excise taxes increased to $1,149 million in the first nine months
of 1994, compared to $940 million in the same period last year. The change
primarily resulted from the fourth quarter 1993 increase in the federal
excise tax rate and a change in the collection responsibility for excise
taxes on diesel fuel.
Financial Condition
Cash flows from operating activities totaled $1,399 million for
the first nine months of 1994. The net cash used in investing
activities for the first nine months of 1994 was $1,687 million and
included expenditures for additions to fixed assets of $1,224 million
and a net increase in short-term investments of $734 million,
partially offset by proceeds from asset sales of $85 million.
The net cash provided by financing activities in the first nine
months of 1994 was $344 million and included proceeds of $1,230
million from issuance of long-term debt, primarily 9% Exchangeable
Notes issued in August, 1994 and proceeds of $453 million from the
issuance of common stock by Vastar Resources, Inc., a subsidiary of
ARCO. These proceeds were partially offset by repayments of long-term
debt of $562 million, a decrease of $143 million in the Company's
short-term debt position and dividend payments of $664 million.
Cash and cash equivalents and short-term investments totaled $4.6
billion and short-term borrowings were $1.4 billion at September 30,
1994.
On August 8, 1994, ARCO issued 39,921,400 9% Exchangeable Notes
(the "Notes") due September 15, 1997 at a price of $24.75 per note.
The aggregate principal amount of the Notes was approximately $988
million. The proceeds to ARCO, net of the underwriting discount of
$.75 per note, were 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 with
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.
-18-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
1. Reference is made to the disclosure on page 17 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 Montana v. ARCO matter. ARCO
challenged the State's estimates as grossly exaggerated and the settlement
negotiations between ARCO and the State of Montana formally terminated.
Accordingly, the stay of this litigation was lifted effective October 15,
1994. In addition, on October 17, 1994, The Confederated Salish and
Kootenai Tribes of the Flathead Reservation (the "Tribes"), filed a motion
to intervene in Montana v. ARCO. Pursuant to this motion, the Tribes, as
trustees, have asserted claims against ARCO for alleged damage to and loss
of natural resources located in the Clark Fork River Basin in southwest
Montana. The Court has not yet ruled on the Tribes' motion.
2. Reference is made to the disclosure on page 18 of the 1993 Form 10-
K Report, on page 16 of the First Quarter 10-Q Report, and on page 18 of
the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1994 (the "Second Quarter 10-Q Report") regarding the Hanford litigation.
On October 13, 1994, the Department of Energy determined that the
government will indemnify ARCO and ARHCO for any judgment or settlement in
the action pursuant to the contract between ARHCO and the Atomic Energy
Commission and the provisions of the Price-Anderson Act.
3. Reference is made to the disclosure on pages 18-19 of the 1993
Form 10-K Report regarding the EXXON VALDEZ oil spill. The appeals to the
settlement have now been dismissed and the $98 million has been paid.
Although Exxon Shipping's objections to the settlement have been dropped,
other issues relating to the spill remain unresolved between the Exxon
companies, on the one hand, and Alyeska and its owner companies, on the
other hand.
4. Reference is made to the disclosure on page 20 of the 1993 Form 10-
K Report regarding the Van Vranken matter. On October 6, 1994, the Court
of Appeals denied the Company's request for reconsideration. The parties
have reached a tentative settlement, which is subject to preliminary (and
then, after notice to the class, final) approval by the Court. In the
event the settlement is not approved, a petition for review by the United
States Supreme Court may be filed.
5. Reference is made to the disclosure on page 20 of the 1993 Form 10-
K Report regarding the Jackson v. Glidden Company matter. Plaintiffs'
appeal will be heard on November 7, 1994.
6. Reference is made to the disclosure on page 21 of the 1993 Form 10-
K Report and on page 18 of the Second Quarter 10-Q Report regarding ARCO
Chemical Company's Monaca, Pennsylvania (Beaver Valley) plant. ARCO
Chemical Company has paid the Pennsylvania Department of Environmental
Resources civil penalties assessed for 1994 in connection with plant
conditions.
7. Reference is made to the disclosure on page 16 of the First
Quarter 10-Q Report and on page 19 of the Second Quarter 10-Q Report
regarding the Riverton Dome Gas Plant matter. On October 7, 1994, the U.S.
Department of Justice signed the consent decree and lodged it with the
complaint. A notice to be published in the Federal Register requests
public comment on the settlement in the consent decree. At the conclusion
of the comment
-19-
period, the U.S. Department of Justice and the EPA will determine to either
proceed with the settlement or revise the decree. If the decree is not
changed, ARCO will have to pay the civil penalty.
8. Reference is made to the 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.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
The following Current Report on Form 8-K was filed during the
quarter ended September 30, 1994 and through the date hereof.
Date of Report Item No. Financial Statements
-------------- -------- --------------------
September 26, 1994 5 None
-20-
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)
/s/ALLAN L. COMSTOCK
Dated: November 9, 1994 _____________________________
(signature)
Allan L. Comstock
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
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