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 March 31, 1996
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
March 31, 1996: 160,838,120.
PART I. FINANCIAL INFORMATION
ATLANTIC RICHFIELD COMPANY AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended
March 31,
------------------
(Millions except per share amounts) 1996 1995
---- ----
Revenues
Sales and other operating revenues,
including excise taxes. . . . . . . . . . . . . . . $4,534 $4,244
Income from equity investments. . . . . . . . . . . . 17 74
Interest. . . . . . . . . . . . . . . . . . . . . . . 52 59
Other revenues. . . . . . . . . . . . . . . . . . . . 157 80
----- -----
4,760 4,457
----- -----
Expenses
Trade purchases . . . . . . . . . . . . . . . . . . . 1,674 1,568
Operating expenses. . . . . . . . . . . . . . . . . . 753 704
Selling, general and administrative expenses. . . . . 415 402
Depreciation, depletion and amortization. . . . . . . 404 412
Exploration expenses (including undeveloped
leasehold amortization) . . . . . . . . . . . . . . 100 90
Excise taxes. . . . . . . . . . . . . . . . . . . . . 378 350
Taxes other than excise and income taxes. . . . . . . 217 194
Interest. . . . . . . . . . . . . . . . . . . . . . . 173 203
Unusual items . . . . . . . . . . . . . . . . . . . . 26 -
----- -----
4,140 3,923
----- -----
Income before income taxes and minority interest. . . . 620 534
Provision for taxes on income . . . . . . . . . . . . . 220 185
Minority interest in earnings of subsidiaries . . . . . 30 27
----- -----
Net Income. . . . . . . . . . . . . . . . . . . . . . . $ 370 $ 322
===== =====
Earned per Share. . . . . . . . . . . . . . . . . . . . $ 2.26 $ 1.97
===== =====
Cash Dividends Paid per Share of Common Stock . . . . . $1.375 $1.375
===== =====
The accompanying notes are an integral part of these statements.
-1-
ATLANTIC RICHFIELD COMPANY
CONSOLIDATED BALANCE SHEET
March 31, December 31,
1996 1995
---- ----
(Millions)
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 1,624 $ 1,537
Short-term investments. . . . . . . . . . . . . . 1,779 1,569
Accounts receivable . . . . . . . . . . . . . . . 1,670 1,684
Inventories . . . . . . . . . . . . . . . . . . . 935 877
Prepaid expenses and other current assets . . . . 294 221
------ ------
Total current assets. . . . . . . . . . . . . . . 6,302 5,888
------ ------
Investments and long-term receivables:
Investments accounted for on the equity method. . 726 711
Other investments and long-term receivables . . . 559 550
------ ------
1,285 1,261
------ ------
Fixed assets:
Property, plant and equipment . . . . . . . . . . 32,995 32,544
Less accumulated depreciation, depletion
and amortization . . . . . . . . . . . . . . . 17,533 17,189
------ ------
15,462 15,355
------ ------
Deferred charges and other assets . . . . . . . . . 1,459 1,495
------ ------
Total assets. . . . . . . . . . . . . . . . . . . . $24,508 $23,999
====== ======
The accompanying notes are an integral part of these statements.
-2-
ATLANTIC RICHFIELD COMPANY
CONSOLIDATED BALANCE SHEET
March 31, December 31,
1996 1995
---- ----
(Millions)
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable . . . . . . . . . . . . . . . . . . $ 1,236 $ 1,174
Accounts payable. . . . . . . . . . . . . . . . . 1,128 1,145
Long-term debt due within one year. . . . . . . . 183 184
Taxes payable, including excise taxes . . . . . . 533 303
Accrued interest. . . . . . . . . . . . . . . . . 135 153
Other . . . . . . . . . . . . . . . . . . . . . . 1,116 1,004
------ ------
Total current liabilities . . . . . . . . . . . . 4,331 3,963
------ ------
Long-term debt. . . . . . . . . . . . . . . . . . . 6,668 6,708
Deferred income taxes . . . . . . . . . . . . . . . 2,635 2,637
Other deferred liabilities and credits. . . . . . . 3,491 3,456
Minority interest . . . . . . . . . . . . . . . . . 496 477
Stockholders' equity:
Preference stocks . . . . . . . . . . . . . . . . 1 1
Common stock. . . . . . . . . . . . . . . . . . . 402 402
Capital in excess of par value of stock . . . . . 624 632
Retained earnings . . . . . . . . . . . . . . . . 5,964 5,816
Pension liability adjustment. . . . . . . . . . . (60) (60)
Foreign currency translation. . . . . . . . . . . (30) (17)
Net unrealized loss on investments. . . . . . . . (9) (11)
Treasury stock, at cost . . . . . . . . . . . . . (5) (5)
------ ------
Total stockholders' equity. . . . . . . . . . . . 6,887 6,758
------ ------
Total liabilities and stockholders' equity. . . . . $24,508 $23,999
====== ======
The accompanying notes are an integral part of these statements.
-3-
ATLANTIC RICHFIELD COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended
March 31,
------------------
1996 1995
---- ----
(Millions)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 370 $ 322
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization . . . . . . . 404 412
Dry hole expense and undeveloped leasehold amortization 48 36
Net gain on asset sales. . . . . . . . . . . . . . . . (26) (8)
Income from equity investments . . . . . . . . . . . . (17) (74)
Dividends from equity investments. . . . . . . . . . . 27 21
Minority interest in earnings of subsidiaries. . . . . 30 27
Cash payments greater than noncash provisions. . . . . (27) (210)
Deferred income taxes. . . . . . . . . . . . . . . . . 7 (4)
Changes in accounts receivable, inventories
and accounts payable. . . . . . . . . . . . . . . . . (58) (84)
Changes in other working capital accounts. . . . . . . 59 8
Other. . . . . . . . . . . . . . . . . . . . . . . . . 23 (57)
----- -----
Net cash provided by operating activities. . . . . . 840 389
----- -----
Cash flows from investing activities:
Additions to fixed assets (including dry hole costs) . (352) (353)
Net cash provided (used) by short-term investments . . (218) 677
Proceeds from asset sales. . . . . . . . . . . . . . . 26 45
Investments and long-term receivables. . . . . . . . . (21) 1
Other. . . . . . . . . . . . . . . . . . . . . . . . . 17 (112)
----- -----
Net cash provided (used) by investing activities . . (548) 258
----- -----
Cash flows from financing activities:
Repayments of long-term debt . . . . . . . . . . . . . (79) (470)
Proceeds from issuance of long-term debt . . . . . . . 45 149
Net cash provided (used) by notes payable. . . . . . . 72 (324)
Dividends paid . . . . . . . . . . . . . . . . . . . . (222) (222)
Treasury stock purchases . . . . . . . . . . . . . . . (14) (11)
Other. . . . . . . . . . . . . . . . . . . . . . . . . (5) (4)
----- -----
Net cash used by financing activities. . . . . . . . (203) (882)
----- -----
Effect of exchange rate changes on cash. . . . . . . . . (2) 5
----- -----
Net increase (decrease) in cash and cash equivalents . . 87 (230)
Cash and cash equivalents at beginning of period . . . . 1,537 1,394
----- -----
Cash and cash equivalents at end of period . . . . . . . $1,624 $1,164
===== =====
The accompanying notes are an integral part of these statements.
-4-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE A. Accounting Policies.
Basis of Presentation.
The foregoing financial information is unaudited and has been prepared
from the books and records of the Company. Certain previously reported
amounts have been restated to conform to classifications adopted in 1996.
In the opinion of the Company, the financial information reflects all
adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations in
conformity with generally accepted accounting principles.
Sales of Stock by a Subsidiary.
Gains or losses arising from issuances by a subsidiary of its own
stock are recorded in ARCO's Consolidated Income Statement.
NOTE B. Restructuring Program.
During 1993 and 1994, ARCO announced restructuring programs under
which approximately 3,700 positions were to be eliminated. Both programs
have been completed. The following summarizes the costs related to each
program:
($ Millions) Funded Unfunded
Actual long-term long-term Short-term
Terminations Benefits (a) Benefits (b) Benefits (c) Total
------------ ------------ ------------ ------------ -----
1993 Program 1,189 $ 35 $ 5 $ 65 $105
1994 Program 2,589 130 70 157 357
----- --- -- --- ---
Total 3,778 $165 $75 $222 $462
===== === == === ===
________________
(a) Enhanced pension benefits to be paid from assets of qualified pension
plans after retirement of recipient.
(b) Enhanced non-qualified pension benefits and postretirement medical and
life insurance benefits. Benefits will be paid after retirement over
the life of the recipient.
(c) Severance and other ancillary benefits paid currently from Company
funds.
An adjustment of $26 million was recorded as an unusual item in the first
quarter 1996 to increase reserves from previously estimated amounts.
Through March 31, 1996, approximately $207 million of short-term benefits
have been paid.
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE C. Investments.
At March 31, 1996 and 1995, investments were primarily composed of
U.S. Treasury securities, corporate debt instruments, and municipal
securities and were principally included in short-term investments.
Maturities generally ranged from one day to 20 months. At March 31, 1996,
all investments were classified as available-for-sale ("AFS"); there were
no investments considered held-to-maturity ("HTM"). AFS investments were
reported at fair value, with unrealized holding gains and losses, net of
tax, reported in a separate component of stockholders' equity.
The following summarizes investments in securities, principally debt
securities, at March 31:
Millions 1996 1995
------ ----------------
AFS AFS HTM
--- --- ---
Aggregate fair value . . . . . . . . . $1,832 $1,769 $ 910
Gross unrealized holding losses. . . . 19 35 -
Gross unrealized holding gains . . . . (12) - -
----- ----- -----
Amortized cost . . . . . . . . . . . . $1,839 $1,804 $ 910
===== ===== =====
Investment activity for the three months ended March 31 was as follows:
Millions 1996 1995
------ ----------------
AFS AFS HTM
--- --- ---
Gross purchases. . . . . . . . . . . . $1,321 $ 698 $1,293
Gross sales. . . . . . . . . . . . . . 531 854 -
Gross maturities . . . . . . . . . . . 1,050 36 1,624
Gross realized gains and losses were insignificant and were
determined by the specific identification method.
NOTE D. Inventories.
Inventories at March 31, 1996 and December 31, 1995 comprised the
following:
March 31, December 31,
1996 1995
---- ----
(Millions)
Crude oil and petroleum products. . . . . . . $232 $184
Chemical products . . . . . . . . . . . . . . 430 423
Other products. . . . . . . . . . . . . . . . 30 32
Materials and supplies. . . . . . . . . . . . 243 238
--- ---
Total . . . . . . . . . . . . . . . . . . . $935 $877
=== ===
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE E. Capital Stock.
Detail of the Company's capital stock was as follows:
March 31, December 31,
1996 1995
---- ----
(Thousands)
$3.00 Cumulative convertible preference stock,
par $1 . . . . . . . . . . . . . . . . . . . . . $ 66 $ 66
$2.80 Cumulative convertible preference stock,
par $1 . . . . . . . . . . . . . . . . . . . . . 716 731
Common stock, par $2.50. . . . . . . . . . . . . . 402,199 402,199
------- -------
Total. . . . . . . . . . . . . . . . . . . . . $402,981 $402,996
======= =======
NOTE F. Capitalization of Interest.
Interest expense excludes capitalized interest of $5 million and $12
million for the three-month periods ended March 31, 1996 and 1995,
respectively.
NOTE G. Income Taxes.
Provision for taxes on income:
Three Months Ended
March 31,
------------------
1996 1995
---- ----
(Millions)
Federal:
Current . . . . . . . . . . . . . . . . . . . . $ 147 $ 140
Deferred. . . . . . . . . . . . . . . . . . . . 5 (2)
---- ----
152 138
---- ----
Foreign:
Current . . . . . . . . . . . . . . . . . . . . 39 22
Deferred. . . . . . . . . . . . . . . . . . . . 2 1
---- ----
41 23
---- ----
State:
Current . . . . . . . . . . . . . . . . . . . . 27 27
Deferred. . . . . . . . . . . . . . . . . . . . - (3)
---- ----
27 24
---- ----
Total . . . . . . . . . . . . . . . . . . . . $ 220 $ 185
==== ====
-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
March 31,
-------------------------------------
1996 1995
---------------- -----------------
Percent Percent
of of
Pretax Pretax
Amount Income Amount Income
------ ------- ------ -------
(Millions)
Income before income taxes and
minority interest . . . . . . . . . $620 100.0 $534 100.0
=== ===== === =====
Tax at federal statutory rate . . . . $217 35.0 $187 35.0
Increase (reduction) in taxes
resulting from:
Dividend exclusion. . . . . . . . . (3) (.5) (18) (3.4)
Taxes on foreign income in excess
of statutory rate . . . . . . . . 17 2.7 16 3.0
State income taxes (net of federal
effect) . . . . . . . . . . . . . 18 2.9 16 3.0
Tax credits . . . . . . . . . . . . (22) (3.5) (18) (3.4)
Other . . . . . . . . . . . . . . . (7) (1.1) 2 .4
--- ---- --- ----
Provision for taxes on income . . . . $220 35.5 $185 34.6
=== ==== === ====
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
March 31,
------------------
1996 1995
---- ----
(Millions of shares)
Average number of common shares outstanding . . . . . 160.8 160.8
Common stock equivalents . . . . . . . . . . . . . . 2.5 2.6
----- -----
Total . . . . . . . . . . . . . . . . . . . . . . 163.3 163.4
===== =====
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE I. Supplemental Income Statement Information.
Taxes other than excise and income taxes comprised the following:
Three Months Ended
March 31,
------------------
1996 1995
---- ----
(Millions)
Production/severance. . . . . . . . . . . . . . . . $103 $ 89
Property. . . . . . . . . . . . . . . . . . . . . . 47 48
Other . . . . . . . . . . . . . . . . . . . . . . . 67 57
--- ---
Total . . . . . . . . . . . . . . . . . . . . . . $217 $194
=== ===
NOTE J. Supplemental Cash Flow Information.
Following is supplemental cash flow information for the three months
ended March 31, 1996 and 1995:
Three Months Ended
March 31,
------------------
1996 1995
---- ----
(Millions)
Gross sales and maturities of short-term investments . $ 702 $1,567
Gross purchases of short-term investments. . . . . . . (920) (890)
----- -----
Net cash provided (used) by short-term investments . . $ (218) $ 677
===== =====
Gross proceeds from issuance of notes payable. . . . . $1,472 $1,892
Gross repayments of notes payable. . . . . . . . . . . (1,400) (2,216)
----- -----
Net cash provided (used) by notes payable. . . . . . . $ 72 $ (324)
===== =====
Gross noncash provisions charged to income . . . . . . $ 132 $ 108
Cash payments of previously accrued items. . . . . . . (159) (318)
----- -----
Cash payments greater than noncash provisions. . . . . $ (27) $ (210)
===== =====
Interest paid during the three-month periods ended March 31, 1996 and
1995 was $191 million and $235 million, respectively.
Income taxes paid during the three-month periods ended March 31, 1996
and 1995 were $47 million and $129 million, respectively.
Excluded from the Consolidated Statement of Cash Flows for the three
months ended March 31, 1996 was the accrual (in other accrued liabilities)
of a signing bonus due a foreign state owned oil company of $225 million.
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE K. Summarized Financial Information.
Summarized financial information for Lyondell Petrochemical Company
("Lyondell"), a company in which Atlantic Richfield owned a 49.9% interest
at March 31, 1996, was as follows:
Three Months Ended
March 31,
------------------
1996 1995
---- ----
(Millions)
Revenues (including sales to ARCO and
ARCO Chemical Company). . . . . . . . . . . . . $1,165 $1,174
Sales to ARCO and ARCO Chemical Company . . . . . 64 90
Operating income. . . . . . . . . . . . . . . . . 61 222
Net income. . . . . . . . . . . . . . . . . . . . 24 127
_____________________________
ARCO's equity in net income of Lyondell . . . . . $ 12 $ 64
Cash dividends received from Lyondell . . . . . . 9 9
________________________
March 31, December 31,
1996 1995
---- ----
(Millions)
Current assets. . . . . . . . . . . . . . . . . . $ 817 $ 678
Noncurrent assets . . . . . . . . . . . . . . . . 2,100 1,928
Current liabilities . . . . . . . . . . . . . . . 630 750
Long-term debt. . . . . . . . . . . . . . . . . . 1,176 807
Other liabilities . . . . . . . . . . . . . . . . 221 210
Minority interest . . . . . . . . . . . . . . . . 505 459
Stockholders' equity. . . . . . . . . . . . . . . 385 380
-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 March 31, 1996 and December 31, 1995, there were contingent
liabilities primarily with respect to guarantees of securities of other
issuers of approximately $32 million and $29 million, respectively.
Following the March 1989 EXXON VALDEZ oil spill, numerous lawsuits
seeking compensatory and punitive damages and injunctions were filed by the
State of Alaska, the United States and private plaintiffs against Exxon,
Alyeska Pipeline Service Company ("Alyeska"), and Alyeska's owner companies
(including ARCO, which owns approximately 21%). Alyeska and its owner
companies have settled the civil damage claims by federal and state
governments and the lawsuits by private plaintiffs. Certain issues
relating to liability for the spill remain unresolved between the Exxon
companies, on the one hand, and Alyeska and its owner companies, on the
other hand.
ARCO and former producers of lead pigments have been named as
defendants in cases filed by a municipal housing authority, three purported
classes and several individuals seeking damages and injunctive relief as a
consequence of the presence of lead-based paint in certain housing units.
ARCO is also the subject of or party to a number of other pending or
threatened legal actions.
In October 1995, the State of Montana presented to ARCO a second
revised demand for damages of $713 million based on alleged injuries to
natural resources resulting from ARCO's mining and mineral processing
businesses formerly operated by Anaconda, ARCO's predecessor, in Montana.
ARCO is contesting this demand.
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 federal Superfund and state-managed sites, as well as other
clean-up sites. 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, the unknown timing, extent and method
of remedial actions which may be required and the determination of ARCO's
liability in proportion to other responsible parties. In addition,
environmental loss contingencies include claims for personal injuries
allegedly caused by exposure to toxic materials manufactured or used by
ARCO.
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 March 31, 1996, the
environmental remediation reserve was $652 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.
-11-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE L. Other Commitments and Contingencies (Continued).
ARCO's environmental remediation 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, sites associated with
discontinued operations and sites formerly owned by ARCO. ARCO has been
named a potentially responsible party (PRP) for 113 sites. The number of
PRP sites in and of itself is not a relevant measure of liability, because
the nature and extent of environmental concerns varies by site and ARCO's
share of responsibility varies from sole responsibility to very little
responsibility. ARCO reviews all 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 amount
accrued by as much as $700 million.
Approximately 40% 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
10% of the total reserve. Substantially all amounts accrued 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. Most of these claims have been resolved. ARCO
has neither recorded any asset nor reduced any liability in connection with
unresolved claims.
Although any ultimate liability arising from any of the matters
described herein could result in significant expenses or judgments that, if
aggregated and assumed to occur within a single fiscal year, 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.
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.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
First Quarter 1996 vs. First Quarter 1995
Consolidated Earnings
The earnings increase in 1996 primarily reflected higher crude oil and
natural gas prices, growing international and U.S. natural gas volumes and
lower interest expense, partially offset by a decline in earnings from
ARCO's chemical businesses, in particular its equity interest in Lyondell
Petrochemical Company ("Lyondell").
The 1996 first quarter included a net benefit from special items of
approximately $28 million after tax. Benefits from insurance settlements
and the sale of an interest in a crude oil pipeline were partially offset
by final charges for previously reported personnel reductions and by other
remediation-related charges.
Revenues
Millions 1996 1995
---- ----
Sales and other operating revenues
Upstream . . . . . . . . . . . . . . . . $2,211 $2,156
Downstream . . . . . . . . . . . . . . . 2,976 2,941
Intersegment eliminations. . . . . . . . (653) (853)
----- -----
Total. . . . . . . . . . . . . . . . $4,534 $4,244
===== =====
The increase in upstream sales and other operating revenues resulted
primarily from higher crude oil and natural gas prices, increased natural
gas marketing activity and higher natural gas produced volumes. Third-
party sales of natural gas (proprietary and marketed volumes) increased to
3.4 billion cubic feet per day in the 1996 first quarter, up from 2.8
billion cubic feet per day in the 1995 first quarter. The majority of the
increase was generated by Vastar Resources, Inc. ("Vastar"), where revenues
increased from $489 million in first quarter 1995 to $759 million in first
quarter 1996.
The increased revenues from natural gas marketing activity were
substantially offset by decreased crude oil marketing activity, as third
party sales of petroleum liquids declined by 126,600 barrels per day in the
1996 first quarter, compared to the 1995 first quarter.
Downstream sales and other operating revenues increased because of
higher refined products volumes and prices. This increase was offset by a
net decline in chemical products prices and volumes. Revenues of ARCO
Chemical Company ("ARCO Chemical") decreased from $1,141 million in the
1995 first quarter to $982 million in the 1996 first quarter.
The higher average crude oil and natural gas prices realized by ARCO
reflected a strong surge in prices throughout the first quarter of 1996.
The combination of a colder than normal winter and a low level of
inventories led to the increased prices. The price for West Texas
intermediate crude oil fluctuated between $21.20 and $25.19 per barrel
during the month of April, with recent prices close to the bottom of that
range.
-13-
The decrease in 1996 Income From Equity Investments primarily reflected
a decline in earnings from ARCO's 49.9% equity interest in Lyondell.
The increase in 1996 Other Revenues primarily reflected insurance
settlements.
Expenses
Trade purchases were higher primarily as a result of higher natural
gas marketing activity and prices, partially offset by decreased crude oil
trading activity.
The higher operating expenses in 1996 were primarily incurred by the
Company's refining and marketing and coal operations. These higher
operating expenses reflected the impact of refinery turnarounds, a charge
related to environmental and other remediation associated with refining and
marketing operations and unscheduled maintenance and two longwall moves
associated with coal operations.
The lower interest expense reflected lower average long- and short-
term debt balances outstanding and lower average short-term rates in 1996.
Unusual items consisted of final charges for previously reported
personnel reductions.
Upstream Earnings
Millions (after tax) 1996 1995
---- ----
Oil & Gas. . . . . . . . . . . . . . . $275 $195
Coal . . . . . . . . . . . . . . . . . $ 5 $ 16
ARCO's earnings from worldwide oil and gas exploration and production
operations benefited from higher crude oil and natural gas prices and
growth in natural gas volumes. Worldwide exploration expenses were $100
million in the 1996 first quarter, compared to $90 million in last year's
first quarter. The higher exploration expense was primarily geological and
geophysical and dry hole costs in Vastar's natural gas operations.
Average Oil & Gas Prices
1996 1995
---- ----
U.S.
Crude oil - per bbl
Alaska . . . . . . . . . . . . . . $13.10 $10.62
Lower 48, including Vastar. . . . . $17.17 $15.53
Composite average price . . . . . . $14.17 $11.87
Natural gas - per mcf . . . . . . . . $ 1.58 $ 1.33
International
Crude oil - per bbl. . . . . . . . . . $17.72 $16.32
Natural gas - per mcf. . . . . . . . . $ 2.60 $ 2.57
-14-
Petroleum Liquids and Natural Gas Production
1996 1995
---- ----
Net Production
U.S.
Petroleum liquids bbld . . . . . . . . 579,700 603,000
Natural gas mmcfd. . . . . . . . . . . 1,055 1,031
Barrels of oil equivalent (BOE). . . . 755,500 774,900
International
Petroleum liquids bbld . . . . . . . . 64,900 60,600
Natural gas mmcfd. . . . . . . . . . . 793 640
BOE. . . . . . . . . . . . . . . . . . 197,100 167,300
The reduction in U.S. petroleum liquids production primarily resulted
from natural field declines in Alaska, where natural field declines in the
Prudhoe Bay and Kuparuk River fields were only partially offset by
increased production from the Point McIntyre Area. The overall decline in
petroleum liquids in the United States was partially offset by increased
international production related to new production from the Blenheim oil
field in the U.K. North Sea.
The increase in U.S. natural gas production primarily resulted from
various Gulf of Mexico fields and from the San Juan Basin, which are owned
and produced by Vastar. ARCO holds an 82.3% interest in Vastar.
The record international natural gas volumes in 1996 reflected
increased production from ARCO's offshore Indonesia gas fields, ARCO's new
South China Sea natural gas field, Yacheng 13, which began sales into Hong
Kong on January 1, 1996, and the Southern Gas Basin in the North Sea. Each
of these three areas increased production by approximately 50 million cubic
feet per day compared to the 1995 first quarter.
Coal Operations
The earnings decline in 1996 reflected higher operating costs,
primarily because of unscheduled maintenance and two longwall moves and
lower average U.S. coal prices. Increased U.S. sales volumes of
approximately 840,000 tons were more than offset by lower average prices
for U.S. coal. Higher average prices for Australian coal were offset by a
sales decrease of approximately 400,000 tons of Australian coal. Australian
production was down as the result of inclement weather and other factors.
Downstream Earnings
Millions (after tax) 1996 1995
---- ----
Refining and marketing . . . . . . . . . . . . . $15 $ 22
Transportation . . . . . . . . . . . . . . . . . $60 $ 50
Intermediate chemicals and specialty products. . $97 $115
-15-
Refining and Marketing Operations
The refining and marketing results reflected the benefits of increased
products sales volumes and prices offset by higher crude oil costs and the
impact of refinery turnarounds. The 1996 results included an after-tax
charge of approximately $8 million related to environmental and other
remediation. The Company expects margins to improve in the second quarter,
after the completion of turnarounds at the end of April, as product price
increases catch up with crude oil price increases. Sales prices for the
Company's refined products have increased, particularly in California,
as a result of increasing prices for the feedstock for those refined
products, clean-air standards in California that require specially formulated
gasoline that is more expensive to produce than traditional fuel and
production problems at refineries serving California.
West Coast Petroleum Products Sales
Volumes (barrels/day) 1996 1995
---- ----
Gasoline. . . . . . . . . . . . . . . . 261,300 251,500
Jet . . . . . . . . . . . . . . . . . . 106,100 93,900
Distillate. . . . . . . . . . . . . . . 75,000 66,700
Other . . . . . . . . . . . . . . . . . 67,300 50,500
------- -------
Total . . . . . . . . . . . . . . . . 509,700 462,600
======= =======
Transportation Operations
The 1996 transportation results included a net benefit of approximately
$15 million after tax primarily related to a gain on the sale of ARCO's
interests in the Platte pipeline. Additionally, Trans Alaska Pipeline System
volumes decreased 5% compared to the first quarter of 1995, while tariff
revenues were also lower.
Intermediate Chemical and Specialty Products
For the intermediate chemicals and specialty products segment,
reflecting ARCO's 82.8% interest in ARCO Chemical, the 1996 earnings
decline primarily reflected lower volumes for most products and reductions
in styrene monomer ("SM") and methyl tertiary butyl ether ("MTBE") margins.
The lower SM and MTBE margins more than offset higher propylene oxide
("PO") and derivatives margins.
Lower worldwide SM demand resulted in significantly lower SM margins
as SM prices decreased more than raw materials costs. MTBE margins
declined as a result of lower domestic prices and short-term operating
problems at a European plant. Domestic MTBE prices decreased from first
quarter 1995 levels when MTBE prices were affected by the high market price
of methanol, an MTBE feedstock.
Propylene oxide and derivatives margins improved primarily as a result
of higher sales prices for PO derivatives and lower raw materials costs. PO
derivative prices were higher primarily due to price increases implemented
during mid-1995. The higher PO and derivatives margins were partially
partially offset by lower PO and derivatives volumes.
-16-
Equity Affiliate
ARCO earned $12 million from its 49.9% equity interest in Lyondell in
the first quarter of 1996, compared to $64 million in the first quarter of
1995. The decline in earnings resulted primarily from a significant drop
in petrochemicals margins and a major decrease in methanol sales prices.
Liquidity and Capital Resources
Millions 1996
----
Cash flow provided (used) by:
Operations . . . . . . . . . . . . . . . . $ 840
Investing activities . . . . . . . . . . . $(548)
Financing activities . . . . . . . . . . . $(203)
The net cash used by investing activities in the first quarter 1996
included expenditures for additions to fixed assets of $352 million and an
increase in short-term investments of $218 million. The Company expects
total capital expenditures to approximate $2 billion for the full year
1996.
The net cash used in financing activities in the first quarter of 1996
included repayments of long-term debt of $79 million and dividend payments
of $222 million, partially offset by an increase of $72 million in the
Company's short-term debt position and proceeds of $45 million from the
issuance of long-term debt.
Cash and cash equivalents and short-term investments totaled $3.4
billion, and short-term borrowings were $1.2 billion at the end of the
first quarter of 1996.
During the first quarter of 1996, ARCO purchased 125,000 shares of its
common stock and contributed them to treasury in order to satisfy ARCO's
obligations upon conversion of the $3.00 and $2.80 Preference Stocks and
upon exercise of stock options.
It is expected that future cash requirements for capital expenditures,
dividends and debt repayments will come from cash generated from operating
activities, existing cash balances, and future financings. At this time it
is not considered likely that there will be an underwritten public equity
offering by a subsidiary similar to that by Vastar in July 1994.
Conversion of LUKoil Bonds
ARCO purchased an additional 94,764 bonds convertible into 2.2% of the
total outstanding shares of the Russian oil company LUKoil for $88.8
million. The transaction closed in April 1996.
On April 6, 1996, the 94,764 bonds, along with 241,080 bonds purchased
by ARCO in September 1995, were mandatorily converted into 57,093,480
shares of LUKoil, which is equivalent to approximately 8% of the total
shares of LUKoil and an 8.8% ownership of LUKoil's voting shares.
-17-
Statements of Financial Accounting Standards Not Yet Adopted
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation." SFAS No. 123 requires companies to adopt
its provisions for fiscal years beginning after December 15, 1995. SFAS No.
123 encourages a fair value-based method of accounting for an employee
stock option or similar equity instrument, but allows continued use of the
intrinsic value-based method of accounting prescribed by Accounting
Principles Board ("APB") No. 25, "Accounting for Stock Issued to
Employees." Companies electing to continue to use APB No. 25 must make pro
forma disclosures of net income and earnings per share as if the fair value-
based method of accounting had been applied. ARCO will continue to follow
the provisions of APB No. 25 and accordingly, will make the pro forma
disclosures, if material, required by SFAS No. 123 in its financial
statements for the year ended December 31, 1996.
____________________
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.
-18-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the Company's 1995 Form 10-K Report for
information on legal proceeding matters reported therein.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's annual meeting of stockholders was held on May 6, 1996.
The stockholders elected all the Company's nominees for director and
approved the appointment of Coopers & Lybrand L.L.P. as the Company's
independent auditors for 1996. The votes were as follows:
1. Election of Directors.
For Withheld
----------- ---------
Ronald J. Arnault 136,973,819 3,402,842
Mike R. Bowlin 137,836,634 2,540,027
Lodwrick M. Cook 137,225,971 3,150,690
Richard H. Deihl 137,999,487 2,377,174
Hanna H. Gray 137,752,074 2,424,587
Philip M. Hawley 137,725,279 2,651,382
David T. McLaughlin 138,052,803 2,323,858
Henry Wendt 138,118,424 2,258,237
2. Approval of appointment of Coopers & Lybrand L.L.P.
For 138,831,995
Against 967,333
Abstain 577,333
In addition, the stockholders voted on the Stockholder's proposal with
respect to guidelines for country selection.
For 7,875,043
Against 108,506,556
Abstain 11,686,769
Broker Non-Votes 12,308,293
Item 5. Other Information.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company desires to take advantage of the new "safe harbor"
provisions contained in Section 27A of the Private Securities Litigation
Reform Act and is including this statement in its first quarter 1996 Form
10-Q in order to do so. The Reform Act did not become law until late 1995.
-19-
Item 5. Other Information (Continued).
From time to time ARCO's management may wish to make forward-looking
statements to inform more fully existing and potential security holders
regarding various matters, including without limitation, projections
regarding future income, oil and gas production, production and sales
volumes of refined petroleum products and petrochemicals, replacement
of oil and gas reserves, capital spending, as well as predictions as to the
timing and success of specific projects. Such forward-looking statements
are generally accompanied by words such as estimate, project, predict, or
expect, that convey the uncertainty of future events or outcomes.
The factors identified in this statement are believed to be important
factors (but not necessarily all of the important factors) that could cause
actual results to differ materially from those expressed in any forward
looking statement made by or on behalf of the Company. Unpredictable or
unknown factors not discussed herein could also have material adverse
effects on forward looking projections. The Company does not intend to
update these cautionary statements.
UPSTREAM FACTORS AFFECTING PERFORMANCE
Volatility and Level of Crude Oil and Gas Prices
The Company's projections as to the level of future earnings are based
on certain assumptions as to the future prices of crude oil and natural
gas. These price assumptions are used for planning purposes and the
Company expects they will change over time. Any substantial or extended
decline in the actual prices of crude oil and natural gas could have a
material adverse effect on the Company's financial position, results of
operations and on quantities of crude oil and natural gas reserves that may
be economically produced. These prices historically have been volatile and
may vary based on factors affecting commodities markets generally, such as
political instability in producing regions, changes in market demand, and
fluctuations in political, regulatory and economic climates throughout the
world.
Ability to Maintain Production Rates and Replace Reserves
Projecting future rates of oil and gas production is inherently
imprecise. Producing oil and gas reservoirs generally have declining
production rates. Production rates depend on a number of factors,
including crude oil prices, market demand, and the political, economic and
regulatory climate.
The other major factor affecting production rates is the Company's
ability to replace depleting reservoirs with new reserves through
acquisition or exploration success. Exploration success is impossible to
predict particularly over the short term, where results vary widely year to
year; moreover, the ability to replace reserves over an extended period
depends not only on the total volumes found, but on the cost of finding and
developing such reserves. Depending on the general crude oil price
environment, the Company's finding and development costs may not justify
the use of resources to produce such reserves. There can be no assurances
as to the level or timing of success, if any, that the Company will be able
to achieve in acquiring or finding and developing additional reserves.
-20-
Item 5. Other Information (Continued).
DOWNSTREAM FACTORS AFFECTING PERFORMANCE
A substantial proportion of the Company's total income for the
foreseeable future is expected to come from operations downstream of oil
and gas production and sale, chiefly refining and marketing of gasoline and
other products and chemical operations. It is possible that the Company
could meet its projections for upstream operations and still fail to meet
overall projections made in various forward looking statements.
Products
The Company conducts significant refining and marketing operations in
the five western states. Results of these operations will be significantly
affected by changes in the volumes sold and the prices received on those
volumes. These, in turn, are influenced by such factors as the general
economic condition of the western states, which affects the overall demand
for gasoline and other refined products, the actions taken by competitors,
including both pricing and the expansion and retirement of refining
capacity in response to market conditions, environmental regulations issued
by the state and federal government, including particularly regulations
dealing with gasoline composition and characteristics. Overall
profitability of the Company's refining and marketing operations depends
heavily on the margin between the price of crude oil and/or purchased
products and the sales price of products produced and/or purchased. These
margins may fluctuate depending upon changes in the price of crude oil and
the relative supply/demand balance for products. Political constraints
either in the form of express legal requirements or general political
pressure may also limit the margins otherwise available to the Company.
The Company's projections as to the level of future earnings are dependent
on producing and selling an increasing volume of refined products and
achieving products margins substantially higher than those realized in 1995.
Products volumes and margins historically have been volatile and may vary
with factors such as the national and regional economy, market demand,
regulatory changes, the price of crude oil, and the ability of regional
refiners and the Company to provide a sufficient supply of refined
products.
Chemical Operations
ARCO derives a material portion of its net income from the chemical
operations of its affiliates. Results of its chemical operations are
influenced by changes in the cost of raw materials, the availability of
substitutes, changes in the supply/demand balance, and actions taken by
competitors to increase or decrease their production volumes. Earnings
with respect to chemical operations typically are cyclical and show marked
responses to changes in the overall economic climate. The Company's
projections as to the level of future earnings are dependent on achieving
volumes and margins for propylene oxide that are significantly above those
realized in 1995. Volumes and margins for these petrochemical products are
strongly influenced by national and world economic growth, market demand,
the availability of substitutes, regulatory changes, the cost of raw
materials, and the worldwide capacity to produce these petrochemical
products.
EFFECT OF POLITICAL AND REGULATORY INSTABILITY ON COMPANY'S OPERATIONS
The Company's ability to conduct acquisition, exploration, development
and production of oil and gas interests is dependent on the political and
regulatory climate in the particular geographic regions where the properties
are located. The Company's ability to negotiate and implement specific
products in a timely and favorable manner may be impacted
-21-
Item 5. Other Information (Continued).
by political considerations unrelated to or beyond the control of the Company.
Political instability may result in insurgencies and military operations that
could interfere with the Company's operating facilities located throughout the
world. Possible political and regulatory actions by governments may affect
future results in unpredictable ways.
OPERATING HAZARDS
The Company's drilling operations are subject to various hazards
common to the industry, including explosions, fires, and uncontrollable
flows of oil and gas. They are also subject to the additional hazards of
marine operations, such as capsizing, collision and damage or loss from
severe weather conditions. Similarly, the Company's refining and
petrochemical operations are subject to explosions, fires, and damage from
severe weather conditions.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed during the quarter ended
March 31, 1996 and through the date hereof.
-22-
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: May 8, 1996 /s/ ALLAN L. COMSTOCK
-----------------------------
ALLAN L. COMSTOCK
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
-23-